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Why Even a Deal on the Budget Is Bad for the American Economy

Outcomes range from slowdown to outright recession. And it's all totally unnecessary.

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The fiscal austerians are literally strangling the baby in the crib today by denying a sensible fiscal response for the current generation’s plight, while hyperventilating that fiscal deficits will do the strangulation of the next generation tomorrow.  All of which exacerbates a problem of economies facing intense global headwinds from private sector deleveraging.

Viewed from that perspective, the terms of the debate have been truly twisted around. Granted, it is obviously more difficult to make the case for more government spending when legitimate distrust reasonably exists of dysfunctional financial and governmental systems.  That said, what really matters is whether the economy will be able to produce a sufficient quantity of real goods and services to provide for both workers and dependents several generations down the road.  The financial aspects of demographics per se should not play a role in policy formulation.

Any reforms which seek to address growth in the context of private sector debt deleveraging and demographics ought to be made with a focus on increasing the economy’s capacity to produce real goods and services today and in the future, rather than on ensuring positive actuarial balances through eternity. Unlike the case with individuals, social policy can provision for the future in real terms—by increasing productive capacity in the intervening years. For example, policies that might encourage long-lived public and private infrastructure investment could ease the future burden of providing for growing numbers of retirees by putting into place the infrastructure that will be needed in an aging society: nursing homes and other long-term care facilities, independent living communities, aged-friendly public transportation systems, and senior citizen centers.

Education and training could increase future productivity. Policies that maintain high employment and minimize unemployment (both officially measured unemployment, as well as those counted as out of the labor force) are critical to maintain a higher worker-to retiree ratio. Policy can also encourage seniors of today and tomorrow to continue to participate in the labor force. The private sector will play a role in all of this, but there is also an important role to be played by government.

On balance, if we were to focus on only one policy arena today that would best enhance our ability to deal with a higher aged dependency ratio tomorrow it would be to ensure full employment with rising skill levels. Such a policy would have immediate benefits, in addition to those to be realized in the future. This is a clear “win-win” policy, unlike the ugly trade-off promoted by both parties, who only differ in the degree to which today’s workers and future seniors are to pay for the mistakes of the banksters through misguided proposals to “reform” entitlements and put our future on a “fiscally sustainable” path.

Marshall Auerback is a market analyst and commentator.