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Paul and Larry Kotlikoff Debate our Economic Future
I was having an amiable argument the other day about our economic future with Boston University economist Larry Kotlikoff (The Coming Generational Storm; Spend 'til the End; Jimmy Stewart is Dead, which argues for what he calls limited-purpose banking, featured here and at kotlikoff.net.)
Our debate continued in cyberspace and though he's not the tallest economist on record, Kotlikoff's considerable stature as an economic intellect made us think his emails might be of broader interest.
The back story is...
...that I'd been preparing for a day in and around New York with zoologist/author Matt Ridley to discuss HIS new book, The Rational Optimist, which makes a techno-Panglossian argument I'm quite sympathetic to, summed up by Sgt. Pepper: "I've got to admit it's getting better; a little better all the time." (For a related version of the argument, see Stephen Pinker or his TED talk.)
So when Kotlikoff bemoaned our collective economic future, I demurred and argued that, in the long run, while he and I would indeed both be dead, the prosperity of humankind in general is -- probabilistically -- very much alive, even admitting some chance of extinction due to global warming, an asteroid, the revolt of the machines, grey goo, or a black-hole singularity.
Look how much longer we live -- in good health, I said. Isn't that the best indicator that life on earth has improved for us humans; i.e., that we have more OF it?
Kotlikoff's argument, long a lynchpin of his "generational accounting" analysis, is that by borrowing from the future to consume in the present, we're dooming our progeny to a DIMINISHED standard of living, that we're in for what he called "immiseration." He elaborated in an email following our encounter:
LARRY KOTLIKOFF: This page has productivity figures.Productivity per work grew by 33 percent in the 60s, 20 percent in the 70s, 17 percent in the 80s, 20 percent in the 90s, and about 24 percent in this decade. I don't see any acceleration of growth in these figures. Yes longevity has risen. But real wages per worker have stagnated. And the fiscal policy will hammer these workers and confine them to a life of relative deprivation (what I meant by the word immiseration). The inventors at the cocktail parties will be on their islands in the Azores or wherever while your kids and mine are slinging hamburgers and paying 30 percent payroll taxes on their meager wages.
PS: your optimism can be infectious. I'm going to need to be careful around you.
PAUL SOLMAN: We have enough stuff. This is the world J[ohn] M[aynard] K[eynes] imagined for the grandchildren [Keynes' 1930 essay, Economic Possibilities for Our Grandchildren], at least in the West. Longevity is the real measure of economic growth per capita. But yes, the issue will be between those who can afford the islands and those who can't. I'm betting on majority rule, however unruly. Though it's only a bet. Some chance of demagogue takeover, 'revolution.' Glad to see you coming around to focus on the key conflict to come.
This prompted Kotlikoff's final email:
LARRY KOTLIKOFF: The key issue is the amount of stuff per person and having more people means less stuff per person, whether the people are here because they were born or because they refuse to die.
So how to keep the amount of stuff growing? Productivity growth, as the numbers show, is not accelerating. At best, we can hope it remains constant. But if you run crazy fiscal policies like we have been running for 50 years, you end up with a transition path to a lower living standard which then grows at the same old productivity rate. If you run crazy enough fiscal policy, you can run the economy right into the ground and grow not at all.
We are running insane fiscal policy. If you call up Paul Romer, Michael Boskin, Bob Hall, Peter Diamond, Jeff Sachs, Peter Orszag, or any other prominent economist, and ask them is the fiscal policy we are now running is highly dangerous for the future economic prosperity of the country and the amount of stuff there will be to spread around. To a person they will say yes. They are coming to this conclusion from looking at the dynamic impact of generationally redistributive policies in a variety of different models. They will all have different solutions, but they will all offer solutions, which are major, immediate, and, in combination, extremely unpleasant.
In the last week, we've just seen the EU's fiscal problems almost lead to a major run on all the banks in Europe, which would have triggered a run on all the U.S. banks. We have created a system of interconnected fiscal and financial risk that may be without historic precedent. If JMK were here, he'd be screaming in alarm.
I don't get your calm at what's going on right now.
So I don't think we have reached consensus on this because I don't think you are sufficiently attuned to the damage generationally irresponsible fiscal policy and the associated very high work and saving disincentives (marginal taxes) can do to an economy. I am because of simulating the computer models and seeing the economies not converge if fiscal policy is profligate for too long. Not converge means, in this context, that the economy drops dead.
This study is the latest simulation study on which I've worked. If you look at the tax rates during the transition, they end up extremely high. This is probably the most detailed general equilibrium model of the world economy around. It just barely converges. Make the fiscal policy just a bit more irresponsible, and the economy collapses, by which I mean that the young are being expropriated to such a degree that they have no corn left over to save and invest. With no investment, you have no capital and with no capital, you have, given our standard assumptions, no output.
And this economy, being simulated, is a nice one -- one in which we have no multiple equilibria and panics and hucksters running the financial system. [By which Larry means, his computer-simulated economy is a best-case scenario, without the negative factors he lists.]
All that glitters isn't gold. For an economist, you are far too cheery.
PS by PS: on Larry's last two sentences: I'm not an economist. I only play one on television. I was born and raised a liberal arts humanist, which is why I can correct the Shakespeare quote. It's "All that GLISTERS [glistens] is not gold." And, with the help of Google, finish the verse: "Often have you heard that told. / Many a man his life hath sold / But my outside to behold. / Gilded tombs do worms enfold."
Of course, this is what Larry meant. I just don't happen to agree with his prognosis, long-term. I think the United States will work out its unfunded liabilities problems by amending social security (later retirement age, raised income ceiling for payroll taxes) and Medicare, by excluding more treatments.
The next few years, however, are anybody's guess. As is the relative position of the United States and the 'West' vs. Asia, say.
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