Thought for Thursday
My column in today’s Fin (subscription required) continues my efforts to debunk the generation game. (So far these efforts appear to be pretty much as futile as a campaign against astrology, but I persist anyway). I’ve extended my range of targets from the general pop sociology on this topic to the Treasury and its analysis of intergenerational equity.
This reminds me that I really ought to say something about the Auerbach-Kotlikoff idea of generational accounting, which had something of a vogue in the early 90s and is still helping to justify generational chatter. Auerbach and Kotlikoff tried to systematically assess the impacts of government fiscal policy on members of different generations. In my opinion, what they produced was a complicated way of answering the question “Are the present settings of tax and expenditure policy sustainable in the long run”. If there’s interest, I might try a more detailed post on this some time.
In the meantime, here’s my article:
It’s almost impossible these days to open a newspaper without seeing some reference to generational conflict, generational change and intergenerational equity. Issues as diverse as the leadership of political parties, the price of housing and the appropriate level of public savings are routinely discussed in terms of the birthdates of those affected.
Moreover, arbitrary markers such as the decline in the birth rate in 1961, are used as a basis for labelling people as Baby Boomers or as members of Generations X and Y. All of this is little better than astrology, but seems to be taken seriously by people who should know better.
most of what passes for discussion about the merits or otherwise of particular generations is little more than a repetition of unchanging formulas about different age groups – the moral degeneration of the young, the rigidity and hypocrisy of the old, and so on.
Membership of a particular age cohort is an important factor for those who reach adulthood at a time of war or economic chaos, but otherwise is relatively unimportant. Even in these cases, age is less important than class or educational levels (not to mention gender) in determining life experiences and life chances.
But the generational analysis that is popular at present doesn’t even have this limited validity. The great divide in terms of the experience of coming of age falls in the early 1970s with the collapse of the long postwar economic boom and the end of the Vietnam war. Those who reached adulthood before the 1970s, having been born during 1930 and the early years of the baby boom entered a labour market with an endless supply of jobs.
Employment opportunities for new entrants to the labour market dried up rapidly in the early 1970s. By the time the last of the baby boomers left school, the rate of youth unemployment was 30 per cent, higher than today..
The pop sociology surrounding generational discussion makes a complete mess of all this, splitting groups with similar experiences, and lumping together people with nothing in common except the fertility of their parents.
The real problems arise when economists get in on the act. The Intergenerational Statement released as part of the 2002-03 Budget .was a prime example. Projections of public expenditure over the next 30 to 50 years revealed that, under current policy settings, expenditure would grow more rapidly than tax revenue, creating a gap that would need to be filled either by higher taxes or by changes in public spending policies.
This result was presented in terms of generational conflict. In reality, however, it reflected nothing more the long-term structural trend in which the share of GPD allocated to services, particularly health care, has grown.
There are good economic reasons why the expectation of future growth in spending demands should lead us to support larger surpluses in the near future than would otherwise be the case. The most important such argument is that this helps to avoid costly variation in tax rates over time.
Given such surpluses, it is natural to raise the question of how they should be allocated. Since the object is to smooth tax rates, investments that do not yield a financial return to the public sector may be disregarded. One possibility is to reduce public debt. Over the long term, however, higher returns may be achieved through equity investment, whether this takes the form of passive investment in a diversified portfolio or active ownership of public enterprises.
The New Zealand government has adopted a portfolio investment approach as part of its plan for smoothing the financing of health and retirement incomes policy. A similar approach has been advocated for Australia by Ric Simes of Lateral Economics.
There are sound arguments to support these proposals. But casting the issues in generational terms obscures the issues. Even if we are not inclined, like Groucho Marx, to ask, ‘What has posterity ever done for me’, it is hard to sell the idea that we are morally obligated to scrimp now in order to benefit future generations who will, undoubtedly, be substantially richer than we are.
Arguments about tax smoothing and structural change may lack the pop appeal of claims that we are robbing future generations. But these are the arguments we need to have if we are to are to formulate a long-term Budget strategy.