January 30, 2008


America still works: The US economy is slowing down, but the long-term trends for the country are more favourable than many think. There has also been a sharp improvement in many of America's social pathologies, such as violent crime and drug abuse (Michael Lind, February 2008, Prospect)

Anyone who reads the serious press about the condition of the US might be excused for believing that the country is headed towards a series of deep crises. This impression is exacerbated by economic slowdown and by the presidential primaries, in which candidates announce bold plans to rescue the country from disaster. But even in more normal times there are three ubiquitous myths about America that make the country seem weaker and more chaotic than it really is. The first myth, which is mainly a conservative one, is that racial and ethnic rivalries are tearing America apart. The second myth, which is mainly a liberal one, is that America will soon be overwhelmed by religious fundamentalists. The third myth, an economic one beloved of centrists, is that the retirement of the baby boomers will bankrupt the country because of runaway social security entitlement costs.

America does, of course, have many problems, such as spiralling healthcare costs and a decline in social mobility. Yet the truth is that apart from the temporary frictions caused by current immigration from Latin America, the US is more integrated than ever. Racial and cultural diversity is in long-term decline, as a result of the success of the melting pot in merging groups through assimilation and intermarriage—and many of the country's infamous social pathologies, from violent crime to teenage drug use, are also seeing improvements. Americans are far more religious than Europeans, but the "religious right" is concentrated among white southern Protestants. And there is no genuine long-term entitlement problem in the US. The US suffers from healthcare cost inflation, a problem that will be solved one way or another in the near future, long before it cripples the economy as a whole. And the long-term costs of social security, America's public pension programme, could be met by moderate benefit cuts or a moderate growth in the US government share of GDP. With a linguistically united, increasingly racially mixed supermajority and a solvent system of middle-class entitlements, the US will remain first among equals for generations to come, even in a multipolar world with several great powers. [...]

In comparison with the problem of healthcare cost inflation, the alleged crisis of social security is puny. Claims of a "crisis" revolve around two dates: 2017, when the social security surplus runs out and the programme becomes a pure pay-as-you-go system based on annual payroll taxation; and 2041, when payroll tax revenues fall short of expenditures. Even in 2041, social security will be able to pay most of its obligations. The crisis, then, is nothing more than the fact that taxes will have to be raised or benefits cut before 2041 in order to supplement a mostly sound system. (Great confusion is spread by the phrase "unfunded liabilities." The only programmes with "unfunded liabilities" are those, like social security, paid for by dedicated taxes, in this case a payroll tax. This permits calculations of future divergences between dedicated tax revenues and expenditures. The Pentagon budget is paid from general tax, so the concept is inapplicable.)

The use of dates like 2017 and 2041, moreover, gives a specious precision to claims that in fact are extremely dubious. This is underlined by the fact that the US government regularly revises the date of the alleged social security apocalypse, as it reconsiders its assumptions. The "intermediate" calculations on which current estimates are based are almost certainly unrealistic. They assume a low rate of productivity growth in the US over the next half century of 1.7 per cent. This is only slightly higher than the average of 1.5 per cent in the long period of low productivity growth from 1973 to 1995. But from 1996 to 2006, US productivity growth boomed at an annual rate of between 2 and 3 per cent in most years. Productivity growth slowed after 2004, but surged ahead in the last quarter at 6.3 per cent. Nobody knows whether the resumption of high productivity growth in the last decade was a blip or the beginning of a new pattern. The point is that if US productivity grows at a rate near the historic average of 1945-2008, the picture for the solvency of social security is much brighter. (This is not the place for a full discussion of economic prospects, but it is worth noting that US industrial output rose nearly 35 per cent in the past ten years, faster than any other G7 country.)

Moreover, what the doomsayers neglect to tell the public is that if the cap on the amount of income subject to payroll taxation were lifted, the result would be such a flood of money from high earners that the problems of social security would be solved forever. And even if payroll taxes were raised on all workers, as a result of productivity growth the average earner in 2050 may well have wages that in real terms are at least 60 per cent higher than today's.

It is possible, and in my opinion likely, that in the future congress will choose to infuse general revenues into the social security system, as an alternative to raising payroll taxes on all workers. If that is the case, then the only question is whether social security is affordable. The answer is clearly yes. The share of government at all levels as a percentage of GDP is lower than that in almost all other industrial democracies. In the US, government expenditure at all levels—federal, state and local—as a share of GDP hovers just above 30 per cent (despite spending a staggering $626bn on military-related costs in 2007, over 22 per cent of the federal budget). By comparison, the EU-25 average was 47 per cent in 2005. An additional 2 per cent of GDP can be added to social security over the next half century without altering America's position as one of the least statist economies in the world.

It's nice to see Mr. Lind is back on his meds, even if only temporarily and even if it doesn't make up for his past ravings.

Posted by Orrin Judd at January 30, 2008 8:05 AM

and 2041, when payroll tax revenues fall short of expenditures. Even in 2041, social security will be able to pay most of its obligations."

I will be 70 in 2041. In 2006, there were about 1.2 million more births than my birth year.

We'll be fine on Social Security.

Posted by: Brad S at January 30, 2008 8:42 AM

Brad, by the time you're 70, the world will so different, you won't even remember what the media were bleating about today, just like we don't remember much about 1975, except it was the aftermath of Watergate and the prelude to the real horrors of the Carter years.

You'll be fine as will the rest of the county.

Posted by: erp at January 30, 2008 10:57 AM

I just hope the myth of a recession lasts through today's Fed meeting. Another 1/4 cut in the prime rate would significantly lower my mortgage.

Posted by: Bartman at January 30, 2008 1:46 PM

The general culture is improving as the days of shame, the days when cowardice had been the handmaiden of treason, fade into the distance.

In those days, the poltroon impulse drew millions into the so-called "counterculture." Most of them rejoined their country after the immediate possiblity of having to bear arms for it had dissapated. Sadly, a great many, even of these, retained an attachment to the leftish ways of thinking they had feigned as a camouflage for their iniquity.

Posted by: Lou Gots at January 30, 2008 4:54 PM