Disinheriting Our Children, or Maybe Vice Versa

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Most
American parents think of their task as providing more opportunities
for their children than they enjoyed. At least, this was the stated
goal of American parents for many generations. I think it still
is.

To
imagine that this is possible requires a vision of the future this
is optimistic. If the vast majority of parents really think that
they can do this for their children, then they have to believe in
economic growth. Our children, unlike those of Lake Wobegon, are
not all above average. For most of them to live lives better than
ours, there has to be a better world in general.

But
if there has to be a better world in general in order for us, as
parents, to make our children’s lives better, then our ability to
achieve this goal is dependent on the economic environment around
us. It is not what we do as individuals that will make "a world
of difference" for our children. It is what we do as a people.

We
might like to think that we, as individuals, are the key factor
in our ability as parents to make it better for our children, but
we all know that if the economic system were to reverse — say, a return
to the Great Depression of 1930-40 — there would not be much that
we could do as individual parents to make our children’s lives better,
economically speaking.

A
growing economy is what enables us to offer more opportunities to
our children. We implicitly accept this fact of life. When each
generation of American parents has said, "I hope my kids don’t
have to go through what I went through," the parents were not
blaming their own parents. They were not saying, "My parents
failed to give me what I needed, but I’m going to do a better job."
They were saying, "My parents faced hard times, so I faced
hard times growing up. I want to live in better times than my parents
did, so that my kids will have more opportunities than I did."
That’s the best definition of economic growth: more opportunities
for more people. Each generation has hoped that the economy would
enable them to make available more opportunities for their children.

Capitalism
has delivered the goods. Year after year, on average, for about
250 years, capitalism has delivered the goods at a rate of about
3% more than the year before. This is what has enabled the vast
majority of parents in the West to say to themselves that their
children would have it better than they did.

American
family income stagnated, 1973-1995. The economic growth since 1995
has been more of a statistical phenomenon than real. The statisticians
are measuring supposed product quality increases due to the greater
output of computers. This is called the "hedonic price deflator."
Dr. Kurt Richesbacher has been unsparing in his newsletter regarding
this government public relations strategy.

Has
the cornucopia begun to run low for Americans? Will my children
be able to say, "I want to give my children more opportunities
than I had"?

HOW
LONG CAN THIS CONTINUE?

My
children had it better than I did during their youth. The main reason
why they had it better than I did was because I sent them to Christian
schools in their formative years. Their history textbooks did not
teach them that the Roosevelt’s New Deal "saved capitalism
from itself." Their civics textbooks did not teach them that
the national debt is not really a problem, because "we owe
it to ourselves."

But
for parents who did send their children into the government’s propaganda
centers, it is not clear that their children did receive better
educations than they did. Maybe their children used computers on
occasion in the classroom, but national college-entrance SAT scores
dropped during the period 1963-2000. Scores fell so far that the
SAT’s test designers jiggered with the numbers in the 1990′s, adding
a hundred automatic points, so that critics of the public schools’
performance could not make such harsh comparisons with SAT-takers
a generation ago.

Then
there is the fading moral environment in the schools. In my day,
high schools did not offer free abortion counselling without parental
consent — or even with parental consent. There were no drug-pushers
on my campus that I ever heard of in the late 1950′s, and if there
were, they were selling to the students who took shop classes and
then dropped out.

My
children face entry-level housing prices that are astronomical,
and climbing fast. The government has created safety nets — real and
assumed — for investors in mortgages, and this has had the same effect
on home prices that Medicare has had on the price of medical services.
It has created a bubble. Today, home owners think they have a purchased
one-way ticket to capital gains, a consumption good that allows
them to deduct mortgage interest payments from gross income for
income-tax purposes. What they in fact have purchased is a one-way
ticket to the debasement of the dollar. The Federal Reserve System
dares not allow the housing bubble to burst.

Then
there is Social Security/Medicare. Informed voters know where this
vast Ponzi scheme is headed, but most voters are naive. They trust
in politics for their economic salvation. They rely on the assurances
of politicians regarding the future solvency of Social Security
in exactly the way that Enron employees trusted Kenneth Lay regarding
the future solvency of their 401(k) retirement programs that were
filled with shares of Enron. The result will be worse. Three-quarters
of Enron’s employees are still employed by Enron, and the rest are
employed by someone else. They have time to recover, although their
dreams of retirement riches are gone. But when tax receipts from
the FICA tax no longer pay for all of Social Security’s expenses,
those who are dependent on the Social Security System for their
income will have no recovery opportunity.

That
is when they will show up, hats in hand, on their sons’ doorsteps.
That is when they will have to sell their homes in order to meet
their living expenses. Their plans, and their sons’ plans, will
suffer major revisions. It will not be pleasant to see. But we will
see it.

Peter
G. Peterson is Chairman of the Council on Foreign Relations, America’s
most influential private policy-advisory association. His book,
Gray
Dawn
(Times Books, 1999), is a chilling look at the statistics
of the West’s government-funded retirement programs. These programs
are unfunded, which is the problem. They are "pay as you go,"
and they are all headed for bankruptcy. As Chairman of the CFR,
Peterson has had access to most of the world’s senior political
leaders. Here is his assessment.

The
leaders of the developed world all know what is coming. In private
discussions I have had in recent years with President Clinton,
Prime Minister Hashimoto, Prime Minister Thatcher, and other leaders
of major economies, I learned that they were all fully briefed
on the stunning demographic trends that lie ahead. But so far,
despite the magnitude of the challenge, the political response
has been paralysis rather than action, fear not commitment. Hardly
any country is doing much at all. Yet year after year the crisis
approaches with the measurable certainty of an advancing tidal
wave. . . .

Rarely
have so many multilateral bodies — such as the International
Monetary Fund (IMF), the World Bank, and the Organization for
Economic Cooperation and Development (OECD) — agreed with such
unanimity on the dimensions of a problem. Margaret Thatcher told
me that she repeatedly tried to raise this issue at the G-7 summit
meetings. Yet the answer from her fellow leaders was, in effect,
"Of course aging is a profound challenge, but it doesn’t
hit until early in the next century. That means it won’t hit on
my watch." (Gray Dawn, pp. 7, 9)

The
modern industrial West, beginning with Chancellor Otto von Bismarck’s
introduction of a compulsory old-age retirement program in late-nineteenth-century
Germany, has steadily transferred responsibility for the care of
the aged from the family to the State. Now the State faces bankruptcy,
and those who have trusted the State’s promises face economic disaster
in their old age. Their families, who have not prepared for the
re-transfer of economic responsibility back to families, have no
idea what is about to take place.

A
TAX REVOLT

I
think we will see a tax revolt at some point over the next 15 years.
Those who remain in the work force will see their after-tax income
fall as Social Security/Medicare taxes absorb more of their income.
Younger voters will begin to perceive that the system is stacked
against them.

They
will hang onto their illusion of a secure future until the fall
in the value of the dollar and the increase in FICA taxes finally
force them to face the reality of an unfunded tax liability that
cannot possibly be met by present taxes and present pay-out levels.
Everything in the West’s political system is geared to delaying
this realization. People prefer to believe in political lies, and
they vote out of office anyone who dares to tell the truth about
the statistical reality of these unfunded retirement program liabilities.
But reality will hit the economic system, whether voters accept
it or not.

In
Japan, the reality of a near-insolvent banking system is grinding
down the economy, with or without the government’s acknowledgment
of the true cause. The next major hit in Japan will be the demographic
reality of an aging population that must be funded by existing workers.
The Japanese stock market is facing a steady, decades-long sell-off
by workers who are leaving the work force.

Japan’s
family structure can absorb this shock better than the West’s nuclear
family can. Mamma-sans already run millions of Japanese households.
If you want to find out about mother-in-law problems, visit Japan.
Resentful daughters-in-law have only one hope: to make their daughters-in-law
equally miserable 30 years from now. Their resentment is made worse
by their knowledge that Western daughters-in-law do not live in
households where a mother-in-law’s word is the final word.

In
the United States, there will be no easy transition to the world
of unfunded retirement programs and a falling stock market, when
mutual fund-owners sell off their shares in order to maintain their
post-retirement lifestyles. We will see garages converted into one-room
apartments for the in-laws. That will be a step down for both families.
It will be a major revision of expectations for both families.

As
parents move in with their sons, the sons’ commitment to Social
Security/Medicare will diminish. They will be paying for their parents
anyway. Why should they also bear the burden of paying for other
people’s parents? What has been a long commitment to these programs
will reverse. Voters have long seen these programs as present payments
for their own future independence: independence from their children
(separate households) and also independence from their parents (separate
households). But when the twin reality of a dollar of falling value
and rising taxes hits voters in their productive middle years (ages
40 to 60), there will be a great reversal of opinion.

THE
NON-JAPANESE ASIANS

If
you had two companies to invest in, and one of them had permanent
labor costs 7% higher than the other one, which company’s shares
would you buy?

American
companies pay half of their employees’ Social Security taxes. This
money could go to the workers, or even better, into a tax-deferred
retirement fund. Non-Japanese Asian companies pay no similar tax.

Same
decision: two companies, but one company’s employees are paid 7%
higher wages. Which company is more competitive in the labor markets?

American
workers pay half of the total FICA tax burden of about 15%. Non-Japanese
Asian companies don’t.

Today,
Asian nations are burdened with their own local tax extractions.
Government corruption is high. Private property is not always protected.
But capitalism is spreading to Asia, and it is changing old attitudes.
The Asian Tigers — Singapore, Taiwan, Hong Kong, and South Korea — have
set the example for the Asian mainland. It is unlikely that the
governments of East Asia will be able to maintain the kinds of controls
over their economies that they have exercised in the past. The result
will be the unleashing of thrift and productivity on a scale that
has been inconceivable for Asians in the past.

As
Europe (except for Ireland and — maybe — Portugal) steadily builds up
tax and regulatory burdens on their economies, despite example of
the fall of the Soviet Union, Europe’s ability to compete falls
behind Asia, as well as behind the United States. The Europe-born
population is aging fast, and the birth rate has collapsed. Their
economies are relieved only by a flood of Muslims coming in from
Turkey and North Africa. Europeans have opened their borders to
these immigrants because their governments have to have them in
order to pay for the governments’ tax-funded retirement programs.
The United States is now dependent on Mexican immigrants to keep
the nation’s family birth rate (2%) even close to the population-replacement
rate (2.1%). But these immigrants are not getting the high-output,
high-pay jobs that are necessary to replace Anglos when they retire,
and also to fund Social Security with high-income-base FICA taxes.
The immigrants’ wages are at the low end of the scale.

The
economic future points to Asia. Our children and grandchildren will
be facing a highly competitive world. This doesn’t mean that they
will be poorer than we are. It is better to participate in a world
of richer people than a world of less productive people. This is
why you and I don’t live in the slums, where we could surely afford
the nicest house on the block. But the level of economic competition
will increase. Those at the top of America’s output pyramid will
be wealthier as a result of the spread of free enterprise to Asia’s
mainland. But the days of America’s easy living are just about over.
Alan Greenspan’s bubble economy may not pop in the next few years,
or it may. But the reality of China’s
7% per annum economic growth
will make itself felt in the West
soon enough. The fate of the American steel industry points to the
future: compete or die. There will be no free rides.

This
tells upper-middle-class Americans what they don’t want to hear.
Their sons should become plumbers. Plumbers face no competition
from Chinese entrepreneurs. Paper-pushing graduates in sociology
do, and this competition will only increase.

The
secret of guaranteed economic success for young Americans over the
next three decades will be to become a supplier of high-quality,
high-priced blue-collar repair services in a local economy where
blue-collar workers are mostly high school drop-outs. But nobody
with a college degree wants to think of "my son, the plumber."
It’s a step down, not socially — economically.

Pride
goeth before the fall . . . the fall of income for those in glutted
white-collar professions.

WHEN
BUBBLES BURST

The
U.S. stock market is a bubble. It is being pumped up by Federal
Reserve credit and by a constant flow of tax-deferred retirement
fund income into what is a narrow, government-regulated, government-approved
investment market. It will no longer perform as it has since 1982.
That era is over. The question now is this: How long can the stock
market levitate above the investment landscape with a 1% dividend
return after fund expenses? That depends on how successful Greenspan
is at walking the policy tightrope that is suspended over a falling
dollar and a falling stock market.

A
central bank can do a lot for years to pump up the nation’s main
stock market. But the cost of achieving this is the misallocation
of capital into that market. The other cost is the steady erosion
of purchasing power of the monetary unit.

In
February, the median Consumer Price Index rose to 4.2% per annum,
up from January’s 3.7%, which itself was up from 2% in December,
which was the lowest it had been since December, 1999.

http://www.clev.frb.org/research/mcpi.txt

When
prices are rising at over 4% per annum, and money-market funds are
paying under 2% because of the FED’s expansion of money, it is not
surprising that consumers are buying more stuff, going further into
debt, and buying bigger houses. The Federal Reserve is subsidizing
consumer debt by lowering short-term interest rates. The government
is subsidizing mortgage debt by allowing deductions from gross income
of mortgage interest payments. The joint subsidy system penalizes
thrift, other than mortgage credit.

When
long-term rates rise in response to the depreciating dollar (price
inflation), those who have invested in the mortgage credit markets
will discover the error of their ways: the falling value of their
capital. When you buy a future stream of dollars, and the purchasing
power of the dollar falls, you will take a hit in your capital’s
market value.

When
the housing bubble bursts — and every bubble eventually bursts — millions
of people will re-think the wisdom of moving up. Some of them will
be forced to move down. That’s when the duplex market will pay solid
returns to owners.

THE
DUPLEX

My
maternal grandfather lived in the back of a duplex. He owned both
units. The renter in the front portion helped pay for my grandfather’s
non-retirement. My grandfather refused to retire. He worked full-time
as a salesman until his late 70′s. As a meat packing engineer, he
had been forced to retire at age 65, so he went with another firm
as a commissioned salesman of meat packing equipment. He retained
his independence until the final months of his life, when he moved
into a retirement home at age 80 or 81. He has long been my personal
model.

I
look today at a duplex and see several advantages. I may be ready
to buy one. The second unit could be used for my office. My wife
would get rid of me during the day. I could put several thousand
books in a duplex, though hardly my entire library. The second unit
would be good for visits from my children. They could have a place
to stay: a two-bedroom unit. They would maintain their independence
during visits, which might increase the number of visits. Also,
if I ever did need an additional stream of income, I could rent
out the second unit. I would not have to move in with any of my
children.

The
problem with duplexes is that they are usually located in middle-class
or lower-middle-class parts of town. Zoning laws have kept them
out of upper-middle-class neighborhoods. Most people with capital
don’t want to move down. So, they resist buying a duplex.

I
see the duplex market as a good future real estate market. I think
the reality of unfunded government retirement programs and a falling
stock market will force millions of families with wealth to move
down a notch after they retire. There is something to be said for
making the transition to your post-retirement neighborhood before
you are forced to do so by economic considerations. This way, you
can join into the neighborhood as a pre-retirement participant.
You won’t be the aged stranger who moves in.

I
suppose that the most famous American to live in a duplex was Calvin
Coolidge. He bought it before his political career began, and he
retired to it after he left the Presidency in 1929. He rented out
the other half. Had it not been for the constant stream of visitors
to see him, he probably would have died there. But, to regain privacy,
he and his wife bought a more isolated home. He died in 1933.

CONCLUSION

There
are no free lunches. We are wise when we look into the future to
discern who will be supplying our lunches, and why.

I
don’t want my children to supply them. I don’t expect voters to
supply them. I don’t think the stock market or the bond market will
supply them. So, there is only one reasonable source: my own productivity
in serving consumer demand. This means that I must invest in terms
of a future market that few people see today.

Tip
O’Neill said that all politics is local. So are most services. My
goal is to supply local buyers of local services — services
that are both recession-resistant and inflation-proof. I tell my
children the same thing. And do they listen! As comedian George
Goebel used to say, "Suuuure they do."

Basically,
the best place for a diligent young person to look for a future
profession is in the Yellow Pages. "Let your fingers do the
walking!" A local company that takes out a quarter page in
the Yellow Pages has a solid clientele. If there are only two or
three companies that run large Yellow Pages ads, this a local cottage
industry that has room for a well-capitalized, skilled competitor
who understands direct-response advertising.

Look
for repair or maintenance services aimed at the well-to-do. Then
go shopping for a young man with a good work ethic who might be
willing to be a partner. You supply money and experience. Let him
supply the skill.

The
lower the social prestige of the service, the fewer the number of
qualified new competitors from the ranks of the highly educated.
That’s what you’re after as a qualified new competitor.

Here
is an example: heating and cooling repair services. A local junior
college or technical school trains people in this field. This is
not where people with an IQ of 120 fill the classrooms. A word to
the wise is sufficient.

Now,
about your bachelor’s degree in sociology. . . .

April
3,
2002

Gary
North is the author of Mises
on Money
. To subscribe to his free
investment letter (e-mail), click here.

©
2002 LewRockwell.com

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