Imagine a time machine has just moved you back 75 years, to the spring of 1928. If you are a little hazy about history, here are a few reminders:
The armistice that ended World War I will have its 10th anniversary in a few months, about the time that Herbert Hoover will be elected president. World War II won’t break out in Europe for another 11 years, though it won’t be too long before Japan attacks China.
The economy is booming, electric motors are replacing steam all over industry, telephones and electric light have reached everywhere except farms. The stock market is booming and will not collapse for another 16 months. Prohibition is still in force.
And while more and more families own automobiles, streetcars remain ubiquitous in urban areas.
The atomic bomb, nuclear reactor, digital computer, television, jet engine and polio vaccine are still decades in the future, as are TV dinners, microwaves, VCRs, space travel and genetic engineering.
The U.S. population has just passed 120 million. In a few years the Census Bureau will issue its famous finding that the U.S. population eventually will peak at 135 million and never exceed that level.
OK, now that you are oriented in 1928, please project government revenue and spending for the time in which we live, the first decade of the 21st century.
“Utterly impossible,” you respond, and you are entirely right.
Keep that in mind when economists reach conclusions by projecting trends far into the future.
The issue arose last week when the “Financial Times” reported on a study two economists did for the U.S. Treasury Department. Jagadeesh Gokhale and Kent Smetters projected what budget deficits would be over the long run, using current trends in growth of output and income and current tax policies and spending based on existing Social Security and other program rules. They then converted the projected deficits and surpluses to one lump sum in 2003 dollars.
Their conclusion was that if one takes existing promises (in the form of Social Security and other entitlements) together with existing tax rates, we face a cumulative shortfall of some $44 trillion. That is about 10 times as much as the entire national debt “held by the public.”
The “Financial Times” report made a brief flash and then dropped off media radar screens. Most of the commentary was about whether the Bush administration had deliberately withheld the report — commissioned at the personal behest of former Treasury Secretary Paul O’Neill — because its findings contradicted the wisdom of the Bush tax cut. However, the report’s conclusions themselves apparently were so esoteric that the story quickly faded away.
This is highly unfortunate. It is important to remember that whenever something “can’t go on like this forever,” it usually does not. If current tax levels and benefits promised cannot be sustained in the long run, they won’t be. Benefits will be cut or taxes raised or both.
That said, the better the public understands an issue and the earlier it acts, the easier any required adjustments usually are. Aging of the baby boom generation is going to impose large changes on many aspects of our society, including Social Security and Medicare. If we start making adjustments soon, even if only gradually, our society will be a lot better off than if we wait until we are in crisis.
Japan has been in an economic funk for nearly 14 years because its leaders have consistently refused to tell voters that hard adjustments are needed. Protesters are on the streets of France right now demonstrating against precisely the sorts of changes to retirement entitlements that the United States also will have to make eventually. If they succeed in delaying reform, they will make their nation and their households poorer in the long run.
The lesson? Take specific estimates based on long-term projections of current programs with very large doses of salt. Life throws up lots of surprises for nations as well as individuals.
But don’t let a healthy skepticism about specific forecasts of a distant future blind you to the importance of all long-term trends. Nations with a cultural propensity to adjust with the times do better than ones where all change is resisted, even when obviously necessary.
© 2003 Edward Lotterman
Chanarambie Consulting, Inc.