by Gary North
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.
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.
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.
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
© 2002 LewRockwell.com