by Gary North
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.
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
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