Tag Archives: USA

Jan 16 2013

The Canary and the Colly Bird

Colly birds are unexpectedly thought-provoking.  Learning that colly comes from the Old English col led me to the history of coal and other energy sources, how power shifts when it’s abused or new technology arrives, and differences between resource-extracting and self-sustaining economies.

Colliery work was very dangerous.  Workers who were not killed by mine shaft collapse, flooding, or explosive gas accidents died later from black-lung disease.  Mine owners in 19th century British held all the power and invested little in safety.   The workers could get no other jobs but they organized as the 20th century approached.  They balanced the owners’ power by striking and they got safer conditions.  In 1947 all mines were bought by the government.  The miners’ and other unions continued to gain power and make more demands via work stoppages that peaked in 1979 when over 29 million working days were lost.  In 1984, the miners stopped work for a year.  That cost the economy well over $2 billion but the government refused to negotiate and broke the unions’ power.  Stoppages were below 2 million working days by 1990.   The number of mine workers fell even more precipitously from over 700,000 in the 1940s to around 12,000 in 2002.

So, excessive power was abused first by the mine owners, then  the workers’ unions, then government gained the upper hand before re-privatizing the mines.  Union leaders got power when the workers were roused to desperate protest, then lost it when coal began to grow scarce and new technology eliminated the miners’ jobs.

UK Coal Production

While UK coal production fell from 112 million tonnes in 1980 to 9 in 2006, coal consumption fell only from 123 million tonnes to a low of 59 million in 2000 after which it grew to 67 million in 2006.  The growth in demand for coal came from power stations that accounted for 86% of all UK coal consumption by 2006.  The drop in UK coal production was balanced by increased imports.

UK Coal Consumption

Overall UK energy use grew from 205 to 232 million tonnes of oil equivalent since 1980.  Oil use was roughly constant, coal dropped and use of natural gas doubled.

UK Energy Use

In the USA, where I found longer term data, there is much higher dependence on oil, coal still is as important as natural gas and, as in the UK, although production from renewable sources is increasing, it is still only a small fraction of the total.  I’ll return in a future post to energy use and its implications for economies and societies but first, why did I mention the canary?

US_historical_energy_consumption

Canaries were used in British coal mines from 1911 to 1987 as an early warning system.  Carbon monoxide, methane and other toxic gases in the mine shaft would kill a canary before affecting the miners.  Its signs of distress alerted the miners to escape.  It occurred to me that our house was heated by coal when I was a kid and I liked that but I knew nothing about conditions in the mines.  Could there be  mine-shafts in our economy now where great wealth is being extracted and toxicity is building up?  I felt I should take a canary to investigate.

And why colly birds again?  Because they and other birds in the song were rich folks’ food.  The audience for and singers of the song were being promised those things.  We tend to overlook toxic by-products of rich folks’ things because we like to imagine that we, too, could be rich.  That makes us vulnerable to contemporary equivalents of the Monty Python pet store salesman who insisted the deceased Norwegian Blue parrot he sold was not dead but resting, pining for the fjords or momentarily stunned, or the 4th century Greek man complaining to a slave-merchant that his new slave died who was told: “When he was with me, he never did any such thing!”  Those jokes work because we really are vulnerable to such nonsense.

We should always, but rarely do, consider incentives.  To understand a business’ sales results, understand its sales folks’ comp plan.  To understand a society, understand the basis of its economy.  Resource-extracting endeavors like coal mining encourage owners to make their one-time harvest as fast and profitably as possible.  Self-sustaining enterprises like Nepali hill farms that require terraces to be maintained for food this year also enable them to raise crops next year, and their descendants in future years.  The different bases of the two economies drive short-term-only or short-and-long-term-optimizing behaviors.

Coal mining and subsistence farming are illustrations.  I’m no romantic about village life.  My sheep needed care every day; care in bad weather, intensive care in lambing season, care when I was sick, care that must be expert or they would die.  It’s hard and stressful work that never ends and sheep die in disasters no matter what.  There are much easier ways to support oneself.  All I’m saying is we should notice negative side-effects of the way we live and consider if there are better ways.

So, in future posts I will take a canary down some jointly-owned, private-public mine-shafts that are disproportionately rewarding for their owners and harmful to others.  Four that seem especially problematic are the:

  • Miilitary-industrial mine-shaft that keeps us in a ruinously costly perpetual state of war
  • Washington-Big Oil mine-shaft that keeps us in a military trap in the Middle East and keeps climate change off our agenda
  • Washington-healthcare industry mineshaft, our largest at 17% of GDP, which costs us twice as much as in any other rich country and makes us the only one without universal healthcare
  • Washington-Wall Street one that supplies almost every US Treasury secretary and paved the way for financial crisis, mega-bailouts and not a single prosecution of criminals.

I will also explore the economic and social impact of technology.   The UK coal miners who improved their lives by increasing their relative power later lost their livelihood to new machines.  New technologies like that can greatly increase capital returns by replacing human labor, which increases unemployment and pushes down wages.  That cuts society’s ability to pay for the newly automated products and services, and everything else.

I will try to shed light on how governments can respond to:

  • A great imbalance of power in part of the economy
  • New technologies that will have disruptive economic and social impact.
Jan 7 2013

Trends that Cannot Continue

Pragmatic conservative Herbert Stein gave us the Law: “If something cannot go on forever, it will stop”.  What that implies is, actions will be taken.  It also implies they are unlikely to be immediate.

On Dec. 3, shortly before the “Fiscal Cliff”, the Government Accountability Office (GAO)  released new estimates of the federal government’s long-term budget outlook.   These numbers will not be changed much by the deal Congress so embarrassingly arrived at just after we went off the cliff.  We are still following trends that cannot continue.

Examining them in the order they appear in the table below; first Social Security (S/Sec).  Spending will grow by almost a quarter as a % of GDP as baby boomers retire and average life expectancy continues to increase, then stabilize at that level.  S/Sec revenue is at this time higher than spending but that will not continue if no action is taken.  S/Sec tax used to be levied on 90% of covered earnings.  That has fallen to 84% because most wage gains in recent years went to those making more than the maximum taxable income.  Raising the maximum so the share of covered earnings goes back to 90% would eliminate almost half of S’Sec’s projected long-term deficit.  Other small changes would fix the rest of the potential problem.

Spending & Revenue vs GDP

“Medicare, Medicaid and other health” spending now totals 4.7% of GDP, almost the same as S/Sec.  But at 8.2% it has almost doubled by 2030 then it continues to climb steadily to just under three times today’s level six decades out.   That’s the good news.  The bad news is our total healthcare spending is 17% of GDP.   “Medicare, Medicaid and other health” spending is barely a quarter of the total.  Medicare spending will grow as a higher % of our population reaches 65, and Medicaid will grow unless wages increase at the low end and unemployment drops, but those increases are relatively small in the context of our overall healthcare system.

We spend twice as much per capita on healthcare as the next highest nation, 48 million Americans have no health insurance, and other first world nations get better healthcare results.  If the 8.2% of GDP we’re projected to spend on “Medicare, Medicaid and other” in 2030 was our total healthcare spend, we’d be in great shape but it’s nowhere close.  Although the rate of increase for “Medicare etc” does not need to be cut drastically and it must be done, our healthcare system is far from easy to change.

Bypassing net interest for a moment, we find “All other spending” falls.  It will be worthwhile to examine some line items inside this category in another post.  Is it, for example, a good plan to keep cutting spending on education?  Is it a good plan to continue making war in Afghanistan?  Those questions and more are for another day.

By far the greatest problem revealed by the GAO analysis is how our growing annual deficit drives an insane rate of growth in interest costs.  The deficit grows because while spending increases steadily at rates that are too high but not alarmingly so, revenue stays at its historical average around 18% of GDP.   That drives ever increasing  cumulative debt, the interest on which more than doubles from 1.4% of GDP this year to 3% in 2020 and is almost five times as high only a decade later.  Even those numbers are only if the federal government continues to be able to borrow at 1.3% through 2017 and 3.7% in the long run, which is not possible.

Stein’s Law tells us that because the deficit cannot continue to grow as it does in the GAO’s projection, it will not.  The reason it reaches the impossible height in this projection is because relatively small growth in big spending programs like S/Sec and Medicare compounds into big numbers.  In the same way, relatively small changes in the growth rate of those programs would result in big long term changes in the deficit.

And therein lies the problem.  The Congress that raises taxes and cuts benefits will suffer politically.  Future Congresses will be the ones to get the benefits of lower deficits.  If today’s Congress does not take action, future Congresses will be forced to respond to their society’s pain from high inflation and/or high interest rates.   But we in today’s society are not feeling those pains, so there’s no motivation to act now.  What we are suffering from is low growth but there’s no quick fix for that and many ways we might attack the deficit would likely cut growth more.

Congressional inactivity is something that cannot go on forever but it looks unlikely to stop soon.  They blundered over the fiscal cliff.  I expect them to blunder through at least the next debt ceiling.  Deficit reduction is not likely in the near term.

Note:  The GAO document is at http://www.gao.gov/assets/660/650466.pdf

Jan 1 2013

“Four Colly Birds,

three French hens, two turtledoves and a partridge in a pear tree.”  This old Christmas song was written when the blackbird was food along with the hen, turtledove and partridge.  Colly in Old English means ‘black’ hence ‘colliery’ meaning coal mine and colly bird meaning blackbird.  Blackbirds were gourmet food in those days.  In “Sing a Song of Sixpence” 24 of them are baked in a pie.  So here, as thought-provoking fare, are four colly charts.

Fed Tax and Spending vs GDP

The first one shows Federal spending, the red line, and revenue (taxes), the blue one, in relation to GDP, the overall economy.  Spending is now 24% of GDP, higher than its ~22% average for the past few decades while revenue is substantially lower than spending at 17% of GDP and lower than its ~19% average over the past few decades.  This chart illustrates two of our three big problems, too high spending and too low taxes.  Our third problem (which I haven’t illustrated because I want only four charts) is economic growth that’s too slow to grow us out of the revenue and spending problems.   Slamming on the brakes to fix the deficit would make all three problems worse.

Health Care Indices

Where to cut spending?  Medicare?  We keep hearing that’s out of control.  The second chart suggests otherwise while also showing that our overall healthcare spending is unsustainable .  Medicare spending is now growing at an annual rate of 2%, right around the upper end of forecast GDP growth.  It was more than 7% six years ago.  Overall healthcare spending, however, (the composite index), which was also increasing 7% then is still growing 6% to 7%, an unaffordable burden on our economy.  Cutting Medicare, the only part of our healthcare system that is growing at an affordable rate, would increase that burden.

Labor vs Capital Share of Nonfarm Business

Where to raise revenue?  Wage-earners?  The third chart shows that after holding fairly steady at around 65% for the half century following WW2, labor’s share of non-farm business spending has, for more than a decade, been dropping fast.  It’s now around 57%.  What is correspondingly growing is capital spending.  Workers of all kinds are being replaced by computers and robots, not just by lower paid workers in other countries.  They, too, are being replaced by technology.  Capital investment is especially favorable now because interest rates have been driven so low.

Debt v Income Tp and Bottom Quintile

The fourth chart shows that even though low interest rates are attractive to all spenders (especially governments), they are not helping everyone equally.  Debt (also interest payments, therefore) as a percentage of income is growing rapidly for those with incomes in the bottom 5%.  That’s because their living expenses keep growing but their incomes do not.  That will not change for the better in a very slowly growing economy.

Conclusions: (1)  Here, too, there is no silver bullet.  (2) We’ll shoot ourselves in the foot (at best) if we act as if there is one.

Dec 23 2012

The Massacre in My Home Town

Twenty young children were shot to death last week in Newtown CT where I lived for 35 years.  Setting aside the emotion, why do these things happen and what can we do?  The NRA says we should place armed guards in every school.  Others say we should ban guns, we need more religion, we should ban violent video games.   What do the statistics suggest?

The following table of UN data shows our results in the context of  some other countries for the past decade.  We average around 5 homicides (intentional killings) per one hundred thousand people per year.   Because there are more than 300 million of us that means we have around 15,000 homicides per year.  Because Canada’s 35 million population is only about a tenth of ours and their homicide rate is one third of ours, they have only 550 homicides per year.  Our other neighbor, Mexico, has a population of 115 million.  Because their homicide rate was twice as high as ours at the start of the decade and is now over four times as high, they have over twice as many homicides as we do, 27,000 last year.

Homicide Statistics

The rate in the UK was one third as high as ours, about the same as Canada’s, at the start of the decade and is now only a quarter.  China’s rate is about the same as the UK’s and has dropped in the same way.  Switzerland has a much lower rate, around one seventh of ours.  Japan has by far the lowest.  It is stable at around one tenth of ours per capita.

How about homicides specifically by firearms?  Are the rates of  those homicides correlated with gun ownership, religious practice or video game spending?  The following table combines statistics from several well respected sources.  The data are not all from the same year (the range is 2007 to 2011) and the number who practice religion is self-reported census data so it should be taken with a grain of salt.  Nonetheless, the data are dependable enough to support some conclusions.  One thing that stands out is our very high rate of homicides by firearm, almost 300 times as high as the rate in Japan.

Firearm Homicides

Our rate of firearm ownership is also by far the highest.  Our 270,000 thousand firearms in civilian possession means we have almost 90% as many firearms as people.  The most interesting statistic in this column is Switzerland’s 46% rate.  Switzerland has no standing army, only a peoples’ militia for its national defense, the vast majority of men between the ages of 20 and 30 undergo military training, including weapons training, and their weapons are kept at home as part of their military obligations.  Their gun ownership rate is half ours, their percentage of homicides by firearm is similar to ours, but their firearm homicide rate is one quarter of ours.  Even so, it is twice as high as Canada’s and enormously higher than the rates in the UK and Japan.

These firearm-related statistics show that a higher rate of gun ownership is correlated with a higher percentage of homicides by firearm and that tighter gun control legislation, e.g., Switzerland’s vs ours, leads to a relatively lower rate.  The first table shows that there is from country to country a much wider range of homicides by all causes.  The rate in Mexico, for example, is 40 to 50 times as high as in Japan while ours is 10 times as high.   Those big differences must result from a combination of situational and cultural factors.  Criminalization of our insatiable appetite for drugs, for example, which makes smuggling so profitable, is one cause of Mexico’s violence.

Is religious instruction a way to reduce violence?  The statistics say otherwise.  Two thirds of Americans report themselves as religious practitioners, significantly more than other countries.  Only 29% of Japanese identify themselves as followers of a religion despite their very low homicide rate.

Violent video games and movies are also blamed but again the statistics say otherwise.  The nations with the lowest firearm homicide rates, Japan and the UK, are among the highest spenders on video games.

So what does the data suggest we should do?  While the data tells us we cannot eliminate homicide, we know we can eliminate the kind of homicide in my home town last week by banning civilian possession of automatic weapons, the only weapons making that kind of massacre possible.  As noted in my previous post, the writers of the 2nd Amendment gave us the right to bear the arms of their time, single shot firearms.  They did not intend for civilians to have grenades or automatic firearms.  We don’t claim a right to bear grenades.  We should not claim a right to bear other such weaponry.

The second table shows a clear correlation between the number of firearms in civilian hands and the rate of homicides by firearms.  While Switzerland’s overall homicide rate is lower than relatively peaceful China, Canada and the UK, a high percentage of them is by firearms.  Only Japan has a significantly lower overall homicide rate than Switzerland.  This says we could significantly cut our overall homicide rate by implementing tougher gun control as Switzerland does, and cut it even more with stricter control as in Japan.  More religion or less video games are not indicated.  Better mental healthcare is indicated although I have not assembled the stats.

Statistics alone can not show us how to cut our homicide rate tenfold or even further.  They give us a first answer to “why do these things happen and what can we do?” but shed no light on the root cause of homicide.  Why, for example, do so many of us feel the need for weapons?  My Swedish classmate Peter asks us about Buddhist practitioners who, when they go alone deep into the jungle to meditate, take a weapon.  “What if I’m attacked by a robber or a bear” they think?  They hope their meditation practice will in the end remove the cause of their fears.  They expect their fear of attack while meditating will make it less effective and hope a weapon in the meantime will help them focus.  More dramatically, my American friend Sean pretends to propose a Federal program to arm every schoolchild with an automatic weapon for self-defense.  We can (I hope)  all agree that would be a crazy response to our fears.  Maybe we can reflect and find some of our own crazy ideas that make us all vulnerable to causing violence.

But we can in any case see what to do to make an immediate big difference.  We must update our approach to gun control.  With well written and well enforced legislation we could eliminate the Newtown type of massacre altogether and cut our overall homicide rate by at least half.  There is no benefit to society in not doing that.

Dec 21 2012

A Tale of Two Constitutions

Nepal’s political morass has not changed in the months I was gone.  Progress is stymied by too many squabbling children in politician bodies crying “mine, mine, mine”.  How did it get this way?  Does history of the US Constitution offer guidance?

A transitory coalition of the other 5 leading parties recently announced they would no longer attend public meetings where Maoist Prime Minister Baburam Bhatterai or anyone else in his unappointed government is present.  The parties are united in wanting his government to fall, at odds on what should happen next.  The government is unappointed in the sense that there was no provision for what would happen if the Constituent Assembly (CA)  failed to draft the new Constitution.

When the CA was dissolved in May four years after its two year term began, Prime Minister Baburam said (a) we need an election to establish a body that will do what the CA failed to do, (b) we need a government in the interim, and (c) the existing government should stay in place to hold elections asap.  The second largest party, the Nepali Congress (NC), said that’s OK but Baburam must resign in favor of an NC leader.  Baburam said that’s no good because the President, who had the authority to disband the CA, is a member of the NC.  There would be too much risk the NC would hang on to power until they thought they could win an election.  If we want to make a change, he said, we should choose a coalition government for the interim.

It’s not clear how a coalition government would differ from what’s already in place nor how the politicians could ever agree who would make up the Cabinet.  The NC can’t even agree which of them would replace Baburam in the impossible event anyone else agreed to that.  Meanwhile the smaller parties make transitory alliances to promote specific agenda items that cannot be implemented in the current situation, anyway.

The leader of a party that recently split off from the Maoists published a 90 point demand.  One third of these demands relate to India, including that Indian vehicles must be banned from Nepal, Hindi movies must not be shown and Hindi music must not be broadcast.  The leader said his party would begin enforcing the demands nationwide and immediately.  Like other such initiatives, even the ones that makes sense, that soon fizzled out.

Having failed to accomplish what they were elected to do, the politicians fear they will not be reelected.  The one thing they can agree on is it’s best to keep delaying a new election.  It’s not clear how those not in the Cabinet are getting paid but it’s never clear how money flows in this society.  Transparency International reports that Nepal is the only South Asian nation whose Corruption Perception Index has worsened in the last seven years.  To get a government-financed contract, contractors must pay 50% of the project budget to politicians and civil servants who could block it.  Only 20% to 30% of the budget is spent on the goods or services provided.  They are inevitably of poor quality.

For some, the argument over the number of States in Nepal is philosophical; broader representation (more States) vs strengthening Nepal as a nation (fewer States).  For others, it’s personal.  Tribal leaders allegedly fighting for their people but wanting access to the money trough, “Nationalists” wanting to preserve the Hindu establishment’s lock on power, the breakaway party motivated by anti-Indian prejudice and seeing high caste Nepali Hindus as “really Indian”.

How did it get this way?  A regional prince who conquered his neighbors and unified the territory paid his generals with rent they could collect from newly conquered land.  After further conquests were halted by British India and imperial China the monarchy was pushed aside by the Rana family and, under new ownership, Nepal continued to be operated as a private family tax farm.  No industry developed because Nepal has no coal, oil or useful minerals and its geography makes transport very hard.  Subsistence farming was supplemented by petty trading.  One third to half the total economic output went to the center as rent.  Many men left to be soldiers in the British Indian army. When the Ranas fell 60 years ago the monarchy was restored.  Foreign aid began to arrive but much was siphoned off by the elite.  Almost the only government Nepal had ever had that was for the people was in villages with a good head man.  No surprise that apart from tourist services there are still few alternatives to getting a position to extort bribes, getting property to rent, or working abroad.

How important is a new Constitution for Nepal?  A nation’s Constitution is much like a business strategy; every business should have one and it should not be a bad one but several good ones could be successful.  A well executed good strategy will always beat a less well executed better strategy.  So Nepal’s politicians just need to choose one of the good ones, apply it diligently, and adjust as conditions change.  To illustrate, let’s take a quick look at the US Constitution that was established with equally high hopes and, as it happens, around the time Nepal first became a nation.

The US Constitution reached its current form in three stages.  First, the structure and purpose of government was articulated: (A) three branches of central government to make, enforce, and interpret the law, (B) the roles and powers of  central and local governments, and (C) what the national government would provide the people, namely justice, civil peace, common defense, things of general welfare they could not provide themselves, and freedom.  It was adopted in 1787 by a Constitutional Convention, ratified by conventions in eleven states and  went into effect in 1789.  Next, ten amendments known as the Bill of Rights were proposed in Congress and came into effect in 1791 after approval by three-fourths of the States.  It had been too hard to agree everything at once.  In the third stage, the Constitution undergoes periodic clarification and/or amendment.  It refers, for example, to “the people” but the rights it asserts for them were understood for very many years to apply only to white men.  Rights for American Indians, African Americans, women and others were adopted much later.

The US Constitution does not specify the nation’s borders, or the borders between States.  US territory greatly expanded after the Constitution was adopted and some State boundaries changed.  The Constitution is not explicit about whether States could secede and form a new nation.  The 1860s Civil War aka War of Northern Aggression established that the southern States would not be allowed to do that.  The great ongoing debate, however, is about the third element of the Constitution, the social contract, what the central government should provide to the people and how it should do so.

How have the first three Amendments, presumably considered to be the most important, stood the test of time?

The first amendment says: “Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances.”  This may be the most important principal in the entire Constitution.  The devil, however, is in the details.  How much freedom, for example, should there be about speech on behalf of political candidates?  My freedom is abridged if my campaign contributions are limited but if there’s no limit, I can in effect silence you.  Estimated  contributions for the most recent US election range up to $6B.  Because US politicians now need so much money to get elected they must depend on a wealthy few to whom they must deliver correspondingly big favors.  So a side effect of the Constitutional right to freedom is, at this time, a corrupt central government.

The second amendment says: “A well regulated Militia, being necessary to the security of a free State, the right of the people to keep and bear Arms, shall not be infringed”.  The intent of that tortured phraseology, at a time when only single shot firearms existed, was to prevent the central government from tyrannizing the States and, by implication, its citizens.  There was no need then to define what kinds of Arms the people could bear.  The federal government now has nuclear arms, however, and killer drones.  Does this Amendment mean the States and “the people” also have the right to them?  Nobody I know believes that but many Americans support the right to bear assault weapons (I’ll say more about that in a future post).  Some even imagine they must have assault weapons to defend against central government attack. 

The third amendment says:  “No Soldier shall, in time of peace be quartered in any house, without the consent of the Owner, nor in time of war, but in a manner to be prescribed by law”.  Although this Amendment has long been entirely irrelevant it continues to be enshrined as part of the Constitution.

What conclusions should Nepali politicians draw from this and other nations’ Constitutions and from the above examples, (1) a profoundly important right that also has a deeply corrupting effect, (2) an important safeguard when the Constitution was established that is now ineffective against that risk and creates unanticipated new dangers, and (3) a provision that became completely irrelevant ?

First, since several structures of national government have proven to be effective, Nepal’s politicians should just choose one and start governing.  Second, they should not imagine that even the most finely crafted Constitution will guarantee what the people get from their government.  Third, some Constitutional provisions will need significant update when conditions change and not all will remain relevant, anyway.  Above all, what is important is good governance.  The time for that is now.

Aug 22 2012

Social Security – Past and Future Changes

Social Security was originally established as insurance.  The Old-Age, Survivors, and Disability Insurance Act (OASDI) was for those who became unable to support themselves.  At that time, during the Great Depression, the poverty rate among senior citizens was over 50%.  OASDI became a pension plan a half century later when in 1983, President Reagan sponsored an increase in Social Security taxes, changing the program from pay-as-you-go to collecting more than it paid out.  When OASDI was established, life expectancy was only 62 and benefits became payable at 65.  Ever-improving medical technology raised life expectancy, however, and folks came to expect they would live long enough to get a Social Security pension.  The change made in 1983 recognized that new reality.  Boomers would prepay part of their old age benefits.

Social Security then began accumulating a surplus.  It took in $95 billion more than it spent last year and ended 2011 with a $2.7 trillion surplus.   Of course, surpluses every year forever were not expected.  The accumulated surplus would at some point start to be drawn down and what was taken in would be brought into balance with what was paid out.  But now there’s a new factor; not only is life expectancy increasing, the birth rate is dropping.  That means fewer workers contributing to Social Security as well as more people getting benefits.  We now have 66% workers and 14% folks 65 or older.  The US Census Bureau projects that by 2050 we will have 60% workers and 21% folks 65 or older.  That means the ratio of contributors to benefiiciaries will plummet from 5:1 to 3:1.

Even so, our demographic prospects are better than most.  China has 74% workers and 9% 65 or older today but is projected to have 60% workers and 27% 65 or older in 2050.  Its working age population is projected to be 200 million lower by 2050 while ours will be 50 million higher.  Nonetheless, our steeply dropping ratio of contributors to beneficiaries must be acted upon and it will get worse unless we also increase job creation.  Social Security trustees project the program will start to pay out more in 2021 than it takes in and the surplus will be gone in 2033.  Only enough tax revenue will then be collected each year to pay about 75% of benefits.

An additional issue is that the Social Security surplus was supposed to be invested in interest-bearing federal bonds but there is no trust fund in the sense most of us imagine.  That $2.7 trillion surplus was already spent on other things.  It exists only as a part of our overall federal debt.  It is, of course, backed by the full faith and credit of the US government.

And there’s one more very important change to consider.  Social Security taxes increased in the last half century while income taxes shrank.  From 1961 through 2011, Social Security taxes grew from 3.1% of GDP to 5.5%.  Personal income tax dropped from 7.8% to 7.3%, most of that decrease benefitting those in the top 1% of incomes (the top rate fell under Reagan from 70% to 28%).  Corporate income tax fell from 4% to 1.2% (the rate fell from 50% of profits to 35%).  What happened, in other words, is corporate income tax fell by 2.8% while Social Security taxes increased by an almost identical 2.4% and since Social Security tax is capped, most of the burden of the tax increase was born by the bottom 90%.

So now it’s time for another major update of the Social Security program.  What could we do?  What should we do?  And when should we do what?

The AP recently used data from the Social Security Administration to calculate how much of the projected shortfall would be eliminated by various options. To highlight the urgent need for action, they also calculated what would have been eliminated if those options had been adopted in 2010.  I’ve also incorporated some data from David Cay Johnston.  First, what could we do and why should we do something soon?

1)  We could raise the payroll tax ceiling to generate more revenue. If we restore the Reagan standard that 90% of wages are taxed instead of today’s 83%, the tax would now apply to close to $200,000 of wages not $110,100.  Workers making $200,000 in wages would get a tax increase of $5,574.  If we entirely eliminate the ceiling and levy the tax on all wages, we would eliminate 72% of the shortfall. Two years ago, we would have eliminated 99%.

2)  We could also generate more revenue by raising the tax rate.  If we raise it by 0.1% a year for 20 years until it reaches 14.4% versus the current 12.4% (of which workers and employers each pay half but for 2011 and 2012, employees temporarily pay only 4.2%), workers making $50,000 a year would get a tax increase of $500. That would eliminate 53% of the shortfall. Two years ago, it would have wiped out 73%.

3) We could also get more tax revenue by increasing wages, which had fallen in 2010 back to the 1999 level, and by creating more jobs, which grew at only a fifth the rate of population increases since 2000.

4)  Or we could cut the outflow by raising the retirement age.  If we gradually raise it from 66 for full retirement benefits (67 for those born in 1960 or later) to 68 in 2033, that eliminates 15% of the shortfall. Two years ago, it would have eliminated 20%.  If we go to 69 in 2039 and 70 in 2063, that eliminates 37% of the shortfall. Two years ago, it would have eliminated half.

5)  We could also cut the growth of payouts by changing the inflation index that governs benefit increases.  If we use the Chained CPI, which assumes people change what they buy when prices increase, that would eliminate 19% of the shortfall. Two years ago, it would have eliminated 26%.

6)  Or we could reduce benefits for those with lifetime wages above the national average, currently about $42,000 a year.  If they still got more than lower paid workers but not as much more as now (the average monthly benefit for a new retiree is $1,264), we could eliminate 34% of the shortfall. Two years ago, we could have eliminated almost half.

Which of these options should we adopt?

Since the fundamental problem is the greatly increasing ratio of those getting pensions to those contributing to the program, option (4) seems appropriate.  The AP only calculated the result of raising retirement age from 67 to 70.  We could go further.  When Social Security was established, most folks expected to continue supporting themselves throughout their life.  The idea that most of us can retire is quite recent.  But the issue with this line of thinking is that those who most need the Social Security retirement benefit have low wage jobs that tend to be least suitable for older people.  Those with higher paying jobs can invest in their own pension plans, can more easily continue working while their body ages, can better mitigate the effects of aging, and are more likely to have work that remains attractive.  So maybe we should also adopt option (6) because higher income folks can increase their retirement benefits by investing in a supplementary plan.  Option (5) seems a gimmick, a way to avoid addressing the underlying challenge.

Our culture has changed enough in the last century (I hope) that winding down Social Security is not an option.  Most of us now need an employer so we can support ourselves, and we need to be well enough to work.  More people do become self-employed when there’s a persistently high lack of jobs but they will never be more than a minority in today’s economy.  Granted, we have many people living on the streets begging and/or thieving, we support by far the world’s greatest number of citizens in jail, and we have people benefitting from Social Security who should be working, but most of us now favor OASDI because we know people can’t always get a job.  If today’s Great Recession degenerates into another Great Depression, only the uber-rich may disagree.

So the more difficult question is to what extent we should increase Social Security’s revenue.  Recall that the payroll tax ceiling was higher under Reagan and we could (option 1) eliminate much of the projected shortfall by reinstating that level.  We could also secure the program’s finances by slowly raising the tax rate (option 2).  That seems reasonable since future beneficiaries are likely to receive more benefits for a longer time but I prefer option (1), eliminating the ceiling altogether, because that would partially reverse the 1961-2011 shift in tax collection from high to lower income folks.  Our society was not improved by that shift.

The greatest challenge is implied by option (3), increasing wages and creating more jobs.  It’s easier to imagine an accelerating reduction in the number of jobs for humans as more and more jobs can be done by computers and robots.  I touched on this in other posts and will return to it in more depth.  Planning for society with only the jobs that will still be available to humans in 2050 may be our greatest strategic challenge.  But today we need to address the more immediate problem, preventing Social Security from being defunded.

Jul 11 2012

Fear, Greedy Fear and the Indicated Strategy

Why are folks buying today’s very low paying bonds or depositing cash at negative real interest rates?   It’s true they’ll be better off with cash if there’s another market collapse.  It’s possible they can sell bonds to a “bigger fool” at an even higher price in future.  But by avoiding the risk of sudden loss they guarantee getting wiped out gradually by even moderate inflation, and most of them will not in real life sell their bonds before the price collapse when interest rates rise.  Fear is preventing them from a rational assessment of risk, fear alone in the case of cash, greedy fear in the case of bonds.

In his 1936 “General Theory of Employment, Interest and Money” Keynes wrote: “If we speak frankly, we have to admit that our basis of knowledge for estimating the yield 10 years hence of a railway, a copper mine, a textile factory, [or etc] amounts to little and sometimes to nothing” and “If human nature felt no temptation to take a chance, no satisfaction (profit apart) in constructing a factory, a railway, a mine or a farm, there might not be much investment merely as a result of cold calculation.”

We cannot eliminate risks, only choose which ones to take.  When we are consumed by fear, we underestimate the impact of avoiding short term risks and of failing to take longer term ones.

How is our government (and others) responding to the current bubble in fear?  With monetary policy, specifically quantitative easing.  By raising the cost of holding safe, liquid assets they hope to encourage investment in more productive and riskier ways because safe assets are, as a result of QE, guaranteed to lose money in the long term.

But Keynes said, and we are now living in such a time, monetary policy can not always overcome a bubble in fear.  If private investors will not invest, he said, governments must.  Because they can spread risk across the whole of society, governments can accept higher risk.  They will not necessarily make better decisions, Keynes said, but state-led investment is necessary for an economy paralyzed by fear.  I cannot fault his logic.  I introduced what looks like the best candidate for such investment, renewable energy, in a previous post about monetary policy and will return to it in more detail.

Jul 11 2012

High Unemployment -> Lower Earnings -> Further Economic Decline

At 15% of the civilian labor force, total unemployment was down last month from its 17% high in October 2009, but it was still almost twice as high as before it rocketed up from the start of 2008.

At 40 weeks last month, the average number of weeks unemployed has not changed this year after increasing sharply from less than half that level at the start of 2008.  The rate of change was very high during 2008.  It  dropped rapidly since the start of 2010 to stabilize at the current exceptionally high level.

Employment continues to drop in federal, state and local governments, all of which get less tax revenue because our economy is in recession.  They account for a little under 17% of total non-farm payroll.  In the goods producing sector which accounts for 14% of total non-farm payroll, we see 2% growth in manufacturing from one year ago.  In the service sector, 70% of total non-farm payroll, we see 3% growth in professional and business services, 2% in education and health, 2% in leisure and hospitality, and a small drop in information services.

Persistently high unemployment has driven average hourly earnings down from a year ago.  The only exceptions are mining and logging, the second highest paid sector, which is up 4%, financial activities up 3%, and trade, transportation and utilities, the largest individual sector payroll, which is up 0.34%.

Professional and business services, the sector with the highest payroll growth, had, at 1.27%,  the greatest drop in average earnings from a year ago.  Manufacturing, the highest payroll growth goods-producing sector, had the next highest drop in average earnings, down 0.47% from a year ago.   Information services, the only service sector where payroll dropped, had the next highest decline in average hourly earnings, 0.42%.  That is almost identical to the 0.41% drop in average hourly earnings for the sector where average earnings are by far the lowest, leisure and hospitality.

Continued tax cuts will drive continued cuts in government payrolls, which will worsen our economic decline.   People without earnings can spend only what is transferred from those who do.   We must restructure our federal budget as I’ve noted in posts at http://usaturnaround.wordpress.com/ But as I’ve also noted there, we must at the same time restructure our economy.  We must create more jobs.  Without jobs there are no earnings, and without earnings there is no economy.

The big question is what kind of jobs in which sectors?  More and more jobs can be done at lower cost by workers in other countries, or by machines.  Businesses will, and should, continue to cut their high cost payrolls.  They have no incentive to form strategies to increase  US payrolls.  Politicians do have that incentive but chiefly in the short term, between now and their next election.  That is OK when the world is not changing but this is not such a time.  We must figure out how our society and economy should respond to currently unfolding great changes, identify the projects to achieve that transformation, and mobilize our workforce.

I began to explore this at the end of my previous post, “Monetary Policy, Fiscal Policy – What to Do?” at  http://martinsidwell.com/?p=117 and will continue.

 

Jun 27 2012

Monetary Policy, Fiscal Policy – What to Do?

Why isn’t our monetary policy working?  Set and executed by the Fed, it aims, by expanding or contracting the supply, cost and availability of money, to increase economic growth and lower unemployment, or cut inflation.  But we are stuck in low growth and high unemployment despite an extraordinarily expansionary policy.  What should we be doing?

The Fed continues to greatly expand money supply and it has for many years cut to unprecedented lows the cost of borrowing money.  In “normal” times that encourages more borrowing.  Those very low interest rates did  fuel borrowing for investment in dot-com and real estate price boom/bubbles.  They also enabled ongoing consumption that exceeded income.  But then the bubbles burst and asset values collapsed.   That was the start of “new normal” times.  Borrowers no longer had sufficient assets to support more borrowing, greed was supplanted by fear, and folks began repaying existing debt while they still had income.  Making borrowing more attractive is useless when borrowers cannot or will not borrow more.

Expansive monetary policy is not working now because we are in a balance sheet recession.  More specifically, we are in a household balance sheet recession.  Mortgaged real estate is by far the largest asset of most households.  While the real estate bubble was expanding they could get ever-larger mortgages and equity loans.  Now they can’t.  They can no longer continue borrowing to spend more than they earn.  Since household spending accounts for 70% of USA GDP, that hurts all across the economy.  The following chart illustrates the severe contraction of household debt in the last couple of years and suggests it will continue for at least another four years before it’s back to what could be a “normal” level.

Lower household spending resulted in a contraction of economic growth, which shrank income growth and raised unemployment.  That led to lower tax revenue and higher welfare program spending that compounds the preexisting imbalance between government income and spending.  While our household debt drops, our public debt soars.

Low interest rates help in one important way by minimizing the cost of public debt.  They hurt by minimizing the income of pension funds, insurance companies, and all fixed income investors whose spending commitments depend on a “normal” rate of return.  Their “new normal” income is often significantly below their committed spending.  And QE, the Fed’s injection of new money into the economy, helps equity investors only temporarily:

QE stimulates the  confidence fairy but she stops dancing when QE ends.

Large enterprises that account for most of the S&P 500 are helped by low interest rates, they refinance existing borrowing at lower rates, but they have no need or desire to borrow for expansion.  For one thing, they already have sufficient resources; more importantly, they do not expand production in face of shrinking demand.

The big banks are in better shape than when the real estate bubble burst.  The Fed bought large amounts of their bad loans and the value of their assets now appears to be in better balance with their liabilities.  But their assets may have much less value than appears.  The value of property against which they made loans  is now much lower.  Derivatives they own based on those loans may have no value at all.  Instruments they sold that insure against such risks may trigger payouts higher than they could make.  Big banks are now afraid to lend to each other because they do not know if either they or their counter-party is solvent.

What will happen if we stay on this course?  It looks like deflation first, then inflation.  We’re getting lower-than-expected results or declines in GDP, job growth, retail sales, income growth, manufacturing production, core capital goods orders, vehicle sales and initial unemployment claims.  We have uncertainty about tax rates, an imminent “fiscal cliff” and a dysfunctional congress.  Commodity prices are declining worldwide, there’s a sovereign debt crisis in Europe, and ominous economic indicators in China, Japan, India, Brazil and other emerging nations.   Collapsing aggregate demand could force producers to cut prices to find buyers.  That would trigger rising unemployment and more defaults, bankruptcies and bank failures.  Deflation would be followed by inflation if the Fed and other central banks expanded the supply of money far beyond the value of what it could buy.

No need to flesh out how bad that could be.  What can we do to avoid it?  How can we stimulate growth and employment?

The indicated strategy is the opposite of our apparently emerging fiscal policy.  The National Association of Manufacturers and others estimate the Budget Control Act of 2011 which mandates $1.2 trillion of Federal spending cuts between 2013 and 2021 will cost one million jobs in the private economy by 2014, drive unemployment up 0.7% and cut GDP growth by 1%.   Federal spending in 2011 was $3.753 trillion of which $1.233 trillion, the spending for goods and services, was added to GDP.  Transfers, e.g., Social Security and interest on the debt do not add to GDP, only if they are used for private spending.  Two thirds of Federal spending for goods and services, $835 billion, was for national defense.  If, as seems probable, cutting that spending will cut GDP growth and employment, the opposite, increasing that spending, should increase economic growth and employment.

It would not be productive to stockpile more weapons or borrow more money to wage wars in Afghanistan and elsewhere, but there are productive alternatives, investments in the same class as President Eisenhower’s 1956 National Interstate and Defense Highways Act and his 1958 National Defense Education Act in response to the Soviet Union’s Sputnik launch.    We are now under-investing in transportation infrastructure and education, greatly so relative to China, Singapore and others, but our greatest vulnerability is availability and cost of energy.  Failing to address that will make our defense impossible.  Fixing it will have great competitive benefit.

The Department of Energy funded a recently published detailed analysis of the extent to which renewable energy supply can meet US needs over the next several decades.  Its most key finding is:  “Renewable electricity generation from technologies that are commercially available today, in combination with a more flexible electric system, is more than adequate to supply 80% of total U.S. electricity generation in 2050 while meeting electricity demand on an hourly basis in every region of the country.”  See: http://www.nrel.gov/analysis/re_futures/

This means we can eliminate our greatest vulnerability, which could happen soon, e.g., by Iran blocking the Gulf, and must happen when the wells run dry, and by doing it first we would create an enormous global market for our solution.  Why would we not not work with utmost urgency to achieve that?  Enough money is available for the private sector’s share of the investment and the Fed would create more if required.  The US government would have to take on additional debt to fund its share but there would be no problem selling the bonds because the US is already considered the least unsafe borrower.  This investment program would be viewed positively, unlike the existing structural budget deficit and it’s the perfect time for such an investment because borrowing costs are so low.

But we cannot do this with a Congress that will not take action, a President whose leadership does not compel action, and a citizenry that does not understand what to demand.

For much more detail on monetary theory and what the Fed and other nations’ central banks do and why, see my earlier post at:

Can Monetary Policy Reverse our Economic Decline?

Jun 25 2012

Socially Acceptable Healthcare

We have in the USA universal access to medical treatment via the most costly system possible.  What we need is a socially acceptable level of healthcare for all with a way for those who can pay more to get more.

Everyone on US soil regardless of citizenship has the right to medical treatment defined by the Emergency Medical Treatment and Active Labor Act (EMTALA) passed under President Reagan.  A frequently quoted court judgment about it says:  “The Emergency Act was passed in 1986 amid growing concern over the availability of emergency health care services to the poor and uninsured. The statute was designed principally to address the problem of “patient dumping,” whereby hospital emergency rooms deny uninsured patients the same treatment provided paying patients, either by refusing care outright or by transferring uninsured patients to other facilities. Reports of patient dumping rose in the 1980s, as hospitals, generally unencumbered by any state law duty to treat, faced new cost containment pressures combined with growing numbers of uninsured and underinsured patients. Congress responded with the Emergency Act, which imposes on Medicare-provider hospitals a duty to afford medical screening and stabilizing treatment to any patient who seeks care in a hospital emergency room.”

Since essentially all hospitals are Medicare providers, EMTALA in effect mandates that anyone who comes to a medical emergency department must be examined and, if suffering from an “emergency medical condition”, provided with treatment.  A pregnant woman in active labor, for example, must be admitted and treated until delivery is completed.  We treat everyone regardless whether they can pay but only after they need the most costly treatment.  Our cockamamie approach means hospitals must recover the cost of treating those who cannot pay via higher prices for those who do.

Medical insurance in the US is a significant burden on US employers who provide it, a burden their competitors do not bear.  In 1986 we decided to no longer accept that many Americans were being denied treatment for a medical emergency, but we have yet to face up to the competitive issue.

We need all Americans to be productive.  Getting everyone to want to be productive must also be addressed but that is outside the scope of this post.  To be productive you must be healthy, which means you must have access to healthcare.  Since some treatments are extremely expensive and everyone is at risk of needing them, insurance is necessary for all.  Because most people will not in fact need the most costly treatments, universal insurance has the lowest per capita cost.  We currently insure only those over 65 years of age and to a lesser extent those with a serious health issue who cannot afford treatment, i.e., only the most costly to insure.

We need our health care costs to be affordable.  We currently have no defined limits on what treatment will be supplied yet ever advancing technology makes what can be attempted to prolong deeply and irreversibly impaired life astronomically costly.  Who should get what level of treatment is a value judgment we avoid discussing.  We should debate openly what judgments about treatment we want in our society.

There is, however, no disagreement that we want the finest possible healthcare.  That means those who can pay for the best should be able to do so, and the best should be affordable by as many as possible so as to maximize its supply in our society.  If great healthcare isn’t available affordably within our system, we will increasingly go to other countries for treatment.

So what in the end does “socially acceptable” mean?  It implies a level of rationing we agree is OK at a cost we agree is OK.  Achieving that balance is among the most difficult of all challenges.  We will get nowhere until we accept that a balance is necessary.