It can be argued that all this glumness repeats a historical error: projecting the present onto the future. Just because the economy is rotten today doesn’t mean that it will always be. After World War II, the Nobel Prize-winning economist Robert Fogel has recalled, there was widespread “alarm about massive unemployment.” Eleven million veterans and 9 million defense industry workers had to be re-employed. People feared a new Depression. It didn’t happen, because pent-up demand for homes, cars and appliances fueled a hiring boom.
Unfortunately, this caveat is only half relevant now. Our future would certainly be brighter if the economy resumed strong growth, but that wouldn’t automatically ensure higher living standards. A society generates those through productivity — increases in efficiency, technology or business organization that lower costs or enable firms to pay higher wages. Without higher productivity, broad living standards won’t rise. But even with it, the young may not enjoy gains.
The explanation is that productivity improvements have already been committed to demographic trends we can’t alter (aging) or problems we haven’t addressed (runaway health costs, deteriorating infrastructure). Future productivity and income gains will be diverted to these uses: higher taxes to pay for an older population; health spending; and taxes and fees to repair roads, schools and water systems.
It’s already happening. “A decade of health care cost growth has wiped out real income gains for an average U.S. family,” report two Rand Corp. researchers in the journal Health Affairs. From 1999 to 2009, total compensation of a typical four-member family with employer-paid health insurance rose by $23,000. About 95 percent of this (almost $22,000) went to inflation and health care, including employer costs, family premiums, out-of-pocket payments and taxes. For most families, higher costs didn’t deliver parallel benefits. The reason: Health spending is concentrated; the sickest 5 percent account for half the total.
Meanwhile, spendable incomes — what people consider their living standards — stagnate. The squeeze will continue. In 1990, there were 32 million Americans 65 and over; by 2040, that’s reckoned at 80 million. Rising costs for Social Security and Medicare have created a new political dynamic: If benefits for the elderly aren’t cut, burdens on the young will go up. Decaying infrastructure poses similar choices. Either pay for repairs or tolerate substandard roads and dilapidated schools.
Our children’s futures have been heavily mortgaged. That’s true even if the economy returns in a few years to “full employment” (say, 5 percent unemployment) and past productivity gains (about 1.7 percent annually since 1966) continue. If today’s weak recovery persists, the outlook darkens. Unemployment will remain high, say 7 percent to 9 percent. Wage increases will remain depressed. Young workers will have trouble finding jobs to develop the skills and contacts that lead to better jobs. Productivity growth might falter.
America is a competitive society. It’s not guaranteed that children achieve their parents’ relative economic status: The children of parents in the richest 20 percent won’t automatically stay in the richest 20 percent. Some children advance; some fall. But if overall incomes are rising, even those who don’t advance relatively often have higher absolute incomes than their parents. Studies by the Pew Economic Mobility Project confirm this. Two-thirds of Americans have higher incomes than their parents; half of those either ranked in the same spot of the economic distribution as their parents or lower.
Generational gains tempered individual setbacks. We may now lose this comforting cushion. Our leaders might try to avoid that by boosting economic growth, controlling health spending and trimming benefits for the elderly. But we aren’t sure how to do the first and lack the political will to do the second and third. The future is never entirely predictable, but downward mobility is not just a scary sound bite. It’s a real possibility.
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