U.S. vice president, Joe Biden, a practicing Roman Catholic, said something in “prepared remarks” during his China visit on Tuesday which I have difficulty understanding.
“But as I was talking to some of your leaders, you share a similar concern here in China. You have no safety net. Your policy
Biden in China Image Courtesy of Whitehouse.gov
has been one which I fully understand — I’m not second-guessing — of one child per family. The result being that you’re in a position where one wage earner will be taking care of four retired people. Not sustainable. So hopefully we can act in a way on a problem that’s much less severe than yours, and maybe we can learn together from how we can do that.”
Under that country’s “one child policy” the Chinese are restricted to having small families. In urban areas they are permitted a single child. In rural areas they are permitted two, but only if the first is a girl.
The vice president’s office responded to the growing controversy concerning these remarks through its spokewoman, Kendra Barkoff.
The Obama administration strongly opposes all aspects of China’s coercive birth limitation policies, including forced abortion and sterilization. The vice president believes such practices are repugnant.
All of this made me think. Assuming the office of the vice president is correct in saying that he views these practices as repugnant, how could he have been so deaf to the implications when delivering his prepared remarks on this issue?
I think that it is very clear, though he may find forced abortions personally abhorent, that Mr. Biden really more deeply believes that the Chinese Communist government has the legal and rightful power to inflict this policy upon it’s own people. I admit that, on examination of my own conscience, this is also the basic flawed mind-set under which I have been operating.
We need to spend a moment examining the conflict here. This is no small problem, a forced abortion occurs in China, according to a panel of experts, astoundingly every 2.4 seconds. Phillips, M. (2010/06/02), Women forced to abort under China’s one child policy. Washington Times. http://www.washingtontimes.com/news/2010/jun/2/women-forced-abort-under-chinas-one-child-policy/. That amounts to millions per year. Can this be true? If it is true, isn’t this entire controversy really about the inviolability of national sovereignty and the virtually unlimited authority of governments over their own people? Is it also about our government or perhaps any government’s right and, perhaps even, obligation to be values neutral in setting policy? Do ends in this case justify means? Are the ends, a smaller population of humans, an unfettered good thing? If so, what government policies can be tolerated in a civilized world even for the sake of achieving this good? Where is the line which cannot be crossed between governmental authority and personal human reproductive rights? Is it different for different countries? Do the citizens of one country have the obligation to try to effect change in the policies of another country if they violate personal human rights? What is the role of the government of one country vis-a-vis protection of the citizens of another country against the cruel or inhumane use of power by the government against citizens of that other country? Is this a legal issue or a moral issue?
I am thrust back into my youthful self-debates about national sovereignty and when and under what circumstances it should yield to other ideals. What burdens should be borne for those not of our own nation? Should we have forcefully confronted Germany on behalf of defending the Jews before most of those European Jews were murdered? Would that intervention have been legal? Should our government give much more in foreign aid to prevent starvation and poverty around the world? Can we use force against governments which refuse to take this aid on our terms, i.e. giving directly to the people of that nation bypassing the, usually corrupt, government? Or is the obligation to intervene more of an individual moral obligation animated by individual religious faith or other moral conviction? I am reminded of the woeful response we made to genocide in Rawanda. Should we have sent our military to prevent this genocide? How long would they have had to stay? At what cost in lives and treasure? Wouldn’t we be accused of being colonialists? And our military, is it intended to be used only in situations of threats which at least theoretically involve the United States? If not, and if it is seen as a vehicle for righting wrongs, shouldn’t we tell those in uniform that they are signing up for a job which is not solely protecting their country, but to be the world’s policeman? Should we, as a nation, at least embargo trade with China to try to end this repugnant “one-child policy”, as we did in an attempt to end apartheid in South Africa and communism in Cuba? This would obviously cost all of us in terms of the increased prices we would have to pay for things we now take for granted as being cheap or cheaper. The Chinese government would try to get back at us though using the trillion dollars worth of U.S. Treasury bonds that they hold. Is this a risk which is incumbent on the U.S. government to take or should we be left to taking individual steps against this abhorent Chinese policy? If we firmly believe that forced abortion is among the most repugnant and inhumane acts which can be committed regardless of who the perpetrators are, are we obligated to agitate to impose these potential burdens and risks on our fellow U.S. citizens who don’t share our view of morality or of human dignity? After all we are ultimately doing so in order to give women, Chinese women, the right to control their own uteruses. Sort of seems like a strangely reversed Roe v. Wade, doesn’t it? Is it a matter of the dignity of life for which the United States, in my own view, should always stand? But what of the lives of the Tutsi in Rawanda? Were the Tutsi blameless victims? Did we owe them a duty of protection? If so, why did we let them down? And then what of our own country, the right to life and the dignity of the fetus as a potential human person is not exactly respected here either, what of that contradiction? What is the moral difference between having a policy of forced tonsilectomies and a policy of forced abortions? Aren’t they both, under the theory of abortion used in this country, simply forcing women to render a bit of their own tissue?
I know the debate over the right to abortion in this country has scarred me. It has apparently scarred the vice president as well. He has pushed it down inside himself so far that the implications of what he was saying didn’t even occur to him. Bringing this issue of forced abortions in China out of the shadows will lead to an even more emotion laden debate between us and within us. It’s probably not what the vice president had in mind, but it is very a good thing. When we push it down and leave it out of our everyday thoughts and prayers, it just festers inside us. One thing I know is true and this is the point from which I will start, human dignity is human dignity regardless of the sovereign country in which the persons involved reside or of which they are citizens.
This post will begin a series of posts addressing the economic “common knowledge” of the American voter. The American voter has, particularly over the last 70 years, been asked to cast votes which require an education on basic economic matters. The level of education and interest which most voters have on matters of economics is frighteningly low. This leads to a public which can be easily manipulated to their own detriment. People don’t need to be Ph.D.’s in economics in order to vote intelligently but they must have a basic knowledge of how the economy works. They must know two things above and beyond all others. First, all resources are scarce and therefore cannot be put to every use imaginable. Second, never forget the TANSTAAFL rule. [There Ain’t No Such Thing As AFree Lunch, somebody always has to pay.] I will start this series by debunking, with the help of professor Mark Skousen, the profound myth that consumer spending makes up 70% of all spending in the United States in any given year.
The single most ubiquitous macro-economic “fact” known to most people in this country is that consumer spending is the most important element of the U.S. economy because it makes up 70% of all U.S. spending. Armed with this unimpeachable knowledge and intuitively knowing that economic activity is good for everyone, the average U.S. voter embraces the idea that spending money on consumption is an
Average Family Consumption 2008
economic virtue. In keeping with their own personal “common sense,” they embrace the idea that the best macro-economic policies for the government to follow are those which cause consumption to increase. This policy provides both goods and jobs for everybody and let the good times roll!!!! Nancy Pelosi, Chris Matthews and Jay Carney are but a few of those in the media and high government service who have recently articulated this idea in public. Here is Jay Carney ‘schooling’ a Wall Street Journal reporter on this subject:
But what if this “fact” is not actually true but only true because of the way a statistic, the GDP, is calculated? How would this change our preferred policies?
Let’s first deal with the “fact.” Ph.D. economist and professor, Mark Skousen, has made this analysis:
[P]ersonal consumption expenditures represent 70 percent of gross domestic product, but journalists should know from Econ 101 that GDP only measures the value of final output. It deliberately leaves out a big chunk of the economy — intermediate production or goods-in-process at the commodity, manufacturing, and wholesale stages — to avoid double counting. I calculated total spending (sales or receipts) in the economy at all stages to be more than double GDP (using gross business receipts compiled annually by the IRS). By this measure — which I have dubbed gross domestic expenditures, or GDE — consumption represents only about 30 percent of the economy, while business investment (including intermediate output) represents over 50 percent.
Let’s look at the economic statistics. The following graph is courtesy of the San Jose State University Department of Economics website (http://www.applet-magic.com/) which shows the relatively stable amount of consumption spending occurring in the economy during boom times and lean times.
U.S. Consumption 2005-2010
Whoa, that may blow a few minds so let’s see what this means. This means that subsidizing consumption is not actually the most important thing to American pocketbooks. The most important thing in the economic world is facilitating exchanges or trades of all kinds, including investments. This is because each trade leads to increases in the total of perceived value held by Americans because with each trade the parties believe that they have each gotten more than they parted with or the trade would not have occurred.
What public policies does this suggest? First, and most important, it suggests that government should adopt as few policies as possible which create incentive or disincentives for any particular type of economic trade over others. The more decisions and options which the American people themselves have without the government’s factoring into the equation, the more transactions and trades they will engage in overall. Following this prescription will lead, over time, to an increase in absolute number of trades among Americans and by definition an increase in the perceived value which exists in the economy overall. Over time this will allow the energy and creativity of Americans to be used in ways which create for themselves the world they want to see. If they are left to their own devices, they will work harder and longer to achieve their vision, it is human nature. This, in turn, will provide lift to all boats. That is what public policies on economic matters ought to do. But, pursuant to the TANSTAAFL rule, who will pay for this sort of freedom? The government and those who derive their sustenance from the government will pay, because the government will become less and less relevant to the economy and hence will lose some of the resources it now collects for itself. And who thinks this would be a bad thing?
BREAKING NEWS:
Secretary of Agriculture Vilsack was also touting Food Stamps as stimulus this morning on TV. Hey guys, why not just send every man, woman and child a check for a million dollars, on condition that they agree to spend it within one month, and $1.84 million in economic activity will be stimulated? If this transfer payment is such a good boon for the economy because people spend it immediately, let’s not stop with food stamps. Why not???? Man, these guys are so smart.
I want to share a thought I’ve had but is not yet fully cooked. I look forward to hearing from you if you have any insights or criticisms.
It is my hypothesis that in the last eight decades and particularly in the last four, the US has actually undertaken policies which have encouraged and subsidized current consumption on the basis that this is “good” for the economy. The corrollary is that saving is bad for the economy. Can this non-intuitive argument hold water?
Check out Chris Matthews spouting the party line and the commonly held belief about the economics of public policy.
In following the preferred economic policies of Chris Matthews and his “well informed” (those who took economics in school) brethren U.S. economic and job growth has been retarded and following this prescription over a number of years has led, albeit not obviously or intentionally, to the current financial meltdown we are experiencing.
First I should define my terms. Wealth means any thing which is valued primarily for it’s capacity to create a future stream of income in a competitive economic environment. Consumption means any thing which is valued primarily for the physical or psychic benefit of the creator or purchaser rather than for it’s capacity to create a future stream of income.
Everything which can be labeled either wealth or consumption is created by the application of human ingenuity or skill to the environment or context in which they live. Consumption is required to continue life. Wealth is built when there is excess over and above what is needed to maintain life and that excess is put to the creation of wealth. In the hunter gatherer societies, wealth may have been created by inventing and building a bow and arrow or a ladder for picking fruit from high branches. Whoever owned these tools could use them to create a stream of income in the future, income in terms of additional food animals and fresh fruits unavailable to other humans. The inventors of these products had to have had a bit of time to work on their ideas which was not absolutely required for subsistence activities. This “extra time” is something which, at it’s basic level, can be seen as savings. The results of these inventions created yet greater savings since it increased the productiveness of the people who used them and made still more time available to invent other things. Wealth (at least by this definition) and savings, in whatever form they may appear, are clearly inextricably intertwined.
As to savings, why do modern people, if they do, spend less than they make? First, they believe in saving for a rainy day. Second, they want to save because they would like to buy something in the future. Third, they desire to be free of having to live on current earnings, i.e. living from hand to mouth, and would prefer more leisure or other consumption in the future, i.e. luxury and/or retirement.
What do modern folks do with that which they don’t spend? First, they put it at interest with a bank. Second, they invest in businesses owned by them or people they know. Third, they invest in financial instruments. Fourth, they put it under a mattress or it’s equivalent, buying gold or government debt.
What do the first three of these have in common. They represent an investment in or purchase of productive capacity which amounts to wealth. Putting money in the bank has this effect because it is loaned out (or is used to support loans) to others who, at least sometimes, purchase productive capacity. The fourth, “putting money under the mattress,” is an attempt to the preserve the value of their savings when there appear to be unacceptable (to them) risks or disincentives in following the other alternatives.
Since the New Deal we have decided to make it government policy to increase consumption which it is my contention amounts to a decrease in wealth building which would have otherwise occurred. It is a trade off. In this undertaking the government decided to subsidize or otherwise advantage consumption over wealth building. This has led to predictable results which we all see.
It is understandable that the Roosevelt administration focused on the problem of deflation because once begun it becomes a sort of self fulfilling prophecy for “negative economic growth.” People wouldn’t spend money today because what they want to buy will be even cheaper tomorrow. This is true of both consumer items and wealth. People were trying to keep what they had because they were afraid of what was going to happen next. They thought it might be impossible to replace what they had. The “sure thing” in the minds of many was that over time their money would be more valuable tomorrow. The longer it went on the more fear there was and consequently the more reticence to spend money. Remember old FDR’s “The only thing we have to fear is fear itself” speech? FDR concluded that a government remedy was needed, as if the government hadn’t begun it in the first place, which would force or subsidize people into spending money. Enhancing consumption was good then, in the 1930’s, and this idea has persisted as the economic gospel for decades.
The first of the permanent government policies begun by the FDR administration was the social security system. In keeping with Matthews’ view and as explained by FDR in the following quote this was but a toe dipping foray into forced spending, to wit:
The Social Security Act offers to all our citizens a workable and working method of meeting urgent present day needs and of forestalling future need. It utilizes the familiar machinery of our Federal-State government to promote the common welfare and the economic stability of our nation.
The Act does not offer anyone, either individually or collectively, an easy life–nor was it ever intended to do so. None of the sums of money paid out to individuals in assistance or in insurance will spell anything approaching abundance. But they will furnish that minimum necessity to keep a foothold; and that is the kind of protection American’s want.
1938 FDR Address on the 3rd Anniversary of the SSA.
Okay, what am I complaining about? What incentives and disincentives did Social Security introduce with encouraging the spending of money? It had several effects on the Rational Economic Actors (REA) among us. First, it factually shifted the economic burden of providing an income to retirees from the retirees themselves to their children, grandchildren and great grandchildren. Second, it removed some of the economic benefit of having and raising children because it required those children etc. to pay a percentage of their incomes to people who had not borne the vast majority of the burden of raising them. Third, it tended to change the perception of children from necessities to secure old age into expensive luxury items provided to the public. Acknowledging this subsidy for the childless, the Rational Economic Actor [REA] tends to have fewer or no children. The REA will also reduce their personal savings during their working years in proportion to what their social security benefits are expected to provide. With this need for savings reduced the tendency of the taxpayer will also tend to more consumption. Furthermore, the government did not invest any of the funds obtained from working Americans in the form of current taxes in creating wealth for the future. If it were an insurance company from which a policy of old age insurance was purchased, the company would have had to invest the “premiums” paid by its customers in order to be able to pay the future claims for benefits. On the other hand, the social security administration received govenment IOU’s for the excess of taxes over expenditures which actually reduced the need for raising other taxes to defray day to day government expenses, hence further enhancing what was available to consume. As opposed to the requirement that an insurance company must save and invest to pay future benefits, the government simply raised taxes in order to defray any shortfall between “premiums” and “benefit claims.” When fewer children are born, as the REA reacts to the government’s subsidy, even more consumption is available to the parent. In short, there is nothing in the effects of this law which increases savings and the creation of wealth although it does reach it’s goal of subsidizing consumption.
The extension of the social security system from a supplemental income system to a rather more full pension system has increased the perverse incentives over time. The, in FDR’s words, “American” desire for a minimalist approach as indicated in the quote above, has morphed over time. None other than Frances Perkins, Secretary of Labor under President Franklin Delano Roosevelt, noted this in 1960.
“When I saw this bill adopted by Congress with a large majority of the votes of both parties and when I saw after a few flurries of opposition in later years, both parties to continue to improve it and to broaden it’s coverage and to make more generous it’s benefits, I have come to realize that not only was it the crowning act of my working life, but that it was perhaps one of the most useful blessings time has brought to the American people.”
As noted by Perkins, over time the social security system benefits were enhanced. In this, it is clearly the way of all government entitlements. They constantly evolve and grow. Their constituency becomes more organized and single issue motivated and their opposition becomes, effectively, politically suicidal. With every new benefit the incentive to save, invest and have children is reduced. Over time payroll taxes to pay the increased benefits are raised but since that tax money is not saved but is spent to pay ongoing government bills there is more consumption.
Then came the great Medicare benefit of Lyndon B. Johnson.
Even as late as 2004 additional benefits were added to Medicare in the form of Part D, a system of drug benefits paid for out of general revenues, i.e. with no new taxes to pay for it. And this was in a Republican Congress with a Republican President. How much clearer can this be? We are buying drugs now and the future tax payers are going to have to pay for them. This increases current consumption but does nothing about paying for it. Can it really be free?
The creation of the Medicare entitlement had the same effect as social security and it was based on the same funding mechanism, payroll taxes. The presence of Medicare emphasized the freedom from the need to save for a rainy day and actually enhanced the consumption effects created by social security and for the same reasons. It reduced the necessity of embracing the gift of children who, if they were raised them right, might pay for our future health care. About this aspect of Medicare President Lyndon Johnson said:
And through this new law, Mr. President [referring to President Truman], every citizen will be able, in his productive years when he is earning, to insure himself against the ravages of illness in his old age.
And in fact President Johnson specifically noted that government requirement would replace the filial bond between the generations, to wit:
No longer will young families see their own incomes, and their own hopes, eaten away simply because they are carrying out their deep moral obligations to their parents, and to their uncles, and their aunts.
Concluded LBJ in a speech in 1966 on the eve of Medicare’s debut:
Medical care will free millions from their miseries. It will signal a deep and lasting change in the American way of life. It will take it’s place beside Social Security and together they will form the twin pillars of protection upon which all our people can safely build their lives and their hope.
He was certainly right that it would forever change the American way of life. Perhaps not in positive ways, but certainly deeply and lasting.
And there is the creation of a trillion or more in underfunded liabilities in state and local public pension systems to say nothing of the federal system. According to Pew Charitable Trust:
All told, states already have set aside about $2 trillion to meet their long-term obligations. But they still need to come up with about $731 billion—a conservative figure that does not include all costs for teachers and local government employees.
How does this idea of underfunded public employee pensions work into my hypothesis? Well it works the same way. A public pension is a promise by a public entity to pay money for current services at some time in the future. When the public entity is not saving and investing enough to make the agreed upon future payment, the public entity is actually consuming more in public services than it can afford to pay for currently. Therefore future tax payers, largely different people, will have to make payments even though the previous and current tax payers have received the benefit of the services provided by the public employees. We have, in this way, enhanced current consumption (in terms of increasing government services) and not set aside enough money to pay the future costs of the retired workers who have provided or are providing those services. In a way, by making an unfunded promise, we have actually found a way of having our cake and eating it too.
Likewise, something which has been discussed extensively on this blog, tax policy has been favorable to current consumption. High wage earners have been taxed at the highest rates for both payroll and income taxes. Hence, the excess which the high income earners would have had available to save and invest was taxed away and made into current consumption by way of government spending. The larger the house which is purchased, the greater tax benefit from the mortgage interest deduction, which is another incentive to consume. The high wage earner sees what is actually nothing but consumption as a way to save on his taxes and buy something which is likely to appreciate in value (up until recently that is). It works the same way for second homes. The second home’s mortgage interest is deductible and hence subsidized by the tax code. It appeared for years to the REA that it was more likely that she would receive a big pay off when she sold her home or second home than if she would have paid the taxes on the mortgage interest and invested the difference in productive assets. This was particularly true when the tax law permitted appreciation on a home, up to $500,000, to be received totally tax free without requiring the money to be reinvested in a new home. Deductions such as the charitable deduction also tends to direct spending towards current consumption (what the charity will do with the money) over long term after tax savings and investment. The only tax benefit which favors savings and investment are the reduced rates for those who receive dividends or create profitable asset sales in the form of a 15% cap on taxes paid on dividends or long term capital gains. But given the rather small amounts left after most people, even high wage earners, have paid their federal taxes, only those who already have a great deal of wealth and savings to invest are the only real beneficiaries of this law. And of course, when such individuals die their estates are generally taxed at large percentages, thus converting savings into consumption. So there are clear limits on the actual benefit to saving and investing of the current capital gains law.
And then there is our preferred manner of keeping us out of “depression” which amounts to no more than borrowing huge amounts of money from future Americans in order to keep the “economy moving now.” As Chairman Bernanke said recently of his latest Quantitative Easing [QE] program (QE just amounts to buying government debt with money freshly off the printing press) and after the government has already issued more than 5 Trillion in public debt in just the last two years:
“By easing conditions in credit and financial markets, these actions encourage spending by households and businesses,” Bernanke said. “A wide range of market indicators suggest that the Federal Reserve’s securities purchases have been effective at easing financial conditions, lending credence to the view that these actions are providing significant support to job creation and economic growth.”
Emphasis added.
There is example after example of the public policies of this country directed at consumer spending at the expense of savings and wealth buidling. This has built a country which is focused on the here and now and completely forgets about the long term effects of anything. Even the idea of a depression is unthinkable. We’ve had a significant number of depressions in this country’s economic history and only one lasted more than a few years. And that depression is called the Great Depression because it was greatly extended by nearly every public policy initiative undertaken in a vain attempt to halt it.
Government has little power to affect the economy as a whole in a way which creates only winners. Our understandable aversion to short term pain has created a governmental policy which has limited our country’s creation of productive assets and wealth in favor of ever more consumption. The focus has been on consumption, Starbucks, luxury housing, second homes, expensive cars, and gadgets for everything has been the result. This means when it comes time to hire people to make and do things, there has been little invested in productive assets which would give them something to make or do. We haven’t applied a large amount of our wealth to create more wealth, we’ve consumed it. It’s been spent. All those luxury houses which have been foreclosed may never be used. Even maintaining and paying the utilities on them may be too much of a strain on our much poorer nation. Jay Carney, White House spokesman, is the poster boy for the idea that debt doesn’t matter, thwarting savings and increasing consumption is the RIGHT THING to do.
In the same way I suppose that riots are the RIGHT THING to do since they create damage which must be repaired. Maybe this explains his thinking on a whole range of destructive and freedom destroying government policies. Hey Jay, there is no such thing as a free lunch, somebody always has to pay.
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