Behind the Fiscal Cliff is a Demographic Struggle
Washington's battle over the fiscal cliff is best understood as a confrontation not only between Democrats and Republicans, but also as an early skirmish in what could be a decades-long struggle for resources and influence between the Brown and the Gray.
That's a phrase I've coined, drawing on the work of demographer William Frey, to describe the two giant generations that will dominate American life in the coming decades. The Brown is centered on the racially diverse Millennial Generation (generally defined as young people born between 1982 and 2002) and the even more kaleidoscopic cohort (sometimes called The Homeland Generation) born after them. The Gray is centered on the preponderantly white baby boom generation moving into retirement, plus the older Silent Generation that is already there.
Over two-fifths of the Millennial Generation are non-white, and the Census Bureau recently projected that a majority of Americans younger than 18 will be non-white around 2018. Meanwhile, because the US largely banned immigration between 1924 and 1965, about four-fifths of today's seniors are white and experts like Frey expect that number to drop only slowly in the decades ahead. In an America that is simultaneously diversifying and aging — browning and graying — these are the two generations at the cutting edge of the change.
Politically they are on a collision course. Polls show the Brown generally believe they need public investment, particularly in education and health care, to move themselves and their children into the middle class; meanwhile the Gray has grown increasingly skeptical of the taxes needed to support such programs and dubious of public spending on anything except the Social Security and Medicare programs that directly benefit them. In 2012, President Obama won three-fifths of voters aged 18 to 29 (and an even greater share of non-white young people) while about three-fifths of both white seniors and whites near retirement backed Mitt Romney. In the exit polls conducted on Election Day, three-fifths of voters over 65 said government is doing too much; three-fifths of voters under 30 said it isn't doing enough.
Although it is rarely discussed, the debate over balancing the federal government's books directly pits the interests of these two groups against each other. At the core of many of the choices Washington faces in resolving both the immediate fiscal cliff and its longer-term budget challenge are questions of generational fairness.
The best way to understand the generational implications of budget choices is to consider them over a lifetime. To borrow from the common conservative terminology, all Americans evolve from takers to makers and then back again over the course of their life. "Early on, we are all takers," notes Robertson Williams, a senior fellow at the Tax Policy Center. "We go through school and we are being supported by the public education system, and then grants and loans for college. Middle-age we tend to subsidize everybody else [through taxes]. At retirement we tend to draw it back out. Either end of your life you are a taker, middle of your life you are a maker."
Measured against that scale, the baby boom has lived a charmed life. It benefited from expanding public investment when it was young (from the interstate highway system to expansions of the great state public university systems); participated in voting itself declining taxes during its working years (the top marginal income tax rate fell from 91% when the first boomers entered the workforce to 35% today); and enjoyed increasingly generous entitlement programs for retirement (offset partly by the decline of guaranteed private pensions).
The Millennial Generation has been dealt a much tougher hand. It has matured in an era largely of stagnant or declining public investment, and it faces the prospect of both higher taxes during its working years (to support entitlements for a senior population expected to double by around 2040) and a retrenchment of those same benefits by the time it retires. The resolution of the fiscal cliff, and the longer term budget challenge, will either compound or blunt that inescapable inequity.
Three dynamics will shape that verdict. The first is how much debt America's adults will leave to their children. Public debt can benefit the next generation if it is directed into investments that make them more productive. But much of our public debt now is being accumulated to finance current consumption (in different ways, both retirement benefits for today's seniors and the war in Afghanistan fit that description); that squeezes the opportunities available for future generations by requiring them to divert more of their tax dollars to paying interest costs on the debts they inherit. The Congressional Budget Office projects that without any intervention, federal interest payments will double as a share of the economy over the next decade or so. So a threshold requirement of any fiscal deal that aspires to generational fairness is to reduce the amount of debt we require future generations to shoulder. "Doing nothing is bad for kids; the current baseline we're living under is going to be squeezing children out of the budget," notes Julia Isaacs, a scholar at the Urban Institute, who studies generational patterns in public spending.
The second key dimension that pits the Brown against the Gray is the balance any deficit-reduction deal strikes between tax increases and spending cuts. Tax increases, especially targeted at the affluent, would fall most heavily on workers in their peak earning years. As Williams notes, those tend to be workers from their mid-forties through their late fifties.
That means any tax hike aimed at the top 2% would also heavily target the youngest edge of the baby boom and the oldest portion of Generation X. In either case, each dollar of deficit-reduction achieved through tax increases, rather than spending cuts, increases the extent to which today's workers (especially those at the peak of their earnings) are bearing the cost of today's spending, rather than leaving it for the next generation as debt.
Probably the most pointed collision between the Brown and the Gray revolves around how Washington allocates its future spending. The Brown benefit from programs that support the health and productivity of the future workforce, particularly investment in education, research and infrastructure. The Gray benefit mostly from spending on programs that provide a safety net for retirees, primarily Social Security and Medicare.
Over the past generation, the balance of federal spending has tilted dramatically toward the Gray. In 1969, payments to individuals (mostly entitlements) constituted about one-third of the federal budget. So did federal investments on infrastructure, research and development and education. Today, payments to individuals have exactly doubled, soaring past three-fifths of the budget, while investments have fallen in half to less than one-sixth. Isaacs calculates that the federal government today spends about $7 per senior for each $1 it spends on kids.
Changing that balance isn't easy. Seniors reacted with outrage when Obama modestly challenged it by slowing the growth of Medicare (a program for the Gray) to help fund his expansion of health coverage for the working-age uninsured (which heavily benefits the Brown.) The first round of budget talks between Obama and the Republican Congress pushed in the other direction. In the 2011 deal to raise the government's borrowing limit, the two sides agreed to $1.5 trillion in reductions over the next decade solely in so-called "non-defense discretionary" spending (the programs that include government's investments in areas such as education and research) while exempting entitlements. Under that agreement, spending on these domestic programs, measured as a share of the overall economy, will fall by decade's end to a record low.
Jared Bernstein, the former chief economic adviser to Vice President Biden, notes that while young people also can benefit from food stamps and Medicaid, those discretionary programs represent the government's principal spending on opportunity for future generations, from pre-school programs to college loans. "That's where we embed our mobility ladders," he says. "And by cutting too deeply into non-discretionary domestic spending we are cutting those ladders down. It's not fair and it's not smart economics."
All of that means that any budget deal won't be fair to the Brown unless it targets spending cuts not only at the discretionary programs that help them, but also the entitlement programs that the Gray rely upon. Fairness also demands that any changes in entitlement benefits don't entirely exempt those near retirement (which spares baby boomers from the knife) while targeting retrenchment solely on younger workers retiring decades down the road.
The irony, almost completely obscured as these two giant generations stampede in opposite directions politically, is that they need each other more than today's debate allows. Unless more minority young people rise into the middle class, there will be no one to pay the payroll taxes needed to fund the entitlements for the growing senior population. As Washington navigates its painful fiscal adjustment, the best way to ensure fairness across generational lines is to remember the simple truth that there is no economic security for the Gray without economic opportunity for the Brown.