Saturday, April 9, 2011

The end of the social wage

Just reading one of Krugman's multiple hatchet job posts on the Ryan fiscal plan, and an interesting point emerges.

Krugman points out, amongst the many other fantasies contained in the Ryan document, that

The Ryan plan calls for cutting the top marginal rate to 25 percent — lower than it has been at any time in the past 80 years

Why is this so unrealistic? Why should it be that taxes have by necessity to be higher now than 80 years ago?

A point Krugman makes in the next post sums up exactly why that is the case. The plan:

has as its centerpiece a Medicare plan that will collapse as soon as seniors start getting their grossly inadequate vouchers

In other words, the aging of the welfare state means that there is simply no way that spending can be cut - the political veto point of older voters sees to that. So the point is that, even if the electorate as a whole decided that it had a preference for a 'smaller state', this preference could not actually be exercised, because the existing commitments of a 'larger state' built up by previous generations cannot be reversed. Cynical politicians try to imply that the trade-off is between lower taxes and higher spending on teachers' salaries, pork-barrel projects and welfare. In fact, it's between lower taxes and healthy grandparents.

What this all means is that a smaller state costs more than voters think. Because so much of the value of the social wage is deferred into the future, voters are tempted, in hard times and with limited real growth in living standards, to go for cash in hand now, and worry about their old age later. But of course in practice that can't work, because somebody else's old age has to be paid for now.

This is what I meant by time inconsistency in the previous post. but I guess there is also a big chunk of this which is inter-generational solidarity too. This is familiar stuff of course, but the link with tax, spend and deficit debates is rarely made.