The Economics of Enough_ How to Run the Economy as if the Future Matters - Diane Coyle [54]
Besides, inflation doesn’t address the real transfer of resources from smaller future generations to larger old generations, which current systems of pensions and health care imply. Disguised default is not an attractive option, although it will probably seem the least problematic politically.
What should governments in fact do?
Nothing is not an option. The unsustainable won’t be sustained; but governments and voters can either decide to respond to the pressures or just to let events unravel. And a mix of the various possibilities is likely. Higher growth would be terrific but is hard to achieve. Additional migration on a large scale is probably unlikely given that it has already reached such high levels compared with the recent past, although it will continue. According to Carmen Reinhardt and Kenneth Rogoff, default is a surprisingly common policy response to financial crisis, in a mix of the forms described above, and often described as “restructuring.” In their thorough study of the history of financial crises, they conclude that not only do crises commonly cause very large increases in public debt, but also that subsequent default on this wide definition is nearly universal.22 It seems only realistic in the light of their findings to expect many governments to take this route.
Economists would rather urge long-term reforms of entitlement spending on pensions, health care, and welfare as well as higher taxes and other spending cuts. For example, the IMF’s John Lipsky said in a speech: “Just keeping debt ratios at a post-crisis level will require new policy action. Unwinding the discretionary anti-crisis stimulus measures would contribute only 1½ percent of GDP to the [necessary 8 percent] fiscal adjustment. As a result, the bulk of the required progress will have to reflect reforms of pension and health entitlements, containment of other primary spending, and increased tax revenues.”23 Many countries will end up having to restructure the way they pay pensions and provide medical and social care to the elderly, although reform is likely to be incremental and slow, given the political challenge of achieving such reforms with an aging electorate.
Ultimately, too, people in the OECD countries will need to increase their work level and increase their domestic savings. Retirement ages will climb. The long-term trend toward shorter workweeks and longer holidays will come to an end or go into reverse.24 And, just like the response required for greater environmental sustainability, debt sustainability will also call for lower consumption and higher savings. This can take many shapes, but one important factor will be the realization of those not yet retired that we’ll need to work longer and more productively, and to save more of our own incomes to finance our later retirement years.
WHAT DO WE OWE TO POSTERITY?
The postwar generations lived through the Cold War and the fear of nuclear annihilation; but they took other elements of their security for granted. This has applied in particular to economic security. This rested on an assumption of the plentiful availability of natural resources, including carbon-based energy, with no impacts so large or irreversible in their scale that normal market mechanisms can’t handle them. And also on the fundamentals of social security, everywhere founded on old age pensions, dating back to the earliest introduction of social welfare by German chancellor Otto von Bismarck in the 1880s but greatly extended after 1945.
Now it has become clear that we have borrowed massively from the natural and human resources of the future—to an extent that means an end for the first time in more than two centuries to the easy assumption that people in future generations will be better off than we are. Not only have we left nothing for posterity, we’ve made it likely that standards of living will be lower in the future when people have to service our massive