Category Archives: American Economy

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In the Nineteenth Century, the United States prided itself on being the land of “Go-Getters.”[1]  A vast continent packed with natural resources awaited exploitation.  At the same time, American entrepreneurs felt a grievous need for labor to transform those riches into “riches.”  Partly the country satisfied that need through massive immigration.  Partly the country satisfied the need by technical innovation to substitute machines for men.  Partly, the “professional” standards were lower then.  People—men mostly—could try their hand at whatever caught their fancy.

Yet, with all the problems of using what the United States already possessed, there were people who wanted to expand the “Empire of Liberty” still more.  As the term “Manifest Destiny” began to buzz about, people began to ask in which directions that destiny lay.  For most, it meant expansion westward to the Pacific Ocean.  For others though, such notions reeked of reticence, even cowardice.  Everywhere one looked to the South of the United States one saw the same conditions: vast natural wealth going to waste, the “rule of ignorance and superstition” (a common term for the Catholic Church); and the brutal oppression of the many by the self-enriching few.  These were the hall-marks of mid-century Mexico, Spanish-ruled Cuba, and—worst of all—Central America.  By 1836, Texas had gained independence from Mexico; by 1848, California.  The Mexican-American War had ended with a definitive boundary between the two countries.  Still, why stop there?  Why not add southern lands or Pacific islands?

At the same time, the issue of slavery began to tear savagely at America.  All the political compromises banned slavery “north of” some line.  What if the United States—or some one acting on behalf of the United States—conquered foreign lands where slavery already existed or had recently existed?  The sectional “balance” might be restored in an enlarged United States.

It is against this background that we might see the career of William Walker (1824-186o).[2]  The Southern-born Walker tried to set-up an independent state of Sonora and Baja California (1853-1854).  He next invaded Nicaragua, where he made himself President (1855-1857).  In Nicaragua, Walker reinstated slavery, made English an official language, and encouraged immigration from the United States.  Kind of like Texas in the 1820s-1830s.  In the end, an army of understandably-nervous Central American oligarchs drove out Walker.  So, no Santa Ana.  In 1860 Walker took another swing at Central America by trying to invade Honduras.  He wound up having a last smoke in front of a pock-marked adobe wall as a dozen sweating soldiers fiddled with their weapons.

As a thought experiment, consider what would have happened if Walker had succeeded in adding Nicaragua and Honduras and a chunk (or all) of Mexico to the Estados Unidos.  Perhaps the Americans would have wiped out the “colonial legacy” from Spain.

Perhaps the new territory would have ended up like Texas and California.  Leaving aside the Democrat-Republican split, they are both big states with diverse populations, and are states with lots of natural resources and lots of industry.  Same might have happened to Central America if it had become part of the United States.  Perhaps everyone would have been better off?

[1] Not to be confused with the drag performer Carmen Geddit.

[2] Scott Martelle, William Walker’s Wars (2019).

American Opinion in June 2019.

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According to a recent poll, ten percent of Americans believe that Donald Trump is the best president of their lifetime.[1]  Trump’s support was concentrated among older, white, men.  In particular, according to a Pew Trust analysis, “49 percent of those aged 30‒49 feel warmly toward him, 60 percent of those aged 50‒64 do, as did 56 percent of those over 65 years of age.”[2]  So, the enthusiastic ten percent may come from older voters.

In contrast to most voters, both Trump supporters and Trump opponents have some historical basis for judging “best” and “worst” presidents.  If someone was 50 in 2016, then they were born in 1966; if someone was 60 in 2016, then they were born in 1956; if someone was 70 in 2016, then they were born in 1946.  If we postulate that people start to become politically aware at age 20, then 2016 Trump voters became politically aware between 1966 and 1986.

What do they have to work with in terms of historical experience of the presidency?  They have late-stage Lyndon Johnson (Vietnam, the social turmoil associated with the “Great Society”); Richard Nixon (Vietnam, Watergate); Gerald Ford (the first “oil shock” and inflation); Jimmy Carter (second “oil shock,” inflation, Iran hostage crisis); Ronald Reagan (Paul Volker wringing out inflation, defeat of the “evil empire,” Iran-Contra); George H. W. Bush (Preppy in the White House, first Iraq War, “read my hips”); Bill Clinton (Eddie Haskell in the White House); George W. Bush (Frat Boy in the White House, 9/11, the flunked war in Iraq, Hurricane Katrina); Barack Obama (Affordable Care Act, but also the Stimulus bill, rule by decree).

Experienced voters might be forgiven (although they will not be forgiven) for thinking that in their lifetime American government has run amuck and that the quality of presidents has deteriorated.  This ignores the reality that we have lived through very turbulent times that demanded government responses.  Many of these problems found no easy solution.  Still, is it possible that the typical voter follows the meta-narrative, rather than the micro-narrative?

Polls also showed that Trump appealed most to those with only a high-school education, but least to those with a college BA or more.  Well, auto-workers and steel-workers and a bunch of other workers used to be able to earn a middle-class income walking off the graduation stage and into an industrial job.  These people used to be a) Democratic voters, and b) the salt of the earth in Democratic discourse.[3]  Why did they stray, assuming it was the voters, rather than the party, that strayed?  Then, how does the educational profile of Trump voters compare with the educational profile of African-Americans?  Data suggest that educational attainment among African-Americans, measured in terms of BAs, is about two-thirds that of whites.[4]  How different is this from the educational profile of Trump voters?

The Pew poll also showed that core Trump voters believed—correctly—that free trade had harmed their own interests.  They believed that he would address illegal immigration, which they regarded as a serious problem.  They thought he was an awful person who might get things done.  “Those who sow the wind shall reap the whirlwind.”

[1] “Poll Watch,” The Week, 14 June 2019, p. 17.

[2] See: https://www.thoughtco.com/meet-the-people-behind-donald-trumps-popularity-4068073

[3] See: Norman Rockwell, “Freedom of Speech.”  https://www.periodpaper.com/products/1945-print-norman-rockwell-vermont-man-freedom-of-speech-open-forum-oil-painting-126405-xaa5-061

[4] See graph: https://www.usnews.com/news/blogs/data-mine/2015/01/28/us-education-still-separate-and-unequal

Rising Tide.

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In the 1840s, two republics contended for power in the southwestern quadrant of North America.  In 1846, Mexico and the United States went to war over the issue.  The United States inflicted a catastrophic defeat on Mexico.  As prize of war, the United States got California, Nevada, Arizona, and New Mexico.  Plus the Republic of Texas was allowed to join the United States.  In 1853, the United States “purchased” the Gadsden Strip from a chastened Mexico.

Until 1924, the United States pursued a policy of “open borders.”[1]  That meant millions of Southern and Eastern Europeans could migrate to the USA.  Big industrial cities in the East and the Midwest filled up.  It also meant that there were no restriction on cross-border movements in the Southwest.  Many Mexicans migrated northward toward the more dynamic economy of the United States.

Then came the Depression, which decreased wages in both Mexico and the United States.[2]  When the United States entered the Second World War, the American economy began a long boom.  Between 1944 and 1966, 5 million “braceros” (Mexican temporary workers) came to the United States.  Not all of them went back.  By 1969 an estimated 540,000 illegal immigrants were working in the United States.  That number increased markedly in the 1970s and 1980s.  The economy of Mexico slumped far more than did that of the neighboring United States.  By 1986, perhaps 3.2 million illegals were living in the United States.  Mostly they were doing work that ordinary American citizens would not do.  Hard, dirty, and for long hours.

In 1979, the Carter Administration (1977-1981) proposed building a border wall.  In contrast, inn1986, the Reagan Administration supported an Immigration Reform and Control Act that granted amnesty to 2.7 million of the illegals.

Under the Bill Clinton and George W. Bush Administrations, it was back to “get tough.”  From a dozen miles of fence between San Diego and Tijuana, the amount of fence grew to 560 miles after 9/11.  In 2000, 1.6 million illegals were caught at or near the border.  Then the Obama Administration added 137 miles of fence for a total of 697 miles of fence on the 1,954 mile-long Mexican-American border.  Purportedly, improvements in the Mexican economy then reduced the migration of Mexicans.[3]  In 2017, the Border Control arrested only 310,000 illegals.   So, triumph without a—full–wall!

The recent border “crisis” arises from different sources.  Many Central American countries are collapsing under the weight of gang violence and mis-government.  Whole families are migrating and presenting themselves as “refugees” at US points-of-entry.

However, people crossing the Sonoran desert is a peripheral issue in so far as illegal immigration is concerned.  In 2017 alone, 700,000 people obtained US tourist visas and then over-stayed their visas.  They just disappeared into the American hinterland.[4]  That is better than half of all the illegals.

Why should Central Americans get priority while Asians, Africans, and Muslims wait?  “It’s a serious question.”  https://www.youtube.com/watch?v=vInFuLgwR1U

[1] From 1882, the United States did try to limit immigration by Asians to the Pacific Coast.

[2] “A history of the southern border,” The Week, 8 February 2019, p. 11.

[3] The huge slump in the American economy—the “Great Recession”—may also have had something to do with it.

[4] This was basically the story with the 9/11 hijackers.

Just the Facts, Ma’am 2 11 February 2019.

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Second, three tax proposals have been offered to raise more revenue from the rich.[1]  Congresswoman Alexandria Ocasio-Cortez has suggested raising the tax on incomes above $10 million from the current 37 percent to 60 or 70 percent.  This would return upper-income tax rates to the level that prevailed during the 1970s.  In the regime of the 1970s, many deductions and exemptions existed which do not exist today.  The effective tax rate on high incomes under the Ocasio-Cortez proposal would be much higher than the one of the 1970s.  However, the top rate in the 1970s applied to the contemporary equivalent of $800,000.

Senator Elizabeth Warren has proposed a “wealth tax,” not merely an income tax.[2]  People with a net worth between $50 million and $1 billion would pay 2 percent per year[3]; people worth more than $1 billion would pay 3 percent per year.[4]  According to the calculations underlying Senator Warren’s proposal, this tax would generate $2.75 trillion over ten years.

The Warren proposal may not be constitutional.  The 16th Amendment to the Constitution created a tax on income, not a tax on all assets.  Apparently, the courts have held that taxes on estates and gifts are excise taxes on the transfer of assets, rather than a tax on the assets themselves.  The tax also might be a logistical nightmare to apply.

Senator Bernie Sanders has proposed revising the estate tax.  Until 2009, the tax applied to estates of more than $3.5 million.  A 2017 tax change raised the threshold for individuals to about $11 million and the threshold for couples to about $22 million, with a standard tax rate of 40 percent.  Senator Sanders would return to the 2009 level of $3.5 million.  In addition, he replaces a single tax rate with multiple rates.  From $3.5 million to $10 million, the rate would be 45 percent; on estates of $1 billion or more, the rate would be 77 percent.

[1] Paul Sullivan, “Taxing the Rich Sounds Easy.  But It’s Not,” NYT, 2 February 2019; Sydney Ember, “Sanders Unveils a Plan To Increase Estate Taxes,” NYT, 1 February 2019.

[2] Senator Bernie Sanders also supports the idea of a wealth tax, if not necessarily Senator Warren’s version of such a tax.

[3] Apparently, there are 39,735 people worth between $50 million and $1 billion in the United States today.

[4] Apparently, there are 680 billionaires in the United States today.

Just the facts, Ma’am 1 11 February 2019.

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The Congressional Budget Office (CBO) reports that spending on people aged 65 and older[1] has increased as a share of federal spending from 35 percent (2005) to 40 percent (2018) and is projected to rise to 50 percent (2029).  The federal budget deficit is projected to exceed $1 trillion a year from 2022 to 2029.  Proposals recently offered by Democrats intending to run for President in 2020 or to shape the party’s policy for that race may have an effect on this situation.  None of the proposals claim to aim at deficit reduction.  Instead, they target reducing income inequality and/or financing expanded programs.

First, it is proposed to reform Social Security.[2]  As originally designed, Social Security enhanced private preparation for retirement by adding the resources from a tax on currently working people to individual savings and/or pensions.  Today, however, there appears to be a savings crisis among working people.

There is also a financing crisis for Social Security.  The actuaries at the Social Security Administration report that outlays (payments) will soon exceed income (withholding tax revenues).  Thereafter the payments will be paid from an accumulated surplus held in the form of U.S. treasury bonds.  When that trust fund is exhausted by 2034, benefits will have to be reduced.  Currently, about 63 million people receive Social Security benefits.  The number is expected to rise to 89 million by 2030.  The total current cost is about $1 trillion.  The maximum amount of income subject to Social Security tax is $132,900; the current withholding tax on payrolls is 12.4 percent.

Democrats propose to increase the minimum benefit to help lower-income people who have saved less than have higher income people; increase benefits by an average of about two percent; raise the annual cost-of-living adjustment to payments to respond to the reality that retirees consume goods and services in a different pattern than do still-working people; cut the tax on benefits for middle-income recipients while increasing them on upper-income recipients; and increase the payroll tax rate from the current to 14.8 percent by 2040, and the payroll tax would be imposed on incomes above $400,000 a year, while incomes between $132,900 a year and $400,000 a year would not be subject to taxation.

This proposal would permanently fix the financing problem.  It would also increase benefits paid out to some Social Security recipients.  An estimated three-quarters of the extra income would go to covering the looming deficit; the rest would go to increased benefits for lower-income recipients.

[1] Social Security, Medicare, Medicaid.

[2] Robert Pear, “Democrats Push First Major Social Security Expansion Since 1972,” NYT, 4 February 2019.

I am running for President in 2020 1.

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I believe that life begins at conception.  (If it didn’t, then women wouldn’t want abortions.)  Let me state plainly: I would never have an abortion.  OK, I’m a 64 year-old guy, so that’s an easy position to take.  At the same time, I’m not willing to shove my personal opinion down the throat of a fifteen year-old black girl in West Philadelphia, living with her mom and grand-mom in some tumbledown row house, and attending what the City of Brotherly Love is pleased to call the public “schools.”  Moreover, with Prohibition and the War on Drugs having been such great successes, I don’t see how a War on Abortion is any more likely to succeed.  Unless, you know, heart-break and misery across multiple generations is what you really want to produce.  Then go ahead, knock yourself out.

 

The same goes for a War on Guns.  Yes, there are things we can do.  We could strictly regulate the sale and possession of all firearms through the Defense Department.  This is what our friends in Mexico do.  Virtually no one in Mexico is allowed to own a firearm of any sort.  This step would could reduce our gun-death rates to Mexican levels.  Furthermore, many deaths are linked to the drug trade.  We should forbid the use of or trade in drugs.

OK, sounding like the mayor on “The Simpsons.”  More realistically, we could end the War on Drugs and we could try to revise the National Firearms Owners Protection Act.  The former promotes a “war for the corners.”  It also promotes a macho “step to him” code of behavior that leads to violence not directly related to the drug trade.  The National Firearm Owners Protection Act restricts the ability of the Bureau of Alcohol, Tobacco, and Firearms to closely regulate federally-licensed gun-dealers.  While the vast majority of such dealers are responsible and honest people dealing in a Constitutionally-protected commodity, a tiny minority facilitate straw purchases and suffer “robbery.”  So, let’s knock-off the stuff about the “gun-show loop-hole” and not allowing father-to-son gun transfers without a background check.

 

We should RICO the Catholic Church.  Pennsylvania’s attorney general recently released a report on the sexual abuse of minors by members of the clergy.  Here’s the thing, the AG got the information for the report by gaining access to Church records and then interviewing a lot of parishoners who had been abused.  Well, this scandal has been running for a while now.  Long ago, the Church could have done what the AG later did without breaking a sweat.  If they wanted to know.  Apparently, they didn’t.  Why not?

I suspect that, at some point back in the day there, the American priesthood became a place for gay Irish men to go and hide.  Fine by me.  They were doing God’s work.  If they go sylphing-off to have sex with other gay men, I don’t care.  However, given the anti-gay stance of both the Church and larger society, it exposed them to a terrible vulnerability.  They could be black-mailed by pedophile colleagues.  Pedophiles appear to be a very small segment of any sexual orientation.[1]  But they may have been just as ruthless and predatory toward their fellow-priests as they were toward their child-victims.

So, treat the Church as a criminal conspiracy.

[1] You ever noticed how few girls from Catholic schools have come forward to say “Sr. Mary Elephant copped a feel on my then-almost-non-existent tit”?

My Weekly Reader 23 July 2018.

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“Globalization” means the trade in goods and services, the flow of capital, and the movement of workers across national boundaries with little or no national constraints.  This is an old story in human history, but it accelerated dramatically after 1945[1] and it has moved at astonishing speed since 1990.[2]  Globalization has spawned disruptive costs that accompany its immense benefits.  Much attention has focused on some of the costs more than on the benefits.

The political reaction against globalization commands the headlines.[3]  Examples include President Trump’s “America First” policies of tariffs and limits on migration; the British vote to leave the European Union (“Brexit”); and Angela Merkel’s suddenly precarious leadership of Germany.  The most persuasive interpretations see this reaction as rising from two sources.  One is the unequal distribution of both the benefits and costs of globalization.  The other is the resulting discrediting of the elites as leaders in the eyes of everyone else as followers.

One can point to many flaws in democratic governance.  However, part of the current problem is that democracy actually works.  Donald Trump won the 2016 election; a narrow, but real, majority of British voters chose “Brexit”; Italian voters supported the current coalition of anti-immigrant, anti-EU parties that governs the country.  Many of the reforms seem intended to blunt the responsiveness of politicians to the popular will.  These include giving the president of the United States more authority to commit the country to treaties that could not pass the Senate; extending the time between elections to buffer politicians from the public moods; raising the pay of politicians so that a better class of person will go into politics; and instituting civic literacy tests for voters.

Trends that have nothing to do with globalization, but which will rock a globalized world economy get lost in the shuffle.[4]  For example, in Western countries, robots look like a mechanical version of China: low-cost, high-productivity workers.  In developing countries, however, they are just as great a challenge.  Hundreds of millions of people in China, India, and elsewhere have been pulled out of abject poverty by industrialization.  Their jobs, too, are at risk.  Developed countries will have no incentive to off-shore production and developing countries will have to compete with their own robots.

Then soon–but possibly not soon enough–a demographic shift will occur from low birth-low death to low birth-high death.  The United States already depends upon immigration for its population growth (and the financial stability of Social Security).  Japan and many European countries (Germany and Italy for example) are in much worse shape in terms of their young workers-elder retirees ratios.  China will soon enter the ranks of countries this imbalance.  How will different societies pay for their aged, non-working populations?

[1] After the Second World War, the United States led the construction of an open “Free World” economy through institutions like the World Bank (International Bank for Reconstruction and Development), the International Monetary Fund (IMF), and the General Agreement on Tariffs and Trade (GATT).

[2] The collapse of the Soviet Union discredited centrally-planned, non-market economies in the eyes of previous true believers.  Russia, the former “captive nations” of the Soviet Empire, and the Peoples Republic of China all adopted capitalist market economies.  Many other leftist economies in the developing world (notably India) did the same thing.

[3] Dambisa Moyo, Edge of Chaos (2018).

[4] Ian Bremmer, Us vs. Them: The Failure of Globalism (2018).

Annals of the Great Recession XVI, Legacies.

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In theory, the American economy is doing well.  Unemployment is at the lowest level in this century; corporations are investing, and there are signs of increasing consumer spending.  Fine.  However, there are also reasons to be concerned.  One is the “flattening of the yield curve.”[1]

The United States government borrows money by selling bonds (Treasury notes).  Basically, bonds are IOUs + Interest.  These Treasury notes run for different periods of time and pay different rates of interest.  Long-term bonds run for like 10 years, while short-term bonds run for like 2 years.  The long-term bonds pay higher interest (called “yield”) than do short-term bonds to account for inflation.  When the economy is growing strongly, prices will tend to rise.  The gap between the yield for long-term bonds and the yield for short-term bonds is called the “yield curve.”

If people think the economy will grow, then they will put their money in stocks and the Treasury will have to pay higher interest on its long-term bonds.  If a lot of people want the security of long-term bonds, rather than the risk of stocks and don’t fear inflation, then the Treasury won’t have to pay as much interest.

Then there are the banks.  They borrow money at low short-term rates and lend it at higher long-term rates.  That’s how they make a profit.  If short-term rate approach long-term rates, it pinches their profits.  If short-term rates exceed long-term rates, they actually lose money.  So, they stop borrowing and lending.

Here’s the thing.  The gap between long-term and short-term bonds has been closing.  This is called “the yield curve flattening.”  A year ago the gap was 1 percent; three months ago it was 0.5 percent; in early July it fell below 0.3 percent.  Interest rates for long-term bonds has not been rising much, while the rates for short-term bonds has continued to rise.  This suggests that bond-traders do not expect a lot of inflation, which suggests that they have doubts about future economic growth.  At some point, the yield for short-term bonds could rise above the yield for long-term bonds.  When this happens, the yield curve is said to be “inverted.”  Economists interpret an inverted yield curve as “a powerful signal of recession.”  Inversions have come before every recession and one near-recession since 1955.  However, the time lag between an inversion and a recession can stretch from six months to two years.  So, we aren’t there yet.

The huge number of bonds that central banks acquired to push down long-term rates during the period of “quantitative easing” are continuing to weigh on the long-term rates.  Now the Federal Reserve Bank is raising short-term rates to prevent excessive price rises in a strong economy.  There is mounting concern that policies being pursued by the Federal Reserve Bank could harm the economy by pinching off lending or by pushing banks to pursue riskier strategies.[2]    On the other hand, there is evidence that, in the wake of the “Great Recession,” the yield curve has lost some of its predictive power.  Moreover, a strong American economy coupled with a slowing world economy could push foreigners to buy long-term bonds.  The issue at hand is whether the Fed should continue to raise short-term interest rates as planned.  The stakes are high.

[1] Matt Philips, “A Recession Signal Is Flashing Yellow,” NYT, 27 June 2018.

[2] Nick Timiraos, “Fed Debates Signal From Yield Curve,” WSJ, 9 July 2018.

GPA+.

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Ten years ago, 32 percent of graduating seniors received some form of “Latin honors” from the University of Southern California.[1]  This year, 44 percent received “Latin honors.”  Way to go Southern Cal!  Recruiting all those extra smart kids!  I bet the Ivy League schools will be taking their meals standing up after that spanking.  Oh, wait.  Turns out Harvard granted “Latin Honors” to more than half its graduating seniors.[2]

Granting “Latin honors” isn’t based on the subjective direct judgement of individual merit by the faculty members.  It’s based on the more objective quantifiable judgement of Grade Point Average.  So, Southern Cal and all the many other schools granting “Latin honors” to a growing share of graduates is just an artifact of long-term grade inflation.  According on one expert, a 3.7 GPA (on a scale of 4.0) “is just a run-of-the-mill student.”[3]

It starts in the schools.  In 1998, 39 percent of high-school seniors graduated with an “A” average.  In 2016, 47 percent graduated with an “A” average.  Over the same span, the SAT Critical Reading scores fell from an average of 505 to an average of 494; the Math scores fell from an average of 512 to 508.[4]  Students expect to continue their high-school experience in college.  Elite schools claim that they haven’t studied the trend, and don’t know how to explain it.[5]  The situation probably differs at tuition-driven, not-selective schools.  Too many schools pursuing too few students has led the recruiting effort look like feeding time at the shark tank: “Throw in another goat.”  After the admissions office has done what it can, the faculty face a heavy emphasis by their employers on retaining the students who have been admitted.

Grade inflation is like monetary inflation.

It is fueled by a weak authority in charge of controlling the volume of the unit of exchange.   In the case of the schools this could be parental pressure applied through the influence of a school’s reputation on housing prices.  In the case of colleges and universities, it is the desire to attract student dollars.  A strong authority might tell students that they aren’t particularly distinguished, or well-prepared, or hard-working.

It distorts incentives.  Thus, if you can get the same or more money for less work, then you’ll do less work.  If you can’t trust the money to have real value, then you’ll pursue other stores of value.  One form of this could be a flight to non-public schools with a reputation for greater rigor, or to home-schooling.

It favors people, better positioned to exploit the nominal value of a unit of exchange/measure and disfavors people poorly positioned to do so.  Employers, for example, lack any reliable means to evaluate the educational attainment of potential employees.  High GPAs fog over individual differences in both ability and work ethic.

The historical record shows that breaking an inflation is very painful and politically difficult.  People are willing to try this only after conditions have become intolerable.  We aren’t there yet.

[1] That is “cum laude,” magna cum laude,” and “summa cum laude.”

[2] Down from 91 percent in 2001.

[3] Melissa Korn, “You Graduated Cum Laude?  So Did Everyone Else,” WSJ, 3 July 2018.

[4] See: https://blog.prepscholar.com/average-sat-scores-over-time

[5] See “Captain Henri” in “Casablanca.”

The Old Way and the New Way.

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Once upon a time, the United States briefly (1945-1965) stood unchallenged atop the world economy.  “What America makes, the world takes.”  A handful of giant companies dominated the American economy.  They were capital-intensive mass production and mass employment manufacturers.  They paid good wages and many offered generous defined-benefit pension plans.[1]  The companies had been created by ruthless, visionary entrepreneurs.  By the Forties, Fifties, and Sixties, they were owned by mere heirs and by a great many upper middle-class stockholders.  Salaried managers with B-School degrees actually ran the increasingly bureaucratized companies.  No one much objected to punitive taxation of the well-off.  This is today’s Democratic Party idea of a “normal” economy.  It has been in decline for 50 years.[2]

Then change happened.  Part of the change came from abroad.  Foreign countries became serious competitors with American industry.  Then the “oil shocks” of the Seventies set off an inflation that disordered many areas of the American economy.  Part of the change was domestic.  New generations of ruthless entrepreneurs pushing new products rose up.  These people weren’t heirs to someone else’s work.  They had built their own businesses and fortunes.  Many of these people got rich without getting stupendously rich.  Therefore, many of them rejected the existing social consensus on soaking the rich.[3]  Reaganism followed and continues to this day.[4]  These changes sent shock waves through America’s economy, society, and politics.

For example, dying old industries and growing new industries faced the same problem of employee compensation.  (For that matter, so did many states and cities that had fobbed off public employee unions by promising them generous benefits in what the Brits call the “Never-Never”).  Neither corporate profits nor the stock market could guarantee adequate returns to support the defined benefit promises.  First, beginning in 1978, the private sector began to shift from “defined benefit” to “defined contribution” retirement plans.  Second, employers shifted a large share of medical insurance costs to employees as a way of holding down labor costs.  Since 1999, inflation has raised prices by 47 percent, but average contributions by workers to individual health insurance premiums have risen 281 percent.

The future well-being of employees came to depend upon their wisdom in choosing suitable retirement plans and on their willingness to divert income into savings.  Other factors also shaped their behavior.  First, we’ve been living with low interest rates for quite a while now.  This both encouraged people to pick up “cheap debt” and—through the magic of compound interest—slowed the rise in value of what people did save.  Second, many people had never thought much about saving and investing because the company’s pension and Social Security allowed them to not learn about it.  People often opted out of savings plans or made poor investment decisions when they opted in.

The median personal income of people aged 55 to 69 leveled off from 2000 (before the Great Recession) to the present.  This did not stop people from spending more.  On average, people approaching retirement these days have heavy debts (some for college for their kids, but also for other stuff).[5]  They also have been mining their savings, rather than building them.  The Great Recession both reduced contributions to 401k plans and caused many people to withdraw from them to make ends meet.

The long-term results of this huge change in the social contract are just now beginning to be felt.[6]  More than 40 percent of households headed by people aged 55 to 70 will not have the resources to maintain the standard of living they enjoyed while working once they hit retirement.  Households with at least one worker aged 55 to 64 had a median savings of $135,000 in their 401k plans.   The median annual income from their 401K plans is $8,000.  This should yield a paltry $675 a month in income.

Worse still, the Social Security Trust Fund will have to reduce payments at some point in the future as it is depleted or exhausted.

Undoubtedly, the disaster that is emerging renders a severe judgement on many of the “Baby Boomers.”  Not all of the human-interest stories included in journalists’ stories arouse the same degree of sympathy.  Faced with the need to save for the future and to be self-reliant, many of them delayed saving, stinted saving in favor of consumption[7] until too late, and then did too little.

Still, as a matter of public policy, there are going to be powerful and compelling arguments made in favor of a government response.  If the government expands benefits to the worst off retirees, then either taxes or deficits will rise or benefits for the better-off will be decreased.  Perhaps all three will form the basis of a compromise.

[1] By the 1980s, almost half (46 percent) of workers belonged to an employer pension plan.

[2] Without Democrats being willing to notice the changes.  JMO.

[3] Warren Buffett is in no sense a representative figure among this group.

[4] To the Democratic slogan of “tax, spend, elect,” the Republican learned to reply “tax-cut, spend, elect.”  See: William Shakespeare, Romeo and Juliet, Act 3, Scene 1.

[5] The per capita student loan debt of people aged 60 to 69 rose from about $300 to about $1,800 between 2004 and 2017.  Per capita debt for cars for the same group of people rose from about $3,000 to about $4,000 between 2004 and 2017.  It looks like people chose not to choose between guns and butter.

[6] Heather Gillers, Anne Tergesen, and Leslie Scism, “Time Bomb Looms for Aging America,” WSJ, 23-24 June 2018.

[7] Sales of HD televisions soared during the Great Recession.  The graph is for global sales, but may offer an approximation of American behavior.  See: https://www.statista.com/statistics/461114/full-hd-tv-shipments-worldwide/