An Onerous Inheritance

01.30.12

An Onerous Inheritance

01.30.12
John WalkerJohn Walker

In his 1998 book, Tom Brokaw famously coined the term, The Greatest Generation, to refer to the generation of Americans who lived through the Great Depression, fought in World War II, and went on the build the powerhouse that was the American post-war economy.

Considering the achievements of this generation, many expected great things of their progeny, the baby-boomers. To be sure, the boomers accomplished many things in their time; America became more open and tolerant; it produced the music, art, and culture of the 1960s and 1970s; America became less sexist, less racist, and less homophobic under the boomers’ watch. They completed the struggle against world communism, launching the United States to the pinnacle of its power. Given so many accomplishments, it is disappointing that the boomers have largely failed to live within their means and invest adequately in the future.

The baby boomer generation has given way to the generation of austerity, a cohort who will, to a large extent, have to pay for the profligacy and unrealistic expectations of their parents. For as much social progress as the boomers accomplished, they left their children with a heap of debt, a downgraded credit rating, a struggling economy, and a poisoned planet.

Health care and college education are now more expensive than ever. Many institutions such as universities, unions, and health and pension plans, seem designed to suit the interests of the boomers, rather than their children. Up to this point, each succeeding generation of Americans could realistically expect to have a better standard of living than the one before. Unfortunately, this two-century-old convention seems to be unraveling. Many young Americans are starting to realize that they will have to confront challenges that their parents did not have to face and, in many ways, pay the bills their parents failed to pay.

Indeed, this pattern is not confined to the United States. It has played out in many other rich world countries. Like the US, these countries saw great social advances, but repeatedly failed to embrace reality and make the tough decisions necessary to safeguard the future of their children and grandchildren.

The Burden of Youth

All across the world the young are asked to take up the burden of the old. Even though the young have suffered disproportionately through the current economic crises, they are obliged to shoulder boomer benefits and entitlements too generous to be sustained. Many young workers, particularly in manufacturing, can expect less pay and fewer benefits than their older counterparts. Healthcare and college now cost far more than at any other time in American history. Many school children are condemned to poor performing schools because teachers’ unions have resisted even modest changes to the status quo.

Moreover, this generation will have to deal with the challenges of changing climate and increased competition from abroad. The challenges that confront the young are daunting, yet their parents have left them with precious few resources to draw upon. Many rich countries are now flirting with bankruptcy. In 2009, the US had an external debt to GDP ratio of 101%; Australia’s was 139% while Italy’s ratio was 146%. Meanwhile, France had an external debt more than two and a half times its annual national income. But this is not even the worst of it. Several European countries had ratios above 300%.

Ireland’s ratio reached a mind-boggling 1,000% of GDP in 2009. Debt to GDP ratios at these levels cannot be sustained indefinitely. These debts will have to be paid eventually, and when they are, they are likely to lead to a fiscal contraction and reduced economic growth. In some nations, this has already begun.

Moreover, many countries, like the US, have seen their credit downgraded recently. Downgrades to credit have the potential to be truly punishing, as a bad credit rating can raise the cost of borrowing by orders of magnitude. Unfortunately, many nations are discovering that while good credit is hard to build, it easy to squander.

In the United States

One of the few good-news stories in the United States is that our universities continue to be some of the best learning institutions in the world. Indeed, the US can plausibly claim to have eight of the ten best universities on the globe. Unfortunately, college costs far more in America today than in the past. This has occurred as a college education has become more necessary than ever to compete in the global economy. Adjusted for inflation, tuition and room and board at a four-year institution costs 2.5 times more today than in 1980. According to the College Board, the price of a bachelor’s degree from a public institution now exceeds $80,000.

College costs have climbed sharply, in part, because of the increased demand for college-educated workers and because of a more generalized trend of cost inflation in the service sector. However, costs are also influenced by the manner in which colleges and universities are governed. In reality, most universities are run by professors, for professors.

Granted, most institutions have a Board of Trustees, but big donors, not professional overseers, fill these positions in many cases. Fortunately, the faculties of most colleges generally seem uninterested in fleecing their students in order to augment their own pay and benefits. The faculties of American universities have instead used their power to channel students’ tuition towards research. This is because universities are judged, not by how well they instruct their students, but by the quality, quantity, and cost of their research. While some of this research is useful and can benefit students, much of it does not. Moreover, it is unclear why students should have to bear the burden of paying for research. After all, research benefits society as a whole, why is it that the young shoulder much of the cost?

While American tertiary education suffers from a problem of cost, its primary and secondary education suffers from a problem of quality. It is in the realm of public education that we see another instance of the old reaping benefits for themselves at the expense of the young. Even though there is national consensus that our schools are in dire need of improvement, the country’s powerful teachers’ unions have repeatedly blocked even modest educational reforms. To be sure, the United States is not alone in this. Teachers’ unions have long been the bane of educational reformers across the globe.

The intractability of the teachers’ unions has been particularly detrimental to poor minority children from troubled backgrounds. More worryingly, the unions seem intent on blocking the growth of successful educational institutions, lest they demonstrate too clearly to the American people what modest mechanisms of autonomy and accountability can accomplish. For example, some New York charter schools have been unable to expand due to the lobbying of New York City’s teachers’ unions. Consequently, some of the most successful charters have acceptance rates lower than Harvard.

Yet the damage the unions have inflicted extends beyond the education system. The autoworkers’ unions, for instance, overreached during their boom years acquiring impressive retirement and health care benefits. However, their unwillingness to alter these agreements almost proved the death-knell for the American auto industry and manufacturing in the United States in general. As a consequence, many firms have flirted with insolvency. In response, many automakers have moved their factories to the Southern states and overseas in order to escape the unions’ grasp.

Luckily, many autoworkers have seen the light and have agreed to compromise. Unfortunately, the brunt of the unions’ compromise will be borne by their younger members. For example, new Ford autoworkers will be paid only $15.78 an hour; a fraction compared to the $28.00 and hour garnered by older workers.

Alas, public sector unions have done no better than their private sector counterparts. Over the past 30 years, these organizations extended political support to politicians who promised early retirement and plush pensions. Many of these politicians were only too happy to oblige. After all, the future liabilities would not have to be paid for decades to come.

Sadly, these promises to public sector workers are now coming due and many states and municipalities across the country are unable to pay. This comes at a time of economic downturn, when government hiring could ease the short-term pain of the recession and give young people the chance to earn some cash and experience.

Another burden borne by young Americans is sustaining a health care system that is far more costly than in years past. Moreover, the young do not have the refuge of Medicare, a benefit exclusively reserved for the old. Health care costs have grown by about 5% per year over the past 40 years – double the growth rate of the economy as a whole. The Congressional Budget Office projects that American health care spending could reach 25% of GDP by the year 2025. Unfortunately, this spending seems to be for naught as the US has been shown to have no better health outcomes than other rich nations that pay a little as half as much as the United States.

One of the reasons that the United States has a dysfunctional health system is because real health reform cannot be achieved without effectively changing the way health care is delivered to millions of Americans. For example, most economists agree on the need to de-couple health insurance from employment and eliminate the fee for service system. However, this could not be accomplished without changing the delivery of health care for a large part of the American public, specifically those who receive generous employer sponsored health plans, tax-free.

Unlike the other issues, the health care issue is not clearly divided along generational lines. However, it is another example of a general pattern, the inability of the boomer generation to make the necessary decisions early on, instead the problem to grow and fester until it reaches crises proportions.

And Across the West

Although America’s youth have little reason to be optimistic about the future, they could at least take comfort in the fact that many other countries are similarly ill fated. One common burden that the youth across the rich world share is the cost of old age pensions and entitlements. In many ways, this is a benefit that the young pay for, but will not receive. Due to slowing population growth rates and longer lifespans, this burden has and will continue to increase. Payroll deductions now amount to approximately 16% of wages in the United States. However, this is modest compared to the 20% paid by Germans, and rates exceeding 30% in Italy, Portugal, and Spain.

Truly, the projected size of public pensions in the rich world has reached staggering proportions. By 2035, Social Security and Medicare will amount to 16% of GDP. In France, Italy and Spain spending on old age entitlements will reach 15% of GDP a decade earlier, in 2025. Public pensions are especially burdensome in Europe, which has a lower worker to retiree ratio than the US. In contrast, public spending on education in these countries only reaches between 3.5% and 6% of GDP in most rich countries.

What should we make of the prospects of any nation that invests three to five times more in its old, than its young? Seniors reading this article would likely remark that public pensions are far from generous. To be sure, this article is not suggesting that old age entitlements are overly lavish. Rather, the retirement age in many countries is simply too low. Most rich world countries have a retirement age between 60 and 67. This worked well in the 1950s, when the average lifespan in the rich world was in the 60s.

However, lifespans have been increasing and are expected to rise well into the 80s over the next few decades. This problem is exacerbated when we consider that many high-income countries have declining populations.

Moreover, education has become even more important to the modern economy; in other words, many young people will not even enter the labor force until their mid twenties. This cruel math suggests that the state has to educate a person for the first 25 years of life and care for them in last 20 years of life, leaving only about 40 years between the ages of 25 and 65, when a person is actually a productive tax-paying citizen.

Certainly, there have been some forward looking countries, such as Denmark, who have indexed their retirement age to life expectancy. Unfortunately they are in the clear minority. Most countries have chosen to ignore the issue, leaving their future generations with a problem that could have been easily resolved at an earlier juncture.

While public pensions and entitlements represent a great burden, the young in many countries also have to contest with a labor market that is skewed against them. In some European countries, such as France, Italy, and Spain there are two-tiered labor markets. In these nations, robust labor laws protect older employees on permanent contracts. These workers receive good pay and are very difficult to fire. Meanwhile, young workers have to work informally or on temporary contracts. These jobs often come with low pay and low job security. It is not surprising, therefore, that these countries have staggeringly high youth unemployment. For example, youth unemployment is almost 25% in France and a shocking 44% in Spain.

Even without a two-tier labor market, the youth of the world have been affected disproportionally by the recent economic crises, a crises caused, in part, by boomer profligacy. The youth unemployment rate in the UK and the Eurozone averages at 20%, in the United States it is 17%, and in Greece it stands at almost 40%.

Some countries, blessedly, have chosen to come to grips with their budgetary crises. The UK, has bravely embraced austerity measures in order to shore up its finances and safeguard its future. Unfortunately, these cuts have fallen disproportionally on the young who saw university tuition rates triple across England in a single year.

These problems are not confined solely to North America and Europe. The youth of Japan are starting to realize that they will not live to see anything like the Japanese ‘miracle years’ from 1950 to 1990. Indeed, the Japanese economy has been stagnating for 20 years partly because of severe demographic decline and partly because the Japanese government has not been able to pass tough bank reforms.

The Left and the Right

Who is to blame for the rich world’s penchant to consume the futures of its own young? While the competing parties will point fingers, both the Left and the Right are to blame for the current state of affairs.

For the Right’s part, it has largely refused to consider tax increases as a method of closing deficits. According to the CBO, American taxes are the lowest they have been since 1950 yet the US Republican Party has remained intransigent on the issue. For whatever reason, the global Right has convinced itself that modestly higher tax rates will spell death for long-term economic growth and have chosen instead ‘starve the beast’ in the hopes of reigning in government spending. Of course this has not worked. A lack of tax revenue has not forced governments to cut spending; it has just increased the deficit. It also did not work because the Right, particularly the American right, was unable to restrain its own spending impulses.

Under Presidents Ronald Reagan and George W. Bush, the US dramatically increased defense spending and the deficit. Bush, for his part, increased Medicare spending by about 10 billion a year by creating Medicare Part D. Nor has the Right in any major nation moved decidedly to eliminate agricultural subsidies. Even though the Right speaks the philosophy of small government, it has proven utterly incapable of restraining government growth to any great extent.

Moreover, it cannot even be said the Right is for lower taxes. The Right is for low current taxes; it couldn’t care less about tax rates in the future. It has repeatedly demonstrated this by running high deficits. Indeed, we should no longer refer to deficits, as deficits. Instead, deficits should be called what they really are, a tax on the future. Therefore, whatever the Right accomplishes by keeping taxes and regulation low, they necessarily nullify by running large deficits that all investors know must be repaid at some point.

The American Right has also chosen to utterly ignore the evidence of climate change. Indeed, many on the right have even adopted a conspiratorial attitude seeing climate change as a Trojan horse; a nonexistent problem conjured by the Left. In their minds, the Left intends to use climate change as a pretext for increasing taxes and regulation and seizing control over more and more segments of the economy. Instead of seeing the very real threat of climate change, the Right chooses to see a paranoid mirage of Leftist scheming.

While the Right has contributed mightily to the current unsustainability, the Left is equally to blame. Just as the Right has chosen to ignore the obvious evidence of climate change, so has the Left ignored the obvious evidence of math. Too many leftist politicians and pundits have chosen to ignore the inconvenient truth that spending on pensions, benefits, and entitlements has spiraled out of control. They have convinced themselves that, despite large increase in the human lifespan, the system only needs to be tweaked. Moreover, they tend to perceive any move to reform the unsustainable system, as an attempt to destroy their cherished social safety net.

Moreover, the Left has championed the unions at every step of the way seeing every employer concession as a victory for social solidarity. Unfortunately, they chose to ignore what many people at the time knew; that these generous future promises would one day wreak havoc on the very industries, states, and municipalities that guaranteed them. This bill is just now becoming due, and it is the boomers’ offspring that will pay. More worryingly, in the realm of public education, the Left has largely sided with the teachers’ unions over poor, disadvantaged children. In doing so, the Left has chosen the path of political convenience over the path of social justice, giving credence to what many on the Right have long suspected: that the Left is far more interested in gaining power than in relieving poverty.

Yet, it would be too politically convenient to just blame the politicians. After all, in a democracy people get the government they deserve. Instead of facing reality, the boomer generation chose to elect politicians, patronize companies, and subscribe to media establishments that told them what they wanted to hear: that everything was fine, that if there was a problem, it was not their fault, that if a sacrifice had to be made, another could make it. People chose to believe unrealistic promises and predictions. They chose to believe that taxes could be cut, benefits increased, and the deficit reduced, all at the same time. They chose to believe fairy tales such as cutting taxes leads to more revenue, that entitlements were sustainable, and that deficits did not matter.

Very few in the political spectrum chose to challenge the public’s Pollyanna sentiment. As a result, when the Right asked for more defense spending and the Left asked for more social spending, the sides compromised and did both. When the Right defended tax cuts, and the Left defended entitlements, the sides compromised and did both, all the while passing the bill to the grandkids. Indeed, this perfidious bargain has prevailed in the rich world for the past 30 years. The terms were simple, the Left gets what it wants, the Right get what it wants, and the difference will be paid by people not yet born.

The Baby-Boomers and the Golden Age of Capitalism

We should not conclude, however, that the boomers profligacy is due to some generational defect. The boomers are neither more, nor less virtuous than any other generation. The boomers grew up in a special time of unusual dominance and prosperity, when not much was asked of them. Indeed, for many people growing up in the 1950s and 1960s, it seemed as if anything was possible. Technological progress was rapid, economic growth was robust, and the baby boom meant that generous entitlement programs could be easily maintained. This sentiment was probably most prevalent in the United States, the leader of the Western world.

At the conclusion of World War II, the US was the most affluent, most technologically advanced, and most powerful country on the globe by far.

To be sure, the US economy comprised almost half of the world total in 1945. Yet, the phenomenon was not uniquely an American one. During the 1950s and 1960s, the world witnessed the so-called Golden-Age of Capitalism where worldwide economic growth surged ahead. Between 1950 and 1973 Western Europe grew at an average of 4.5% per year, more than twice the rate as before and since. This rapid growth made the establishment of extensive European welfare states possible. To many in the period, it may have even seemed that these generous social programs were improving economic performance, not impeding it. In Japan, things looked even better than in Europe. Between 1950-1980 Japan entered its miracle period, growing at an average of 7.4% per year.

Even countries outside the West such as those in Latin America and Africa saw strong growth during this era. The Golden Age ended in the early 1970s with the oil crises and the abandonment of the Bretton Woods system. Worse, the period seems to be entirely anomalous, as the western world has not seen such strong growth since. However, this period had a strong affect on the psyche of the boomers. Their generation expects that the promises made during this period can still be kept.

Moreover, they seem to believe that another Golden Age, with America and the West in ascendance, is just around the corner. It is this lingering nostalgia that has allowed the West to maintain its overly rosy optimism, and postpone the tough decisions that have to be made.

Unfortunately, it is the children of the boomers, the generation of austerity, who will have to pay for their parents’ dithering and over-optimism. It is this generation that will have to live through the West’s gradual, but inevitable, decline. It is this generation that fought in America’s longest war and lived through one of its worst recessions. It is this generation who will have to confront the challenges of a changing climate; who will have to continue to stand for democracy and freedom in a world increasingly dominated by China. It is this generation who will have to pay far more, but receive far less.

It is this generation who came of age during a time of troubles, who understand that the days ahead will prove no less daunting, and who know that every burden will be made heavier by the sins of their forebears.

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