September 7, 2011

Who Pays for Past Mistakes

Marc Comtois

Generational warfare: It's bound to happen here in Rhode Island with the pension crisis. It's also happening nationally on the budget deficit debate with the new Super Congressional panel set to convene. Education Policy wonk Rick Hess offers his perspective:

You're either with the kids or with those rushing to the ramparts to defend retiree entitlements. So, which is it?

Consider the President's vague calls last week to spend billions more on school construction and preserving school staffing levels (which would've been more compelling if he had offered any inkling as to how we might pay for it). Obama finds himself unable to do more than offer marginal, dead-on-arrival programs because the feds have spent more than half the budget just mailing checks to retirees, covering health care bills, and paying interest on the accumulated debt. Everything else—schools, financial aid, the FBI, defense, transportation, the environment, NASA, foreign aid, you name it—has to make do with what's left.

As Julia Isaacs at the Brookings Institution has pointed out, the federal government now spends about $7 on seniors for every $1 it spends on children....Do we really think it's a good idea to spend half of all non-interest spending on making retirement ever more comfy?

Past or future? Which will it be? He provides an important breakdown of we pay for current Medicare spending:
[T]oday's retirees have contributed taxes that amount to less than half their Medicare outlays. Today's Medicare payroll tax doesn't fund Medicare--it funds only Part A (hospital expenses). Premiums cover just 25 percent of Part B (doctor treatments and visits). And premiums for Bush's Medicare drug program (Part D) cover just 10 percent of the cost. The rest of the hundreds of billions in outlays for these programs is vacuumed out of general revenue. (See here for a good breakdown on Medicare funding.)
And Social Security:
Social Security has the government reflexively spending hundreds of billions to mail out monthly checks to the wealthiest segment of the population, without an ounce of thought as to whether that's the best use of borrowed funds (the famed Social Security "trust fund" being, you know, nonexistent). The Social Security Administration reports that more than 20 percent of those 65+ have incomes over $65,000 a year. In a nation where median household income is in the $40,000s, is it really radical to rethink how much we mail to these households every month?
As for taxes:
Toss in all of the tax deductions that President Obama called for eliminating this summer, including the corporate jet deal, and you address another $400 billion over 10 years, or less than 2 percent of the shortfall. So, just keeping the deficit from exploding will involve all those taxes and trillions more in cuts. Those demanding substantial new spending then need to raise hundreds of billions beyond that, through additional cuts or tax increases....Even with hefty tax increases, protecting existing entitlements ensures that we won't have much available for schools, colleges, or anything else.
He urges education advocates to step up to the plate and take on the AARP and similar groups so that more money can go towards kids and education.
In short, it's possible to get our house in order, free up dollars for schooling, and shift dollars towards youth. But doing so requires facing down the massive, intimidating seniors' lobby.

Shared sacrifice involves asking Baby Boomers and retirees to step up and, you know, sacrifice. It doesn't mean holding harmless the generations who voted themselves free stuff through the good times and doesn't rely almost entirely on raising taxes and curtailing benefits for the under-40 set.

Hess' bailiwick is education and his goal is to increase funding for it. Regardless of whether you agree or disagree with Hess' priorities, his argument helps to lay out the choice that needs to be made: should the people who benefited or made the mistakes in the past be held most accountable for those mistakes? Or should their kids and grandkids?

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Middle class and middle generation. Yet never have I felt so polarized.

Of course those that made and benefited from the mistakes should be the ones held accountable. Of course that won't happen. But even if I'm wrong and they were to sacrifice and free up dollars, transferring it to schooling is, in my opinion, just another mistake.

Mark Twain's observation, "Everything has its limit--iron ore cannot be educated into gold", seems pretty accurate to me.

Right now, perhaps more than ever, we need to create a climate that promotes useful productivity. More productivity equals more government revenue. We've got to work our way out of this mess were in. Higher taxation rates, for anybody, is not the answer.

Posted by: swamper at September 7, 2011 8:51 PM

I hate to say it but given the state of education today, you can build all the schools you want and retain all the teachers you can, the system is still a failure. Right now the the skills gap ratio is so bad that there are fields that have open jobs going unfilled. In the health care practitioners and computer fields alone the ratio of open jobs to workers is 3 to 1. Just give the money to the retirees. Maybe it will stimulate consumer spending.

Posted by: Max Diesel at September 7, 2011 10:08 PM

The system is certainly a failure. We can't seem to educate the iron out of the ore, and even if we did do that decently, there's not a whole lot for plain old iron to do these days here in the USA.

There used to be a job for iron. And it was the backbone of our economy. Manufacturing, or put more simply, factory work was readily available for those without the wits or resources to attend an institute of higher learning. The sad part is pretty soon one will need a bachelor's degree to flip burgers, only serving to furthur exaserbate the problem. Why hire a high school graduate when a college graduate is wandering the streets looking for work?

We need to put some balance into our economy. Our increasingly service based economy needs to be balanced with manufacturing. Service only shifts money around. Manufacturing creates wealth. It also provides more holes for the pegs of our society.

Posted by: swamper at September 8, 2011 7:22 AM

"spend billions more on school construction and preserving school staffing levels"

Why do I suspect that this is just throwing a bone to the teacher's union? It isn't as though the schools are operating efficiently.

Rather reminds me of using stimulus funds to prop up failing governmental units.

Posted by: Warrington Faust at September 8, 2011 8:16 AM

Look at the numbers swamper. Unemployed BAs are at 5% while less than high school is at 14%. There are jobs out there but Americans don't have the skill set to fill them.

Posted by: Max Diesel at September 8, 2011 10:40 AM

Yes Max. That chart illustrates nicely exactly what I'm talking about. Sure, some high tech manufacturing does indeed require higher education to operate the sophisticated hardware.

I am looking at what I believe to be the core problems:

Our wealth is being exported more and more every day with each manufacturing job lost to, say, the Chinese. It really doesn't require much to learn how to operate most manufacturing machinery.

Our money is funding terrorists and friendly nations with every barrel of oil that remains untapped and every yard of coal that goes unburned due to environmental constraints. This amounts to unrealized opportunity and exported wealth.

Commercial fishing is a basic wealth creating industry that has been eroded by government mismanagement and over regulation resulting in fleet consolidation and offering fewer jobs. It has flung the doors wide open for the importation of cheap and inferior product.

These are but a few examples of the wealth creating jobs and industries that have been outsourced that require the most rudimentary form of education. Manufacturing, extraction, and agriculture are at the base of the wealth creation pyramid. Those that fill the majority of these positions need little more than a high school diploma and the desire to work.

We have created an hostile and unprofitable environment for these basic industries, whether it be over regulation, permitting, environmental hypersensitivity, union strangleholds, over the top safety requirements, and many more restraints that I've not mentioned.

The end result is a vacuum created by the loss of these industries and jobs. The sucking sound is our money being exported and our poorest and more likely less educated citizens grossly underemployed.

We've created an environment where there is little to do for the common foot soldier. What's left of what used to be their role is now being filled with decorated, yet indebted officers. I think the chart referenced proves this theory.

Posted by: swamper at September 8, 2011 9:42 PM
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