2008 September 07 Sunday
Obama And McCain Fail To Address 2 Major US Problems

Robert Samuelson says our terrible US Presidential candidates aren't seriously addressing two of our biggest problems. (Hat tip to Michael Blowhard)

Though echoed by policy wonks, pundits and politicians -- last week, Bill Clinton -- the conventional wisdom is wrong or, at least, misleading. Here's a more accurate assessment. For most Americans, living standards are increasing, albeit slowly, over any meaningful period. But rising health spending is eroding take-home pay, and immigrants are boosting both poverty and the lack of health insurance. Unless we control health spending and immigration, the economic report card will continue to disappoint. Unfortunately, neither Obama nor McCain seriously addresses these problems.

McCain and Obama support illegal immigrant amnesty that would make these problems worse. They aren't just not addressing these problems. They are supporters of the growth of these problems. Both candidates for President of the United States are wrong on a huge and growing problem and yet substantial portions of the US population support one or the other of them. How tragic. McCain's presidential bid almost failed because he is wrong on immigration. But we did not get lucky.

Immigration's effects on poverty and health insurance coverage are greater. Since 1990, Hispanics numerically account for all the increase in the number of officially poor. Similarly, immigrants represented 55 percent of the increase of the uninsured from 1994 to 2006, says the Employee Benefit Research Institute. Many unskilled workers can't get well-paid jobs with insurance.

Immigration not only grows the size of America's lower class. It also increases the burden on the higher productivity net taxpayers (those who pay more in taxes than they receive in benefits) in a few ways. First off, the net taxpayers need to pay more in taxes to pay for health care, education, police, prisons, and other costs generated by the poor. Plus, the net taxpayers pay more in medical insurance to pay for medical costs of the uninsured that governments do not reimburse. This medical cost shifting onto the insured is a substantial portion of medical costs of the insured. Plus, poor people create crime and other problems that are burdens to net taxpayers. All these costs are rising due to immigration. The shift of money toward taking care of the poor pulls productive people away from wealth-creating activities such as research and development toward just providing services. This slows economic growth.

From 2000 to 2007, only 53 percent of the increase in average compensation came from wages and salaries, says economist Gary Burtless of the Brookings Institution. The rest went to health insurance (21 percent), pension contributions (19 percent) and payroll taxes (6 percent).

These numbers are even worst than they look. Not only are employers shifting more compensation toward paying rising health insurance costs but they are also shifting more medical costs directly onto employees. So that 53% of compensation increase that actually becomes taxable income not only gets a piece taken out of it by taxes but also more of it needs to go to pay for higher medical costs. Higher deductibles bite.

But it gets worse. The use of mortgage equity withdrawal (MEW) to boost disposable income is rapidly declining with declining home prices. So people are feeling the effect of less money to spend from borrowing.

From 2004 to 2006, Americans took almost $700 billion per annum of net equity out of their homes through borrowing and spent as much as 50% of it on consumables. The most highly regarded study on mortgage equity withdrawals (MEW) is “Estimates of Home Mortgage Originations, Repayments, and Debt On One-to-Four-Family Residences,” by Prof. James Kennedy and none other than Alan Greenspan (Federal Reserve Board FEDS working paper No. 2005-41); Kennedy has been updating his numbers on an ongoing basis, as set forth in the graph below.

...

In addition to the wealth effect resulting from the housing bubble, Kennedy has concluded that MEW, at its peak, constituted as much as 8% of all disposable personal income and a correspondingly higher percentage of non-housing spending.

MEW declined 60% from 1Q 2007 to 1Q 2008. It peaked at 8% of disposable income and as of 1Q 2008 was at 2% of disposable income. It probably has dropped further in the mean time and will drop further still. The housing price decline is far from over because the housing price-to-rent ratio is still well above historical norms. So is the price of a single family home as a percentage of median household income.

The bursting real estate bubble, immigration, and the rising cost of medical care are some of the bad trends in the United States. Add in the coming retirement of the Baby Boomers, the need to end the trade imbalance, and dwindling oil and natural gas reserves and I'm expecting slower rates of per capita economic growth in the coming years. We might even experience declining living standards.

Share |      By Randall Parker at 2008 September 07 09:40 PM  Immigration Economics


Comments
dchamil said at September 8, 2008 7:00 AM:

I find it heartening that Samuelson regards continuing illegal immigration as a problem. I was not aware that this establishment economist had spoken out this way up to now.

bjk said at September 8, 2008 7:27 AM:

Frum blames Republican losses on rising healthcare costs. Is GWB at 30% in the polls because of healthcare premiums or the Iraq war?

Robert Hume said at September 8, 2008 9:46 AM:

And some substantial part of the real estate bubble was due to Bush and Congress pressuring banks and Fannie Mae and Fannie Mac to issue no-doc loans to the poor ... especially including illegals. They had *quotas*. Of course these folks could not repay. And further, the resulting low standards flowed to everyone, including con-men and flippers. I think it is very likely that without the PC making it impossible to criticize the no-doc loans we would never had had this bubble. There has never been a nationwide bubble like this before, despite the fact that greed has always been with us. There must have been something new, and I think it was Bush's infatuation with Hispanics leading him to urge these loans for their benefit.

Reality Czech said at September 8, 2008 10:39 AM:
There has never been a nationwide bubble like this before, despite the fact that greed has always been with us.
Interest-only mortgages also flourished before the Great Depression. We knew better, but people like Phil Gramm didn't care as long as they could make a buck.
Audacious Epigone said at September 9, 2008 12:21 PM:

The RNC was certainly discouraging. Four--Riley, Pawlenty, Blackburn, and Fallin--of more than thirty speakers can possibly be considered restrictionists, even though the majority of the electorate is restrictionist. And not one of these speakers chose (or was permitted) to say anything about immigration, not even an innocuous platitude along the lines of "We need to secure our borders before we do anything else".

There were two mentions/references to immigration. One was from former US Treasury Secretary Rosario Marin, now working for the Schwarzenegger administration, who greeted the crowd with a buenas noches and closed with gracias. Really promising. (She also gaffed by referring to herself as the "first immigrant of America", instead of the first immigrant treasury secretary). The other was from McCain, who said:

We believe everyone has something to contribute and deserves the opportunity to reach their God-given potential from the boy whose descendents arrived on the Mayflower to the Latina daughter of migrant workers. We’re all God’s children and we’re all Americans.


MaverickFAIL.com said at November 9, 2008 11:21 AM:

Very well written article. It is true about the lending, that is what is getting us in the spot we are in now. With people taking their money out, and banks having less to work with, then it just keeps falling down. McCain Failed at most of his aspects on the economy, Obama made more sense to people, and so he got extra points for that part.


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