What I'm Reading: 1
By Arnold Kling
Boomergeddon, by James A. Bacon. He sent me a copy after he saw my piece on guessing the trigger point for a sovereign debt crisis. Years ago, I read Boomernomics by William Sterling. That book also raised the issue of fiscal sustainability, but I recall it as being less alarmist.
Bacon’s book has many sections, one of which is on Washington, D.C. as “the imperial city.” He points out (p. 40) that in the 9 counties that make up our area Barack Obama defeated John McCain by a margin of 72.5 percent to 27.5 percent.
An excerpt from p. 153:
The United States may be in denial today about the inevitability of Boomergeddon, but impending disaster will be abundantly clear 10 to 15 years from now. The all-consuming focus of the media will be the out-of-control budget deficits, runaway interest payments on the national debt, debt downgrades, the declining dollar, bankrupts states and municipalities…Businesses will be failing. The health care system will be breaking down. Social Security will be on the edge of insolvency. Americans will be entering the crisis of the century, and there will be no hiding it.
I think this is overstating the case. For example, as you know, I do not think of Social Security as having a trust fund. By the same token, it cannot become insolvent. To me, it is a tax-and-transfer scheme. As the Baby Boom generation requires, either taxes have to go up or transfers have to be scaled back. This is basic arithmetic, that not even Paul Krugman can find away around. But I would not use a term like “insolvency.”
What I see as quite possible is a sovereign debt crisis for the United States. If a crisis comes, it will force the government to decide which promises to break. My guess is that we will see only limited cuts in payments to seniors. Instead, I suspect that in a crisis the U.S. government would try a combination of a capital levy (at tax that quickly confiscates financial assets) and rapid money creation. In any event, I think a lot of personal savings will get wiped out.
I think that the likelihood of a crisis over the next twenty years is high, in part because most Americans do not believe that a crisis is possible. I know many couples in their late fifties who are looking forward to retirement, even though they have no pension, less than $250,000 in savings, and average annual spending of more than $75,000. These people know enough arithmetic to be able to calculate that their savings will last them only about four years. They just put it out of their minds.
That is how the leading politicians and pundits deal with the unsustainable budget. They are perfectly capable of understanding the arithmetic. But they put it out of their minds.