Worms, Pond Scum and Economists

-- Dean Baker, Center for Economic and Policy Research

The effort to blame the awful plight of the young on Social Security and Medicare is picking up steam.

In recent weeks, there were several pieces in The Washington Post and The New York Times that either implicitly or explicitly blamed older workers and retirees for the bad economic plight facing young people today. There is now a full-court press to cut Social Security and Medicare benefits, ostensibly out of a desire to help young workers today and in the future.

Just to be clear, there is no doubt that young workers face dismal economic prospects at the moment.

The unemployment rate for workers in their early 20s is over 13 percent, and even for workers in their late twenties, it is over 9 percent, almost 1.5 percentage points above the national average.

These numbers would look even worse if many young people had not dropped out of the labor force and given up looking for work. Because of the dismal labor market, few young people have managed to accumulate anything by way of savings for a home or retirement. And many are saddled with large amounts of debt from student loans.

There is no doubt that this is not a pretty picture, but this story has nothing to do with Social Security and Medicare. There is a simple and obvious cause of the dire economic conditions of the nation's young: the downturn created by the collapse of the housing bubble. This downturn caused the high unemployment rate and weak labor market that has made it impossible for most young people to secure decent jobs with rising wages.

The housing bubble, in turn, was caused by a combination of Wall Street greed and inept and/or corrupt regulators. People like Federal Reserve Board Chairman Alan Greenspan, who should have been shooting at the bubble and the lending practices that fueled it before it grew so large as to endanger the economy, were instead cheering the bubble on. Virtually none of the country's thousands of economists could be bothered to take notice of an $8 trillion housing bubble whose collapse would quite predictably devastate the economy.

Not only did the economics profession completely miss the bubble, it is also largely AWOL when it comes to prescribing the medicine to rescue the patient. The basic story here is pretty much the simple textbook Keynesian story of inadequate demand.

However, much of the economics profession has gone to great lengths to obscure the situation and ignore the evidence.

The obvious medicine for a slump due to inadequate private-sector demand is to run government deficits large enough to restore the economy back to its potential. The private sector isn't going to increase demand on its own, no matter how much we profess our love for job creators. That is the simple reality.

But instead of preaching what the textbooks prescribe, much of the economics profession has become enamored of numerology, telling us that all hell will break loose if the debt-to-GDP ratio crosses some magical number. And even though many countries do, or have, exceeded the magic number - with no obvious dire consequences - the concerns raised by these economists have been sufficient to block stimulus of the size needed to get the economy back to full employment.

This means that young people today can expect many more years of dire labor market conditions, because the remedies that could turn around their job situations have been blocked by nonsense spewing from economists. Incidentally, this situation works out very nicely for those on top, who are enjoying the benefits of record-high profit shares, which have also helped to fuel a soaring stock market.

The failure to see the largest asset bubble in the history of the world, coupled with the failure to prescribe an effective remedy to deal with the damage, should be sufficient to earn the economics profession the contempt of right-thinking people everywhere. But there is nothing too low for this group of professionals.

We are now seeing economists joining the crusade to cut Social Security and Medicare by implicitly or explicitly claiming that these programs are somehow responsible for the dismal economic plight of the young. The argument is that we can only free up money for helping our young if we take money from the old, a group with a median income of $20,000 a year.

By contrast, the upward redistribution of income to the richest 1 percent is equal to 10 percentage points of national income, or more than $1.3 trillion a year. To put this in the ten-year-budget-window context that dominates Washington debate, the amount that has been redistributed upward will be more than $16 trillion over the next decade. And that is based on the heroic assumption that the upward redistribution does not continue.

But the economists, most of whom are highly paid themselves, don't want us to pay any attention to this $16 trillion. They say we have to cut Social Security and Medicare for the good of the young.

Needless to say, the worms and pond scum will angrily object to the title of this column.

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of many books including The End of Loser Liberalism: Making Markets Progressive. His blog Beat the Press is an essential resource for media critics. This article first appeared at CEPR.