NYT On Future Of Government Safety Net: Misses Growth, Health Care Stories

The NYT had a thoughtful piece on the public's greater reliance on Social Security, Medicare and other benefits. While the piece provides many useful insights into the increasing importance of these programs in people's lives and their attitudes toward them, it does miss a few key points.

First, it implies that the growth of government programs, rather than the economic downturn, is the main factor behind the current deficit:

Politicians have expanded the safety net without a commensurate increase in revenues, a primary reason for the government’s annual deficits and mushrooming debt.

In fact, the country would be facing very small deficits at present had it not been for the recession. Part of the rise in the deficit in the last four years has been due to the expansion of unemployment benefits, food stamps and other government programs, but this was a response to the recession, not a sudden urge on the part of politicians to increase the generosity and scope of these programs.

A second point that deserved more emphasis is the extent to which the projected budget problems in future years are the result of a broken health care system. The United States already spends more than twice as much per person for its health care as do people in other wealthy countries with little obvious benefit in outcomes. This gap is projected to grow rapidly in the decades ahead. If U.S. health care costs were in line with costs in other countries, then the country would be looking at long-term surpluses, not deficits.

A third factor that provides an important backdrop to this discussion is the path of wage growth. The people interviewed for this piece expressed concern for their children and grandchildren's living standards based on the possibility that they would face higher taxes. However, the extent to which taxes impose a burden depends hugely on workers' before tax income.

If workers get their share of projected productivity growth, then real wages will rise by roughly 1.3 percent a year, even assuming a higher portion of compensation going to pay health care benefits. This growth rate implies that wages will be nearly 40 percent higher after 25 years, roughly a generation. This would mean that if most workers got their share of productivity gains, then after-tax wages would be far higher for the next generation than for current workers even if the tax rate they paid increased substantially.

This brings home the point that the real problem faced by the people interviewed for this piece and elsewhere in the country is that they have not been sharing in the gains of economic growth. If the current policies that enforce this pattern of income distribution persist, then workers in the future will find their taxes to be a serious burden, however the core problem is the set of polices (e.g. trade, Fed policy, patent policy etc.) that lead to an upward redistribution of income, not taxes.