The 2008 financial crash originated with a housing bubble. Not long ago, the cheap-money policies of the Federal Reserve, the infusion of trillions of dollars in new foreign investment, and the misguided policies of Freddie Mac and Fannie Mae all conspired to extend to millions of Americans lots of easy credit for houses whose inflated prices they could hardly afford. Owning a house was seen as a “right” rather than the just rewards of household sacrifice, delayed gratification, and budgetary discipline.
Builders, lenders, realtors, and bureaucrats all got in on the easy-money Ponzi scheme — until a few noticed that the emperor had no clothes and that rather pedestrian homes were hardly worth what unqualified purchasers had paid for them. Financial hysteria followed when shaky borrowers began to miss exorbitant mortgage payments and walk away, and lenders panicked. The subsequent meltdown is history.
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A similar situation — more a vacuum than a bubble — is unfolding with pensions. There is perhaps as much as $6 trillion owed in retirement pledges to Americans, $500 billion in California alone. That tab under present conditions simply cannot be met. For the last 30 years, politicians outbid each other to offer more lavish retirement packages to union members and public employees — more eager for their votes than for ensuring the payment of what they had promised. Receiving a generous retirement package was considered a right rather than an investment predicated on past savings coupled with modest interest and dividends.
There may already be a $1 trillion shortfall in meeting what is owed current retirees. Pensioners on the receiving end are becoming more numerous, older, and more affluent, while the younger workers on the paying end are becoming less numerous and poorer. At some point, a city, a state, or perhaps the Social Security system itself is going to announce there is no more money. Then, if there is not another financial crisis and Wall Street meltdown, the fantasy will end with workers paying higher contributions, retiring later, and receiving less.
Then there is the higher-education bubble, as collective student debt nears $1 trillion with no guarantee that it will be paid back. Lots of poor college students and their strapped parents are floating huge government-subsidized student loans to pay for ever-more-costly bachelor’s degrees that no longer ensure that the recipients are well educated, will find a job upon graduation, or, if they do become employed, will be better paid than the vocationally trained. Going to college has somehow become seen as a national right rather than a privilege predicated on superior academic achievement, financial sacrifice, and continued academic discipline.
There are disturbing commonalities between these situations — and others like the recently enacted health-care entitlement on the way. The rich and connected seem exempt from the impending reckoning, and the poor assume government will offer them debt relief. Those in between are on their own and will have to pay more for receiving less.
America is not creating enough wealth to justify the notion that everyone should go to college, get a higher-paying job than their parents, buy a nice, affordable house, and retire earlier and with more money than did prior generations.
We have forgotten what wealth is — and how tenuous our grip on the good life is. Riches are created by educated and skilled workers who directly translate natural resources into commodities that make life easier. The nonproductive sectors of government, law, and banking must facilitate that process with efficient and transparent financial and political systems.
Very well said. The fact is that if only we return normalcy and get back to work, the future would look brighter than ever. There is a technological revolution underway in artificial inteligence, nanotechnology, genetics and molecular biology (to name a few fields) that portend unimagined advances if only we don't abandon free enterprise.
Well said, jstuart! If that blasted healthcare law is upheld, people will stop inventing things! AI, nanotechnology, genetics and molecular biology research is all being done by aged, infirm people who will inflict massive healthcare premiums on their employers. I can't envision a company continuing to do research, let alone anything else, if their healthcare premiums skyrocket. The economy will just grind to a halt, just like when gas prices skyrocket.
In Thomas Sowell's Basic Economics there is a portion that discusses the incentives that drive politicians.
In a nutshell, he describes a situation where a city bus system needs to increase fares to repair/replace it's aging bus fleet. The local politician opposes the fare increases and then is elected to the next higher level in the political arena (away from the bus problem) because he was the champion for the little guy. The next guy who gets elected in gets stuck with the same problem, only worse. He is forced to raise fares, which does fix the bus system, but results in his defeat in the next election.
The point is that our political system rewards the short sighted and penalizes the person that faces reality.
This is my argument for a balanced budget amendment (or at least limited debt) to our federal constitution and equivilent guidelines at the lower levels of government. The politicians need boundaries with which to work. If they can promise the moon, they will eventually be FORCED to by the electorate, even if they don't want to. We need SYSTEMATIC limitations to provide our politicians with boundaries in which they can then make better long term decisions. Our current open ended system is what is allowing (or in some cases forcing) politicians to make the unrealistic promises that Mr. Hanson describes.
Why, VDH is just SO right about hard work and deferred gratification. For that reason, I am sure he will join me in proposing a 100% excise tax on inheritance. We wouldn't want those heirs getting something for which they didn't work hard and defer gratification, now would we?
The problem is that we have been steadily, and stealthily attacked on several fronts for many years. To solve our problems requires multiple cures. From the classroom to the looming unfunded pension fiasco with the easy money culture sandwiched in between and undergirded by an ever expanding government we have tossed personal responsibility and American ingenuity overboard.
All the necessary elements that fostered our achievements have been forsaken on the public altars of political correctness, environmentalism and diversity and sacrificed at the private altar of power.
Try to imagine the discovery of oil in today's Texas, or testing flying machines at today's Kitty Hawk. You'd never get the "proper" approvals for such folly, as it would be impossible that someone along the approval line would not find offense at the request.
I am always amused when Obama yammers on about innovation, as if we would not do so without the government goading us on. C'mon!
The ever encroaching government is the single biggest obstacle standing in the way of progress.
@ Mike B. Do you have have a job that produces anything? I mean, really? Everytime I read an article at this site, there you are trying to refute the author's position. You must have a lot of free time. When are we going to read the Mike B column at the Huffpo or some other liberal rag if you are so smart? And yes, you are a moron who gets the government he deserves.
@Never_outraged Why shouldn't familes be able to pass down the fruits of their hard earned success to their children? In your view, is it really their money or is it just on loan from Leviathan to be returned when they pass?
I propose a small but increasing tax on pensions paid by the government. Say start at 10%, and increase by 10% per year, until you get to 120%.
That way the government can continue to hand out lavish pensions, and after a few years, those blessed with long life will pay their own way, and more.
"AI, nanotechnology, genetics and molecular biology research is all being done by aged, infirm people who will inflict massive healthcare premiums on their employers."
Yeah, if your local nursing home is in Silicon Valley. Everywhere else, the infirmed elderly are sitting around drooling and knitting coasters....
Why shouldn't families be allowed to pass wealth on to their children? A good question! It is to teach the kids the value of hard work and delayed gratification.
Now if you'll excuse me, typing this missive is hard work. When I finish, having delayed gratification for a few minutes, I'm going to grab a beer. A portion of my lifestyle is brought to you by my inheritance. Thanks, mom and dad.
It is amazing to me that people think we can keep placing obstacles in the way of business and it will keep producing wealth. One thing that never works is raising tax rates. The rich evade them and the middle and entrepreneurial class lower their sights on success or, these days, move to Singapore.
Southern California once had a thriving boat building industry. It had many small manufacturing companies. All these industries were driven away by a combination of taxes and environmental regulation. California government reminds me of the parable of the frog and the scorpion. This state will always sting the frog to death because that is its nature.
I don't believe you can stop these bubbles from busting. The best you can do to limit the damage and force fiscal sanity is to never, never, never compromise and accept any tax increase (social sercurity, excise, national sales, income) for the promise of spending cuts. That strategy will only make the bubble and bust bigger. I am hoping Jerry Brown can get his tax extension request on the ballot so it can go down in flames is spectacular fashion. We are going to have a big fall, protect yourself now.
MK,I would note that tax rates were generally high in the fondly-remembered Eisenhower era. While raising taxes does not necessarily solve any problems, I maintain that lowering them likewise does not necessarily solve any problems.
Economics classes like to point out the Kennedy tax cuts, as a spur to business in the 1960s. Really? Was that the only thing going on, back then? How about the large government programs of the Cold War, the Vietnam War, and NASA?
Perhaps business will move to countries X Y and Z. But I am more concerned about folks from X Y and Z pouring in here in large quantities, with incompatible cultures. Even been at a job, or in a community, that lacks sufficient social cohesion to tell ordinary jokes? I'm not referring to PC. I mean that your co-workers or neighbors lack sufficient cultural basis to understand what you mean, or why it should be funny. Just go back to your computer terminal and shut up! Is that economic progress? Maybe. I can do without it.
There are many forms of capital, including social capital. Ours is dissipating. If companies want to locate here, it would only be in expectation that the nation has sufficient military force to defend stationary capital, and sufficient legal force to defend intellectual capital. Other than that, the USA might as well be country X Y or Z.
Amen brother!! That's all I have to say... I was a middle class guy who worked really hard to, get into a great college, pay for said college, and consider it an honor to have done so, not a right. I think that part of the problem is that our current president thinks and is telling people that college is a right that should be handed to you, much like everything else that "government" can provide for you and people are NOT working for anything and expecting government to hand them everything.. That is why these Liberal/Socialists drive me crazy.. they are perpetuating the lazy American. We are a country that works hard and works to achieve, or we used to be and I'm not even that old!
@MAFV Wealth should be spread around. I just question the means by which BHO would like to do so, i.e. taxes, socialized medicine etc. I might be a kook, but I think the best way is the free market which, by the way, we don't have, thanks to constant interference from the Fed. Capitalism has lifted more people out of poverty than any other system, ever. I think Dr. Hansen's assessment is correct. Government and their crony capitalists pervert capitalism by creating these phony bubbles and we suffer the resultant mess.
Chadds Ford: We need more of your last comment. There is a principled, substantive argument for minimizing interference with the market. But it has to be stated effectively -- and proved. Otherwise, if we simply can't know what the best way of spreading the wealth around is, how do we reject the simplest solution, i.e., just plain spread it around through taxation and redistribution?
Please give us some examples of articles that do correctly make their point since the scholars at NRO apparently fail to impress.
(NRO writers are human so of course they're wrong in some ways, but to go around saying they blew it by writing thought provoking articles does make you seem kooky.)
