A Lost Generation

We may be seeing a new underclass develop, which has disastrous implications for the country

By John Mauldin

It is pretty well established that a tax increase, especially an income tax increase, will have an immediate negative effect on the economy, with a multiplier of between 1 and 3 depending upon whose research you accept. As far as I am aware, no peer-reviewed study exists that concludes there will be no negative effects. The US economy is soft; employment growth is weak – and yet we are about to see a significant middle-class tax increase, albeit a stealth one, passed by the current administration. I will acknowledge that dealing a blow to the economy was not the actual plan, but that is what is happening in the real world where you and I live. This week we will briefly look at why weak consumer spending is going to become an even greater problem in the coming years, and we will continue to look at some disturbing trends in employment.

Last week, I noted that an unintended consequence of Obamacare is a rather dramatic rise in the number of temporary versus full-time jobs. This trend results from employers having to pay for the health insurance of employees who work more than 29 hours a week.

I quoted Mort Zuckerman, who wrote in the Wall Street Journal:

The jobless nature of the recovery is particularly unsettling. In June, the government's Household Survey reported that since the start of the year, the number of people with jobs increased by 753,000 – but there are jobs and then there are "jobs." No fewer than 557,000 of these positions were only part-time. The June survey reported that in June full-time jobs declined by 240,000, while part-time jobs soared 360,000 and have now reached an all-time high of 28,059,000 – three million more part-time positions than when the recession began at the end of 2007.

That's just for starters. The survey includes part-time workers who want full-time work but can't get it, as well as those who want to work but have stopped looking. That puts the real unemployment rate for June at 14.3%, up from 13.8% in May.

As it turns out, the unintended consequences of Obamacare are not the only problem. Charles Gave wrote a withering indictment of quantitative easing this week (which we will look at in a few pages) and included the following chart, which caught my eye. Note that the relative increase in part-time jobs began prior to Obama's even assuming office. The redefinition of part-time as less than 29 hours a week and the new costs associated with full-time employment due to Obamacare simply accelerated a trend already set into motion.

An Ugly Secular Trend in Part-Time Work

Look closely at this graph. It turns out the trend toward part-time employment started in the recession of the early 2000s, paused only briefly, and then really took off in the recent Great Recession. This is clearly a secular trend that was in place well before 2008.

Seven reasons to hate your parents: Reason #4

A two tier labour market

by Eugen von Böhm-Bawerk 

Ludwig von Mises allegedly said that 

“government interventions create unintended consequences that lead to calls for further intervention, and so on into a destructive spiral of more and more government control” 

We agree with von Mises as this is exactly what has happened in labour markets.

Our parents felt it was their right, given by God or Nature, to have a job. And it was not only that they felt other people owed them a job; they also felt they were entitled to these jobs for life. Any change in their professional life should be a decision made solely by themselves, and no one else. Never should the actual job provider have any say when it came to decisions regarding his own capital in its relation with labour.

So our parents went forth with revolutionary zeal to impose their will through political coercion. The reason for their eagerness was of course heightened job insecurity brought upon them by their insistence on overconsumption. In the process of increasing inflation and debt, capital consumption made it harder and harder for business to keep up and living standards were destined to fall.

In order to maintain profit margins, demand on labour became more onerous. To avoid such pains, our parents used the coercive power of the state to force business into compliance. They introduced all sorts of schemes to “spread the work around” under the fallacious belief that there are a fixed amount of work to be done. Obviously, there cannot be any shortage of work so long any human need goes unsatisfied, but rational thought were never a strength possessed by our parents. No one tells the story of the absurdities our unionized parents have been up to better than Henry Hazlitt;

“This error lies behind the minute subdivision of labor upon which unions insist. In the building trades in large cities the subdivision is notorious. Bricklayers are not allowed to use stones for a chimney, that is the special work of stonemasons. An electrician cannot rip-out a board to fix a connection and put it back in again, that is the special job, no matter how simple it may be of the carpenters…”

“Economics in One Lesson” page 45

In addition to such incongruous demands, they have lowered retirement ages, insisted on additional pay for “overtime”, made it fiendishly difficult to lay-off workers and even harder to shut down factories and so on. Every step toward our highly inflexible labour market has been rationalized in the name of solidarity with the proletariat in its fight against capital.

Business unsurprisingly moved from the “Western World” to more friendly jurisdictions, hence the current fight against globalization.

Seven reasons to hate your parents: Reason #3

Establishing a Pure Fiat Money System

by Eugen von Böhm-Bawerk 

Inflation is another word that has become completely confused in everyday conversation. Inflation used to mean an undue expansion of the money supply. By undue, one would refer to an increase in the money supply over the supply of gold. Today, on the other hand, our parents refer to a general increase in consumer prices when they speak of inflation. In reality, it is simply an increase in an arbitrary compiled index. The change of the very meaning of the word inflation is of immense importance, because the conclusions and policy implications that will be resorted to under the two different definitions can be diametrically opposites.

If inflation is defined as an undue expansion of the money supply, then it is easy to know when the banking system inflates. By comparing outstanding money notes with gold in reserves one can immediately determine if there has been inflation or not. Under the second definition things becomes far more obscure because there will be a considerable lag between the change in the money supply and its effects on prices. Inflation with our parent’s definition does not occur before the retailer changes his prices announced to his customer. In other words, the causal connection between inflation and money expansion appears broken, and replaced by a new causality between the whims of a store clerk and his idea of what prices should be. Please observe; the reason and hence blame for increasing prices can no longer be put on the government, but the evil capitalist. For whom, other than the capitalist, does the actual act of increasing prices?

With our parent’s definition of inflation also follows a depraved definition of deflation. Nowadays deflation is defined as falling consumer prices. Deflation through modern history has often been highly correlated with economic depressions, and today’s economists believe falling prices causes depressions. Think about that for a minute. Can falling prices actually be the reason for lower economic activity? Say we were on strict commodity based money standard with outstanding notes 100 per cent backed by said commodity. In this world, we could reasonably assume economic output of consumer goods to exceed output of commodity money. In that case consumer goods prices will most surely fall. However, there is no depression in this economic constellation as prosperity increases through higher purchasing power for everyone. The policy response when equating falling prices with hardship and poverty would be to damage this healthy development through inflating the money supply. Such is the world created by our parents, where good is bad and bad is good. No wonder we tend to be confused.

The guillotine returns after September 22, 2013

Two Months Until The German Elections And The Return Of Reality

by Mark J. Grant, author of Out of the Box,

“For what we regard as reality is conditioned by the theory to which we subscribe.”

                                      -Stephen Hawking

Europe has denigrated into a strange place where fantasy replaces reality as necessitated by their governments and the Union that governs them. It is a world where anything but direct liabilities are not counted, where securitizations worth 50 cents on the Dollar are held at par and where both data and numbers are manipulated for the preservation of the State.

Dreams are born of imagination, fed upon illusions, and put to death by reality. The guillotine returns after September 22, 2013.

You cannot believe anything that you are told by the Europeans. You cannot accept any of their financials, both sovereigns and banks, at face value. The actuality of the financial condition of the European Central Bank is not only shrouded in secrecy but it is shrouded in make believe. It is a Grimm fairytale.

Familiarity, the first myth of reality: What you know the best, you observe the least.

Devotion, the second myth of reality: The faithful are most hurt by the objects of their faith.

Conviction, the third myth of reality: Only those who seek the truth can be deceived.

Fellowship, the fourth myth of reality: As the tides of war shift, so do loyalties.

Trust, the fifth myth of reality: Every truth holds the seed of betrayal.

             -Magic, The Gathering

You may have noticed the small blurb recently that the ECB had eased the rules for asset backed securitizations. You may have read this snippet and thinking nothing of it you moved on. This would have been a mistake because just here you would have noticed the cracks of a crumbling empire.

The French banks, the Spanish banks, the Portuguese banks are all engaged in an ongoing charade so they do not need to ask the EU for help. They all are taking their Real Estate loans, the properties that they have confiscated, the commercial loans that are no longer paying and they have put them into massive securitizations that are pledged at the ECB as they are given cash for the collateral. The collateral, as you may suppose, has all of the value of cents on the Dollar but they are given money at par while the ECB carries them on their books at par. It is a fraudulent scheme jam packed with money created out of nothing but it is judged to be a better plan that to have to admit to accurate financials and have the banks of Europe default all across the Continent.

Conspiracy of dogmatic, deliberate, and willful ignorance does not either form the “raison d'être” or constitute an excuse for inaction. It is the tolerance of sheer lies, self-deception and malfeasance. It merely locks all your flaws in floors and stored behind concrete doors; a thick veil that obscures clear seeing of reality and it may cause you to stumble, fall and drift into transgression to reach the end point of decadence.

After almost forty years on Wall Street let me assure you that reality always returns. Always and because it must. What is uncounted does not disappear. Losses eventually have to be paid. Deception by governments has a long time frame but it is not eternal. Lies are eventually confronted by truth.

There will be nothing but lying until September 22, 2013 which is the date of the German elections. This is the drop dead date that I have been asked about for so long. Then, as soon as the celebration is over that Ms. Merkel is to remain in power, the world will turn on its axis. The status quo will disappear and there will be a “shock and horror” campaign as the Southern nations of Europe demand more help and Germany squirms and then refuses to provide it because it does not have the assets to do so.

Spain, France, Portugal, Greece, Cyprus, and even Italy are all going to line up at the trough only to discover that the promise of water was just that, a promise, and does not exist. A Biblical drought will be upon the Continent and from the political battles will emerge new alliances and new screams calling the traitors by name. The twin towers upon which the markets rest, money from nothing and fairy tale financials, will decompose in the light of this new sun and our old friend, Fear, will return to haunt us.

First the bough will be exposed. Next it will crack. Let’s all hope that it does not break and toss the baby into the thorns.

“Reason is a choice. Wishes and whims are not facts, nor are they a means to discovering them. Reason is our only way of grasping reality; it is our basic tool of survival. We are free to evade the effort of thinking, to reject reason, but we are not free to avoid the penalty of the abyss we refuse to see.”

        -Terry Goodkind, Faith of the Fallen

Seven reasons to hate your parents: Reason #2

The so-called retirement funds, both private and governmental, are allocated toward sovereign bonds

by Eugen von Böhm-Bawerk 

We could write volumes on the western world’s obsession with their beloved welfare systems and volumes have been written. The reader is obviously familiar with most of this history and the glaringly obvious unsustainability of the systems enacted.

We will therefore only make a couple of observations that are novel to the debate. When the systems were introduced in the 1960s it is true that we did get a boost to savings. Payments into the system were made without large payments out of the system. However, contrary to the old system before public pension funds were introduced, saved capital that were supposed to be allocated to productive business loans were now diverted into the government coffers. What used to be cash strapped politicians now suddenly saw a windfall of wealth flowing into their grip, which consequently could be used to buy votes in the next election. Unsurprisingly ambitious projects within the government sphere were undertaken to “invest” the newfound money.

Consider the Swedish experience during the time of plenty. The Swedish politicians “invested” the capital in low cost housing for the poor often in less well-off municipalities. While the intent may have benign and not a wilful act to bribe the electorate to be re-elected it does not change the conclusions that can be drawn from this story. The government allocated scarce capital to highly unproductive usage and gave it to dependents. Participants paying into the system did so under the pretence of saving for old age while they unknowingly consumed valuable capital. As the government coerced them to “save” people were tricked into reducing their own savings confident they were secure from the government program. Instead of securing a decent yield to secure consumption as dependents, they ended up by bailing out the municipalities that obviously could not pay back. First their taxes went into poor investments, and then they had to bail out the inevitable default from current taxes. All was lost. Twice!

In other words, the Swedes reduced savings through the introduction of a system with the intention to make sure everybody saved. Talk about unintended consequences and perverted incentives through government intervention! We are sure the Swedish experience was not unique as similar programs were introduced all over the western world.

More generally we know that a large part of so-called retirement funds, both private and governmental, are allocated toward sovereign bonds. The system is rigged in several dimensions to make sure that happens. But is this not just a more sophisticated version of the Swedish experiment? Think about it; today’s retirement saving goes into destructive debt (see previous blog post), which reduces the productive potential of the economic system! In other words, the assets held by pension funds are an unwilling promise forced upon our generation to pay taxes in the future. Since the system reduces our productivity we have to pay higher and higher taxes just to keep up. From this we can draw the obvious conclusion that a welfare state will per definition create less and less wealth and prosperity, and this vicious circle of lower and lower growth must continue until insolvency strikes and restructuring is forced upon a bewildered population. The generational fight for resources that we face will undoubtedly be ugly, and until the demographics shift to our favour, we will lose.  

Any way you slice it, Germany wins

Germany holds all the cards in the euro power struggle

By Cyrus Sanati

The faster Europe realizes that Germany holds most, if not all, of the cards when it comes to ending the eurozone debt crisis, the faster a lasting solution can be found. With positive economic growth, low unemployment and fantastically low interest rates, Germany is simply in no rush to implement reforms that have been proposed by its economically weaker neighbors, as they would negatively impact Germany's ability to borrow cheaply and expand exports.

The only way the EU's biggest member can be convinced to take on reforms, like issuing eurobonds, would be if it were granted incentives, such as control over the fiscal policy of the eurozone. Other members of the eurozone, namely France, have been wary about handing more of their economic power over to Brussels and ultimately to Frankfurt. But while solutions like the pooling of eurozone's existing debt is a good first step to diffusing the crisis, they still require incentives for Germany to get on board.

Since the start of the crisis, Germany's chancellor Angela Merkel has been accused of dragging her feet when it comes to ending the eurozone crisis. Headlines like, "Where is Germany?" or "Merkel's failure to lead," have graced newspapers on both sides of the Atlantic.

But unlike nearly every other eurozone leader, Merkel hasn't been thrown out of power since the crisis began more than two year ago. While that is due in part to election rules in Germany, it is also due to Germany's economy, which, while a little wobbly now, has actually improved since the crisis began in 2010. That year, Germany's GDP grew at 3.5% - much faster than its neighbors. In 2011, it grew at 2.7% at the same time most of its neighbors slipped into recession. And while economists had predicted a terrible first quarter for Germany this year, its economy actually grew five times more than expected, at 0.5%.

That might seem puzzling given that many of Germany's main trading partners are crippled eurozone members, but the country seems to have benefitted greatly from the weakening of the euro, since it has increased the competitiveness of its exports in non-eurozone countries. Unlike the rest of the eurozone, Germany is an exporting powerhouse, making high-quality goods that are in demand across the world. The eurozone crisis has ironically only increased its export strength, continuing to make it the world's second-largest export economy in the world, behind China.

At the same time, Germany has also benefitted from an increase in investor demand for its debt. Germany has a debt-to-GDP ratio of around 80%, which is higher than troubled Spain at 68%, yet its debt is trading at zero, while Spain's debt is trading near 7%. Demand for German debt was so great this month that at some points it actually traded at a negative yield. Investors buying this debt range from German banks to U.S. pension funds. But the big surge in buying lately has come from Spanish and Greek depositors who are frantically withdrawing their life savings and putting them in German bonds on fear that their respective governments will leave the eurozone and destroy their savings through devaluation.

Sharks, Vampires and Central Planners

Even at low tide you won’t see the shark until it’s upon you

By Moshe Silver

This shark – swallow you whole.

                                     - Quint, “Jaws”

We often hear government economists and policy makers express concern that market turmoil might “spill over and affect the real economy,” an Orwellian locution where the price of oil spiking over $110 is seen as a “market dislocation,” and not as a multi-billion dollar tax on America’s middle class.

There have been measurable benefits from government programs going back to the first responses to the crisis under Treasury Secretary Paulson, though largely of dubious value.  The fact that we spent a trillion dollars to keep a bunch of bankers employed, while technically a win for the nation’s employment statistics, was arguably not the application that would have attained the utilitarian goal of the Greatest Good for the Greatest Number.

Last week saw a convergence of data points that all point to the likelihood that Chairman Bernanke wants to retain Friends in High Places, assuming that his legacy will be set not by those who write history – and especially not by those who live it – but by those who decide what gets published.  (Quoth the Duke of Gloucester, patron of historian Edward Gibbon, upon being presented with the completed Decline and Fall of the Roman Empire, “Another damned thick, square book!  Always scribble, scribble, scribble, eh?”)

We don’t mean to scoff at the very real suffering caused by economic collapse, but Hedgeye holds firm to the view that government meddling in the economy is generally not a good thing, and that a long-term program of persistent government meddling in the economy is a decidedly harmful thing. 

Government intervention has the predictable effect of shortening economic cycles, while also increasing volatility – perhaps two sides of the same coin of time compression.  In consequence, it also has the predictable effect of generally not really fixing anything and of battering the middle class, edging them nearer to the abyss with each new policy nudge.

By the Fed’s own reckoning, each successive round of QE has a diminishing impact on the markets.  Mind you, that impact is measured in basis points – one-hundredths of a percent – and the twenty-five basis point impact looked for from any future round of QE is not predicted to last.  The banks are still not lending, largely because of uncertainty over government policy.  But don’t blame the banks.  People aren’t borrowing, for much the same reason: no one wants to take a loan to expand a business that might be shot execution style by the Fed suddenly reversing its interest rate policy.

So, if the Fed’s easy money policy is not supporting the “real economy,” who is benefitting from it?

Most excess liquidity seems to be supporting the short-term trading of major financial houses – which helps explain the furor over the Volcker Rule, designed with the sole purpose of walling off risk trading from deposit taking (a proposition that a tenth-grader could clearly articulate in a single sentence – do you know a tenth grader who wants to be President?)

Seven reasons to hate your parents! - Reason #1

In order to maintain a high level of consumption, our parents chose fewer children

by Eugen von Böhm-Bawerk 

We will, over the course of the next several days, present seven different reasons for why we should hate our parents. While the headline may seem unduly provocative we believe the following arguments will be more than enough to substantiate such a harsh claim. Some may say our allegation is nothing more than an interesting intellectual exercise with no valid practical implications. What our parents did is water under the bridge; dwelling with bygones helps no one!

We beg to differ. We look at what is happening throughout the world and we see angry, frustrated young people without jobs, without prospects, without useful academic degrees, carrying unsustainable debt burdens protesting FOR status quo! One should think a generation facing so many headwinds of which they are of no responsibility themselves would demand a revolution and overthrow the power that is. Perversely, they rather ask for more of the same. They take to the streets and ask elected and non-elected leaders to continue the policies that brought them into their predicament in the first place.

We will present seven reasons for why today’s youth should protest AGAINST status quo by showing the reader how our parents made a complete mess of what they once inherited from our grandparents. Hopefully, our little contribution will make a small, but right step in taking today’s protesters in a new direction.

Reason number one: in order to maintain a high level of consumption, our parents chose fewer children

We often hear about the “baby-boom” problem created by our grandparent’s high fertility rate. Those children are now retiring, and thus strain the western world’s welfare system. Before we move on to explore this particular problem, let us just say that our parents have had a tendency to obfuscate our language and terms, making rational conversation much harder to achieve.

They somehow manage to call outright statists for liberal, they call war peacekeeping operations, and they call fascism right-wing extremism and so on. The same is true for the term “baby-boom” as if it is something novel that the new generation is larger the previous one. Our parents blame our grandparents for the dire straits we are heading into due to the baby-boom problem. It is not a baby-boom problem; it is a birth-deficit problem! It is not our grandparents that got a lot of children that causes the problem we now face; it is the fact that our parents got so few.

They did not want the extra responsibility of raising a lot of kids. It cost them money and it took away valuable time which they could rather use to satisfy their own narcissistic tendencies. This choice of course provided them with the best of two worlds with few elderly dependencies and simultaneously very few younger dependencies. Hence they could expand current consumption by imposing a demographic tax on the future. This is often referred to as a demographic dividend. Worryingly, for many troubled countries this dividend is now entering a phase of pay-back!

Let’s explore the demographics in more detail and see what’s going on in the western (and to some extent the emerging-) world. One of the best indicators in terms of economic impact from changing demographics is called dependency ratios. This is the ratio of cohorts in non-working age relative to cohorts in working age. This ratio gives an explicit number on how many dependents there are relative to breadwinners. Contrary to economics in general, demographic trends are relatively certain since generations already born will by law of nature age and develop in a highly predictable manner. As the next two chart clearly points out, dependency ratios will worsen inexorably in the decades that follow. Unfortunately, that is only half the story, because not all within their working age is actually working, but are dependents themselves. This is in itself a product of the welfare state that was built in the post-WWII area, but more on that later. In many countries participation rates, those within working age that is working or is looking for work, is depressingly low. Assuming participation rates will be maintained at their long-term averages, which today are a highly optimistic assumption, we can also get an idea of the real burden expected to be carried by our own generation as we move forward.

Egypt’s Coup Conundrum

The grand hopes of the Arab Spring are withering away

By Doug Bandow

There are many grand failures of U.S. foreign policy. Egypt has joined the pantheon, with Washington seemingly under attack by every faction in Cairo.

Egypt long has been a national wreck. Its recent history featured rule by an indolent king and a leftish Arab nationalist. A couple of authoritarian generals followed. The economy was ruined by dirigisme economic plans, endless bureaucratic incompetence, and pervasive political corruption.

Washington was only too happy to go along in the name of “stability” since Cairo backed U.S. policy and preserved peace with Israel. This ugly Realpolitik persisted even after the Cold War ended and the Bush administration launched a war to end tyranny and promote democracy.

The people of Egypt finally had enough, forcing the Obama administration’s opinion to shift from “Mubarak is our friend” to “Mubarak should leave in an orderly fashion” to “Mubarak should go—now!” However, the end of autocracy loosed Islamist forces.

This was not what Washington desired, but Egyptians weren’t concerned with what Washington desired. Mubarak’s fall led to the election of the Muslim Brotherhood’s Mohamed Morsi and approval of an Islamist-oriented constitution. Both were flawed, but both were approved democratically. Washington had no choice but to accept Morsi’s rule, after spending decades supporting autocrats who had suppressed the Brotherhood.

Alas, President Morsi failed politically. He failed to accept government limits, especially checks on executive authority. He failed to ensure accountability for government. He failed to accommodate religious minorities and political opponents who feared centralization of power. He failed to reassure those who feared the Brotherhood was determined to Islamicize Egyptian society.

He also failed economically. He failed to open and deregulate the economy. He failed to encourage foreign investors. He failed to offer opportunity to impoverished Egyptians.

Why Fight for King and Country?

There is something monstrously out of whack about going to war for a large nation state

By Robert Higgs

I can understand why a man might take up arms in defense of himself, his family, his friends, perhaps even his neighborhood or his town. But once we get past the lived-in milieu, a man’s risking his life, limbs, health, and mental composure to fight for a large politically defined unit makes less and less sense, the larger the unit. Why, for example, should a man from Arizona go to war on behalf of people from New Jersey, people with whom he is not acquainted, people about whom he knows little or nothing. The man from Arizona might well have more in common with and greater concern for a typical “enemy” soldier than he has for the people of New Jersey. He might even dislike people from New Jersey and like the enemy people.

I do not care much for many Americans. I find their apparent values and modes of life offensive or worse, although I am personally acquainted with only a handful of them and so I may be doing a disservice to many of those with whom I am not personally acquainted. But in view of the constraints everyone faces, no one can really know, much less like, more than, say, a few hundred other people. What am I to make of a demand that I bear great personal risks in defense of hundreds of millions of complete strangers—for all I know, these people don’t even exist, and the Census Bureau has perpetrated a gigantic fraud in its declarations that they do.

On the opposite side of the ledger, I do know and like—indeed greatly admire and esteem—scores of people in other countries. I cannot imagine going to war against them; I’d sooner go to prison than harm them. So, if the U.S. government went to war against Guatemala, for example, it would have to count me out; I’ve far too many dear friends there even to consider joining in such violence. I wonder sometimes how many of the U.S. soldiers who went to Iraq to kill people there had ever seen, much less been acquainted with, an Iraqi previously. What impels a man to kill perfect strangers, especially perfect strangers who pose no threat to him or to those he cares about at home? To me, it defies basic elements of humanity. One might say that such killers are responding more to their allegiance to their own government’s leaders, but why should they have such a loyalty in the first place? Not one soldier in a thousand has ever personally encountered a top American political leader. Unless the soldier is extraordinarily dense, he understands vaguely that such people are all liars and crooks. Why should he kill other people and risk being killed himself merely because these political kingpins want him to do so? Does he fail completely to see the government’s propaganda for what it is?

I realize, of course, that the questions I have raised are merely queries about the basic nuts and bolts of the great machine of nationalism, and I am aware that astute philosophers, social scientists, and others have labored long and hard to delineate the configuration and operation of this machine. Nevertheless, I find it worthwhile to step back from the abstractions and highfalutin scholarly talk and to ask questions about national loyalty as if we were encountering it for the first time. When we do so, it strikes me that we are accustomed to taking for granted some things that are, at best, quite counter-intuitive and highly perplexing.  

Mirror, Mirror, on the Wall, Which Nation Is in the Deepest Fiscal Doo-Doo of All?

United States in a worse long-run position than Greece, Italy, Spain, Portugal, France, and other failing welfare states

By DANIEL J. MITCHELL

According to the Bank for International Settlements, the United States has a terrible long-run fiscal outlook. Assuming we don’t implement genuine entitlement reform, the only countries in worse shape are the United Kingdom and Japan.

The Organization for Economic Cooperation and Development, meanwhile, also has a grim fiscal outlook for America . According to their numbers, the only nations in worse shape are New Zealand and Japan.

But I’ve never been happy with these BIS and OECD numbers because they focus on deficits, debt, and fiscal balance. Those are important indicators, of course, but they’re best viewed as symptoms.

The underlying problem is that the burden of government spending is too high. And what the BIS and OECD numbers are really showing is that the public sector is going to get even bigger in coming decades, largely because of aging populations. Unfortunately, you have to read between the lines to understand what’s really happening.

But now I’ve stumbled across some IMF data that presents the long-run fiscal outlook in a more logical fashion. As you can see from this graph (taken from this publication), they show the expected rise in age-related spending on the vertical axis and the amount of needed fiscal adjustment on the horizontal axis.

In other words, you don’t want your nation to be in the upper-right quadrant, but that’s exactly where you can find the United States. 

Yes, Japan needs more fiscal adjustment. Yes, the burden of government spending will expand by a larger amount in Belgium. But America combines the worst of both worlds in a depressingly impressive fashion.

So thanks to FDR, LBJ, Nixon, Bush, Obama and others for helping to create and expand the welfare state. They’ve managed to put the United States in a worse long-run position than Greece, Italy, Spain, Portugal, France, and other failing welfare states. 

Prison Eugenics in the Golden State

No woman should give consent on the operating table

By Carl Close

In 2003, California Governor Gray Davis issued a formal apology for the forced sterilization of inmates in the state’s prisons, a practice officially banned in 1979.

“To the victims and their families of this past injustice, the people of California are deeply sorry for the suffering you endured over the years,” he said in a press release. “It was a sad and regrettable chapter in the state’s history, and it is one that must never be repeated again.”

Given the mountains of bad publicity surrounding the Golden State’s history of forced sterilization—an estimated 20,000 male and female California inmates were sterilized from 1909 to 1964—it’s easy to see why most people might have assumed that such practices were halted long ago. But new evidence suggests that coercion continued well into the twenty-first century.

This week the non-profit Center for Investigative Reporting released a study claiming that from 2006 to 2010 California prison doctors performed tubal ligation surgery on at least 148 female inmates without having obtained the necessary state authorizations. Moreover, an additional one hundred violations may have occurred going back to the late 1990s.

According to Dr. Ricki Barnett, who heads the state committee tasked with authorizing the restricted surgery on a case-by-case basis, prison health administrators, doctors, and nurses seemed unaware that they needed special permission to perform tubal ligation on inmates.

The study supports its claims of unauthorized sterilizations with state documents and interviews with former prison staff and prisoners.

In 2010, Kimberly Jeffrey, 43, was an inmate at Valley State Prison for Women and was sedated for a C-section when a prison doctor pressured her to undergo a sterilization procedure, she told the Center for Investigative Reporting.

“He said, ‘So we’re going to be doing this tubal ligation, right?’ ” Jeffrey said. “I’m like, ‘Tubal ligation? What are you talking about? I don’t want any procedure. I just want to have my baby.’ I went straight into a panic.”

The China-US 'Brotherhood'

"Fragile"? You wish.

By Pepe Escobar 

The fifth round of the US-China Strategic and Economic Dialogue began this Thursday in Washington. This China-US "Brotherhood" does involve a lot of talk - with no perceptible action. US Think Tankland is trying to convey the impression that Beijing is now in a more fragile position relative to Washington compared with the post-financial crisis environment in 2009. Nonsense. 

It's as if the ongoing NSA (global) scandal never happened; Edward Snowden exposed how the US government has turned against its own citizens even while it keeps spying on virtually the whole planet. Then there's the meme of the Chinese economy being "in trouble", when in fact Beijing is launching a long-reaching, complex strategy to calibrate the effects of a relative economic slowdown. 

Finally, the supposed "aggressive Chinese behavior" in terms of Asian security is just spin. Beijing is building up its navy, of course - yet at the same time both China and selected members of the Association of Southeast Asian Nations are fine-tuning their tactics ahead of multilateral talks about a code of conduct for any serious problems in the South China Sea. Beijing would be foolish to go for diplomacy of the gunboat variety - which would certainly attract a US countercoup. 

Bogged down, all over
Beijing has clearly interpreted the North Atlantic Treaty Organization's "liberation" of Libya - now reverted into failed state status; US support for the destruction of Syria; and the "pivoting" to Asia as all interlinked, targeting China's ascension and devised to rattle the complex Chinese strategy of an Eurasian energy corridor. 

Yet it does not seem to be working. As Asia Times Online reported, the Iran-Pakistan (IP) pipeline may well end up as IPC, "C" being an extension to Xinjiang in western China. Beijing also knows very well how the proposed Iran-Iraq-Syria gas pipeline has been a key reason for the emphatic attack on Syria orchestrated by actors such as Qatar, Saudi Arabia and Turkey. Beijing calculates that if Bashar al-Assad stays and the US$10 billion pipeline ever gets completed (certainly with Chinese and Russian financial help) the top client may end up being Beijing itself, and not Western Europe. 

Germany’s Energiewende Is Not Just Unworkable, It Might be Illegal

The implications for the already struggling continent are enormous

By Walter Russell Mead

Germany’s Energiewende, or “energy revolution,” has been heralded by greens as a shining example of the kind of true commitment to renewable energy that our planet requires, but in practice it’s been a flop. As the country phased out its nuclear reactors in the wake of the Fukushima disaster, it heavily subsidized wind and solar farms, passing the costs of these subsidies to consumers in the form of higher electricity prices. In a bid to keep them competitive—and, well, to keep them in Germany—Berlin decided to exempt many of its energy-intensive industries from these high energy prices.

But now the EU is stepping in. The European Commission, concerned that these exemptions violate competitions laws within the trading bloc, will open up an investigation on the matter this Wednesday, Spiegel reports:

[EU Energy Commissioner Günther Oettinger] said many provisions in the law appeared to be in breach of EU single market rules and competition law. For example, he said, it wasn’t acceptable that Germay subsidizes its own wind power but makes no subsidies available to operators from Denmark and Norway that deliver windpower to Germany. [...]

The Commission plans to launch proceedings aimed not only at banning such exemptions in the future, but also requiring companies to repay the charges they were exempted from in the past.