LOS ANGELES — Medicare and Social Security have long been viewed as the third rail of American politics. But Sylvester Schieber, chairman of the Social Security Advisory Commission, argues that neglecting reform of these huge and rapidly growing "entitlements" is setting the stage for intergenerational warfare.
"There are many worthy claims on the attention of the political culture. But we simply can't afford to use these claims as an excuse to ignore the financial crunch created by escalating health-care costs and the retirement of the boomers. Tinkering at the margins or appointing yet another blue ribbon commission isn′t going to get us out of this mess."
Also in this issue, Eswar Prasad of Cornell explores the paradox of poor countries financing Americans′ habit of shopping ′til they drop.
"In an ideal world, relatively capital-poor economies would have better financial systems that would allow them to channel both domestic savings and foreign capital to their most productive uses. By the same token, rich countries would generate surpluses to finance lucrative investments in capital-poor economies.
"But this isn't an ideal world. And rather than asking whether 'uphill' capital flows reflect irrational behavior, it would be useful to ask what these seemingly perverse international financial flows are signaling about more basic problems in the institutions buttressing the world economy."
Elsewhere in the Milken Institute′s quarterly journal, Diana Farrell and Susan Lund of the McKinsey Global Institute preview the financial tsunami now building in the Persian/Arabian Gulf.
"Almost daily we see signs of how surging oil prices have changed the six nations of the Gulf Cooperation Council into major players on the world financial stage," they write. "Decisions by Gulf leaders on how to use their wealth will have global repercussions for decades, affecting interest rates and the liquidity of financial markets everywhere. Their domestic investments will determine which industries and cities thrive, whether the region's economies successfully diversify beyond oil, and whether they generate enough jobs to employ their young people."
Other highlights from the new Review:
Steve Cecchetti at Brandeis University's International Business School tackles the question of how the Federal Reserve should react to real estate and stock market bubbles.
Larry White at New York University's Stern School of Business assays the newly visible role of Fannie Mae and Freddie Mac, the giants astride the mortgage market.
G. Pascal Zachary, a former foreign correspondent for The Wall Street Journal, turns a skeptical eye toward crash efforts to provide universal primary education in Africa.
Jim Barth, Tong Li, Triphon Phumiwasana and Glenn Yago of the Milken Institute put the subprime market meltdown in perspective.
This issue's book excerpt is from David Dranove's Code Red, an economist's look at how to reform health care in the United States without destroying it.
The Milken Institute Review is sent quarterly to the world′s leading business and financial executives, senior policymakers and journalists. Its editor is Peter Passell, former economics columnist for The New York Times.