Monthly Archives: February 2012

Another Unintended Consequence

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And this one is entirely predictable, so we have no excuse for it occurring.

The Obama administration has closed the comment period on a new set of automobile fuel efficiency standards, taking the government-mandated average from the current 2016 requirement of 35.5 mpg to 54.5 mpg by 2025—a 53% increase in those 9 years.  Superficially, this seems good for the environment and good for the amount of oil we buy from the Middle East.

However.

These fuel efficiency standards will add $3,200 to the price of a new car.  As a result, the National Automobile Dealers Association estimates that nearly 7 million drivers won’t be able to buy them because they’ll be unable to qualify for the loans necessary.  After all, most car buyers do so with loans against the car or pickup that they’re buying.  As the NADA points out, during the loan approval process,

…it matters not whether the new vehicles in question offer improved fuel economy performance characteristics compared to the transportation options currently being used by prospective purchasers. … All that matters is whether prospective purchasers are creditworthy.

As a result, cash-strapped—and other frugal—buyers will simple keep their existing cars longer or buy off the used car lot, thus keeping the (relative) gas guzzlers on the road longer.  Any claimed savings from the greater fuel efficiency is just “fantasy” for these 7 million drivers.

Moreover, the Alliance of Automobile Manufacturers estimates that compliance costs will reach $133 billion to $157 billion by the end of the process.  This is separate from the loss of sales of some $175 billion from those drivers not buying the new “fuel-efficient” car at a naively estimated $25,000 per.

Aging Populations

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National population trends depend on a number of factors, including such things as fertility rates, death rates, immigration, and emigration.  At this point, though, I’m only going to look at general population trends for a few countries, without looking into particular influences or causes: today’s age breakouts compared with their projections over the next couple of generations, along with current net immigration rates, for Brazil, the People’s Republic of China, Russia, Germany, France, Great Britain, and the United States.  This list is selected purely for an initial, superficial look in the mirror and at some of our major economic competitors (with the deliberate exclusion of the EU as a whole, since it remains sufficiently fragmented among its constituent nations from a political and economic perspective that some of the individual nations are more important to me than the continent).  The UN’s report World Population Ageing: 1950-2050 is my source for the population data; I massaged data from the CIA’s The World Factbook 2011 snapshot for the immigration numbers.

In Brazil, nearly 63.5% of the population was in the age band 15-59, while those 60 and older comprised under 8%.  By 2025 (one generation after those 2000 figures), these are expected to have shifted to 62.5% and a shade over 15%, while in just one more generation, by 2050, the numbers are expected to have shifted to 56.5% and a bit over 23.5%, respectively.  The support ratio, the number of people in the actual labor force (15-64 years old, nominally available to contribute to the support of the elderly) per person 65 or older, reflects this shift and emphasizes the problems confronting an aging population: the support ratio is expected to shift, over those same two generations, from 12.9 to 1, to 6.6 to 1, to 3.5 to 1—or the number of workers supporting that older population is expected to fall by nearly 75%.  The fertility rate (loosely, the number of children per woman during her child-bearing years) is expected to remain just at the replacement rate of 2.1.  Brazil has a net emigration rate close to zero; movement into/out of the country plays almost no role in Brazil’s population and its future economic impacts.

Here are numbers for the People’s Republic of China:

2000 2025 2050
15-59 (% of total population) 65 53.8 29.9
60+ (% of total population) 10 62 19.5
support ratio (work force to 65+) 10.0 5,2 2.7
fertility rate 1.8 1.9 1.9

The size of the work force available to support that aging population is expected to fall, in relative terms, by two-thirds.  China has a net emigration rate roughly 450,000 persons per year.  This, coupled with that below replacement fertility rate will continue to present the nation with an economic problem in efforts to support that relatively expanding aging population.  Moreover, this shortfall can only be exacerbated by the one-child policy and its associated gender bias in the coming generations.

In Russia, the numbers stack up like this:

2000 2025 2050
15-59 (% of total population) 63.5 60.8 49.3
60+ (% of total population) 18.5 26 37.2
support ratio (work force to 65+) 5.6 3.6 2.1
fertility rate 1.1 1.4 1.8

There are a couple of points here.  Russia starts this period with a low number of workers per old person.  Indeed, they haven’t had a support ratio above 7.7 since 1975.  Also, the fertility rate is at disastrous levels—this is a population implosion in progress.   The trend is in the right direction, but in our two generations it still doesn’t reach the replacement level—and that ratio is from a rapidly shrinking population base.  The situation is very dicey for Russia.  Russia gains, due to immigration, roughly 40,000 persons per year; however, despite this, the country experienced an annual population decline of 650,000 in 2011, and this will continue until the combination of immigration and fertility rate can reverse the trend.

The German numbers are these:

2000 2025 2050
15-59 (% of total population) 61.2 54.6 49.5
60+ (% of total population) 23.2 33.2 38.1
support ratio (work force to 65+) 4.1 2.6 1.8
fertility rate 1.3 1.4 1.6

The situation looks as bad for Germany as it does for Russia; however, there is a critical difference: the German economy is a much more productive economy, owing to its relatively free market operation.  Germany also accepts a large number of guest workers (although not all become immigrants); these are not reflected in the above population figures.  Separate from the guest worker program, Germany experienced a slight net immigration, yet it still lost, as of that 2011 snapshot, roughly 170,000 persons.

The French numbers are these:

2000 2025 2050
15-59 (% of total population) 60.7 54.8 51.3
60+ (% of total population) 20.5 28.7 32.7
support ratio (work force to 65+) 4.1 2.8 2.1
fertility rate 1.8 1.9 1.9

The projected French support ratio is in better shape than the German one, and this seems related to the somewhat more stable age break out between the two population bands.  The fertility rate doesn’t reach the replacement rate, but France, like Germany, accepts a large number of guest workers.  So far, the relatively free market tenets of the French economy makes it, like Germany’s, more productive than most; this mitigates (but does not eliminate) the economic results of the unfavorable population trends.  France had a net immigration of some 100,000 persons in 2011, and its population grew by 325,000 that year.  The net influx of immigration clearly is helping stabilize/grow the French population.

The numbers for Great Britain are these:

2000 2025 2050
15-59 (% of total population) 60.4 55.4 51.1
60+ (% of total population) 20.6 29.4 34.0
support ratio (work force to 65+) 4.1 2.9 2.1
fertility rate 1.6 1.7 1.9

The British fertility rate is too low, but its trend is the most favorable of the three EU countries presented.  Like France and Germany, the British also accept a large number of guest workers.  The British economy, especially after Thatcher’s earlier reforms and Cameron’s present efforts, is  a relatively free market one, and so highly productive.  This, as with Germany and France, helps mitigate the economic impact of its unfavorable population trends.  Great Britain had a net immigration of some 163,000 persons in 2011, and its population grew by nearly 350,000.  As with France, immigration is helping the stabilize/grow the British population.  In both countries, net immigration may be going a long way toward slowing, and mitigating the effects of, the projected decrease in support ratio over the next two generations.

The numbers for the United States look like this:

2000 2025 2050
15-59 (% of total population) 62.1 56.6 54.6
60+ (% of total population) 16.1 24.8 26.9
support ratio (work force to 65+) 5.4 3.4 2.9
fertility rate 1.9 2.0 2.1

The Baby Boomer generation is much of the spike in the first generation after the 2000 data; after that, the rates begin to stabilize (although we’d need to see more generations of data before stabilization can seriously be claimed), and the fertility rate reaches near replacement by 2050.  The US’ economy is the freest of the nations surveyed; this relatively higher productivity goes a long way toward mitigating the economic effects to the population age band trend.  The US experienced a net immigration of 1.3 million and a population growth of over 3 million in 2011.  This immigration rate also will be critical in overcoming the support ratio decrease over the next couple of generations, even though that ratio may begin to stabilize after that.

Even in a centrally managed economy, new workers are needed to produce the economic output required to support those too old to work—the work force must be replenished at least as fast through births and immigration as it is depleted through aging and death.  It’s important to note at this point that guest workers may not be a long-term answer.  All three of the EU countries above are starting to have—or think they’re starting to have—problems with their guest worker populations.  Moreover, the long-term work force and support ratio solutions—the overall population and economic output trends—depend on a net influx of permanent members of the population: birth rates and immigration rates.

With our more productive and flexible (relatively) free market economy, we still need immigration just to maintain our work force, much less support our own aging population, even with our projected replacement rate fertility level.  This puts a premium on getting control over our borders while making it easy for people to enter our country legally, and to stay legally once have arrived.

A Look at our National Debt

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The Congressional Budget Office pipes up.  Here’re some highlights from its January 31 annual Budget and Economic Outlook.

The current-law baseline which the CBO uses is a set of budget projections based on existing law as enacted, including sunsets and expirations.  These assumptions thus accept, for instance, that all temporary tax provisions, including those originally enacted as part of the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003—the Bush tax cuts—will expire as scheduled and that the alternative minimum tax (AMT) will not be indexed for inflation past 2011.  Further, under these baseline assumptions, about $1 trillion of spending cuts that mandated under the Budget Control Act of 2011 following the failure of Congress’ supercommittee will begin as scheduled in January 2013.

What flows from this baseline?  The budget deficit falls from the current year’s nearly $1.1 trillion, or 7.0 percent of GDP, to 1.5 percent of GDP in fiscal 2015—primarily due to an optimistic 25 percent increase in total federal revenues during that period.  The CBO cautions, though, that the deficit will resume its expansion post-2015 due to mandatory spending on programs such as Social Security, Medicare, and Medicaid and increasing interest payments on the still expanding federal debt.

The CBO also offered estimates based on an alternate scenario and its assumptions.  In its “alternative fiscal scenario,” the CBO assumes that the expiring Bush tax cuts are extended (excluding the current 2% payroll tax holiday); the AMT is indexed for inflation post-2011; Medicare physician payments are held constant at current levels (rather than falling nearly 30 percent in March 2012); and the spending cuts required under the Budget Control Act do occur.

Using these assumptions, the CBO concludes that annual budget deficits will remain elevated at about 5.4% of GDP over the next 10 years, and the ratio of publicly held debt to GDP will rise from its current elevated level of nearly 72% in fiscal 2012 to over 94% in fiscal 2022.

There are other aspects to this.  The CBO estimates that with the Bush tax cut expiry, economic growth—GDP growth—will be a meager 1.1% until recovery can begin in the out-years.  On the other hand, were these alternate assumptions enacted, GDP growth would be 0.3 to 2.9 per centage points greater than under current law.  Later in the decade, though, higher levels of government borrowing would crowd out private investment, drive up interest rates, and hold back economic growth.

Notice what’s not being assumed in the alternative scenario: real cuts in spending.  The assumptions don’t even include the effects of the fictional cuts of “reduced increases” in future spending.  What is it that drives that “higher level of government borrowing?”  It’s not not enough revenue for the government.  It’s too much spending by the government.

When, and only when, government spending is reduced to sane levels can we begin to pay down our burgeoning national debt.  Only by leaving our money in our hands and not having it taken away from us by ever-increasing taxes and by ever-increasing debt payments can our private investments increase, our job creation increase, our prosperity begin to recover.

h/t: Deloitte

Information Flow, PRC Style

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Last month the People’s Republic of China’s government news service, Xinhua News Service, carried a statement from the State Administration of Radio, Film and Television (SARFT) concerning the PRC’s decision about what the Chinese people will be permitted to see on theirthe government’s television sets.  The translation is courtesy of NightWatch.

A recently implemented rule has effectively curbed the “excessive entertainment” trend as two-thirds of the entertainment programs on China’s 34 satellite channels have been cut….  According to an SARFT directive last October, each of the country’s satellite channels would be limited to broadcasting two entertainment programs each week and a maximum of 90 minutes of content defined as entertainment every day during primetime….  The directive also required channels to broadcast at least two hours of news programming.

The restricted programs on the SARFT list include dating shows, talent contests, talk shows as well as emotional stories that were deemed ‘excessive entertainment’ and of “low taste.”  …the satellite channels have started to broadcast programs that promote traditional virtues and socialist core values.  The newly-added programs…are documentaries as well as cultural and educational programs….  The SARFT believes that the move to cut entertainment programming is crucial in improving cultural services for the public….

Nothing like limiting speech “for their own good.”  The Chinese people apparently are sufficiently bereft in judgment that they cannot be left to their own devices—or to their own decisions concerning what speech they might wish to hear.

KnightWatch reminds us that the PRC does not have freedom of speech.  It’s important to note, also, that these broadcasting restrictions are consistent with another fundamental ideological position of the PRC: free markets, free speech, freedom of association, and so on are not inalienable rights; they are privileges granted by government, to be adjusted from time to time solely according to government judgment.

Consider also, the background of this broadcasting move.  In response to increasing influence in the PRC  by Western culture and ideas, which has been facilitated by increasing foreign trade (and some loosening of economic strictures in the direction of freer markets), which in turn helps foster an increasingly prosperous peasant and middle class population (at least by historical Chinese standards), Chinese leadership is pulling back and retightening restrictions.

Last fall, the Chinese Communist Party Central Committee approved an explicitly ideological foundation for cultural activities, announcing a new policy specifically to eliminate many Western entertainment shows and so limit much foreign influence.  Moreover, the PRC government earlier this year ordered internet service providers to ensure that microblog posters (a rough equivalent to the Western Twitter facility) have registered their accounts under their real names—no anonymity here. The government also has pressured those running the microblog platforms to censor themselves “voluntarily.”

So, I ask: of what is the PRC government so afraid?  Oh, wait—it’s the men populating the government…. And I ask further: why do we want these guys for our national banker?

h/t Business Insider

European Finance Crisis

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I’ve written before about this subject.

The chart below is from Spiegel Online International, which has a related story, but I want to visit another aspect of this.  The chart’s breakout indicates German governmental exposure to Greek debt and that exposure’s cost to the German economy were Greece finally to default altogether on its debts.

 

The 50%, or so, haircut currently being sort of negotiated with Greece’s commercial financial institution creditors is a real default, albeit much lipstick has been applied to this PIIG’s lips, and much makeup is being added to its face.  The breakout elides those private banks and the cost to the German economy through the private sector generally; however, the governmental institution cost breakout has its uses.

The German economy is the EU’s and the euro zone’s largest, so the figures in the chart can be taken as an outer bound, within which the other European creditor nations’ costs can be assessed.  Alternatively, and perhaps more effectively, the German cost can be proportionally bounced against the other nations’ GDPs to get an idea of the costs to them, along with an idea of how expensive those costs really are.  Since I don’t have 2011 GDP figures, yet, my greasy spoon diner napkin analysis uses 2010 GDP estimates.

Germany’s 2010 GDP was in the neighborhood of €2.7 trillion.  The chart’s seemingly enormous €72 billion bite, presented without context, shrinks when compared to German economic strength: it’s about 2 2/3% of the German GDP.  The French GDP was €2.1 trillion; its proportional “share” then works out to a bit under €56 billion.  The Netherlands’ GDP was €641 billion; its “share” would be roughly €17 billion.  And so on.  It’s true enough that stronger economies will have an easier time than weaker economies, but in the end, these are sums that are easily absorbed.

To be sure, the private sector also will take hits from a Greek default.  Taking the private sector as a whole, not just the commercial bank interests mentioned above, but including insurance company, pension firm, and mutual fund holdings of Greek debt, the total private exposure works out to around €142 billion.  That’s about half the total Greek debt; it doesn’t add much at all to the GDP-based cost.  For individual economies, the ripple effects of private sector dislocations and occasional bank bankruptcies could seem sharp, but they would be short-lived.  The economies of the non-Mediterranean EU nations (yes, including France) are simply too large and too strong to suffer permanent, or long-lasting, damage.  And the private sector is the only place the hits should occur, anyway.  There’s no reason a French, German, Dutch, and so on, taxpayer—private citizen—should pay for the profligacy of a Greek government, or for that of any government other than their own.

Certainly, it would be suboptimal for Greek’s national creditors to walk away from the deals already made for a Greek bailout: even a bad contract must be honored.  But there should be—and there need be—no more public monies committed to this effort.

The Greeks will be better off, too, for having been released from their indenture to their creditors and allowed to default and to start over.