The din of current events can make it difficult for anyone to think. And with the possible exception of a Kiss cover band on karaoke night, nobody does din like the federal government.
Between the election and the fiscal follies, this has been a particularly difficult time to get any sort of perspective on what is happening in our economy. Without that perspective it is very hard to feel comfortable about where we are and where we are headed.
We are not the first people or the first Americans to live in uncertain, turbulent times, of course. During the upheavals of medieval times and the Renaissance, educated Europeans found solace in the “Music of the Spheres,” the musica universali. It was not music as we normally think of it today, for it was the sheet music of soundless mathematics that recorded and revealed the rhythms and harmonies of day and night, the seasons, the planets and the universe.
It was a great idea ultimately ruined by a misguided need to define beauty ahead of time instead of appreciating it when it was discovered. The belief that an ellipse was somehow less perfect than a circle, for example, eventually caused a collision with reality. Ultimately the inability to see that complex things had a beauty of their own brought an end to the music of the spheres.
It did not bring an end to the recurrent duel between simplicity and complexity in our world, though.
The reality of our economic system isn’t simple at all, but its complexity has a certain beauty of its own. There is nothing wrong with simplicity — most of us would prefer it in our lives — but we don’t want to overlook some of the powerful forces reshaping our world just because they are complex and make the math more difficult. A circle, after all, is easier to deal with than an ellipse, but that is not going to change the shape of the earth’s orbit.
Nowhere is this more evident than in the area of “entitlements,” the federal government benefit programs embodied in law where each can be identified by its Title number in the United States Code.
Most entitlements are transfer payments that the government uses to redistribute income. They support a diversity of programs, including government worker retirement, Social Security, veterans benefits, Medicare, Medicaid and food stamps.
Every one of these entitlement programs is in financial trouble to some degree; some underfunded currently, some underfunded actuarially, and some insolvent.
While we need to deal with this as quickly as possible, simplicity so far has proven to be better at feeding rhetoric than solving the problem. Taking a look at the system’s complexity might help us get past some of the animosities that are blocking our path to agreement.
Social Security provides just one example of complex forces affecting a supposedly simple system. One reason it is going bust, for example, is almost never discussed, because it is an added complexity we know little about.
In its simplest form, stripped of its trust fund intermediary function, the Social Security system is based on taking a percentage of people’s current wages and distributing that money to previous wage-earners who have retired.
Part of the reason that the Social Security system is going bust is that people are living longer and their cumulative retirement payments have risen accordingly. That’s simple enough.
Another reason, though, is that the system is based on a payroll tax imposed on wage earners and their employers. When wage earners’ share of national income declines, as it has, Social Security taxes do not grow as fast as the overall economy or the number of workers, causing an imbalance.
The common factors in people’s growing longevity and labor’s declining share of national income are technology and innovation. Unfortunately, neither of these factors are simple; they are not easy to predict, and their real effects on our economy are often only apparent when we look back on them.
The same technology that adds years to people’s lives, for example, pushes the costs of Medicare and Medicaid to the point of insolvency — and will do the same for Obamacare. The same technology that adds to our standard of living pushes wage earners out of the workplace, which raises other entitlement program costs.
We need to take some immediate steps to get the entitlement programs pointed in the right direction. We can be patient about reaching the point where all entitlement programs are on a sound financial footing, but we need to change course right away. Then we can drop the rhetoric and get to work on our understanding of innovation and technology. That’s music we can all enjoy.
James McCusker is a Bothell economist, educator and consultant. He also writes a monthly column for the Herald Business Journal.