19. Output per Hour = MFP X [α(L/H) + (1-α)(K/H)], where MFP = multifactor productivity, α = labor compensation/GDP, L = labor input, K = capital input, and H = hours.
20. Medicare and Medicaid are in-kind benefits; hence, by definition, they are “received” as consumption.
21. As a child in the 1930s, I was enthralled by the radio and film portrayals of Buck Rogers in the 25th Century (the Star Trek of my youth). Much of the future technology envisioned back then, in today’s context, seems naive and uninformed.
22. Herman Kahn, The Emerging Japanese Superstate: Challenge and Response (New York: Prentice Hall; 1971).
23. Thomson Reuters 2011 Top 100 Global Innovator companies, November 15, 2011, http://top100innovators.com/.
24. The capital costs of robots are falling to the point where their equivalent wage per hour is becoming competitive with low-wage developing countries. The United States may continue to lose manufacturing jobs but not manufacturing business.
25. Nonetheless, some breakthroughs, such as the telegraph, are discontinuous, as has been the development of much information technology—notably, the emergence of the Internet.
26. I recall visiting in the 1960s a tall and narrow stamping plant built at the turn of the century. I was struck by its unusual shape. But it was only decades later that I learned that I had entered one of the last surviving relics of a certain aspect of America’s industrial history.
27. Our current account deficit.
28. If, owing to market inefficiencies or regulation, competition is tepid, the degree of financial intermediation will be less and the proportion of accruing profits that are monopoly profits will be larger. (See discussion of crony capitalism in Chapter 11.)
29. This churning process that is driven by the relative price of assets is ongoing, continually tracing out what Joseph Schumpeter of Harvard labeled “creative destruction.”
30. It is also not so for a highly regulated economy, or one rife with crony capitalism (see Chapter 11) which will, more often than not, direct savings into investments that do not offer rates of return high enough to effectively increase standards of living for all participants in the economy rather than for a favored few.
31. Stephen Oliner et al., Explaining a Productive Decade, August 2007.
32. Stacey Tevlin and Karl Whelan, “Explaining the Investment Boom of the 1990s,” (Federal Reserve Board, March 2000).
33. America: The Story of Us (History Channel documentary).
34. In fact, much of today’s reordering for inventories is conducted by computer programs that automatically send repurchase orders to suppliers.
35. Because the thin just-in-time supply chains reduce the amount of idle resources that companies require, those resources are partly replaced by a block of idle cash to be available when, for whatever reasons, the thin supply buffer breaks down. (See Gillian Tett, “Reality Not Politics Dictates Corporate Cash Hoarding,” Financial Times, January 18, 2013, citing analysis by Finn Poschmann of CD Howe Institute.)
36. The issue is somewhat mixed in that, for example, the metals content of ore can go in either direction.
37. The adjustment is in the prices that the BEA uses to convert nominal dollars of output to indexes of 2005 dollar purchasing power. As the quality of passenger cars, for example, improves with increasing technology, the Bureau of Labor Statistics, the source of most BEA prices, will adjust any rise in car prices to factor out changes in technology improvements from real inflation-related price increases.
38. Most important, these two separate indicators of the gross weight of GDP both exhibit historically flat trends over the past half century, and show a remarkably high relationship in year-to-year fluctuations. It is not clear, however, why the raw commodity weight is so low relative to that of the total output of goods. To be sure, there are many physical inputs, such as cotton, wool, and wood, that are not counted in the commodities measure, but the gap nonetheless seems inordinately wide.
39. Moore’s law is the popular name for the prediction made by Intel cofounder Gordon Moore that the number of transistors per integrated circuit, or microchip, will roughly double every two years.
40. Since 2008, however, the share of global trade relative to global GDP has flattened.
41. Most fifteenth-century serfs tilled the same soil using the same tools and methods of their forebears. That resulted in nearly two millennia of stagnant output.
42. Angus Maddison. The World Economy: A Millennial Perspective. Development Centre of the OECD, 2001, p. 28.
43. I interpolate contiguous years to estimate a value for the end-of-year “stock” of productivity.
CHAPTER 9: PRODUCTIVITY AND THE AGE OF ENTITLEMENTS
1. President Barack Obama, remarks to the AARP convention in New Orleans, September 21, 2012.
2. AARP Commercial, MSNBC, September 18, 2012.
3. Sociologist Alice Fothergill (University of Vermont) conducted a study of the attitudes of recipients of aid during the 1997 Great Falls, North Dakota, flood. [Alice Fothergill, “The Stigma of Charity: Gender, Class, and Disaster Assistance.” The Sociology Quarterly, vol. 44, no. 4, pp. 659–80 (2003).] Some recipients of aid following the flood that inundated New York City in late October 2012 in the wake of Hurricane Sandy expressed a similar sense of degradation. [Sarah Maslin Nir; “Helping Hands Also Expose a New York Divide,” New York Times, November 16, 2012.]
4. “The Debt to Pleasure,” Economist, April 27, 2013.
5. Private pension funds, on average, have not always been fully funded. A study by Goldman Sachs in 2011 indicated that between 2002 and 2011, the market value of private defined benefit plans of Standard and Poor’s 500 corporations (U.S. plans only) ranged between 79 percent funded (2008) and 108 percent funded (2007).
6. Whether Social Security is fully funded or not has nothing to do with the security of payments to future beneficiaries. Benefits in either case are de facto fully guaranteed by the U.S. government. Because the federal government will cover any shortfall in the trust funds with general revenues, it is no longer conceivable that, as required by law, benefits will be cut in the event of a depletion of trust fund assets.
7. Pay-as-you-go funding requires only that current receipts of trust funds (contributions, interest, and, since 1984, taxation of benefits) cover current benefits. In this paradigm, contributions for social insurance or other taxes would have to rise sharply in line with the projected rise in benefits paid out to the retiring baby-boom generation. Full funding sets the payroll tax rates at fixed (higher) levels that will accumulate assets in the trust funds prior to the acceleration of benefits and then run them off as benefits rise. That smoothing effect creates an economically nondisruptive trust fund. The seventy-five-year (official) funding requirements fall somewhere in the middle owing to the fact that, under current projections, the trust funds become exhausted immediately beyond the seventy-fifth year.
8. The 2013 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Trust Funds, p. 16.
9. The 1983 NCSSR was required to meet the seventy-five-year criterion—which it did, but only a year later the depth of the deficit of the seventy-sixth year again put the Social Security Trust Fund out of compliance.
10. The 2012 Annual Report of the Board of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, p. 3.
11. The trustees, I might add, included three incumbent cabinet secretaries.
12. Harry S. Truman, special message to the Congress Recommending a Comprehensive Health Program, November 19, 1945.
13. The BEA lists, under total government social benefits to persons, Social Security, Medicare, Medicaid, unemployment insurance benefits, veterans benefits, and other social benefits.
14. Dwight D. Eisenhower, State of the Union address, January 5, 1956.
15. John F. Kennedy, Economic Report of the President, January 1963.
; 16. Federal government savings (positive or negative), by the BEA’s reckoning, is close to but not the same as budget surpluses and deficits.
17. The huge surge in stock market-related revenues temporarily propelled government savings into positive ground between 1996 and 2001.
18. To be sure, the cut in individual and corporate tax rates in 2001 and 2003 did lower federal receipts as a share of GDP somewhat. But by early 2013, as a result of “fiscal cliff” legislation, federal government tax receipts returned close to their historic range relative to GDP.
19. Contributions to social insurance had some association with benefits from 1965 to 1970 but then fell off abruptly thereafter. By 2012, contributions were little more than two fifths of benefits. Since 1970, they can just as readily be considered a generic payroll tax indistinguishable from any other form of tax receipt.
20. Since 1982, within the private sector, all of the crowding out of savings by consumption took place in the households subsector. Business savings edged higher. (See Exhibit 9.4.)
21. Gross savings are before charges for depreciation, and net savings are after such charges.
22. Richard Sutch, “Saving, Capital, and Wealth,” Historical Statistics of the United States, millennial edition, 3; pp. 287–95.
23. Under full consolidation, domestic capital investment is necessarily equal to gross domestic savings plus new borrowed savings from abroad.
24. Gross savings as a share of GDP are, however, significantly positively correlated with interest rates (Exhibit 9.8).
25. For definitions of ex ante and ex post, see Chapter 7, note 20, page 360.
26. Federal Reserve banks, despite their “private” chartering, are a part of the federal government.
27. Corporate cultural restraints on capital investments I assume do not have a role in this process (see Chapter 4).
28. Adjusted for inflation.
29. The propensity to save out of household income has clearly been no match against the forces driving personal consumption. (Household consumption as a percent of income hovers between 90 percent and 95 percent.) The same pressures do not exist in the business sector, however, because business has no avenue to consume conspicuously. Its choice is not between consumption spending and saving, but largely between spending on capital assets; retiring debt and paying dividends to, and buying back stock from, shareholders.
30. There are, of course, statistical discrepancies in the published data.
31. All output has a claimant or owner. When claims to the GDP (wages and capital income) are summed, we obtain gross domestic income. Of necessity, it is equal in value to GDP.
32. Transactions can be classified as either capitalized or noncapitalized. Capitalized transactions are those that end up on the balance sheets of firms or of the economy as a whole. Noncapitalized transactions are consumption expenditures, which, once spent, disappear from our accounts.
33. Of course, if intentions to save in the private sector and among foreign lenders to the United States exceed ex ante U.S. funding requirements, there is no savings (and hence no investment) to be crowded out. In fact, the excess of savings intentions will tend to suppress interest rates and rates on other income-earning assets, thereby inducing some “crowding in”—that is, an increase of both savings and investment. Crowding in was particularly evident between 1998 and 2001 when the U.S. government was running a (rare) surplus. It was also the cause of the decline in interest rates in global markets from 2000 to 2005 (see Chapter 3, note 5).
34. The major problem with those surveys is that they depend on the tenuous recollection of people. Moreover, there is an apparent tendency to overestimate savings out of income, given what we know about the more accurate household savings totals from the Bureau of Economic Analysis and the Federal Reserve.
35. See Chapter 11 on measures of income inequality.
36. The upper quintile’s effective tax rate fell from 17 percent of pretax income in 1981 to 13 percent in 2009. But the tax rate decline among the lower quintiles was much larger.
37. Had the slowdown in output per hour not occurred, average pretax household money income in 2011 would have been many thousands of dollars more than what was actually received.
38. The result also suggests that if benefits had risen only by 6.8 percent per year (in line with GDP growth) rather than 9.4 percent per year, gross domestic savings and the GDP growth rate would not have been importantly impaired.
39. Fortunately, through the spring of 2013, neither decreases in the dollar’s trade-weighted exchange rate nor a rise in U.S. interest rates relative to foreign borrowing rates suggested that we had encountered borrowing difficulties. But such changes often happen unexpectedly with little advance notice.
40. Margaret Thatcher in an interview for Thames TV This Week; February 5, 1976: “Socialist governments traditionally do make a financial mess. They always run out of other people’s money. It’s quite a characteristic of them.”
41. An ophthalmologist suggested to me that the prospective aging population will require, in the years ahead, a major increase in cataract removal procedures. But many ophthalmologists will retire with the baby boomers. Will we have adequate staff to cover that demand?
42. The hours worked are assumed to be those actually employed. The same people would be working in the counterfactual scenario, but, in 2011, at a higher level of output per hour. I further assume that the MFP residual is the same as calculated by the BLS.
CHAPTER 10: CULTURE
1. The group is officially called the G-10 governors, but it is actually made up of central bank governors of eleven countries: United States, United Kingdom, Canada, Germany, France, Italy, Belgium, Netherlands, Switzerland, Sweden, and Japan.
2. There was dissent, especially from Britain. Eddie George, the governor of the Bank of England, was skeptical. So was I.
3. For Ireland and Finland, the spread change during this period was slightly greater, at 106 and 112 basis points, respectively.
4. Gold was removed from U.S. circulation in 1933, but the Treasury offered unlimited gold convertibility to central banks.
5. There are thus two distinctly defined Eurozone areas: the north and the south. The ranking of credit risk spreads throughout the Eurozone at mid-year 2012 was almost identical to the ranking of the level of unit labor costs (relative to that of Germany), suggesting that the higher labor costs and prices have rendered Euro-South less competitive and so more subject to credit risk. The more competitively priced net exports of the northern Eurozone participants, in effect, more than covered the rising level of net imports of the south. In short, since 1999, there has been a continuous net transfer of goods and services shipped from the north to the south. Northern Europe in effect has been subsidizing southern European consumption from the onset of the euro on January 1, 1999. It is not a recent phenomenon.
6. Kieran Kelly, “Greek Default Crisis Is All About Cultural Differences in the Eurozone,” Australian, September 24, 2011.
7. The credits and debits of the central banks of the Eurozone against one another are TARGET2 balances. As such, any losses are against the ECB (not the creditor central banks) and are then distributed in proportion to the capital contributions to the ECB. See, for example, “The TARGET2 Settlement System in the Eurozone” by Gerald P. Dwyer of the Federal Reserve Bank of Atlanta (March/April 2012).
8. Many of the fiscal problems in southern Europe, of course, have reflected excessive leverage in their private sectors.
9. Calculations presume that all Eurozone currencies that locked into the euro’s exchange rate on January 1, 1999, were competitive at that date.
10. A high savings rate, a measure of prudence, is a necessary but not a sufficient condition for high investment. An effective financial system that directs a nation’s savings toward the funding of productive capital investments is also a requirement.
11. France, of course, has ties to both the north and the south.
12. Remarks
by Mario Draghi at the Global Investment Conference, London, July 26, 2012.
13. The response was similar to what the U.S. Treasury did to help stop the run on Mexico’s Tesobono and peso in late 1994.
14. It is difficult to determine the extent of a deutschmark premium relative to the euro in the event of a Eurozone breakup. There is little doubt that the Euro-South countries would be much weaker subsequent to a breakup. And given the weakening of the Euro-South legacy currencies, of necessity there will be an equal offset to northern strength because the consolidated euro exchange rates must “sum” to the value of the euro overall.
15. ECB assets are larger than those of the Federal Reserve.
16. Earlier in this chapter, I pointed to the sharp contraction of sovereign bond spreads against the German bund leading up to the adoption of the Euro.
17. Mure Dickie, “Fukushima Crisis ‘Made in Japan,’” Financial Times, July 5, 2012.
18. It is instructive that experiments with children, testing their ability to forgo available consumption in exchange for greater consumption in the future, showed a positive correlation between self-restraint and SAT scores (see Chapter 1). The choice of austerity now for greater future consumption is a clearly deeply inbred human trade-off.
19. Calculated slightly differently from gross domestic savings rates.
20. The correlation coefficient is .65, and the t-value of the 2011 savings rate regressed against per capita GDP is 3.3.
21. Of course, this conclusion more or less must be true owing to how we define a developing country relative to a developed country.
22. For details, see data on World Bank Web site (http://data.worldbank.org/data-catalog/worldwide-governance-indicators).
23. For details, see World Economic Forum Global Competitiveness Report (http://reports.weforum.org/global-competitiveness-report-2012-2013/).
CHAPTER 11: THE ONSET OF GLOBALIZATION, INCOME INEQUALITY, AND THE RISE OF THE GINI AND THE CRONY
1. Tom Brokaw, The Greatest Generation (New York: Random House, 1998).
2. The food aid that the United States gave to both its allies and adversaries following World War I, under the leadership of then-United States food administrator Herbert Hoover, was nonetheless substantial.
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