Politick

Demographic Demise and the Real Deficit Problem

Today United was approved in being able to dump its pension obligations on the Federal government.  This could open the floodgates for GM, Ford and others to run through bankruptcy and strip out their excessive benefit and pension plans.  Should we be concerned?  Is there a limit to have much obligation can be assumed by the US government? 

Yelnick noted a while ago of the declining birth rates in the West and how it would lead to shrinking populations and lower growth, sparking a global scramble for yield. The scramble has already begun, as we sit in the low yield environment of the Kondratieff Winter. Now the mainstream punditry is picking up on this theme.  The first week of May, the Wall Street Journal ran a first page column on retiring boomers withdrawing from growth stocks and moving their wealth (what they can hang on to) into income producing properties, depressing the stock market. McKinsey has also completed a study of The Demographic Deficit: How Aging Will Reduce Global Wealth.  Their core message is that aging populations will save less and spend more, and governments will be pressed to fund all those welfare programs to support the aging, further reducing private investment.  What these analyses have so far overlooked is the other side of the story: in a low return environment, how to pay for all of the unfunded obligations we have assumed? How to pay it back?

Long Dead Economists and the End of GM

Today's story that GM debt is now rated as junk bonds should make us sit back and ask what is going on.  Much of the reason for GM's fate lies in pension and medical benefits obligations.  How we got here is one of the great delusions of our age, that we layer benefits and obligations on the private sector and still manage our way to prosperity.  Where did this come from, this illusion that wealth was just out there and we could take a bit here and a bit there and things would work out? 

It comes from a long dead economist, John Maynard Keynes, who once opined that we were all living in thrall to the theories of some long dead economist.  He succeeded beyond even his wildest imagination. His theories during the Great Depression gave justification for massive government intervention in the economy.  At first they were resisted. For 150 years the US Constitution had been interpreted to grant economic rights as a bedrock of a free society: protection of property, enforcement of contract and so forth, not to be removed without due process of law.  The Constitution itself specifically limited the powers of the Federal government.  During the Great Depression, the Supreme Court overturned many of FDR's interventionist acts.  Frustrated, the President attempted to 'pack the court' to change these decisions.  A key Justice backed down, and the floodgates opened.  Now almost any Federal law is allowed to intervene in economic affairs, and the Welfare State has us in thrall. 

Keynesian justification for action is so pervasive that it is like the air we breathe in debating political issues.  We argue over whether the government is the problem, and is too big, without even recognizing the extent to which we allow coercive political meddling in almost every aspect of economic life.  The issue is not its larger size but our smaller freedom.

Keynesian economics have failed repeatedly.  They did not lift us out of the Depression; we fell back into it in 1937-8 and did not escape until a war intervened.  They got us into the mess of stagflation in the '70s, after President Nixon famously said, "We are all Keynesians now."  They have justified piling layer after layer of unfunded liability onto the public, to the extent of estimates as high as $89T (that is trillion) or 8x our current GDP, half of which is government spending in any event - so an incredible 15x the private sector.  GM was saddled with all sorts of obligations that have now reduced it from the premier industrial giant of the US economy to a rustbelt relic with excess capacity that makes almost all its cash flow on finance not manufacturing. 

Keynes' other most notable quote is: "In the long run, we are all dead." How right he was again.  This is the epitaph we can put on GM.