What If We All Were Rich?
Barack Obama has said on numerous occasions that if you make less than $200,000 he wants the government to look after you, but if you make more than that you’re on your own and can fend for yourself.
Okay, I know those weren’t his exact words. But it’s a reasonable approximation.
Now consider this. What if we lived in a world where the average family earned more than $200,000? What if almost every family earned more than $200,000? I’ll tell you in a moment why it’s reasonable to speculate this way and why it’s relevant for current public policy. First, I want to consider the implications of almost everybody being rich.
For one thing, we could forget the funding problems of Social Security and Medicare. People who are rich can take care of themselves. In fact, without too much trouble we could cut the federal budget in half. We could eliminate the federal debt in fairly short order. Then we could cut everyone’s federal taxes in half. We wouldn’t need ObamaCare. There would be no appealing argument for card check. In fact, other than some environmental goals, the entire Obama domestic policy agenda would become unnecessary, superfluous and undesirable. Indeed, from the Obama administration’s point of view, if everyone were rich there would be almost nothing for government to do!
Have I got your attention? Okay, now I’ll tell you why this is not a pipe dream.
As Gary Becker pointed out the other day, from the middle of the 19th century to the end of the 20th century (about 150 years), real per capita income in the United States grew at an average rate of 2%. What if that growth rate continued for another 150 years?
If so, average income would double every 36 years. So today’s average household income of $52,020 would exceed $100,000 (at today’s prices) in 36 years and would double again to $200,000 after 72 years. Now if that doesn’t knock your socks off, you need to know that 75 years is the planning horizon for Social Security and Medicare. It is smack dab in the middle of the retirement period for today’s young people — people who think they are more likely to see a UFO than get the entitlement benefits they’ve been promised.
Even more interesting, when the children of today’s teenagers are in retirement, say, in 108 years (36 +72), average household income will exceed $400,000. At that point almost everyone in America will be rich, except for a few people living at the margin.
Now let’s think about some choices we have to make for the future. The focus of almost everyone who talks about the crisis in elderly entitlements is: we’ve made promises we can’t keep. Today’s young people will pay taxes over their entire working lives and get only a fraction of what they were told they would get. Almost all reform proposals are designed to “save” the system for our grandchildren.
But why are we thinking that way? If our grandchildren are rich, they won’t need Social Security and Medicare. At least, they won’t need those programs the way we need them. Their retirement savings will easily generate today’s average Social Security benefit and they will have no trouble paying the full cost of today’s Medicare insurance.
Shouldn’t our focus be different? If we had to choose between shoring up today’s entitlement programs and making sure that real income grows at 2% per year, shouldn’t the latter be the more important goal? More specifically, suppose we have to choose between shoring up the entitlement programs with taxes on the rich (read: high taxes on capital) and a pro-growth policy (read: low taxes on capital). The choice should be a no-brainer.
Let’s all get rich and make the welfare state a relic of the past.
There are two likely objections to the argument I am making. First, some are questioning whether the 2% growth rate can be maintained for middle-income families. Tyler Cowen has a new book out, The Great Stagnation, that gives grounds for skepticism. Reviews of the book are generating lots of points and counterpoints, especially in the blogosphere. (See, in particular, Econlog.) I won’t weigh in on that debate today.
A second possible objection is that 75 years from now people earning $200,000 won’t think of themselves as rich. As income grows, the variety of ways to spend it will also grow. People in the future may be considered unfortunately poor if they don’t own their own spaceships. There will also be advances in medical science. People in the future may be considered poor if they can’t afford to replace their biological limbs with bionic limbs — like the $6 million dollar man.
True enough. But what should our attitude be toward this today?
How much do you care about the distribution of spaceships and bionic limbs 75 years from now? If you’re like me you are fairly indifferent. So instead of trying to plan the retirement years for today’s youth, it makes more sense to plan an orderly obsolescence for the entitlement programs and let the kids make their own choices about the future.
Here’s the principle. If you’re a teenager and you’re concerned that during your retirement years others will have spaceships and bionic parts and you won’t, then you should start saving so you can keep up with the Joneses. But for the rest of us (today) this is not a matter of collective concern (today), so we are not going to coerce young people (today) because of what may or may not happen 75 years from now.
If median income was $200,000, we would probably still face many of the problems we do today. Prices would be higher (try enticing a kid to work at McDonalds for $5.25 per hour when his parents earn $200,000). Illegal immigration would be a rampant as middle-class families (struggling on a measly $150,000 to $250,000 per year) try to find ways to get their kids’ day care, lawn care and other menial tasks done for less than low-income workers (earning only $100,000 per year) were willing to do the work. Politicians would pander to constituents’ complains of about how hard it is for families earning less than $150,000 per year to make ends meet. President Obama, Nancy Pelosi and Sen. Harry Reid would announce far and wide how those families earning more than $1 million per year need to pay their fare share.
With higher sustained economic growth, and higher per capita incomes (and higher median incomes) there would be less need for income redistribution, and -also — more resources available to deal with any problems. The impediment to higher growth, the late Jerry Scully showed through empircal analysis of growth rates and government expenditures as a percentage of output, is the size of government. In studies for the NCPA, he showed that up to a point, government spending promotes growth, but beyond that point, reduces the rate of growth. Moreover, at the growth maximizing rate, government has the greatest resources to help the poor. See here! , here! and here!
“There would be no appealing argument for card check.”
No attempts were made to pass card check.
“If so, average income would double every 36 years. So today’s average household income of $52,020 would exceed $100,000 (at today’s prices) in 36 years and would double again to $200,000 after 72 years.”
Here is the crux of you problem. Given current trends, 90% of the population would still be making what they make now, in real dollars. All of the growth will have taken place among the top 1%.
“Shouldn’t our focus be different? If we had to choose between shoring up today’s entitlement programs and making sure that real income grows at 2% per year, shouldn’t the latter be the more important goal? ”
False dichotomy. No one knows how to guarantee real 2% growth per year. We cannot afford the entitlements on our current path either.
Steve
If someone is earning $200,000 today, in today’s dollars, and they have a family of four or five — I have news for you — they are NOT RICH!
In 72 years or whatever years you want to use, people are earning $400,000 — if those dollars are in their value at that time and not 2011 value, they will not be rich either. Who knows what a car will cost in that meany years. Back in the 50’s when I was a teenager a new pretty fancy Cadillac cost $3,500.00. I can remember my dad laughing and stating that it was crazy that anyone would spend $3,500.00 on a car; If he were alive today I wonder what he would think of the prices of cars. My guess is he would just faint dead away!
My husband and I are earning from SS and earned income more money that we ever thought we would make and guess what: we live literally from paycheck to paycheck! We are a job loss or illness away from disaster.
John, again, food for thought.
In his book “Stealing From Each Other” Edgar K. Browning states the culmination of his research for the book estimates the welfare state lowers the income of the average American by 25%. We could start by narrowing the siphon created by the policies of the egalitarian experiment. Surely, the 2% and more could be found here.
Keep in mind that in the last 100 years the dollar has lost 95% of its value (thanks, federal reserve–compare that to the prior century, during which the dollar lost 5% of its value). If that trend continues, in a hundred years $400,000 dollars would be worth about half of the current median family income today, and everybody would be poor. If that trend accelarates, as is likely from the blowout government spending and money printing, we will all be living in the equivilent of the Weimar Republic. Extrapolating the real per capita growth of prior centuries is a fool’s game, inasmuch as we have never had such massive government spending, debt, and entitlement promises as we have today. That rosy future of universal wealth can only be seen with the rose-colored glasses of economists who think the future will be like the past. Doubtful. Read Tyler Cowan’s “Low Hanging Fruit”. Then consider the immense efforts of our current administration to hamstring America economically. They don’t want anything produced here, and they don’t want anyone using any reliable energy to do anything. If that rosy future is going to materialize, in won’t be in the good old US of A. (Unless the Tea Party takes over–also doubtful–we’re dominated by extreme leftists who hate humans, believe they are ruining the planet, and have to be eliminated, and certainly prevented from doing anything that would produce material comfort–they want a Hobbesian world, with human life short and brutal).
Keep in mind that in the last 100 years the dollar has lost 95% of its value (thanks, federal reserve–compare that to the prior century, during which the dollar lost 5% of its value). If that trend continues, in a hundred years $400,000 dollars would be worth about half of the current median family income today, and everybody would be poor. If that trend accelerates, as is likely from the blowout government spending and money printing, we will all be living in the equivilent of the Weimar Republic. Extrapolating the real per capita growth of prior centuries is a fool’s game, inasmuch as we have never had such massive government spending, debt, and entitlement promises as we have today. That rosy future of universal wealth can only be seen with the rose-colored glasses of economists who think the future will be like the past. Doubtful. Read Tyler Cowan’s “Low Hanging Fruit”. Then consider the immense efforts of our current administration to hamstring America economically. They don’t want anything produced here, and they don’t want anyone using any reliable energy to do anything. If that rosy future is going to materialize, in won’t be in the good old US of A. (Unless the Tea Party takes over–also doubtful–we’re dominated by extreme leftists who hate humans, believe they are ruining the planet, and have to be eliminated, and certainly prevented from doing anything that would produce material comfort–they want a Hobbesian world, with human life short and brutal).
John,
Your theory makes too much sense to ever gain acceptance among politicians and bureaucrats. Their objective seems to be to create a second economy on top of the real economy in which they are able to live well in exchange for pointing out how unfair it is that the “rich” won’t do more for them and their followers.
And, as long as the politicians are able to keep the average American convinced that it is the Corporations and “rich” who pay taxes, they will probably be able to continue.
Have you ever undertaken a study that would point out how average consumers actually pay the taxes? To me this seems logical, if you consider that corporations, and the “rich” who own them, simply add the taxes they are forced to pay to the government back on the goods and services they produce. If this is true, and if average Americans understood it, the politicians would have a problem, don’t you think?
Devon and Kent. All calculations are in real (2011) dollars.
My comment was meant to be tongue in cheek. In my classes on Theories of Political Economy, our professor told us there will always be politicians (and despots) who will use inequity as an excuse to argue for redistribution (or legitimize gaining power). I don’t believe the Big Government types would simply go away if average income rose to $200,000 per year. Indeed, government would probably grow even larger. It tends to be the rich countries (not the poor ones) that have paternalistic governments. Over the past 100 years the United States has increased its wealth substantially. It has also increased the size of government steadily as wealthy rose.
John,
Good thought….but it ignores “democracy” in that our population and especially its elected leaders will still want to “spread it around” not necessarily to the poor (since by your reconning, they would disappear) but to their political buddies.
I like the idea of planned obsolescence for the entitlement programs. It reminds me of Newt Gingrich’s idea of “withering on the vine.”
I think the amount of money isn’t the real issue. The real issue is relative wealth. My husband and I were watching “Robinhood” the other night, and it reminded us that compared to the richest of the rich in those days, we live like utter kings. It doesn’t matter how many people we bring “above poverty.” Every time anyone makes any meaningful progress, the bar will move again.
There are some people that would prefer we all live in squalor, so long as none of us lives in opulence.
John,
Most interesting thinking. Our biggest health care problem that no one seems to understand is the financial model is so flawed as to what we Republicans, and Democrats don’t seem to get it with its current conundrums, it never will.
There is no other industry who has a similar configuration economically. It is a classic situation of too many cooks stirring the broth. It encompasses every aspect of our daily lives, nutritionally, legally, economically, honesty, technologically, and on and on. And it seems like all the folks involved have only one goal in their greedy state is to make sure that they get their share (without regard to any one else’s problems) at the expense of all the other entities. The economics as well as the delivery route is so inequitable that the health care problems cannot be fixed without destroying the present and rebuilding a system, that will work. We have to go back and teach medicine in the same vein as all those who follow once they have graduated. Why can’t people do something for the greater good and allow everyone to benefit from the whatever plan we come up with. Our current system is so flawed that trying to save it or tweak it has no merit or survivability using today’s model. How will it work; we would have to remove the inherent greed that now exists, and let our colleagues not only do things right, but doing the right thing. How do two cardiologists approach the treatment of a patient who has chest pain. One says the patient needs a cardiac cath and angiogram, whereas the second one says that he needs bypass surgery. Both do what they do spectacularly well, but one gets $40000, and the other gets $15000. Neither one will tell you that don’t need what they do. How does one earn a living by being brutally honest. Yet this is the way that medicine is practiced. What can we do?
Dr Bob Kramer
I LOVE IT! This is an analysis I’ve done for folks and they dont believe. It needs a much broader distribution.
-Mike Whalen