One of the issues that have surfaced in this presidential election cycle is that of the advantages or disadvantages of free trade versus protectionism. And so it was that a friend of mine and I found ourselves debating the issue. As an unabashed protectionist, who has been opposed to all these free trade deals starting with NAFTA, I said that I wanted tariffs that will encourage more goods to be manufactured here in the United States, in part because I think it is better if we are self-sufficient in this regard and in part because it will mean better paying manufacturing jobs for the American worker. And if it be argued that much of that manufacturing would be done with robots, then let them be our robots.
My friend, on the other hand, believes in free trade. He argues that higher tariffs will result in higher prices, so that any increase in wages will be offset by the increase in prices. Furthermore, he points out, whereas the increased wages will be taxed, thereby reducing the dollar amount received by the worker, the increased prices will be subject to sales taxes, thereby increasing the amount paid out by that same worker. Therefore, he concludes, the American worker will be worse off without free trade.
Each of us being unable to persuade the other, we soon moved on to other topics. It was only later, however, that it occurred to me that as both of us are retired, we would both be better off with free trade. That is to say, even if I were right and the American worker would make more money in wages than he would have to pay out for the stuff he buys, affording him a higher standard of living, I, my friend, and anyone else that is retired would be worse off. No longer working, we would not benefit from the higher wages, but we would definitely suffer from the increased prices.
Now, I could tell you that notwithstanding this consideration I remain a protectionist owing to the fact that I am high-minded and care more about what is good for this country in general than my own narrow self-interest. However, the truth of the matter is that my advocacy of protectionism was more the result of a lifetime of working for wages, creating a strong affinity between me and the American worker in general, but that from the moment this evil thought entered my head that without free trade I would have to pay higher prices without any offset from higher wages, the idea of protectionism has been losing its appeal.
What is true about goods is also true about services. Lower labor costs mean that I will have to pay less for services provided to me. At the same time, as someone who is retired, I do not suffer from being paid less for the services I might have had to provide were I still a part of that labor force. And thus it is that while I, along with so many others, suffered from the decline in real income during the years that I was working, now that I am retired, such declines in real income on the part of the American worker will only be to my benefit. In fact, if I were a cad, I would be hoping there will be even more such declines in real wages in the years to come. But I am not a cad. At least, not too much of one.
Inasmuch as the demographic trend is for an increasingly older population, self-interested calculations of retirees will tend to play an even greater role in the future. That is to say, as the population ages, there will be more political pressure in favor of free trade over protectionism owing to the fact that retired people will receive all the advantages of lower prices without suffering the disadvantages of lower wages. Add to this the fact that older people are more likely to vote than younger people, and the demographic effect will only be intensified. Moreover, this reasoning concerning the asymmetrical considerations of prices and wages for those of us that are retired is not restricted to just the question of free trade and protectionism. It also has implications elsewhere.
Consider the matter of illegal immigration. One of the arguments for putting a stop to illegal immigration is that it takes jobs away from American workers and forces those Americans that keep their jobs to work for less as a result of having to compete with this cheap labor pool. On the other hand, these illegal immigrants provide goods and services at a cost much less than would have to be paid if American workers had those jobs. Once again, for the American worker, there is the symmetrical tradeoff of wages and prices, while for the retired American, there is the asymmetrical consideration of prices only. As a result, as the number of retired people increases, there will tend to be increased political pressure favoring de facto open borders. However, unlike the issue of free trade, prices and wages are not the only consideration when it comes to illegal immigration, so this is not a pure case.
We have not heard anything about replacing the income tax with a value added tax in this presidential election cycle, and if the above considerations are valid, we are not likely to hear much about it in the future. While some retirees are well-off enough to have to pay income taxes, most do not. As a result, retirees would look with disfavor on any plan that would eliminate a tax they no longer have to pay anyway and replace it with a tax resulting in higher prices on the things they still have to buy.
What we do hear about, however, from a candidate that might just become the Republican nominee if the Stop Trump movement is successful, to wit, Ted Cruz, is a tax plan that is equally unlikely to be regarded by retirees with much enthusiasm. Without going into all the details of his plan which may be perused here, he wants to significantly cut income taxes. But, as noted above, paying income taxes is not a major concern for most retirees. On the other hand, Cruz also wants to reduce the COLA for Security by a percentage point because he believes the CPI overstates inflation by that much. So, if the CPI says we had 3% inflation, the amount of one’s Social Security check would increase by only 2%. Needless to say, a retiree with, say, a twenty-year life expectancy would regard such a change in the law with alarm.
Not only are Ted Cruz’s proposals likely to become ever more unpopular as the number of retirees increases (assuming he doesn’t get elected and push it through Congress in 2017), there is likely to be a shift to a very different kind of entitlement reform in the future. While Republicans have been boldly talking about cutting Social Security in one way or another (reducing the COLA, means testing, raising the retirement age, privatizing), Democrats have been sneaking up on the idea of lifting the cap on the payroll tax as a way of putting Social Security in the black. I predict that as the number of retirees increases, Republicans will begin to lose their nerve while Democrats will gradually become emboldened. In short, the solution that logic has called for but politics has forbidden is that of not merely lifting the cap, but of raising the payroll tax itself. The taboo of raising the payroll tax will diminish in the years to come inasmuch as it is a tax retirees will not have to pay. They will get all the benefits of a secure Social Security check without any of the costs.
Given my argument that the self-interest of the increasingly large retirement population will mean more political pressure in favor of free trade, open borders, and higher taxes, some might say that I am playing right into the stereotype of the greedy geezer popularized by Alan Simpson. Well, in the words of Gordon Gekko, “Greed is good.”