Tag Archives: economics

Government Spending

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…there are also liberal members of the party who have said the government has done too much to reduce the budget deficit and should focus on short-term spending to boost the economy.

A larger point, albeit outside the scope of Damien Paletta’s column, is that when “short-term spending” simply is repeated “short-term” after “short-term,” it becomes long-term—permanent.  And that’s disastrous for our economy, quite beyond what these liberal members’ hero, JM Keynes, had to say about government (deficit) spending; that man is spinning in his grave.

Another Case for Immigration Reform

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James Pethokoukis as some thoughts on human population decline at AEIdeas.  The thrust of his piece is a study that indicates that the human population on Earth will begin to decline in absolute numbers around 2055, just a scant 40-ish years from now—two generations—our grandchildren’s generation or thereabouts.  He quotes Demographer Sanjeev Sanyal of Deutsche Bank:

We forecast that world population will peak around 2055 at 8.7 billion and will then decline to 8.0 billion by 2100.  In other words, our forecasts suggest that world population will peak at least half a century sooner than the UN expects and that by 2100, and that level will be 2.8 billion below the UN’s prediction.  This is obviously a radically different view of the world.

He then quoted Sanyal at greater length:

1. Aging societies will have to adjust soon to the fact that it is not possible for economies to sustain a retirement age in the early sixties.  With people routinely living well into their eighties, it will soon be common for people to extend their working life into their mid-seventies….  Societies that cannot make the socio-political adjustment to this new reality will struggle in the 21st century and will unduly burden the shrinking base of young people entering the workforce.

These young people, unable to get work due to that extended work life of the aging, also will be harmed in their ability to gain experience and skills that would be useful to their employers and to their countries.  A longer work life, if an economy can make the needed adjustments to continue to incorporate the young at today’s “early” age (i.e., late teens to early 20s), will be able to innovate faster from that deepening experience base.

Unfortunately, the current labor politics makes it difficult to impossible for nations like the US and France even to contemplate extending the age of “full retirement” even for the sake of their respective social security pension plans, much less concern themselves with that waste of a potential for growth in skills from a lengthened work life.

And the problem leaves wholly untouched the shrinking numbers of workers—or any age—to pay into those national social security pension plans.

2. An aging does not imply a boom in retirement homes and an ever expanding medical sector.  Yes, there will be more people in their sixties and seventies, but they will largely be fit and working.  While there will be some increase in the medical support needed to keep this cohort going, it should not be blindly extrapolated from the past.  Meanwhile, as anyone with children will know, falling birth rates will reduce demand for medical care from a high maintenance segment of the population.  This implies a change in the mix of medical care rather than a spiraling increase in per capita medical support.

Thus, the main impact of aging will be the extension of active, working adulthood rather than a situation where large portions of the population are living in a prolonged geriatric twilight.  In turn, this will impact consumption patterns, urban real estate and even the education system.  For instance, university systems will have to be reoriented to deal with middle-aged workers who need to update their skills over a 50-year career or perhaps want to completely change their profession.  In contrast, the intake of younger cohorts will ease off due to the shrinking pipeline coming out of secondary schools.  This implies a big change in the way education systems are set up.

3. The global demographic shift is not a developed country issue since the shift has been faster for many emerging markets.  Russia already has a shrinking workforce and many Latin American countries, contrary to popular belief, have TFRs [Total Fertility Rates, the rate at which child bearing age women actually have children] that are at or below the replacement rate.  …  The rapid shrinking of China’s workforce from 2020, which is now unavoidable, will have a major impact on the dynamics of the world economy (even allowing for some older workers working longer).  As argued in an earlier report in this series, China will transform itself from being the “factory to the world” to becoming the “investor to the world.”  This will create opportunities for younger emerging markets like Indonesia, Philippines and, most importantly, India to enter market segments being vacated by China.  In turn, they will be followed by even younger countries like Nigeria.  Nonetheless, it should be emphasized that demographics alone is not sufficient to generate growth and cannot substitute for sensible policy leadership.

4. Some developed countries may do surprisingly well.  The one developed country that stands out in our model is the United States.  Even though our population growth projections are more moderate than those of the UN, the US can be expected to continue to enjoy an expanding working-age population till the 2050s (i.e., longer than many emerging economies).  Germany’s low birth rate implies a declining population but we feel that it will be much more successful in absorbing immigrants than anticipated by the UN.  Thus, its demographic trajectory may not be quite as dire as generally believed.

Crass as it may sound, all the nations will, wit in the lifetimes of our grandchildren, be competing for immigrants for their economic welfare, for their very national security.  We’d better lay the groundwork now for encouraging immigration into the US, for making immigration a whole lot easier than it is now.  That doesn’t mean we need to compromise our principles—it’s those principles that have acted as such a powerful magnet these past 200 and more years.  It’s the mechanics that want, desperately, improvement, not the purpose.

Obama’s War on Energy

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The Obama administration plans to block the construction of new coal-fired power plants unless they are built with novel and expensive technology to capture greenhouse-gas emissions[.]

There’s a surprise.  The EPA’s latest rule version on this subject looks to control CO2 emissions as an urgency exists in the minds of climate deniers (i.e., those who deny that the existing climate change is an ongoing natural phenomenon) to reduce humanity’s output of this “greenhouse” gas.

[T]he revised rule said it would propose an emissions limit of 1,100 pounds of carbon dioxide per megawatt hour for coal plants and 1,000 pounds per megawatt hour for large gas-fired plants.

…such stringent limits would ban new coal plants….

And

The rule is also a crucial stepping-stone for the Obama administration’s next big environmental project, emissions standards for the fleet of existing power plants.  Mr Obama has told the EPA to produce those standards by June 2014.

Never mind that CO2 is a trailing indicator, confirming the health of the planet.

The climate deniers’ minds—and those of their pet policy makers in the EPA—are made up, and they resent being confused by facts.

Another One of those Non-Existent Republican Health Care Alternatives

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Louisiana Governor Bobby Jindal (R) is implementing one.  Understanding the risks of accepting Federal money (no, he’s not reading my blog), he accepted a federal Medicaid funding cut and imposed it on the Louisiana State University’s health care system, choosing to privatize much of it.

The LSU System had operated 10 hospitals around the state and their network of outpatient clinics.  Outsourcing agreements have been worked out for nine of the hospitals and their clinics.

Jindal outsourced much of that.

[T]he first outsourcing deals, rolled out in April and June…private health providers have taken over the services previously run by LSU.

What are Louisianans getting for this?

Shortened emergency room waits and an eliminated prescription backlog in Baton Rouge.  A re-established gynecology clinic in Lake Charles.  The reopening of operating rooms in New Orleans and an orthopedic clinic in Lafayette that were previously shuttered by budget cuts.

And

[T]he numbers of graduate medical education residents have grown in Lafayette, a breast health clinic and a cardiology clinic have been added at LSU’s outpatient clinic site in Lake Charles, and a new psychiatry residency program is being added in Baton Rouge.

And

The administration estimates the state will save more than $100 million this year from the arrangements….

Hmm….

Minimum Wage

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…and costs to the consumer as well as the worker….

California is about to raise its minimum wage to $10/hr.  Washington (the state, not the capital, so far), has a current minimum wage of $9.19/hr, and that’s tied to inflation.

However, neither labor nor the wage paid for it occur in a vacuum.  Labor is required to produce the good or service being sold, and the wage paid the laborer—whether CxO or line worker—has a direct impact on the minimum price the producer must charge for that good or service in order to stay in business.

Labor costs amount to about 10% of the cost of a car sold to you at the dealership.  Not many cars are produced in California—or Washington—though, so minimum wage increases in these two states won’t impact the prices Californians or Washingtonians must pay for their cars.  Labor costs in the restaurant industry, though, run to 25%-30% of the cost of the meals sold, with the high end coming in sit-down restaurants, the low end in fast food restaurants.

Labor costs as a per cent of the cost of the the end product or service being sold vary widely across industries (vis., auto vs restaurant); I’m going to focus on the restaurant industry for illustration.

California’s rise in its minimum wage, a 25% increase over its existing $8/hr minimum, will have a commensurate impact on the cost of meals bought in these places.  In a sit-down restaurant, that increase in cost can amount to meal price increase of 7.5%.  Factoring in the impact on the business’ payroll taxes for Social Security and Medicare/Medicaid (and eliding the payroll tax that California charges), we get an additional labor cost increase through those taxes (7.65%) of 1.9%, for a total labor cost increase in the price of a meal of 9.4%.  That’s what consumers can look forward to in the inflation of their price for a relaxing dinner out.

Here’s where the tie to inflation comes in: Washington’s tying minimum wage increases to its inflation guarantees that that state’s inflation will be higher than it otherwise would: by that state’s labor cost impact on the prices of goods and services sold there.  This feeds back into its mandated inflation-driven rising minimum wage.  And the vicious circle is up and running.

Of course there are other ways California restaurants can deal with a 25% increase in labor costs.  In order to hold down the total cost of their labor force and thereby keep their meal price increase down to something more marketable, they can either eschew hiring the additional labor with whom they were considering expanding (and not expand), or they can lay off existing workers, or both.  Either way, the restaurants end up using fewer workers to do the same amount of, or more, work.

It’s important to note at this point that food service companies can function very well with low-skill—minimum wage—labor, while other industries (vis., auto assembly) need skilled labor, pay commensurately higher wages, and so are little impacted by minimum wage requirements.  It’s the low-skill, low-wage worker that’s hurt by minimum wage laws, yet it’s these guys who need to get that first job so they can start accruing the experience and training and skills necessary to get better jobs.  Or that need this second job so they can save a little, put a little by for their kids’ college, and so on.

Government-mandated minimum wage increases are job killers.  And they kill the jobs with the greatest marginal value for a nation’s economy and for the individual worker: the low-skilled worker on the cusp of having a job at all.