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Tuesday, November 01, 2005

The Coming Debt Bust

One of the reasons that I find politics so dreary is that so much of today's political rhetoric is focused on issues that matter little, while issues that matter a great deal go without any attention.

One of the major issues I care about is economic, and it has to do with the slow extraction of purchasing power from the private sector workers and the declining ability to accumulate capital that has afflicted the lower earners in our country. That has correlated with a shift in rewards from the private sector to the public sector, the rise in Social Security and Medicare taxes (with the surplus being simply spent, instead of saved), the wholesale importation of cheap labor and a set of social policies that utterly disregard the needs of the average person.

City Journal has an excellent article about the shift in rewards from the private sector to the public sector. For example, the average person isn't aware of this:
The prime budget buster has been the outlandish wage and benefits packages of public employees. Contractually guaranteed, they are untouchable even during economic slowdowns. Public-employee unions have so successfully used their political muscle that whereas public-sector compensation once lagged the private sector, now the reverse is true. Astonishingly, the average state and local government employee now collects 46 percent more in total compensation (salary plus benefits) than the average private-sector employee, according to the nonpartisan Employee Benefit Research Institute.

Wages average a hefty 37 percent higher in the public sector, but the differences in benefits are even more dramatic. Local governments pay 128 percent more, on average, than private employers to finance workers’ health-care benefits, and 162 percent more on retirement benefits. Although the private sector’s heavier concentration of low-wage service employment accounts for some of the wage and benefit gap, public-sector employees do better these days even when you compare similar jobs. Total compensation among professional workers in the public sector is on average 11 percent higher than for similar jobs in the private sector, for instance.
The article details how property taxes have been raised far more quickly than inflation or wages. It's no different at the federal level. And the worst of it is that the hefty pensions and medical benefits will force states to raise taxes, and raise them, and raise them. Many states are in severe fiscal trouble over their own spending:
By 2003, state and local pension funds had accumulated over $250 billion in unfunded liabilities, reports the National Association of State Retirement Administrators, leaving taxpayers on the hook. Pension costs in California’s state budget skyrocketed 14-fold, from $160 million in 2000 to $2.6 billion in 2005, and are headed to $3.6 billion in 2009. New Jersey’s pension costs are rising so quickly that without reform they will consume 20 percent of the state budget in five years, up from 8 percent this year. Illinois’ state budget pension obligations will reach $4 billion a year by 2010, which could make them a bigger share of the state budget than local aid to education.
And all of this is just a preview of the impending federal budget crisis. Meanwhile, in the private sector benefits coverage is dropping (Bureau of Labor Statistics), which is a historic reversal of the trend since WWII:
Among workers in both private industry and State and local governments--referred to hereafter as civilian workers--the percent of full-time employees with medical care coverage declined from 83 percent in 1989-90 to 68 percent in 1998-99.2 For full-time workers in the private sector, medical care coverage declined by 24 percentage points over a somewhat longer period,3 from 80 percent in 1989-90 to 56 percent in 2003. Trends in retirement benefits also show declining coverage since the late 1980s, although less so than for medical care.
See BLS' table 4, which lists the percentage of workers in the private sector participating in various benefit plans in 2003. Taking all private sector workers together, only 45 % were getting medical insurance, and only 49 % were participating in retirement plans. For workers in service occupations (the fastest growing sector), only 22 % had medical insurance through their employers, and only 21 % had retirement plans. Take a good look at that table. The segments that are adding jobs (service industry and small companies) are the segments that have the lowest coverage.

Even large corporations such as Motorola are dropping retiree health coverage. Combine that with the fact that workers in many of these companies are restructured out the door in their 50's, and you have a bomb of older people who will not be covered by Medicare yet and will not have any health insurance for 10 years or so. This is the reason why most employees will take Social Security early retirement benefits, which will worsen our Social Security problem.

For a more analytical look at the problem, see this Monthly Labor Review article:
Between 1992-93 and 2003, the percentage of private sector workers participating in employer-provided medical care plans steadily declined. Medical care covered 63 percent of workers in 1992-93, compared with 45 percent in 2003....

Among full-time workers, there was a 17-percentage point decline in medical care coverage over the decade, from 73 percent in 1993-94 to 56 percent in 2003.
These trends are so dangerous that they should be the biggest topic on the table in every political discussion, yet no party is willing to discuss them. You can't combine a bloated, secure government sector with a hyper-competitive free-market private economy. Sooner or later the peasants revolt, which is, I suppose, why we are importing so many Spanish-speaking ones who have no representation in government and no legal right to be peasants in this country. They can't revolt.

It is not right that you have a 30-year old mechanic making $36,000 and covered by no medical or retirement plan paying high social security taxes (which are partly spent to fund regular government expenditures), high Medicare taxes (which are spent), high property taxes and income taxes. Is it any wonder that everyone knows that the best path to security is a government job? Does anyone really believe that our country can survive for long this way?

My respect for George Bush is largely founded on the fact that he is trying to figure out how to address this trend. My lack of respect for the Democrats is that they are fighting a bitter war against any such effort. That's because they depend on the public-sector unions for a large segment of their votes. What we are really facing is a war between the interests of the government and the private sector. The Dems are the party of government for historical reasons. They once were the party of the people; now they are the party of the elite.

In the meantime, the only thing the peasants can do is follow Dave Ramsey's advice, which is good.

Shades of the dot com bust! This time it seems, we're over valuing ourselves, with healthcare costs as the window dressing.

Is the handwriting on the wall?

This is a really good post.
It's what I think of as the Potemkin economy.
> the rise in Social Security and Medicare taxes (with the surplus being simply spent, instead of saved)

The problem here is that it is actually impossible for the Fed, as the source of money, to "save" money. The only thing they can do, really, is spend it.

The seems improbable, but if you talk to someone trained in economics they can explain it so that it becomes clear.

I've had a friend with a degree in economics show me how this is so. I can't repeat his explanation but I could follow it and I see the validity of the claim.

As the source of money the government can either create money or destroy it. They can't save it, it serves no purpose whatsoever in economic terms.

That said, there is no valid reason for them to be jacking those taxes higher than the expense of the service, except to get a behind the books cash infusion for funding pork projects.
Those taxes could be invested in accounts in one way or another. Federal employees have an arrangement like that. They could be invested rather than spent.

What the feds do is take the extra money, use it for operating expenses, and write an IOU to the SS trust fund. It's a giant operating scam which has been used to inflate the amount of money available to spend each year. So your excess taxes are used to pay for bridges to nowhere and memorial parks in GA.

If a private company did this it would be prosecutable.

Just looking at SS, when the number of retirees causes a deficit each year, the current taxpayers will have to:
A) Pay higher taxes to make up for the amount of SS that is no longer being used to pay for federal programs.

B) Pay higher taxes to get money to send Social Security checks to retirees each month.
Their is only one "elite" in America, and it is the group who owns the lion's share of American wealth. If you think these people are Democrats you are sadly mistaken. Public employees have a slightly better standard of living than other Americans, but they're just pikers compared to the truly wealthy who are slavishly served by Bush and his cronies.
There are many types of elites. I would argue, for example, that the core of our armed forces represents a "duty" elite. They vote predominantly Republican.

There is another type of well-defined elite in our country that I would call the academic/political elite. They would prefer to vote Marxist, but content themselves with voting for the most leftist Democratic candidate they can find.

There's a third type that is largely involved in big business, often is at least third generation of being in the upper class, and strongly votes Democratic.

I cannot agree that either the Republicans or the Democrats are dominated by one set of interests. What I see tells me that Congress is dominated by money. Most of the politicians among either party seem to be following a set of policies that advantage the power interests in our society.

There are a lot of consequences to this stratification. Some that I can name without much thought are that the big scientific/technical agencies in our country are no longer run by scientists or engineers, but by bureaucrats with a political background.

The commonality in all this is that the organizations that control money or access to it have become dominated by a web of interests that does not correlate to party but to interests.

To make myself clear, I would say we are suffering from a Sovietized type of dacha class. The dacha holders will always act together. Just as in the Soviet Union, those who are insulated from turmoil have a strong interest in maintaining the status quo.

If you don't believe me think about the story of Able Danger. A bipartisan group is attempting to suppress the whole story. It ought to be a huge scandal, but it receives almost no attention. The bribery-ridden Oil For Food program in Iraq is another such story which receives relatively little attention.

The failure of the regulatory agencies to properly supervise and penalize bad behavior among the biggest banks in this country is another such scandal. The Bush administration seems to have acted to curb that somewhat. At some point, the national leadership of the Democratic party seems to have gotten on board with the big banks.

I find all of this incredible, but the facts are clearly evident.
I agree we do have the coming of a debt bust and we must do something to help improve our health care system. There are too many which lack health insurance.
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