A couple good articles by Robert J. Samuelson

May 10, 2010

I think these two articles are worth paying attention to. The first is about the export-led growth that we are now experiencing due to growth in Asia. The second is about how what’s going on in Greece is a warning to us. We will be in the same boat as they are in another 10 or so years if we do not either cut entitlement benefits or increase revenue to the government sufficiently to decrease the spread between revenue and spending.

“A new economic world order?”

“The welfare state’s death spiral”

If I had to make a prediction I’d say that we’re not going to react to head off the problems with entitlements until we start to feel their effects on our economy, namely “stagflation”–lethargic economic growth and inflation. The answer our society will most likely come up with is to try to increase government revenue through various taxing schemes. I don’t think we’re going to see a repeat of Ronald Reagan this time, because of demographic differences between now and the 1980s.

History has shown that increasing taxes doesn’t really increase revenue to the government relative to GDP. If you increase taxes the people who spend the most money (the wealthy) will find ways around the taxes, and so the government will get about as much as it’s been getting relative to GDP. If we have economic growth, the government will see revenue increase. If we pass a Value-Added Tax (VAT) I think the government will see a “step up” in its revenues (history shows that it does, and provides a more reliable revenue stream than with income taxes), but it’ll stay at that level no matter what they do with it.

If elderly voters have to make a choice between economic growth and a sense of security from government entitlements, history has shown that they vote for security every time.

The reason I make the above prognosis is that seniors are not going to want their benefits cut. I know that the Tea Party movement is feeling its oats now, and is supporting more fiscally conservative candidates. What it really represents in my view, is a defense of the status quo, no matter how Democrats try to cast it. It’s a rebellion against out of control government spending, but it is not a rejection of entitlements. Unfortunately this is not radical enough, because the existing entitlement programs are going into fiscal insolvency. The only way out that I see is a translation of entitlements into private sector, market solutions, with little government regulation, that provide less security, but more affordability and access. I doubt that this is the direction our society will choose, because of the tendency of the elderly to vote for security over all else.

As the Baby Boomers retire they are going to swell the ranks of elderly voters, who vote most reliably, and vote most often for candidates who promise more entitlement benefits, or to protect the ones the elderly already get. The follow on generation to the Boomers, my generation, is small. We cannot possibly out-vote our parents, even if we tried. Personally I think the days of bullish economic growth that we saw in the 80s and 90s are over for the time being. We may be in this state or worse for another few decades when today’s children of Boomers may gain political power and decide to change course.

Perhaps what we will see in the future, going off of what Samuelson says in “a new world economic order?”, is that the U.S. government will try to benefit off of the economic growth in Asia, through export-led trade. Until then it’s going to be more “exciting” in the political arena, though all too predictable if one is paying attention, than it is in the economic one.