Archive for the ‘economics’ Tag

$3000 more income per year   Leave a comment

Regulation under the Last Six Presidents

That last figure represents reduced regulatory costs of $23 BILLION by eliminated hundreds of burdensome regulations.

This represents a fundamental change in the direction of the administrative state after decades of unchecked growth.

For contrast, the Obama administration imposed more than $245 billion in regulatory costs on American businesses and families during its first two years.

The benefits are lower consumer prices and more jobs.

But is it safe to reduce regulation like that?

The questions we should be asking are:

What is the problem this regulation is trying to fix?

The answer to that question should be

Unless otherwise required by law, we move forward with regulation only when we can identify a serious problem or market failure that would be best addressed by federal regulation. President Bill Clinton recognized that “the private sector and private markets are the best engine for economic growth.”

Let’s look at some new research from the Council of Economic Advisers, which estimates the added growth and the impact of that growth on household income.

  • Before 2017, the regulatory norm was the perennial addition of new regulations.
  • Between 2001 and 2016, the Federal government added an average of 53 economically-significant regulations each year.
  • During the Trump Administration, the average has been only 4.

Even if no old regulations were removed, freezing costly regulation would allow real incomes to grow more than they did in the past, when regulations were perennially added. The amount of extra income from a regulatory freeze depends on (1) the length of time that the freeze lasts and (2) the average annual cost of the new regulations that would have been added along the previous growth path.

…In other words, by the fifth year of a regulatory freeze, real incomes would be 0.8 percent (about $1,200 per household in the fifth year) above the previous growth path.

As shown by the red line, removing costly regulations allows for even more growth than freezing them. As explained above, the effect, relative to a regulatory freeze, of removing 20 costly Federal regulations has been to increase real incomes by 1.3 percent. In total, this is 2.1 percent more income—about $3,100 per household per year—relative to the previous growth path.

Even modest improvements in growth lead to meaningful income gains over time.

Posted July 5, 2019 by aurorawatcherak in economics

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Whatever Happened to the Telephone Operators?   Leave a comment

I am seriously tired of the 2020 election and it’s still 18 months away. It’s going to be hard to stay focused on principles when drowning in politics.

But some of these candidates are — well, worthy of a laugh or two. Take Andrew Yang, a former lawyer and entrepreneur, who is advocating for a Universal Basic Income to be implemented for all 18-64 year-olds. It’s pretty much his entire platform. His argument for this, per his website, is “a third of all working Americans will lose their job to automation in the next 12 years. Our current policies are not equipped to handle this crisis.”

There is a growing list of vocal people insisting technology advancements will result in massive unemployment, and so they advocate for the UBI as necessary to keep society afloat. The idea that technology destroys jobs and will cause massive unemployment prevails despite being a disproven myth.

Take a look at history before you argue.

If technology had been destroying jobs for the hundreds of years people have been arguing about automation and machines, there would be hardly any jobs left. Bulldozers took the place of men with shovels. Cars put railroad workers out of business. Elevator operators, typists, blacksmiths, and manual telephone operators jobs all vanished over the 20th century.

Official unemployment in September of 2018 was the lowest in nearly 50 years. The labor force participation rate has actually increased due to women entering the workforce. We have more jobs now than ever.

In other words, predictions of technology harming the workforce have constantly failed since the dawn of technology. Despite this, Yang says automation will create a crisis within the next 12 years and that a UBI will handle that crisis.

Sigh ….

Technology helps to make the economy stronger as machines and tools make humans more productive. The entire goal of economic progress is to make us more productive, more efficient, have more consumer goods available, more leisure time, and higher standards of living. This is achieved by higher productivity and efficiency. We are better off not needing twelve people with shovels to do the same thing as a bulldozer.

Yang worries about what the 3.5 million truck drivers in the US will do if their jobs are automated away in 12 years. THis is assuming that all companies can afford and will buy self-driving 18-wheelers in that time frame.

Well, what happened to all the video store workers who lost their jobs when streaming overwhelmed Blockbuster? What happened to the 1.5 million railroad workers who lost their jobs as people moved to their own cars? They didn’t all starve to death. They found new work and that’s already occurring in many industries. Job hopping has already increased as people learn new skills and get new jobs. They do it constantly. Society creates and destroys different kinds of jobs through technology. Markets adjust and people find new work. It’s been going on since the Industrial Revolution.

Job displacement does occur because of technological advancement and people must adjust. Some people may need help when finding new jobs and new careers and that’s a worthy discussion to have. However, technology should not be avoided and feared because it replaces currently existing jobs. It makes our lives better and leads to the liberation of labor for newer, better jobs.

The next generation of technological development and automation won’t result in a joblessness crisis. It will simply result in a change in occupations that might feel chaotic for a while, but will not be the end of the world.

Whatever happened to the weavers displaced by the Jacquard looms, for example? If you don’t know, you should study some history.

Posted March 26, 2019 by aurorawatcherak in economics

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Medical Insurance Is NOT Medical Care   1 comment

I know that flies right past the ears of many people, but take a pause and consider the implications of that statement.

Medical care is when you interact with medical providers and receive a diagnosis, surgery, therapy, a prescription and so on.

Medical insurance is how you pay for medical care.

Politicians use the terms interchangeably, but they are NOT the same thing. Whenever I hear someone use terms that mean different things as if they are the same thing, I become suspicious of their motives for conflating the two.

Of course, there are other types of insurance that we don’t do this with. Nobody confuses car insurance with vehicle maintenance, for example. I keep my own car clean and I pay out of pocket for repairs. If my car is damaged in an accident, my insurance covers the repairs, less the deductible, but I don’t call my insurance agent if I need an oil change or to replace my starter.

Homeowners insurance is similar. I don’t call my insurance company to finance painting the house. I call them when a tree falls on the roof.

Medical insurance ought to work the same way that car and home insurance do, but right now it doesn’t. Routine procedures, drug prescriptions for chronic disease, and a variety of other predictable and non-urgent procedures are all handled through insurance companies.

Now, take a pause and realize that one of the key differences between medical insurance and car or homeowners insurance is that medical insurance is a state-run and -regulated program with limited competition while care insurance has plenty of competition.

March is the month we renegotiate our car and home insurance and I received dozens of circulars in the mail offering me insurance plans that will meet my needs at a price I’m willing to pay. None of them offer to reimburse me for minor damage because they wouldn’t stay in business for long doing that.

Continuing this theme, repair shops, tire manufacturers, and other car-care providers all compete on price to get the largest possible share of the millions of car owners in the market for their products and services.

Meanwhile, the medical care market we currently know is provided by a mixture of public and private payers, and it funds a significant share of the vast majority of procedures. Providers don’t compete on price even for services that millions need on a regular basis.

When it comes to medical insurance, most people expect their coverage to give them more than they pay in. That makes no economic sense. If one person’s treatment costs $120,000 a year and they pay a monthly premium of $1,000, the company needs nine people to pay $1,000 a month, but those eight other people cannot consume any medical care services in order for the company to even break even.

The primary role of insurance should not be to pay bills. Insurance is customer peace of mind—a guarantee that a catastrophic event will not bankrupt us.

If medical insurance worked as it should, we would only use it for catastrophic medical needs. For more minor medical care services, we would be looking for the best-value care in the market because those costs would be coming out of our pockets. Yet the high levels of medical debt show that our current insurance system has strayed far from this model as the prices for minor procedures and treatments have gone through the roof.

Increased coverage sounds nice, but as our recent experiment in increased coverage shows, we’d still struggle with unaffordable copays and deductibles and staggering levels of medical debt. The first step toward obtaining an affordable medical insurance system that works for the maximum number of people is to let insurance be what it was meant to be: peace of mind against catastrophe.

Andrew Yang’s Math Doesn’t Add Up on Universal Basic Income | Jacob Dowell   Leave a comment

The UBI rests on the assumption that consumption spending grows the economy and drives production. Transferring money from savers to consumers, as Yang’s UBI hopes to do, does not grow the economy in the long run—it has the opposite effect.

Source: Andrew Yang’s Math Doesn’t Add Up on Universal Basic Income | Jacob Dowell

Andrew Yang, 2020 Democratic presidential candidate, has revived the debate on Universal Basic Income (UBI) with his proposed “Freedom Dividend.” His plan is to offer an alternative to the modern means-tested welfare state with one simple program to pay $1,000 per month, or $12,000 per year, to every American adult over the age of 18.

Yang has already received a thorough response from Gonzalo Schwarz. Though Schwarz’s response contributes important insights—such as the insignificance of technology replacing jobs, the self-worth that work brings, and the likelihood of a UBI supplementing rather than replacing welfare—I would like to contribute some further insights that more directly address the economic errors of Yang’s arguments.

First, let’s look at the funding. Yang says his 10 percent Value Added Tax (VAT) would raise $800 billion per year, save $600 billion per year from the costs of other welfare programs, save $200 billion per year from reducing the demand on health care services and incarceration, and eventually raise $600 billion extra per year from economic growth.

There is an even deeper flaw in the argument that the UBI would expand the economy.

Before the economic growth (which would not actually happen as I explain below), he has only $1.6 trillion of funds. Even after his expected economic growth, he will have only $2.2 trillion of funds per year, still far from the $2.8 trillionrequired excluding bureaucracy (234 million people 18+ at $12,000 per year). Yang never mentions debt as a means for payment, but his own math doesn’t add up.

Yang is also deceiving in his argument about the program’s impact on the economy. He cites a paper by the Roosevelt Institute that finds, at $12,000 per year, UBI would expand the economy by 12.56 percent over eight years. However, the 12.56 percent growth is under a scenario of a completely debt-financed program. The study admits that a completely tax-funded program would result in a 6.5 percent growth over eight years. Since Yang’s program is mostly tax-funded, it is highly deceiving to claim economic growth of 12.56 percent.

However, there is an even deeper flaw in the argument that the UBI would expand the economy. It rests on the assumption that consumption spending grows the economy and drives production.

The argument goes like this: By transferring money from those who save money to those who have a higher propensity to consume, there will be more spending on consumption goods such as food and clothing. This, in turn, will give an income to the shop owners who will spend their new profits on other consumption goods. And the circulating money creates more economic activity for the macroeconomy.

Transferring money from savers to consumers, as Yang’s UBI hopes to do, does not grow the economy in the long run—it has the opposite effect.

The “propensity to consume” as the cause of economic growth is a common Keynesian notion. But it’s dreadfully wrong. First, it is important to recognize that economic growth is not when everyone gets more money. Economic growth occurs when an economy produces more valuable goods. And what causes this? Capital goods.

Capital goods are the previously-produced goods that are used in the production process and that improve the productivity of workers and the general economy. The use of hammers and nails, for example, greatly improves a construction worker’s ability to build a house. Capital goods are created through savings and investment—the opposite of consumption. Without investment funded by savings, the production of capital goods will slow, causing economic growth to slow.

It may be argued that no one argues for 100 percent consumption spending and that since an individual business will be getting more money, they will be better able to afford more capital goods. But this argument still ignores how the capital goods were produced in the first place.

To create capital goods, someone in the past must have put aside resources to use for a line of production that would not create immediate value. To create a hammer, someone has to save and invest resources into mining iron ore, which then requires resources to smelt into steel. Someone must also have invested resources into tree-cutting for the wood to create the handle. Each of these projects, in turn, required resources for its production process.

In order to have economic growth, there must be a sacrifice of current consumption in order to fund the creation of capital goods.

All of these steps required the production of goods that did not serve any immediate consumption value. The steel and the wood are only a means of creating a hammer, which is itself a means of creating houses and other consumer goods.

The final consumption good, however, would not be possible without someone in the past saving resources to be used for a line of production that was not immediately serviceable but used for the production of capital goods.

In order to have economic growth—to expand production—there must be a sacrifice of current consumption in order to fund the creation of capital goods. Transferring money from savers to consumers, as Yang’s UBI hopes to do, does not grow the economy in the long run—it has the opposite effect.

A common argument against UBI is that it will incentivize people not to look for work. Yang answers this criticism, saying that $12,000 per year will still not be a good enough living for most people, so people will still be incentivized to get jobs and contribute to production.

However, there are still marginal effects at play that can add up to huge changes: 1) It decreases the incentive for workers to quickly find new employment once they’re out of a job, and 2) it decreases their sensitivity to income differences between jobs.

A UBI would skew choices towards enjoyable work rather than efficient or productive work.

The increased time between jobs means there will be lower employment at any given time and, therefore, less production. And the decreased sensitivity to higher incomes means people will be more likely to do less productive work for the sake of enjoyment. While it may be desirable for workers to balance their income needs and their work preferences, a UBI would skew choices towards enjoyable work rather than efficient or productive work. Yang even admits this: “UBI increases art production, nonprofit work and caring for loved ones.”

While these may be admirable activities, Yang is forgetting to consider the opportunity costs associated with them. While people will be more inclined to make art, write novels, and work less, the amount of needed goods in society will decline. This may be a worthwhile tradeoff to some, but when the main stated goal is to help those in poverty, producing less clothing and food is not going to achieve the desired ends.

Andrew Yang does bring up some admirable points about a UBI avoiding the welfare cliff and reducing bureaucracy. However, the overall greater expansion of the government, the even more massive resource transfer from savers to consumers, and the productivity-reducing effects on labor all toll to a huge loss for the economy in the long run.

Posted March 16, 2019 by aurorawatcherak in economics

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Creative Destruction   4 comments

Are humans better at creating or destroying?

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What an amazing topic!

As with so many things, I don’t see this in black and white terms. Without a doubt, human beings have a history of destructive behavior. Wars, environmental damage, genocides, infanticide – God must weep to see His creation being so absolutely stupid. He created us to be nurturing and we spit in His face and put ourselves on His throne and started smashing the china.

It would be easy to look around our planet and judge, as some people do, human beings as destructive beyond redemption.

And yet we are the most creative species. No other species creates art like we do. Amazing paintings, music that takes our souls to the heights of heaven and the depths of hell, books that speak words that break our hearts and put them back together again … there’s just so much that shows how incredibly creative we are. We were created by the ultimate Creator, and a part of being made in His image is that we hold an incredible capacity for creation.

Image result for image of creative destruction economics

And then there’s this little-recognized and largely not understood concept of Creative Destruction. It’s an economic term. It means that as new technologies and economic sectors are created, old ones are often destroyed, but in the process of the destruction, the people displaced by that transformation end up with improved lives.

This has application in so many areas, including as a writer. I am currently happily wrestling with my perennial work in progress, “What If Wasn’t.” I think I am on Complete Rewrite #3 and it’s starting to look like a series (no real surprise there, I guess). I’ve killed a lot of darlings in the process – but in the debris of each editing, I find gems worth keeping and making better. Destruction and creativity are symbiotic processes.

I think humans are naturally better at destruction than we are at creativity because, since the Fall, we’re bent and we struggle to access the nature God created us to have. At best, creativity is a vestigial talent left over from when we were whole and complete, in full contact with the Creator. Destruction became our legacy when we divorced from His guidance. But because we are both, we live through this endless cycle of destruction and creativity, using the debris of our destruction as building blocks for our creativity, even as our creativity powers us forward into a future that leaves behind the technologies of the past.

It’s fascinating to view the cycle. In economics, it’s wonderful to see how the process of creative destruction has lifted so many people out of poverty. In history, it is stunning to see civilizations that have risen from the debris of prior civilizations. And, yet, there remains that destructive bent that believes that we must strangle others in order to get ahead. Whether we do the strangling in the board room or the capitol, we so often refuse to see that there is a better way based on individual striving in a society that allows both competition (which makes us strong) and cooperation (which allows for support where we’re weak). I see a lot of my daughter’s generation who are beginning to understand this and adopt a live-and-let-life strategy to live, but there are so many voices today that couch destructive messages in touchy-feely rhetoric. It is hard sometimes to know whether we are improving or devolving, but that too may be a cycle of creative destruction.

And now we should head off to see what my fellow authors think on this subject.

Posted January 28, 2019 by aurorawatcherak in Blog Hop

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Unseen Benefits of Brexit   Leave a comment

Madeline Grant

https://fee.org/articles/the-unseen-economic-benefits-of-brexit/

In a now-famous essay, “What is Seen and What Is Not Seen,” the great economist Frederic Bastiat warned against judging the value of any activity in a vacuum.

Brexit.pngBastiat’s “broken window fallacy” brilliantly exposes a common tendency to focus on the visible, tangible benefits of an action—the “seen”—while neglecting the “unseen” penalties and long-term drawbacks associated with the same activity—the invisible cost of opportunities foregone.

Though he wrote the essay in 19th-century France, Bastiat’s insights have a timeless wisdom. We live with the consequences of reductive “broken window” thinking every day, especially where public money is concerned. Politicians often praise the visible benefits of public spending, e.g. the number of jobs “created,” without considering whether the funds could have been spent more wisely elsewhere or even how the taxpayer might have spent the cash had it remained in his or her pocket.

For my money, the fraught Brexit debate badly needs a dose of Bastiat.

So far, discussions of the gains and losses of Brexit have understandably tended to focus on the most obvious costs, like the amount Britain may pay in any “Divorce Bill,” the potential “Brexit hit” to companies exporting to the EU, and so on. Of course, these concerns are vitally important, but our focus on the immediate costs of EU departure risks blinding us to the very real costs of maintaining the status quo.

Membership in the European Union carries huge unseen penalties whose implications may not be immediately apparent. The EU’s Common External Tariff, for example, raises prices and so reduces the quantities of goods and services available to ordinary consumers. Since shoppers in the EU lack the counterfactual experience of trading at world prices, this penalty goes unnoticed, but it involves a misallocation of resources on a vast scale.

In adopting the government’s proposed model for close customs cooperation and a common rulebook, we run the risk of finding ourselves with little scope to diverge from EU regulations on goods and unable in practice to strike new trade deals with the rest of the world.

Negotiating the terms of our departure also comes with huge hidden dangers. In adopting the government’s proposed model for close customs cooperation and a common rulebook, we run the risk of finding ourselves with little scope to diverge from EU regulations on goods and unable in practice to strike new trade deals with the rest of the world. It is often pointed out that the UK’s interests in trade agreements are primarily in services, but this makes it even more vital to maintain flexibility over what we can concede in goods to incentivize potential trading partners to strike a deal. The status quo, or anything close to it, carries huge opportunity costs of its own.

Due to a combination of the precautionary principle enshrined in the Lisbon Treaty and the difficulties of getting 28 countries to agree on anything, the EU, intentionally or not, often stands in the way of innovation.

In particular, the precautionary principle, the preferred risk management strategy of EU regulators, places the onus on creators of new technologies to prove their invention is safe where some risk may exist—even if there’s no scientific consensus to suggest any actual harm will occur.

In particular, the precautionary principle, the preferred risk management strategy of EU regulators, places the onus on creators of new technologies to prove their invention is safe where some risk may exist—even if there’s no scientific consensus to suggest any actual harm will occur.

The result? It’s often too much bother to innovate.

During the 19th century, many viewed the emerging railways with a great deal of suspicion. As recorded by cultural anthropologist Genevieve Bell, critics of early locomotives believed “that women’s bodies were not designed to go at 50 miles an hour” and worried that their “uteruses would fly out of [their] bodies as they were accelerated to that speed.” Had Victorian Britain followed some version of the precautionary principle, it’s hard to imagine a single track of rail being laid given the levels of contemporary railway fear.

Of course, moral panic over new technology is nothing new. Now, as in the 1850s, over-cautiousness risks hampering important drivers of future growth.

Given the EU’s structure, history, and current trajectory, the balance of probability suggests AI will be the latest in a long line of missed technological opportunities.

So far, the European Union has taken only tentative steps towards regulating artificial intelligence and robotics, though they are currently consulting on the issue. Yet given the EU’s structure, history, and current trajectory, the balance of probability suggests AI will be the latest in a long line of missed technological opportunities.

Take genetically modified crops. Since their commercialization in many parts of the world during the 1990s, GM crops have raised the quantity and quality of the global food supply while lowering fuel and energy usage, requiring fewer pesticides and reducing both soil erosion and carbon emissions—all with no scientifically-documented evidence of harm to human health. And yet, EU-wide precautionary thinking has meant a de facto ban on GM crops, only one variety of which has ever been approved and grown in Europe.

While farmers outside the EU continue to develop newer, better technologies, hysteria over man-made pesticides has kept European farming methods behind the times. Ironically, foregoing the GM revolution in insect-resistant plant breeding has left European farmers more reliant on pesticides than ever (as has the ECJ’s foolhardy ruling on genome editing earlier this year).

Just last week, the French Finance Minister claimed that EU member states are “very close” to agreeing on a counterproductive tax on the turnover of tech companies, a policy likely to discourage new entrants and inflate costs for consumers.

Given all the above, are the EU’s hyper-cautious regulators likely to pursue a different path when it comes to AI and robotics? Or will it be “business as usual”—namely, when in doubt, tax and over-regulate? Certainly, initial signs, including misguided calls for a “robot tax” from the likes of Guy Verhovstadt, don’t inspire confidence.

If you have to get a human to explain the logic, why bother investing in an AI solution in the first place?

The EU’s new General Data Protection Regulation (GDPR), implemented earlier this year, will almost certainly hinder the development of artificial intelligence by raising costs and limiting access to data. In particular, Article 22 creates a new requirement for humans to review certain algorithmic decisions, a restriction that will significantly raise labor costs, thereby creating a strong disincentive from using AI. After all, the whole point of developing AI is to automate functions that would otherwise be slower, costlier, and more difficult to complete if performed by humans. If you have to get a human to explain the logic, why bother investing in an AI solution in the first place?

These may seem like small concerns in the grand scheme of things, but taken as a whole—and the EU creates a whole lot of regulation—it adds up to an environment often hostile to innovation.

It’s no coincidence that Europe has lagged behind the US for decades when it comes to new inventions, innovations, and entrepreneurship. There are of course important cultural differences between these continents, but much relates to the US government’s comparatively light-touch regulatory approach. Not for nothing are there no tech giants in Europe to rival Facebook, Google, Apple, or Amazon.

Creating a competitive, innovation-friendly atmosphere is a huge potential hidden “win” of Brexit—with correspondingly huge opportunity costs from failing to do so.

Creating a competitive, innovation-friendly atmosphere is a huge potential hidden “win” of Brexit—with correspondingly huge opportunity costs from failing to do so. Indeed, with more leading universities than the rest of Europe put together and an already thriving tech sector, Britain has much to lose compared to many of its neighbors.

One can only imagine what Frederic Bastiat would have made of things like robotics, AI, and machine learning. But I suspect the spirit of his advice would be the same: consider the unseen, and don’t destroy the jobs of the future in a misguided attempt to protect the jobs of today.

Posted November 2, 2018 by aurorawatcherak in economics, Uncategorized

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Sea of Red Ink   Leave a comment

The federal budget deficit has jumped 17% in 2018, to $779 billion. Scary, huh? Not quite as scary as it was in 2012, when it topped $1 trillion, but still, the federal government will borrow $870 billion this coming year.

Why? Well, it’s not being done under the guise of economic stimulus. This has been a year of “relatively strong economic growth, low unemployment and continued historically low interest rates”. So, why is the federal government is on track to borrow nearly $7,000 for every household in America?

Drowning Red InkThe future is looking grim. Even if the “Trump boom” continues, current tax and spending patterns indicate that deficits will continue to increase, approaching $1 trillion in two years and steadily rising afterward, on and on into the future. On the current path, the outstanding public debt will rise by one third to $20 trillion just five years from now. That works out at nearly $250,000 for a family of four, more than twice the median household wealth.

Scared yet? The Trump administration is using interest rates of 3.5% for its projections. If they rose to 5%, the interest costs alone on the projected debt would total $1 trillion annually. As the Washington Post economists note, “More than half of all personal income taxes would be needed to pay bondholders.”

No, the tax cuts are not responsible for the red ink. The Budget and Economic Outlook for 2018 to 2028 released by the Congressional Budget Office in April reveals that, as a share of GDP, tax revenues are currently 17.3% of GDP and the CBO forecasts this to rise to 18.5% in 2028. The argument that the cut in federal corporate tax rates is a cause of the increased deficits and debt is absurd. According to the CBO, there is no difference between tax revenues as a percentage of GDP in 2017 compared to their forecasts for 2028 (both will be 1.5%).

The real answer is out-of-control spending. The CBO forecasts that spending will rise from 20.8 percent of GDP now to 23.6 percent in 2028. But it is not increased “discretionary” spending such as defense or education that are driving spending upward. In fact, from 2018 to 2028, the CBO forecasts that discretionary spending will fall from 6.4 percent of GDP to 5.4 percent. Defense spending, for example, is projected to fall from 3.1 percent of GDP in 2018 to 2.6 percent in 2028.

The CBO is unequivocal that this increase in spending is being driven by out-of-control entitlement outlays. Between 2018 and 2028, spending on Social Security, Medicaid, and Medicare is projected to rise from 12.7 percent of GDP to 15.2 percent. Social Security spending is expected to increase from 4.9 percent of GDP to 6.0 percent, Medicare from 3.5 percent of GDP to 5.1 percent, and Medicaid from 1.9 percent of GDP to 2.2 percent. This is what is driving America’s catastrophic indebtedness. In another words, Granny’s eating our lunch and she’ll be kicking our asses come 2028.

America’s politicians know this and they have acknowledged the vast problems this borrowing spry is creating, but they aren’t attempting to mitigate it. Why not?

Economist Pierre Yared seeks to address this question in a new paper titled “Rising Government Debt and What to Do About It”, in which he dismisses the idea that these elevated levels of government debt represent an “optimal” policy response to either foreseen or unforeseen fiscal shocks.

You’d think governments would reduce their debt in preparation for the increased expenditures an older population will require. But that’s exactly what isn’t happening. Governments across the developed world have increased their debts. The wars in the Middle East and the 2008 crash added unforeseen pressures, but increases in government indebtedness long predate 2008 and are present in countries that did not intervene in the Middle East.

Yared suggests political polarization produces something like a ‘tragedy of the commons’ where “political parties acting independently engage in excessive targeted government spending since they do not internalize the shared financing costs of government debt.” Yared asserts aging populations care less about the future, citing evidence that younger households place a larger value on fiscal responsibility than older households. As a result, “countries with a large number of constituencies or deep disagreements in spending priorities across constituencies will incur larger government deficits, resulting in faster government debt accumulation.” Finally, electoral uncertainty “causes the current government to be impatient, since the party holding power recognizes that it may not have the opportunity to benefit from spending in the future.” Yared presents evidence that this political uncertainty has increased in recent decades as government indebtedness has risen.

Image result for image of drowning in red inkIf Yared is right, America’s fiscal outlook isn’t encouraging. None of these factors are going away anytime soon. America’s population is projected to continue aging for the next couple of decades. By 2035, according to the Census Bureau, there will be 78 million people 65 years and older compared to 77 million under the age of 18.

And who doesn’t love a sugar daddy to keep picking up the tab for our favorite goodies? Yes, American seniors have come to rely on Social Security and Medicare, but let’s be honest here — the money to fund them doesn’t magically appear simply because politicians promise the funding.

And does anyone think political polarization in the US is going to decrease much anytime soon? I certainly don’t.

The promises government makes cannot be supported by any reasonable expectation of tax revenue. Printing the money to cover these liabilities will result in inflation, which would decimate private retirement accounts as well as family budgets. At some point, the irresistible force of insufficient government revenues is going to meet the immovable object of entitlement commitments.

And, so, we face year after year of yawning deficits and increasing floors of red inks. Are you scared yet?

So, now the question becomes — what happens to  all the people who rely on that red ink?

Posted November 1, 2018 by aurorawatcherak in economics, Uncategorized

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ouryoungaddicts.wordpress.com/

Too many young people are becoming addicted to drugs/alcohol. OYA is a community of parents and professionals sharing experiences, resources and hopes on the spectrum of addiction, treatment and recovery.

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