Social Security and Medicare Funding Issues: Even Worse when One Considers Resource Constraints
Posted by Gail the Actuary on April 15, 2010 - 10:35am
Today is "Tax Day" in the US--the day that income taxes are due for 2009. Another on-line group asked for submission of tax related articles for Tax Day. The audience there is not particularly peak oil aware, so I put together this post.
When we think about the taxes and the federal deficit, we don't usually think of Social Security and Medicare, because in government lingo, the payments we make for these programs aren't taxes, they are contributions, and the funding deficit for these programs is not taken into account in determining the federal deficit.
If we think about the situation, though, the difference is really academic. The payments we (and our employers) make to Social Security and Medicare are very close to taxes, and the fact that the programs are underfunded is not taken into account in determining the federal deficit doesn't make the problem any less real. If the programs are to be maintained at current levels, young people will have to pay much higher contributions--doesn't this sound a lot like debt?
I think, though, that the funding situation for these programs is likely to be even worse than the actuarial forecasts project. The actuarial forecasts assume that the economy can continue to grow as it has in the past, and that wages will continue to rise. The forecasts also assume that population will continue to grow. With these assumptions, the plans tend to stay fairly close to in balance, with contributions, as percentages of wages, remaining unchanged.
The problem is that we live in a finite world, and our resource use cannot continue to grow forever. In fact, we likely will need to reduce the use of some resources because we are reaching limits, such as depleted fresh-water aquifers and less available oil supply (higher prices compared to pre-2004 norms). We may also decide to limit fossil fuel use because of climate change concerns. If we are reaching limits such as these, there is a substantial chance that incomes will no longer grow as they have in the past, making the funding of future promised benefits even more problematic than actuarial forecasts would suggest.
Typical View of Funding
Many people believe that somehow the contributions they and their employers make to Social Security and Medicare are set aside for them, earn interest, and when the time comes, will be there for them.
This is quite far from the truth (although this impression is fostered by calling the programs insurance programs). When Social Security was first begun, it was simply a pay-as-you-go system.
One can see from Figure 2 that up until about 1986, differences between contributions and expenditures were very small. It was as if the cost of benefit payments in a given year was divided among the current working population. After about 1986, there is a greater difference between contributions and expenditures, but the amounts are still fairly close because the funding assumptions assume a fair amount of real growth in wages will occur in the future, limiting the need for advance funding.
If one looks at the spreadsheet of Medicare contributions, one finds that expenditures match up fairly closely with the sum of "Contributions" plus "General Revenue," implying little advance funding. Detail data indicates while the "Hospital Insurance" portion of the program is funded by contributions, the other portions (Supplementary Medical Insurance and Drug coverage) rely to a significant extent on general revenue.
What Happens to Excess Funding
The amount of excess funding for Medicare is pretty minimal, but for Social Security, at least up until to 2009, there were several years when substantial extra funds (the difference between Contributions and Expenditures) were being collected.
What happens to these excess funds? There are different accounts with different names, but when one looks beyond the rhetoric, what, in fact, happens is the government takes the contributions that exceed needs on a pay-as-you go basis and spends them on whatever else it might need tax revenue for--salaries, roads, the war in Iraq or Afghanistan, or whatever. In its place, it leaves IOUs in the form of special issue bonds and certificates of indebtedness. As of the end of 2009, the amount of these bonds amounted to $2.5 trillion dollars, and the average interest rate was 4.688%. These bonds are held in trust funds. For more information, see Social Security and Medicare Trust Funds: An Expanded Exposition.
Because of the availability of these funds, the US government has less need for borrowing from "outside"--for example China or Japan. For example, at the end of 2009 Wikipedia shows the US having gross debt of $12.3 trillion dollars, and "Debt held by the public of $7.8 trillion dollars. By subtraction, $4.5 trillion dollars of debt is held by government agencies. Social Security Trust Fund debt is $2.5 trillion out of this $4.5 trillion dollars. The other $2 trillion dollars relate to other government programs where the expenditures were lower than cash flow (perhaps because of premiums collected in advance). The advance funding in these programs were treated similarly to Social Security and Medicare--that is, the excess funding was spent, and US government debt substituted for it, allowing the US government to borrow less from outsiders.
From the point of view of those putting together the financial statements for Social Security and Medicare, the US government bonds are assets paying interest, and thus reduce the need for Social Security contributions. But let's think about this. Where is the money going to come from, both to repay the government debt, and to pay interest? It can only come from higher taxes. So while Social Security contributions may be a bit lower, essentially the same individuals will likely have to pay higher income taxes (or other taxes) in the future to repay this debt plus interest, so the benefit of this whole arrangement is much less than it might otherwise would be.
The actuarial reports for Social Security and Medicare talk about when the trust funds for these organizations (containing US government debt) will have exhausted their balances, because outflow will exceed income for enough years that all of the US government debt will need to be redeemed. While this is one date of interest if you are running the trust funds, it seems to me that at least an equally important issue is when it is no longer possible to use Social Security and Medicare as an easy place to get funding for government programs (war in Iraq, or whatever), without having to sell bonds to outsiders. Once expenditures start exceeding contributions on an annual basis, the US government loses a place to conveniently fund its debt, and is forced to borrow more from other sources. Based on Figure 2, we seem to be reaching the point now where expenditures exceed contributions for Social Security. If trends continue, and expenditures start to materially exceed outflow, it may be necessary to further ramp up external governmental debt because of the loss of internal debt financing provided by Social Security.
The Role of Limited Resources
If a person stops to think about it, paying for Social Security and Medicare benefits on a pay-as-you-go basis isn't quite as dumb as it sounds. In some real sense, all beneficiaries can receive in a given year is goods and services that the economy can produce in that year. These goods and services are a subset of the total of the total goods and services produced by the economy, since the workers who produce the goods and services will also have to have shares as well.
Each worker or benefits recipient receives a tiny sliver of the total "pie" of goods and services available. While there is some variability in the size of this "pie" because a service giver or manufacturer can choose to produce more output, this output is limited by necessary inputs. For example, if gasoline or diesel is in short supply, fewer goods may be manufactured, and food may be in shorter supply, because diesel is used in cultivation, transportation, and refrigeration. If fresh water pumped from the Ogallala Aquifer is in short supply, less corn may be grown in the Plains States, leading to less ethanol and less food for animals.
Where We are Now with Respect to Resource Limits
Unfortunately, we are already getting to the point where resource limits are affecting economies. Figure 5 shows that world oil production hit a plateau, starting about 2004. Figure 5 shows data only through 2008, but production for 2009 still is on the same flat plateau. Since world population is growing, this means on average, less and less oil products are being produced for each person. The limiting effect of reduced oil supply ripples through world financial markets, either as higher prices or (something which is less recognized) reduced credit availability.
Oil is used for a lot of things--food production, manufacturing new cars, and in building new homes. The constricted supply of oil has no doubt played a role in the recent economic contraction--for example, with higher oil prices after 2004, homes in distant suburbs no longer were as desirable, leading to loss of demand and lower prices for these homes.
To offset the failure of oil production to expand, Figure 5 shows that there has been a huge ramp up of coal production, and a smaller ramp up of natural gas production. But coal and gas are not very good substitutes for oil--they can be used to produce electricity, but electricity doesn't fuel our long haul trucks, or supply asphalt to pave our highways, or fill many other roles now handled by oil products.
The ramp-up of coal has been mostly in lesser-developed countries, but the US and other developed countries received the benefit of this ramp up, through cheap goods imported from abroad. Long term, the ramp up of coal is not a very good strategy from a climate change point of view--coal is the worst fossil fuel from a point of view of CO2 emissions, and carbon capture and storage is a long way away from a feasibility point of view.
Going forward, there are differing views on whether world oil production can again be ramped up, or if it will soon begin to decline. We know that in individual locations, oil production seems to reach a maximum level, and then start declining.
As an example, oil production for the US 48 states (excluding Alaska and Hawaii) reached a maximum in 1970. Drilling was then started in Alaska, and production reached a peak there a few years later. The same pattern has occurred in many areas around the world where liquid oil is produced - the North Sea, Mexico, and in something over half of the oil producing countries in the world, lead most observers to believe that eventually liquid oil production for the world will begin to decline. At this point, world oil production is approximately flat, as shown in Figure 5.
There are various solid forms of oil, which theoretically have longer, flatter production patterns, which might possibly be ramped up to offset declining liquid oil production. For example, a huge amount of oil is theoretically available from the oil sands in Canada, but extraction is very slow and expensive. . Oil can also be produced by heating kerogen (found in oil shale) for long periods, but this procedure is also expensive and slow to ramp up. It remains to be seen whether sources such as these will have provide more than a very minor impact.
There are many estimates as to when world oil production will decline. This recent US military report says (page 29):
By 2012, surplus oil production capacity could entirely disappear, and as early as 2015, the shortfall in output could reach nearly 10 MBD [million barrels per day].
The National Petroleum Council put out a report called Facing Hard Truths about Energy Supply, in response to a request by Samuel Bodman, who was at that time Secretary of Energy. The report talks about the need to ramp up energy resources of all types, in response to growing demand and uncertain future supply.
An estimate by Tony Eriksen ("ace") of The Oil Drum shows world oil production beginning to decline in 2011.
Even without a significant decline in world oil production, Figure 8 shows that the US has seen its oil consumption decline in the last couple of years, as China and the oil exporting countries take more of the available oil. While some would argue that this decline is the result of the recession, a good case can be made that the causality is as more the other way around--high oil prices, starting as early as 2004, had an adverse impact on the US economy. James Hamilton is one economist who has shown a connection between high oil prices and the current recession. The adverse impact of oil on the economy is also frequently mentioned by Energy Secretary Steven Chu. Figure 8 shows that renewables have played a very minor role, and do not come close to offsetting the decline in available oil supply.
If oil is in short supply going forward, there is a significant chance that what we have seen as the recent recession will continue or will reappear, after a short intermission. In fact, the recession may well get worse. A cutback on other energy sources, such as coal, would likely cause further recessionary impacts, as would a widespread shortage of fresh water.
What is this Likely to Mean for Social Security and Medicare Funding?
Social Security and Medicare funding are done through contributions that are computed as percentages of wages. If wages do not rise, because of recession, neither will contributions to these programs, and this lack of contributions is likely to be a problem. If a person looks at Figure 2 (shown above), one can see that there has been a very distinct flattening of Social Security funding in the last three years, as wages have plateaued.
At the same time, expenditures have tended to continue to increase. A big part of this arises from the fact that many people are now reaching retirement age, because the oldest baby boomers are now 64 years old. With layoffs more frequent, and jobs less available, some may choose to take benefits early, rather than look for another job. Figure 2 seems to show a larger uptick in expenditures recently, as if more are taking retirement benefits when other options are not available.
If, in fact, we are now hitting resource limits, the patterns of the past couple years may repeat themselves. In Figure 9, I show a very rough idea of what kind of impact this might be expected to have on the Social Security program. Trends toward high expenditures and flat contributions would continue. Eventually, high unemployment rates and lower wages would have an impact on benefits received, but before this happens, contributions (based on wages) would likely fall far below expenditures.
I have not tried to make any forecasts for the Medicare program, but note that even with the current actuarial estimates, expenditures are shown as rising much more rapidly than Social Security expenditures. Medicare expenditures are now about 75% of Social Security expenditures, but by the late 2020s, Medicare expenditures are expected to exceed Social Security expenditures. If contributions are based on flat, or possibly even falling salaries, this would cause a real funding problem. (Of course, plan administrators would have the option of raising contributions or reducing benefits to fix this problem.)
Solutions
There are no easy solutions. Population growth has always been encouraged, because such growth makes it easier to fund benefits for a rising population of seniors. It also gives spreads the US debt over a broader base.
But if resources are limited, the last thing we need is a growing population. We would be better off with a smaller population, so that earth's limited resources can be shared among a smaller number of people, providing more for each person. If families start having only one child each, this would be helpful from a resources point of view, but it would make it even more difficult to pay off out all of the outstanding debt, in addition to paying for Social Security and Medicare benefits for all the seniors.
I think we need to assume that eventually Social Security and Medicare benefits will need to be cut back--otherwise the retirees' share of the resource pie will just become too large. This will especially be an issue, if resources in total are declining, so everyone is poorer. Social Security and Medicare will not be an easy issue to fix, because all of us are affected, and no one will welcome the changes. Politicians are likely to continue to find the issue very difficult to deal with.
Social Security and Medicare Funding Issues: Even Worse when One Considers Resource Constraints
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Social Security and Medicare Funding Issues: Even Worse when One Considers Resource Constraints
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The problem is all bonds public and private. The obsession of focusing on public debt which is dwarfed by private debt is an ideological hobby horse. I would submit that the balance between public and private is the issue and in the case of the U.S. would be better if it were balanced more toward public than private than it is now.
The statistical metric that seems to drive all policy is labor productivity.
I was able to model the distribution from a huge Japanese database on labor productivity and the results are startling. I have begun to see the statistical mechanics of capitalism more clearly than ever before. The overriding trend in the data is a square power-law that either derives from (1) competition or (2) a growing debt.or debt leveraged as cheap energy. It might be possible to separate these two if we can look at how the statistics change with time. Competition might turn into a more nearly zero-sum game while debt can continue to grow if it is backed by cheap energy. Whatever the significance of the model is, I've gotten a deeper appreciation of how the analytical tools of econophysics allow us to make sense of the broader macroeconomics picture.
http://mobjectivist.blogspot.com/2010/04/business-as-entropic-warfare.html
From the end of your post on the mobjectivist blog--
I honestly can't follow all the math, but the general trend is clear enough: in a resource constrained world the strong get stronger and the weak pass away or scuttle around in the shadows. "Resources" can be real things, like oil and water and coal and sunshine, or they can be debt proxies -- promises to pay for future delivery of resources. However, a debt-based economy requires at least the illusion that the debt will be retired, and requires a powerful enough enforcement mechanism to ensure collection.
Based on what I read on TOD, I believe that we have reached "peak oil", and probably peak many other resources. The illusion of retiring debt with future resource production is evaporating, and the ability of the government and banks and other enforcement agencies to collect appears to be waning -- attempting collection of all debt would really send the economy into a tailspin --so in effect, we have truly reached "peak debt" as well.
The Internet has made some forms of information-gathering easier, and accordingly, the number of "rubes" may also be declining -- how many Norwegian city councils are likely to buy Goldman-Sachs CDO's for their pension funds in the future? -- and so we may have reached "peak rubes" as well.
How does this fit with your zero sum model? Pretty well, I would guess. The strong will grow like the mighty Douglas Fir, and the rest of us had better become shade tolerant.
That is a pretty good summary of what I was getting at.
The math is only difficult because you need "entropy eyeglasses" to follow it. The variables are not single-point values but encompass a range in values that follow from the Maximum Entropy Principle.
The same entropy applies in resource depletion, just as in we have a range of productivity rates, we also have a range in discovery rates.
The ultimate for oil depletion is a URR and that for productivity is some sort of debt ceiling.
We know that a finite URR exists for resource depletion, and one might exist for the debt ceiling.
What happens if the debt ceiling is somehow tied to a URR? We hit that and ... kablooey.
If not that, we enter into a brief Ponzi scheme that can only end badly.
In that context, the only hope is to be rescued by alternative energy forms that allow the debt-based economy to continue.
The other interesting thing about entropic distributions is that they show the "haves" and "have nots" of society. A higher effective productivity URR keeps pushing the number toward more "haves".
I have to admit that the concept is not completely intuitive, but that is why the analysis has remained buried for so long. People don't intuitively think in these terms.
It might eventually come down to a case of "monkey" see "monkey" don't do...
http://www2.gsu.edu/~wwwcbs/pdf/Senseoffairness.pdf
Who knows we might yet get to see ex bankers chained to plows tilling the fields while the rest of us monkeys hurl feces at them...
I suppose that that these strategies exist on an individual level and amongst closely interacting groups. Yet, senses of fairness probably do not extend outside some "compassion range". At the largest scale, the aggregation of individuals continues to disperse with a range of rates so that they effectively fill out all available niches, and any sense of equitability gets lost. Perhaps governments can change this through "equitability" regulations but that is not the natural progression unless energy is added to the mix. To stem the tide of entropy we need to add order in the form of law, and people of course have their own personal opinions on that approach. That is in essence the idea behind Social Security and why it raises arguments on both sides. We are essentially trying to reduce disparity via laws.
This brings up an intersting point. Species diversity is more entropic (inverse power law) than human productivity (inverse square power law). This implies that our own set of rules on how we perform capitalism does in fact add enough order to at least reduce the entropic dispersion. This order is in the form of energy and rules on how to work capitalism. Are we compassionate enough to reduce this further ... while dealing with resource depletion at the same time. What an incredible double challenge.
"fair" isn't the same thing as "equal" or even "compassionate".
I would guess that in many societies a large number of people regard unequal distribution of resources and income as "fair" for any number of reasons.
The usual ones are 1) God wants it that way (some animals are more equal than others because they were born that way) -- most settled aristocratic societies
2) The "pre-rich" phenomenon -- I can be rich if I work hard enough, and maybe with a little luck (the U.S.A mentality)
1) works as long as "God" (or his priesthood) is strong enough to keep the peons down.
2) works as long as there is the illusion of limitless resources which are available to everyone.
Both seem to be failing. We need a new standard of "fairness"
Fairness to reward effort vs fairness to even out misfortune.
Your are right, perhaps the latter is more like compassion.
So we have the fair tax. Who decides what is fair in that case?
That's why we need a new standard of "fairness." A whole new way of thinking about it.
Actually, it's already been done -- but largely in metaphysical and theological frames. As long as we insist on technical fixes, we will fail. The Faust legend comes to mind, or for that matter, Adam and Eve in the Garden of Eden. Our ancestors thought knowledge would bring damnation. We threw that all over in the Enlightenment, but I'm not so sure "we" aren't on the short side of a Faustian bargain.
The USA has PLENTY of money for Medicare/ Social Security, public transit, windmills,
solar energy and pretty much all we need to move into the 21st Century Green Economy
if we quit wasting over $1 Trillion every year, about 53% of federal income taxes,
on Wars. See http://www.commondreams.org/view/2010/04/13-4 for details.
The total bill including interest on War Dept comes to $1.6 Trillion.
War spending is not just in the War Department but hidden away in various places like
the Dept of Energy nuclear weapons spending, CIA black box spending, National Security Agency, as well of course as the continuing hundreds of billions for the Iraq/ Afghan wars.
Social Security taxes have been overpaid for decades and placed into the "Social Security Trust Fund" owning US Treasury Bonds to pay for future retirees.
That is in trouble because since LBJ raided the Social Security Trust Fund and included it as part of the General Budget to pay for the Vietnam War.
For the trillions the US has wasted on War since the Arab Oil Embargo we could have
built a totally Green Infrastructure.
Even as Obama negotiates a laudatory agreement to reduce nuclear weapons, Hillary Clinton is insisting on wasting $5 Billion a year to "test" existing weapons and for the nuclear arms labs.
I agree that would have been possible up to peak oil. Declining oil production changes the whole game.
And of course the whole system was eventually going to break down anyway because the economy can't grow forever on a finite planet. It was always only going to grow until a limiting resource stopped it. It just happens to be oil. A little bit longer and it might have been fresh water or any number of other resources.
The world economic system is designed to fail.
it won't fail my congress critter told me they could make hot air(CO2) our next money system, instead of all those worthless paper bills I was laying down as mulch.
See endless growth.
Smiles
charles.
And of course the whole system was eventually going to break down anyway because the economy can't grow forever on a finite planet.
That assumes economic growth requires more commodities. The US now uses less oil than it did in 1979, while GDP is more than twice as large, and domestic manufacturing is 50% greater than it was then (I know, hard to believe...but true). Similarly, the US appliance and vehicle sales per capita leveled off decades ago.
I am pretty sure US oil usage surpassed the 1979 peak in the mid 90s... if it has dipped below that peak (I don't think so, but couldn't quickly find the answer) it is only because of recession.
That said, I tend to agree that oil isn't absolutely required for growth, though I do think any decoupling is going to require a period of economic pain, which I think is what we are seeing now. Oil is required for our current infrastructure. But I could easily imagine an all-electric economy based around bike-able cities with public transport hubs to mitigate historic sprawl and syn-fuel powered construction/maintenance.
In fact, there are very few problems I can't see being impossible to overcome if one had plentiful electrical power. (Assuming you don't consider giving up unlimited motorized personal transport a problem.)
Yes, economic growth requires more commodities. This is a rock-solid correlation.
Add another human to the planet and that human will consume more than just services. As that person attempts to raise their standard of living, they will use more commodities. Even if they were to magically use only more services (never buy a new car, or bike or anything) their use of services will requires that the entity providing the services buys commodities.
The ratios might shift a bit here and there, one country may take over first place from another, etc. but that's all just noise. Living requires consuming and there is no way around that.
economic growth requires more commodities. This is a rock-solid correlation.
Andre, here are some examples showing that's not the case:
1)The US now uses less oil than it did in 1979, while GDP is more than twice as large, and domestic manufacturing is 50% greater than it was then.
2)US vehicle, appliance and vehicle sales per capita leveled off decades ago. Home sales did too, except for the recent bubble (which wasn't driven by actual demand, but by a speculative bubble).
There are many more examples.
Add another human to the planet and that human will consume more than just services.
Sure. OTOH, the Demographic Transition is a really good example of what I'm talking about here: population growth doesn't go on forever.
Living requires consuming and there is no way around that.
Well, sure, but that's not what we're talking about here: we're talking about whether growth in consumption of commodities is needed.
Can you explain the obsession with debt? Debt exists in virtually all societies.
Your paper doesn't provide much intuition and what is the relevance of entropic dispersion?
On TOD the idea is that debt acts like the apple leading the horse. Future payoffs expected from variable risks. Same genral idea as a Ponzi scheme. What makes this work is that low-cost energy will lead to innovation, thus mitigating the risk.
Dispersion is simply a wide spread in some measured value. As the metric increases in size, the relative variance does not change so it looks like the statistics get more and more spread out. Entropic dispersion is a specifi dispersion which follows maximum entropy arguments, which allows one to reason from a minimum of known iformation. So we only know things like the mean, and finite constraints.
Trust me that there is little room for intuition in the posting. The majority of people have not understood this concept for years, and it will take a while before it gets accepted. I did place in a snippet of code describing how you would simulate the effect. I thougt that might give some people a hands on feel for what is happening.
Most people are used to solving a problem where one behavior occurs and it roles out as expected, the so-called deterministic solution. Next, imagine that all possible solutions with various initial conditions were solved for simultaneously, a multi-tasking solution basically. That is what you need to solve these kinds of problems.
Of course people can't get their head around this with respect to oil depletion either. The same issue occurs; oil exploration is a multitasking solution of many individual workers exploring all areas of the world at different rates. The math ain't intuitive but fortunately the results are simple.
What makes this work is that low-cost energy will lead to innovation, thus mitigating the risk.
Why low-cost? Why not medium-cost? German and Japanese manufacturing seems to do quite well with electricity that is twice as expensive as in the US (and, of course, manufacturing uses electricity more than oil).
Splitting hairs. I deal with actual numbers, and you can split up a range into low and high. By my specifying low, you can see the half I am suggesting.
Splitting hairs
No, I'm trying to get at something important.
It's often said that 20th century economic growth depended on cheap energy. Well, there's no question that energy is going to get a little more expensive, but is that a problem?
Wholesale power generation used to cost well below the current $.05/KWH. Combined with transmission, distribution & other overhead, it costs now around $.10. It's very likely that the cost of wholesale generation rise by, say, 50%, and T&D will rise by 10-20%, so the grid will be a bit more expensive.
But, German and Japanese manufacturers would laugh at the idea that these costs, lower than they face now, would cause serious harm to an economy.
One reason is because energy productivity is not measured properly.
Energy productivity is assumed the way all inputs are assumed as interchangeable with other forms of capital, such as credit. Your final remark in your article suggests a divergence between the various forms of capital that does not exist in current economics. Free substitution is one of the ways in which current established economics is able to square the circle on depletion as energy inputs are conveniently switched from the denominator to the numerator.
Labor productivity is improperly analysed because energy productivity components of labor productivity aren't separated from the human components.
Highly automated Japanese businesses embed a large energy component into labor productivity. As energy productivity declines (an arithmatic inverse relationship to energy cost -- NO, due to marginal utility decisions made within productivity process as part of that process) there is distortion on human component of labor productivity.
There are too many institutional biases in economics - ass covering is part and parcel of the job along with prejudices that are set in stone. (Watch this video.) One prejudice is that marginal utility is the exclusive province of the buyer whose set of preferences sets the final, top line price irrespective of cost. Rather, there is tension between the different participants' marginal utility effects - participants' proxies' aggregate MU which determines price and thence returns.
.
How that works is top line profit and growth are functions of marketing. The inverse relationship in productivity is between the marginal utility decsion on the part of the purchaser as determined by the marginal utility factors put into play by the producers' marketing campaign. Production productivity becomes largely irrelevant as low productivity output can be hugely profitable due to smart advertising decisions that amplify the advertiser's MU, while another highly efficient producer fails because of marketing shortcomings that leave him vulnerable to credit constraints or other factors outside his control.
The counterweight is purchaser productivity; the unit purchases per customer or purchases per currency/credit unit. This is the heart of Keynes' "lack of aggregate demand" and why not-so-dense economists like James Galbraith and Michael Hudson are beating themselves to bloody pulps in frustration with the 'Reaganomics/Gingrich Self- Defeating' economic model which exports customers to low- wage China where energy, etc. productivity is irrelevant.
Needless to say, US purchaser NET productivity is declining. Why do I say that?
Right now marginal utility is warped into something unrecognizable as marketing goes viral and the product is anti- business anarchy. Whatever MU has become, it's smashing the sh)t out of expectations of 'rational marketplace participants' (From Yves Smith):
Where debt repudiation on a grand scale is financing top line growth in China is does not suggest (a) any sort of utility return regardless of any sort of productivity ... or (b) rational behavior.
None of the foregoing is a critique of your obsrvations as these exist within the envelope of (distorted) marginal utility, ignored fundamentals, institutional bias and moral hazard running amok.
Man, oh man, if we can put our heads together we just might have all this figured out in no time.
That's why I comment here. We get people like Steve to contribute and we gain incredible insight.
I don't know if you intended this but where the information goes, numerator or denominator, changes the power-law behavior significantly. As it stands, productivity goes in the denominator and we get the fat-tail in labor productivity.
And from what I know of Steve, this is just his hobby!
Same thing here, its all a hobby, but a rather serious one at that.
Steve,
Thanks for your insights. Your video link doesn't seem to work. Could you give it again?
Let's see if this link works.
It worked. Thanks!
Your final remark in your article suggests a divergence between the various forms of capital that does not exist in current economics. Free substitution is one of the ways in which current established economics is able to square the circle on depletion as energy inputs are conveniently switched from the denominator to the numerator.
Could you expand on that? It's not quite making sense to me.
I think I get it. Behavior that looks like compound growth can come from any number of factors, such as energy, debt, or innovation.
Steve is saying that substituting energy between its various forms is not at odds with this notion.
Behavior that looks like compound growth can come from any number of factors, such as energy, debt, or innovation.
hmm. That doesn't sound right. For instance, some people seem to be saying that the recent US bubble was created with debt. On the contrary, it was a construction bubble - the GDP growth largely came from solid, real construction. The Finance, Insurance and Real Estate sector was only a small part of GDP growth over that period.
What is house flipping but a form of compound growth?
This isn't very hard to reason about.
Capital gains income from house flipping wasn't the big contributor to GDP, it was the actual construction.
There was quite a lot of unrealized capital gains, but that was a paper gain that was never turned into real income.
You know what? The analysis I did was on disparities. In part, disparities come about because someone extracts the wealth from someone else. They leverage their own wealth as a compounding effect at the expense of someone else. This is no paper effect.
The actual construction also has a compounding effect. The higher productivity firms leverage their wealth into more automation and efficiencies.
Nice try, Nick. I know you have a habit of hanging around the comment area long after most people have stopped reading, so I admire your tenacity.
The analysis I did was on disparities.
Well, I'm not talking about your analysis of the distribution of Japanese labor productivity - your findings seem perfectly reasonable to me. Instead, our conversation started when I asked a question about Steve's analysis.
Steve seemed to be suggesting something about labor vs energy that I couldn't make sense of (perhaps that energy and debt were not fungible, but that they were treated that way by traditional economic statistics). I think you answered that GDP growth could come from, in part, expansion of debt, and I replied that I thought that the recent US bubble was mostly composed of tangible economic activity (construction), not services like the FIRE sector.
Fair enough. What is quasi-stable and what is bubble-like behavior is still up in the air in my mind.
It all depends on what you mean by "growth". One can have sustainable growth that feeds on itself. One can have growth that is not producing the foundations for further growth. The growth caused by the construction boom did not lay foundations for further growth. But the construction boom really did result in much more physical activity of making the houses and office buildings. It was not just assets becoming worth more on paper.
During the construction boom GDP rose. That rise in GDP included a misallocation of capital due to poor regulation of the banks. But the economy really did grow. It just did not grow in a way that was sustainable.
I agree.
As I'm sure you gathered, it goes back to the question: can GDP grow without oil? - the answer: yes. Of course, infinitely better to build things that are needed, investments in alt energy and electrification, etc, etc.
Thank you for this post, Gail. The phenomenon you describe is well known as "Debt Service Mentality".
For years the Government borrowed Social Security and Medicare money AT BELOW-MARKET RATES. In other words, the Government would have had to pay a higher rate if it tried to borrow this money on the open market. But instead the Government had access to a large pool of money with no ability to negotiate borrowing terms - your Social Security and Medicare and withholding.
When financing is cheap, it is very tempting to think in terms of "What payment can I afford?" rather than "How much principal obligation can I safely assume?" To date, the Government has systematically avoided the latter view by systematically REDUCING RATES. Every time rates fall, the Government's current payment falls and it can "afford" more payment.
There comes a day of reckoning, however, when the payment concern is superceded by the principal concern. This shift occurs when you are forced into a pattern of spiraling borrowing to satisfy your obligations (including debt-service obligations in your last death throes). There are a number of possible triggers:
1. Your revenue is reduced by economic phenomena such as systemic unemployment.
2. Your expense is increased by physical phenomena such as a boom in retirees.
3. Your expense is increased by fiscal phenomena such as "target inflation" that increases benefit payouts.
4. Your expense is increased by liquidity phenomena such as rolling short-term debt structure or extraordinary funding draws that force renegotiation of borrowing less favorable terms.
Right now we are seeing ALL of these triggers and ALL of these triggers are worsened by critical resource constraints. This pattern is exactly what Greece is going through right now - soon to be followed by many other sovereign entities.
The question is whether these obligations are ultimately payable, or are they are of such a scale that than they can only be defaulted. (Some countries interest payments are such an astonishly large percentage of GDP that it seem unlikely such debt can ever be repaid.)
These are not new issues, the problem is huge. The retirees have been repeatedly beat up by the phony CPI inflation that is skewed to allow government indebtedness at the expense of benefit holders. The government abuses the payers of the SS by questionable IOUs, and reduces the payees payment with undeterred inflation in energy, food and health care. It is no picnic to live on SS as a significant portion of retirement income.
I can assure the writer that the solution to cut benefits has already been implemented by the Government by not recognizing inflation at the retiree's level for more than 20 years.
Not true. It is an urban legend that the CPI figures are rigged. The ShadowStats stuff is not credible. It's handwaving.
CPI may not be rigged, but I would counter that at best it is an indirect measurement of inflation that is constructed and altered (retroactively) by the same group of people who stand to gain if it happens to come in on the low side (conflict of interest) and that it's components may not reflect what many people experience in their own lives as an increased cost of living.
A lot of pretty loaded words, Mr. Beck.
The average poor person is better able to afford color TV and cell phones and such now than in the past -- but gasoline, housing, utilities, insurance and taxes have all gone up significantly. Just depends on what's in the CPI. I don't personally experience ShadowStats as "handwaving."
Great points Shunyata. I would argue that it ends in inflation and printing money rather than default, but other than that minor quibble I think your analysis is spot on.
It can't end in inflation because the obligation itself is inflation indexed!!!
I would add to your (accurate) comment that the obligation itself is inflation indexed - AT THE CURRENT TIME... I fully expect that provision to change, or the inflation indexing to be capped at a set percentage, with real inflation far outpacing whatever cap is set. Also, although Social Security is indexed to inflation, I don't believe that Medicare payments are.
In fact, Medicare payments to providers were planned to be decreased before being overrode by Congress. Physician payments in 2006 were held to 2005 levels (they were orignially slated to decrease by 4.4%), in 2007 they were held to 2006 levels, in 2008 they were held to 2007 levels and in 2009 they were slated to increase by 1.1%. Without further intervention by Congress, Medicare payments to providers are scheduled to decrease between 25% and 35% over the next several years.
Runeshade,
There is virtually no inflation today. Core inflation is 1%.
Medicare payments are to the providers, not the consumers of services.
You're confusing the two.
Gasoline is up over $1.00 a gallon over the last year and there is no inflation? I would beg to differ. John
Really no inflation? I think that statement is virtually inaccurate - with the exception of certain goods that are hedonically adjusted by our guv already.
What do you call the asset market behavior over the last 12 months? (stocks, bonds, commodities?) They don't say we are reflating for nuthin' - or at least attempting too.
Cost of utilities - phone tv/cable, property taxes, gasoline, food - (bag of chips is about 1/3 less volume than 5- 10 years ago).
How about foreign currencies vs the dollar over the last 1, 5, 10 year timeframes? Can we buy more for our dollar than we could 1, 5, 10 years ago? For a few goods and fewer services yes, but not in healthcare, education, transportation, taxes, food, energy or similar virtualities.
http://inflationdata.com/inflation/inflation_Rate/historicalinflation.aspx
Looks like its running in the low to mid 2's. At 3% over 24 years your purchasing power is cut in half. That seems to be my experience in my 40 odd years living on this once and future blue planet.
If you believe the government numbers, you will be like my old aunt (before Cola) who sent me 3 dollars for my birthday back in the 70s and my mom told me to write her a nice thank you card because for her living on social security that was a significant sacrifice for her. I'm afraid that this will become more common for more people in the future, and I'm afraid the government numbers will only show 1-3 % official inflation all the while.
Here's to official inflation numbers accurately reflecting reality,
-Cloudy with a chance of rain
Since core inflation ignores energy and food, its use is intended to under report inflation especially for the poor whose main expenses are shelter, food and energy.
As of this moment, Medicare payments to physicians are cut by 22%. Congress does not seem to be able to change that, even if they want to, which is debatable.
This cut hits different physicians disproportionately -- those of us in "primary care" with heavy Medicare loads are pretty badly affected, because it is illegal to collect anything from patients that isn't "approved" by Medicare -- even if a patient is rich as Croesus.
Of course, in the end, it is all part of a plan to discredit, and eventually eliminate Medicare in favor of some private insurance scheme.
While I once was in favor of private insurance rather than a government program,the private insurance companies have become even more powerful and less accountable than the government, and since insurance is apparently mandatory in the new "healthcare" plan, things are looking somewhat bleak.
The Mafia and its protection rackets have finally triumphed -- and the Tea Party plays right into their hands.
Hi, Lng,
Of course I know nothing about you personally-perhaps you work in a poor people's clinic for a pittance.
But except for the fact that when doctors aren't paid they quit working, I find it quite amusing that they are now on the other end of the govt hand out stick;after all, the profession came to be one of the very best paid "sure thing" professions in this country because the govt , in collusion with the profession, made it so.
Beware the handout, as the hand that brings it can turn into a fist pdq.
It's indexed to an arbitrary number calculated by the same government who has to write the checks and that has already shown a willingness to change the way it calculates that number as it pleases. If that sounds like a good deal then I have some 30 year TIPS to sell you.
Yes, it can because the cost-of-living adjustment is based on last year's undersized CPI-W. For example:
In 2010 Fed prints $1 trillion which is used to purchase U.S. treasuries increasing the money supply by 1.5 times causing an inflation of 50%.
The COLA for 2010 is 0% based on 3rd quarter 2008 to 3rd quarter 2009 data.
In 2011 Fed prints $1.5 trillion which is used to purchase U.S. treasuries maintaining inflation of 50% per year.
COLA is 32%.
In 2012 Fed prints $4.0 trillion which is used to purchase U.S. treasuries increasing inflation to 89%.
COLA is 44%.
For 3 years, SSI purchases less than half what it did at the start of 2010.
The pattern of inflation rising faster than COLA continues for years deflating the purchasing power of Social Security income until recipients die from starvation or exposure after losing their homes. That's hyperinflation. After enough Social Security recipients are eliminated, the government issues a new currency worth 2 times the original which, after conversion, immediately devalues to 1/2 while the government insists, using ineffective price controls, the value remains unchanged (CPI-W = COLA = 0). Welcome to hyperinflation.
Thanks, Shunyata!
I would agree about the day of reckoning coming. I would add to your list of four possible shocks a fifth one, of shocks based on natural phenomena, that in our overstretched condition we can no longer handle adequately.
We already saw that with Hurricane Katrina. We don't know yet about how serious the volcano in Iceland will be. Right now, it is disrupting airplane traffic between the US and Europe. The WSJ reports
Ash From Iceland Volcano Disrupts Air Traffic
We don't know what will happen yet, but if this continues and the fallout is "only" a few bankrupt air carriers plus loss of tourism revenue, it could send some teetering world economies over the edge.
After becoming slightly worried by the way this was setting up, I have begun to do some fact checking and the first appreciation seems to be rather reassuring.
Judging by the pictures, and according to Wikipedia, up to now the eruptions have actually been relatively small, and the air traffic disruption is a consequence of the very peculiar climatic environment of the place and its significance for the making of european weather (see for instance Icelandic Low & Northern Atlantic Oscillation).
As long as the eruptions don't become larger, it won't be a big deal beyond Iceland and air traffic.
There seems to be a risk of secondary activity at nearby Katla, which is a larger volcano with an eruption listed at more than 6 to 7 cubic kilometers (1.4 to 1.7 cu mi) dated to 10,600 years BP, again according to Wikipedia. To put that into context, Mount Tambora came up with an estimated 160 cubic kilometers in 1815.
I couldn't find any really large volcanic event for Iceland, maybe because they originate from an oceanic fault where the plates pull apart. On the other hand, there's a hotspot below Iceland, and therefore there may be a remote possibility of the planet coming up with something new...
Disclaimer: I'm not a volcanologist.
That simply not true. Federal debt is sold through auctions. So by definition it is a market rate.
I am amazed at the lack of economic sophistication ...
I get it now. You are kidding us.
As I understood it the Federal debt that Social Security owns is specifically not marketable and not sold at auction. I could be wrong, but it seems to me some debt is sold at auction and some isn't.
This is correct. The IOUs to SS are a special type of treasury bond that are not marketable.
Social Security and Medicare get their own special version of government debt, which cannot be sold elsewhere. I don't know how the rate is set, but I suspect Shunyata may be correct. He works in a financial area, and may have direct knowledge of this.
2. Your expense is increased by physical phenomena such as a boom in retirees.
This is an important mistake, made by many people. Retirement is a social phenomenon.
Further, people are living longer, and disability rates in the aged are falling sharply: the retirement age should be dramatically raised.
The End of Retirement
Well, that's different from what I'm saying.
I'm saying that our current "pension/social security crisis" is a perverse flip side of a very good thing: we're all getting healthier.
Retirement was really a form of disability insurance: people were expected to not be able to work after a certain point, and pensions and SS helped support them.
Now, we're getting much healthier, and we don't need retirement, at least not until much later.
--------------------------
I have to say, I'm puzzled: if you feel that Energy Descent is a very long-term phenomenon, then I really can't understand why you are so pessimistic. It's perfectly clear that wind, solar etc can provide all the energy we need in the long-term.
Thank you for shedding light on a difficult and politically sensitive subject. The fact is, the spending of the US Government is completely unsubstainable in the long run. As we stand right now, spending on just 3 programs, Social Security, Medicare and Medicaid will shortly consume the entire revenues of the federal government. When you add the interest we are paying on the national debt to the mix, the day of reckoning becomes closer and closer, and as Gail said, this is independant of any setbacks that might appear to economic growth, like peak oil. This means that there will be NO money left over for ANYTHING else. No national defense, no social programs, no Dept of Education, no homeland security, no basic science research. Without some fundimental changes in both our government spending and our taxation policies, the US is on the road to bankruptcy.
So, how many of you believe that our politicians see this incoming train wreck arriving and are going to raise taxes in order to balance the budget and push back this impending disaster? Anyone? Likewise, how many believe that the government is going to cut back on military spending by about 3/4, and all other domestic spending by about half? Any takers on that one? Without huge reductions in our government spending now, this country is in a lot of trouble.
Since neither the Democrats nor the Republicans can be counted on to actually act on this unfolding crisis and balance the budget, where does that leave us? Unfortunately, it leaves us borrowing more and more money to balance our budget until the inevitable occurs and the borrowing well runs dry. So... what happens when you hold an auction for government bonds (this is how we finance our deficit/debt) and no one shows up to buy? This moment, which is fast approaching, will be the moment of truth. The sad answer is, when we can't borrow the money, we are left with one option... print more money.
So, when we are forced by our out of control deficit spending to start printing money, you can expect inflation to kick into high gear. Basic economics tells us that printing more money increases the overall money supply. An increase in money supply is a textbook cause of inflation, and the longer the imbalance of spending and revenues continues on, the worse that the inflation will get, until it becomes hyperinflation.
This is the future for the US without drastic changes in BAU, and as Gail astutely pointed out, this is even BEFORE we factor in reductions of economic growth due to PO. If you think the picture looks bleak, its because the picture is bleak. Without an IMMEDIATE move to totally elimiating the budget deficit, the picture just gets worse and worse. GW Bush really screwed us economically by turning the small surpluses he inherited into massive deficits. Obama has not improved the situation any, and in fact, if you look at his proposed deficits in the years going forward, will in fact make the debt/deficits much worse by the end of both his first, and proposed 2nd term. In other words, don't expect the politicians to bail us out, because unless they are proposing increasing taxes and/or DRASTIC reductions in benefits, they won't solve these problems. Don't kid yourself about the Republicans either, they talk about reducing the size of government, but they have failed to do so every single time they have had control of the government. In fact, the Republicans tend to make the problem worse through dishonesty. The party of "Borrow and Spend" tends to lower tax rates while simultaneously increasing spending, on national defense, conservative programs, etc.
In summary, we should prepare for a period of rising and unrelenting inflation, and/or hyperinflation. Some people will respond by putting assets into gold as a defense, and that is one potential solution, at least until the government decides to tax this potential revenue. The best answer to a almost impossible situation however, is to use extra money that you have now to 1) Pay off your own personal debts and 2) Use that money to make preparations for the future. The time is now to plan and start your garden, purchase and store supplies and make general preparations. Read up on Zimbabwe if you want a current example of how bad inflation (hyperinflation) can be to an ecomony.
Thanks for this great article Gail.
Runeshade,
The best analogy for the current US situation is Japan's Lost Decade. Japan had massive deficits, rising money supply as measured by the Japanese equivalent of M1, and deflation.
Inflation expectations as measured by the interest rate differential between ten year Treasury bonds and inflation indexed ten year Treasury bonds is 2.4%.
Oh, and Zimbabwe had rising money supply velocity ...
One huge difference.....Japan was and is a net exporter and the US?
Gail exaggerates the economic impact of peak oil. There is plenty of room for energy substitutes and improvements in energy efficiency and plain old fashioned reductions in energy use to mitigate the slide down the fall side of oil production mountain.
"Gail exaggerates the economic impact of peak oil."
Yes and no. If you ignore for the most part the interconnectedness of the current system, "yes". But we don't really have a way of measuring that interconnectedness. Looks like we're going for an experimental evaluation. Gail seems to think that a critical aspect of that interconnectedness is the global trade system. I doubt that will the major one. "Our system" has self-adjusted for many decades to a certain rate of growth/energy availability. To ask for a smooth readjustment in the likely time frames is optimistic. Current degree of globalization is so recent that I don't think system dependencies are that deeply embedded.
Since this is all an experiment, how do I get a transfer to the control group?
I really think peak oil is likely to cause debt defaults, because without economic growth many people's incomes are not rising, (and some are falling) making more than the expected number of people default on their debts. From debt defaults, we move to problems with the financial system and also to major problems with international trade.
We started seeing debt defaults, starting first with subprime mortgages, and moving on to regular mortgages. Defaults will likely get worse and worse if the economy cannot grow because of peak oil (except perhaps temporarily, before it crashes again). Commercial real estate is one area with more defaults coming, but so is mortgage debt and municipal bonds.
If there were no financial system connecting everything together, I think we could get along quite well, in spite of peak oil. There is room for some economizing in oil use. But this doesn't fix the financial problems that the oil shortage causes.
The US, for many years, has bought close to twice as much imports as it sold as exports. This was sort of OK, as long as the US was growing, and the view would be that there would be enough to pay later for purchases, even if there isn't now. Problems will arise if someone says, "I really don't want to sell to you. You can't really pay for it." Today the problems are with Greece, but in not too long, it may be Britain and the United States.
Exactly. The unwinding financial system is going to be make everything else more difficult then impossible.
Nomura calls it a "balance sheet recession." Perhaps it's a term of art but I've never heard the term before.
See the Business Insider post and see the comparison between Japan when their deflationary period started in 1990 and the current U.S. one. Amazing parallels (h/t Mish):
Richard Koo's Awesome Presentation On The Real Reason Why This Recession Is Completely Different
http://www.businessinsider.com/richard-koo-recession-2010-4#-1
Well I am going to agree with you on this.
Americans in particular could reduce energy consumption by 50% and not feel deprived at all.
That is just conservation but we have to do it.
If we wait until the "market" does it through price and substitution it might get pretty tight.
A general 50% reduction in waste spending is a 50% reduction in the jobs which rely on said waste spending. Thus causing a positive feedback loop.
Not at all - it would mainly be a reduction in income for oil exporters. This is what economists call "rent" (unearned income), not labor income.
Not in agriculture. Its common, though a bit disingenuous, to say in the future we'll just waste less, so things will be ok. Perhaps it touches on psychology, but I think everything we've seen suggests that we'll bear a very large cost before we give up discretionary consumption, and by bearing the cost of non-essentials we more or less wreck the fundamentals.
I welcome the discussion of demographics and its effect on the economy and society. It's a discussion that is still in its infancy and is as important as peak oil.
On the negative side, the analysis is marred by the total omission of military spending in the US, a HUGE portion of the national budget. As the price of fuel goes upward, overseas bases and military adventures will only become more expensive.
Why did you leave this out, Gail?
By the choice of subjects, one determines the direction of the debate - framing. Selecting some aspects of the problem to analyze and not others is a political choice.
Social security and medical care are critical to the well being of society as a whole. They are currently under attack by right wing elements. Military spending, OTOH, gets a free pass.
Bart / EB
Bart -
Now that you mention it, while Gail has been relentless in criticizing alternative power, such as wind and solar, as being a mal-investment of capital, I don't recall a single peep out of her as to whether the upwards of $1 trillion the US spends annually on its defense budget, various wars, and overall security apparatus just might also be a 'mal-investment'. Apparently, some things are up for discussion, while other things are not.
I recently read somewhere that the total cost of delivering fuel to a point of use for our forces in Afghanistan is something like $100 per gallon (yes, per GALLON - that is not a typo). A $70-million Osprey tilt-rotor plane crashes in Afghanistan, and it's ho hum. Money no object. PV panels and wind turbines are a waste of money, but nothing is said about the Pentagon throwing away billions like they're nickels. Military spending does not seem to be considered unsustainable, perhaps because the government believes it will be sustained as long as there are taxpayers to be squeezed.
I fully agree with you that at TOD we seem to have just a bit of a disconnect in this regard.
Hi Joule,
I do understand your point, but we are after all discussing this issue at this very instant, are we not? ;)
I don't see Gail's comments and posts as being anti renewable myself.
I do see her as being honest and realistic , in the face of what might turn out to be excessive optimism on the part of the readership in general in respect to the speed at which renewables can be ramped up.
Think of her as a sort of Hubbert , if you will, warning us that our proposed solutions are going to be too little, too late.
I hope she is wrong, but I have a gradually growing sinking feeling in my gut that she is right.
Today I will begin the installation of a solar domestic hot water system for our home-partly because I think it will save some money.I have cribbed the design from the net, salvaged most of the materials, and will construct it my self with a helper as needed.
But the current savings will not really justify the effort and expense..It's the future cost of energy, combined with a possible future loss of income, that has me convinced that this is a worthwhile project.
Unfortunately the vast majority of the public,probably including most of the people who read TOD, will not change thier ways until it is too late and a trully crippling crash takes place-one so bad that recovery might not be possible.
If things work out this way, the renewables industry will crash with everything else.
A somewhat more pessimistic pov is that even without such a crash and the maximum likely rate of expansion of the renewables industries,including subsidies, renewables will not be able to shoulder the load as fast as ff are depleting.
I can't speak for Gail, or anybody else of course, but as a regular reader I believe this last scenario is a reasonable,condensed interpretation of her overall position.
As I see it,she's not antirenewable at all, but simply more pessimistic, or , in my estimation, more realistic, than the average renewables fan.
I share her position if indeed I have correctly interpreted it.
I won't speak for Gail either but that's my impression of her position.
It's a position I share with her, also.
The number of financial systemic events that could take down the whole system is large and one of the more recent ones added to the list are derivatives. Granted, they are just another form of debt so the fundamental problem lies beneath them: declining energy means the debt won't ever get paid back. No way, no how.
We will watch the not-so-slow self destruction of the financial system and it has already begun.
-----
Derivatives are Economic Time Bombs (Buffet)
Credit Default Swaps Are STILL Dangerous
http://www.washingtonsblog.com/2009/09/credit-default-swaps-are-still.html
"Energy and debt are the primary drivers of economic growth, but of course debt doesn't contain BTUs."
Abstract Energy Gain and the Permanent Recession (Nate Hagens onASPO.TV; behind paywall)
Military spending is left out (even though it is going to HAVE to be reduced), because it is not a current legally mandated expenditure. The benefits of Social Security, Medicare and Medicaid are known as mandatory spending, and by current law are funded before anything else. The road we are on shortly leads to a time where we won't have to worry about military spending, because there won't be any left over money after financing those three programs plus interest on the national debt.
These massive unfunded liabilities make Military spending look like a rounding error. Everything will be cut.
The US tax burden is much lower than in Europe. It will be quite easy to raise the money to cover American's stingy social programs by implementing a VAT tax or raising taxes.
How about a little less fear mongering?
US social taxes are only 15% of the first $100K in income. In Germany, the world's largest exporter, it's 25% of all income ...
And the US does need to spend a half trillion dollars on defense ...
And the US does need to spend a half trillion dollars on defense
But, was the Iraq war defense?
Also, we're spending far more than $500B on total direct military spending.
The benefits of Social Security, Medicare and Medicaid are known as mandatory spending
The benefit levels are not mandated. They could be cut overnight by a simple act of congress.
The likeliest target: retirement age, which is far too low.
This post is one I had serious issues with both length of article (getting too long already, focused on what I was attempting to focus on) and time to research and write the article (less than two days). One picks a focus, and goes with it.
I purposely stayed away from writing an article about general spending issues (including military spending) and the published debt levels, because it is hard to write an article that is not so bleak that no mainstream organization would consider printing it.
I did mention the possible use of Social Security and Medicare cash flow for both the war in Iraq and Afghanistan where I could in the article.
I understand the need to focus.
Nevertheless, Gail, this is a serious error in the analysis. Not only does it miss the big picture, but it calls into question your fairness.
It would only take a paragraph or two to put the issue into perspective. And if you wanted to cover the issue fairly, you would continue the analysis with other parts of the budget, perhaps in later columns.
And if you are to focus, why did you choose these subjects to focus on? You seem to be saying that you avoided subjects that are taboo in the mainstream press. If so, this diminishes your credibility as an analyst, since you are tailoring your message.
You are a crack analyst and I depend on you! Please maintain the fairness and objectivity that you've shown in previous analyses.
Runeshade points out that military spending is not legally mandated. In this case, it would be the relevant sector to focus on, since it could more easily be changed.
I don't think Runeshade is correct when he says that military spending will automatically decline. The history of declining imperial powers shows that they spend an increasing portion of their income on military/police. The cost/benefit of imperialism declines, the home population becomes restive, and the society's thinking becomes militaristic rather than problem-solving.
I think that is the dilemma that faces us: do we spend dwindling resources on imperialism and illusion, or do take a more productive path?
best, Bart / EB
Forgive me for intruding but I'm going to anyway.
Can people please make an effort to stop impugning other people's character?
Gail explained why she did what she did. She puts in gobs of hours into the site as it is. She has a preference for the topics she chooses to cover and that's entirely her prerogative. It is perfectly fine to allow other people to handle other topics or what you would consider the "big picture."
Here. It's easy to be generous with other people.
Just say, "Gail, this is really good, especially in just two days! Have you thought of incorporating military spending? Personally I think that without discussing military spending we just won't see the whole picture. Let me know if you want a collaborator, I'd be happy to help."
Notice that bit at the end. It's really easy to ask other people to do all the work. Now, I know you have put in gobs of hours yourself into this topic (EnergyBulletin), but the point still stands for this case. The reality for people involved in social change is that the (few) people who are committed and involved are almost all overworked, which often leads to burnout.
Also, anything one ever wants to say is "wrong" can be alternately expressed as "what's missing." It makes conversations work much better and respects the other person, making them likely to want to stay in the conversation with you.
In this case, what's missing is generosity.
Thanks for reading to the end.
Good on yer aangel.
If you need some muscle to back you up, I'm right here.
Thanks for your comment, aangel. I appreciate your trying to keep communication going.
If there were a better way to make this point, I'm sorry I didn't do it.
There are two separate issues here.
One is whether one respects the volunteer work that other people do. In a volunteer movement, that's very important. Agree with you totally here and Gail deserves kudos.
Second, there are questions of fairness and framing. I take Gail's work seriously, as well as her ability to deal with legitimate criticism. In this case, significant perspectives were left out of a piece of analysis. As joule points out, "at TOD we seem to have just a bit of a disconnect" [regarding defense spending].
So this is an ongoing problem.
It is not easy to take exception to the writing of someone you like personally, whose work you respect. But if we want to get outside the TOD ghetto, we've got to have good analysis and be fair.
Please note that I gave a suggestion for an easy way to correct the problem in this article -- a paragraph or two to give the overall budget picture, and an explanation of why only two factors were being looked at.
best to all, Bart / EB
I read through the (many) comments, and I think I'm better able to verbalize the problem.
The problem is not whether Gail, I or anyone has political beliefs. The problem is mixing them up with objective analysis. It is fine to express one's opinions, but it is important to label them as such, and keep them separate from the analysis.
It is probably possible for us at TOD to agree on a general analysis of how resource constraints will probably emerge.
We could also probably agree that society will make choices, and we can also agree on a list of what the questions might be. For example, military, highway intrastructure, education, health, senior benefits, agriculture subsidies etc.
Despite our differences, we could also examine the size of each sector, and what the implications of cuts would be. We could also examine ways that spending could be made more efficient.
Where we would disagree is in assigning priorities.
This is where politics comes in. There will be a debate and struggle.
Even here, we could agree on the need to define different viewpoints clearly, and listen to the most articulate and intelligent.
The problem with this essay is that it skips several steps, and instead of allowing the problem to be seen as a whole, it jumps in with an implicit set of priorities. As can be seen from the discussion, we don't all agree on the unspoken assumptions.
I would like to see more emphasis on the problem itself, seen as objectively as possible. And THEN it would be interesting to hear Gail's opinions, as well as those of other people.
Bart / EB
It is probably possible for us at TOD to agree on a general analysis of how resource constraints will probably emerge.
I think we still need to do a lot of work at that stage. We still haven't come anywhere near a consensus on the limits for things like coal, wind, solar, and EVs.
Thanks Nick. I dunno, I think we're a lot closer to agreement than it seems. Especially if we allow for an uncertainty factor.
I'm surprised at how much agreement there is among a wide swathe of the population, once they become aware of the basic concepts and data. (Omitting outliers and those with a special interest).
The reaction seems to be a consistent "Very Concerned" to "Urgent."
As Sharon Astyk said in one of her columns, one doesn't have to know the date and time of peak oil in order to start preparing.
One of the encouraging things is that people from across the political spectrum can agree on resource constraints.
Even more surprising is that among those who are informed, there is the widespread conviction that we must cut back ... somehow. The disagreement is in the details. But even then there is a lot we can agree upon.
That sounds right to me.
Sorry ... one more thought.
From the point of view of analysis, there is a critical logical fallacy here. To be schematic:
1. Assumption: Peak oil and resource constraints. (Heartily agreed upon, at least by most TODers)
2. Missing Step: There are multiple ways that society's resources are currently expended. At the level of the US budget, here are the major expenses and their % of the whole.
3. The Leap: One portion of society's expenditures - Social Security and healthcare - is unsustainable at current levels.
Logically, Step 3 has not been proven and cannot be proven without considering Step 2.
Skipping Step 2 also means that assumptions about the relative value of expenditures are not articulated.
Mainstream organizations would not publish your article because it is so one-sided. There is plenty of room for energy substitution, reduced energy consumption, and improved energy efficiency in mitigating peak oil.
Similarly, the US had comparable debt levels during the WWII and suffered no downside.
Pessimism needs to be meticulously back up by facts ...
You want pessimism? Look out your window at Europe and look at all the unemployed youths. Simply saying "There is plenty of room for energy substitution, reduced energy consumption, and improved energy efficiency in mitigating peak oil." does not make it true. There is not necessarily a way to mitigate everything and keep things going as they have been. However, this does not mean going back to the 18th century.
"...Things fall apart; the center cannot hold;
Mere anarchy is loosed upon the world.
The blood-dimmed tide is loosed, and everywhere
The ceremony of innocence is drowned;
The best lack all conviction, while the worst
Are full of passionate intensity" — WB Yeats
Roderick Beck -
The US WW II debt did not become an irreversible drag on the US economy simply because of the incredible post-war economic boom that set in during the Eisenhower years. Growth was everywhere, globally the US was numero uno, and optimism was rampant (though you did have to worry about those Ruskies and The Bomb).
Things are just a bit different today.
I think you may be missing optimism as well, eh?
I will even venture to say that all policy initiatives, general discussion and debate are bolstered with evidence.
Nod to Alan, ... Here's to evidence based reasoning,
-Partly cloudly and a chance of sun
Even though I disagree with Gail I think mainstream organizations should not try so hard to maintain a narrow range of acceptable positions. The beauty of the internet is it allows fringe positions (e.g. that Peak Oil is near) to get a hearing.
WWII and debt levels: We had lots of natural resources and the economy was growing for decades to pay off the debt. People treat debts differently when business is contracting. The burden gets worse. Companies go bankrupt.
Your optimism needs to be meticulously backed up by facts.
Gail -
So then, is the criterion upon which you write solely to get your articles printed by a mainstream organization? And once you've accomplished that, then what? Become some sort of a national 'authority' on energy?
You seem to be saying that military spending is just another 'general spending issue'. Well in my view, upwards of $1 trillion per year is hardly just another general spending issue, but rather is one of THE most important spending issues faced by the American people. Evidently, you think it unimportant.
I am still totally puzzled as to where you are really coming from and where you want to be going, and how exactly you are using TOD to accomplish your aims. You definitely HAVE an agenda of your own, but I can't quite figure out exactly what it is. However, I am getting increasingly uncomfortable as to how closely your expressed views on energy conform to that of the energy industry and the people who run the show in the US.
Yes, it is a bit like a "12 Days of Christmas" post. The entire history of peak oil and social security has to be explained before one gets to any meat, and after that you find little meat to hang on to. And so every post gets prefaced with the 12 +/- salient points. But apparently that's what people need since no everyone is up to date with the info.
I don't think you understand what the article is about. It is about the ability to cover growing obligations with a shrinking resource base, not about proper budget priorities.
Consumer,
Thanks! You got it exactly.
Excellent post, Gail.
Laurence Kotlikoff and Scott Burns
http://en.wikipedia.org/wiki/Laurence_Kotlikoff
wrote a great explanation of this predicament in "The Coming Generational Storm: What You Need to Know about America's Economic Future (2004)" http://en.wikipedia.org/wiki/The_Coming_Generational_Storm.
Without factoring in peak oil and economic decline they calculated that the eventual shortfalls in SS and Medicare would be over $50 trillion. Now, who knows?
A great but scarey read.
In 1950, there were 16 workers supporting 1 retiree.
In 2006, there were 3 workers supporting 1 retiree.
In 2035, there will be 2 workers supporting 1 retiree.
The situation for social security is not dire, IMO.
If the average worker has an income of $50k and social security taxes are 15.3%
then that worker will be contributing about $7.5k per year or 2 workers would contribute $15k to each retiree, which is a little less than they do now- in 2009 $650 billion was paid to 51 million americans = $12745.
You may notice that SS actually runs a surplus as $650 billion /130.7 million workers = $4970 is transfered to retirees, disabled, etc. versus ~$7500 collected.
The politicians use that surplus to 'balance' the budget and pay a bit of Medicare.
The problem is Medicare/ Medicaid and Obama has succeeded in doing something to control that. Medicare is the same size program as social security ~$650 billion but the for-profit medical industry at all levels is fighting against government regulation (aka socialism).
To me it is a moral outrage to extract money from poor sick people or even
stick it to rich people who are very ill. Most hospitals were started as charities.
For-profit health care is the product of US conservative religion
of market perfection and infallibilty, you just don't see this system in other countries, where with a few odd exceptions(Netherlands, Switzerland) you see a Single Payer systems, where taxes pay for health care but that cost less than 50% of US for-profit health care and the average life expectancy is far higher.
Why hasn't the rest if the world decided to emulate 'the greatest HC system on the planet'?
In 2004, Canada government-spending was $2,120 (in US dollars) per person on health care, while the United States government-spending $2,724.[11]...However, U.S. government spending covers less than half of all health care costs. Private spending for health care is also far greater in the U.S. than in Canada. In Canada, an average of $917 was spent annually by individuals or private insurance companies for health care, including dental, eye care, and drugs. In the U.S., this sum is $3,372.
http://en.wikipedia.org/wiki/Comparison_of_the_health_care_systems_in_Ca...
Now, let's see...in Canada the state pays $2120 and the individual pays $930, total $3050.
In the wackadoole USA-greatest-country-on-earth, the state pays $2724 and the individual pays $3372, total $6096.
DOUBLE!
We pay twice what the g-dam socialist 'hosers' pay?
Gail, a f$%#ked-up, insane, faith-based system is more 'unsustainable' and prone to collapse than a logical, controlled system.
So what would happen if we adopted Canada's system and we increased the payroll tax on those two workers?
Well, since 'nationalizing health care' amounts to another evil entitlement we could estimate that the cost to the government would increase per $650 billion x
$3050/$2724=$728 billion. Add that to SS pay out of $650b you get $1.38 trillion/130.7 workers = $10559 average in payroll taxes, whereas payroll taxes bring in an average of $7500 per year.
But that's a tax increase of $3059!..gasped a tearful Glennnn Beckkkk.
True enough but medical costs, including for-profit, high deductible, we-never-pay medical insurance goes away.
The cost of a base policy for a single taxpayer is about $6000 per year.
But under the tyranny of Canadian socialism the payroll tax would go up $3059.
But, but..
Death panels...enthanasia...government rationing...your own doctor...eeekkkk!!!
Plus, as a bonus, you get to live two years longer in Canada. And your children have a better chance of surviving, as the infant mortality rate is lower.
ARRAAGH!
#$%@..
G-DAMN SOCIALISTS!!!
I really don't know what you are talking about with respect to Social Security. Look at Figure 2.
http://en.wikipedia.org/wiki/Social_Security_(United_States)
Your graph showing ~$760? billion probably includes other kinds of SS payments, disability,etc. and administration. I used $650 billion because you're really talking about payments to retirees and the number of workers supporting them.
I stand by my rough estimate.
Try following the link I give that go to the Social Security Administration database. The point is that Social Security is now paying out about as much in expenditures as they are collecting in contributions. As there are more and more retirees, this is only going to get worse, unless there is a big increase in real wages--something that looks unlikely to happen--or in the contribution percentage. From the point of view of Social Security, this is not a crisis, because they are holding $2.5 trillion in government debt, which they can redeem. But that just means the US must borrow that much elsewhere.
For what it is worth, the spreadsheet for 2009 shows $686 billion in Social Security benefits. The amount of contributions was $667 billion, plus $22 billion from taxation of Social Security benefits. So they are pretty well matched. You say,
What gives you this idea?
130.7 million taxfilers, roughly. $7500 payroll came from 15% of income with an average household income of $50000(median is $46324).
My numbers are rough but tracking down this stuff to the gnat's ass has greatly diminished returns.
I think it shows that SS is in good shape which is what the SS Administration thinks.
http://www.ssa.gov/pressoffice/trustees98_press.htm
http://www.ohio.com/news/american_dream/27325314.html
Got to stop listening to Fux Noise, Gail.
Social Security is a freaking ponzi scheme. The first few people to start collecting literally paid a dime into the system and got out tens of thousands of dollars. It's going to go pop whether you want it to or not. Us young people aren't going to pay even more of our income when we won't get anything at all. Your release was from 1998. Sorry but this recession from hell will bring the day of reckoning much sooner. With fewer workers each year to support the retirees it will eventually collapse, simple math dictates this. If this program isn't a ponzi scheme, why can't I opt out? I don't want social security and I don't want to pay for it.
Social Security would work if the population continued growing geometrically, but it can't because we live in a finite world constrained by finite resources.
Even Bernanke says Social Security and Medicare won't work.
http://www.washingtonpost.com/wp-dyn/content/article/2010/04/07/AR201004...
You'll pay your fair share, Floridian or you'll go to jail.
Social Security is a typical insurance policy like old age insurance, not a Ponzi scheme.
People pay in, retire and receive benefits. If you live longer than the average you're more of a burden, shorter a windfall for the system, so there's no money there for your heirs, just you. Nobody's skipping town with the proceeds.
In a Ponzi scheme your investment is a 'sure thing'.
You can't opt out of paying taxes because it is not a charity, it is insurance.
If you don't want to pay taxes, you should be locked up as a crook(crooks don't want to pay taxes either).
That doesn't make any sense. If the population falls then the average wealth will rise just as it did during the Black Death in the 1300s. The wealth accummulated in the past will go to fewer descendants.
Rather increasing population will make people poorer on average and overburden Social Security, which is the opposite of what you said.
Bernanke didn't say SS and Medicare don't work, obviously they do. Only that rising deficits must be paid for--and that means raising taxes and jailing tax
cheats.
"You'll pay your fair share, Floridian or you'll go to jail."
Unless you are unemployed, by choice or economics, in which case you can go on welfare. Jail might not be too bad of a choice for some, as they give you free food and keep you warm. A third option might be to flee the country, but that option is likely open only to the richest, and/or the most skilled workers.
Floridian,
I agree. There is a whole lot of similarity to a Ponzi Scheme. It is hard to say that in an article. As long as we all have lots of kids, and there are plenty of resources for them, the system works, but in a finite world, it is hard to see it going on forever.
Not at all: the main problem faced by SS is demographic: the falling ratio of workers to retirees. This ratio is changing because of better health, lower disability and greater longevity.
The solution is simple: raise the retirement age. This would be an improvement in every way, even for those who would be disappointed by having to work longer (even if they don't know it), because the benefits of retirement are greatly exaggerated.
OTOH, if your pessimistic view is correct, the problem will solve itself, as a worsening economy causes deteriorating health and shorter longevity, and we return to where we were in 1935.
My only concern with raising the retirement age is how to convince employers to hire 70 year olds.
Perhaps the Social Security Administration can be the employer of last resort to the 65 and over set. They can work processing each others benefits.
Yes, age discrimination is a real problem. And, yes, government has often been the employer of last resort for victims of discrimination.
Have you seen any stats on unemployment by age?
I don't listen to Fox news. I look up the real numbers, rather than trying to make a guess--as it turns out a wrong guess--at what they might be.
@Majorian
This set of statistics is actually a canard based upon an ideological assumption.
In fact it is not just the use value - aka earned income - of workers which supports retirees; it is the use value of land/location (which is the basis of two thirds of money in existence, through mortgage loans); and it is the use value of the energy embedded in the land/location, and also of energy being used by workers in the course of production; and finally it is the use value of the rapidly increasing accumulation of knowledge in the form of Intellectual Property in one form or another.
The problem is that the conflicting ideologies of Left (Socialist/Communist) and Right are both based upon an assumption that all Value originates in Labour.
Technocrats on TOD - like John Carter - assume that all value derives from energy; while Henry George - who was the second most famous man in the US around 100 years ago - assumed that most value derived from land/location, and that a 'Single Tax' based on land/location would be sufficient to fund governments. There is a strong case made by Mason Gaffney that neoclassical economics was created purely to nullify George's political economy, and its success in doing so is quite evident today, as George has been almost entirely air-brushed from history.
For the Right an anthropocentric assumption is an ideological expedient which justifies the imposition of taxation only upon Labour and 'earned income'. It means that the unearned rents acquired from privileged property rights may therefore go untaxed.
What we should be doing is drastically cutting taxation on earned income, and increasing it on the unearned income obtained from privileged property rights such as exclusive use of land and other commons (knowledge, non-renewable resources) and the privilege of 'free' limitation of liability enjoyed by stock-holders. I would argue that to do so is in the fine radical liberal tradition of Adam Smith, John Stuart Mill, and of course that great American, Henry George.
By taxing privilege rather than people, the tax take could be drastically increased; deadweight costs of bureaucracy could be drastically reduced; demeaning means-tested benefits dispensed with; and citizens' dividends could be paid as of right to entire populations from the proceeds.
It will never happen within the current Public = State; Private = Corporate paradigm of course, because the privileged turkeys in the Executive and the Legislature, and the big Corporates will not vote for Christmas, but there is more than one way to skin the cat.
Revolution
No.No.
Tax Carbon as it comes out the ground.
Before it taxes us.
I am reading "Tales of the Genji" by Murasaki Shikibu. It is about a different society,long before the Samurai.
In this tale healers heal, why?
Because that is what healers do.
It was their raison d'etre.
Methinks capitalism is the disease.
You can go through the numbers all you want, but the major, overriding theme remains the same: The U.S. is now in secular decline. We may disagree about when it all started, why it happened etc., but it seems to be baked in now.
The point is that we don't have the political will to reduce oil consumption, massively ramp up energy efficiency, raise taxes on high earners, cut Medicare and SS benefits, and cut military expenditure. Only a combination of all five gives us any hope of surviving the next 20-30 years intact with some semblance of a civil society.
You see, good old fashioned American enterprise and ingenuity can only go so far. It needs to be supplemented by capital and good governance, and we have neither. So it matters not if some startup company has a great new design for an electric car or something like that - it will go nowhere because, like a drug addicted abused wife, we are wedded and dependent on ways of life which are in fact bringing us down.
It's just basically over. If you accept that then you can slowly start to prepare.
The US pays for a disproportionate share of drug R&D. Drug benefits for the rest of the world are subsidized by the US.
Has anyone seen stats?
Above quote from Gail's article.
I am not sure how the right-wing orthodoxy that budgets MUST be balanced by cutting benefits has become unquestioned wisdom even on the Oil Drum.
But fixing Social Security would only require including all income in Social Security taxation, rather than the current regressive exclusion of all income above 105 K.
Similarly, fixing Medicare would be easy if we returned to the progressive income tax structures that the US had under Nixon, Eisenhower, etc. (those radicals!), but that is not even mentioned as a possibility, but cutting services to the unfortunate elderly becomes what we "need to assume".
Hopefully, when the issue really comes to a head, our current attitude of "coddling the rich" without even considering alternatives will be on the ashcan of history.
I'm not sure how the left-wing orthodoxy of class envy became unquestioned on TOD. Seriously though, not knowing the numbers, removing the income cap for FICA tax may very well keep Soc Sec afloat at current "promised" benefits for some time longer. That said, I have seen reports that there is no "soak the rich" tax plan that will ever balance the Federal Budget entirely at current spending rates. Too much of the national earning power is in the hands of the middle class. Notice I didn't say "wealth" for the middle class, because most are up to their eyeballs in debt, i.e. they can't afford tax increases.
Whether or not SS and Medicare should be fixed by a more progressive tax structure (which has nothing to do with class envy, but simple ability to pay) is debatable.
But to not mention the possibility of fixing the problem by more progressive tax structures and to assume the only solution is to cut benefits is not an honest and fair evaluation of the problem. When a potential solution is not even evaluated, but simply ignored, what does that say about the quality of the evaluation?
This ain't rocket science.
The US government takes in $2.1 trillion dollars 85% of it from individual tax returns and 7% from corporations.
The US government spends $3.5 trillion dollars 20% for SS, 19% for Medicare/medicaid, 23% for the Department of Defense, 17% for legal obligations under current law, 5% to pay interest on the national debt, and others 16%.
Not a lot of wiggle room for budget cutters.
The $1.4 trillion difference goes onto the national debt, mainly because nobody wants to raise tax rates.
Right wingers often state that the lower half of taxpayers, making less than $50k, pay 4% very little of the US tax bill.
The reason why is obvious.
They have nothing to be taxed---you can't get blood out of a stone.
Willy Sutton robbed banks because 'that's where the money is'.
If you had a true flat tax, the average tax payer would have to pay 40% of his income to the IRS.
Now, the rich are doing very well out of the current economic system, while the masses are stuggling to get by.
This system helps the rich get richer, they benefit the most so they should pay more.
It's also a fact that redistributing income allows people to move up the economic ladder a little(allowing the government to tax more).
Under Clinton, without the Bush tax cuts the budget was balanced and the national debt was reduced. It can work again.
First you balance the budget by 'soaking the rich'--Clinton style, then you keep
your discretionary spending down.
Under Clinton the Cash Basis budget was balanced and the hand picked, On-Balance Sheet debt was reduced. Don't get me wrong I think he was fiscally much better than his successors, but it's still accounting slight of hand that sweeps Social Security and Medicare under the rug.
Workers don't work for nothing. They need to get a fair share of the resource pie. This has nothing to do with right-wing orthodoxy. If there is not very much available in total, the retirees can't "hog" it all.
How realistic would you consider an evaluation of Social Security and Medicare which focused only on the revenue increases required to make them solvent, and ignored any discussion of retirement age, benefit levels, and other cost-side issues?
Such an evaluation would be looking at only half of the problem, and would be incomplete.
Looking only at cost-side issues and ignoring fixes on the revenue-side is similarly incomplete.
When discussing increasing the SS income cutoff above the current 105K , we are generally not talking about "workers", because most people in those tax brackets do not earn their income from "work" but from capital gains, dividends, interest, and other returns on investment.
Actually, there are a bunch of workers who earn more than 105K a year. Professional people of a lot of types make more than that--doctors, lawyers, actuaries, financial analysts. Also, upper level managers often make more than 105K a year, and I bet there are some sales people who make more than 105K per year. There are obviously some in these groups who make less than this, but there are a lot who make more.
Sure, I earn more than 105K myself.
But the vast majority of the income above the 105K threshold is not wages for "work", because US maximum income extends up into the billions, while wages for for work only extend up to a few million for a few individuals. So the vast majority of additional revenue from removing the 105K SS cap would not be derived from wages for work, but from investment returns of one form or another.
Investment returns have many other other privileges as compared to wages (15% capital gains rate, depreciation allowances,etc.) all of which serve to increase US income inequality (makes damn sure that the rich get richer while we are busy cutting benefits to the poor because we "have to").
I see no reason why income is not income.
Why should it matter if it is from dividends, cap gains, rental income, interest, etc.
If we are going to have a SS system, all income should be taxed as a part of it, whatever the source or amount.
The current system benefits the rich. Perhaps it was planned that way.
Not originally. OTOH, the shift towards excess FICA taxation to cover deficits certainly had the effect of reducing tax progressivity.
Time to finance SS with carbon taxes...
It is absolutely true that workers need to recieve resources and a fair pay. In fact, Democrats understand this. The whole notion behind democratic tax policy is to make certain that taxes do leave a good income for people and that is through a progressive income tax which keeps thr tax rate lower for the lower income groups rather than to penalise those who do the most difficult jobs which pay less than that of the CEO.
Democrats have been all for working people so this idea that, in fact the Republicans have done all they can to attack working common people. They oppose unions to improve wages, they oppose minimum wages, they oppose the progressive income tax, which is designed to help workers especially when they are unemployed and looking for a new job, etc.
The idea that Republicans are for working people is a lie. Every one of their policies can be shown to enrich an elite class and further consolidate wealth. They manage to use their control over the media to propogate this illusion that they are for working people, and this idea that the government is against working people, which is outrageous and not true as the government is the only thing often that will hold people through until they find a new job after being abandoned by a greedy corporation, and one of the few things that protects workers from abuses of corporations
First, if you include all income as being subject to the FICA tax, then you have just raised your future payouts since those people now get larger checks when they retire. I don't think this really solves the problem.
If people insist that they don't pay enough taxes in the United States(as hard as this is to believe after paying income, FICA, state, local, property, sales, etc taxes), then please pay up so you don't feel guilty:
https://www.pay.gov/paygov/forms/formInstance.html?agencyFormId=23779454
or
Attn Dept G
Bureau of the Public Debt
P. O. Box 2188
Parkersburg, WV 26106-2188
There is no inherent reason that higher FICA limits should increase payouts for higher income contributors.
Since 2500 BC in Mesopotamia, taxes have not been voluntary.
Despite libertarian daydreams, that is unlikely to change.
I don't think that I don't pay enough taxes, I think that Warren Buffet, Rupert Murdoch, the Walton family, and other billionaires don't pay enough taxes.
In a democracy, if enough people agree with me, we can fix that problem.
Quite.
As long as no dollar of income is taxed at greater than 100% any cries of foul play by the super rich are crocodile tears at best.
It seems to me to be best to key tax rates to the standard deviation of income from the median (all income, not just wages). Say 20% +/- 10% for each SD from the median, with a minimum of 0% and a maximum of 90% (based on which bracket each dollar earned fell into).
Cutting benefits or at least budgets is sometimes easy to see at the local level, without looking at tables
of numbers or the actual budgets. One can walk around and see waste. In my township all the town owned vechiles are brand new, but my neighbors don't seem to be able to replace their aging cars. My School district build two new high school palaces, who's hallways are 3 times wider than the classrooms i used in high school in the 70's in a new modern high school (of that day), but my neighbors are defering getting their roofs repaired, and they can't "follow up" from those high schools to afford to send their kids away to college, and are "settling" for local community college.
While the capitalism vs socialism debates sometimes crop up here, I'd like to say that monopolies and
non-competitive strategies ("tenure" comes to mind), should be an absolute exception in our thinking not
a "given" or a "rule". I have seen so few situations where they worked out well strategically.
I second that, tommyvee.
I, for one, have become convinced that this "budget balance" meme is a red herring (and a rotten one, at that).
For those who like to work things out from first priciples, I recommend Bill Mitchell's blog, starting with his Simple Business Card Economy example.
Steve Keen recently in a television interview summed up his performance wrt the GFC as "only halfway smelling of roses" (he called it, but missed the effectiveness of government intervention in halting the downward spiral) and opines that the only school of economics completly smelling of roses (both calling the GFC and correctly anticipating the effects of govt intervention) is the Chartalist (or Modern Monetary Theory, short MMT) one. Mitchell is an outspoken MMTist.
(Mitchell doth frequently rant a bit on his blog, but I for one enjoy a good rant).
For those preferring a more anecdotal approach I recommend James Galbraith's book "The Predator State". In it, he devotes a chapter to "The Impossible Dream of Budget Balance":
(p. 54)
and further on p. 58:
and on page 60 f:
Also, there's a long and good interview with Galbraith here: "There is No Return to Self-Sustaining Growth"
At last, someone else on TOD who has a clue about how money works!
This article from Gail at least raises the right issue - Will there be real resources for the retirees of the future? - but still goes down the blind alley of "funding".
Repeat after me, people: there is no "funding issue" with SS or Medicare. Whether the government writes a check, or a retiree sells a stock or bond, the monetary system is only a way for resources to be moved from current workers to current retirees. The real issue is not some numbers on a spreadsheet, it's "Will the resources be there to support both the workers and the retirees"?
And guess what? There is no way we can "save" for it. The workers of 2050 will have to produce enough in 2050 to support both themselves and the non-working people (including both children and retirees). Changing numbers in banks accounts today will not have any effect on it - the only thing we can do today is to enable the productivity increases it will take to do it when the time comes.
Here it is boiled down to one sentence. Keep in mind that this does Not include the new healthcare plan which is estimated to raise the deficit even further trillions (and the actual cost will probably be at least twice that).
According to Barrons just about a month ago......
In order to pay for just the medicare and social security deficits, tax collections will at least have to double and possibly increase three or four times.
End of point, Cann't happen...mathematically.... What happens then; I say inflation and a very weak dollar, likely high interest rates and especially commodities driven inflation.
A perfect time to mention a favorite quote about Democrats but editorialized by me to Government itself...
I would say the problem with Government (he said Democrats) is that they spend money like drunken sailors but that would be insulting to sailors because at least they are spending their own money.
Ronald Reagan
(PS no responses for those who want to insult the man who in spite of the Democrats brought down the Berlin Wall and Soviet communism and brought us one of our last great times of prosperity/21 million new jobs created...as I will be on Vacation but before you randomly argue why don't you do some serious research first into the specific point you are making).
If those sailors are in the US Navy, they're technically spending taxpayer money... But who am i to quibble with Ronald Effing Reagan?
PS - As a student of Russian language and history, I have a hard time with the arguement that Reagan brought down communism. And I'm not (nor have I ever been) a member of the Democratic party.
Back to the point of the article; I am currently in my late twenties. Under a best case, BAU scenario, I could retire around 2045 to 2050. I do not, ever, under any circumstances, expect to see my 'contributions' to Social Security or Medicare/aid every again. Peak oil, environmental degredation, public and private debt are all making the possiblity I will ever draw a Social Security check very, very unlikely.
Under a realistic scenario, I expect my 'retirement' will consist mostly of growing vegitables in an urban garden, and living close to whatever medical care may be available. As an EMT, I appreciate the value of preventative care. I try to keep myself healthy now, so I don't spend the last twenty years of my life miserable later. (Of course, I could get hit and killed by a bus tomorrow, so I hedging my bets that I'll live to see 65)
Another part of my 'retirement' plan involves having kids that can support me and my spouse in old age. And therein lies a problem with the conclusion of the article. Is having fewer kids really an option?
Once people realize all these programs don't work in the long term they will have families once again. You can not rely on pension fund managers or politicians to manage these programs properly. As you said yourself, there are too many resource constraints to keep them funded. Who is to say the United States will even exist in 2050?
Yup. And eventually they will discover the hard way that the resulting population explosion won't work in the long term either...
Perhaps death rates will increase worldwide or something.
Reagan did have a great deal to do with it but it's also never easy to prove causality on any issue. Reagan used an intentional strategy of building up the U.S. military budget and emphasizing a missile defense shield (which was mocked by Democrats as "Star Wars" but similar technology is in use today) which he knew the Soviets couldn't match because they were having severe economic issues. This strategy is detailed in his memoirs in advance of the changes. The Soviets also were undergoing economic pressure in general. After a Cold War that lasted though 7 Presidents, it seems likely that Reagan's carrot and stick approach (reforms for detente) was at least part of the cause for the very unexpected reforms, the pullback of Soviet troops, the sudden fall of the Berlin Wall, etc.
If a manager takes his team to the World Series and wins, it is difficult to prove causality but I would give him at least a good amount of credit.
http://abcnews.go.com/Politics/HealthCare/health-care-bill-cost-940-bill...
"The long awaited analysis of the bill by the Congressional Budget Office was released today and predicts the legislation will reduce the deficit by $138 billion over ten years.
The Barron's article you mention is propaganda with no reference or source for the absurd claims about doubling or tripling taxes, just arm-waving and simplistic assumptions.
We have no ability to predict budget details or deficits 75 years out, and the concern of realistic government is the next decade or two, and nothing like a doubling of taxes is required to make Social Security or Medicare solvent over that time period.
Of course, if the US health system had the price/performance characteristics of the European national health systems, the whole Medicare deficit would disappear.
http://online.barrons.com/article/SB126903927809864777.html
Same type of argument the liberal thinkers have been making for years about not worring about the future deficits...except the future it just about here...Medicare deficits are 6 times the social security deficit and it's about to go into the red (I believe in 2016).
Really think about this,do you really think a society will be able to support 1/3 of it's population with low cost health insurance and income for life (keep in mind the 0-18 group doesn't pay taxes) so the worker to retiree ratio is absurd.
Just to show how rediculous the healthcare bill is...it is an absolute fact that it depends on 10 years of revenues to pay for 6 years of benefits. That is why it is starting in 2014 not 2010 (If it was so important how could they justify the 2014 delay). You may not have seen that because I am guessing you don't look at opposing news sources such as Fox news. It is absolutely purely absurd to call a budget bill a surplus creator using 10 years of revenue for 6 years of cost. Hey, but our kids be damned.
The American people are pissed (rightly so).
Do you have anything to say, wallstreetexpress, about sending "our kids" to occupy the Middle East indefinitely for oil and gas?
I suppose not, because junkies need their fix. And we need our oil.
This country is screwed but Republicans will just accelerate the decline, as they did from 2000-2008.
Democrats are accelerating the decline in their own way with corporate bailouts, misguided stimulus, massive deficit spending, failed climate regulation and trying to save unproductive members of society. Get rid of both Republicans and Democrats.
So let's just put Reagan on Mount Rushmore. I'm sure you'll help pay for it. He should get consideration just for kicking the can the farthest down the road! And don't forget the deficit under BushII compared to the Clinton deficit:
Enjoy your vacation, WallStreet!
Yay for magical accounting and a dotcom bubble the size of Alaska!
You are correct that Clinton's "balanced budget" was nothing more than one time capital gain taxes from the dot come swindle bubble and all the day trading that went on.
It is all bullshit anyway.
Nice graph. Bush was a Republican but certainly not a Reagan Republican or fiscal conservative (he was also a terrible communicator and a weak leader). The Tea Party will hopefully and I predict very likely be eliminating many of those types of Republicans along with a slaughter of Democrats (I have a very good track record on my predictions).
In 20 years you should publish the chart again and it will be ALL BLUE (unless things radically change and the retirement age is raised quickly and Obamacare doesn't go though the Supreme Court challenges (which is at least 50%...the issue being does the Government really have power under the commerce clause- the supposed authority for the bills power- to force an activity on someone (if there is no activity---there is likely arguably no commerce). (What if the Government required you to purchase an abhorrent item to you---beer, soda...whatever you don't like---because they felt it in the public interest)and the nation addresses peak oil yesterday.
Bye I'm going to Disneyworld! where all deficits can be handled with a credit card.
If it is constitutional to make citizens pay for something with their life via the military draft then it is constitutional to make citizens pay for health care not just for themselves but for their fellow citizens. Also we are not being forced to buy health care. We have the option to pay the penalty fee which is about only $60/month. OTOH I have long believed the military draft was unconstitutional since it violated the forced labor clause.
Back in the 1960s when I was in school there was an American value called CITIZENSHIP the heart of which was your personal well being was dependent on the well being of your neighbors. Since then we went from being citizens to becoming just taxpayers.
According to zFacts.com, the two largest increases in the Federal debt occurred under Reagan's eight years and Bush II's (Cheney's "deficits don't matter") eight years. Republicans can "talk the talk", unfortunately, they have not been able to "walk the walk" on Federal debt expansion.
Ronald Reagan gave us massive deficit spending, Iran-Contra and the collapse of Savings and Loans.
My take on the issue:
We have been paying in 7.65% (or close to it - there have been a couple of rate increases quite a few years back) all of our working lives. This has been matched by our employers - money that would otherwise have been going into our paychecks. Apparently most of this hasn't really been going into "savings" at all, it is just a pay as you go scheme. Most of us have known this, and have even been joking about there not being anything there for us when we hit retirement age, so no real surprises for anyone who has been paying even the least bit of attention.
Now, I happen to feel that it is not fair to impose a higher tax rate upon the rising generations than I myself have had to pay. At the same time, I have trouble having sympathy for those of younger generations who are now complaining about having to pay anything at all - that it is too much of a "burden" upon them. Well, that burden was upon me and everyone else of my generation our whole lives, and we (with the exception of maybe a few fringe cranks) did not make any complaints along those lines. It is a flat tax, so keep it flat and keep it the same, from one generation to the next. "Fair" is a fuzzy and relative concept, but that strikes me to be about as close as one is going to get to something that a neutral, disinterested observer would recognize as truly being fair from an intergenerational equity perspective.
Will keeping the FICA tax rate the same enable us to continue paying out the level of benefits that current and previous retirees enjoyed? You bet not! Again, most of us have known - or should have known - that we were not going to have it as good as our parent's generation. Too bad, but that's just the way it is going to have to be. Tally up whatever comes in, and divide it up amongst the retirees. Maybe we'll only get 75% of what we were "supposed" to get, maybe only 50% or 25%. So be it, I'll take it.
The only thing we might consider doing is adjusting the benefit formulas so that they are based less upon earnings history, and the entire schedule compressed, with the minimum benefits held up as much as possible. This would eventually turn it into more of something that just provides a minimal income floor for retirees. I don't think it is right that younger workers should be feeding their kids dog food - if that - while retirees are living it up on the golf course or cruise ship, but I also don't think that it is right that retirees should be eating dog food - if that - while younger workers refuse to carry the same level of burden that workers have been bearing in the US for generations.
A few of you will disagree with me. Fine. I respect your point of view, but this is what seems right to me.
A tax which is eliminated above 105K income is by definition not flat.
The whole concept of a flat tax is that it applies the same to all levels of income (which is a bad idea in my opinion).
The income level to which the SS tax applies has been adjusted many times and is not flat either.
The Social Security Administration's (SSA's) Q&A regarding the trust funds:
This is my favorite part: "Far from being "worthless IOUs," the investments held by the trust funds are backed by the full faith and credit of the U. S. Government." Left unsaid is that the SSA is part of the US Government. They might as well have said that the investments held by the trust funds are backed by the full faith and credit of the Social Security Administration.
But let's consider someone who entered the workforce at about age 20 in 1983, when I believe that the Payroll Tax was increased in order to "save Social Security." Over the past 27 years, they were taxed, via the Payroll Tax, to build up the Trust Fund. In future decades, they will not only pay the Payroll Tax, but their income taxes would have to go up to pay off the very bonds that their taxes from 1983 to 2010 were "invested" in. Come again?
This is why I think it really is better to just operate it as a "pay as you go" system, and drop any pretense that it is anything else. Set a tax rate that isn't too unreasonable, and then just distribute the revenues it produces, whatever those may be. At best, the "trust fund" only really makes sense as a way to smooth variations out a little bit so that people don't have to see their benefits constantly jerked up and down.
I agree it would be better to drop the pretense, but I personally would rather have a "save as you go" system. I don't choose to live a month behind on my credit card and HOPE that I can make the payments at the end of the month. In my opinion we shouldn't structure a national system like that either.
We have a "save as you go" system. They are called IRAs, 401Ks, 403B, etc. Not perfect, but good enough.
I also think that is an important date (And notice Gail DID mention the Irag war). I like to call it Peak Unfunded Liabilities though I am certain that when it happens they will develop some "new technology" to further increase liability production. Perhaps Bernanke can develop horizontal money printing. Sorry carrying a joke too far...
but I would also like to add that it doesn't just mean that the Government will have a harder time finding new funding; it also means that Social Security will have to SELL their own Treasuries back--a double whammy that could drive up rates and since the government doesn't have any money to buy them back with they will have to borrow all of that money as well.
I didn't notice mention (maybe I missed it) of the pertinent articles I've been seeing indicating that Social Security will be in the red for 2010 such as this one http://www.nytimes.com/2010/03/25/business/economy/25social.html That indicates the above date may already be here. Now, they SAY there will be a surplus again for a couple of years before entering permanent (without fixes) deficits after 2016. I think it will be interesting to watch the next couple of years.
The fact that this recession is hastening this date backs up Gail's idea that an economic decline from PO would also worsen the problem.
"horizontal money printing" only it is better put as "horizontal money putting".
Yes, indeed, a real possibility. Doesn't require any new technology though. The financial analog would work as follows: Instead of handing out money to bankers so that they can pay off the big investors, etc., hand out money to the working class so that they can buy food and pay their rent or mortgages. The deflationists loudly trumpet there is no way to for the government (yes, Virginia, the Fed IS part of the government) to get "printed" money out there to replace the collapse of phony IOUs in the shadow banking system. It's a matter of getting the money to where it will be spent, like getting the drilling to where the oil is.
Then let inflation rip! With production hitting the wall (resource constraints), there are two ways to pay off debt: (1) repudiation of debt and (2) inflation which leads to a reduction in nominal debt but leaves the economy so weakened that one winds up with repudiation.
I had seen that article, or a similar one, so I went back and pulled up the Social Security Administration's data. For 2009, there actually is a slight surplus, when you compare expenditures of $686 billion to contributions of $667 billion plus taxes on Social Security benefits of $22 billion. (If you leave out the taxes on benefits, there is already a shortfall.) But you can see by my graph in Figure 2 what the trajectory is for each of these lines--expenditures and contributions. Expenditure are going through the roof, while contributions are flat. That is the reasoning behind my Figure 9.
I was under the same understanding for 2009. I think articles like that one are referring to CBO and SSA projections for fiscal 2010. I'll be watching with interest. Will the largest owner of US debt be able continue to buying or have to start selling? Good post.
The fact is health care and social security are things that must be taken care of. It becomes a question of what is the most efficient way to do it. The US private health care systems are the most profitable, wasteful and packed with inefficiencies of any country in the world. We have health care systems in Canada that manage to deliver better health care to all its people at half the cost. The republicans try to sell an ideology that government is always inefficient, when its the opposite, private corporations are packed with inefficiency. They then use the argument that we "cannot afford it". Which is a lie, as if we simply copied Canadas health care system, or that of any European country, we could save 50% of our health care costs. The fact is, the private system just hides the fact the system is bankrupting this country better, the fact that health disasters are a leading cause of bankruptcy and that skyrocketing health insurance costs are breaking family budgets. They then claim there is a government take over of health care, when private insurance companies who are entirely driven by the profit motive and who try to sell the worst product for the highest cost are far more abusive than any government system. A government system would be run non profit, transparently by democratically elected officials to deliver the best quality, not by profiteers whose interest is to swell the stocks and the wealth of the owners. Satisfaction ratings for Canadas health care are very high and we are looking at overall net benefit, the system provides better access to more people, and saves more lives, and at the same time costs less than the US system.
It is true that in many cases medicare and social securities projections are optimistic, and that would apply to any system. These systems are not different in that respect to private systems, private systems would deal with the crisis even more inappropriately. Obviously we need to have a steady state economy, and we need to prioritise on making these democratic systems works to meet basic human needs and reorient society towards meeting basic human needs most efficiently as possible with highest priority on food production, medical care and scientific research, and environmental production. Population growth must be stopped and we should strive through a negative growth rate to a lower population level over time, focusing on quality of life not quantity, perhaps for the US stabilising at 100 million eventually. We can do this and do it in a way with careful planning where human living conditions will actually improve in many ways. We need to place more value on clean food, clean water, nature and the protecting the natural beauty of our planet than our endless highways filled with exhaust pumping cars and bleak miles and miles of concrete steel, and cookie cutter mcmansion subdivisions with artificial, nature free yards. We cannot continue to destroy wildlife habitat and endless run amok and mow down every acre of this planet leading an ecological disaster and stark, apocalyptic nightmare of collapsing biological systems, famines, massive toxic waste and pollution, garbage filled slums, trash and human refuse with no space to put it, and a march towards a bleak desolate world without a forest or a drop of clean water or air anywhere. Population growth is a ponzi scheme that needs to be stopped for our own well being and for that of the planet.
We have to adapt and to think out of the box and thats what republicans cannot do. The stiff rigid tree that cannot bend in the wind is snapped into suddenly while the grass can bend and sway without any harm. We are approaching a snapping point where the massive, inflexible tree that cannot bend is going to suddenly snap in two. Its massive size and strength is decieving, it looks so large and powerful, how could such a big tree collapse? Oh, just ignore that hurricane that is coming, its not really there. If we were more flexiblw we as a country could massively reduce our oil usage, beginning in a few days, with as simple as car pooling, and over a longer period, with things such as bike and pedestrian friendly upgrades to cities, better public transportation, more telecommuting, as a part of stimulus build cheap affordable housing for workers near where they work and capping housing costs (both preventing another speculative bubble and allowing affordable housing to be found near work). We probably would have to tax gas more and use the revenue to fund public transportation, renewable energy, affordable near work housing, more bike trails, and cancel all road expansion projects. We have to move away from a consumption based economy to one with basic gaurantees of food and shelter and with a conservation based economy with highest priority on basic needs. But the result would be a better quality of life than if we had done nothing. We would still have food to eat if we plan carefully to prioritise our resources.
Republicans beleive it is their god given right to drive their SUV and eat endagered species and pave over every last acre of wilderness to feed their gluttonous lifestyle. I believe the glenn beck i popular to conservative because he is a gluttonous pig who lives and breaths to create the most unjust society where which is geared to massively expanding the wealth of the elite with total disregard and recklessness towards the workers, the poor, the environment and anything else. Glenn Beck and Palin types are the greatest threats to the future of this planet and our freedom, for they use clever trickery to shroud an evil, procorporate, elitist ideology to massively expand plutocratic corporate power and simultaneously attack democratic governmental institutions, and have distracted people away from the real source of power and corruption, the corporations, and tricked people into attacking the very solutions needed, that is a democratic government. They oppose any effort to eliminate corporate money from government so it is effective at representing people and protecting the environment rather than corporations, and their attacks on democracy end up making the Corporations infinitely powerful. The direction they would want to take things is towards a country such as china, where workers work 15 hours a day, make 60 cents a day, where workers may be beaten with impunity, and live in overpopulated, ruined country that is filled with toxic waste. Their ideas such as busting unions are designed to make workers completely subservant to the corporations. Their insane idea of offshore oil drilling s meant to distract people and resources away from real, positive energy solutions and in a traitorous way, they know it will not solve our energy problems and actually it is a trick to keep the US dependant on foreign oil, for whatever the Republicans evil agenda they have is. Pretty much every one of his ideas including the getting rid of ability to pay income tax and replace with a highly regressive sales or flat taxes which would be a tax increase on the poor and middle class and lower taxes on the rich, and massively increase wealth consolidation which would lead to great poverty and misappropriation of critical resources to continue the extravagent lifestyle of the rich and famous admist a time of severe peak oil induced economic collapse, apparently so they can live in complete oblivion to the disaster that is unfolding in the world as a result of their own corrupt policies.
The fact is health care and social security are things that must be taken care of.
Is this really a "Fact"? Humanity survived and thrived for quiet a long time before any government health care and social security programs were in place. There was a time where individuals enjoyed the rewards or their own decisions, and it was not compulsory for our government to make the decisions and remove the responsibility from us. Personally, I have small faith in the government and greater confidence in my decision making capability. I would much prefer to use my talents and efforts to prepare for my future, rather than having the results of my talent and effort robbed from me by the government to be spent for me as "they" see fit. It is not as if I could just opt out of these programs.
But what about the little people? All those poor folks that can't seem to manage for themselves? Isn't it the government's responsibility to care for them? Isn't it my responsibility? Someone goes out and buys a house well beyond what they can afford, max out their credit cards, and then cry that the government should pay their mortgage? The government should tax me to take away what I earn to give to them to reward their irresponsible behavior, when I chose to live modestly within my means?
What would people do if there was no Social Security or health care? Less fortunate folks may be dependent on help from churches or charities, which means they have a vested interest in treating others with respect and civility because any help would not be viewed as an entitlement or a right. Families may recognize a need to stay together, and marriages may stay together if for not other reason than it is pragmatic. People may actually take a sense of pride of being responsible for themselves and their actions, instead of looking for quick fixes and easy ways out. Would that be such a bad thing?
Let's not forget that Social Security was actual set up because of a belief that the government could do a better job of ensuring the well being of it's citizens than the individual could.
respectfully,
ej
Maybe you should read some Charles Dickens to see how "great" things were in the days without government social security and health care.
While peak oil and climate change may bring us back to Dickensian conditions, I see no reason to rush the process. Government social safety nets did not develop in a vacuum, but because of the obvious "fact" that many desperate people were falling though the inherent gaps in private and church charity systems.
The US is already the industrialized nation with the highest income inequality and removing Social Security and health care would only make it more unequal with all the increased crime, ill health, and social dysfunction that inequality brings.
Ever since I entered the work force, someone has been trying to discredit social security, and make working people and retirees alike anxious.
It has been wall street policy since Pinochet was put in power to raid socialized retirement funds, to garner fees from managing them into the ground. Meanwhile, the burden of supporting the aged was conveniently shifted onto their children and grand children. Which is what you are advocating at the moment.
Tell me, why don't you simply line up all retirees against a wall and have their children shoot them?
At Public Research Institute ( PRI ) we looked into this matter. In fact creating a reverse income tax system based upon social security would cost 900 billion annually and could be funded with an 11% flat tax on wages and incentives, not matched by employer contributions. We envisioned this system replacing all existing support systems including SS, food stamps, welfare, unemployment, etc. Our beneficiaries need have completed 6 yrs national service, or 40 quarters to receive $ 20,000 / yr annually and both 6 yrs national service and 40 quarters or 80 quarters to receive $ 30,000 / yr annually.
Given the multiplier effect, this 900 billion of benefits, would generate 4.5 trillion in GDP.
We separated out the medical expense problem into a single payer health scheme with an annual premium of $ 2700 / citizen - yr. This is equal to the cost of the French system. At 850 Billion / yr this scheme costs less than what the Federal govt currently pays in it's various schemes, and of course state, local, and private costs are additional burdens currently.
What is needed is the realization that currently there are 24 million unemployed and in the next 10 years 25 million are reaching retirement age. The nation needs these people to retire to make room for younger workers.
Also needed is the realization that this retired group can make further contributions to reducing the carbon footprint because when retired they use much less fuel, they can garden, they can pursue art and other activities which contribute socially, and in these ways contribute to improving the quality of life for the working population, by babysitting their grand children if nothing else.
What is definitely needed is the realization that using the Swiss model, DOD's budget could be reduced to $ 100 billion annnually. Also needed is the realization that the "free" markets so mentioned were to be free of rentierism, that is interests collecting funds for passive activities, ala Goldman's Front running using computers and realtime data from the NYSE.
This means that the US consumer debt load needs drastic reduction, ala a Jubilee, or purchase of CDO's at market, does any one really believe they aren't worth little more than pennies on the dollar, and redemption by the debtors at 10 cents on the dollar.
I note that you are not advocating Treasury recover the 4 Trillion squandered on the big banks, not advocating putting them and the big three automakers into bankruptcy, which is where they belong, not advocating breaking the residue up, not advocating writing off the worthless paper they generated. Why? Considering they suck up more than $3 trillion in rent annually from main street??
Also definitely needed is allocation of funds to electrify and double track 56,000 miles of mainline rail, shift of all freight, except local freight, back to rail to save 6 MBbl/day. A feed-in tariff for renewables to provide the missing link in shifting the electricity grid to them.
Eliminating the income tax and replacing same with a VAT on goods and services, with Financial instruments considered taxable services, could at a base rate of 10% provide $ 1.4 trillion in revenue.
This would permit the US to implement an industrial policy by rating imports at zero, thus taxing their full value, including freight. This tax should be progressive, with large firms paying as much as 33% Do you realize that GE pays less than 0.5% of its income in tax???
A carbon tax of $14 / MT would provide $ 250 billion in revenue.
A tax on crude oil of $ 15 / gallon, collected at the refinery, would be easy to collect and would produce $ 4 Trillion in revenue, while finally causing the public to pay the true cost of imported oil. We think $ 4 / gallon is a good place to begin.
With such a tax SUVs would no longer be economic, and the US would be using vehicles much like ROW. For example, my Toyota HiLux Surf with 3.O L Diesel got 25 mpg in Africa. The US HiLux 4Runner with V8 gas engine gets 8 mpg. It's the same truck!! The difference... subsidized fuel...
Also needed is a shift from suburban living to compact towns and small cities, so it easier to provide services, and to conserve farm land.
Considering farm land.. when farmers shifted from horses to tractors for draft power, they freed up 100 million acres which formerly grew horse feed. Those additional acres accounted for much of the surplus food production which plaqued the US during the 50S - 60s and 70s. During the next 50 years farmers will shift back to horses, and that land will revert to horse feed, leaving a shortfall..and a crisis.
Dr. George W. Oprisko
Public Research Institute
www.publicresearchinstitute.org
Tell me, was that a common practice prior to the introduction of Social Security?
I would agree in part to this. Not sure about the small cities. I would prefer hamlets and small villages, and a more rural approach. Problem is that to do that, there are still just too many people. Why not focus on reducing taxes rather than raising new ones, and substantially reduce the size and power of governments. They introduce a huge inefficiency and produce very little value added.
For what it is worth I accept that we are in deep population overshoot which is maintainable only through massive consumption of a one time endowment of fossil fuels. Renewable energy is actually an oxymoron. What it describes are techniques for capturing forms of energy transmitted from the sun, with great entropy, but still viable for processing to release some energy for human consumption. "Renewables" are silver bbs but will not come close to replacing the amount of energy we are currently consuming. It is inconceivable to me that we will achieve such technological gains in energy consumption efficiencies so we will be able to maintain our current life styles for the quantity of people we have on this planet with drastic reductions in the net energy available. I interpret this into a belief that a mass dieoff is unavoidable. (note, I am not saying I want this, or look forward to it)
The comment above asking me to read Dickens, hummm, were not most of his novels set in industrial 19th Century England, which had been transformed by the Industrial revolution due to the expanded use of Coal (a fossil fuel).
I try to imagine what the world may look like in say, 500 years. Certainly, the fossil fuel craze will have run it's course and hopefully humanity will have settled back into some level of equilibrium with our environment, and returned to living in a sustainable manner. If you could picture that, that would be the target for us to move toward today. Ultimately, that would be where we arrive, the question is do we transition on our terms, or do we wait until reality forces us to change. I don't think it is possible for any government to assist in guiding us toward this future reality, especially when it means that that move would tend to weaken the government. Instead we will see reluctance and resistance to change, and most likely grab for greater power and control, along with decisions which take us in exactly the wrong direction.
That blame should be put on the mortgage industry for swindling the ignorant into loans that they knew were illegal.
Oh yes, the poor innocent borrower who was forced into a loan for a house that they couldn't afford the payment on, with loan terms that they didn't understand. Sorry, but if you can't afford the payments and you don't understand your loan, then you probably shouldn't be in that house, either now or then... Since you found a shortsighted way to get it then, you are probably in the process of losing it now. A good clue would have been that you couldn't afford the monthly payment on a 30 year fixed rate loan, but somehow this adjustable thingie where you don't actually have to pay the full cost of the loan for awhile is going to make it all work out perfect for you. And the loan officer gave you a lollipop too.
I have sympathy for those who lost their job, or had a serious medical issue which forced them into bankruptcy or delinquency, but please don't expect me to feel sorry for the foolish.
I have not seen any political party willing to take on our current issues.
Yes and there is no consensus that they should do so. People have gotten used to the bread and circus's and to try and take that away is going to be very unpopular. Its going to take enormously affective and effective leadership from alot of people to get it to sink into people's heads. One party will not be able to do it.
Here's to new leadership, hopefully based on reality,
-
It's a chicken and egg question which can never be truly answered.
Did the middle class collapse, and that led to extremes of wealth, toxic politics, and the rise of corporate neofeudalism? Or are extremes of wealth, toxic politics, and corporate neofeudalism causing the middle class to collapse?
I don't think there's an answer. It is what it is, though.
I do not understand money.
We are not friends.
Both the American and the Australian Governments are directing our attention towards the cost of health.
What is it that they don't want us to discuss?
Climate catastrophe? Energy plateau? What?
What is there lurking in the shadows?
What meme needs to be eradicated by the ruling classes?
http://thetrustadvisor.com/news/billionaire
http://thetrustadvisor.com/news/billionaire
By it's fruit is a tree known.
Is this the fruit of the "American Dream?"
No thanks.
It's just too icky.
What this current economic crisis points towards is the next stage in the development of globalization in the advanced, western, nations. We've already seen the dumping of the traditional working class on the scrapheap of history, along with their jobs in manufacturing, now the great axe is heading towards the heads of the middle class, the final bastion of the American Dream.
A fundamental question is, will the middle class follow meekly in the footsteps of the working class and passively accept the destruction of their careers, social position, lifestyle and dreams too?
We appear to be entering a new era of "fuedalism" where there will only be two classes, the rich and the poor, with little imbetween of significance anymore.
Of course I'm oversimplifying here, but I think it's obvious that this is the socio/economic trajectory we are on. It's kind of back to the future. The kind of society that existed before the fossil fuel revolution, take that away and what's left? It's something like Jane Austin's England, which was clearly great fun for the tiny elite at the top of the social pyramid, but not so much fun for the 95% of the population working their backs off to support Mr.Darcy and the Bennet family in the elegant styly they were accostomed to.
(Gail, up top, my emphasis)
I would not be comfortable making a statement like this; I fear you are setting yourself up for an unearned "debunking".
While I agree that we're likely to become poorer in real terms, that does not preclude GDP from increasing, and GDP is the agreed-upon measure of economic health in mainstream discourse.
A thought example inspired by yesterday's aquaculture discussion:
In The Beginning: Our ocean fisheries fish a Quantity (Q) of salmon each year.
At A Later Date: There's no more salmon in the oceans, but there is stuff like the lesser sand eel that can be scooped up, made into fishmeal, and used as fodder for farmed salmon. This is done, and so consumers can continue to consume Q salmon each year.
Now society as a whole is clearly worse off Later than it was in the Beginning, because the amount of salmon available to consumers remained constant, but to provide it, more work was done (a fish farmer was added, and a fishmeal factory worker was added), more capital was invested (a fish farm was added, a fishmeal factory was added)...
Now GDP is commonly defined as
GDP = Consumption + Investment + Gov. spending + (Exports - Imports)
and this has clearly gone up. The fish farmer bought the fishmeal from the fishmeal factory, which bought it from the fisher, both stages "adding value" and adding to Consumption;
and a fish farm, and a fishmeal factory was built, adding to Investment.
The point is, GDP is a good measure of the size of the ecomomy.
GDP is perverse as a measure of the health of the economy, or the well-being of the people in it.
As long as mainstream discussion of the economy is habitually framed in terms of GDP, I see little hope of getting the "we're getting poorer" point across, because, measured in GDP, it may not be strictly true.
I'll go further than Gail and say that for sure incomes will not be the same as the past in real terms, and I'm reasonably sure she meant that even if she didn't put in the "real terms" qualifier. The number of unemployed around the world is huge and will grow as the energy abundant, specialized economy we have now reverts to a more generalized, poorer one. Downward wage pressure is tremendous right now as people will work for 1/4 of their former salaries (or less) just to keep money coming in the door.
The trend started even before the run up in oil prices.
Hyperinflation may change the numbers a bit but everyone will no doubt know that they are still becoming poorer as that occurs.
Yes, I agree. But that was not my point. Let me come at it from a different direction:
This was linked in DrumBeat April 7th:
Is Africa underpopulated?
This kind of reasoning is widespread, and actually compelling to a lot of people.
(In fairness I must say that the excerpt is not entirely representative of the article, which is sort of reasonable)
By not nipping it in the bud, we can easily be countered by a "growth is driven by demand" - argument, and the counter will be accepted by the mainstream.
The social security problem of retirees would not be that severe. Its because due to general decline in economy there would be a general decline in health care services. Due to general decline in health care services the number of living retirees would be much less than currently estimated.
I am not convinced that the medical problems would get rid of the number of retirees all that quickly.
If there are issues with something like polluted drinking water, that will affect people of all ages--not just the elderly. Healthcare is most helpful in keeping mothers alive through childbirth, and infants alive. Also, dealing with accidents. These are young people issues.
Even if an older person is saved from cancer, they often die of something else not too long afterword.
I don't know which government lingo that is. I've always read about them as "Payroll Taxes".
It is possible republicans want to call them contributions - because they don't want to admit how regressive our tax structure is. The poor pay a disproportionate % of their income in taxes than the rich. That is accomplished mainly through payroll taxes - where these is a cap on the amount of payroll taxes one needs to pay.
I have been researching and writing about Social Security for more than a decade, and I have published four books on the subject. The hard fact is that every dime of the $2.5 trillion in surplus Social Security revenue, generated by the 1983 payroll tax hike, has been spent on wars and other government programs. Every month, for the past 25 years, the total receipts from the payroll tax have been split two ways. First, benefits for current retirees are paid from the Social Security revenue. Then, all remaining Social Security revenue, not needed to pay that month’s benefits, are deposited into the general fund and become indistinguishable from other general fund revenue.
Most workers think that at least some of the FICA taxes deducted from their paychecks will be saved and used to pay future Social Security benefits. But it doesn’t work that way. Not a single dime of payroll tax revenue has ever been saved and earmarked for the payment of future benefits. To put it bluntly, the government has “borrowed,” “embezzled,” or “stolen” every penny of the $2.5 trillion of surplus revenue that was supposed to be saved and invested. I consider this to be the greatest fraud ever perpetrated on the American people by their government. I have been trying to expose this awful truth for more than a decade, and some courageous people were trying to expose it even before I stumbled onto the scam in 1999.
On October 13, 1989, Senator Ernest Hollings (D-SC) issued the following warning in a speech on the Senate floor.
“…the most reprehensible fraud in this great jambalaya of frauds is the systematic and total ransacking of the Social Security trust fund ..in the next century…the American people will wake up to the reality that those IOUs in the trust fund vault are a 21st century version of Confederate bank notes.”
A year later, on October 9, 1990 Senator Harry Reid (D-NV) made a similar warning in a Senate speech. He said:
“…on that chart in emblazoned red letters is what has been taking place here, embezzlement. During the period of growth we have had during the past 10 years, the growth has been from two sources. One, a large credit card with no limits on it, and, two, we have been stealing money from the Social Security recipients of this country.”
On January 21, 2005, David Walker, the Comptroller General of the GAO, tried to make it clear to everyone that the trust fund contained no real assets. He said:
“There are no stocks or bonds or real estate in the trust fund. It has nothing of real value to draw down.”
If anyone has any remaining doubts about whether or not the trust fund contains real assets, those doubts should be removed by the following statement from the 2009 Social Security Trustees Report:
“Neither the redemption of trust fund bonds, nor interest paid on those bonds, provides any new net income to the Treasury, which must finance redemptions and interest payments through some combination of increased taxation, reductions in other government spending, or additional borrowing from the public.”
I urge everyone who cares about the future of Social Security to please visit my website at www.thebiglie.net to learn more about Social Security and my efforts to expose the scam. Excerpts from my latest book, “THE BIG LIE: How Our Government Hoodwinked the Public, Emptied the S.S. Trust Fund, and caused The Great Economic Collapse,” are posted on the site. Please feel free to download them.
Allen W. Smith, Ph.D.
Professor of Economics Emeritus
Eastern Illinois University
Website: www.thebiglie.net
Email: ironwoodas@aol.com
Phone: 1-800-840-6812
Thank you for the work you are doing.
Thanks for your views.
What you are saying sounds a whole lot like what I am saying.
I discovered that the same thing happens with any other kind of "premiums" or advance funding taken in by other departments. They just get spent, and replaced with government IOUs. Taxpayers will have to pay for both the principal and interest on this debt.
I think it's imperative to break out of the divisive and diverting straightjacket of "left" and "right" and start to look at the real schism in society, the one that's going to characterize the future to an alarming degree; and that is "up" and "down". Who is up and who is down, and why exactly? Wealth and power, who has it, who doesn't, that's what we have to concentrate on.