• The Economic Statistic US Elites Keep ‘Hush-Hush’
By Ron Robins. First published June 6, 2011, in his weekly economics and finance column at alrroya.com
It is a simple statistic that continues to warn of huge economic problems ahead for the US. Some economists call it the ‘marginal productivity of debt (MPD).’ It relates the change in the level of all debt (consumer, corporate, government etc.) in a country to the change in its gross domestic product (GDP). However, due to the message it is delivering, most US economists employed in financial institutions, governments and private industry, as well as financiers and politicians, want to ignore it.
And for the US economy and government finances, the MPD (and related variants of it) is continuing to indicate extremely difficult economic times ahead.
I have vague recollections of the MPD concept from my economics classes long ago. But I was re-introduced to it around 2001 by a renowned economist who, during the following few years prior to his passing, became alarmed as to the MPD path of the US. His name was Dr. Kurt Richebächer, formerly chief economist and managing director of Germany’s Dresdner Bank. Dr. Richebächer, was so respected that former US Federal Reserve Chairman, Paul Volcker once said of him that, “sometimes I think that the job of central bankers is to prove Kurt Richebächer wrong,” reported the online financial journal, The Daily Reckoning on May 15, 2004.
Investigating Dr. Richebächer’s concern further, I wrote an article on my Enlightened Economics blog on January 23, 2008, titled, Is the Amazing US Debt Productivity Decline Coming to a Bad End? I found that, “for decades, each dollar of new debt has created increasingly less and less national income and economic activity. With this ‘debt productivity decline,’ new evidence suggests we could be near the end-game… ”
Another way of viewing the debt productivity problem is to look at it in terms of how many dollars of debt it took to help create total national income, which is the wages, salaries, profits, rents and interest income of everyone. Again, from my above mentioned article, which quotes Michael Hodges in his Total America Debt Report, that, “in 1957 there was $1.86 in debt for each dollar of net national income, but [by] 2006 there was $4.60 of debt for each dollar of national income – up 147 per cent. It also means this extra $2.74 of debt per dollar of national income produced zilch extra national income. In 2006 alone it took $6.32 of new debt to produce one dollar of national income.”
Such data helps explain why US exponential debt growth—after reaching certain limits—collapsed in 2008 and contributed massively to the global financial crash.
However, whereas the US private sector debt has marginally ‘de-leveraged’ (retrenched) since that crash (which might now be reversing), the US government, as everyone knows, has run up mammoth deficits to purportedly keep the country’s economy from imploding. Thus, the US’s MPD is marching to another, perhaps even more frightening tune, suggesting government financial insolvency and/or debt default.
One fascinating way of looking at the declining MPD of US government debt has just been presented by Rob Arnott on May 9, 2011, in his post, Does Unreal GDP Drive Our Policy Choices? What Mr. Arnott does is to subtract out the change in debt growth from GDP, and refers to this statistic as ‘Structural GDP.’ He finds that, “the real per capita Structural GDP, after subtracting the growth in public debt, remains 10 per cent below the 2007 peak, and is down 5 per cent in the past decade. Net of deficit spending, our prosperity is nearly unchanged from 1998, 13 years ago.”
In its effort to counter the significant economic difficulties since 2008, the US government has added, or will have added, around $4 trillion in deficits (financed by new debt) in its three fiscal years 2009, 2010 and 2011. Yet, all this massive government deficit spending has failed to really ignite economic growth. Most likely this is because of the enormous dead weight of unproductive and onerous private sector debt, particularly that of consumer debt. Hence, real US GDP will have increased probably less than $1.5trn during these years. Including some further economic benefit in the years thereafter, a total GDP benefit of only about $2trn is probable.
So, $4trn borrowed for $2trn in GDP gains. Thus, in very rough round numbers, each new one dollar of US government debt might only produce $0.50 in new economic activity and probably only about $0.08 in new federal tax revenue. (Federal tax revenue as a percentage of GDP is around 15 per cent.) Therefore, the economic marginal return for each new dollar of US government debt is possibly around -50 per cent! If you loaned someone $10 million and they gave you back $5m, you would not be happy!
Hence, it might not be long before those holding or buying US government bonds perceive the reality that the US government, and US economy, are losing massively on government borrowings. This will result in much, much higher US government bond yields and interest costs. Most importantly, it may make the rollover of US debt and new debt issuance incredibly difficult unless either US taxes rise stratospherically to cover the deficits, and/or the US Federal Reserve money printing goes into hyper-drive to purchase the debt the markets will not buy. (Of course US banks, pension funds etc., could also be forced to buy them.)
Thus, the idea that US government debt continues to be ‘risk-free’ is absurd.
For this, and for many other reasons cited above, is why the US financial and political elites want to keep hush-hush about what the MPD and its variants reveal!
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• Proposed Healthcare Surgery Won’t Heal America
By Ron Robins. First published May 18, 2011, in his weekly economics and finance column at alrroya.com
Yes, surgery is required for the US government’s Medicare (healthcare) program. But before the scalpel is used to control unsustainable costs, an understanding of what promoted the financial disease is required. Unfortunately, that understanding is almost totally missing in the American debate. The Medicare changes proposed so far will not heal America.
In “Short Term Gain, Long Term Pain”, I wrote “unacknowledged as key causes of most developed countries’ growing and unsustainable debt is their citizens’ lack of happiness and well being. This induces people to seek immediate comfort in material goods, drugs, and activities and lifestyles that eventually cause them, and their societies, great harm, ill health, and massive debt!” Additionally, consider the immense psychological distress and impact on individual lifestyle and chronic diseases when about half of all American marriages end in divorce and 29 per cent of all children live in single parent ‘families.’
Hence, for many tens of millions of Americans, this lack of happiness and well being inflicts significant psychosomatic (mind/body) based illnesses, accounting for 70 per cent or more of costly chronic lifestyle-based diseases.
Supporting the view concerning the negative effects of lifestyle-based diseases is Mark Bittman, writing in the New York Times on April 12. He said that, “for the first time in history, lifestyle diseases like diabetes, heart disease, some cancers and others kill more people than communicable ones. Treating these diseases—and futile attempts to ‘cure’ them—costs a fortune, more than one-seventh of our GDP… But they’re preventable, and you prevent them the same way you cause them: lifestyle. A sane diet, along with exercise, meditation and intangibles like love prevent and even reverse disease… ”
Mr. Bittman also quotes Dr. David Ludwig, a Harvard-affiliated paediatrician and the author of Ending the Food Fight, who says, “the magnitude of the [US government] deficit is small when you consider costs of nutrition-related disease; the $4 trillion that the Republicans want cut over a decade is about the same as the projected costs of diabetes over that same period.”
Hence, it is clear that what should be done is to put resources into proven cost-effective programs that promote improved psychological health and lifestyles. Unfortunately, the US Congress is probably too psychologically unstable to seriously consider incorporating such programs! Instead it will probably resort to changes in Medicare that mostly attempt to limit healthcare costs. However, changes to Medicare are unlikely to happen until after the 2012 Presidential elections unless Congressional action comes sooner due to a collapsing US dollar and/or bond market, or a miraculous bi-partisan bill that both Democrats and Republicans agree on.
The starting point in this debate is that the US is dealing with potentially mammoth unfunded Medicare liabilities of up to $125tn. over the infinite horizon, according to Boston University’s professor of economics, Laurence J. Kotlikoff. Funding that would require all 309 million Americans to each write a cheque to the US treasury for $405,000! Clearly, that is not about to happen.
President Obama revisited the Medicare cost debate on April 13, by saying the following: “Already, the reforms [to Medicare]… will reduce our deficit by $1tn… We will cut spending on prescription drugs by using Medicare’s purchasing power… We will change the way we pay for healthcare… with new incentives for doctors and hospitals to prevent injuries and improve results… we will slow… Medicare costs by strengthening an independent commission of doctors, nurses, medical experts and consumers who will look at all evidence and recommend the best ways to reduce unnecessary spending…”
“… the reforms we’ve proposed… [are] saving us $500 billion by 2023, and an additional $1tn in the decade after that… [and] I will not allow Medicare to become a voucher program that leaves seniors at the mercy of the insurance industry…” A ‘voucher’ program is at the heart of proposed Medicare reform by US House Budget Committee’s Chairman Paul Ryan. It is also favoured by Professor Kotlikoff.
Commenting on April 14, a CNN post on President Obama’s Medicare reform proposals and those of Mr. Ryan, Professor Kotlikoff made the following remarks: “This is simply a continuation of kick-the-can down the road, which leaves ever larger government bills for our kids to pay… Obama’s speech made no effort to find common ground with House Budget Chairman Paul Ryan’s plan to address Medicare… ”
Professor Kotlikoff also writes about his own plan, The Purple Health Plan (PHP), which shares many similarities with Mr. Ryan’s proposal. “The [PHP]… provides all Americans with vouchers each year to purchase a basic healthcare policy. Those with bad genes or bad luck receive larger vouchers. The vouchers are paid for by our taxes. We pay for a basic health plan of our choosing solely with the voucher. Insurance providers of the basic plan can’t turn us down… [spending is fixed at] 10 per cent of GDP… [the plan] also offer[s] participants financial incentives to lower their weight, stop smoking, take their meds, and otherwise improve their health.”
Professor Kotlikoff’s PHP is partly based on the healthcare systems of Germany, The Netherlands, Switzerland and Israel, who the OECD ranks as having some of the most cost-efficient and effective healthcare systems. American per capita healthcare spending is around 50 per cent greater than in those countries, yet with frequently poorer outcomes. The PHP has great credentials, being supported by five Nobel Economics’ Laureates: George Akerlof, Edmund Phelps, Thomas Schelling, William Sharpe and Vernon L. Smith.
Surgery to America’s healthcare system, Medicare, is coming around again. The changes that eventually gather the most support may well centre around Professor Kotlikoff’s PHP, utilising a voucher system and limiting government spending. His plan also incorporates some financial incentives to promote improved health. But the PHP, as with any of the other plans being proposed, need to include a major emphasis on psychological health too. Without such an emphasis, the proposed changes to Medicare will not solve the massive problem of psychosomatically induced diseases—which are the bulk of chronic health problems and with which are associated most of the huge mounting costs.
Thus, none of the proposed changes to Medicare offered as yet by President Obama, US House Budget Chairman Paul Ryan, or by Professor Kotlikoff, will really heal America.
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• Financial and Economic Modelling – A Waste of Time?
By Ron Robins. First published April 21, 2011, in his weekly economics and finance column at alrroya.com
“…both risk models and econometric models… are still too simple to capture the full array of governing variables that drive global economic reality,” wrote Alan Greenspan, former chairman of the US Federal Reserve in the Financial Times on March 16, 2008. And if anyone should know about the quality and predictive validity of such models, it would be Mr. Greenspan. Time and again it has been shown that reliance on the predictions from such models is foolhardy.
It was the reliance on, and failure of their predictions, that caused enormous global financial and economic carnage in 2008 and 2009. Yet today dependence on these models seems greater than ever. I suggest our overt focus and use of them is often a wasted effort.
A truth that many modellers and their followers seem to have difficulty accepting is that the past—which most modellers use to prognosticate the future—has frequently been shown to be a poor basis upon which to determine future outcomes. Modellers can continue to refine their models in great detail, and then some unusual event occurs with a one in a million chance of happening—such as the US sub-prime mortgage fiasco—and their models fail. Sadly, the variables which may encompass a one in a million event are numerous. Among them are sudden changes of investor attitudes, weather patterns, geological events, and political and social upheavals.
If we look around today from the sudden movements in sovereign bond markets to the extraordinary weather recently in Australia, to the horrific Japanese earthquake, tsunami and nuclear reactor troubles, to the political upheavals in North Africa and the Middle East—all are kinds of exogenous events that can trash the predictions of the most exacting risk or econometric model.
Furthermore, a ‘perfect’ econometric model would only be possible, metaphorically speaking, if the modeller had ‘the mind of the creator.’ Only then perhaps, could all be known and predicted. Sadly—and I do not mean any disrespect to the modellers—I do not believe that many (if any) of them have that level of intelligence and consciousness at this time. So those constituencies that trust in these models are doomed to suffer continuing disappointments.
Another problem with these models is how to model for human behaviour, as it is both rational and irrational at different and unpredictable times. Therefore, before such modelling can ever hope to fully succeed, it must completely understand human consciousness: who we are, and how and why we act. And the modellers are a long, long way from such an understanding. Incidentally, there is a branch of economics, ‘behavioural economics,’ that is moving in that direction. I wish them good luck with that!
Economists today, unlike those of earlier eras, seem to believe that the only way they can be perceived as legitimate is to be scientifically oriented. Hence their passion for increasingly complex models and their statistician-like orientation.
The type of economic modelling that incorporates mathematics and statistical relationships to economic data, is termed econometrics. Google econometrics and you will probably find over 5,000,000 links. They are largely links to innumerable academics, research institutions, studies, papers and journals. With so much effort put into this field, any independent observer could conclude that econometrics must be a highly successful and seemingly scientific endeavour. It reminds me of the enormous quest for artificial intelligence (AI) to recreate the abilities of the human mind in computers. At least AI is somewhat plausible as it advances the field of computing and robotics which have many, many practical applications that we all know about.
But unlike AI research, economic and econometric models—with their significant variances and failures—have much less to offer society at this time. Mark Thoma, Professor of Economics at the University of Oregon offers these pertinent remarks in his blog, Economist’s View, on February 8. “Much of the uncertainty in economics derives from our inability to do laboratory experiments, and that includes uncertainty about which model best describes the macroeconomy. When the present crisis is finally over, those who advocated fiscal policy, those who advocated monetary policy, and those who advocated no policy at all will all say ‘I told you so’ based upon their reading of the evidence… the answers you get are only as good as the model used to get them, and considerable uncertainty remains over which macroeconomic model is best.”
In the 19th century’s Europe and North America, there were no econometric models (not in the way we know of them today), yet those continents experienced unprecedented economic growth. And the concept of gross domestic product (GDP)—which is usually a top concern in econometric modelling—was not created and used until World War II.
We know that econometric models are unreliable in providing information on how economies behave as well as their projections of future economic activity. Similarly, modelling for financial risk has been shown to be more than problematic and history shows reliance on risk models brings eventual failure and grief.
Therefore, given the facts, we need to be much, much less anxious about trying to create perfect risk and econometric models—and not rely on these models, generally. After all, it was mostly intuition and drive, not decisions based on risk and econometric models that led our greatest inventors, financiers, entrepreneurs and leaders to great success, thereby creating our modern economies.
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• Eliminate Corporate Taxes and Spur Economic Growth
By Ron Robins. First published April 7, 2011, in his weekly economics and finance column at alrroya.com
What should overly indebted developed country governments do to spur economic activity and reduce deficits and debt? Should they spend more, or less? Should taxes be increased, or lowered? A number of recent studies collectively suggest that government stimulus spending provides no stimulus at all beyond the amount spent. But where there are large deficits, spending should be cut. However, the best way to stimulate the economy is through lower taxes—and especially to cut corporate taxes! But what a political bombshell these policies would be in many countries.
Increased government spending, say numerous economists trained in traditional Keynesian economic theory, should have a ‘multiplier’ effect that increases overall economic activity by an amount larger than the sum spent. However, some recent empirical research disputes that assumption.
In a prestigious US National Bureau of Economic Research (NBER) study, Identifying Government Spending Shocks: It’s All in the Timing, by Valerie A. Ramey, published in October 2009, she found that, “… none of my results indicate that government spending has multiplier effects beyond its direct effect.” That is a dollar of government spending contributes only about a dollar to economic activity.
Furthermore, the same conclusion was noted by Harvard University’s Economics Professor Greg Mankiw while reviewing new research in his blog post, “Spending and Tax Multipliers” on December 11, 2008. He stated “…Bob Hall and Susan Woodward look at spending increases from World War II and the Korean War and conclude that the government spending multiplier is about one: A dollar of government spending raises GDP by about a dollar.”
So, these studies indicate that increasing government spending does not increase economic activity by anything more than the original sum spent.
By contrast, cutting taxes may have a much larger economic multiplier effect. Quoting Professor Mankiw again, he says, “…research by Christina Romer and David Romer looks at tax changes and concludes that the tax multiplier is about three: A dollar of tax cuts raises GDP by about three dollars…” (Incidentally, Christina Romer was chairman of President Obama’s Council of Economic Advisers in 2009-2010.)
Furthermore, Professor Mankiw adds that, “…these findings are inconsistent with the conventional Keynesian model. According to that model, taught even in my favourite textbook, spending multipliers necessarily exceed tax multipliers… How can these empirical results be reconciled? One hypothesis is that compared with spending increases, tax cuts produce a bigger boost in investment demand. This might work through changing relative prices in a direction favourable to capital investment–a mechanism absent in the textbook Keynesian model.”
Reviewing the spend and tax empirical data for most developed countries suffering from large deficits and debt is this study, Large Changes in Fiscal Policy: Taxes Versus Spending, by Alberto F. Alesina and Silvia Ardagna—another NBER paper, dated October 2009. They state, “we examine the evidence… of fiscal stimuli [stimulus] and in… fiscal adjustments [reducing deficits] in OECD countries from 1970 to 2007. Fiscal stimuli based upon tax cuts are more likely to increase growth than those based upon spending increases. As for fiscal adjustments, those based upon spending cuts and no tax increases are more likely to reduce deficits and debt over GDP ratios than those based upon tax increases. In addition, adjustments on the spending side rather than on the tax side are less likely to create recessions.”
So if cutting taxes gives the best boost to economic activity, are there particular taxes to cut that provide the most economic stimulus? The answer is yes, according to the OECD study, Tax Policy Reform and Economic Growth, November 3, 2010. The reviewers say that, “…corporate taxes are the most harmful type of tax for economic growth, followed by personal income taxes and then consumption taxes, with recurrent taxes on immovable property being the least harmful tax.”
Corroborating these findings is another recent peer reviewed study supporting lower corporate taxes: The Effect of Corporate Taxes on Investment and Entrepreneurship, published in the American Economic Journal in July 2010. It stated, “in a cross-section of countries, our estimates of the effective corporate tax rate have a large adverse impact on aggregate investment, FDI [foreign direct investment], and entrepreneurial activity… The results are robust to the inclusion of many controls.” (The authors were from the World Bank: Simeon Djankov, Caralee McLiesh and Rita Ramalho. And from Harvard University: Tim Ganser and Andrei Shleifer.)
Based on this evidence, some observers argue to significantly reduce or even eliminate corporate taxes entirely! In fact, many countries and jurisdictions are reducing corporate taxes significantly, exactly because of such studies. Though no country has yet eliminated them altogether.
Most of these respected studies variously infer that one optimal solution to spur economic growth in developed countries is to cut taxes, while to reduce onerous government deficits and debt, Alberto F. Alesina and Silvia Ardagna suggest cutting spending. Moreover, some of these studies clearly demonstrate that to promote economic growth, governments should most especially cut corporate taxes. Of course this is advocated by some US ‘Tea Party’ leaders, though it is a problematic issue for electorates in many developed countries.
However, shouldn’t at least one country try eliminating corporate taxes entirely? Now that would be one country to study!
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• Short Term Gain, Long Term Pain
By Ron Robins. First published March 31, 2011, in his weekly economics and finance column at alrroya.com
Unacknowledged as key causes of most developed countries’ growing and unsustainable debt is their citizens’ lack of happiness and well being. This induces people to seek immediate comfort in material goods, drugs, and activities and lifestyles that eventually cause them, and their societies, great harm, ill health, and massive debt!
After decades of study, Robert E. Lane, the Eugene Meyer Professor Emeritus of Political Science, at Yale University in the US, found that it is a lack of happiness and well being that is eating away the moral fibre of the populations in advanced market democracies. In Professor Lane’s seminal book, Loss of Happiness in Market Democracies, he writes, “amidst the satisfaction people feel with their material progress, there is a spirit of unhappiness and depression haunting advanced market democracies throughout the world, a spirit that mocks the idea that markets maximise well-being and the eighteenth-century promise of a right to the pursuit of happiness under benign governments of peoples choosing.”
Continuing, “the haunting spirit is manifold: a postwar decline in the United States in people who report themselves happy, a rising tide in all advanced societies of clinical depression and dysphoria [anxiety, malaise], especially among the young; increasing distrust of each other and of political and other institutions, declining belief that the lot of the average man is getting better, a tragic erosion of family solidarity and community integration together with an apparent decline in warm, intimate relations among friends.”
It is these conditions which Professor Lane observes that give rise to individuals seeking immediate comfort anyway they can. Hence, most developed countries’ populations gravitate to instant solutions that might ameliorate their lack of happiness and anxieties. This, no matter the long term monetary, psychological, or physical consequences and costs to themselves or society. Professor Lane believes it is imperative for western democracies to give the highest priority to improving the happiness and well being of its individuals. And this means their focus should be on human psychological health and relationships—not about income levels.
By looking for hedonistic joys in the present, many developed countries’ individuals seek excessive material consumption which then creates unsustainable levels of consumer debt. In the US, though to a lesser degree in other developed countries, consumer debt has grown far faster than individual earnings gains over the past several decades. Despite a respite in consumer debt growth during the past two years, signs are emerging that US consumer debt might well begin to outpace actual earnings gains again in 2011, thereby creating conditions for yet another future financial crisis.
Also, and again much ignored in the debate concerning debt, are other individual behaviours that induce it. For example, to provide a modicum of happiness and to make life more bearable, people in America (and in many developed countries) consume drugs (legally and illegally) in extraordinary amounts. These drugs—alcoholic beverages, marijuana, cocaine, cigarettes, prescribed and non-prescribed medications, etc.—often create dependencies that impair health, brain and psychological functioning. These dependencies then lead to greater crime to support drug habits, increase prison populations and criminal/legal costs, raise the number of accidents everywhere, and encourage unhealthy lifestyles that in turn produce epidemics of obesity, diabetes, heart disease and all manner of health problems.
Americans spend more on healthcare, by far, than anyone else. In 2009, according to the Centers of Medicare and Medicaid Services, Americans spent $8,086 per person on healthcare, equal to 17.6 per cent of their economic output or gross domestic product (GDP). And such expenditures continue spiralling 4 to 10 per cent a year, far faster than GDP itself. Thereby they add inexorably to future unfunded US federal government medical liabilities that Boston University’s Professor Laurence Kotlikoff believes is about $125 trillion over an infinite timeframe. To fund that liability would require every man, woman and child in America to pay about $407,000 to the US federal treasury!
And among public companies a short term focus on near term profits that potentially create longer term costs and debt has been endemic. Consider this 2001 quote by Maryann Keller on the US automobile industry. In Forbes magazine, she said, “[That] Chrysler, GM and Ford spent billions of dollars to buy their stock in the open market… It was always obvious that product spending [developing new autos] was being sacrificed to provide trading liquidity [ease of selling stock] for big investors while boosting earnings per share. GM, Ford and the Chrysler Group today [in 2001] find themselves with growing gaps in their product portfolios as they lose market share…”
Thus, the US automobile industry preferred to spend profits on supporting their near term stock prices rather than developing new products for longer term profits. By 2009 all but Ford were bankrupt. After losing tens of thousands of jobs and engaging in a massive automobile industry restructuring program, the US government bailed out the industry (for now?) at a cost of about $85 billion. (Canadian governments also supported GM and Chrysler to the tune of $13.5bn CAD.)
Total societal US debt (private, corporate and government) is now likely to continue moving higher again as consumers are forever encouraged to spend now while saving is discouraged due to artificially mandated low rates. Increasing employment, though welcome, is not likely the answer to mounting unsustainable societal debt. In fact, it might well exacerbate it if former long term trends of debt growth outpacing income gains continue.
The US, like most other developed countries, is on a path to increased human suffering and tragic financial circumstances unless it deals with the fundamental issue: enabling individuals and families to become intrinsically happier and experience feelings of greater well being. Only then can the compulsion towards short term thinking and gratification—which builds huge unsustainable long term debt—be stopped.
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• America’s Economic Rebirth
By Ron Robins. First published March 24, 2011, in his weekly economics and finance column at alrroya.com
A rebirth of the American spirit and economy is probable. It would be founded on huge reductions of societal debt and consumption. It will arise on re-invigorated American entrepreneurship, a revamped government and healthcare system, new energy sources, local manufacturing and a growing working age population, amongst many other changes Americans will embark on.
However, before America can begin its rebirth, it has to deal with its debts. Total US societal debt may well have reached a tipping point and many investors are wondering when US government bonds will be abandoned. In fact, this process might already be underway. Reuters’ Jennifer Ablan reported on March 9 that Bill Gross’s $237 billion Pimco Total Return Fund, the largest bond fund in the world, had sold all its US government bonds over the past few months.
The most likely cause for wholesale abandonment of US government bonds is when there is broad recognition that the US economic recovery is not self-sustaining—as Bill Gross believes—and that the fiscal stimulus packages and Fed quantitative easing (QE) programmes have been ineffective in righting the US economy. One major result of US bonds being dumped will likely be much higher US interest rates and restrictive credit market conditions. Such conditions could give rise to dramatic falls in consumption as happened in 2008-2009.
In such circumstances, facing a stark new reality, Americans will be forced to look within themselves for guidance. As they do, I believe they will regain their ‘can do’ attitude and surprise the world with a regenerated spirit and incredible enterprise and entrepreneurship. Gerald Celente, probably the most accurate trends forecaster of our time, predicts an ‘American Renaissance.’
More than likely the economic and social circumstances of the next few years will cause a total re-organisation of US governments: federal, state and local. With greatly restrictive finances, many of their services will no longer be available. This will leave room for numerous private entrepreneurs to fill the gaps. Perhaps the area where this will be most felt will be healthcare. As I have written in US Healthcare Delivering a Heart Attack!, financial conditions will force major reductions in Medicare and probably private insurance plan coverage as well. Individuals will have to pay directly for many more services.
With patients in the drivers’ seat by having to pay directly for numerous healthcare services, doctors and healthcare service providers will have to compete in ways they never had imagined before. Alternative therapies such as Chinese medicine, homeopathy, ayurveda, meditation, etc, will compete on a more equal footing with established healthcare practitioners, drug plans, and so on, to provide health remedies. It will be messy and likely finally force down the prices of many healthcare services that had been rising in prices far faster than incomes. Finally, healthcare will become more affordable to Americans. But as in any competitive marketplace, those that offer the most cost-effective services and products will gain most.
There is also the opportunity for eventual US energy self-sufficiency, particularly as many forecasters believe that oil will become ever more expensive—most especially in devalued dollar terms. Renewable energy systems—wind, sun, geothermal, etc —all have the capacity to vastly increase output. An article by Karin Rives on February 18, on the website United States Mission referred to a Bloomberg New Energy Finance report that said US onshore wind power electrical generating costs are now about the same as for coal-generated power. The gradual transfer to electrically driven vehicles is also just beginning.
Furthermore, if environmental safeguards can be found, shale gas deposits in the US could go a long way to ensuring US energy self-sufficiency. In “Facts About Shale Gas”, Washington DC based API states that the US has over 100 years of supply at current gas consumption rates. Moreover, an MIT study reviewed in the New York Times by Matthew L. Ward on June 25, 2010, foresaw natural gas usage doubling over the next several decades to 40 per cent of the US energy market.
Thus, US ingenuity in energy production could substantially change its energy mix. The US could become much more self-reliant while dramatically decreasing its oil related imports that today account for more than 50 to 70 per cent of its trade deficit.
The financial conditions that will befall the world when the US dollar crumbles will probably lead to trade restrictions and tariffs in the US and in many countries. US manufacturing, behind a tariff wall and ‘buy America’ policies, together with a shortage of imported goods, will re-invigorate American manufacturing and technological prowess. Mr Celente predicts an ‘elegance trend’ and the need for durability in all things manufactured.
Similarly, Mr Celente forecasts a rebirth of American agriculture. Americans will demand real, natural food and it will also be grown abundantly in numerous urban and roof gardens.
Looking out over the next few decades, the US has another advantage over other large developed countries. It is expected to have the most favourable demographics as well. By 2050, according to the UN’s 2008 population database projections, the US dependency ratio is forecast to be 63 dependents per 100 working age individuals, compared to 96 for Japan and 74 for Europe.
The next few years will be difficult for America. But beyond that is its revival. Its unsustainable debt burden will be substantially reduced and US governments—federal, state and local—will be financially forced to live within their means. This will entail a huge restructuring of what they do and in the process provide major opportunities for new entrepreneurial activities.
Healthcare, energy, food, manufacturing and technology, will be among the areas that will undergo transformations that will lead America and the world into a new era. A new American spirit probably arising sometime this decade will give rise to the birth of a new US economic paradigm.
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• India, Ancient Economic Behemoth, to Overtake China
By Ron Robins. First published March 20, 2011, in his weekly economics and finance column at alrroya.com
When Europe was going through its murderous medieval period, India was an economic behemoth controlling from one-fourth to one-third of the world’s wealth. After the death of the Indian Mughal Emperor Aurangzeb in 1707, India descended into fractious internal wars. This gave the British with their East India Company the opportunity to seize and control vast Indian assets, eventually assuming supremacy over all India.
In 1700, India’s economic output—its gross domestic product (GDP)—was almost 9 times that of Britain’s. By 1947, just before Indian independence from Britain, the tables had turned dramatically with British GDP about 1.2 times that of India, according to data by Angus Maddison in his study, The World Economy.
Now, the International Monetary Fund (IMF) believes the Indian economy has grown to be the world’s fourth largest on a purchasing power parity (PPP) basis, that is, equalising exchange rates given the purchase of a set basket of goods. A Citi study reviewed in The Times of India on February 23 said that based on PPP, India will have the largest economy in the world by 2050. And the World Bank suggests that India’s economic growth rate could surpass that of China this year. The Indian government is projecting 2011 GDP growth of near 9 per cent.
Furthermore, the US Census Bureau projects India’s population becoming the world’s largest and surpassing China in 2025. And by 2050, the Bureau sees India’s population at 1.66 billion compared to China’s 1.3 billion.
Population demographics are crucial in another sense. In Ed Dolan’s, India’s Secret Weapon in its Economic Race With China: Demographics, November 11, 2010, he writes that, “rich countries with slow population growth have high dependency ratios because they have many retirees. Low-income countries with fast population growth have high dependency ratios because they have lots of children. In between these two states, countries go through a Goldilocks period when the working age population has neither too many children nor too many parents to support… India is just entering its Goldilocks period while China, like the United States, is already leaving.”
While considering demographics, Mckinsey & Co expects India’s middle class population to grow from 50 million in 2007 to 583 million by 2025, while over 291 million will move away from desperate poverty to a more sustainable livelihood. Mckinsey also sees India’s consumer market becoming the world’s fifth largest by 2025, up from twelfth place in 2007.
Such consumption growth implies enormous economic investment. And in fact, in the next three years, a massive $500 billion is being spent on Indian infrastructure says Chris Devonshire-Ellis in his post, China Demographics Dictate India as Global Manufacturing Hub, last September 27. Citing data from Asian Comparator, he says that Indian wage rates and associated costs are highly favourable when compared to China and other Asian nations.
However, for now it is India’s service sector that is its real star. Relative to China, and given its state of development, India’s service sector is much larger too and is thus offering a different growth path to that of China. In fact, Ejaz Ghani, Economic Advisor at the World Bank, says in The Service Revolution, March 23, 2010, that the growth in services has India and other South Asian countries exhibiting the growth patterns of middle to high income countries.
Mr Ghani also says, “productivity growth in India’s service sector matches productivity growth in China’s manufacturing sector… that the effect of services growth on aggregate economic growth appears to be as strong, if not stronger, than the effect of manufacturing growth on overall growth… India’s growth experience suggests that a global service revolution—rapid growth and poverty reduction led by services—is now possible.” Incidentally, services represent about 70 per cent of global GDP, whereas manufacturing is much lower at 17 per cent. Thus services represent potentially, a much higher order of growth for India than does manufacturing.
And services continue to grow rapidly. In a February 21 article in India’s Express Computer, it says that IT-BPO (information technology-business process outsourcing) is estimated to be up 19 per cent this year with revenues of $76 billion. Exports are expected to be $59 billion of that. For fiscal year 2012 the publication says that software and services growth is expected to increase 16 to 18 per cent.
India may have yet another advantage over China: it might be more attractive to foreign executives says Mr Devonshire-Ellis. He quizzed a number of western executives who had worked in China and India and asked them where they prefer to work. He said that, “the surprising conclusion was that India was preferable. Several executives expressed a desire never to return to China.”
Also, the world’s business language, English, is used by 350 million Indians, while about 100 million speak and write the language fluently. Moreover, unlike China, much of India’s legal, political, financial and commercial framework is more familiar to developed countries’ businesses that would like to do business with or invest in India.
India has traditionally been a land of great entrepreneurial activity and wealth. The past three centuries of poverty have been an anomaly. Now its economic growth could soon surpass that of China and its economy become the biggest in the world by 2050. Its population is projected to be the largest of any country by 2025. As it grows to have the world’s biggest pool of working age individuals, its forthcoming massive investments in infrastructure, its comparative wage cost advantages, widespread use of English and globally compatible financial and legal structures, India could soon become a major world centre for both manufacturing and services.
India is rising again to become a global economic behemoth.
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• Banks’ Cheap Money is Economic ‘Poison’
By Ron Robins. First published March 10, 2011, in his weekly economics and finance column at alrroya.com
Developed world bankers continue to proclaim that enforced low interest rates—cheap money—will lead their countries back to economic prosperity. But didn’t the same policies a few years ago help bring us to the precipice of financial and economic collapse? Do they still not understand that cheap easy money led to many large US and European banks becoming gambling institutions, eventually failing and bailed out at taxpayers’ expense?
And above all, that cheap easy money enticed people, companies and governments, to become horribly indebted, with many individuals and companies failing. Soon, even developed country governments may go bankrupt. As proof that cheap easy money is again causing extraordinary economic problems, just look at where some of it is now going—to the commodities’ markets. There, it helps inflate food prices, thus causing starvation and food riots around the world.
Do the bankers not read history and know that artificially induced cheap easy money can be economic poison?
Of course one simple reason that many bankers advocate cheap easy money is that it makes them a lot of money. When they can—as they did for many years and still seem able to do—‘leverage-up’ their assets in relation to their equity, they can make multiples of profits compared to before. And since, often courtesy of their benevolent central bank, they can frequently borrow at nearly free rates and ‘invest’ those proceeds in bonds/securities/commodities that often offer high potential returns, it is possible for them to make ever bigger profits.
For most large US and European banks, their assets frequently exceeded their equity by 20 to 60 times before the financial crises. That is, keeping it simple, they were somehow able to leverage every $1 of equity, usually by borrowing funds, to create $20 to $60 of assets! The risk in such high leverage is that a small loss in asset values of say, just five per cent, could wipe out their equity and cause insolvency and bankruptcy.
Unfortunately, very high leverage ratios continue in many developed countries’ banking and financial institutions. (Perhaps this is the real unspoken reason for cheap money: to inflate asset markets to keep the banks semi-solvent! Though, that topic is for another post.)
Therefore, the real story is the culture of leverage and risk that numerous developed world banks now embody as a result of easily available cheap money. This is in contrast to that during much of banking history when money was regularly relatively expensive (with higher rates of interest) than today and often difficult to obtain.
The easily available cheap money encourages enormous ‘moral hazard’ among bankers and all players in the financial system. Moral hazard denotes a lack of morality and a carefree greed mentality that produces excessive speculation. It is this attitude that promotes the creation of maximum leverage and the taking of big risks—and not caring too much about any potential losses as they are covered by others. Bankers under the influence of moral hazard are like addicted gamblers who cannot stop gambling. But the gambling is not at the card table. It takes place in their boardrooms and trading desks.
And fortunately for the bankers they can enjoy their moral hazard largely at the expense of taxpayers. As we know, much of the potential and accumulated massive losses in the US and European financial and banking systems have been transferred to governments and central banks. The US and European governments and central banks make light of these burdens saying that as their economies recover these losses will be greatly reduced. However, the ‘central bank of central banks,’ the Bank for International Settlements (BIS), has issued new global bank regulations (Basel III) that—if implemented—might reign in some of the excesses associated with moral hazard.
Of course not all banks speculate or gamble to the same extent. In Islamic banking, spiritual and ethical considerations greatly restrain speculation. Also, for instance, Canadian banks adhere to more conservative principles and are better regulated and so have not suffered the same fate as that of many of their US and European rivals.
For now though, cheap easy money is seen by bankers as our economic salvation. And it inflates global markets, including those related to food and energy. As their prices rise, the unforeseen repercussions of the bankers cheap easy money ‘poison’ assists in creating starvation, food riots, and political upheaval around the globe.
Furthermore, the continuing high leverage, moral hazard, and gambling tendencies within the banking and financial system assures that some of today’s ‘good’ investments will sour and suffer large losses. Will the taxpayers again assume those losses? If not, then what? Until the cheap easy money poison is banished it continues creating conditions for even bigger economic and social catastrophes in the years ahead.
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• A Global Central Bank and Currency?
By Ron Robins. First published January 27, 2011, in his weekly economics and finance column at alrroya.com
There are many paths forward for the global monetary system, but the hitherto unthinkable is becoming debatable: a global central bank and currency. However, despite the recent financial distress and potential for further financial calamity, the creation of such a new institution or currency is far off. But would a global central bank with possibly its own currency help bring monetary solace, universal prosperity and humankind together? Or would such a bank and currency result in yet another calamitous monetary failure?
The 2008-2009 financial debacle showed just how unprepared the global financial system was to deal with a loss of faith in, and imploding of, the global banking system. To stave off a global financial meltdown, the central banks of the US, the EU, Japan and many others around the world advanced vast sums in loans and guarantees to banks and financial entities. And the US Federal Reserve (the Fed) in particular loaned out hundreds of billions of dollars to foreign-owned banks, in effect acting as a bank of last resort to the global banking system.
As big as the Fed is, it and other central banks, for many reasons, may not be able to address the demands of a future global financial maelstrom with possibly even larger calls for loans of last resort. For the Fed, this is due to 1) the declining relative importance of the US economy and the dollar in relation to the global economy, and 2) potential political interference in its activities.
The mounting problems and lessening importance of the US economy and its dollar globally are obviously why a new international currency regime is being considered. International Monetary Fund (IMF) data (published in The Economist magazine) shows that while the US now makes up about 24 per cent of global gross domestic product (GDP), its dollar accounts for 84 per cent of foreign exchange transactions. Furthermore, over 60 per cent of international central bank reserves and about 60 per cent of global bank deposits are denominated in US dollars.
The continuing use of the US dollar internationally is largely dependent on the performance of the US economy and its domestic fiscal and monetary policies. Domestically, the US government is growing massive unsustainable debts while the Fed is hugely expanding the creation of new money and the buying of US government bonds (its quantitative easing programs). These actions are likely to further devalue the US dollar globally. Thus, holders of US dollars and assets will increasingly be less interested in retaining them.
Rising to compete with the US dollar has principally been the euro. However, with its member countries’ debt problems, the attention is turning primarily to China’s yuan. It is probably no accident that on January 12 China made a significant step forward in yuan foreign exchange convertibility by allowing it to trade in the US. China has also recently made deals with Russia, Brazil and other countries to settle trade accounts in yuan.
Such gains in the international acceptance of the yuan make it likely to be included in the revised and re-invigorated Special Drawing Rights (SDR) issued by the IMF. The SDR is presently a type of currency used in a limited way among central banks and the IMF. However, its role could eventually be expanded and in the decades ahead might even form the basis of a global currency.
The SDR comprises a basket of currencies that include the US dollar, yen, euro and pound sterling. Besides including the yuan, a revised form of SDR might include additional currencies and even gold or other commodities as well. As gold has an inherent market value, proponents for its inclusion suggest it could help bring further stability to the SDR. Changes to the SDR are favoured by many countries such as Russia and France.
Hence, the IMF may well begin to act in the coming years as a quasi global central bank. However, Barry Eichengreen of the University of California in the US cautions—quoting the Economist magazine of November 4, 2010—that, “no global government… means no global central bank, which means no global currency. Full stop.” Economists like Mr Eichengreen have the weight of evidence on their side regarding the need for a global government before a true global central bank and currency could come about. One only needs to look at the European Central Bank’s problems to see how the lack of an overarching, integrated and authoritative governance structure greatly impeded its ability to deal with the recent crises.
Advocating against the concept of a global central bank and currency are some free market proponents such as Ron Paul, a US Republican and now chairman of the powerful US Congress’s Monetary Policy Sub-committee. He and many others believe currencies should be freely chosen and have intrinsic value, backed by commodities, most likely that of gold. They say without gold backing, any currency and central bank issuing such currency, is deemed to eventual failure due to the historical fact that governments inevitably print excessive amounts of money. This ‘printing’ thereby debases the currency’s value and essentially commits fraud against the holders of the affected currency.
It is possible that the world may proceed towards a global central bank and currency over time. In the near future, the IMF will probably revise, re-invigorate and expand its SDR program to assist in the transition from reserve dependence on the US dollar. But the dangers with the SDR are that it is still largely linked to the viability and variability of national economies and their domestic policies and currencies. Advocates of a completely free market approach such as that proposed by US Congressman Ron Paul might also hold sway. The idea of a global central bank and currency is still just an idea. But it is an idea arising out of the calamity of our present day reality. It deserves hot debate.
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• Severe Debt Scarcity Coming to US
By Ron Robins. First published December 26, 2010, in his weekly economics and finance column at alrroya.com
If US consumers believe it difficult to borrow now, just wait! In the next few years credit conditions are likely to go back seventy years when private debt was difficult to obtain. Most Americans intuitively believe there is too much debt at every level of society. But the economic and political vested interests do not want them worried about that. They want to give them credit to infinity to keep this economic mess from imploding. The US Federal Reserve’s new round of quantitative easing (QE2) is clear evidence of that. However, Americans are right about their inordinate debt load, and future economic conditions are likely to create a severe debt scarcity.
The principal reasons for the coming debt scarcity are that ‘debt saturation’—where total income cannot support total debt—has arrived, say some analysts; also, the growing understanding that adding new debt may not increase GDP—it could decrease it; and that the banks and financial system are a train wreck in waiting, eventually being forced to mark their assets to market, thus creating for them massive asset write-downs and strangling their lending ability.
The realization that debt saturation has arrived will not surprise many people. But understanding that new debt can decrease economic activity might surprise them. And the numbers illustrate this possibility. In Nathan’s Economic Edge, Nathan states, “in the third quarter of 2009 each dollar of debt added produced NEGATIVE 15 cents of productivity, and at the end of 2009, each dollar of new debt now SUBTRACTS 45 cents from GDP!”
In fact Nathan also shows that for decades, each new dollar of debt produces less and less in return, from a return of close to $0.90 in the mid 1960s to about $0.20 by 2007. One explanation for this is that as societal debt increased it focused disproportionately on consumption rather than productive enterprise, whose return appears greater.
On the subject of consumption, the renowned economist David Rosenberg in The Globe & Mail on August 16 stated that “U.S. household debt-income ratio peaked in the first quarter of 2008 at 136 per cent. The ratio currently sits at 126 per cent, but the pre-2001 norm was 70 per cent. To get down to this normalized ratio again, debt would have to be reduced by about $6-trillion. So far, nearly $600-billion of bad household debt has been destroyed.” This data reaffirms Americans growing aversion to debt, that debt has become too onerous, and is suggestive of debt saturation.
Replacing declining consumer debt is the exponential growth of US government debt. For 2009 and 2010, the combined US government’s fiscal deficits required or require borrowing an extra $2.7 trillion or so. Yet with all that spending—combined with about $2 trillion of ‘money printing’ from the US Federal Reserve (the Fed)—it created only around $1 trillion in increased economic growth!
One may argue that the phenomenal US government borrowings will provide returns far into the future and that the present low economic returns are due to not funding areas with potentially better returns. Some economists say that spending on infrastructure and education provides the best returns. However, with economists such as Nobel Laureate Paul Krugman and numerous others predicting huge continuing deficits for years ahead, and with a Japan-like slump in economic activity, the odds are likely that any new borrowed dollar will continue to provide only poor returns for years to come.
A further, major reason for the coming debt scarcity will be the tremendously impaired financial condition of the banks. The values assigned to many bank assets are fictional according to numerous experts. QE2 is about many things but one of them is aimed at delaying the potential for implosion of the banking system. In 2009, the Financial Accounting Standards Board (FASB) caved in to government and banking industry lobbyists to allow many bank assets to be ‘marked to fantasy’ and not ‘marked to market.’
This viewpoint is best expressed by highly respected Associate Professor William Black (and formerly a senior regulator who nailed the banks during the savings and loan debacle) and Professor L. Randall Wray, who wrote an article on October 22 in The Huffington Post, entitled, “Foreclose on the Foreclosure Fraudsters, Part 1: Put Bank of America in Receivership.” They wrote that, “FASB’s new rules allowed the banks (and the Fed, which has taken over a trillion dollars in toxic mortgages as wholly inadequate collateral) to refuse to recognize hundreds of billions of dollars of losses. This accounting scam produces enormous fictional ‘income’ and ‘capital’ at the banks.”
However, the Federal Reserve may be realizing that it might not have been such a good idea to buy some of these ‘toxic’ securities. Bloomberg reported on October 19 that, “citing alleged failures by Countrywide to service loans properly… Pacific Investment Management Co., BlackRock Inc. and the Federal Reserve Bank of New York are seeking to force Bank of America Corp. to repurchase soured mortgages packaged into $47 billion of bonds by its Countrywide Financial Corp. unit, people familiar with the matter said.”
Also, on November 2, CNBC reported that Citigroup could be liable for huge amounts of toxic security buy-backs as well. “If all four mortgage acquisition channels turn out to be equally as defective… Citi’s liability for repurchases could soar to about $100 billion dollars at a 60 per cent defect rate – and to around $133 billion dollars at an 80 per cent defect rate.”
Clearly, such numbers are staggering. These, as well as many other banks and financial entities, could collapse. Politically, in the present circumstances, it would be difficult for the US government to provide massive new funds to support the financial system. Therefore, it will be up to the Fed to decide what to do.
If the Fed prints ever increasing amounts of new money to try to moderate the financial collapse, hyperinflation could be the result. If it does not print massive amounts of new money, a deflationary depression could be born.
In high inflationary or hyperinflationary conditions, few will want to lend as they get paid back in dollars that are declining very rapidly in value. In a deflationary episode, lending is reduced due to huge loan losses. Therefore, during either, and/or after such events, debt scarcity will be in full force.
Data indicates that American consumers do not want to increase their debt. Debt saturation is occurring, and with it a declining return on each borrowed dollar—even for the US government. Most significantly, the banks and the financial system will probably soon experience a new round of massive real estate related losses and subsequent financial institutions’ bankruptcies. Thus, a new major financial crisis will likely soon engulf America, greatly impairing its lending facilities and creating a severe scarcity of debt.
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• US Healthcare Delivering a Heart Attack!
By Ron Robins. First published February 10, 2011, in his weekly economics and finance column at alrroya.com
Medical spending could deliver a debilitating heart attack to the US economy, despite the recently passed healthcare legislation that hopes to significantly control costs. Depending on assumptions made, the unfunded US government medical liabilities range as high as $125 trillion, equivalent to about eight times America’s annual gross domestic product (GDP). These unfunded liabilities—money that might have to be borrowed—have the possibility of totally derailing the US economy.
In 2008, Richard Fisher, president and CEO of the Federal Reserve Bank of Dallas cited the US government’s unfunded Medicare program liabilities at $85.6trn over the infinite horizon. He said that including the unfunded liabilities of US Social Security the total rises to $99.2trn. Mr. Fisher further added that were they to be funded, it would require a lump sum payment of $1.3 million per family of four to the US federal treasury! Or alternately, an increase of 68 per cent in federal taxes for all individuals and corporations, for now and forever.
The unfunded liabilities figure of $125trn arose from a conversation I had recently with Boston University’s renowned Professor of Economics, Laurence Kotlikoff, who believes they could range that much also using an infinite horizon time frame.
Now really ‘low-ball’ medical unfunded liability estimates come from the 2010 Annual Report of the Boards of Trustees of the Federal Hospital Insurance Trust Fund and the Federal Supplementary Medical Insurance Trust Fund. They are the reports of the Medicare trustees of the US government. The 2010 estimates of US government medical unfunded liabilities have been shaved dramatically from their prior year reports.
And the Medicare trustees make the following remarks in that regard. They say that, “the Affordable Care Act [the recently passed healthcare legislation] improves the financial outlook for Medicare substantially. However, the effects of some of the new law’s provisions on Medicare are not known at this time, with the result that the projections are much more uncertain than normal, especially in the longer-range future… the actual future costs for Medicare are likely to exceed those shown by the current-law projections.” In other words, their low-ball estimates are based on such flimsy assumptions as to make them untenable.
And the record of government predictions and cost containment in regard to Medicare expenditures is anything but encouraging. As Gary Shilling, a US economist recently remarked, that in 1967 a special committee of the US Congress predicted by 1990 that Medicare would cost $12 billion. It actually cost $110bn. Quite likely the estimates of US government medical unfunded liabilities, by Richard Fisher and Professor Kotlikoff are nearer the reality, barring truly significant program cuts, changes and increases in taxes.
The US government’s Medicare program began in 1965. It primarily covers medical expenses for people over 65 years of age and for certain disabilities for people younger than 65. Medicare was envisaged as being able to pay its own way through payroll deductions, and for many years it did even more than that: it built up surpluses. However, in January 2011 the US Congressional Budget Office (CBO) showed that the cash flows of the Medicare trust funds had now grown significantly negative. Also, the CBO sees US government Medicare related costs jumping from an estimated “$870bn in 2011, or 5.8 per cent of GDP… to $1.8trn in 2021… and 7.4 per cent of GDP.”
Also, the US spends disproportionately higher on its healthcare than other developed countries, yet with frequently poorer outcomes. Mark Pearson, Head, Health Division, of the Organisation for Economic Co-operation and Development (OECD), made these written comments to the US Special Committee on Aging on September 30, 2009. He wrote that, “the United States spent 16 per cent of its national income (GDP) on health in 2007. This is by far the highest share in the OECD… Even France, Switzerland and Germany, the countries which, apart from the United States, spend the greatest proportion of national income on health, spent over 5 percentage points of GDP less: respectively 11.0 per cent, 10.8 per cent and 10.4 per cent of their GDP… For all its spending, the US has lower life expectancy than most OECD countries (78.1; average is 79.1).”
Further illustrating the enormity of the US healthcare spending problem, the US government’s Centers for Medicare and Medicaid Services (CMS) said that total US national health expenditure (NHE) “grew 4.0 per cent to $2.5trn in 2009, or $8,086 per person, and accounted for 17.6 per cent of GDP [up from 16.6 per cent 2008].”
Additionally, CMS found that US government Medicare and affiliated Medicaid 2009 program expenditures grew even faster at 7.9 and 9 per cent respectively, accounting for 35 per cent of NHE. The US federal government’s share of health care spending rose by just over 3 per cent in 2009 over 2008, to 27 per cent.
Reining in the growth of US federal government Medicare and related spending will require huge healthcare industry adjustments, spending cuts and continuing modification of government health funded programs. And it will probably require substantially increased taxes to fund its remnants. In recent polls by CNN/Opinion Research Corp Poll and Gallup, the vast majority of Americans said no to cuts in Medicare. A healthcare expense heart attack could be on the horizon for Americans.
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February 16, 2011 Posted by Ron Robins | Economics, News, Commentary | affordable care act, americans, centers for medicare and medicaid services, CMS, congressional budget office, federal hospital insurance trust fund, federal supplementary medical insurance trust fund, gary shilling, healthcare, laurence kotlikoff, life expectancy, Medicaid, medical spending, Medicare, national health expenditure, nhe, OECD, unfunded liabilities | Leave a Comment