My 9 year-old and I traveled in February to Mexico City for a brief visit. On our first day, during a two-hour walk touring our center-city neighborhood, I was pleased to hear her say “If my school was here, and my friends were here, I’d like to live here.”
Her comment followed directly after her inquiry into the price of things. Our 30-minute Uber ride from the Mexico City airport cost just $7. The plane ticket itself cost just $250 on a Mexican discount airline. She realized the food we were buying – in Mexico’s most expensive city – was about half the price of food in San Antonio – one of the United States’ least expensive cities. I enjoyed watching her wrap her math-brain around exchange rates between the US dollar and the Mexican peso. I’m pretty sure in part she liked Mexico because she likes a bargain. That’s my girl!
Throughout the rest of our brief trip I thought about other financial and economic comparisons with Mexico.
Mexico is the 15th largest economy in the world, and the 11th largest when measured by purchasing power parity. (This second measure takes into account the domestic cost of living, and is considered a better measurement of poverty in a country). Eleventh in purchasing power parity ranking puts Mexico, perhaps surprisingly, ahead of Italy, Spain, and Canada.
My purpose in going to Mexico gave me anecdotal insight into the system of healthcare in Mexico. Like the United States, Mexico has a somewhat chaotic mix of public and private health care. Unlike the United States, Mexico offers some form of basic universal coverage.
I came to Mexico to visit my “host mom” from 27 years ago, in the house where I first lived in Mexico City during college. I visited because her breast cancer – in remission from 7 years ago – returned in December 2019. She had an emergency procedure to drain her lungs in January. I learned from her son that she had the option of electing to pay at a private hospital – with what they perceived as top-notch surgeons – or going to a public hospital to undergo the procedure, for free. Her son had recently received a lump sum severance from Ford Motor company, where he had worked in marketing. He decided to use that money to pay for the lung drainage procedure for his mom at the private hospital.
She now gets her regular chemotherapy treatments, which would cost them around $1,000 each, for free at the public hospital. This is essential because she has no private insurance. She and her son admittedly don’t love the scene at the public hospital, which they describe as chaotic and an inconvenient hour’s drive away. On the other hand, free chemotherapy treatments.
Ever since I first met her 28 years ago, my host mom has walked on crutches from having survived polio as a child. She can’t work. She’s privately uninsurable due to the polio as well as due to her previous bout with breast cancer. But with free chemotherapy, she’s alive to fight the cancer some more, and her family is not bankrupted.
I know some form of basic universal health care coverage remains an extremely controversial subject in the United States. I did not visit the free public hospital in Mexico. I trust my host family’s report that the scene isn’t great. In the face of death and bankruptcy, however, I am grateful that Mexico offers free cancer care to all of its citizens. My host mom deserves a chance to fight cancer and live longer.
Like much of Latin America throughout history, Mexico’s income is unevenly distributed, with the top 10% of the population earning 33% of the nation’s total income. And yet, in the United States, the top 10% earns 39% of annual income. We’re more unequal in terms of income earned in this country than is Mexico these days.
Looking at wealth inequality puts us in the United States further to shame. The most common simple measurement of wealth inequality, the Gini coefficient, indicates the United States as a more unequal society than Mexico. While Mexico has wealth inequality typical of Latin American countries, the United States by contrast is a complete outlier on inequality measurements, when compared to its common peer group of wealthy countries such as Canada, Australia, and European countries.
While Mexico’s economy has grown at a slightly slower rate than the United States’ economy over the 25 years since I last lived there, the changes in wealth in Mexico are significant. This is probably most obvious in central Mexico City, where my daughter and I visited.
I remember as a college student fantasizing about retiring some day to Mexico and living simply, on a very modest amount of money. The cost of living can be very attractive in Mexico, especially in rural areas. I think my daughter began to appreciate that idea as well, even though we only visited the expensive parts of its biggest city.
I lived in Mexico long enough (back in the 1990s) to not be naive about its struggles. Struggles with poverty, violence, corruption, and the absence of the rule of law in so many areas.
Yes, in the United States we’re richer, outright and on average, than Mexico. But increasingly, we’re a harsher society.
I kept humming to myself during our trip my version of the lyrics from Paul Simon’s Graceland. “My traveling companion is nine years old. She is the child of my first marriage. I have reason to believe, we both will be received, in Me-xi-co.”
Scott Burns and Laurence J. Kotlikoff wrote The Clash of Generations: Saving Ourselves, Our Kids, and Our Economy, thought-provoking and highly readable financial policy book in 2012, featuring four “purple” policy proposals – “purple” meaning meant to appeal to both red and blue sides of the American political spectrum.
In the context of a 2016 Presidential contest featuring the unappealing choice between Know Nothingism (Trump), Socialism (Sanders), Nepotistic Oligarchy (Bush), and Nepotistic Pandering (Clinton),[1] I find it refreshing to read ideas designed to appeal to a broad spectrum of the right and left. Maybe you will too.
Inter-generational screwing
No, I’m not referring to an inappropriate Spring/Winter romance. Rather, Burns/Kotlikoff’s central thesis is that the older generation has – through a combination of tradition, neglect, and the compounding affects of fiscal policy – doomed the younger generations to financial deterioration and eventual financial wipeout.
Intergenerational burden
One of my favorite illustrations of the inequality between generations is the example of seniors gathering for a “Senior Coffee” breakfast at a McDonalds, featuring 55 cent coffee and $1 specials. It initially sounds innocuous.
However, with an average senior’s monthly Social Security check of $1,172, the authors point out that the average McDonald’s worker has to put in 1,172 hours (at $8.00/hour, that’s a 50 cent payroll tax from worker, and a 50 cent payroll tax from employer going to the Federal Government) to generate enough tax revenue for a single senior’s monthly check. With the typical Mcdonalds worker putting in 120 hours per month, it takes almost 10 minimum wage McDonalds workers to support each senior. We don’t usually view the different generations at odds this way, but that’s the kind of intergenerational burden the authors are talking about.
When they run through the runaway increases in federal health care costs [Medicare, plus increased prescription drug reimbursements (W Bush) and the Affordable Care Act (Obamacare)] in addition to unequal tax treatment, the ‘clash of generations’ seems both unfair and unsustainable.
This crisis sets up the background to their main four policy proposals.
Purple Policies
I like this book a lot, and their purple policies deserve to be part of any serious fiscal policy conversation (although which leaders would have that conversation, I’m actually not sure, such is our political discourse these days). I suspect the authors would have their own doubts about the political viability of their somewhat radical solutions, but would argue that the risks of inaction are too great, given the impending fiscal insolvency.
I’ll briefly describe below their four big policy ideas, with links to their further thoughts online.
Finally, after reviewing their policy ideas, I have one critique of the tone of the book’s early chapters.
Kotlikoff and Burns advocate a radical simplification of banking functions. Their proposal says that any and all banks (plus insurance companies, brokerages, credit unions, private equity firms) must fund themselves and be regulated as “mutual funds,” taking in actual deposits for every dollar invested in loans. No borrowing, full stop. Any company that prefers to leverage itself (hedge funds might want to) must operate under a “full-liability” regime, meaning losses are guaranteed personally by the business owners and executives. You can see why this is kind of appealing in the wake of the 2008 crisis and bailout of Wall Street.
[Incidentally, my own radical ‘purple plan’ addresses this same post-2008 moral hazard problem, but in a different way. My rule is: Any financial firm over a certain size (I don’t know how many would qualify but let’s say the biggest 25 firms, and any that are considered ‘systemically important’) get regulated like public utilities, with massive restrictions on executive pay. Of course, all financial firms are invited to get smaller through divestiture, sales, breakups, whatever, to get under the size limit and become systemically irrelevant. At that point, executives at the newly smaller firms can go back to paying themselves whatever they want. That’s my solution to the problem of “profits get privately enjoyed via executive compensation but any liabilities get socialized” when a systemically important financial institution gets bailed out.]
Their plan begins with individual vouchers for everyone for purchasing a basic plan to receive care from a private provider of their choice. Vouchers are individually ‘risk-adjusted,’ meaning documented medical conditions receive larger vouchers. Anybody is allowed to supplement with additional care out of their own pocket. Insurance companies providing standard care cannot deny coverage. For fiscal sanity, however, they advocate a panel of doctors to set strict budgets on the total cost of all federal vouchers, not to exceed 10% of GDP in any year. (death panels!)
Comprehensive health care policy is well beyond my ken to deeply comment on, but I do appreciate their attempt to set limits to how much public money is spent on health-care. Unfortunately there has to be some rationing of costs when we set a limit like 10% of GDP maximum. I know this a politically radioactive (again, death panels!) but seems like an important adult conversation to engage in.
Since tax policy is arguably the most important and least understood part of public policy, I appreciate the authors’ radical approach here.
For starters, they eliminate personal and corporate income tax (whoa!), which they argue is surprisingly regressive in its current form.
They replace it with a high 17.5% federal retail sales tax, as well as a tax on all consumption above $5,000 done abroad (to catch up you folks running over to Canada to do your shopping, to avoid the high retail tax).
To correct the regressive nature of consumption taxes, they would include a monthly ‘demogrant,’ effectively a transfer to all households, based on family composition, and meant to alleviate the sales tax burden (get to net zero tax) on families below the poverty line.
Estate Taxes in their plan
Interestingly (since I think estate taxes should be discussed more frequently) they would eliminate the federal estate tax, and replace it with a 15% inheritance tax above $1 million. The effect there, I think, would be to encourage estate planning that involves a greater number or recipients. If you had $10 million to pass to heirs, for example, and could pass it on tax free as long as recipients only got $999,999. I think lots of people would choose ten recipients, rather than pay 40% on amounts over 5.43 million (so, $1.828 million in taxes) when giving to a smaller number of heir under the current system. The effect is a wider distribution of inheritance, which is a reasonable goal for addressing intergenerational wealth transfers.
Burns and Kotlikoff address the problem of our unsustainable unfunded social security liabilities, and argue that funding retirement with real worker contributions (through a Personal Security Account PSA) is a necessary replacement system. Workers under age 60 would fund their accounts with a mandatory contribution of 8% of wages. Funds would be invested by the government, at zero cost, in global securities. The federal government would match contributions by the poor, disabled, and unemployed on a progressive basis.
In any case Burns and Kotlikoff argue there should be a government guarantee of at least a ‘zero real return’ for individuals, which seems like a reasonable solution to the fact that some people will find investing in global securities ‘too risky.’
I’ve skipped many of the details of each of their four policy plans, including quite a few specific provisions to address problems that would arise in the process of shifting from our current system to their radical purple solutions.
I’ve linked above to each of their plans because if you’re a policy nerd, you might enjoy reading through their radical and thoughtful solutions to pressing financial problems.
Ok, now one critique of their book.
A problematic first three chapters
I don’t particularly like their first few chapters, in which they lay out their alarming financial thesis in warnings bordering on Chicken Little-style.
The tone seems intended to strike extreme notes about our future financial doomsday.
The younger generation is getting financially screwed by the older generation! [2]
Fiscal deficits are forty times worse than anything the federal government reports!
Unless dramatic, politically impossible steps are taken soon (and they wont be!) the United States economy will sink into a morass worse than Greece! [3]
Specifically, they note that official estimates of government deficits systematically undercount unfunded public liabilities – for health care and social security in particular – and that the unchecked growth of these liabilities, in the long run, will completely overwhelm the United States’ economy. The losers in this scenario won’t be old folks today, but rather their grandchildren, who inherit the public liabilities. I believe this basic premise, and I believe it’s important to point out, but I guess I don’t like some of the hyperbolic ways its presented, and I don’t think the use of big future numbers tracking deficits is carefully interpreted.
One of the things I’ve noticed when describing compounding effects on money with long time periods is that you can quickly get into overwhelmingly large numbers. I have even done this trick myself in the service of making a dramatic point, but because it combines assumptions about an unknowable future with compounding effects, it’s not hard to mislead readers in the service of a particular thesis.
Between them Kotlikoff and Burns have written and published many serious books (and I have published precisely zero books, serious or otherwise, so what do I know?) but the tone of these first chapters struck me as BIG PUBLISHER driven.
“Make sure you make the case to the reader in Chapter One that everything will go to hell unless people buy this book and also legislators make the policy changes you advocate,” seems to have been the mandate handed down by BIG PUBLISHER.[4]
One problem with this tone is that, if the sky does not fall, and three years have since passed (the book came out in 2012) their dire warnings begin to look less true in retrospect. Or, even if true, (and FWIW I trust the economics behind their warnings) the consequences are less imminent or less dramatic than claimed.
Anyway, what I really mean to say is, their book is much better than the tone of their initial chapters would suggest.
[1] And those are just the leading candidates. Further down the ballot we get financial policies such as Fundamentalist Christianity (Carson, Huckabee), Fire Everyone (Fiorina), Shut Down Government (Paul), Shut Down Government And Burn All The Buildings Too (Cruz), Personal Bankruptcy At Any Moment Now (Rubio), Bully Everyone But Especially Unions (Christie), and I’m Just An Average Joe Son Of A Coalminer From Hellhole Scranton (Biden). And finally for completeness’ sake, I have no idea what they think about financial policy (Chafee, O’Malley, Pataki, Graham, Kasich, Jindal, Santorum).
[2] Somewhat charmingly, both authors are of an age eligible for social security, so they are really writing and advocating against their own self-interest, narrowly understood. If this book was written by a twenty-something, complaining about how the US financial system unfairly favors older people at the expense of younger people, it would read more as a call to intergenerational conflict by the aggrieved youth.
[3] This is the jacket cover language: “The United States is bankrupt, flat broke. Thanks to accounting that would make Enron blush, America’s insolvency goes far beyond what our leaders are disclosing. The United States is a fiscal basket case, in worse shape than the notoriously bailed-out countries of Greece, Ireland, and others.” None of these sentences are objectively true, at all.
[4] The publisher is academic, MIT Press, so its not really BIG PUBLISHER in any obvious sense. But still, the early tone feels marketing driven.