Login

Archive for January 2, 2013

Stein’s Law

Written by Sean Murphy. Posted in skmurphy

“If something cannot go on forever, it will stop.”
Stein’s Law (Herbert Stein)

Some excerpts from Choices for Deficit Reduction [Full Report PDF] released by Congressional Budget Office on November 8, 2012.

The United States is facing fundamental budgetary challenges. Federal debt held by the public exceeds 70 percent of the nation’s annual output (gross domestic product, or GDP)–a percentage not seen since 1950–and a continuation of current policies would boost the debt further [...] to 90 percent of GDP 10 years from now and continue to rise rapidly thereafter.

[...]

Federal debt cannot grow faster than the nation’s output indefinitely, and prolonged increases in debt relative to GDP can cause significant long-term damage to both the government’s finances and the broader economy. Higher debt leads to larger federal interest payments; making those payments would eventually require some combination of lower government spending and higher taxes.

This offers a context for planning and an opportunity for entrepreneurial thinking.

With the population aging and health care costs per person likely to keep growing faster than the economy, the United States cannot sustain the federal spending programs that are now in place with the federal taxes (as a share of GDP) that it has been accustomed to paying. To put the budget on a path that is more likely to be sustainable than if current policies were continued, lawmakers will need to adopt a combination of policies that require people to pay more for their government, accept less in government benefits and services, or both. However, making policy changes that are large enough to shrink the debt relative to the size of the economy–or even to keep the debt from growing–will be a formidable task.

[...]

In sum, a wide gap exists between the future cost of the services that the public has become accustomed to receiving from the federal government–especially in the form of benefits for older people–and the tax revenues that the public has been sending to the government to pay for those services.

If we rely on current technology and methods to supply those services we are no doubt in a lot of trouble. We will either need to cut our expectations and standard of living or increase or productivity and lower the effective cost of the services we expect.  Walter Russell Mead suggests as much in “The Real Problem is the Policy Deficit

[...] the need to move from a late stage industrial society to an early stage information society is the major task before the country today. Essentially, this involves reorienting our society to capture the benefits of the information revolution in ways that dramatically increase our productivity as a society. It involves coping with the continued decline of manufacturing employment, a shift away from lifetime employment in big box companies to more entrepreneurial and flexible economic relations, and the reconstruction of the learned professions (medicine, teaching, civil service, law and others) as the information revolution does to the learned guilds what the industrial revolution did to workers like the spinners and the weavers. This is a hugely complex transition and there aren’t many examples we can look to for ideas: the United States is on the cutting edge of a transformation that will ultimately affect the whole world.

I like his reframing the of challenges we face from healthcare costs, the demographic transition of the Baby Boomers, and the transition to an information economy from “dividing the pie” to the need for more innovation and entrepreneurship.

See also

Switch to Desktop Version