u2018Hey, Kids, Mom and I Are Moving In'

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First, your
children need to know something about economics. This means that
they need to know something about economists. Therefore, they
need to visit the following Web page. Here, in graphic form, they
can learn the inescapable truth about economists in about 30 seconds.
See if you agree.
Click here. (I dare you!)
(When
you have finished examining these top-flight economists in action,
click the Back button.)

One of the
best things about being a resident of what we have chosen to call
Western civilization is that each generation has confidence that
its children and especially its grandchildren will live in a better
world. For a quarter of a millennium, this hope has come to fruition
in the realm of economics.

That’s not
to say that the 20th century was better than, say,
the 18th. It depended on where you lived, your class
position, and your age. If you were a typical resident of France,
1789—1815, you were subjected the horrors of a bloody revolution,
followed by the horror of full-time war waged by a megalomaniac.
French soldiers in the Russian campaign of 1812 might have looked
fondly on the 19th century, but they probably would
not have voluntarily traded places with Germans on the eastern
front in 1943—45.

The wars
of the 20th century dwarfed all other wars in history.
In World War II, on an average day, how many people were killed
as a direct result of the war? Have you ever thought about this?
I hadn’t until I read Martin van Creveld’s masterpiece, The
Rise and Decline of the State
(Cambridge University Press,
1999). He is a historian at Hebrew University in Jerusalem, a
specialist in military history. When I read the number, I knew
it was true, because I knew the standard estimate of total losses:
40
million to 60 million lives. But the daily figure drives home
the reality. There were approximately 2,000 days. That means a
daily death toll of between 20,000 and 30,000, seven days a week.

Now, it is
possible that this death toll figure is inflated by Soviet losses
that were really not that high. That’s because Comrade Stalin
may have killed off an extra 10 million to 20 million Russians
during the purges, 1936—38, a fact subsequently covered up
by fake statistics regarding Russian war losses. The low-ball
estimate for the purges is 20 million (Robert Conquest, The
Great Terror
). But what’s a few million among friends?

My point
is that the 20th century, for all of its technological
wonders, was no picnic.

THE
AVERAGE JOE

The typical
American had it better economically, even in 1935, than his great-grandfather
did. Medical care was far better. In the words of libertarian
humorist P.J. O’Rourke, when you think "good old days,"
think "dentistry." From 1945 until about 1973, there
is no question that it paid to be an American. That generation
benefited from two centuries of capital investment. Year by year,
productivity went up by about 2.5%, as well as economic historians
can estimate. That 2.5% figure, compounded, increased wealth by
orders of magnitude over a 200-year period.

Then, without
warning, in 1973, American family income ceased increasing. For
the next two decades, it went flat. There was a brief reprieve,
1995—2000. Then it stopped again. It may be increasing again,
but with unemployment high (6%) for a recovery period, the economists
are just not sure.

For the first
time in American history, parents look at the conditions facing
their children, and wonder, "Will my children be better off
at my age?" That question indicates the presence of nagging
doubt. The American dream has always been this: "My children
will be better off than I am. Their children will be better off
than they are." This was a dream based on faith in compound
economic growth. For two centuries, it came true. It came true
on a scale undreamed of by each generation of grandparents when
they were starting their families.

My grandparents
were born in the early 1880s. They were young adults when the
Wright brothers took off. My maternal grandmother lived to see
men walk on the moon.

In the movie
Fat
Man and Little Boy
(1989), the story of the making of
the atomic bomb, there is a scene after the bomb has been detonated.
Team members of the Manhattan Project are at a meeting in a movie
theater, celebrating the event. That event did take place. The
project’s organizer, J. Robert Oppenheimer, came on stage. He
was dressed in an Indian chief’s headdress. Why, the movie does
not say. I called my friend Sam Cohen a few days ago. He was at
that meeting as one of the team. I asked him if Oppenheimer really
did that. He said he didn’t.

When I saw
that scene, it struck me: In 1945, there were people alive who
had been alive when the Sioux defeated Custer. For all I know,
there were a few aged Sioux warriors still alive who had participated
in some festive celebration that no doubt followed the event.
From bows and arrows to the atomic bomb in one lifetime: Here
was the promise, for good and evil, of technological innovation.

No one doubts
that technology will still advance, possibly at an accelerating
rate. If oil exploration teams are able to discover significant
new oil reserves — this has not happened in several decades — or if
technologists finds a substitute for oil, the world economy will
continue to expand into the foreseeable future. So, from the point
of view of gadgets per capita, our children will be better off
than we are.

Then what
are we worried about?

I suggest
a one-word answer: ourselves.

THE
TRANSITION PERIOD

As we move
from age 20 to age 55, our productivity increases. We work with
better tools because of capital investment. We sell into larger
markets as international trade increases. But then, in every generation,
the members begin to slow down. The promotions cease. Management
looks ahead, and we are not part of their vision of victory. We
are, if anything, liabilities: pension fund liabilities, promotion-blocking
liabilities, codgers becoming geezers.

My friend
Arthur Robinson is a top-flight scientist. He is today working
on some of his most creative experiments. He is self-funded. This
makes all the difference. He does not answer to an academic board
or a government research agency. He told me recently of a visit
he had from some 30-something professors. They were polite. They
were also self-confident. But they did not know the basics of
research, he said. They had delegated everything to graduate students
and off-the-shelf computer programs. He said that he could have
saved them a decade of research, but he decided to forego the
opportunity. They would not have listened to him anyway. He has
a friend who won the Nobel Prize in chemistry, a man older than
he is. The other man says that if younger staffers would listen
to him, he also could save them time and provide interesting leads.
They of course ignore him. So, he goes on with his experiments.

Most of us
know that we cannot persuade our bosses to judge us today by our
potential future output. We go in defensive mode mentally after
age 55. The shift from offense to defense is characteristic of
old men. It is the mark of the transition to old age.

Then there
is the threat of a bankrupt Social Security/Medicare system. This
is always denied by the politicians, but the statisticians say
otherwise. Our children, despite the promise of more gadgets,
are going to bear this burden. If they don’t, then we will have
to bear it, at an age when we have slowed down and can no longer
persuade employers to take us seriously.

That our
children will have more gadgets is beside the point. They are
the generation in which the bills of two generations of politicians’
promises will come due. That they will be better off, gadget-wise,
than we are today is not the point. The question is: Where will
they be in terms of such things as job opportunity, retirement
options, and comparative income in relation to Asians?

This is the
old debate over absolute economic growth vs. relative growth.
It goes back to Karl Marx. He initially thought the proletariat
would suffer absolute economic losses. But then, when the economic
disaster was postponed, and workers’ income grew, Marx switched
to predicting relative economic poverty. The worker would steadily
fall behind the bourgeoisie. He was wrong about this, too. Capitalism
continued to make workers richer by supplying them with the tools
of production. They never became revolutionaries, contrary to
his predictions. The Communist revolutions came in rural Russia
and China, where they were, in terms of original Marxism, premature.

Today, however,
the ever-rising economic burden of the welfare state has dredged
up the old debate. That our children will have more gadgets seems
sure. The problem is, they will also have us to support. They
have not budgeted for this statistically inevitable event. They
will then face a choice. . .

SPEND
LESS OR EARN MORE (AFTER TAXES)

We have not
trained our children to spend less. The difference between the
Americans of my grandparents’ era and the youth of today can be
found in the attitude toward thrift. My grandparents grew up in
an era before Social Security, pension funds, mutual funds, and
third-party fund managers. They recognized that they would have
to save or, failing that, reduce expenditures dramatically upon
leaving the work force.

My long-divorced
grandmother worked in a greeting card store close to UCLA. She
never made much above minimum wage, I suspect. But she was tight-fisted
with her money. She was never impoverished. One of her colleagues
was a sweet older lady named June. I don’t recall June’s last
name. I do recall her maiden name: Preisser. If you are a classic
movie buff, the name may be vaguely familiar. I always think of
her in some 1940s MGM musical about college kids. She was the
girlfriend of the heroine. Well, graduation day eventually came.
In my college days, June Preisser’s later career was never far
from my mind. The message was loud and clear: "Save more
or earn more (after taxes)."

Meanwhile,
taxes have kept going up. Nationally, the rate of savings has
been going down.

Americans
have been accustomed to believe that the future will always take
care of itself, but it doesn’t. For the future to continue to
deliver its politically guaranteed cornucopia, people have to
save. They must provide capital for the creative people who invent
the gadgets and improve distribution. Capital is not out there,
in tooth-fairy fashion, bringing nice things for good little boys
and girls in exchange for used teeth. Capital is out there all
right, mainly in Asia, and Americans are rapidly selling off their
income-generating capital assets in order to buy all those neat
gadgets that Asians manufacture.

The self-discipline
necessary to reduce spending and increase investing is now a rapidly
depleting resource in the United States. The future-orientation
that motivates people to forego consumption today in order to
enjoy even greater consumption later is declining. As older Americans
approach the age of retirement, they continue to save, if at all,
mainly by purchasing the same types of capital assets that all
of their peers are buying, i.e., financial assets approved by
the Securities & Exchange Commission. The lemming-like nature
of this portfolio strategy does not seem to occur to them or to
the staff lawyers at the SEC. There are now more stock mutual
funds than there are listed stocks on the New York Stock Exchange.

Why should
children regard the future differently from the way their parents
view it? Tooth-fairy economic theory has governed the textbooks,
from high school through graduate school, ever since John Maynard
Keynes (B.A., mathematics) wrote The
General Theory of Employment, Interest, and Money
in 1936.
The state is always assumed to have the power to create bread
out of stones. (Keynes actually wrote this in an anonymous essay
in 1943.) Someone else will be there to hand out the checks.

These checks
will be small, and they will be accompanied by the incredible
shrinking dollar. Retirees will have to cut their spending. They
will have no choice. The time for them to begin is now, before
retirement. Spending is based on habits, and habits of thrift
do not come naturally. But this isn’t happening. The national
personal savings rate is still below 4%.

The Asians
are not going to continue to send us the gadgets at today’s low
prices — "buy now, pay later" — when they discover that
there are superior investment opportunities at home. China will
add more people to its middle class over the next 10 years than
there are Americans of all income levels. India will not be far
behind China in this regard. The market for loin cloths is being
replaced by the market for DVD players.

They buy
gold, too.

CONCLUSION

You are not
the average Joe. The average Joe, if he has any retirement portfolio,
still trusts the system to deliver the goods, whether he is in
the work force or not. Presumably, you don’t.

Nevertheless,
the average Joe still has a nagging suspicion that his children’s
lifestyle will have a lot more economic pressure and fewer benefits,
despite the gadgets, than he has faced. This does not lead him
to re-think the politicians’ promises. He still vents his electoral
wrath on any politician who tells anything resembling the truth
about Social Security/Medicare. The politicians respond, as trained
seals respond, by guaranteeing their undying support for the federally
funded retirement system. Only a handful of economists warn them
that the system cannot deliver unless the funding is changed:
either spend less or increase revenues (taxes). The game of musical
chairs goes on.

It is easy
to pretend that the game is not rigged and that the politicians
are not lying simply because voters demand that they lie. The
voters go on as if they were not facing an entire generation of
bounced checks.

Is any candidate
for president raising these questions today? Of course not. So
the game goes on.

You have
these choices: reduce spending, increase your income (after taxes),
or both. The alternatives are these: Trust
the politicians now and move in with your kids later.

If you want
a simple, easy-to-read chapter on Social Security/Medicare for
your children to read — and for you to verify for yourself
what I have said — read
Chapter two of this free manual
; or (if the site jams up):
http://www.demi-edu.org/manual.pdf.

November
15, 2003

Gary
North [send him mail]
is the author of Mises
on Money
. Visit http://www.freebooks.com.
For a free subscription to Gary North’s newsletter on gold, click
here
.

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