October 13, 2013

The Road To Real Recovery: There Are No Express Lanes.

by Hal Gershowitz

Comments Below

 

The road to real economic recovery, which we’ll define as the America we once knew – you know, the one in which Americans in every generation knew they would do better than their parents had done – will be a long winding road once we find it.  Right now we’re still driving around, somewhat aimlessly, looking for the entrance ramp.

It’s true.  We’re really not on the road to real recovery.  It is more like we’re on the beltway that circles Washington, DC.  If we stay on this road we’re apt to wind up right where we began.  We have, essentially, become an entitlement society, and that’s okay as long as we understand what that means.  In excess of 60% of our federal budget goes to fund various entitlements such as the federal portion of healthcare (22%), social security (21%) and welfare and other various and sundry entitlements (19%).  Add to that the 19% that we currently budget to defend ourselves, and the nearly 7% that goes to simply pay interest on our debt and, Presto! — nearly 90% of the entire federal budget is gone.

That leaves a dime out of every dollar to fund everything else about which we care such as education, research and development, veterans’ health care, transportation, air safety and air controllers, environmental protection and the restoration of our crumbling infrastructure about which we’re always complaining.  Unfortunately, a dime doesn’t go very far these days.   We spend about fifty cents of every dollar in the budget on our oldest citizens, and about a nickel to help educate our youngest citizens.  In fact, it is estimated that, overall, we spend six times more on the elderly than we do on our young. Something seem out of kilter here?

Okay, let’s assume, for the purpose of this essay, that everyone likes the idea that the primary mission of the nation is to provide for or greatly subsidize healthcare for all, retirement support for the elderly and income, food and shelter for our fellow Americans without sufficient income to adequately support themselves.  All well and good.

We’ve been on this entitlement course for along time.  It’s not just an Obama priority.  It was Bush’s priority and, in varying degrees, every President’s and Congress’s priority for most of the last century.  So it must be okay. Right? Sure, it’s okay if that’s what we want our primary national priority to be — as long as we’re willing to, and capable of, paying the cost.

Well, so far, we’ve been paying the cost with the substantial help of very willing lenders, about half of who don’t speak English. They mostly speak Chinese and Japanese.  These lenders (along with those who are fellow citizens) are holding markers for about $12 trillion (about 75% of the size of our entire economy).  Add to this what our government owes to various depleted trust funds for such entitlements as Social Security and our collective obligation (and that of those not yet born) stands at just a hair under $17 trillion (slightly more than the value of the entire economy).  We’re very lucky to have such generous creditors because we only have fifty-four cents of every dollar we spend.  Fortunately, we have people willing to lend us the other forty-six cents of very dollar.

America has a very large and diverse economy and that’s good, but we also have a very large and, in some respects, not so (demographically) diverse population. And that’s not so good. In fact, it’s a real problem that, so far, we have refused to address in any meaningful way.  When we started down this path eighty years ago almost everyone was paying in and almost no one was drawing out.  In a sense, those were the good old days (even though nearly everyone was poor).

By the time our GI’s came home from the war we had about 41 wage earners to every retiree.  We were in clover.  However, by the time Lyndon Johnson became President twenty years later, we were down to only about four workers for every beneficiary, and the actuaries tell us that over the next two to three decades we’ll have less than three wage earners supporting every retiree.  Thereafter, we’ll start sliding toward one worker for every retiree.  This is, to use a currently popular term, a death spiral from which there are very few remedies.  Get the picture?

So, you see, the country started kicking the can down the road, as the talking heads like to say, when the road was so long that it didn’t matter.  But now we’re beginning to run out of road down which to kick the can.

There are other consequences of what we’ll call entitlementism that really compound the problems we face. Entitlements, by their very nature, increase dependency so people at all levels become conditioned to save less for the rainy days that, sooner or later, always come.  Liquid savings, that is savings not tied up in retirement plans, are negligible in America.  That may well begin to change as our entitlement system begins to sag of its own weight.  And when people begin to increase their liquid savings, their spending (consumption) will decrease, putting downward pressure on an economy desperately struggling to find its footing.

Here’s the point.  This isn’t just a phase we’re passing through.  It is not a blip in a cycle, or just the current state of affairs. It is the state of the union and we will stay stuck here like so much detritus captured in amber unless we begin seriously addressing the problem.

What to do?

 Rethink Social Security.

Stop living in the 1930’s when we were a young population with dozens of wage earners supporting every pensioner, and when almost all pensioners died before they began collecting their pensions.  Ten thousand relatively young and able men and women are now reaching retirement age every day.  If we think we can continue to fund this onslaught indefinitely with a declining ratio of young to old citizens, we’re kidding ourselves, and sooner or later, everyone will suffer.  If life expectancy has increased to 80, we can’t be paying people to retire at 67.

 Welcome immigration once again.

Young immigrants were and can, once again, be the salvation of the country.  Immigrants will provide the workers to support our growing army of pensioners. Immigrants also have larger families (less affluent people always do) and young, growing families are vibrant consumers.  Without a new and sustained wave of consumption, industry will stall and jobs will diminish.   We cannot allow that to become the new normal in America.

 Get serious about education.

Our union-controlled, politicized education complex is producing a breathtakingly undereducated citizenry, especially in our urban centers. If we continue to produce second and third-rate students, we WILL become a second and third-rate country.  This is a crisis in America and we must deal with it as such.

Focus, like a laser on innovation. 

Nothing produces wealth throughout the economy and at every level like innovation.  Regulations should be designed to hasten research and new product and new plant development.  Our regulatory establishment should be aggressively reviewed to identify regulation that unnecessarily increases costs, slows progress and impedes innovation.  Get rid of every hoop through which we make entrepreneurs jump that isn’t really necessary.

 Reform tax policy.

Taxes should serve the purpose of raising the revenue needed to run an effective and efficient government, provide for the defense of the nation and provide a safety net to supplement the earnings or income of those whose wages or income are insufficient to provide an acceptable minimum standard of living.  Tax policy should not be used to subsidize some industries (at the expense of other industries).  This ultimately always artificially distorts the economy and unwisely skews investment.

Rethink baseline  budgeting.

Baseline budgeting assumes budgets will equal the current  budget times the inflation rate times population growth. Every agency of government should not be presumed to warrant an increase in spending. Baseline budgeting destroys any incentive to cut costs where costs can and should be cut. It also corrupts the language with which government communicates budget decisions to the public. An increase in spending that is less than the increase the baseline calculation would allow is communicated to the public as a decrease in spending. This causes an annual year-end rush in almost every government agency to spend any unspent funds.

We must get on with the job of rethinking our priorities and determine whether we want our economy to primarily be an engine for growth or a funder of ever-growing entitlements. There is a road to real recovery.  It is apt to be a long journey, but if we tarry much longer on the path we’re on, we’ll find the entrance ramp to that road closed indefinitely.

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3 responses to “The Road To Real Recovery: There Are No Express Lanes.”

  1. Mark J Levick says:

    Great analysis and road map for success. Too bad we are so polarized ideologically and so dominated by bloated bureaucracies and public employee unions that nothing of substance will be done until we are confronted by a national crisis. In 1938 we were still in the throughs of a Depression which did not stop us from being an isolationist nation. We’re it not for the collapse of France, Pearl Harbor and the active support of intervention by Wendell Wilkie as FDR dithered it is doubtfull that much would have changed. There are no Wendll Wilkies or for that matter FDR’s to galvanize the public to take action to overcomet the economic crisis we face. In fact our only leader has chosen to lead from behind internationally while he panders to a complacent me generation which deems itself entitled to a free lunch. Were it not for a small number of innovators and the inability of the European Union to put its own house in order the bell would have tolled for us years ago. We continue to live on borrowed time as well as borrowed funds and very few either know or care. That is a failure of leadership which will continue as long as public opinion lacks enlightenment and our politicians are poll followers in their quest to continue feeding at the public trough.

  2. Carol Frankel Cohen says:

    I am wondering if that “dime” you mention in your excellent discussion also has to be stretched to fund the National Institutes of Health? Funding for The National Institute of Mental Health (NIMH) research in particular has dropped disastrously in the past decade. We decry the mass killings committed by a few of the one million ambulatory schizophrenics and bi-polar individuals who are in our population. Without government funding for NIMH, this picture is likely to worsen. When was the last time any private organization asked you for a contribution to help fund mental health research?

  3. Donald Borsand says:

    Well done, as usual. But, what about the “underground economy” in the U.S.? Any idea of its size? What about the “brain drain” taking place in the U.S. – that is ,those who come here for their education, but who leave for better opportunities back home or abroad? Finally, if they retire at, say 70 0r 80, how many new job openings will that take away for the new job comers?Thanks.
    Don

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