Yesterday I stopped with a promise to show a more general,
or maybe more realistic, version of the simple diagram I was using to
illustrate Nick Rowe’s point about the burden we can place on future
generations by borrowing today even if we never place a burden on future time
periods. I’ll do that here, but
first I want to make quick point: this is not just an exercise. The points do have relevance to current
issues even if the diagrams looked simple. For example, the last point I made yesterday was that
economic growth can make the issue of inter-generational equity a lot muddier,
and can make a current plan that imposes an extra tax on future generations
look inter-generationally equitable.
This is the exact issue that Dean
Baker was raising when he said this:
“However, the change in the projected growth of
health care costs also has another much more important implication that went
altogether unnoticed. It means that workers in the future will be considerably
wealthier than we had previously believed. In other words, if healthcare reform
will effectively contain cost growth without jeopardizing quality, then our
children and grandchildren will be far wealthier than in a world without health
care reform.
The 2010 projections show the average worker's wage
will be 47.8 percent higher in 2040 than it is today. This is after adjusting
for inflation, so the projections show that workers' purchasing power in 2040
will be 47.8 percent greater than it is now. The new projected annual wage for
2040 is 6.3 percent higher than figure projected for last year.
To
understand the importance of this change in wage growth projections, suppose we
told our children and grandchildren that the payroll tax would have to be
raised by 3.0 percentage points to support Social Security (an extraordinarily
large increase). They would have more money in their pockets with the tax
increase under the current projections, than with no tax increase and the wage
growth projected in the 2009 report.”
So
if we can make our simple diagram more realistic, and provide some more
accurate data to fill it, we might be able to see something about our current
decisions that matters. I don’t
plan to do all of that here, because it sounds like a career rather than a blog
post. But I’ll take one step in
that direction. Actually,
this is an area where I haven’t done a lot of reading, so I’m sure there are
better versions somewhere on the web of the graphs I will show here, but I
haven’t been able to find them in what I admit was a fairly brief search. Maybe someone who reads this can point
me in the right direction.
An
initial word of caution is in order: I grabbed the easiest real world data I
could find to do this. That turned
out to be the median household income by age group, which I got from the Census
Bureau in the Commerce Department historical data on incomes here. I looked at table H-10, all races, to
grab some numbers to fill a graph that showed the median of income by age of
head of household by year, that is, by what I was calling an accounting period
in my last post. That may not be
the best data to use for this---I mean, why the median instead of the mean, for
example? And since the data I had showed things like “15 to 24, 25 to 34” and
so on, I assigned the number for that category to the middle of that
range---meaning I said that the number for “15 to 24” was what a 20 year old
head of household made. So that
gave me data for ages 20, 30, 40 and so on. Finally, in order to make the data
fill the graph I had to do a lot of interpolation to give me a data point for
each year of life, which I did in the easiest and probably least justifiable
possible way, which was straight lines between the points. Because of this, and
knowing that once you put something on the web it can go anywhere and be used
for anything, I’ve embedded nasty warnings at the tops of these graphs that
they are not to be used for argument in favor of against any specific policy
agenda. A graph like this can be
used, but first it has to be filled with trustworthy data that is
appropriate to the task.
Here’s
the result (below). This is very
like the simple two-age diagram from yesterday’s post, except I have ages from
20 to 70, and years 1967 to 2010.
I think this kind of diagram can be useful---I’m tempted to
use the phrase “no matter how you slice it”, because that’s what I want to
do. The first slice direction is
already there in the diagram: that’s the slice-by-year or
slice-by-accounting-period that is shown as the various color slices in the
picture. The purple slice in the
front is the data for distribution of income in 1967. It has the shape you might expect: young heads of household
have modest incomes, but that grows through life until they get to be about 50
when some of them begin to retire.
After that it falls off fairly rapidly, and the lowest lifetime income
occurs at (or after) age 70. In
some ways, that might even be optimal: it’s in the middle of life, from 30 to
55, that many people have the heaviest responsibilities for supporting their
children, or for helping their parents and their ne’er-do-well rapscallion
siblings.
A second slice direction would be to slice along the “year”
axis. You can see one of those
slices by looking along the edge of the picture, at age 20. But here’s a version that shows several
such slices:
Interesting.
People who were seventy in 2010 were doing a lot better than people who
were 70 in 1967. The elderly have
done fairly well over the last 40 years.
The rise in their incomes was not impacted much by the dismal economy of
the late seventies and early eighties, but it was also not accelerated by the
Volcker recovery from the Volcker recession through the mid-eighties. Whether you think this is a good or a
bad thing is a matter of personal vision. On the other hand, the thirty year
olds have been buffeted by every recession, early eighties, early nineties,
2000, and the most recent one starting in 2007. People who were 30 in 2010 were better off than those who
were 30 in 1967, but not by much.
And so on.
Now let’s look at the cohort slices, the 45 degree slices I
sketched on top of the diagram in colored lines. Here’s what those look like when you slice in that
direction:
This is a picture of the trip through life of particular
groups, particular cohorts. People
who were 20 in 1967 are the blue line on the top. The fact that they are on top, and that the lines nest
underneath each other in age order, is evidence that things do get better; that
in spite of everything each cohort so far is better off than the cohorts before
them. The blue light line at the
bottom is the group that was 60 in 1967.
The teal line above that is the group that was 50 in 1967. And so on. The right side edge of the graph is the income---or their
rough estimate within my massaged data set---of each of these cohorts at age
63, and each of the lines start in the year 1967, so that the ages of the
cohorts depicted in these lines will line up. One thing this means is that events in time, like the
early-eighties recession, occur at different points along the different
lines. That event, for example, is
the downward kink in the dark blue line at roughly age 32, and in the yellow
line at roughly age 42, and so on.
You can see that the cohorts that were in their thirties or forties when
that recession started had a reasonable recovery---but those that were in their
fifties or older (the purple line at roughly age 52) basically never recovered
from it. I think that may be
true in every recession.
One other thing that’s immediately evident from this picture
is that life is not a smooth journey: all that bumpiness, the ups and downs of
the lines, shows the turbulence of the times these cohorts lived through. And this was a very easy time with
limited economic turbulence! This
graph covers the time period that economists have been calling the “great
moderation”! I would guess that
the life-lines of cohorts that lived through the world wars, or the great
depressions, or the dust bowl, were vastly more turbulent than these.
You may have noticed that I haven’t talked about slicing the
NICE graph along the vertical axis, that is, along income slices. That’s partly because I don’t know what
to do with that graph. Economists
use contour maps of mountains a lot (ask your local economist about isoutility
curves or isoquants or iso anything else: they are all contour plots of
mountains of utility or quantity or something.) But I’m not sure it shows anything new or enables anything
we haven’t already seen. But it’s
worth plunking a contour map down here just to be complete. So here it is:
There is one thing that’s easier to see in this view than in
any of the others. If you were 20
years old in 1971, your cohort went right through a sweet spot in this graph,
the highest median household income shown. If you were 20 in 1988, you seem to be moving through a
mountain pass: your cohort seems to be skirting that peak of incomes.
Recessions hurt.
But they don’t hurt everyone equally.
So I’m back to where I started, in my opinions, in a
way. Does debt “burden” future
generations? It depends. But failing to create sufficient stimulus
is burdening our current generations, all of them that are around right
now. We have a lot of idle
resources, and record low interest rates---actually negative real rates on Treasury
bonds. We can incur debt now and
invest in infrastructure and education, and the end result will help us all get
up off the floor of this mountain pass right now, and will lay the foundation
of prosperity in the future.
Krugman wrote a book with this title: End This Depression
Now! It’s a good book. I recommend it. We can, and in this case, under these conditions, that means we should.
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