The Future of U.S. Affluence

What is going on in the global economy?

“At present, the world economy is growing topsy-turvy, with more countries coming under its influence. Global markets — shaped both by impersonal forces and by governments’ political decisions — are poorly understood.”

Where’s the real pitfall?

“Most nations are tempted to pursue their own narrow interests on the assumption that some other country — or group of countries — will watch over everyone’s collective interests.”

What about the role of the United States in all of this? Why are you worried?

“Sometimes, the global economy needs governmental supervision. The question is whether it will be there in the future. The United States is less able to perform the stabilizing role — its trading position is diminished, its currency is less preeminent, its military power is less effective against terrorist threats — but there is no obvious substitute.”

What is the impact on Americans’ economic well-being?

“Americans’ personal borrowing will mainly follow the contours dictated by today’s high debt burdens, an aging society and the maturing of consumer credit markets.”

Doesn’t productivity offer the way out of this mess?

“Productivity gains may or may not match past performance, but even if they do, most of the increases may be siphoned off into higher taxes, higher energy prices (to combat global warming, among other things) and high health costs. The residual gains in purchasing power for many households may be slight.”

What do you see as the solution?

“We need to stem the welfare state’s mounting costs. This means curbing the spending for older Americans. If we don’t, the great danger is that the economy and welfare state will go into a death spiral.”

How about other options?

“Taxes may have to go up somewhat, but if they go up too much, they will lead to lower economic growth. The same is true of a permanent increase in the size of budget deficits.

“Lower economic growth in turn would make the promised benefits harder to pay — and threaten yet higher taxes or budget deficits. Social Security, Medicare and Medicaid are essential parts of the U.S. social fabric, but that does not mean that every benefit must be perpetuated forever.”

What was the reasoning behind the welfare state when it was created decades ago?

“When the U.S. Congress enacted Social Security and Medicare in 1935 and 1965, respectively, many older Americans were poorer than the rest of the population. In the Great Depression, from 30% to 50% of the 65-and-over populations was thrown onto the mercy of children, relatives and friends for food, shelter and care.

“Social Security and Medicare have moved beyond their original purpose of protecting people from destitution and have become retirement subsidies — welfare payments to enable people to enjoy their ‘golden years.'”

Is there anything wrong with wanting to live well in your “golden years”?

“The welfare state has in part created a reverse Robin Hood effect: It sometimes transfers income from the struggling young to the relaxed old. Even if this did not threaten economic growth, it would pose a moral issue: Is it fair?”