Filed under: Economics
Here’s an example of a post I can’t write for the Economist, because it’s crazy and stupid. So here goes: my plan to solve the housing demand crisis.
1. Use high demand for US Treasury bonds to build up collateral to issue free government insurance on US housing stock, including natural disasters, war, etc.
2. Use the United States Air Force to destroy the excess supply of existing homes. Select homes to be bombed at random. With supply at just over 12 months and sales of 4 million per month, bombing 25 million homes should be sufficient to bring supply down to a historical average of 5 or 6 months.
3. Pay out insurance to homeowners, and watch the housing industry (and home values) recover as they use the cash to buy homes.
For many reasons, this plan doesn’t actually make any sense, but at some level I still find it amazing that the key statistic showing that our economy is in serious trouble is that we just have too many great big suburban American houses. Most people in rural Vietnam would still have trouble figuring out how a surplus of great big suburban American houses is a problem.
Filed under: Economics
Megan McArdle argues that in mankind’s brilliant future, we’re all going to have to work until we’re…much older. Maybe 75. It’s not clear.
It was nice that a combination of rising life expectancy and broader pension coverage allowed a large segment of American workers to take what amounted to a multi-decade vacation. (Though this was never quite as widespread as people now “remember”). But this was never going to be sustainable. Retirement experts typically say that retirees should shoot for 75-90% of their working income in retirement (the theory being that some expenses fall, but other expenses rise, and you don’t need to save for retirement when you’re already retired).
That’s fine when the ratio of workers to retirees is 1:12, as it was within the Social Security system in the early years. But by the time you get to 5:1, it starts to pinch–assuming everyone has the same income, each worker has to toss at least 15% of their own income into the pot to support the retirees. Once you get to 2:1–which is where we’re rapidly headed–33% of your income is going to support someone in retirement. Woe betide you if you also have kids.
It’s important to note that this is true no matter how retirement is funded. Whether you collect a dividend check, get a corporate pension, or live off your social security, your retirement is funded by real claims on the output of people in the workforce.
This is certainly true, unless of course we start manufacturing millions of robots to augment the humans in the workforce. A ratio of two humans plus, say, ten tireless mechanical workers per retiree might make that old Social Security formula viable again.
But wait a minute. We are in fact manufacturing millions of robots to augment the humans in the workforce. That’s why a steel plant that had 4,000 employees in 1948 takes just a hundred or so people to run now. And that’s why the average technology-augmented American manufacturing worker creates $300,000 in output per year, while the average Chinese manufacturing worker creates just $8000. In fact, most areas of the economy have been revolutionized by various productivity advances over the past few decades. And, unless we expect GDP to stop growing, we’re planning on more such productivity growth in the future.
Clearly it’s true, as Megan says, that estimates of stock market growth were wildly optimistic in the 1990s, and therefore pensions are going to have to be more generously funded to pay out a given level of benefits. But whether or not we can afford to let people retire at 65 isn’t simply a question of how many workers you have per retiree. It’s a question of whether the ratio of retirees per worker (and the cost per retiree, as medical expenses rise faster than the CPI) is growing faster than per capita GDP is. And with that relationship in mind, it becomes a question of how we want to allocate the gains from productivity. Do we want to take them as current income, so we can live better during our working years? Or do we want to continue to ensure that old people can retire in reasonable comfort?
One final thing that you really can’t avoid considering: to say that old people will have to keep working longer presumes that somebody out there wants to employ old people. In fact, in an economy obsessed with youth and creative destruction where old people are at a disadvantage because of their inflexibility and lesser aptitude for learning new skills, there’s not necessarily much demand for seniors’ labor. If seniors are unable to earn much, this leaves us with the options of devoting a greater share of young workers’ output to their upkeep, or letting them eat the proverbial cat food. If the seniors end up eating the cat food, that’s not some kind of natural disaster that has befallen us because of demographic trends or the failure of technological innovation to keep up with historical norms. It’s a choice we make as a society about how to allocate our resources.
Speaking of US-China competitiveness, Paul Krugman has been on a tear over the past week arguing that the US has to put some muscle behind its demands for China to stop undervaluing the yuan. The other day Krugman addressed China’s allegations that imposing countervailing tariffs to retaliate for Chinese currency manipulation would violate WTO rules. And indeed it isn’t really clear whether WTO and IMF rules consider currency manipulation to be a trade subsidy, so it’s not clear whether the US has a case on those grounds.
But here’s my question: if it’s not a violation of WTO rules to manipulate your own currency, why doesn’t the US simply do exactly the same thing China is doing? Why don’t we purchase a countervailing quantity of Chinese government debt to compensate for the US government debt China buys in order to keep the yuan low? Is it because the US government, unlike the Chinese government, lacks the spare cash to buy up foreign debt? If so, couldn’t the Fed do this as an open-market operation? Or is it because the Chinese State Bank controls sales of government bonds and would stop us from buying up Chinese debt via administrative measures? Or does Chinese government debt simply not trade openly? Or what?
I saw this guy Sunday afternoon risking his life while attempting a routine maintenance task in our neighborhood here in Hanoi, and it reminded me of why US industry still remains potentially competitive in many sectors with industry in East Asian emerging markets. Things here are simply much, much less efficient. The country has extremely pressing infrastructure needs to fulfill just to ensure it won’t have continuing blackouts knocking out power to factories, traffic jams that prevent goods from getting to port, sewers that don’t flood streets with excrement every rainy season, and so on. And of course the incredible tangle of wires that is the residential power, phone, and internet system, which I hereby dub the Infrasnargle.
All of these contribute to the fact that Vietnamese workers are vastly less productive than American ones. PPP-adjusted output per worker in the Vietnamese manufacturing sector in 2008 was $8100. For Chinese workers, it was $22,000. For American workers, it just passed $300,000 this year. (I’m not really clear on why we’re using PPP-adjusted figures here; for purposes of comparing competitiveness in exports, the flat dollar value seems more appropriate. But regardless, it’s clear that workers in the US economy can produce vastly more value per hour.)
That said, Vietnam is frantically investing in infrastructure improvements, and if we want to keep American workers competitive, we need to do the same.
DAVID LEONHARDT is among my favourite writers, and when my RSS reader showed me that this weekend he got a slot in the New York Times Magazine to talk about “What the oil spill and the financial crisis have in common,” I got all excited. Then I read it, and it’s…pretty good. Leonhardt’s premise is that what the Deepwater Horizon blowout has in common with the global financial crisis is heedlessness of tail-end risk. Black swans, an unwillingness to take seriously the consequences of very low-probability, very high-damage eventualities, and all that. And this is certainly true. As Leonhardt writes, BP executives had never seen an oil rig blow up, so they didn’t really believe it could happen, just as Ben Bernanke didn’t really believe a nationwide real-estate crash could happen.
But this isn’t the main theme the two events have in common. The main theme they have in common is much simpler than that, and has more moral valence. And it’s the main theme not just for the oil blowout and the financial crisis but for the Katrina disaster and the Enron collapse and the Chinese melanin milk scandal and an extraordinary array of scandals, disasters and tragedies so far this century. The main theme they have in common is regulatory failure. The regulations weren’t strong enough, and the regulators didn’t do their jobs. Oil companies were allowed to self-certify, and MMS inspectors let them hand in their own inspection reports in pencil, then traced over them in pen * approved their design changes within five minutes with no real review. Non-bank financial institutions escaped regulations that had been written to cover banks, and when SEC inspectors were sent in to banks to monitor suspicious debt-hiding activities they spent their time downloading porn. Dyke safety standards established by the Corps of Engineers were inadequate, and officials at FEMA were incompetent. And, obviously, the people’s elected representatives chiefly clamoured for weaker regulations and tried to stop regulators when they did attempt to enforce the rules.
We may not be heading towards an End of History, but Hegel was right that sometimes there’s such a thing as a weltgeist that moves directionally from decade to decade, and what we’re seeing here is comeuppance (or, as Hegel would put it, the antithesis) for the deregulatory exuberance of the 1980s and 1990s. Leonhardt concentrates on the unfortunate human tendency to discount the highly unlikely. This is certainly a factor, but as advice, it’s only partially useful. If the lesson of the catastrophes of the noughties is to pay attention to tail-end risk, then we should all be running around building nuclear fallout shelters and working out deflection strategies for massive asteroid strikes. And that’s not going to happen. (Though in the case of climate change, one of Leonhardt’s examples, it is useful: we should be paying more attention to the risk that global temperature rise by 2100 will be near the catastrophic 6-degree-celsius high-end estimate, not the merely awful 2-degree median estimate.) But I don’t think that is the main lesson. The main lesson is simpler and more concrete: government regulations need to be more restrictive, regulators need to be more aggressive, better-paid, and more powerful, and they need to stop people and corporations more often from doing things that may be profitable but pose unacceptable risks to the public. We had this theory for a while that economic self-interest would prove sufficient disincentive to foolish risk-taking. But now the Gulf of Mexico is on fire, so I’m afraid we need to go back to the old-fashioned system with the rules and the monitors carrying sticks. Sorry.
* It turns out this probably isn’t true. The Interior Dept. Inspector General’s Report says there were reports with pencil that were then traced over in pen, but it’s likely that the inspectors themselves filled them out in pencil for convenience in case of corrections, and they couldn’t find any evidence that any had been filled out by the oil company. They had apparently heard a rumor that this had happened, but couldn’t substantiate it.
Andrew Sullivan writes that we shouldn’t dismiss libertarians as cranks just because they back the gold standard: “The insanity we take for granted every day – the Afghanistan war, for example – is a lot crazier than the gold standard.” Like Andrew Sullivan, I think the US should extricate itself from Afghanistan, but this is, to put it mildly, not a good illustration of the point he’s trying to make. Supporting the introduction of the gold standard in today’s global fiat-money economy is simply much crazier than supporting the continuation of a counterinsurgency and nation-building war against the Taliban that the US originally got into for very honorable reasons and with apparently good chances of success. Supporting the abrupt and unprovoked invasion of Iraq in 2003, I would grant, might have been compared in its craziness to supporting the introduction of a gold standard in a world economy that has long outgrown such metaphysical superstitions.
There are other reasons why, as Conor Friedersdorf says, we shouldn’t dismiss libertarians as cranks and nut jobs. But one of those reasons is that a lot of libertarians are much too smart to believe in snake-oil stuff like the gold standard.
My colleague Erica Grieder at The Economist has a nice post up relating Joachim Kalka’s essay on coins in the New Left Review to the possibility that increasing use of debit cards will lead to a more cash-free economy. Strangely, it seems to me that electronic innovations have actually led to more cross-country differences in modes of payment over the past 40 years, rather than less. In the Netherlands, for instance, credit cards are rare; tighter regulation meant they never had the explosion in credit card offerings that hit the US in the ’80s. On the other hand, they were using debit cards much earlier and more ubiquitously than the US.
Meanwhile here in Vietnam, the economy is exceptionally cash-based, considerably more so than in, say, Africa. Here, in fact, they have no checks. Never have. Hence, they’ve never sent bills through the mail: there’s no way to pay them. They send actual human bill collectors around to collect your phone bill, water bill, electric bill, etc. in cash at your door. This is only now beginning to change, with options for electronic bill payment at ATMs or via mobile phone. But while it’s an exceptionally cash-based economy, it’s not coin-based. In fact, for decades, there were no coins at all. It was all paper money. There are still a bunch of antique Chinese coins floating around, with square holes in the middle; they’re used for jewelry and decor. A few years ago, though, the government decided to start issuing coins, because they last longer and are in the long run cheaper to circulate. The result is this:
This is a roll of Vietnamese 5000-dong coins (about $0.25). Here’s the thing: nobody will accept them. I mean, official shops will, and probably chain supermarkets and so forth. But taxi drivers won’t, people in the market won’t, and basically most individual owner-proprietor businesses won’t. Why not? Because they’re afraid they won’t be able to spend them, because nobody will accept them. It’s a completely irrational collective-action problem. The things are issued by the Vietnamese government; they’re clearly unfakeable at any reasonable cost, who would want to fake a $0.25 coin anyway, and if they did, who would care? You could just let it circulate, it wouldn’t do any harm. But for some reason your average Vietnamese person will simply not accept their own government’s coinage as legal tender. They only trust the banknotes. Craziest thing.