TOPICS IN POLITICAL ECONOMY

DOES THE AARP RULE THE COUNTRY?

The dictionary defines gerontocracy as “government based on rule by elders.”  After studying recent trends in household income, I conclude we have arrived at that point. Furthermore, our “elders” are essentially the lobbyists for the 37 million members of the American Association of Retired Persons (AARP).

Consider the charts below, based on the Census Bureau’s well-regarded Current Population Survey (CPS).  I have emphasized median incomes, so that an equal number of households have lower and higher incomes than the median household in that particular age group.

Steady Growth in Income. Old folk, defined as those living in households headed by someone 65 years of age or older, typically draw on savings, in addition to income, to support themselves. They have seen their incomes increase at a remarkably steady pace throughout the last 30 years.  Not even the nasty recession of 2008-2010 made much of an impact on them.

 

 

If we wanted to include Federal government outlays on Medicare in old folks' income (which the CPS does not), that would have added 65% or $524 billion in 2010 to their household income of roughly $800 billion. A more complete accounting would also include the numerous housing, nutrition, homecare, energy assistance and transportation subsidies for the elderly.

Going Nowhere.  Meanwhile, the youngest households are going nowhere on the income scales, even while many try to pay off their staggering level of college loan debt. Despite the rise in mean (average) incomes, the median real income of such households, which numbered 6.1 million in 2010, has stagnated over the past several decades.  In fact it was lower in 2010 than in 1990, a sharp contrast to the 15% gain for the old folk.  Although not shown here, between 2000 and 2010 median real incomes fell for all income groups - except for the 65+ age group, which enjoyed a 7.5% increase.

 

 

These generational divergences are an unhealthy and worrisome trend. In effect, the older generation is squeezing younger generations via the iron fist of government via Medicare, overly generous pensions for its employees, and a multitude of elderly-oriented programs.

In short, the AARP, which stoutly defends every big and little government subsidy which benefits its members is doing a great job for its constituents.  Maybe the Occupy Wall Street crowd should take its show to AARP headquarters at 601 E Street, NW in Washington, DC and ask the old folks to exercise a bit of restraint.

 

 

 

 

 

 

 

 

 

 

 

 

The dictionary defines gerontocracy as “government based on rule by elders.”  After studying U.S. trends in household income, I conclude that not only have we arrived at that point, but that our “elders” are essentially the 37 million members of the American Association for the Advance of Retire Persons (AARP).

Consider the charts below, based on the Census Bureau’s well-regarded Current Population Survey (CPS).  I have emphasized median incomes, so that an equal number of households have lower and higher incomes than the median household in that particular age group.

Steady Growth in Income. Old folk, defined as those living in households headed by someone 65 years of age or older, have seen their incomes increase at a remarkably steady pace throughout the last 30 years.  Not even the nasty recession of 2008-2010 made much of an impact on them. 

 

If we wanted to include in old folks’ income Federal government outlays on Medicare (which the CPS does not), that would have added  65% or $524 billion in 2010 to their household income of roughly $800 billion. A more complete accounting would add in special housing, nutrition, energy assistance and transportation subsidies for the elderly.

Going Nowhere.  Meanwhile, younger folk are going nowhere on the income scales, even while they try to pay off their staggering level of college loan debt. The median real income of such households, which numbered 6.1 million in 2010, has stagnated over the past 20 and 30 year periods.  In fact it was lower in 2010 than in 1990, a sharp contrast to the 15% gain for the old folk.  Among the 45-54 age group, median real incomes fell 14% between 2000 and 2010.

These generational divergences are an unhealthy and worrisome trend. In effect, the older generation is squeezing younger generations via the iron fist of government via Medicare, overly generous pensions for its employees, or free public transportation.

In short, the AARP, which stoutly defends every big and little government program which benefits its members is doing a great job for its constituents.  Maybe the Occupy Wall Street crowd should take its show to AARP headquarters at 601 E Street, NW in Washington, DC and ask the old folks to exercise a bit of restraint.

 

THE STUDENT LOAN BROUHAHA: GOOD NEWS AND BAD

The student loan "bubble" has been swelling for years, puffed up by college adminstrators, spendthrift politicians, and  misleading (self-interested?) academic analyses that promise sharply higher incomes later in life for all those with college degrees. 

This is why the current brouhaha ("a noisy and overexcited critical response, display of interest or trail of publicity") over a scheduled increase in loan interest rates from 3.4% to 6.8% is actually helpful in focusing attention on the implications of a well-meaning program gone askew.

If Congress and the President decide to keep the interest rate at 3.4%, that would reduce currently forecast Federal government revenues by roughly $6 billion between 2012-2017, according to the Congressional Budget Office. 

The Bad News. The down side to the brouhaha is that both Republicans and Democrats, with eyes on college-age voters, want to keep the rate at 3.4% (Mitt Romney has endorsed a one year extension). In other words, they want to continue to encourage young people - and their parents - to borrow for college degrees that, on average, are of questionable value. 

In a recent piece entitled "The Imperiled Promise of College," New York Times op-ed columnist Frank Bruni  observed that  "college is a luxury item with newly uncertain returns." He might have added that a measurable factor in making college a "luxury item" has been the availability of cheap student loans, a point which Arthur Hauptman, in the respected blog "Inside Higher Education," expands upon.

The Good News.   The bright side to the brouhaha is that Congress recognizes the lost revenues must be balanced by either tax increases or spending reductions if the budget deficit is not to be increased.  That is progress.

Democrats are solidly lined up behind a tax increase on either oil companies or "the wealthy."  Republicans would make up the lost revenue by defunding a new "preventive healthcare" program that wormed its way into the massive Obamacare legislation.

In other words, the student loan issue frames the question very clearly: do we pay for new legislation by higher taxes or cutting spending in some other program? Put another way, the fundamental issue is, do we wish to increase the role of government in the economy or to constrain it?

It would be commendable this fall if electioneering politicians, when discussing Federal taxes and spending, could go beyond clever sound bites and debate this fundamental issue.  And that they recognized that "good budgeting is the uniform distribution of dis-satisfaction." 

 

 

HIGHER EDUCATION, RICK SANTORUM AND PRESIDENT OBAMA

According to the well-credentialed Rick Santorum (BA, MBA, and LD), when it comes to higher education President Obama (just BA and JD) is a "snob." In what sense could the erst-while candidate be using that term to put down our current President? 

To understand where Santorum is coming from you need to read Obama's 2009 controversial "back-to-school" speech at a Virginia high school. He told the students "no matter what you want to do with your life, I guarantee you that you'll need an education to do it." Little to quarrel with there.

But what occupations did the President cite as goals for the assembled students?  The order in which he mentioned them was writer, doctor, teacher, police officer, nurse, architect, lawyer, and "member of the military."

The "Lowly Occupations." What's missing from that list? John Derbyshire tried to complete it in a recent issue of the Claremont Review of Books:

So much for the mechanics, gardeners, fishermen, glaziers, loggers, athletes, barbers, truckers, cooks, butchers, roofers, miners, crane operators, manicurists, linemen, dancers, cameramen, steel fixers, personal trainers, carpenters, brewers, florists, ranchers, masons, potters . . . to hell with them!  

Derbyshire equates Obama's vision with a Chinese Mandarin proverb: "Ten thousand occupations are lowly; only book-learning is exalted."  In other words, this is the prevailing wisdom "about useful, honest work in an imperial-bureaucratic despotism run by arrogant scholar-officials" - whether in China AD 1000 or the U.S. in 2012.

To be fair to the President, his public position is more nuanced than ex-Senator Santorum implies. As Obama put it in footnote-like aside when talking at the University of Michigan earlier this year,

When I say higher education, I don't just mean four-year colleges and universities; I also mean our community colleges and providing lifelong learning for workers who may need to retrain for jobs when the economy shifts.  

That is an important caveat. But I suspect it is probably a speech-writer's late-in-the-day insert.  The President himself has essentially zero experience in working with his hands or working up a sweat (other than playing basketball) on the production line or stacking hay. He is, essentially, a talented verbalist and orator with very little contact to the world where material things are made, distributed and sold.

As Derbyshire correctly implies, Obama cannot recognize that there are sensible alternatives for many high school graduates other than second-rate higher education mills and the ruinous student loan burden that typically goes with them.  Given his background, how could he understand what a fault-free production run, an on-time delivery, a well-laid brick wall or stack of hay bales mean to a productive and conscientious but college-degreeless worker?

Devaluing the High School Degree.Nor does the President and the higher education lobbying juggernaut concede that the ease with which high school graduates can gain admission to most colleges is devaluing the degrees they award - as well as high school degrees.  As Albert Shanker, late president of the American Federation of Teachers put it,

Whatever colleges pretend, their influence over high school standards and student achievement is decisive.  Kids are just like adults: they will work to get what they want.  If they know they have to work hard, listen in class, and come to school every day with their homework done in order to get into college they'll do that.  If they know they can get by with less and still get into college, that is what they will do. [Quoted in Jackson Toby, "The Lowering of Higher Education in America," 2010.]

In other words, in far too many cases high school graduates get a second-rate education because that's all they need to get into college.

"Snob" is not the right word to characterize President Obama and his position on higher education, however much attention it got Rick Santorum on the evening news and Youtube.  More accurate would have been "well-intentioned and naive." 

Getting it Right. If President Obama (or Rick Santorum) really wanted to effectively promote better educated youth they would be chastising college presidents and trustees for making it too easy to enter their hallowed halls.

RENTING: THE NEW HOUSING PARADIGM

Public policy played a major role in precipitating the housing bubble, its subsequent implosion and a painful recession. 

The Federal government's mindless promotion of home ownership, the mantra of owner-occupied McMansions as a sure-bet investment, and the tidal wave of government-supported mortgage financing turned a traditional cyclical downturn in the economy into a financial crisis.  There is even a government program designed to "help" active duty military, who typically are relocated every three years or less, to buy homes rather than rent.

A modest recovery in the housing market is now underway, but it has very little to do with any Federal government initiatives.  The Obama Administration has focused on suing banks for sloppy paperwork and forcing lenders to modify existing mortgages to reduce borrowers' monthly payments.  As summarized by a recent New York Times article, these programs have been "crippled by weak oversight, conflicts of interest, mind-numbing complexity and poor performance by many of the participating banks."

Return to Rentals.  As I suggested in a post six months ago, the dominant reality in housing today is a return to the rental market.  This is particularly true for younger households. Census Bureau data indicates that home ownership rates overall have dropped from 69.1% of households in 2005 to 66.0% in the fourth quarter of 2011. 

The trend in most marked among younger, more mobile households, where drops of over 5 percentage points have taken place. Between the fourth quarters of 2010 and 2011, there was no significant change in the number of owner-occupied housing units; however, there was an increase of 750,000 in the number of renters. This should be viewed as a healthy trend, unless you are a realtor or real estate lawyer.

The need to stay mobile - to be able to move out of town to a new job without the burden of selling a home - is undoubtedly a major factor here, now that everyone is aware that home prices can decline as well as rise.  The Case-Shiller national composite index of home prices continues to fall and is now down 34% from its 2006 peak. (The price index for rental housing has risen 2.5% over the past year.)

Private Sector Response.  The clearest measure of private sector response to the demand for additional rental housing units is in data on new construction.  Starts on multi-unit housing structures in 2011 were 60% ahead of year-earlier levels, compared to a 9% drop in single-family homes.

In addition, conversion of existing single-family homes to rental units appears to be attracting major investor interest.  Bloomberg Markets' most recent issue features a lengthy description of how private equity real estate funds, backed by major institutional investors such as California's state employee pension plan, are moving into this sector.  Such funds buy units in or facing foreclosure, refurbish them, and then rent them out. The Federal Housing Finance Agency, stuck with 180,000 repossessed homes (courtesy of FNMA and Freddy Mac), is now looking to offload them via similar arrangements.   

In short, financial markets and individual entrepreneurs are responding effectively to a significant shift in households' preferences for housing.  Meanwhile, Washington politicians and bureaucrats frantically try to "do something" to clean up the mess they helped create in the first place.

JOBS LOOKING FOR WORKERS, CONT.

Yet another current and substantive report on "Factories Struggling to Find Skilled Workers," this time from this past Sunday's Washington Post.

Reporter Peter Whoriskey, writing from Holland, Michigan, notes that while presidential candidates roam the state promising to bring jobs back, " the jobs are already here.. . what's missing are the skilled workers needed to fill them." Michigan manufacturers are looking for machinists, particularly those with the ability to handle numerically-controlled equipment. Welders, tool and die makers, and assembly team leaders with basic programming skills are hard to find.

By one recent survey done for the Manufacturing Institute, there are as many as 600,000 manufacturing jobs going unfilled. The article correctly points out that high schools persist in making entrance into four-year colleges the goal of graduates - despite the fact that skilled operators-programmers make from $18-$28 an hour while the upstairs "white collar" designers make $14-$24.

Maybe, thanks to governors in the 41 states that cut spending on higher education last year, the word is getting out that for many young people four-year college degrees are a waste of time and money - and that there are plenty of jobs out there that don't require a four-year degree.

If the governors' actions send the message to the school boards that set policies for the nation's high schools, that would be a major step towards reforming the higher education Goliath - and meeting the needs of American industry.

For additional facts and analysis, check out my posts in the "Education" category written over the past 18 months, including one earlier this month.

REGULATION, THE EPA, AND THE MING DYNASTY

After considering 16,000 years of humanity, Stanford University historian Ian Morris  concludes in Why the West Rules - For Now that the most advanced and influential society is that which is best at "getting things done." 

To quantify Eastern and Western societies' ability to get things done over 16,000 years, Morris (originally trained as an archaeologist) has designed an "index of social development."  It is based on four metrics: per capita consumption of energy, organizational capacity, the ability to process/communicate information, and the ability to wage war.

This thoughtful way of looking at history raises the issue of government regulation and "the ability to get things done."  I was reminded of this when puzzling over why China, inventor of the compass, paper, printing, gunpowder, and an early exploiter of coal and producer of iron, failed to realize its technological potential.  Instead, it discouraged innovation and eventually succumbed to European domination.

Much of the reason for China's failure can probably be found in the work of famed sinologist, Etienne Balazs commenting on the Ming and later dynasties.  As quoted by David Landes in his The Wealth and Poverty of Nations:

Chinese society was highly totalitarian . . . no private initiative, no expression of public life escapes official control . . . there is a monopoly of education, jealously guarded . . .  there are clothing regulations, a regulation of public and private construction . . . the providential State watches minutely over every step of its subjects, from cradle to grave.  It is a regime of endless paperwork and harassment.

The ingenuity and inventiveness of the Chinese . . . would no doubt have enriched China further and probably brought it to the threshold of modern industry, had it not been for this stiffling state control.  It is the State that kills technological progress in China.

Now, consider the trend of regulation emanating out of Washington, DC over the past decade or so, as depicted by a recent graphic in The Wall Street Journal.

 

 

This chart clearly shows that the pipeline of upcoming Federal regulations, each of which will impose a cost on the economy of $100 million or more, has soared over the past five years.  At the same time, Washington University's Center for the Study of American Business estimates that the cost of administering existing regulations will be $57 billion in 2012 while employing over 290,000 people.  Finally, there are the costs of investment-dampening uncertainty when firms are unsure what regulations are likely to be imposed.

Smog and Highway Signs.  Consider the Clean Air Act administered by the Environmental Protection Agency.  The Supreme Court has upheld EPA's contention that it should not consider costs when imposing new regulations. The Agency is presently finalizing rules that will probably shut down a substantial number of coal-fired generating plants in the midwest and southern states before the end of their useful lives.  The estimated all-in industry costs could exceed $80 billion (passed on to customers, of course) according to one research study.

However, when the Obama Administration's proposal to reduce ground-level ozone and the resulting smog was found to cost up to $90 billion annually, the President finally backed off, citing "the importance of reducing regulatory burdens and regulatory uncertainty."  Well, at least $90 billion catches the President's eye.

One other very small victory for regulation skeptics: in August, the Department of Transportation eliminated 46 deadlines for local communities around the country to replace existing highway signs with DOT-mandated standardized replacements. (It kept in place an additional twelve).  

DOT's reasoning?  "Local and state transportation agencies are best-equipped to determine when they need to replace signs and other items in the course of their daily work.” But apparently they can't be trusted to design the eventual replacements.

There clearly is a place for sensible, cost-effective regulation in sectors such as processed food and pharmeceuticals, although frequently law suits for damages may be more effective than regulation in heading off egregious behavior. (Note that British Petroleum has paid out to date $7.5 billion in claims arising from its 2010 Deepwater Horizon accident and oil spill in the Gulf of Mexico.)

Reduce the Burden.  While the regulatory burden may not currently approach that of the late Ming Dynasty, it is time to act.  The White House and Congress should be spending as much time and political capital on "reducing the regulatory burden and regulatory uncertainty"  - as the President puts it - as on spending and taxes.

 

 

 

 

 

 

OCCUPY WALL STREET, HIGHER EDUCATION AND JOSEPH SCHUMPETER

What are the links between the Occupy Wall Street crowd and the massive, overgrown higher educational system in the United States?

Perhaps the most penetrating answer can be found in Joseph Schumpeter's "Capitalism, Socialism, and Democracy," first published in 1942. Herewith several penetrating observations from chapter XIII of that powerful work:

One of the most important features of the later stages of capitalist civilization is the vigorous expansion of the educational apparatus and particularly of the facilities for higher education......

Inasmuch as higher education thus increases the supply of services in professional, quasi-professional and in the end all 'white collar' lines beyond the point determined by cost-return considerations, it may create a particularly important case of sectional unemployment....

It may create unemployability of a particularly disconcerting type . [such a person] becomes psychically unemployable in manual occupations without necessarily acquiring employability in, say, professional work . . . due to either lack of natural ability - perfectly compatible with passing academic tests - or to inadequate teaching.  Both cases will . . . occur more frequently as ever larger numbers are drafted into higher education.

All those who are unemployed or unsatisfactorily employed or unemployable drift into vocations in which standards are least definite or in which aptitudes and acquirements of a different order count.  They swell the host of intellectuals in the strict sense of the term whose numbers swell disproportionately.  They enter it in a thoroughly discontented frame of mind.  Discontent breeds resentment.

For substantiation of how our current situation mirrors, to a surprising extent, Schumpeter's insights, see my previous Topics in Political Economy on "Too Big to Fail: The Academic Establishment" and "Jobs Looking for Workers."

However, I am not ready to accept Schumpter's thesis that capitalism is ultimately doomed by the "inability of the capitalist order to control its intellectual sector effectively." At least, not quite yet. 

 

 

JOBS LOOKING FOR WORKERS: UPDATE

Another report on jobs looking for workers, this time in a lengthy, well-researched front page Wall Street Journal article.  Problem:  I don't think very many of the Occupy Wall Street types are trained/capable of doing them.

By one account, 83% of manufacturers report a "moderate or severe" shortage of skilled production workers to hire. At Union Pacific railroad a 27-year old who can install fiber optic cable is offered $48,000 annually plus overtime, plus a traditional pension. BA college degree not required.

Pass the word to high school administrators and counselors - and to parents of teen age children.

DEFICIT REDUCTION: THREE CHEERS FOR SENATOR TOOMEY

The clock is running out for Congress's "super committee" to come up with credible spending cuts and additional tax revenue to avoid disruptive meat axe cuts throughout the budget or "kicking the can" down the road, again, with very unpleasant consequences in financial markets.

There still is light at the end of the tunnel.  The good news is that forty House Republicans joined with 60 House Democrats in a letter to the Committee to urge it to  "consider all options for mandatory and discretionary spending and revenues" to reduce the deficit, over time, by $4 trillion.

In addition, some Tea Party types appear to have learned to how to add and discovered that even draconian spending cuts alone will not achieve desired goals.

The Toomey Proposal.These developments have now been followed up this week by super committee member Senator Toomey's eminently sensible proposal to raise tax revenues by almost $300 billion over the next decade.  This would be done largely by limiting tax breaks for those itemize deductions on their income tax returns. 

At the same time, the top tax rate would fall from 35% to 28% and the bottom rate from 10% to 8%. The net effect of the Toomey proposal is to raise taxes for individuals earning over $174 thousand and married couples making over $212 thousand and raise $290 billion in revenue.

Senatory Toomey's initiative follows closely the proposal developed by Martin Feldstein and his colleagues, discussed and advocated in this blog earlier in the year (April 19).

The Arithmetically-Challenged.  It is now liberal Democrats who appear to be arithmetically-challenged.  They don't understand that you can reduce marginal tax rates for upper income types and if you plug tax deduction loopholes at the same time, you can actually increase their total tax bill. Take a look at this post by a Daily Kos contributor, inspired by a New York Times article, for a sample of this illiteracy.

Let's hope that super committee negotiations will now revolve around the ratio of spending cuts to tax revenue increases. If liberal Democrats want more tax revenues and fewer spending cuts they should specify which remaining loopholes should be plugged.

Caveat: super committee members of both parties should not think they can outsmart financial markets by clever accounting tricks and dubious assumptions. Yes, the Greeks got away with it for several years, but they - and the rest of the Euro bloc - are now paying the price for that deception.

 

IS THE U.S. IN DECLINE?

The best "big picture" economic historian today is Harvard Professor Niall Ferguson. The favorite big picture topic of the day, "decline of the U.S." is explored in a recent and extremely well-produced 22 minute video discussion between him and Wall Street Journal editor John Bussey.

Alternatively, you can read the post on his web site which contains a summary of his analysis.  Here is an excerpt which contains most of his prescription to rejuvenate public policy in this country:

What we need to do is to delete the viruses that have crept into our system: the anticompetitive quasi monopolies that blight everything from banking to public education; the politically correct pseudosciences and soft subjects that deflect good students away from hard science; the lobbyists who subvert the rule of law for the sake of the special interests they represent—to say nothing of our crazily dysfunctional system of health care, our overleveraged personal finances, and our newfound unemployment ethic.

I take particular note of his last citation, suggesting that the European "dole mentality" is creeping into American life.  Ferguson does not buy the pessimists' argument that we are in an "inexorable" absolute decline. And he is careful to point out that there is little basis for alarm over rising living standards in China. But he makes a strong case that we are currently on a track where an absolute decline in the U.S. is a distinct possibility.

The full exposition of Ferguson's analysis is contained in his latest book, "Civilization."