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.

 

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.

OUTLOOK FOR 2012

Believers in the business cycle should opt for modest optimism for the U.S. economy in 2012.

As I pointed a year ago, the average expansion phase of a business cycle since 1945 is 59 months. We are now just halfway - 30 months - along that path, and nearly all the key indicators remain favorable, although not buoyant.

The economy in 2011 grew at about 2%, less than my cheery forecast of 3.5%, but enough to silence the "double dip" recession fears of some. Signs of encouragement include:

• In the past 12 months, the number of unemployed has dropped by 1.3 million. Employment has being rising steadily, although is still down substantially from the cyclical peak.
• Industrial production is up 3.7% through November.  
• U.S.-assembled auto sales in December were 11% ahead of a year ago.

The private sector's weak spots continue to be employment in financial services (particularly investment banking and related activities) and residential construction,  whose sweetheart bubble burst in 2008.  Contrast the flat employment picture in these sectors with the overall economy, as charted below using BLS data.

TOTAL EMPLOYMENT, 2001-2011

 

EMPLOYMENT - CONSTRUCTION OF BUILDINGS, 2001-2011

 EMPLOYMENT - SECURITIES, COMMODITIES, INVESTMENTS

 2001-2011

As a long-time believer in the powerful dynamics of the business cycle, I would normally be comfortable in suggesting economic growth in the U.S. next year should be on the order of 3.5% or better.  This would be achieveable even with continuing sluggishness in single-family home building and important financial subsectors.

Consumer spending is clearly strengthening and capital spending budgets appear to be buoyant.  The latter is due partly to the spreading impact of gas and oil shale drilling, development, and pipeline activity on both suppliers and customers (e.g. utilities and chemical manufacturers in several regions of the country.

However, the outcomes of the European Euro-debt crisis and political gridlock in the U.S. over taking steps to avoid precipitating a similar situation on this side of the Atlantic are truly exceptionally bothersome uncertainties. 

The pessimist will side with Kenneth Rogoff, the leading historian of such events, who has written  recently about "the likely coming wave of sovereign defaults."  The optimist will concede that Greek bondholders will shortly take a bath, but that the resulting waves will be insufficient to overturn the boat.

Bottom line?  A growth rate of 3.5% for the U.S. in 2012 is my "most likely" possibility, but the downside odds are larger than usual. 

 

 

 

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.

 

 

 

 

 

 

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."

JOBS LOOKING FOR WORKERS, CONT.

Caterpillar, one of the world's largest machinery manufacturers, with 59,000 employees in the U.S. alone, is building five new plants in the United States.  Their biggest problem? Not enough qualified workers.

CEO Doug Oberhelman is not shy about pointing fingers.  In a September CBS TV interview, he stated flatly, "our education system has failed all of us." 

At about the same time, Oberhelman spelled out for a Chicago business newspaper the details, as relayed by Thomas Friedman in the New York Times, as they are affecting Caterpillar:  

"We cannot find hourly production people, and, for that matter, many technical, engineering service technicians, and even welders, and it is hurting our manufacturing base in the United States . . . we have to retrain every person we hire."

Perhaps the most important retraining initiative would be to focus on those 300,000 counselors in high school systems around the country who advise graduating seniors on what their next steps should be. At the moment, collectively, they are doing a terrible job.  Call your high school principal or school board representative.

WHY THE FED IS FLOUNDERING

“Most of the economic policies that support robust economic growth in the long run are outside the province of the central bank.”  Federal Reserve Chairman Ben Bernanke, August 26, 2011

 Here we go again. A majority of the high priests of monetary policy (e.g. members of the Federal Reserve's Open Market Committee) voted to institute "Operation Twist" at their most recent meeting.

This follows their efforts to stimulate growth and bring down unemployment by pumping $600 billion into the economy under the "QE2" program by purchasing U.S. Treasury securities. With little to show for that project, the Fed will now try to reduce long-term interest rates and increase slightly short-term rates by selling shorter term bonds and buying longer term ones.

If you want an insider's technical critique of this maneuver, read today's remarks by Dallas Federal Reserve Bank President Richard Fisher, who voted against Operation Twist. 

However, Fisher also makes several more important points. First, he suggests the Fed does not really know what it is doing. He does this by passing along a wry Norwegian aphorism:

Theory is when you understand everything, but nothing works.

Practice is when everything works, but nobody understands why.

[Here], theory and practice are united, so nothing works and nobody understands why.

Secondly, Fisher stressed that further monetary accommodation, of whatever form, "will represent nothing more than pushing on a string" until Congress and the Executive get their act together on spending, taxes and the deficit.

The Fed is floundering because it is trying to do too much.  In the process of doing so it has managed to simultaneously raise Congressional hopes about what it can do and stir up a hornet's nest of political critics.  Despite his message at the opening of this blog regarding the Fed's limited powers in the current situation, Chairman Bernanke still feels impelled to do "something."

A stronger Fed Chairman would put substantially more heat under the bottoms of Congressional leaders of both parties and the White House to dispel the vast amount of regulatory and fiscal policy uncertainty created by the politicians. That is Washington's real damper on the private sector's willingness to spend and invest.