US Economy

[a_majoor]

Incone inequality?

http://blog.american.com/2011/10/5-reasons-why-income-inequality-is-a-myth-and-occupy-wall-street-is-wrong/

5 reasons why income inequality is a myth — and Occupy Wall Street is wrong
By James Pethokoukis

October 18, 2011, 10:54 am
A A A Sorry, the story just doesn’t hold together. According to left-wing think tanks, columnist and bloggers—and, of course, the Occupy Wall Street radicals—the top 1 percent have been exploiting the 99 percent for decades. The rich have been getting richer at the expense of the middle class and poor.

Really? Just think for a second: If inequality had really exploded during the past 30 to 40 years, why did American politics simultaneously move rightward toward a greater embrace of free-market capitalism? Shouldn’t just the opposite have happened as beleaguered workers united and demanded a vastly expanded social safety net and sharply higher taxes on the rich? What happened to presidents Mondale, Dukakis, Gore, and Kerry? Even Barack Obama ran for president as a market friendly, third-way technocrat.

Nope, the story doesn’t hold together because the financial facts don’t support it. And here’s why:

1. In a 2009 paper, Northwestern University economist Robert Gordon found the supposed sharp rise in American inequality to be “exaggerated both in magnitude and timing.” Here is the conundrum: Family income is supposed to rise right along with productivity. But median real household income—as reported by the Census Bureau—grew just 0.49 percent per year between 1979 and 2007 even as worker productivity grew four times faster at 1.95 percent per year. The wide gap between the two measures, if accurate, would suggest wealthy households rather than middle-class families grabbed most of the income gains from faster productivity.

But Gordon explained that this “compares apples with oranges, and then oranges with bananas.” When various statistical quirks are harmonized between the two economic measures, Gordon found middle-class income growth to be much faster and the “conceptually consistent gap between income and productivity growth is only 0.16 percent per year.” That’s barely one‐tenth of the original gap of 1.46 percent. In other words, income gains were shared fairly equally.

2. A pair of studies from 2007 and 2008 conducted by the Federal Reserve Bank of Minneapolis supports Gordon. Researchers examined why the Census Bureau reported median household income stagnated from 1976 to 2006, growing by only 18 percent. In contrast, data from the Bureau of Economic Analysis showed income per person was up 80 percent. Like Gordon, they found apples-to-oranges issues such as different ways of measuring prices and household size. But in the end, they concluded that “after adjusting the Census data for these three issues, inflation-adjusted median household income for most household types is seen to have increased by 44 percent to 62 percent from 1976 to 2006.” In addition, research shows that median hourly wages (including fringe benefits) rose by 28 percent from 1975 to 2005.

3. A 2008 paper by Christian Broda and John Romalis from the University of Chicago documents how traditional measures of inequality ignore how inflation affects the rich and poor differently: “Inflation of the richest 10 percent of American households has been 6 percentage points higher than that of the poorest 10 percent over the period 1994–2005. This means that real inequality in America, if you measure it correctly, has been roughly unchanged.” And why is that? China and Wal-Mart. Lower-income families spend a larger share of income than wealthier families on goods whose prices are more directly affected by trade. Higher income folks, by contrast, spend more on services which are less subject to foreign competition.

4. A 2010 study by the University of Chicago’s Bruce Meyer and Notre Dame’s James Sullivan notes that official income inequality statistics indicate a sharp rise in inequality over the past four decades: “The ratio of the 90th to the 10th percentile of income, for example, grew by 23 percent between 1970 and 2008.” But Meyer and Sullivan point out that income statistics miss a lot, such as the value of government programs and the impact of taxes. The latter, especially, is a biggie. The researchers find that “accounting for taxes considerably reduces the rise in income inequality” over the past 45 years. In addition, “consumption inequality is less pronounced than income inequality.”

5. Set all the numbers aside for a moment. If you’ve lived through the past four decades, does it really seem like America is no better off today? It doesn’t to Jason Furman, the deputy director of Obama’s National Economic Council. Here is Furman back in 2006: “Remember when even upper-middle class families worried about staying on a long distance call for too long? When flying was an expensive luxury? When only a minority of the population had central air conditioning, dishwashers, and color televisions? When no one had DVD players, iPods, or digital cameras? And when most Americans owned a car that broke down frequently, guzzled fuel, spewed foul smelling pollution, and didn’t have any of the now virtually standard items like air conditioning or tape/CD players?”

No doubt the past few years have been terrible. But the past few decades have been pretty good—for everybody.

 

[a_majoor]

Croney capitalism and the "Blue" economic models reach the end of the road:

http://blogs.the-american-interest.com/wrm/2011/10/23/rhode-island-athens-of-america/

Rhode Island: Athens of America?
Walter Russell Mead

Rhode Island is looking more and more like Greece, and not in a good way.  That is one message of this important piece by Mary Williams Walsh in the New York Times.  Years of blue social policy have wrecked local and state government finance in the country’s smallest state, and now the bills are coming due.  Services are being cut to the bone and elderly retirees are losing money they thought was secure.

In Rhode Island, it is Democrats, not nasty union-hating Republicans, who are doing the dirty work.  Democratic mayors are telling their unions that there isn’t any money — not because they are vicious corporate stooges who hate working people and want to see them suffer, but because There. Isn’t. Any. Money.

Because Rhode Island listened to timeserving blue politicians too long, and union leaders and public sector workers lost their grip on any mathematical realities beyond the numbers at the ballot box, the pension system grew more and more out of control. State and local governments lurched into a crisis.  Vote yourself a raise, vote yourself a pension: why not?

But there is financial math as well as political math and in any war with financial arithmetic, the money numbers win.  If there isn’t any money, the checks won’t clear.  Ultimately, you will have to fire existing workers, stop paying pensions or a mix of both. That is where Rhode Island is now: its economy can’t generate the revenue to support its existing governance system and to pay its pension obligations.



The Ostrich Party has long ruled Rhode Island; their heads planted firmly in the sand - if not in even darker and damper regions – Rhode Island politicians, government and union officials have done everything possible to conceal the true state of affairs from the voters, the bondholders, retirees and even themselves.  Unrealistic assumptions about rates of return helped hide the ugly truth about the looming pension meltdown — and anybody who tried to raise the alarm about the coming crisis was hooted down as an enemy of the workers.  Even now the true blue firing squads are assembling to shoot the messenger; Mary Williams Walsh can expect angry push back from a whole sector of American political life that thinks this whole problem will go away if we tax the rich, clap our hands and all say together, “I believe in government”.

But “objectively”, as our Marxist friends would say, the union leaders and their political chums were the worst enemies of the workers: they told state workers that their benefits were secure even as it became increasingly obvious that, as a matter of arithmetic, they were not.

Let’s be crystal clear about this.  To tell a 50 year old pretty lies about the soundness of a pension plan is one of the most wicked and irresponsible things you can do without actually shedding blood; people who believe these phony promises will not make the extra savings, work the extra years or otherwise take steps to protect themselves until it is too late.  Telling those pretty lies is exactly what Rhode Island’s establishment has been doing for some time; it is what Ostrich Party legislators, trade unionists, journalists and governors are still doing across much of the country.

Reasonable reforms could have made things much less painful, but the unions typically threaten to destroy the careers of any politician who tampers with the pension system until the truck actually starts falling over the cliff.  Now the long fall has begun and Rhode Island and its retirees are caught in a cascade of bad news, lawsuits, and financial crisis.  No Rhode Island retiree can rely on getting the benefits promised; nobody can predict how this will all work out.

That is not the kind of uncertainty that 70 year old retired teachers and firefighters should have to face.  A decent society would not let that happen — but the blue social model in its decadent late shark-jumping years of fake promises is anything but decent. Political chicanery, fuzzy math, denial, rhetoric, ambition: this is how a union betrays its members, this is how politicians betray their constituents.

To give the devil his due, this monumental crack up was the result, in its early stages, of ignorance and complacency more than anything else.  The union leadership and the statehouse pols took growth for granted.  They had grown up in the post war boom; good times were what they expected.  They believed that the American economy would continue to grow richer every year and that there was a never-failing cornucopia of “more” somewhere that would somehow make sure that there was always enough money in the kitty to redeem the promises made.  You could always squeeze another quart out of the milk cow.

This was a natural mistake to make — in 1972.  But state and local government ignored a generation of warnings that the wheels were coming off the car of the blue social model, and especially in rust belt states like Rhode Island.  Factories closed, the economy changed, the state fiscal picture grew steadily worse, but these facts were not allowed to penetrate the closed shop in which the union leaders and their political allies made plans for the future.  The state’s economy would continue to grow at a rate which would make it possible to pay new state workers higher and higher salaries even as a growing number of retirees could collect increasingly generous pensions — adjusted, of course, for inflation every year.  You could tax the rich, defer maintenance, hit the bond markets — and when all else failed, you could assume that your underperforming pension reserves were invested in magic growth beans that would automatically gain 8.5 percent in value forever.



Providence City Hall (Wkimedia)
The union leadership in Rhode Island, as in the majority of US public and private workplaces, failed in the first task of the stakeholder: they failed to undertake and support changes that would ensure the health of the enterprise down the road.  This is partly about wages, pensions and work rules: making unrealistic demands only stores up trouble down the road.  But more profoundly it is about not thinking seriously about the future of the company or, in Rhode Island’s case, of the state.


What economic development options did Rhode Island have to build a sustainable new economy as the old one withered away?  Locked into the assumptions of the blue social model, Rhode Island planners, like their counterparts across the country, fell for white elephant concepts like convention centers, those cliched “new urbanism” pedestrian malls and downtown redevelopments that never seem to work, Solyndra style industrial policy and all the other failed nostrums that strike upper middle class social engineers as cool but that rarely make anything as vulgar and utilitarian as money.

There was a lot of expensive churn, many consultants deposited checks, but the underlying economy never turned around.  The serial failure of one plan after another to regenerate solid growth, turn around the population trend, put Medicare on a sustainable path, and reverse the decline of the cities never led to a questioning of basic assumptions — and it never led the Ostrich Party to think through the implications of economic stagnation and decline for the state’s pension system and its future budgeting.

More care and foresight could have spared Rhode Island’s workers and retirees some of the sacrifices that will now have to be made.  But that would have forced the many members of the Ostrich Party to pull their heads out of the warm and comfortable dark in order to look around and act.  Denial was psychologically more comfortable and politically safer.  The more untenable the old system became, the more tightly they shut their eyes and closed their minds.

The lesson goes farther than Rhode Island.  As Walsh points out in the Times, Rhode Island style pension meltdowns look increasingly possible in hard pressed cities and states across the country.  Can public sector union leaders in other states begin to think proactively about how to build a post-blue economic future and put their muscle behind genuinely forward looking development ideas or will they wait, as in Rhode Island, for the truck to go over the cliff?

We can dream.  Yes, we can.

After Rhode Island, What Next?
As the American political system attempts to grapple with the growing pension, debt and entitlement crisis, three types of responses seem to be emerging.  There is the true blue ostrich approach of the unions themselves and their closest allies: denial and rage.  There is the attitude of more centrist Democrats like Governor Cuomo and Mayor Emanuel: make prudent cuts, hold the line on spending, work to quietly make government more efficient without jumping into a full scale confrontation with the unions.  And there is the Scott Walker, dragonslayer approach: take them on.

The rage and denial crowd in the Ostrich Party, rumps in the air, have nowhere to go.  Both the Cuomo and the Walker approaches have their merits — though it seems to me that neither is exactly what we need.  Cuomo style gradualism may soften the hard landing, but it doesn’t do enough to reverse the decline of the blue state economies.  Upstate New York is in desperate shape, and it cannot prosper without a radical reduction of its cost structure.  New York City is simply becoming more and more of an appendage to Wall Street, even as public opinion in the city turns against the one healthy industry it still has. Governor Cuomo’s policy mix holds out hope to slow the decline — but there is little to suggest that New York can go back to the innovation and leadership that once made it the country’s most dynamic growth engine and a wonder of the world.

The Cuomo/Emanuel Democrats want to fight the unions and the government lobby over specific issues, but they don’t want to pay the ideological and political costs of taking on the worldview behind the blue model machine.  I think leadership today has to do more: political leaders need to talk to the public about what has changed and why, and talk also about where we can go from here.  Intelligently managing the decline of the blue social model is better than nothing, but what is really needed is to prepare a transition to a new kind of growth.

But if the Mama Bear New Democrats serve their porridge too cool, the Papa Bear Republicans like Wisconsin’s Scott Walker and Ohio’s John Kasich risk serving it too hot.

Polarizing politics and demonizing state and local government workers is not a good idea.  It is unfair for one thing; it is bad politics for another.  Toxic blue model legacy costs are the problem: rigidly bureaucratic government structures, unrealistic costs, years of underfunded pension plans, regulations that choke growth and initiative, outdated progressive ideas about how change works — these are the roots of our problems, not the middle school teacher down the street or the retired post office worker living modestly on a pension that may be underfunded but is hardly a bonanza.

The fifty year old teacher, fireman or police officer may have been naive to believe his or her union leaders, the politicians and the journalists who all said there was nothing to worry about — but most of those workers cannot be called “greedy” or “selfish”.  They are victims of a complex, multi-player Ponzi scheme and have been lied to by a lot of people for a long time.  They also face some serious financial costs.  Not only are their pensions likely to be less generous and solid than they were led to expect; they may well face layoffs and wage freezes as states struggle to cope with legacy costs.



The first church in Rhode Island, founded by Roger Williams (Wikimedia)


Reform cannot and should not be understood simply as an assault on state and local government workers — although these workers cannot be insulated from the general consequences of a major failure of our political system.  The problem is not that teachers and firefighters earn “too much” money; the problem is that we have developed a dysfunctional social system which cannot pay its bills.  The public economy needs to be rationalized and restructured, but the most important job is to revitalize and energize the private sector.

Ultimately the only solution is for the country to move on to a new post-blue economic model that can generate enough wealth to cover our existing debts. In the absence of a serious growth agenda, both the Cuomo and the Walker approaches can’t get the job done. And what the country needs is a competition between growth strategies, not a contest between strategies for cutbacks.

In the meantime, there is one thing that state and municipal workers and taxpayers can and should demand: honest and transparent accounting standards that make absolutely clear and explicit what the state of public pensions systems really are, what the assumptions are that underpin them, what the chances are that the systems may fall short, and what the fiscal consequences of any shortcomings are likely to be.  Those reports ought to be annual, they ought to be impartial, they ought to be conducted in accordance with the strictest accounting principles, and the results ought to be public.

This is something that everybody should support: from the Tea Party to OWS and beyond; accurate public reporting on the state of worker pensions should be a no-brainer.  If we can’t solve our problems overnight, let’s at least have a no-denial zone when it comes to public pensions.

Defend your country: kick an ostrich.

Unlike the author, I do not have sympathy for the "50 year old retired teacher", siince this is what they supported and voted for all their working lives. If you make the wrong choices in life, then you must accept the consequences as well...

 

[Redeye]

Unlike the author, I do not have sympathy for the "50 year old retired teacher", siince this is what they supported and voted for all their working lives. If you make the wrong choices in life, then you must accept the consequences as well...

I'd love to watch the pension you paid into in good faith based on the information you had be taken from you, so I could then watch you snivel about it. If only.

 

[a_majoor]

My RRSP is doing just fine, thank you. I realized long ago that the only person who would take care of me is...me, so I make no plans based on CPP, the Reserve pension (no, I am not buying back any time) or any other government plan.

Right now we are in an unstable equilibrium, where any outside disturbance can/will have catastrophic consequences. I have firewalled as best as possible; including ensuring I have a little Euro denominated investments in my portfolio as possible, and steering clear of companies like GM, which only exist by government fiat. OTOH, I have been investing more in India, since they seem to be best positioned to weather the coming blows.

 

[Brad Sallows]

I could have some sympathy for people who paid into a pension in good faith.  What I have no sympathy for is bad faith bargaining: the notion that the demanded increases on the total compensation envelope should outpace inflation or any other marker.  If you ask for more than is supportable, eventually some of it will be removed.

 

[Kalatzi]

Defense Industry: Keep Paying Us or the Economy Dies

http://www.wired.com/dangerroom/2011/10/defense-industry-cuts-economy/

"Defense giant Lockheed Martin had a totally sweet quarter, raking in $700 million and looking forward to the same this time next year. So it raises eyebrows when Lockheed’s anointed mouthpieces predict mass economic disaster if Congress touches the defense budget.

On Tuesday, the aerospace industry put out a report saying that chopping the defense budget would put over a million Americans out of work. Cuts that could total up to a trillion dollars over 10 years would “devastate the economy and the defense industrial base and undermine the national security of our country,” said Marion Blakeley, president of the Aerospace Industries Association, which sponsored the report."

"It’s natural for defense cuts to raise anxiety in a military-industrial complex that’s reaped a decade of cash windfalls. And it’s just as natural for defense companies to cherry-pick arguments to support their revenue. That’s all in the game. But unless they’re also willing to accept big tax hikes to finance their continued desired spending, then it’s hard to see how reports like this get around Winston Churchill’s (or maybe Sir Ernest Rutherford’s) famous aphorism: “Gentlemen, we have run out of money. Now we have to think.”"

 

[a_majoor]

The pension disaster is coming home to roost. US State and municipal government pensions are estimated to be over $2 trillion in the red. Like I said, the people who demanded these sort of benefits and supported politicians who wrtoe and approved these agreements get no sympathy from me:

http://finance.yahoo.com/news/AP-Newsbreak-Brown-to-seek-apf-3979443126.html?x=0&sec=topStories&pos=7&asset=&ccode=

AP Newsbreak: Brown to seek sweeping pension cuts
AP Newsbreak: Calif. Gov. Brown to seek higher employee pension, health care payments

Juliet Williams, Associated Press, On Thursday October 27, 2011, 12:33 am EDT
SACRAMENTO, Calif. (AP) -- Gov. Jerry Brown will propose sweeping rollbacks to public employee pension benefits in California, including raising the retirement age to 67 for new employees who are not public safety workers and requiring state and local employees to pay more toward their retirement and health care, according to a draft of the plan obtained Wednesday by The Associated Press.

The governor will also propose Thursday a mandatory "hybrid" system in which future retirees would get their retirement from a guaranteed benefit and a 401(k)-style plan subject to market whims. For employees with at least 30 years of service, retirement benefits would aim to replace about 75 percent of an employee's salary through retirement funds and Social Security, according to the draft.

The plan, as drafted, also would end so-called pension "spiking" that lets employees boost their payouts by including overtime and other benefits, and end the practice of buying additional service credits.

"It's time to fix our pension systems so that they are fair and sustainable over a long time horizon," Brown said in a prepared statement to the AP. "My plan raises the retirement age and bans abusive practices like "spiking" and "air time" while mandating that public employees pay an equal share of pension costs."

The administration estimates its proposal would save about $900 million annually.

Brown's plan would require approval from the Legislature, where union-allied Democrats are likely to balk at some of the significant rollbacks, and where Brown failed to win consensus on pensions with Republicans last spring.

Several parts of the plan would also require voter approval, including extending many of its provisions to employees at California's public university systems, and Brown's goal to add two independent, public members to the board of the California Public Employee Retirement System, the nation's biggest public pension fund. The board has come under scrutiny during an influence-peddling investigation by the attorney general's office alleging fraud and kickbacks through middlemen known as placement agents who seek investment business.

Kevin Bassett, chief of staff for Senate Minority Leader Bob Dutton, R-Rancho Cucamonga, had not seen the governor's proposals but said many of them sound similar to ideas raised in discussions between Republican lawmakers and the governor last spring.

"We want to have a system that's sustainable, that's fair for employees, fair for taxpayers and that addresses our unfunded liabilities, that addresses our annual cost challenges," Bassett said.

Dave Low, chairman of the union-backed group Californians for Retirement Security, was lukewarm about the plans Brown outlined. Low and other labor officials were briefed on the plan Wednesday.

"The governor has indicated that labor will not like many of his proposals. He is right," Low said in a written statement.

"Many of the governor's proposals circumvent collective bargaining. Unions across California have negotiated major retirement concessions, including increased payments by employees and two-tier benefits. These concessions have already saved the state, cities, counties and other entities hundreds of millions of dollars," Low said.

Earlier Wednesday, a joint Senate-Assembly panel held a hearing on the crisis facing California, where the recession has pummeled once-flush government pension funds that have tumbled in value with the stock market and real estate prices. The state has promised government retirees billions of dollars in future benefits that it might not be able to pay.

Estimates for the gap between what is owed to current and future public retirees, and what will be available to pay them, have varied widely with the fluctuating economy.

A report last year by the Stanford Institute for Economic Policy Research said that retirement funds for 2.6 million California teachers, state workers and university employees together faced long-term gaps of over $500 billion. The California Public Employees' Retirement System has $75 billion in unfunded future pension liabilities, and the state is on the hook for an estimated $51.8 billion in unfunded retiree health care costs.

Brown's latest plan would require new employees to work at least 15 years before they are eligible for any state-funded retiree health care. When retirees become eligible for Medicare, the state would pay only the premiums for that federal program, rather than the more generous benefits now offered.

The administration also wants to require all public employees to contribute at least half the annual cost of funding their pension benefits. Under current systems, some employees do pay that much but others pay little or nothing, leaving the full burden on taxpayers.

Pension talks with the GOP broke down this spring as Republican lawmakers sought deeper rollback than Brown had proposed, including the mandatory "hybrid" system he is now seeking and a statewide vote on permanent pension reform that would ensure changes made now couldn't be easily overturned in the future.

Some of the elements of the plan Brown will unveil Thursday were included in previous proposals, according to the draft. Other parts of the proposal include:

-- Raising the retirement age from 55 to 67 for non-public-safety employees; public safety officials who can now retire as young as 50 would have to work longer, but the calculation would be based on their ability to perform.

-- Prohibiting pension pay holidays, in which employers or employees suspend pension contributions.

-- Calculating benefits based on the highest average compensation over a three-year period, rather than the current system which bases it on a single year of final compensation, which has been used to artificially boost pension payments.

-- Prohibiting retired employees who serve on public boards and commissions from earning any retirement benefits for that service.

Union officials said at Wednesday's hearing that a typical state worker earns an annual pension of about $31,000, but benefits can vary widely. A highway patrolman with 28 years of service can take home a pension of more than $90,000 a year, said David Lamoureux, a deputy chief actuary with the state Public Employees' Retirement System. According to one tally cited by Republicans, more than 9,000 state employees are receiving six-figure pensions.

Associated Press writer Michael R. Blood in Carson, Calif., contributed to this report.

 

[Old Sweat]

The following oped piece from the Daily Telegraph on line edition, which is reproduced under the Fair Dealing provision of the Copyright Act, paints a gloomy picture of the future American society.

Can America survive without its backbone, the middle class?

As the gaps within the classes widen, American society is starting to fracture.

By Anne Applebaum

8:47PM BST 28 Oct 2011

My friend J grew up in Chicago, but spent his summers in a small town on a Michigan lake. His family, because they came from the city and because they were “summer” visitors, were slightly more privileged than those who lived in the town. Nevertheless, the town considered itself “middle class” and the children observed no social distinctions playing together. J told me recently that he had been back to that town and found it utterly changed: shops were boarded up, houses were being repossessed, cars were old. He no longer had much in common with people he had known as children, some of whom were now unemployed, all of whom had far lower incomes than he.


J isn’t a hedge-fund manager or a plutocrat, but he is a member of the American upper-middle class, a group which is now sociologically and economically very distinct from the lower-middle class, with different politics, different ambitions and different levels of optimism. Thirty years ago, this wasn’t the case. A worker in a Detroit car factory earned about the same as, say, a small-town dentist, and although they might have different taste in films or furniture, their purchasing power wasn’t radically different. Their children would have been able to play together without feeling as if they came from different planets.


Now they couldn’t. Despite all the loud talk of the “1 per cent” of Americans who, according to a recent study, receive about 17 per cent of the income, a percentage which has more than doubled since 1979, the existence of a very small group of very rich people has never bothered Americans. But the fact that some 20 per cent of Americans now receive some 53 per cent of the income is devastating.


I would argue that the growing divisions within the American middle class are far more important than the gap between the very richest and everybody else. They are important because to be “middle class”, in America, has such positive connotations, and because most Americans think they belong in it. The middle class is the “heartland”, the middle class is the “backbone of the country”. In 1970, Time magazine described middle America as people who “sing the national anthem at football games – and mean it”.


“Middle America” also once implied the existence of a broad group of people who had similar values and a similar lifestyle. If you had a small suburban home, a car, a child at a state university, an annual holiday on a Michigan lake, you were part of it. But, at some point in the past 20 years, a family living at that level lost the sense that it was doing “well”, and probably struggled even to stay there. Now it seems you need a McMansion, children at private universities, two cars, a ski trip in the winter and a summer vacation in Europe in order to feel as if you are doing minimally “well”. You also need a decent retirement fund, since what the state pays is so risible, as well as an employer who can give you a generous health-care plan, since health care is so expensive.

I’m not going to argue about the economics of this shift in definition of “middle”, or the morality (of course, no one with a small suburban home and a car is “poor” by global standards). The point is that people’s perceptions have changed. Many who used to feel secure in “middle America” now feel, rightly or wrongly, left behind, and they don’t think they will ever catch up. Meanwhile, many of those who used to feel proud of coming from “middle America” now feel, like my friend, that they have little in common with their “heartland”. If this turns out to be a permanent change, the implications for American politics, even for Western politics, will be profound. For the past 50 years, Western democracy has flourished alongside the assumption of upward mobility: everyone could participate in the political system; everyone had a chance at improving his status; and everyone could hope, at least, that his children would live better than his parents had, in Britain, France and Germany as well as America. But if Americans are no longer “all in the same boat”, if some of them are now destined to live better than others, then will they continue to feel like political equals? If Britons, Frenchmen and Germans no longer have much in common with their countrymen, will they still want to take part in the same national debates? We don’t know yet – we’ve never lived without a “middle middle class” before – and we are about to find out.

 

[Edward Campbell]

And here is another "middle class" warning in an article which is reproduced under the Fair Dealing provisions of the Copyright Act from the Globe and Mail:

http://www.theglobeandmail.com/news/world/konrad-yakabuski/battle-rages-over-ohios-union-limiting-law/article2218168/

Battle rages over Ohio’s union-limiting law

KONRAD YAKABUSKI | Columnist profile | E-mail
COLUMBUS— From Saturday's Globe and Mail

Published Friday, Oct. 28, 2011

The pagoda-styled Toledo and Ohio Central Railroad station is more than a 116-year-old Columbus landmark. It is a reminder that times change. The railway faded into history six decades ago and the station is now the union hall for the city’s firefighters.

The question facing Ohioans today is whether the union itself has become as much of an anachronism as the passenger quay where William McKinley caught the train in 1897 to take up his new job in the White House.

On Nov. 8, voters in the Rust-Belt state will decide whether to keep a new law passed by the Republican-dominated legislature that all but eliminates collective bargaining in the public sector.

Facing an $8-billion (U.S.) budget deficit and as much as $166-billion in unfunded liabilities for public pension and health-care benefits, Ohio went even farther than Wisconsin this year in rolling back hard-won gains for the state’s 360,000 unionized public-sector workers – including teachers, firefighters and police officers.

But so-called Senate Bill 5 will do much more than balance the budget. It is, its critics say, an exercise in union-busting that will accelerate Ohio’s division into a state of haves and have-nots, decimating the middle class in the process.

“They said on the TV the other day that, for the past 30 years, the middle class has flat-lined,” explains retired teacher Sue Lally, 63, who has come to the union hall as a campaign volunteer. “The money’s there. It’s just all floated to the top.”

Her husband, ex-teacher Mike Boulware, also 63, nods approvingly: “Once you have a debt, you have to figure out how to pay it. The conservative way is to take away collective bargaining. The middle-class way is to take the top 1 per cent that has most of the profits and increase their taxes.”

The outcome of the Ohio vote will have national repercussions. A variation of its debate is playing out across the United States, from Rhode Island to California, as state legislatures face the intractable problem of having promised trillions in benefits to public-sector workers without figuring out how to meet those commitments.

While state revenues cratered during the recession, bringing the problem to the fore, the crisis was inevitable with the gradual retirement of the baby-boom generation. And it promises to exacerbate the three-decade-long rise in income inequality that President Barack Obama intends to make a central issue of the 2012 election.

Indeed, the referendum to keep or repeal Senate Bill 5, known as Issue 2 on the Nov. 8 ballot, is a warm-up act for the electoral confrontation next year that is expected to be largely fought over how to restore American jobs and economic might. Ohio is a quintessential swing state and how it votes in 2012 will likely determine whether Mr. Obama holds on to the White House.

“It is called lowering the cost of business,” Jim Buchy, a GOP member of the Ohio legislature, says of the new law. “If people have the patience to get this implemented, this state is going to be a juggernaut. We want to create more taxpayers and fewer tax users.”

Mr. Buchy, 71, who still owns the restaurant-supply business started by his German-immigrant grandfather, argues that unions have sapped Ohio’s competitiveness. As proof, he notes that when he first entered politics in 1983, Ohio had 21 congressional districts. Next year, it will elect only 16 members to the U.S. House of Representatives.

“Why? Because it is more lucrative for businesses to go elsewhere,” Mr. Buchy says. “Dayton used to be a General Motors town. Now, it’s a ghost town.”

The decline of Ohio’s manufacturing sector drove the rate of unionization in the state’s private sector toward the single digits years ago, making the public sector the last bastion of labour strength. But shortly after his Tea Party-backed election last year, Governor John Kasich set out to eradicate that union base, too.

The new law is sweeping. It limits public-sector collective bargaining to wages only and eliminates binding arbitration, allowing state and local governments, as well as school districts, to dictate contract terms if no agreement is reached.

The bill forces public workers to contribute more for their pension and health benefits, while allowing employers to roll back benefits unilaterally. It eliminates mandatory union dues and lowers the decertification threshold to 30 per cent of workers.

The union movement has not taken the assault on its very existence lying down. It collected 1.3 million signatures to force a statewide referendum on the new legislation.

Public-sector workers are not the only ones feeling threatened. For Democrats, repealing the bill is a question of political survival, since union contributions are the party’s biggest source of campaign funding.

“Really, what the bill is about is undermining public unions from being able to raise money and support political candidates,” insists John Carney, a Democratic member of the Ohio House of Representatives. “This is a strategy that has come down from the national Chamber of Commerce. It wasn’t created by Republicans in Ohio.”

While polls show widespread public sympathy for the union cause – and concerns about the fairness of the new law – there is also considerable support for many of the individual aspects of the legislation.

The law’s proponents have played up examples of public-sector excesses, such as the accumulation of hundreds of days of unused sick time that result in huge payouts to police and firefighters when they retire. The new law caps such payments.

“Enough is enough,” charges one TV ad that accuses public-sector workers of opposing Issue 2 “because they want even more from us. Better pay and benefits than us. Better job security than us. Better retirement than us. All paid for by us.”

But for Ms. Lally, the us-versus-them approach gets it all backward.

“The thinking shouldn’t be that we shouldn’t have it. It should be: What can we do so everyone has what we have,” she argues. “In order to have a strong country, you have to have a strong middle class.”

Free collective bargaining performs a vital economic function: it allows business leaders to understand and account, correctly, for the cost (and sometimes the value) of labour as an input. But the operative word is "free." We cannot find the real value of labour if the laws regarding collective bargaining are tilted, one way or the other, to favour either business or labour.

Public service collective bargaining is an odd beast. The very words "public service" ought to tell us that the function, serving the public, is important. Some public sector workers have an unfair bargaining advantage because the withdrawal of their services would go farther than just costing the "business" (school board, hospital, city, region ... nation) money it (service withdrawal) might actually endanger the public - as, for example, when garbage collectors go on strike and (knowingly) create a public heath danger.

In the 1950s, before public sector collective bargaining became widespread, there was a tacit agreement - a social contract if you will: public sector workers were, broadly, paid less than their private sector confreres but they had:

1. An excellent, guaranteed pension scheme; and

2. Nearly iron clad job security.

Now, 60 years on, public service workers, especially, bastions of the middle class- many of whom were, 60 years, professionals who would have bridled at the terms "education worker" of "health care worker"have unsustainably high salaries and pensions and iron clad job security. There never was a "free bargain." The public, most of whom worked in the private sector, were and are held hostage.

One problem is that the public sector is too public: too many jobs that can, without any difficulty or danger, be done by the private sector are public. Consider the situation of e.g. garbage collection in some (many? most?) Canadian cities. Some garbage collection workers, those who collect garbage from most private homes are public sector workers. Others, those who collect garbage from public businesses, including condominiums (where many people reside) and even city hall and the fire halls, are private sector workers employed by contractors. Two questions arise:

1. Why is private (single family) garbage in need of public sector pick up and disposal while garbage from apartment buildings can be entrusted to the private sector?

2. Why are there so (relatively) few strikes in the private sector garbage collection business compared to the public sector garbage workers?

I have no answer to the first question but I have one for the second: COMPETITION. Competition keeps wages relatively low - but not too bad because in order to compete and make money garbage collection companies must pay well enough to get the job done on a consistently reliable basis - and competition gives individual businesses and e.g. condominium corporations flexibility: if the contracted company is hit by a strike then the customer can hire someone else. That "discipline" keeps both management and labour focused on their best interests. There is no such discipline in public sector unions.

So, solution one is: privatize, Privatize, PRIVATIZE! There are some jobs - those that involve, for example, the potential use of deadly force on the Queen's (our) behalf (police, for example) or very high risk and unacceptable loss of service (fire, for example) that must be public (along with some bureaucratic functions that involve policy advice to governments). Solution two is to recast the bargain: everything, including pensions and job security are on the table every time public sector unions (be they municipal workers (e.g. public transit) or the national civil service) sit down across the bargaining table from management - the people we elect.

The solution is NOT, in my opinion to "attack" unions in an effort to stop free collective bargaining because free collective bargaining is a valuable, indeed even essential business tool.

 

[Haletown]

Margaret Thatcher was so right when she stated that socialism is wonderful until you run out of other people's money to spend.

 

[a_majoor]

A very interesting look at the numbers. Note that due to the negative "multiplier" effect of government spending [0.8], reductions in spending actually increase the size of the economy. OTOH, the amount of cutting is so vast and the targets are so deeply entrenched that the ability to cut the required amount is in doubt:

http://voxday.blogspot.com/2011/10/why-washington-will-collapse.html

Why Washington will collapse

It's mathematically guaranteed, given the total failure of the supposedly responsible party, the Republicans, to even openly discuss the fiscal realities, much less address them. The Market Ticker walks through the numbers:

NOW we need to cut the federal budget not with a knife or a scalpel, but a chainsaw. Bachmann has said "43%." There were gasps when she uttered those words. Sorry, that's not enough. (Take your heart medication before continuing folks.)

Here's the math.

Last year (Calendar 2010) we ran a 12% of GDP deficit, $1.7 trillion. This year we are tracking to run about $1.4, but we have three months left. If history repeats as to size it'll come in around $1.4 trillion, which is approximately 9% of GDP. This is within the rough range of 9-12% of the last three years. The last year of Bush's Presidency we ran somewhat over 9% of GDP. Obama has run 11 and 12%, respectively, and this will be ~9-10%, so there's no change in that regard.

But withdrawing the deficit spending is not enough because the withdrawal of that money, when it runs through the economy, then produces a (gross) reduction in tax receipts. Figure 1/3rd of that deficit spending ultimately returns to the government in the form of taxes in some form or fashion by the time all of the "turns" those funds made in the economy (e.g. from company making the presidential limo to the folks making the alternator to the folks making the copper wire to the mine pulling the copper out of the ground), and subtract that off as well.

So now we need to reduce spending not by $1,700 billion but that plus about another $500 billion for the tax impact, for a total of $2.2 trillion out of $3.7 trillion spent. About $500 billion of our spending at present is interest so this means we have: $3.7 - $2.2 - $0.5 = $1 trillion in total actual federal spending available to us out of an original $3.7 trillion.

One can - and I will - take exception to the estimate of $800 billion for the net revenue consequences from what economists describe as "the multiplier effect", but the more important point is that changing government spending patterns will have an effect on the economy. It is as foolish to apply a static government spending cut model as it is to apply a static tax revenue model. Now, we can come up with a total range of estimates by utilizing the very high multiplier of optimistic Obama administration economists, who assumed it to be 1.6, then comparing that to the actual Four Wars multiplier of Robert Barro, which worked out to 0.8.

At present, federal tax revenues are $2.3 trillion. This means tax revenues/GDP are 2.3/15.0, or 15.3 percent. For the maximum range, we'll ignore the BEA's estimate of G and go with the actual amount of federal spending, which is $3.7 trillion. The range of multiplier effects means that the net contribution of that government spending to the economy is somewhere between $5.92 trillion (Obama) and $2.86 trillion (Barrow). Applying the Tax/GDP ratio indicates a TOTAL tax benefit of between $906 billion and $453 billion from ALL $3.7 trillion in government spending, which means that Karl's estimate of $800 billion in lost taxes from the aforementioned 1.7 billion reduction is almost surely too high, even before we notice that the 0.8 multiplier means that reducing government spending would tend to increase GDP and therefore tax revenues by a factor of 1.25.

So, in order to obtain the most conservative estimate of the tax effect, we have to multiply (1.25 x 1.7 trillion) x .153. This would indicate a benefit of $325 billion to GDP from the reduction in spending rather than an additional loss. On the other side, (1.6 x 1.7 trillion) x .153 means a maximum tax revenue loss of $416 billion.

I'm not sure where Karl got his interest figure, (it looks like he used the 2015 estimate), but the reported interest on the national debt is $240 billion for 2011. So, in order to prevent the debt situation from expanding, and depending upon which economist you trust concerning the multiplier effect, federal spending must be reduced to somewhere between $2,085 trillion on the high end and $1.344 trillion on the low end. And here are the current big-ticket items:

$761 billion - Social Security
$468 billion - Medicare
$269 billion - Medicaid
$598 billion - Unemployment/Welfare
$679 billion - Department of Defense + Foreign Wars

So, this is why the Tea Party and the Republican Party cannot possibly salvage the situation They're not proposing the end of ANY of these major programs even though the nation can only afford to keep two of them, three in the unlikely event that both Defense and Social Security are entirely junked. Since that's not going to happen, given the way in which the incompetence of politicians presently inhabiting Washington aren't willing to even consider such drastic action, the financial collapse of the US federal government is assured.

Because I harbor Austrian School inclinations and the propensity for government malinvestment is obvious, I think the higher figure based on Barro's multiplier is the more relevant one. It's hardly a surprise that the Keynesian model would make government spending look more desirable and cuts to that spending more horrific, and obviously the administration economists were incorrect about that 1.6x multiplier given the failure of their $787 billion stimulus plan. But I found it to be interesting to discover that the $2.085 trillion figure works out to a 43.6% required reduction in federal spending, which tends to suggest that Michele Bachmann's economists are utilizing an equation similar to the one that I have worked out here.

Perhaps old Crazy Eyes really does read Mises at the beach.

(edit; .8 turned out to be  smiley. Who knew?)

 

[ModlrMike]

Here's an interesting table that shows where the US Treasury debt is held:

MAJOR FOREIGN HOLDERS OF TREASURY SECURITIES

Interesting to note that Canada is 11th on the list and we've doubled our exposure since this time last year.

 

[Edward Campbell]

Here's an interesting table that shows where the US Treasury debt is held:

MAJOR FOREIGN HOLDERS OF TREASURY SECURITIES

Interesting to note that Canada is 11th on the list and we've doubled our exposure since this time last year.

This is one of those times when we should aspire to being Australia.

 

[cupper]

Actually, it does make some sense to have Canadian investment in US Treasuries. The high value of the Canadian Dollar against the US Dollar right now allows us to buy at a lower cost. And the Canadian Dollar is not going to stay at parity or close to it for an extended period of time. Once it starts to decline, the value in $Cdn will provide a larger return.

 

[Edward Campbell]

Actually, it does make some sense to have Canadian investment in US Treasuries. The high value of the Canadian Dollar against the US Dollar right now allows us to buy at a lower cost. And the Canadian Dollar is not going to stay at parity or close to it for an extended period of time. Once it starts to decline, the value in $Cdn will provide a larger return.

I have a different view of our dollar: we are, increasingly, a petrodollar country, and you can watch the exchange rate move, in near lockstep with the price of crude oil.

 

[ModlrMike]

Actually, it does make some sense to have Canadian investment in US Treasuries. The high value of the Canadian Dollar against the US Dollar right now allows us to buy at a lower cost. And the Canadian Dollar is not going to stay at parity or close to it for an extended period of time. Once it starts to decline, the value in $Cdn will provide a larger return.

Perhaps there is some truth in that, however we don't need to be a creditor they're not going to repay some day (soon).

 

[Edward Campbell]

Perhaps there is some truth in that, however we don't need to be a creditor they're not going to repay some day (soon).

America is not, despite the Tea Party rhetoric during the debt ceiling debates, in any real danger of defaulting on its debts, à la Greece, but it is in danger of debasing its currency in a deliberate attempt to lower its value so as to make American manufactured exports less costly for others to buy, thereby "creating" jobs.

(Jobs "created" by undercutting another producer in a wage "race to the bottom" are less 'created' than just moved from one place (say Mexico) to another (say USA). It's not the same sort of job creation as we saw during, say, the industrial revolution, or during the automobile age in the 1920s or the electronics age in the 1950s when new technologies and better wages created "demand" for new products that had to be made - real job creation.)

 

[mariomike]

2. Why are there so (relatively) few strikes in the private sector garbage collection business compared to the public sector garbage workers?

I first saw this post in the "Global economy" thread, so replied there:
http://forums.milnet.ca/forums/threads/91627/post-1086510.html#msg1086510

 

[a_majoor]

Even the combined willpower of all the candidates would not be enough to enact a scheme like this, no matter how logical this is:

http://pjmedia.com/blog/entitlement-programs-a-plan-to-end-them/?print=1

Entitlement Programs: A Plan to End Them
Posted By Amit Ghate On October 30, 2011 @ 12:00 am In Uncategorized | 42 Comments

America’s financial situation is precarious. Over the past eight years our national debt [1] has doubled to $14.5 trillion, and our total unfunded liabilities now exceed an astonishing $114 trillion. That’s $1,115,000 per federal income taxpayer.

Even the most unrepentant spendthrift [2] understands that these debts and liabilities are unsupportable, nor [3] can they be solved by immorally targeting the rich. Instead, we must enact immediate, across-the-board spending cuts, with special emphasis on the biggest components of our financial wreck: Social Security, Medicare and Medicaid. These entitlement programs constitute the majority of our unfunded liabilities, because despite being labeled “trusts” they’re not actually savings plans.

Rather, the programs are essentially pay-as-you-go schemes. (What little surplus the trusts did accumulate was used to fund other government programs, such that nothing’s been saved [4][1] [5].) Operating this way has two terrible consequences. First, because funds aren’t saved and invested, they don’t generate returns. Thus there’s no compounding effect for any of the money that’s been withheld. Second, for every year that the programs are in existence, their total future liabilities increase.

Moreover, the programs have grown inexorably over time, partly because they were deemed good in principle, and partly because it takes nothing but a vote to increase benefits.

When Social Security was first rolled out in 1936, the promise [6] was that the program would be very limited, both in terms of contributions and of payout. The most anyone would contribute was $360 per year, including the employer’s contribution. By 2010 entitlement programs cost employees up to $12,648 for Social Security and an unlimited amount for Medicare (at a rate of 2.9% of salaried income). Promised — but unfunded — benefits grew even faster, with payouts exceeding inflation and the years of retirement coverage continuously increasing. By some estimates [7], a typical 66-year-old couple today will get back double what they paid in. It’s no wonder that our entitlement programs are often compared to criminal Ponzi schemes.

In the past, a myopic focus on the short-term may have allowed some to gloss over the long-term insolvency of the programs, but that’s no longer possible. For we’re now rapidly approaching the time when the money deducted from employees’ paychecks is much less than payouts promised to program participants. Already today, approximately half of Medicare’s funding [8] comes from general tax revenues.

Clearly then, our entitlement programs are an unmitigated financial disaster. But if we’re to properly deal with them, we mustn’t limit our analysis to economics alone. For after all, the deepest arguments underlying the programs aren’t financial — they’re moral. Indeed, much of the reason that there’s never been any reform of the programs is that until recently, few would question the moral views of man’s nature upon which they’re justified.

What are some of these questions?

As recently discussed here [9] and at length here [10], one fundamental question pertains to whether men are ends in themselves or means to others’ ends. I won’t recap the arguments, but suffice it to say that when the Founders created this land of opportunity (not of entitlements), they clearly enunciated a new — American — ideal in which each of us pursues our own happiness. This put them squarely in the camp of treating individuals as ends in themselves. It’s a camp to which more and more of us are proud to belong.

Another crucial question is whether, in general, men are capable of thinking and fending for themselves.

This question is best answered by observing people throughout history. Compare the success and can-do attitude of citizens living under freedom to those living under any form of statism, and one has to conclude that — when left alone — men are eminently capable of thinking and fending for themselves. It’s only when the state removes and restricts incentives and choices that men become dependent.

For nearly two centuries, Americans, including millions of penniless immigrants, eloquently proved the point. The world marveled at the typical American’s self-reliance, be it his ability to earn a living, build his house, fix his car, or move up the social ladder. In every domain, when left free to think, act, and enjoy the rewards of hard work, Americans surpassed themselves and the rest of the world.

But advocates of entitlement programs deny this. They view man (except perhaps that special breed which constitutes the governing class) as feeble and incapable. He can’t think or plan for himself. He must be forced to act for his own “good.” Indeed, as we saw with the passage of Obamacare, there’s no longer even a pretense of persuasion; we childlike peons are to find out what’s in store for us when the laws have been passed. Ever since the New Deal, it’s this paternalistic view that’s guided government policy.

Tragically, however, the paternalists have the causation backwards. In actuality, it’s their myriad of forced redistribution programs that has fostered a mentality of dependence among the populace. With each new program they implement, they further sever the link between personal action and personal outcomes. Slowly people lose the idea of individual responsibility, and begin to believe that somehow they’re “entitled to” or have a “right to” the products of other people’s efforts. As a result, America’s independent spirit is waning.

A final key moral question is whether people should be treated primarily as independent individuals or as interchangeable parts of a larger collective.

Here again, history provides ample evidence. Wherever and whenever they’ve been free to do so, people have exhibited differing values, plans, and priorities. Societies succeed by respecting and catering to these individual choices and preferences; they fail when individuals aren’t even recognized. Take, for example, the contrast between the Free World’s outpouring of diverse and imaginative consumer products with the Soviets’ monotonously drab and barren output during the Cold War. Or the Maoists’ brutal mainland uniformity versus the flourishing trade and production of free Hong Kong. Or, for history buffs, the contrast between ancient Athenian and Spartan cultures.

But the evidence isn’t only historical, it’s also intimately personal. We each have unique dreams and aspirations that require differing paths and choices. No one else, much less the government, can know what’s best for us (despite what might be “good” for a fictional “average person”). College may be generally worthwhile, but the next Bill Gates might be completely justified in dropping out to start a business. Following a safe and steady career path may be good for most, but for the aspiring actor or musician, success may mean taking a very unorthodox route to that one big break.

Yet those pushing entitlement programs see it otherwise. They have a collectivized, one-size-fits-all approach to man. To whatever extent possible, the government should create and impose uniformity: all children should go to public schools until they’re 16. Patients should only be allowed to take drugs approved by some government board. Everyone should contribute 15% of their income to their future retirement and medical needs each and every year. Everyone should retire at 65.

Part and parcel of this collectivized view is the refusal to see individuals at all. Thus there’s no recognition that particular people, engaged in particular processes and efforts, earn and produce wealth. By dropping the individual from their worldview, collectivists don’t have to confront the moral question of why [11] they find it proper to take from some to give to others.

The result of these collectivist and paternalistic views is a continuous assault on individuals and their rights. This is borne out in the implementation of our entitlement programs.

For example, consider all those who haven’t yet acquired sufficient skills and experience for a potential employer to justify both their salary and the additional burden of a 15.3% FICA [12] tax. Entitlement programs price these people out of the labor market, and thereby contribute to our stubbornly high rates of unemployment — particularly among the young.

The same type of analysis applies to those employees trying to save enough to start a family or a business of their own. For many starting out, the 15.3% withholding tax represents a huge percentage of their discretionary income. Forcing them to prioritize retirement over other genuine values is inimical to their personal success and happiness. Contrary to the one-size-fits-all mentality, people’s circumstances vary widely, and there are often times in a person’s life when withholding for retirement is not a good thing.

Next, consider every responsible person who could have — and would have — saved and invested the equivalent of his mandatory FICA withholdings had he simply been allowed to. Over the years many wanted to opt out of the entitlement programs to build their own nest eggs, but they were prohibited from doing so in the name of protecting them from themselves. Now, thanks to our paternalistic caretakers, all that money is gone.

But it doesn’t end there, for not only is inclusion in these Ponzi schemes mandatory to employees, but when FICA contributions are inadequate — as they already are for Medicare — every taxpayer is forced to contribute to the deficiency via the general revenues.

As bad as all this is, perhaps the most egregious violation of rights comes in the treatment of future generations. Thanks to a complicit majority, those of voting age have for years now sought to burden (some might say indenture) the next generation with their retirement and medical bills. It’s a classic case of trying to have one’s cake and eat it too. Voters approve and enjoy all the current year spending to which their withholding taxes go, but still expect someone else — indeed a whole generation — to provide them with the very goods they refuse to set aside.

Redistributing wealth in any form is bad enough, but there’s a certain audacity to forcing the young and not-yet-born to become the primary victims. (This type of conflict is far from an anomaly; collectivist schemes to redistribute wealth always pit one group against another, here the strife they cause is intergenerational.)

Having now established the moral and economic bankruptcy of our entitlement programs, the question becomes: what do we do with them? Given how long the programs have run and how many people have been forced to participate, there can be no easy answer. But to get us started, why not look at an analogous situation? There are obvious differences between Madoff’s and FDR’s Ponzi schemes, but reviewing how Madoff’s is being handled [13] does provide two valuable insights.

First, as soon as Madoff’s scam was discovered, it was shut down. Second, a trustee was appointed to return what funds remained, and then to reclaim money from anyone who’d knowingly or unknowingly profited from the scheme. In justifying this, the trustee appropriately decided that no one had a right to “fictitious profits” or “other people’s money.” Since there was no investment to generate returns, the most anyone could get back was the dollar amount they’d contributed.

With this in mind, here are some initial ideas on how to tackle our entitlement mess:

1)    Stop the programs immediately. No one would accrue another cent towards Social Security, Medicare, or Medicaid.

2)    Continue to make Social Security payments on the existing schedule, but cap the lifetime payouts to the nominal value of past contributions. For younger people this would be an easy transition as they could plan their retirements accordingly. For some older people this would be more difficult, and in those cases of real hardship, they could be added to the welfare rolls. (Indeed, it’s been argued [14] that entitlement programs are already a form of welfare.)

3)    Convert Medicare and Medicaid to a monthly payment similar to Social Security and cap these to lifetime contributions as well.

4)    Fund the remaining liabilities through the general revenues. This is already how SMI and Part D of Medicare are funded, but the difference here is that over time expenditures would taper to zero rather than growing exponentially as they do now.

Ending a fantasy is never welcome for those who want the impossible and who think that all they have to do is cast a vote to make it happen. Nor can there be any easy or completely just solutions to a colossal, multi-decade Ponzi scheme. But the solution outlined above has several merits:

It ends the program.
No one is cut-off “cold turkey.”
Anyone who lives long enough gets back what they put in (less inflation).
Unemployment is reduced by the elimination of the FICA payroll tax.
People are once again able to prioritize their values and plan for their own retirements and medical care.
Finally, and most importantly, future generations can once again enjoy the freedoms and opportunities that were — and should be — this nation’s hallmark.



[1] [15] President Obama recently admitted [16] as much when he declared that Social Security checks might not go out absent a debt ceiling increase. In other words: we must incur new debt to pay for the programs since the “trusts” are empty.

Article printed from PJ Media: http://pjmedia.com

URL to article: http://pjmedia.com/blog/entitlement-programs-a-plan-to-end-them/

URLs in this post:

[1] debt: http://www.usdebtclock.org/
[2] spendthrift: http://www.cnsnews.com/news/article/debt-has-increased-5-trillion-speaker-pe
[3] nor: http://online.wsj.com/article/SB10001424052748703977004575393882112674598.html
[4] nothing’s been saved: http://pajamasmedia.com/blog/the-homer-simpson-approach-to-social-security/
[5] [1]: #_ftn1
[6] promise: http://www.ssa.gov/history/ssn/ssb36.html
[7] estimates: http://online.wsj.com/article/SB10001424052748703864204576314802790577650.html
[8] funding: http://www.ssa.gov/oact/TRSUM/index.html
[9] here: http://blogs.forbes.com/objectivist/2011/07/12/whats-missing-from-the-budget-debate/
[10] here: http://www.aynrand.org/site/PageServer?pagename=objectivism_nonfiction_the_virtue_of_selfishness
[11] why: http://aynrandlexicon.com/lexicon/altruism.html
[12] FICA: http://en.wikipedia.org/wiki/Federal_Insurance_Contributions_Act_tax
[13] handled: http://www.madofftrustee.com/TrusteeReports.aspx
[14] argued: http://www.realclearpolitics.com/articles/2011/03/07/why_social_security_is_welfare_109126.html
[15] [1]: #_ftnref
[16] admitted: http://cafehayek.com/2011/07/the-fraud-of-the-social-security-trust-fund-exposed-by-a-most-unlikely-source.html

 

[Kirkhill]

This is one of those times when we should aspire to being Australia.

I am not sure that that table is all that it purports to be.

If it is an indication of national holdings then Luxembourg and Switzerland are particularly screwed.

On the other hand if it represents the banking centre in which those bonds are held - often by offshore interests - then the picture becomes, fittingly for our times, considerably more murky.

The real "tells", I believe, are the very high exposures in traditional banking centres - like Luxembourg and Switzerland as well as Britain and the Netherlands - as well as new comers like Singapore, Hong Kong and Ireland.

The clincher didn't make it to this list because it was difficult to divine the GDP of the entity

Carib Bnkng Ctrs 4/  161.2

The Bahamas, Turks & Caicos, Cayman Islands etc (many of them British Dependencies like Jersey, Guernsey and Man) hold an additional 161.2 BUSD in treasuries.

Country USTS GDP USTS/GDP
BUSD BUSD
Luxembourg 62 41 151.2%
Switzerland 148 325 45.5%
Hong Kong 108 326 33.1%
Japan 937 4310 21.7%
Singapore 58 292 19.9%
Ireland 34 172 19.8%
UK 397 2173 18.3%
Taiwan 150 822 18.2%
China 1137 10090 11.3%
Brazil 210 2172 9.7%
Thailand 55 587 9.4%
Norway 22 255 8.6%
Israel 18 219 8.2%
Belgium 32 394 8.1%
Chile 19 258 7.4%
Phillippines 25 351 7.1%
Canada 83 1330 6.2%
Sweden 21 355 5.9%
Colombia 21 435 4.8%
Russia 97 2223 4.4%
Turkey 39 961 4.1%
Poland 29 721 4.0%
Netherlands 23 677 3.4%
Malaysia 13 414 3.1%
Korea, South 32 1459 2.2%
Germany 60 2940 2.0%
Mexico 28 1567 1.8%
Australia 12 882 1.4%
Italy 24 1774 1.4%
France 29 2145 1.4%
India 38 4060 0.9%


GDP data from CIA World Factbook (PPP model)