2009 October 24 Saturday
Will Living Standards Decline For Young People

Robert Samuelson fingers health care costs as one of the factors likely to hold down living standards in the next couple of decades.

Unless controlled, rising health spending would absorb much of that gain. The increase in per capita GDP from 2007 to 2030 is $16,700. If health spending continued to grow at past rates, it would go from $7,100 per person in 2007 to $15,300 in 2030. This rise of $8,200 is half the overall gain ($16,700) in per capita income. (For policy wonks: This assumes health spending grows 2 percentage points faster than GDP per capita, the 1975-2005 trend.)

Some will ride the down escalator. The de-escalator if you will.

Downward mobility is possible. Expanding health spending would raise taxes (to pay for government insurance), lower take-home pay (to pay for employer-provided insurance) or increase out-of-pocket medical costs. Other drains also loom: higher energy prices to combat global warming; higher taxes to pay for underfunded state and local government pensions and repair aging infrastructure; higher federal taxes to cover deficits and payments to retirees (much of which reflect health spending). The pressures will undermine private living standards and other public services (schools, police, defense).

Since government debt is growing faster than the economy and is projected to do so for at least the next decade the cost of servicing that debt is going to become a rising fraction of government spending. So the spending party will eventually be replaced by a new fiscal austerity coupled with higher taxes. Government will cost more and deliver less.

The United States government is running up large debts with a projected increase in total debt so large that there's a substantial chance total US government debt will hit 100% of GDP. At that point debt service alone could easily equal 5% of GDP.

Share |      By Randall Parker at 2009 October 24 11:09 PM  Economics Living Standards


Comments
A.Prole said at October 25, 2009 4:38 AM:

But of course you ignore the certainty that government will do what government has always done in the past when faced with a similar dilemma: Inflate its way out of paying the debt by boosting the money supply.

A.Prole said at October 25, 2009 4:39 AM:

But of course you ignore the certainty that government will do what government has always done in the past when faced with a similar dilemma: Inflate its way out of paying the debt by boosting the money supply.

Robert Hume said at October 25, 2009 10:00 AM:

As our demographic approaches about one-half European and one-half NAM we expect our GDP per capita to be about half way between that of Africa/Mexico and that of the current European-American's. Which is to say; the average US European-American can look forward to a decline in living standard by about 50% as their income is transfered to the NAMs via taxes.

Youth said at October 25, 2009 1:45 PM:

Yay! What a brilliant future to look forward to. The American Dream!

gig said at October 26, 2009 5:36 AM:

inflation is not a solution. it works as a mild default on holders of debt that isnot inflation-indexed. it can only postpone the only default that can solve the problem, that is the default in social security and welfare payments

Financial Advisor said at October 28, 2009 10:09 AM:

The bond market likely won't allow the US to reach a debt-to-GDP of 100%. It's too dangerous for the global financial system. Long before that point (probably when that ratio hits between 70-80%), interest rates will rise enough to force Congress to get deficits under control. Congress won't be happy about it, but it won't be a choice.

Now, how they acomplish that task is an open question. If they rely only on increase taxes, it would cripple the economy - though that might take many years to become appearant, which means that's the likely path. They could reduce spending by simply holding annual government spending to inflation, which, assuming GDP grows faster than inflation, would mean deficits slowly fall and Debt-to-GDP would improve. It's a better plan, but not the likely winner.

Also, as mentioned, due to the rising numbers of NAMs and the aging of whites (thus lowering the number of workers relative to retired), the US economy likely won't grow anywhere near its long-term average or 3-4% real. I'd bet that in a decade or so, we'll be looking at real growth of 1-2%, maybe 2.5% if technology manages to get productivity increases out of low-IQ workers. The gov't is not prepared for such low growth; it's banking of at least 3.5%. Tax revenues will be significantly less than expected, while social spending will be higher. It will make the process of getting deficits and the debt under control that much harder.

Our future isn't great. On the other hand, it probably won't be chaos in the streets either. We're on our way to becoming a mature Brazil: gated communities with whites and Asians, cities where parts are enjoyable and reasonably safe surrounded by utter poverty, a gov't that proclaims to be more or less Socialist when, in fact, it's controlled by the wealthy, a more militarized police force, the wealthy keeping a fair amount of their money out of the country, etc. Not what I'd want - and certainly not what liberals think that they're creating (they think that they'll turn us into Sweden) - but it's also not Mad Max. Our grandkids will never have known a different world and so will see it as normal.

For most people reading blogs like this, it will be fine. The group that will get utterly hosed is working-class whites. They won't be able to afford the gated communities. They will be left to wolves.

Randall Parker said at October 28, 2009 10:17 PM:

Financial Advisor,

Good observations. I'm wondering how much internal migration there'll be to get away from the crime, dysfunction, and racial preferences against whites. Working class whites especially will get an advantage from moving.

I'd like to know what percentage of the Brazilian population live in gated communities.

Reduce spending: Hard to do when an increasing fraction of the population won't be able to afford better quality medical care. The demand on the political system will be there to expand subsidize for health care.

Financial Advisor said at October 29, 2009 8:51 AM:

Randall,

I would suspect that working-class whites will migrate more and more to rural and very ex-urb areas, leaving cities to white collar whites, working class Hispanics and poor blacks and Hispanics. I live the Washinton, D.C., area and thats pretty much what you see. The few working-class whites tend to commute in from deep in Virginia and even West Virginia. Working class jobs - construction, plumbers, etc. - are increasingly held by Hispanics, though the higher skill jobs and foreman job, which require higher IQs, are still with whites. But, again, those whites often don't actually live in the city or surrounding suburbs, preferring the very long commute to living next door to blacks and Hispanics.

So maybe working-class whites won't be left to the wolves. Instead, they move to where wolves live, preferring to live with them.

But Hispanics are moving farther out as well. They follow the jobs. Working-class and middle-class whites move to areas that are mostly white. Restaurants, stores, office buildings, lawns that need care follow. Construction, dishwasher, cleaning, landscaping jobs open. There aren't enough working-class white to fill them and besides they want too much money. Hispanics fill the void. Twenty years later, you're right back where you started.

I realize the reducing spending will become increasingly difficult given the greater need for social services in the future. But I'm just saying that countries with very diverse populations can only withstand so much in taxes. Money and people move so easily that there's a limit to how much you can push the upper class. They will fight back, either by moving or by investing their money elsewhere. Eventually, the economy begins to slow. Again, look at South America. Their politicians very often claim to be socialist, but they've learned over the years that you can't kill the goose that lays the golden egg. They throw some food and blankets over the wall, but they don't really force their upper class to pay too much. And the upper class gets compensated to some degree by incredibly cheap labor. They also tend to get sweet-hearts deals for their companies and gov't jobs for the highly educated from the government.

What doesn't do well in those countries is the middle and working-class. That's our future, or more precisely, that's the future of cities and surrounding areas. You may have enclaves that aren't so bad, like the upper Mid-west or Seattle/Portland areas, but eventually, they will follow unless demographic and immigration patterns change dramatically, which is always possible.

The lesson is either figure out a way to live in rural or very distant ex-urb areas or make damn sure that your upper-middle class or higher.

Also, you might want to make sure that at least half of your stock investments are in international mutual funds that hold their stocks in the local currency. On the bond side, keep a fair amount in TIPs.

not anon or anonymous said at October 29, 2009 1:35 PM:

Financial Advisor, what's stopping blacks and hispanics from leaving the cities as these gentrify and moving to rural areas? After all, NAMs have few job opportunities in a gentrifying city, while the cost of living is far cheaper in the ex-urbs and having NAMs as neighbours is far less of an issue.

Randall Parker said at October 29, 2009 5:48 PM:

Financial Advisor,

Call some place paradise and kiss it good bye. The key is finding ways to discourage the dumbest people from moving to the most affluent areas. Is this possible. It seems all a matter of incentives and disincentives:

- Zone for smarties. Really big lot sizes. No apartments.
- Welfare programs that only dispense their goodies in chosen disaster cities.
- Select industries that do not use much manual labor could concentrate in areas which have few dysfunctional people.
- Smart right-wingers could take over a few states, gut them of welfare, do heavy law enforcement against criminals, drive out industries that use lower cost labor.

What else would work?

We also need a few smallish isolated countries that could become the receiving countries for the world's brains. New Zealand comes to mind.

I am also wondering to what extent cheap high speed internet will allow more live video to displace sharing of office space and going to meetings. If smart people could do more work in rural areas then they could create rural economies more isolated from the dysfunctionals.

I also am wondering how fast robots will make the dumbest people unemployable. Once houses get built by robots, lawns get cut by robots, houses get cleaned by robots, and other lower priced labor gets replaced by robots the presence of some smart upper middle class people in, say, a county in Maine or Idaho wouldn't have to attract undesirables. You could buy everything on the internet and use few local services of of lower skill levels.

not anon or anonymous said at October 29, 2009 6:29 PM:
Zone for smarties. Really big lot sizes. No apartments.

This would be anything but smart, especially in urban areas. It would lead to increased waste and inefficiency for no benefit at all.

Welfare programs that only dispense their goodies in chosen disaster cities.

Perhaps this could work as a transition measure, but we should not be incenting welfare recipients to crowd into cities. They're not committed to a specific job, so they should spread in rural areas where the cost of living is lower.

Select industries that do not use much manual labor could concentrate in areas which have few dysfunctional people.

This is happening and will continue to happen, since these industries generally benefit from agglomeration--think Manhattan or the Bay Area. One problem if that these "hotspots" of industry are, well, concentrated. So the cost of living tends to rise in these areas and this soaks up most of the improved productivity.

Smart right-wingers could take over a few states, gut them of welfare, do heavy law enforcement against criminals, drive out industries that use lower cost labor.

Good idea. A group of libertarians is trying something like this in NH.

We also need a few smallish isolated countries that could become the receiving countries for the world's brains. New Zealand comes to mind.

For brain gains to occur you need very well-paying jobs for smarties and good quality of life. NZ's economy is not ideal--it's mostly based on agriculture and tourism. NZ is also one of the most business-friendly countries in the world, so this could change quickly.

I am also wondering to what extent cheap high speed internet will allow more live video to displace sharing of office space and going to meetings. If smart people could do more work in rural areas then they could create rural economies more isolated from the dysfunctionals.

Given the global imbalances in wages and cost of living, this would mostly result in increased offshoring. Improving network infrastructure in sparsely populated rural areas could be quite difficult.

I also am wondering how fast robots will make the dumbest people unemployable.

Not going to happen anytime soon. The dumbest person you can find is quite a lot smarter than a robot.

A.Prole said at October 30, 2009 1:45 AM:

It's rather amusing seeing all these theories dancing around the obvious solution, the great unmentionable elephant in the room.
Why not implement William Shockley's plan to PAY the low IQ'd for irreversible sterilization operations with the cash reward being proportional to thr deficiency of IQ below mean.
If the program was adequately rewarded (I'm speaking of hundreds of thousands of dollars here), I'm sure the recipients would be eager to accept with no objections.

not anon or anonymous said at October 30, 2009 5:10 AM:
If the program was adequately rewarded (I'm speaking of hundreds of thousands of dollars here), I'm sure the recipients would be eager to accept with no objections

Whatever. Take that money and use it to fund IQ-enhancement research. It would be far more effective and politically feasible.

Financial Advisor said at October 30, 2009 10:05 AM:

Randall et al.,

To some degree what you are talking about is/will happen. The towns that lie outside the major cities where whites escape tend to be zoned for single family homes. In addition, they actually enforce rules on how many people/families can live in the house. This dissuades Hispanics from moving into those towns, even though the cost of living is lower in those towns. For example, in my ex-urb town, a small three-bdrm house would cost at least $250,000. (Yes, welcome to the East Coast where even distant ex-urb towns are expensive.) Two-bdrm houses and townhouses are rare.

That's a tall order for for one Hispanic family and a single cousin to afford (Pedro, the husband, makes $30,000 at construction, wife makes $5,000 at fast-food place and cousin makes $20,000 at lawn service for a total of ~$55,000). With no money down, that's a good sized mortgage, especially when you count kids, food, cars, gas and utilities.

On top of that, they'd be one of maybe five or ten Hispanic families in the town, and the working-class whites - bless their hearts - aren't so welcoming. Also, the construction work out in the very distant ex-urbs isn't as reliable. In the cities and suburbs, they will be remodeling work and office building being torn down and rebuilt. If the growth of the ex-urb slows or stops - as has happened with the housing bust - construction work dries up.

Instead, they could buy a $300,000 house in a crappy, but heavily Hispanic, neighborhood in one of the many suburban ghettos where they could have two or three families live without any problems with the police. The cost would be lower; they would be closer to their potential work in the city, they fit in better, and they could always drive out to the ex-urb if new work comes up.

So there are reasons for the Hispanic population of distant ex-urbs to remain somewhat low. Hopefully, I'm right because I live in one.

Also, these towns tend to very big on law enforcement, no surprise given the people who live there are either rural whites and white collar white refugees who escape high crime areas. That means petty crime isn't tolerated and people go to jail. Hispanic and blacks, who will overwhelmingly be the ones arrested, will take that as a sign that this isn't a very tolerant town, which it isn't

As you mentioned, telecommuting - something I and many of my neighbors do - allows us to live in the distant ex-urb without having to move the office building out here, and thus keeping the construction and cleaning crews back in the city or suburbs.

If we're lucky, the distant ex-urbs may be able to hold the line if we can keep housing prices just high enough, enforcing zoning laws, using tele-commuting and have a lot of cops.

But it's a difficult balancing act. The only fool-proof method of keeping NAMs out of your neighborhood that I've ever seen is the old-fashioned method of driving housing prices so high that they can't afford to live there. It works beautifully in many parts of the inner suburbs of DC. Of course, it doesn't me - and I make over $100k a year but my wife doesn't work - and most other whites.

Of course, all of this is completely ridiculous. If whites had even the smallest balls, they would just admit that immigration is a) out of control and b) bad and stop it. Probelm solved. But when your elites have abandoned you, you are pretty much %#@* out of luck.

not anon or anonymous said at October 30, 2009 12:49 PM:

To some degree what you are talking about is/will happen.

Thanks for your post. It seems to me that crime-prone NAMs will basically avoid ex-urbs because the sparse population makes law enforcement more effective--so they will mostly be found in segregated suburban ghettos. On the other hand, the US is probably wealthy enough that it can avoid the South American scenario, where most people are dirt poor except for a minority elite.

We're looking at something more like Europe, with gentrified, productive cities (the current situation with decayed inner cities is ridiculous and unsustainable, except perhaps in Detroit) surrounded by suburbs/banlieues of varying affluence and safety. Pedro will move into a condo flat with his family (no need to have three families living in a detached house) but he'll still be screwed by the high crime levels in his neighborhood--unless he moves to some place with lower density and lots of cops to deter the undesirables.

Clarium said at October 30, 2009 7:37 PM:

"Money and people move so easily that there's a limit to how much you can push the upper class. They will fight back, either by moving or by investing their money elsewhere. "

I am not so sure about this...

I could see two risks that put de facto capital controls on the wealthy's money.

1. A trade war where many countries enact tariffs on each other. Although this scenario is hard to initiate since the wealthy control politics and ignore populist pressures, but if tariffs are enacted, they will be hard to unwind in a jobless environment.

In this scenario, capital would lose out because the exit costs for capital would increase thus giving increased leverage to the nation state. For example, if company X wants to move a plant from country A to country B in a world protectionist regime, it would face the exit cost of losing market share from all the countries that have tariffs on goods from country B. Protectionism would put upward pressure on taxes and government intervention as countries do not have to enact policies that would be accommodate capital. This aspect of protectionism is probably appreciated by the economic elite, but it is underappreciated in vernacular discussions of trade. The effect of protectionism on wages are also important, as protectionism may shrink the economic pie (although this doesn't matter politically as there was productivity growth throughout the 80s, 90s, and zeros, but wages still stagnated, and it shows little correlation between the size of the economic pie, and working class conditions,) but it would still be a net benefit to those that produce labor intensive goods. The net losers would be the net consumers of labor intensive goods, such as the upper middle class, as their real wages would drop as the price of labor intensive goods increase. More ambiguous would be the affect on people would non-import competing jobs in the service sector. One could argue they would lose out since they would have to pay higher prices on goods, but protectionism might help them by reducing the labor supply further. If protectionism increases the wages of males in manufacturing so that they could live without their spouses working, this would decrease the labor supply in non-import competing jobs which would increase the supply of labor.

2. The failure of emerging markets to generate sustainable consumer demand.

An common investment theme on websites such as Seeking Alpha is the rise of emerging markets such as Brazil, India, and China. As a contrarian, I would bet against this (but I do not have enough knowledge about the technicals of emerging market securities to time the trades) because I do subscribe to a left-wing interpretation of the economic crisis and I do believe that income inequality in those countries would make it impossible to stimulate consumer demand in a world of overcapacity. The reason money is flowing to emerging markets because capital correctly realizes that growth in developed countries would be slow. But emerging markets growth like the US in the post World War II era? If we use the US raise to a world power as a model, the conditions do not match up. The US benefited from World War II since most of its physical capital was protected from the Luftwaffe, V-2 rockets, and the Imperial Japanese Navy by the aegis of geographic distance, while many European countries were bombed by B-17s and Japan by B-29s. Furthermore, there was a de facto protectionist regime after WWII since many countries embraced socialism and this sequestered their labor from the world labor market. Emerging markets face the competition of many investors looking for growth, and competition from other emerging markets. In contrast, the US grew because of a lack of competition. Another analogous scenario is the effect of the black death. Ironically, a reduction in the labor supply increased the prosperity of the survivors (although they were faced with decrees that attempted to fight market forces that would increase wages.) The net result of the lack of technological innovation and global competition is low yields on capital. For example, the ten year treasury is currently yielding about 350 basis points despite record deficits, quantatative easing, chronic trade deficits, and all the other macroeconomic "sins" enumerated by the bears at Seeking Alpha.

Does anyone know the yields on capital in emerging markets? I think Brazil yields about 12%


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