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Economic Education Contest Series (click on the links below)
* the $50,000 challenge is from
Nov. 1, 2005 to Dec. 31, 2010
* the $5,000 challenge expires Dec. 31, 2010 * the $5,000 challenge expires Dec. 31, 2010
* the $5,000 challenge expires Dec 31, 2010
5) Debt to GDP Can Never Exceed 1.0 in Real Terms * the $5,000 challenge expires Dec
31, 2010
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THE $50,000 CHALLENGE: “Federal
Government Debt is Pure “Bubble”” In the spirit of education, I will award a $50,000 (escalating to $500,000, assuming no successful contests) qualifying scholarship
or charity contribution in the name of the first person that submits a successful challenge to the logic contained within
the article below. The successful contestant may either credibly debunk the logic via similar argument(s),
or generate a case that empirically demonstrates the presence of a real increase in wealth to the world from what otherwise
would be, as the result of a U.S. Federal Government Bond Issuance. Note: Exceptions and further qualifications are listed at the end of this article.
Contest offer will end December 31st, 2010. First, imagine an island with two inhabitants, Tom and Jerry. In this simplified environment money
is not a necessity. Only goods and services (G&S) are voluntarily exchanged between the two as best
fit their skill sets for production and needs for consumption. Since there is no money, all debt and GDP
are in terms of G&S produced and rendered utilizing their labor and skill sets. Assume Tom and Jerry
are surviving OK and enjoying a satisfactory standard of living, as they would know nothing else.
Suddenly a critical island bridge is washed
out in a hurricane. This extraordinary rebuilding task will require one total man-year of skill-sets employed by both Tom
and Jerry, which is necessary for their long-term survival. They powwow and agree to “tax”
themselves at a 50% rate for one year by spending half of their time building the bridge and the other half of their time
producing half of the normal level of G&S for their respective consumption. The necessary consumption
abstinence works perfectly as there are only 50% of the normal levels of G&S available due to their redirected work activities.
After one year the bridge is completed, the “tax” disappears, and life goes back to the same normal level
of production and consumption that existed before the hurricane.
Introduce Federal Government Debt…
There is, however, a clever way to disguise the real tax that Tom and Jerry
imposed upon their island society. By issuing and selling island government bonds to themselves in exchange
for some island goods, then paying themselves with these same goods as compensation for their labor in rebuilding the bridge,
at the end of the year they will have a new bridge AND the equivalent of one man-year of bonds in “wealth”
to spend WITHOUT EVEN RAISING TAXES…! Since there is no money on the island, the bonds would be
official contracts awarding both holders 6-man months worth of G&S produced upon redemption.
Unfortunately, they will soon realize
when they attempt to cash-in their bonds they will find no value to them at all because the only possible way to redeem them
is by taxing each other to pay for the bonds. The exact magnitude of this aggregate debt illusion
of wealth is the total outstanding “Federal Island” debt.
Incorporate “Freddy”,
the Skilled Bridge-Builder
Let’s now add
“Freddy”, a skilled bridge-builder to the mix. First, without incorporating the Federal Bond
illusion, Tom and Jerry agree to “tax” themselves 1/3 of the goods and services they normally produce then pay
Freddy to spend the next year reconstructing the bridge, thus all three island inhabitants survive the next year on 2/3 of
their normal consumption level. At the end of the year the bridge is complete, the “tax” disappears,
and all return to pre-hurricane production and consumption levels.
Now, by incorporating the Federal Bond illusion technique,
Tom and Jerry could buy the bonds with island goods, which would subsequently be utilized to pay Freddy as he reconstructs
the bridge. At the end of the year once the bridge is complete, Tom and Jerry each have bonds representing
claims on ½ man-year of goods or services. Soon the three island inhabitants would realize there
is no one signed up or committed to repay the bonds, if Tom or Jerry decides to redeem them. Thus, the
first-believed perception of wealth that the bonds represented just vanished into an illusion.
Introduce Uncle
Sam…Let’s now incorporate a fourth member to the island, Uncle
Sam. Sam is a charismatic and persuasive leader who produces no goods or services; he only transfers wealth.
Sam represents government on the island.
Tom, Jerry, and Freddy normally pay ¼ of their production to Sam for
his living expenses, so each on the island enjoy approximately the same standard of living, which is ¾ of an island-producer’s
output.
Without incorporating the Federal Bond illusion, Sam would simply organize an immediate tax on all four island inhabitants
of ¼ of a normal producer’s output, and contract Freddy to reconstruct the bridge, which leaves each of them
surviving on ½ of a normal producer’s output. Assuming Freddy can reconstruct the bridge in
¾ of the aforementioned times, the project would be complete after one year, then all production and consumption returns
again to pre-hurricane levels with no residual extraordinary tax payments due.
Considering the Federal Bond illusion technique, the island
inhabitants would again similarly be left with bonds representing the PERCEPTION of wealth, when in fact no one on the island
again is committed to repay them, if later a bond owner attempts redemption. Sam’s message to all
inhabitants is that on the one hand his Federal Bonds are a safe investment representing real future wealth to the holders
when redeemed, then on the other hand, the concomitant island government obligation to pay them is a mysterious “black
hole” of future limitless taxing authority that is always assumed to satisfy these obligations without any individual
committed to that fulfillment task. It is assumed future growth will enable the debt redemption.
What is not stated is that these debt obligations will be satisfied by claims on future growth proceeds via higher
taxes. Hence Sam has created the magic of a wealth increase (bond holders counting their chickens) with
no announced counter-balancing commitment to repay the bondholders (stealth future tax increases).
Could
We Tax the Unborn Child?Let’s incorporate children or even unborn children
of the island inhabitants into the picture. Following in the footsteps of the prior example, Sam calculates
after the bridge reconstruction that we will be able to surreptitiously increase taxes on our children when they become of
working age, thus enabling a painless redemption of the bonds to those who sacrificed earlier. Remember,
the original perception on the island at the time of bond issuance was that they represented an INCREMENTAL quantity of wealth
compared to the no-bond-issuance alternative. Now, envision years later a bondholder cashing in his bond,
which would increase the tax burden immediately on the “next generation” and effectively TRANSFER real goods and
services that the younger generation would otherwise consume and enjoy. This is not an incremental community
gain; it is again only a TRANSFER of wealth. The former child now working is likely to rebuff this real
incremental tax increase as unjust.
The issuance of the bond in the first place typically represents an incremental illusion of wealth
rather than a transparent overt plan of intertemporal (intergenerational) wealth-sacrifice transfer. One
could argue a current expenditure of labor for a government purpose (tax) will benefit those into the future, thus justifying
the intertemporal wealth-sacrifice transfer. That argument is weakened, however, by the fact that any labor
expenditure (tax) in the past or current, which tends to happen continually, would benefit CURRENT as well as future inhabitants.
So, why in this case should a child sacrifice for their parent’s generation, AND their grandparents generation?
One could argue
a current extraordinary expenditure (e.g. WW-2) should be spread out over the next generation or so because
the future inhabitants will enjoy the freedoms the current generation is sacrificing economically to maintain.
In this highly unusual circumstance (WW-2) one could logically support an immediate tax increase
affecting the current taxpayers in addition to issuance of “War Bonds” designed to spread
the balance of the economic sacrifice over say the next generation as well. In reality, the real tax (allocation
of labor and natural resources) would be imposed upon the current taxpayers and they would sacrifice significantly during
the war-time period as there would be fewer consumable goods available to consume (the labor has shifted to combat, building
bombs and tanks, etc.). Later, those who sacrificed consumption during the War by purchasing “War
Bonds” would enjoy a TRANSFER of wealth from future taxpayers, NOT a new creation of wealth, in repayment for their
earlier sacrifices. The use of this spreading-the-burden technique would be folly for anything less than
a catastrophic World War or equivalent. In any event this extraordinary application still represents an
illusion of wealth (“War Bonds”) for the same reason stated in the final paragraph of the “Introduce Sam…”
section above.
Bonds Dropping from Heaven?Any of the Federal
Bond issuances in the examples above could be philosophically equivalent to Treasury bonds literally dropping down from the
skies above because there is no one committed to pay a higher real tax later to repay the bonds. Initially,
all gatherers of these heavenly bonds would be filled with exuberance, convinced they could retire tomorrow to a fun-filled
retirement. Clearly, once a critical mass of people quit their jobs and begin enjoying the retirement,
the perceived value of the bonds would rapidly diminish, as the market would harshly devalue them. The
common theme is consistent. When Federal bonds are issued, the perception of the entire populous is that
they represent the highest grade, most secure financial investment on earth enhancing our aggregate wealth. The
financial markets, investors, politicians, etc. all view them as incremental wealth, because in fact there is no one identified
and committed to repay them, which should rightfully neutralize the present value of the illusory bonds.
Could
We Arbitrarily Impose a Debt Obligation to be Repaid Later?Similar to the
“Bonds Dropping from Heaven” case the answer is NO within the context of the Real Economy. If
Sam held a spear to the heads of Tom, Jerry, and Freddy, and forced each of them to sign a contract (debt? obligation) that
would supply Sam a percentage of their produce for life beginning the day each became of working age, the initial level of
“debt” would, of course, be greater than the initial output (GDP). One could argue the noted
debt obligation is in fact greater than GDP during most of their working lives.
Clarifying the definition of debt will help develop a response.
Webster defines debt as: “…the common-law action
for the recovery of money held to be due.” The arbitrary imposition of debt is not an act of
“recovery”; it is a simple act of coercion. Therefore, it
should not be considered a debt as though one is obliged to repay for receipt of a good or service.
It should be considered as an ongoing tax as goods and services are produced and transferred. Thus,
the noted bonds represent an illusion of wealth to the island community as there would be no difference in the aggregate future
production of goods and services whether the bonds existed or not.
Can We Grow via Motivation or Productivity
and Pay off the Debt? NO. Repayment of any past
Federal debt via incremental output levels above the ongoing production level of goods and services is impossible without
a real tax increase! If we return to any of the examples and assume dramatic output and/or productivity
growth occurs after the bridge reconstruction, then all of the goods and services produced in excess of the former level of
production would be consumed by the island inhabitants whether the bonds existed or not.
The Laffer Curve
philosophy applies to businesses becoming more motivated than otherwise, if they are taxed at a lower rate and are allowed
to retain a higher percentage of any marginal increase in wealth that they produce. Again, this philosophy
does not apply to producing incremental goods and services only then to be utilized in repayment of existing Federal debt.
Could economic
growth push all taxpayers into higher income tax brackets and capital gains taxes to enable repayment of Federal debt?
Of course! This represents the same impact as the intertemporal transfer of the tax burden discussed
above. You are effectively paying a higher tax percentage, but may not be aware of the increased real burden.
HOWEVER, destructive monetary policy practices have flooded the world with liquidity, primarily in the past 15 years,
such that nearly all financial assets have grown to become overvalued illusory perceptions of wealth. To
illustrate, if Treasury bonds dropped from the skies, gatherers would happily pay capital gains taxes when they cash them
or roll them into another financial asset, which would flood the government with windfall tax revenues that would temporarily
balance the budget. Unfortunately, once the illusory financial asset bubbles are discovered, the opposite
will happen. Massive losses will negatively affect tax collection efforts, which may become a self-perpetuating
force spiraling downward. Extraordinary and desperate monetary intervention would likely follow attempting
to re-inflate falling asset valuations via currency debasement.
Can we Back Bonds with the Inventory
of Wealth We Have?Could we utilize the inventory of wealth (national forests,
monuments, etc.) to satisfy redemption of the Federal Debt securities issued, if necessary? There are two fundamental problems with this concept. First,
we ALREADY OWN THE ISLAND! Any attempt to selectively repay a bond-holder seeking redemption would be trying
to recover something already claimed by all inhabitants, which would be a redundant claim on the same asset! Second,
in our fiat currency world, you would likely be chased away, if you attempted to lay claim to an acre of national forest in
exchange for your treasury bond.
Ricardian
Equivalence Defense? David
Gordon, senior fellow at the Ludwig Von Mises Institute, writes:
Robert Barro (1)
(Harvard Ph.D. economist) is most famous among economists for his defense of "Ricardian equivalence." Against claims
that a budget deficit crowds out investment, our author demurs. Faced with a budget deficit, taxpayers will realize that taxes
must eventually be raised to pay the bills. This being so, they will, if rational, set aside money to pay for the tax increases they anticipate. What counts is
not only current taxes, but the present value of future taxes. "[E]ach person subtracts his or her share of this present
value [of taxes] from the present value of income to determine a net wealth position, which then determines desired consumption"
(p. 93). Since anticipated future taxes affect consumer spending in the present, "taxes and budget deficits have equivalent
effects on the economy" (p. 94).
Clearly, the “Ricardian equivalence” assertion that “deficits
don’t matter” has everything to do with keeping the aggregate activity levels humming in an economy, regardless
of whether the government, consumers, or businesses are doing the spending. However, it has nothing to
do with addressing the fact that the magnitude of bonds issued to fund the shortfall between government revenues and spending
is an illusion within aggregate debt valuation.
Bottom Line…
The issuance of Federal Debt Securities is perpetuating an illusion of wealth,
thus is fraudulent, and must be stopped.
Every dollar of Federal government debt issued is purely
an illusion of wealth (a bubble..!) in aggregate. Its issuance effectively dilutes all Credit Market debt
by the magnitude of the Federal debt. Any attempt of redemption will automatically displace other debt.
The reality is that when the government spends money to activate resources for its purpose, it represents an immediate
real taxation on society at that moment in time. Whether tax money is collected to fund the expenditure,
or whether the excess spending beyond tax collection results in a bond issuance makes no difference upon the real aggregate
tax burden. In one case the funding resource is visible (tax collection and payment), and in the other,
it is an illusion (bond issuance) combined with an invisible future tax liability. Once a labor activity
is performed to serve a government purpose, it becomes “spent human capital” and can never be recovered.
Our monetary taxing system should be aligned with reality rather than hiding an illusion of wealth
in the form of bond issues. Even in times of armed conflicts the actual spending on defense is realized
the moment armaments and supplies are produced via re-allocated labor. Taxes should rise immediately to
recognize this activity because it actually reflects reality, or spending should be reduced in other areas an equivalent amount
to avoid a real tax burden increase.
Only in extraordinary times of catastrophic war (WW-2) or similar would logic justify a Federal
Bond issuance to effectively spread the sacrifice of the real tax imposed during the war over a long period of time.
In this case real taxes should increase immediately with reinforcing statements that they will remain at higher
levels until the “War Bonds” are repaid so those in the affected nation will not perceive the “War Bonds”
as an incremental illusion of wealth, but would see them rightfully as a method of gradual wealth transfer to bond holders
which would effectively spread the extraordinary sacrifice over time via the increased ongoing real tax level as the War Bonds
are paid off.
We
often hear concerns of “burdening the next generation with Federal debt”. The reality is that
they will not be “burdened” at all with most of this debt. The actual losers will be creditors
holding debt securities that are destined to become diluted in value or worthless as governments and central banks debase
currency valuations. Largely, the Boomers retiring will be the losers.
Alternatives to Avoid the Illusion of Federal Debt:
Constitutionally
require a balanced budget. When a spending increase for any reason is passed, the tax rate
should increase or a new tax source should be instituted to align with that reality immediately.
Thus, for example, tax withholding on paychecks should change immediately to accommodate the spending in the time frame
it actually occurs. Congressmen voting for the spending should have a “stamp on their foreheads”
indicating they voted to further burden taxpayers and support “X”. By recognizing the reality
with this level of visibility and scrutiny we should be governed more by the principles of freedom that shaped the formation
of our Republic rather than empowering small groups to satisfy a self-serving agenda at the expense of all others.
I believe with this new paradigm broadly communicated and accepted we would actually gain confidence in and respect
for decisions taken by our elected officials.
A Balance Sheet Approach? Click here then click on the link named: "Our Federal Debt is Pure "Bubble" Balance Sheet .pdf File"
under the #1 Contest Exceptions: - Any Federal government bond issued on behalf of a Federal government owned utility company would
not qualify.
- Any Federal government bond issued
that will be redeemed via direct fees assessed for access or usage of property will not qualify. E.g. grazing
fees, or national park usage access.
- Generally, exceptions
will exclude all Federal government bonds, which will be redeemed via Federal Tax assessments.
References:1) Getting it Right; Markets
and Choices by Robert J. Barro, MIT Press, 1996, xv +191 pgs. by Russ Randall; 12-15-2006
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Houses
DO NOT Appreciate, They Inflate…!
In the
world of “real” economics (in contrast to “financial” economics), housing values in aggregate actually
deteriorate! Within the “real” economic world context, the exchange
value of an existing house for other items of real wealth (see “…Pool of “Real” Wealth” description
below) actually lessens over time. There are three primary drivers that cause
this phenomenon.
First, What is the Economic Pool
of “Real” Wealth?
Before addressing
those drivers, we recognize all items of “real” economic value are produced from commodities and/or labor, and
make up a fixed aggregate pool of “real” wealth available on the market at any moment in time including:
- Commodities that include inputs of natural resources and labor.
- All intermediate or finished Goods and Services that required commodities
and labor (both directly and indirectly; e.g. capital equipment) to produce.
- All businesses that may include land (addressed as a commodity), goods
(in the form of capital equipment and facilities), and services (in the form of labor).
- Infrastructure including utilities, roads, etc.
In contrast,
our fiat currency does not have “real” economic value within the context of this article. Printing more money does not increase “real” wealth in aggregate. Similarly, increasing debt does not increase “real” wealth in aggregate. At best, fiat currency and bonds may only acquire wealth.
Further, the existence
of natural resources within our country available for conversion into a commodity is considered neutral. i.e. we assume that we will not acquire another sovereign country, thus adding to our natural resource
base, nor will we divest any portion of our country that exists today.
Three Drivers that Effect “Real”
Housing Wealth
The first driver
addresses the effect of time on a tangible asset. In 100 years most of our houses
will be dust. Fortunately the actual decay from this “time” driver
outlasts most loan depreciation or obsolescence schedules. So, we end up with
something of value even after it is fully depreciated. In any event, the house
(excluding land) still deteriorates rather than improves in value as you might experience from an antique or fine red wine. The land portion of the house value (approx. 20%) will not decay and is addressed
in the commodity scarcity section.
The second driver
is commodity scarcity. As some commodities become more scarce, the resources
required to bring them to a usable state increases. This added labor detracts
from our aggregate productivity improvement. The “basket of materials”
required for housing taps relatively more abundant commodities (e.g. wood & gypsum) than the total universe of commodities. For example, oil, natural gas, and water will, over time, require much more labor
per unit to mine and process into a usable state than an equivalent value unit of wood.
To the extent scarce commodities (e.g. oil and natural gas) are not used significantly in constructing a house, their
value will increase relative to the material costs of a house. Consequently,
the cost of housing materials will become relatively less valuable in time compared to the average of the total commodity
universe used in all other Goods and Services. Land fits into this driver,
as it is not labor, and is limited in quantity. However, again, land is plentiful
in the U.S. compared to scarce commodities.
The
third driver is productivity improvement. Once a home has been constructed
we can analyze its market exchange power currently vs. one-year later to acquire a share of business, where all economic labor
resides. If aggregate business productivity improved 2% during the year,
thus enhancing total business market value by the same percentage, the exchange value of that existing home one year
later would fetch 2% less of the total pool of business wealth, assuming the first two drivers (decay and commodity scarcity)
were unchanged.
Note: If the productivity of the housing industry was unusually low relative to all other industries, then the
housing valuation impact of the third driver would be neutralized.
What About Supply and Demand?
“Supply and
Demand” is a dynamic valuation driver within the scope of the three drivers noted above.
If there were a temporary shortage of housing due to higher demand, the market would respond with a higher price initially,
and signal capitalists and entrepreneurs to increase supply. Once supply was
in balance with demand, there would be a strong argument that the relative cost of equivalent housing per unit should decrease
due to economies of scale. This article assumes the functional supply and demand
is in reasonable balance. If anything, the current (2005) supply is far exceeding
the functional demand (increased number of family units) because it is speculation-induced.
Since we experience
metric overlap (e.g. both productivity improvement and substitution work partially to counteract scarcity), commonly quoted
metrics for each of these three drivers would not be simply additive. However,
you can logically see they are each independent drivers of true existing housing devaluation.
An expanded
analogy…
If
the entire world advanced one year in time, then all existing goods that have been produced (including houses) would deteriorate
to some degree with the rare exception of a few items (e.g. wine, antiques, etc.). This
represents the decay driver. Within this context, at the end of that year there
would be no reason the value of an existing home would command a higher exchange power for other new goods and services than
it did at the beginning of the year. Why should an apple farmer give more fresh
apples for the same decayed house one year later, assuming there are no supply, demand, or productivity changes?
In contrast,
a year later an oil driller could expect to exchange his 10,000 barrels of oil for a greater value house because of the relative
scarcity of oil to commodities utilized in housing materials (the commodity scarcity “driver”).
Finally, if
the apple farmer became 2% more productive in his business and as a result his business valuation increased 2% (the productivity
“driver”), he should be able to purchase an identical newly constructed house by selling a slightly smaller fraction
of his business assuming commodity scarcity, and relative supply and demand did not change.
Additional
points….
The housing
sector itself will certainly have “hot areas” and “cold areas”.
However, within that sector, for every house commanding greater exchange value of other goods and services due to its
location in a “hot” area, there will be a balancing house that must lose value in a “cold” area. The total pool of wealth at any moment in time is finite.
Can
the entire housing sector experience more demand on average than all other forms of “real” wealth, thus commanding
a greater share of wealth within the sector? Of course, but recognizing there
is a finite limit of wealth at any point in time it would simply displace other forms of wealth for more housing wealth. The “real” wealth pool would have more houses and fewer apples assuming
we are not in a short-term supply shortage condition.
Houses do
not create wealth or produce anything. They just sit there and demand maintenance
attention to hold their value as much as possible. Yes, landscaping will grow
and add value during some periods of a home’s life (a minor positive valuation “driver”). However, you can reach a point where overgrown landscaping actually becomes a liability.
Land that
the house resides upon will not depreciate, but its relative scarcity as a component of the house value is, again, less than
the total index of commodities. i.e. there is plenty of land relative to oil
and natural gas.
.
Where’s
the wealth?
If an existing house
increases in “market” value greater than the rate of inflation such that the net “real” value of the
house increases, who benefits from this perceived wealth gain? Who loses?
First, as we know,
the “wealth” gain described above is an illusion. The market value
will eventually come into line with the real value via deflation (reduction of the market value of the home) or inflation
(currency debasement; i.e. the same dollar market value, but cheaper dollars). If,
for example, the homeowner sells the home at a “bubble” price, he wins and the new mortgage holder will lose if
inflation prevails, or the new homeowner would lose if devaluation prevails. If,
on the other hand, the homeowner refinances, he will be faced with a much higher debt than home valuation, if deflation prevails,
or the new mortgage holder will be the loser, if inflation prevails.
How can you win? Buy the home at a fair valuation price (in 1995), and refinance the home with no cash
out (in 2003-5) utilizing a long-term artificially suppressed interest loan. You
will enjoy the increased valuation and likely pay back in devalued currency.
Conclusion:
We are experiencing
a massive US housing bubble that gives the American homeowner an illusion of wealth, which does not exist. Further, we have erroneously conditioned the average homeowner to believe that by simply holding title
to a home, they will increase true wealth without having to pay down the mortgage debt.
Thus, the seductive debt expansion cycle continues. Unfortunately, this
monetary policy induced condition will end painfully for millions of people.
Disclaimer:
1. This offer is void where prohibited by law.
2. This offer will not be honored in response to a technical legal challenge intended to circumvent
the spirit of the logic. It is offered within the context of advancing macro
economic education.
by Russell Randall; 8-9-2005
Social Security and Medicare Funding Gaps are NOT due to the Boomer Population
Age Profile Shift….
The massive projected funding gaps associated with U.S. Social Security and Medicare programs have created public and
political anxiety for the wrong reasons. The future 76 million “Boomer”
shift into retirement is commonly cited as an overwhelming burden its offspring must support.
This paper will demonstrate the so-called burden is entirely manageable. In
fact, it is the future benefit enhancements that are the overwhelming cause of the projected funding gaps.
Let’s first establish what U.S. Improvement (Productivity) Rate is required to evenly support the Boomers through
the year 2030.
Assumptions:
- The U.S. “Boomer” population was born during the time period from 1946 through 1964; thus
the last “Boomer” at age 66 will retire in 2030.
- Utilize age-based Dependency Ratio data(1) in contrast to Working-Retiree based data. This decision removes the subjective projections of individual retirement decisions. Our goal is to establish the productivity improvement required by those of working
age (20-65) (whether they are working or not) who must support people over 65 (again, working or not). We want to remove the subjective debate regarding trends of younger retirement vs working into the retirement
years. For example, if we actually experience a trend of working longer into
the retirement years, then the productivity improvement requirement to sustain the same retiree standard of living would be
less.
- The “Boomer” population will enjoy the same standard of living in their older years; defined
by maintaining an even level consumption of Goods and Services per 65+ age person through the year 2030 as that group enjoys
today (2005).
- The 65+ group median age will increase due to projected longer lifespan as a result of enhanced health
care and awareness. Further, we assume the improved health that enables longer
lives will evenly counterbalance higher support requirements associated with the increased age of the group over time.
Calculations:
Model
a 2005 group made up of 1 person over 65 plus 4.7 people of working age (20-65), which is the 2005 age-based dependency ratio(1)…or:
1 + 4.7 = 5.7 (# people in 2005 group model)
Establish
an arbitrary Goods and Service Consumption level of 25 “G&S Units” per person per hour. i.e. If 25 G&S Units multiplied by the size of the group were produced in some manner by the group
regardless of how many were working, they would enjoy precisely the same standard of living indefinitely.
Next, calculate
the total annual number of G&S Units/hr required for the 2005 group:
5.7 x 25 =
142.5 (Total G&S
Units/hr required for the 2005 Group)
Next,
what productivity level of the working age group is required to produce the total number of units?
142.5 / 4.7 = 30.3 (G&S Units/working-age-person
hour)
Compare that
productivity level to a 2030 model group in similar fashion:
Model
a 2030 work group made up of 1 person over 65 plus 2.7 people of working age (20-65), which is the projected 2030 dependency
ratio(1)…or:
1 + 2.7 = 3.7 (# people in 2030 group model)
Next, calculate
the total annual number of G&S Units/hr required for the 2030 group:
3.7 x 25 = 92.5 (Total G&S Units/hr required for the 2030
Group)
Next,
what productivity level of the working age group is required to produce the total number of units?
92.5 / 2.7 = 34.3 (G&S Units/working-age-person
hour)
Finally, calculate
the annual compounded productivity improvement required from 2005 through 2030 that will enable the 2.6 working-age people
to support the 1- 65+ age person in the year 2030:
34.3 – 30.3 = 4.0
or a total 13.0 % improvement, or
Compounded annually over
25 years is: 0.49%
improvement per year
Only
0.49% per year?? So, What’s All the Political and Media Hype About?
The
real reason for the elevated anxiety is two-fold:
First, the
recent trend of Goods and Service enhancements received by retirees is expected to continue. i.e. the established trend has conditioned them to expect an ever increasing benefit enhancement
as we move forward, especially in medical care costs.
Second, the
future enhancements built into programs going forward further increase the funding hurdle. e.g. the recently passed prescription drug Medicare program.
Are we a victim of our own success in healthcare? As we develop new healthcare
treatment programs and technology will they incrementally add to the “base-menu” of medical care services included
in coverage plans offered today, thus becoming expected enhancements? If we freeze
the healthcare level enjoyed today for retirees, what programs or services would be eliminated from the “base-menu”
to make room for the new treatment programs and technology assuming productivity in the health care industry is minimal or
stagnant?
Discussion
on Solutions:
1.
Call a “spade a spade”… We have a pay-as-you-go wealth
transfer system. There is no real-wealth build up (government trust fund) to
be distributed later. The concept of even asking our government to build up real-wealth
to be distributed later is folly. What would that real-wealth be (gold? businesses?) ? Who would manage it? What impact would that have on free markets during the build-up phase and the distribution
phase?
2.
Disregard the fruitless analyses that project the need for a wealth build-up based upon a myriad of time projections. Focus upon analyses that contrast the “status quo” level of benefits today
with the future enhanced level to understand the true nature of this issue.
3.
Budget plan one year at a time. Incorporate all retiree programs (Social
Security, Medicare, etc.) as an annual line-item in the budget that must be debated and funded each year. If the working people who make up the US “economic engine” are willing to support an enhancement
of greater than a 0.49% benefit increase required to keep a real Goods and Service level of consumption even, then they must
vote to increase taxes. If they do not vote for the wealth transfer via higher
taxes, then program benefit level must not be enhanced.
Conclusions:
The
much-publicized horrific Social Security and Medicare funding gaps are really a product of recent benefit enhancement
trends along with additional future structural program enhancements. The
gaps are primarily NOT due to the age driven Boomer population shift into retirement, as popular belief would have it. A root cause of the noted enhancements may very well be due to the powerful
Boomer voting block. Thus, in further analyses, this root cause will help to
explain one of the many origins of benefit enhancements.
Considering
the U.S. productivity improvement average of 2.0% annually(2) over the past 50 years, the 0.49%, which represents
approx. 1/4th of the 2.0% average historic improvement, is manageable. However,
the 0.49% is also very significant! A little bit of annual improvement goes a
long way in supporting Goods and Service requirements for the massive “Boomer” population soon shifting into retirement.
Converting
to an annual budgeting and spending plan process would align appropriately with the actual pay-as-you-go wealth transfer system
we operate within today.
Disclaimer:
1. This offer is void where prohibited by law.
2. This offer will not be honored in response to a technical legal challenge intended to circumvent
the spirit of the logic. It is offered within the context of advancing macro
economic education.
References:
(1) Financial Analysts Journal; March/April 2003; pg. 22; article by Robert Arnott and Anne Casscells
(2) Bureau of Labor Statistics; Average of Total Business Output per Hour 1954-2004
by Russell Randall; 8-15-2005
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Feedback, submissions, ideas... e-mail me at: russ.randall@gmail.com.
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