Kicking The Can Down The Road

February 24, 2011

It’s an over-used term that’s been even more over-used as budget battles have heated up in state capitols and in our nation’s capitol.  Failure to come to terms with our fiscal problems now only “kicks the can down the road,” to be faced in greater measure in the future by our children and grandchildren.

But this post isn’t about budget battles.  It’s about the most egregious example of all of “kicking the can down the road”:  the use of population growth to avoid dealing with the costs associated with an aging population.  And here, right off the bat, I’m going to digress onto a tangent.  The “cost of an aging population” bogeyman is regularly lobbed out there any time someone dares to look to a nation with a stable population as a good economic model.  The “cost” they talk about is by now well known – a smaller labor force to support the the elderly in their retirement.  Each retiree will be supported by only two workers instead of three, or some variation of that data.  Your taxes will have to rise.  Sounds scary, right?

But an aging population isn’t a permanent trait of a stabilizing population.  It’s a transient situation that, in about one generation, will vanish as the stable population settles in at a constant median age.  During the course of that generation, the cost of providing retirement income for the elderly will certainly have to rise as the labor force stabilizes and then declines slightly.  At today’s rate of population growth in the U.S., in 70 years we will have only 2.5 working-age Americans suppporting each person over 65.  If our birth rate declined to the point required to stabilize the population, that figure drops to 2.25.  In other words, taxes would have to rise by 10% to continue supporting retirees.

But what no one ever talks about are the costs and taxes associated with all those people added to the population to avoid the “aging population” phenomenon.  In the course of one generation (let’s say 20 years), the population will have grown by approximately 23 million people.  (This assumes only native population growth and factors out immigration.)   That’s 23 million children who will have to be educated.  Assuming an average of 14 years of eduction (half stop at high school and the remainder stop with a bachelor’s degree), and assuming a cost of $10,000 per year per student, that’s a total cost of $3.22 trillion.

And that doesn’t even include the cost for building new schools.  If the birth rate stays at today’s level, then in 20 years the number of school-age children will increase from 81 million today to 85 million, an increase of 4 million students.  Assuming that a new elementary school and new high school will be required for each 1,000 additional students, a total of 8,000 new schools will need to be built.  If we assume a cost of 50 million dollars per school, that’s an additional cost of $400 billion.

So far, that’s a total of $3.62 trillion that would be paid by mostly public funds, while some of the education cost would be paid privately for those students in private schools.  However, I dare say that nearly all of these additional students will end up at public schools, since the affordability of private education is declining faster than the rate at which the population is growing.

What about the cost of simply bringing 23 million additional people into the world?  Even assuming that it’s paid for by private health insurance, insurance costs are really nothing more than another way to distribute costs across the whole population in virtually the same manner that taxes to support public spending programs do.  Assuming an average cost of $5,000 per birth (maybe that’s low), that’s a total cost of $115 billion for 23 million births.  Without those births, we would all have lower health insurance premiums.

So now the cost is up to $3.75 trillion.  And this may just be the tip of the iceberg.  What about the costs to expand our infrastructure to support this larger population – water and sewage treatment, gas and electric utility distribution, roads, bridges, public buildings, railroads, airports, etc.?  These costs, all publicly funded, would add trillions more.  (The cost of expanding our network of paved roads by 7% would cost over $1 trillion alone.)  And what about the costs incurred through the greater demand on limited natural resources?  How much higher will the price of gas be when the population has grown by that many people?

Compare these costs to the cost of providing retirement income for our elderly.  We currently have about 50 million people over the age of 65.  The cost of providing them with social security and medicare currently runs about $1.3 trillion per year.  To provide them with such benefits for an average of 13 years (the difference between age 65 and the average life expectancy of 78), that’s a total cost of about $17 trillion.

When you add up all the costs of providing retirement income for the elderly vs. the costs associated with growing the population, it’s approximately a wash, with one big exception:  the elderly are already here.  The cost is already baked into the economy.  It’s unavoidable.  That’s not true of the additional 23 million people we plan to add just to hold down tax rates a little.  None of them are here and all of the trillions in spending required to support them have yet to be incurred.  Those many trillions of dollars in public spending are completely avoidable.

But I still haven’t touched on the biggest problem of all, the one that started this whole post.  If we add those 23 million people and incur all those trillions of dollars of cost just to keep tax rates from rising a little, we will have only “kicked the can down the road.”  We will be left with a population of elderly that is now that much larger and we’ll need to grow the population even faster to support that many more elderly.  Ultimately, since it’s impossible to grow the population forever, our descendants will, at some point, be forced to come to grips with the same “aging population” problem, but one that’s far worse.

So the next time you hear your congressman, senator or anyone complain about “kicking the can down the road” (as they rightly should in regards to our fiscal issues), you might ask them if they feel the same way about every “can.”  Ask them about curbing legal immigration.  They’ll probably reply, “oh, we should never do that.”  “Our nation is built from immigrants and we have a legacy to uphold.”  BANG …. clankety clank clank.   There goes a can down the road.

Or ask them if we should consider policies that would encourage the stabilization of our population in order to combat rising unemployment, over-dependence on foreign sources of fossil fuel and worsening climate change.  “Oh, no, we depend on population growth as a source of economic growth.  Without it, we’ll be saddled with an aging population.”  BANG …. clankety clank clank.  There goes another one.

Or ask them if we should protect domestic workers from the imported effects of overpopulation in places like China, Japan and Germany by returning to the sensible application of tariffs.  “Don’t be silly.  Free trade benefits everyone!”  BANG …. clankety clank clank. 

With all the cans that are being kicked down the road without even a second thought, even by those so concerned about the fiscal can, the road ahead is beginning to look like the grounds beneath the bleachers at a NASCAR race.

Is Globalization in Its Final Days?

February 19, 2011

Globalization, a process begun in wake of World War II with the signing of the Global Agreement on Tariffs and Trade in 1947, may now be in its last days.  Whether those days number in the thousands or hundreds is yet to be seen but, make no mistake, the end of global economic cooperation is near.  As reported in the above-linked article about the G2o meeting in Paris, export-dependent nations, lead by China, are dragging their feet on the 2-step effort to measure and rectify global economic imbalances. 

Finance chiefs of the world’s dominant economies on Saturday pressured China to drop its resistance to a deal on tracking dangerous imbalances in the global economy, in an effort to revive the Group of 20 rich and developing nations as the forum to prevent further financial crises.

More than any other imbalance, current accounts (trade supluses and deficits), have taken center stage in the talks.

China has so far opposed targeting current account surpluses — which show that a country sends much more goods and capital abroad than it receives …

But patience is wearing thin.  Global leaders understand that such imbalances were at the root of the economic collapse of the past couple of years and that the capacity to deal with another such crisis has been exhausted.

The stakes are high: French Finance Minister Christine Lagarde warned Friday that a failure to address imbalances “leads us straight into the wall of another debt crisis,” while President Nicolas Sarkozy said that countries must not get complacent as some parts of the world are starting to recover from the crisis while others are still lagging behind.

“That would be the death of the G-20,” Sarkozy warned.

The following is perhaps the most frank admission I’ve seen yet of the role that global trade imbalances played in the global economic melt-down:

What is clear to most economists is that sticking to the status quo could be fatal.

In the years before the financial meltdown of 2008, countries with trade surpluses plowed money into mortgage and other investments in the United States, helping escalate their value, U.S. Federal Reserve Chairman Ben Bernanke told his G-20 colleagues Friday. But the U.S. failed to safely absorb money flooding in from emerging nations like China, Middle Eastern oil countries and industrialized countries in Europe, Bernanke said.

“… the death of the G20.”  “Sticking to the status quo could be fatal.”   Strong words that highlight the urgency.  Bernanke and others know very well that a repeat of the recent economic crisis will be exactly that – fatal.  The global economic system will come completely unglued and it will be every man (country) for himself. 

How much time is left?  That’s the big, unanswered question.  But if recent history is any indication, it’s not long.  Consider this:  the economic bubbles we’ve witnessed in the last two decades have been fueled by the trade imbalances.  American trade deficit dollars have to come back to America, one way or another.  In the ’90s, those dollars bought stocks and inflated a huge stock market bubble.  It took about six years for that to run its course and for the bubble to burst in March of 2000.  Then those trade deficit dollars were funneled into real estate in the form  of mortgage-backed securities.  Once again, it took about six years before that nearly collapsed the entire global financial system. 

It’s now been about three years since that collapse in late 2007/early 2008, and nothing has been done to address trade imbalances.  First, trade dollars inflated a bubble in treasuries – a bubble whose bursting has been delayed by the Fed’s program to buy up new treasury issues.  More recently, those trade dollars are re-inflating another stock market bubble.  History suggests that there may only be another three years to go before the next economic collapse.  If the G20 can’t address these imbalances in a coordinated way, then the U.S. will have to go it alone and do what’s necessary to restore a balance of trade.  It’s that or economic oblivion.

Export-dependent nations, most notably China, will never go along with any G20 plan to rectify imbalances, wiping out their huge trade surplus.  They may play along a bit longer to buy time, but it won’t buy them much.  When time runs out, so too will the global economic engineering that has forestalled the day of reckoning for overpopulated, export-dependent nations.  From my perspective, that day can’t come soon enough.

G20 2-Step to Tackle Global Imbalances

February 15, 2011

The above-linked article appeared on Reuters yesterday.  The G20 nations claim to be serious about tackling global economic imbalances.  That much, at least, is encouraging.

Such imbalances, reflected in the current account balance, private and public savings, debt and capital flows, can trigger or augment crises, destabilizing the world economy.

So give them credit for seeing through all the superficial reasons for the global economic collapse – subprime mortgages and Wall Street greed – to the heart of the matter:  global imbalances – most notably the trade (or “current account”) imbalance.  They plan a two-step approach to the issue:

The first step would be to identify the imbalances using an agreed set of economic indicators and benchmark values.

The second step would be to analyze the causes of the imbalances and possibly make policy recommendations on how to deal with them.

The second step gives us reason for hope, but for fear as well.  What are the chances that they’ll arrive at the real cause of the imbalances – the disparity in population density from one nation to the next – when economics doesn’t even recognize the relationship between population density and per capita consumption?  And if they can’t arrive at the real cause, what are the chances that they’ll implement policy changes based on a false conclusion, making matters worse?

If they’re truly interested in the real cause, here are some simple facts about trade results just among the G20 nations.  (By the way, there are only 19 nations on the G20.  The 20th seat is held by the EU, giving Germany, Italy and France double representation.  Hardly seems fair, does it?)

  • Of the six nations less densely populated than the U.S. (Argentina, Australia, Brazil, Canada, Russia and Saudi Arabia), every single one of them has a trade deficit in manufactured goods with the U.S.
  • Of the twelve nations more densely populated than the U.S. (China, Japan, South Korea, France, Germany, India, Indonesia, Italy,  Mexico, South Africa, Turkey and the U.K.), all but two have trade surpluses in manufactured goods with the U.S. – South Africa and Turkey.  South Africa is only very slightly more densely populated than the U.S.  And, at $2.2 billion, Turkey’s trade deficit in manufactured goods with the U.S. is smaller than that of any of the six nations listed in the previous point. 
  • In terms of Purchasing Power Parity (PPP, essentially per capita GDP), Germany’s (seven times as densely populated as the U.S.) is the most enhanced by a trade surplus.  12% of their puchasing power is derived from their surplus of trade in manufactured goods.  Next is South Korea (15 times as densely populated as the U.S.) at 7% of PPP.  Next is China (over four times as densely populated as the U.S.) at 6% of PPP.  Next is Japan (ten times as densely populated as the U.S.) at 5% of PPP.  And so on. 
  • Of the ten nations with a trade surplus in manufactured goods with the rest of the world, the average population density is 413 people per square mile (almost three times the world median), and their cumulative trade surplus in manufactured goods is $1.318 trillion.
  • Of the nine nations with a trade deficit in manufactured goods with the rest of the world, the average population density is 272 people per square mile.  But, take away India (whose small trade deficit landed them in this category) and the average population density falls to 190 people per square mile.  The total trade deficit in manufactured goods of these nine nations is $951 billion. 

Sadly, this relationship between global trade imbalances and population density is sure to escape the leaders of the G20.  They’ll almost surely arrive at the wrong answer, but at least they’ve taken the first step by asking the question.

Is U.S. Manufacturing Renaissance Underway?

February 12, 2011

The headlines about the December trade deficit, released yesterday by the Foreign Trade division of the Census Bureau (link provided above), sound like bad news, emphasizing a larger-than-expected rise in the trade deficit.  Exports were up, but imports were up more.  Here’s the charts:

Balance of Trade          Obamas Goal to Double Exports, 1st year

But dig deeper and you’ll find some good news beginning to take shape in the data.  Most of that increase can be blamed on a boost in oil imports (with price to blame for much of it) and a corresponding decrease in petroleum exports.

The good news emerges when you strip away trade in petroleum and foods, feeds and beverages – in other words, natural resources – leaving only trade in manufactured goods.  (Yes, there are other categories of natural resources – minerals, metals and lumber, to name a few – but trade in these resources is essentially balanced.)  I’m adding a new feature to my monthly report on our progress toward Obama’s goal of doubling exports in five years.  The real goal is to double exports of manufactured products.  So I’ll begin presenting a new chart that gives a broader picture of what’s happening in the trade of petroleum products; food, feed and beverages (identified in the chart as simply “food”); and, most importantly, manufactured products. 

Manf’d Goods Balance

Imports of manufactured products have leveled off since June, while exports of manufactured goods have risen almost steadily since the beginning of 2010 at a pace sufficient to nearly meet Obama’s goal of doubling exports in five years.  The trade deficit in manufactured goods has now fallen four months in a row to its lowest level since May. 

The time has come to consider the possibility that this isn’t merely a short-term blip, but that something is actually driving a real change in trade.  There are a couple of possibilities:

  1. The slowdown in imports and rise in exports may be nothing more than the result of an economic rebound taking hold in the rest of the world, increasing demand for U.S. products, while a stagnant economy in the U.S. has kept a lid on imports.  This doesn’t seem to be a scenario likely to persist for long (if it’s even real), since so much of the world is dependent on U.S. demand. 
  2. The Obama administration’s trade talks with the rest of the world, aimed at rebalancing the global economy and boosting American exports, may have  had more teeth than I gave them credit for.  Is it possible that other nations are (at least so far) living up to commitments to boost their imports of American products?  If so, what is the source of this new demand?  Or are American products simply being stockpiled somewhere?  More likely, these new American imports are eating into domestic production in foreign countries.  How long will such under-the-table trade deals stand up to political pressure when they start eating into manufacturing employment in those countries?

I remain a skeptic, but the data speaks for itself, and we can no longer ignore the possibility that some under-the-table trade deals have sparked the beginning of a renaissance in American manufacturing.  Other economic data have suggested the same thing.  For example, the manufacturing sector of the economy added 49,000 jobs in January, more than the total number of jobs created within the entire U.S. economy. 

A few months of data, especially at a time when the economy is balanced at the edge of a double-dip precipice, isn’t proof of anything and certainly doesn’t undo three-plus decades of enormous trade deficits and the gutting of the manufacturing sector, but it’s possible that we’ve taken a step in that direction.

The Beginning of “The Great Regression?”

February 8, 2011

I found the above-linked opinion piece that appeared on Reuters this morning interesting in that it forecasts a “great regression” to follow what’s been dubbed the “great recession.”  (It’s also interesting how quickly it was pushed off the front page of Reuters.)  I found it interesting because it’s forecasting the very phenomenum (albeit for more superficial reasons) that I forecast in Five Short Blasts – that rising unemployment and poverty and a decline in living standards would be the inescapable consequences of allowing population growth to drift ever higher while ignoring the relationship between population density and per capita consumption.

The author of this piece, a Europe-based Reuters associate editor, sees the dramatic cuts in government spending in European countries leading inevitably to declining living standards there.

Wages, pensions, unemployment insurance, welfare benefits and collective bargaining are under attack in many areas as governments struggle to reduce debts swollen partly by the cost of rescuing banks during the global financial crisis.

The European Union, which long trumpeted a European social model with a generous welfare state, social partnership between unions and employers and a work-life balance featuring limited working hours and long paid holidays, has lost its swagger.

At first, you may think to yourself, “Good!”  “It’s about time that those Europeans had to experience some of the same things that Americans have been going through for decades.”  But not so fast.  In spite of the fact that American workers have always been far more productive than their European counterparts with their 35-hour work weeks and weeks-long vacations, the U.S. has a big trade deficit in manufactured goods with Europe.  Do we really want them to get more competitive?

The problem is that it’s inevitable there, just as it’s inevitable here.  For quite some time, government spending (which includes “spending” in the form of tax cuts) has been used to mask falling wages and cuts in benefits by the private sector.  In spite of all the talk of the need to cut taxes, the truth is that taxation in the U.S. is at historically low levels, having been used time and again to breathe life into a flagging economy.  There was a time when private sector wage increases outpaced inflation, while tax rates were simply shrugged off as a fact of life.  But no more.  And there was a time when every company provided generous health insurance and pension plans because the demand for labor was so great that if you didn’t, your competitor would end up with all the talent.  But no more.

Why pay high wages or provide such benefits now?  Good workers are a dime a dozen.  Announce a job opening and you’ll get a hundred or more applications.  Corporate America eventually figured out that annual merit increases and generous benefit packages were a waste of money when labor was so plentiful.  The only way to prevent declines in take-home pay that would surely result in a recession or worse was to cut tax rates and bolster social safety net programs.

But the government spending can’t be sustained.  The debt crisis may appear to be the problem on the surface, but dig deeper and you’ll find that the problem is really rooted in an ever-worsening imbalance between the supply of and demand for labor.

Greek Prime Minister George Papandreou, one of Europe’s few remaining socialist government chiefs, lamented in Davos that the global crisis had speeded a race to the bottom in labor standards and social protection in the developed world.

Emerging countries such as China and India had achieved competitiveness through low wages, no collective bargaining, little or no healthcare and social insurance and disregard for the environment in exploiting resources and production.

These factors are not what makes a nation competitive.  These factors are the result of a gross over-supply of labor.  It’s the over-abundance of labor that makes them competitive.  And if these factors cited above are the consequences of such badly bloated labor forces, then it begs the question:  why should we want to emulate them?  Why should we “compete” with them at all?  What do we gain?  Wouldn’t we be far better off if we stopped sharing access to each other’s markets?  Of course we would.

But back to the great regression.  With the “great recession” put to bed by the explosion in government spending, now we can tackle the deficit issue, or so the thinking goes.  That is, until someone figures out that cutting wages, pensions, social programs and government spending in general is a recipe for economic disaster, just as the spending itself is a recipe for the same thing.  Such “regression” will manifest itself in the macro-economy in a familiar way – as a recession, or worse.  What will be the approach for dealing with a double-dip recession?  More spending and tax cuts.  Bank on it.

Without addressing the conditions that are driving the ever-worsening imbalance in the supply of labor relative to demand, there is no escape from this conundrum.  “Creating jobs” may sound appealing, but jobs cannot be created from thin air.  Every job depends upon consumption of some product or service.  Per capita consumption in the developed world is in decline as over-crowding there worsens, and manufacturing for export to even more badly overpopulated, already-export-dependent, low per capita consumption nations of the developing world is a logic-defying pipe dream.

500,000 American Workers Go Missing in January

February 4, 2011

According to figures released by the Bureau of Labor Statistics (BLS) this morning (link to the report provided above), it seems that over 500,000 American workers went missing in January.  This is on top of the nearly 1.3 million that had previously vanished since May of 2009.  Nevertheless, the BLS managed to find a silver lining in this story, noting that fewer people seeking work translates into lower unemployment, which fell from 9.4% in December to 9.0% in January. 

But local authorities have grown concerned.  Sniffer dogs have been sighted behind unemployment offices and one can only speculate that they are searching for rumored mass graves of people who have vanished from the unemployment lines.  Layed off workers would be well-advised to avoid the unemployment office until the plight of the missing workers has been determined.

Seriously, folks, does the BLS really expect anyone to believe this morning’s report?  A half million people gave up looking for work?  Have they found some magical way to live without a source of income?  The last I heard, there were only two people who shared in the big mega-millions jackpot in January.  What happened to the other 499,998 people? 

No one will be fooled by this morning’s report.  The jobs data was horrendous.  Instead of the expected 140,000 new jobs, non-farm payrolls added only 36,000.  This is almost 100,000 below the number needed just to keep pace with the growth in the labor force.  So, once again, the government had to come up with some gimmick to gloss over the ugliness of this report, and once again it resorted to the “mysteriously vanishing labor force” trick. 

To be fair, there is a glimmer of good news in the report.  The employment level rose by 117,000 – almost enough to match the growth in the labor force.  For that reason, real unemployment – not the BS number conjured up by the BLS – remained virtually unchanged at 11.8%.  And the more inclusive measure of unemployment – U6a – (which factors in the 1.8 million workers buried in mass graves behind the unemployment offices) – remains unchanged at 21.0%.  And the number of unemployed Americans remains just below its recession peak of 18.9 million workers.  And per capita employment remains near its very lowest level of the recession. 

Here’s the calculation, followed by charts of the data:

Unemployment Calculation

Unemployment Chart  (Notice how U3 and U6, the government’s measures of unemployment, have turned down sharply in the last two months while U3a and U6a, the “un-fudged” versions of the same calculations, have unemployment virtually unchanged in that period.)

Labor Force & Employment Level  (Notice how the red line – the government’s estimation of the labor force – has been trending downward while the real labor force, as a function of the growth in the population (represented by the yellow line) has been rising steadily.)

Unemployed Americans     Per Capita Employment

The reported gain of 36,000 jobs (a figure arrived at from the BLS’s establishment survey) breaks down as follows:

  • Manufacturing:  + 49,000
  • Retail:  + 28,000
  • Health care:  + 11,000
  • Transportation & warehousing:  – 38,000
  • Construction:  – 22,000
  • Professional & business services (temp help):  -11,000

The jump in manufacturing jobs is indeed good news, since this is precisely the sector of the economy where job losses have been the worst for decades.  But I have my doubts that it’s sustainable.  Time will tell. 

Contraction in the last category – “temp help” – is bad news, since analysts have been pointing to growth in that figure over the last few months as a predictor of growth in permanent employment in the future. 

In the meantime, if you’ve recently been laid off, watch your back!