Are “We” Broke?

In an op-ed in today’s New York Times Stephen King, chief economist for HSBC, writes a deeply confused column that seems designed solely to sound serious and informed while scaring readers into thinking the U.S. economy cannot “afford” decent living standards for most Americans. Dean Baker notes a bunch of problems with the column here, but there are a couple of other things worth pointing out.

King lists globalization as the first influence that allowed rapid living standards growth in the past. He contends, however, that the pace of global integration will begin slowing and will provide less of a spur to growth in the future. I’m not sure what it is about international economics that makes people think they can make wild claims and no evidence must ever be brought to bear, but, there is a deep literature on the gains from international trade, and it’s just not true that they were a first-order driver of (aggregate) American income growth in recent decades. Further, while growing trade has likely (slightly) boosted aggregate U.S. incomes, it has (especially in recent decades) also led to significant changes in the distribution of income, outright lowering wages for most American workers. To put it simply, a reduction in the pace of American integration through trade and investment into the global economy would actually be good for most workers’ living standards (if not good for aggregate U.S. income).

After globalization, King lists financial innovation as a key boost to growth that will no longer help in the future. However, it seems clear that financial innovation has not boosted growth for decades now, so, again, a slowdown in the pace of this can really only be good news (pdf) going forward.

King’s discussion of the fiscal past and future of the U.S. is odd. He seems to think only spending, not revenue, is amenable to policy, and argues that because “Even before the Great Recession, rich countries were seeing their tax revenue weaken…government debts accumulate…” that governments must now realize “…promises made during good times can no longer be easily kept,” and goes on to argue for higher retirement ages and other cutbacks to social insurance.

But, besides strangely ignoring the policy lever of taxes, he’s also just plain wrong on the facts. Outside of the early Reagan years and recessions, it is not particularly the case that tax revenues were falling and government debt rising “before the Great Recession.” The graph below shows federal tax revenues and public debt as a share of GDP between 1973 and 2007. In the early 2000s, revenues did indeed fall. But this is, surprise, partly because tax rates were cut. Given this, it would seem odd that calling for higher revenue is not on his list of tough measures government must take.

king blog


Line-by-line squawking aside, the best overall rebuttal to this column is a paper written a couple of years ago by Larry Mishel—titled simply “We’re Not Broke and Nor Will We Be.”  In this paper, Larry looks carefully at the data and notes that we are an extraordinarily rich country that has generated enormous amounts of income growth for generations now. The pressing problem in the U.S. economy is simply that a vastly disproportionate share of this overall growth has been claimed by the very rich, and this rise in inequality has been the primary barrier to decent living standards growth for low and moderate-income Americans. Ironically, while many policies have actively increased economic inequality over the past generation, the key set of economic institutions actually delivering the goods to these low and moderate-income Americans (the crown jewels of social insurance: Social Security, Medicare, and Medicaid) are the same programs that people like King identify as what “we” can no longer afford.

The real takeaway from this column is that when rich people and their partisans tell you that “we” cannot afford Social Security, Medicare and Medicaid, what you should actually hear is that these programs are really the only things that have kept the top 1 percent from claiming even larger shares of the country’s growth in recent decades. And that doesn’t seem to me a problem that “we” must solve.