Consumption smoothing is the best-theorized, least-implemented idea in economics

Given the prestige economics holds as a profession under late capitalism, it’s somewhat odd how little attention is paid to the genuine theoretical innovations of the economics profession. I was reminded of this most recently by George Will’s recent column in the Washington Post, which I’ll quote at length:

“The recent bipartisan budget agreement, which signals that 12-digit deficits are acceptable to both parties even when the economy is robust, indicates government’s future. So does government’s pregnancy, which was announced nine months ago by this tweet from Sen. Marco Rubio (R-Fla.): ‘In America, no family should be forced to put off having children due to economic insecurity.’

“The phrase ‘due to economic insecurity’ is a way to avoid saying ‘until they can afford them.’ Evidently it is now retrograde to expect family planning to involve families making plans that fit their resources. Which brings us to the approaching birth of a new entitlement: paid family leave after the birth or adoption of a child. This arrival will coincide with gargantuan deficits produced primarily by existing entitlements.”

I think it’s worth thanking George Will for making explicit what is often implicit in criticism of reproductive decision-making, since it allows us to ask the question: shall our human biology be subservient to the economics of late capitalism, or shall we forge a political and economic system that encourages human thriving as we actually exist in the world?

What does it mean to afford a child?

We can crudely identify a variety of (non-exhaustive) costs that childbearing creates:

1. Prenatal, delivery, and neonatal medical care. Whether you think childbirth should be as “medicalized” as it is in the United States, even our hippies usually want a few ultrasounds, a clean room to give birth in, and somebody to check in on their newborn. A fully-medicalized birth, of course, costs far more, and if a C-section is required (or “required”) the amounts involved can easily reach the high tens of thousands.
2. Early childhood maintenance. During a child’s youngest years, they demand attention throughout the day and night. This care can either be performed professionally, or by an unpaid amateur who foregoes paid work, but in either case the work performed by the caregiver is a cost created by the presence of the additional human being.
3. Living expenses. In addition to the costs of childhood maintenance, human beings also have nutritional requirements, and rapidly-growing children often have unexpectedly high nutritional requirements. Under conditions of multiple children living in the same home, it’s also frequently found necessary to acquire a larger living space to accommodate the additional people.
4. Educational expenses. Parents often enroll their children in schools, where professional teachers provide instruction in a range of subjects the children may find useful.

No one can afford a child

Looking at the list above, it should be obvious that virtually no one can afford a child, and no one tries.

Most working-age people in the United States have medical insurance provided by their employer or the employer of a partner or parent, so that the medical costs created by pregnancy and birth are spread throughout a pool of people, not all of whom are delivering children at the same time, and some of whom will never deliver children.

Most school-age children in the United States attend public schools paid for with taxes levied on their entire community, some of whom have many children, and some none at all.

George Will would never be stupid enough to ask that people not give birth until they can prove to their obstetrician that their $40,000 check will clear, or until they can afford the services of a professional schoolteacher to educate their child, because George Will is a well-insured columnist living in a leafy Washington suburb with good public schools.

Consumption smoothing is basic economics

What about food, shelter, and supervision? Aren’t those expenses parents should be expected to personally pay for out of current income?

Upon even a moment’s reflection, the answer is obviously not. When a child is enrolled in kindergarten, their childcare is suddenly paid for collectively by everyone who pays taxes in the city, county, or state in question. But the child doesn’t undergo a transfiguration making them worthy of state-provided childcare, they are simply newly eligible for childcare and education provided collectively by their fellow citizens, instead of directly by their parents. There’s nothing “natural” about privatizing the costs of childcare for the first few years of a child’s life and socializing them thereafter.

Of course, the community does this not because they’re deeply committed to the concept of socialized childcare, but because well-educated children are a boon to the community.

But well-fed, well-sheltered children are also a boon to the community, and privatizing the provision of those needs makes no more sense than privatizing the provision of education.

We don’t take consumption smoothing seriously, but we should

All of this comes back to the theoretical innovation I mentioned earlier: consumption smoothing. Throughout history, the vast majority of people have tended to live, reproduce, and die, relying solely on their current income. Under the radical material constraints of feudalism and early capitalism, this often took the form of simply malnourishing, murdering or abandoning to exposure children who required too many resources given the current year’s harvest. In other words, when George Will takes about “affording” children, for most of human history he was talking about infanticide.

But even under late capitalism, the problem is no less obvious: since people’s income tends to rise as they gain experience and education, they have less money than they need early in life and more money than they need later in life. But humans are also more fertile early in life than they are later in life! The logical response to these conditions is for people to consume more than they earn in their younger years, and less than they earn in their older years, “smoothing” their consumption from year to year so they aren’t constantly changing their lifestyle due to income fluctuations, whatever the cause.

Intergenerational consumption smoothing is even more justified

Smoothing consumption across a single human lifespan is a tricky proposition: you would want to start with a fairly accurate estimate of a person’s lifetime, inflation-adjusted income, build in a margin of safety, then divide by the person’s expected lifespan. Then you’d need to find someone to loan them the money in their early years at a low-enough interest rate that they’d completely repay the loan in their higher-earning years without reducing real, inflation-adjusted consumption below the desired baseline.

But intergenerational consumption smoothing is easy! Since the United States is organized as a perpetual entity, all we have to do to is issue debt today that will repaid by our much-richer descendants. Assuming a modest 2% average real growth in GDP over the next 75 years, our descendants will have $4.42 of real resources available to repay each dollar we borrow today.

That’s not to say debt-financing long-term investments is always, or even usually, the best course of action. When interest rates are especially high, debt-financed spending may reduce future consumption to below the level it raises current consumption to, reducing overall consumption instead of merely smoothing it. Under those circumstances, tax-financed spending may be more justified. And of course, there’s no reason to commit to a single option: since growth rates are necessarily uncertain, tax-financed and debt-financed spending are two great tastes that taste great together.

But whenever anyone tells you that your children, grandchildren, or great-grandchildren “will get the bill,” insist on sending it COD — your great-grandchildren will thank you in between their vacations to the moon.