Sunday, June 19, 2016
Transgender
http://dailysignal.com/2016/06/09/i-wish-i-had-been-told-about-these-risks-before-i-had-gender-surgery/?utm_source=TDS_Email&utm_medium=email&utm_campaign=Top5&mkt_tok=eyJpIjoiTVdJd1kyWXhNMkZqTVRobCIsInQiOiJhcU9Sd0J1ZzVLc3BUQVZNNHpMQjRxWGhXcnRHVlFPMUI2ZnhWQTNyT0kxNkY2MlBsaGw5TlwvQ0YyR3Q3RDhuakZsejRWdHdLV3JRcnoyODNFY3FXUkxhTHArdVdISnhXMmQ3ZVVDejh2QW89In0%3D
Wednesday, June 8, 2016
Doctors' War Stories From VA Hospitals
Administrators limited operating time so that work stopped by 3 p.m.
May 27, 2014 7:26 p.m. ET
With the recent revelations about the
disgraceful treatment of patients by the Veterans Affairs hospitals, the
public is discovering what the majority of doctors in this country have
long known: The VA health-care system is a disaster. Throwing more
money at the system, or demanding the scalps of top
bureaucrats—Washington's reflexive response to any problem of this
sort—won't repair the mess. What's needed is a fundamental rethinking of
how to provide medical care for America's veterans.
The
federal government runs two giant health-care programs—Medicare and the
VA system. Medicare is provided by private physicians and other
providers. Its finances are a mess, but the care that seniors receive is
by and large outstanding. The VA health-care system is run by a
centrally controlled federal bureaucracy. Ultimately, that is the source
of the poor care veterans receive.
The Phoenix VA Health Care Center.
Associated Press
U.S. doctors are well aware of the
problems with VA hospitals because many of us trained at them. There are
153 VA hospitals. Most of them are affiliated with the country's 155
medical schools, and they play an integral role in the education of
young physicians. These physicians have borne witness to the abuses and
mismanagement, and when they attempt to fight against the entrenched
bureaucracy on behalf of their patients, they meet fierce resistance.
Most
doctors have their personal VA stories. In my experience at VA
hospitals in San Antonio and San Diego, patients were seen in clinics
that were understaffed and overscheduled. Appointments for X-rays and
other tests had to be scheduled months in advance, and longer for
surgery. Hospital administrators limited operating time, making sure
that work stopped by 3 p.m. Consequently, the physician in charge kept a
list of patients who needed surgery and rationed the available slots to
those with the most urgent problems.
Scott Barbour,
an orthopedic surgeon and a friend, trained at the Miami VA
hospital. In an attempt to get more patients onto the operating-room
schedule, he enlisted fellow residents to clean the operating rooms
between cases and transport patients from their rooms into the surgical
suites. Instead of offering praise for their industriousness, the chief
of surgery reprimanded the doctors and put a stop to their actions. From
his perspective, they were not solving a problem but were making
federal workers look bad, and creating more work for others, like
nurses, who had to take care of more post-op patients.
At
the VA hospital in St. Louis, urologist
Michael Packer,
a former partner of mine, had difficulty getting charts from the
medical records department. He and another resident hunted them down
themselves. It was easier for department workers to say that they
couldn't find a chart than to go through the trouble of looking. Without
these records, patients could not receive care, which was an
unacceptable situation to these doctors. Not long after they began doing
this, they were warned to stand down.
There are thousands of other stories just like these.
Opinion Video
Dr. Ben Carson discusses how private hospitals work, in
contract to the government-run Veterans Administration. Photo credit:
Getty Images.
In my experience, the best thing that
a patient in the VA system could hope for was that the services he
needed were unavailable. When that is the case, the VA outsources their
care to doctors in the community, where their problems are promptly
addressed. But these patients still need to return to the VA system for
other services and get back on a long waiting list.
Proponents of the Affordable Care Act
have long used the VA to showcase the benefits of federally planned and
run health care. Doctors know otherwise—and it is no surprise that a
majority of them have opposed a mammoth federal regulatory apparatus to
control health care in this country. The systemic problems with the VA
bureaucracy are a harbinger of things to come.
The
best solution for veterans would be to wind down the VA hospitals. The
men and women who have served in our armed forces should be supplied
with a federally issued insurance card allowing them to receive their
care in the community where it can be delivered better and more
efficiently.
The veterans who receive
their care at VA hospitals are the kindest and most grateful patients
that I have had the privilege to care for in my career. Unfortunately,
they are getting shortchanged. The time to repair this national
embarrassment is long past.
Dr.
Scherz is a pediatric urological surgeon at Georgia Urology and
Children's Healthcare of Atlanta and serves on the faculty of Emory
University Medical School.
HOW HELICOPTER MONEY WORKS ASSET ALLOCATION
http://www.columbiathreadneedle.co.uk/media/10023117/en_viewpoint_the_impact_of_helicopter_money.pdf
Toby Nangle wrote:
– MAY 2016 J25287 Issued May 2016 | Valid to end August 2016 Page 1 of 8 Once we understand how ‘money’ works, ‘helicopter money’ is straightforward. But what effect might it have on markets? We equate ‘helicopter money’ with monetary financing. On an ex post basis, the UK, US and Japan can be thought to have experienced de facto monetary financing already, and it didn’t come with an explosion of inflation. The evidence doesn’t suggest that new helicopter money, if implemented, would spark inflation either. Monetary financing isn’t a wacky new policy and is easy to understand once you look at ‘money’ the right way. We should treat government debt and taxation as two forms of monetary sterilisation rather than financing operations. There are not clear advantages to announcing a policy of helicopter money over announcing a traditional debt-sterilised fiscal expansion. Indeed, it could end up being a backwards step. Central banks in Europe and Japan have experimented in recent quarters with slightly negative interest rates. In doing so they have broken what many had assumed was a zero lower bound for nominal interest rates, and also given some indication as to where the true lower bound may lie (which is to say around where rates now sit). The question as to how central banks will respond to the next recession has arisen amongst academics and investors. One option being discussed is ‘helicopter money’. Helicopter money refers to the situation where a central bank finances the fiscal expenditure of a government. Or in common parlance, the government prints money instead of raising taxes or debt to fund spending. To many this evokes the sort of policy that brought Toby Nangle Co-Head of Global Asset Allocation & Head of MultiAsset, EMEA VIEWPOINT | MAY 2016 J25287 Issued May 2016 | Valid to end August 2016 Page 2 of 8 hyperinflation to Zimbabwe or the Weimar Republic – and as such provokes meaningful alarm. In this piece I will outline why the implementation of quantitative easing during periods of fiscal expansion in the UK, US and Japan have effectively already delivered ex post helicopter money, and why true helicopter money appears less attractive as a policy option than additional levels of traditional debt-financed fiscal expansion, supplemented if need be by further quantitative easing. But in order to make this clear, it is necessary to look at what money actually is and how it works. What is money? We tend to think of money in the bank and money in our wallets as the same thing. That we do so attests to the success of the monetary system in place. Rather than both being money, one (the bank deposit) is ‘Inside Money’, while the other (the bank note) is ‘Outside Money’. These are not fungible and are instead like oil and water. Inside (bank) Money is imagined into existence by banks in the process of creating a loan. Outside (government) Money is imagined into existence by the monetary sovereign (in the case of UK, the US or Japan, this is the government). Inside Money Imagine that you go to your local high street bank for a loan. In granting the loan the bank creates a deposit in your account. This deposit is a liability on the bank’s balance sheet against which it holds an asset (a loan to you). If you choose to transfer your (borrowed) deposit to another depositor of the same bank (let’s say, if you bought a house from me and I was also a customer of the same bank), the liability (eg, the deposit) never leaves the bank. If you transfer my (borrowed) deposit to a depositor of another bank, your bank would need to settle the transfer (at the BoE) – but the liability would never leave the banking system. And so, Inside Money exists only on a bank ledger and can never take physical form. Inside Money, to be specific and a trifle more technical, is the short-dated liability of the banking system. Changes in bank lending practices do not change Outside Money a jot. Outside Money Outside money (government money) is money that is imagined into existence not by a bank making a loan, but by the monetary sovereign (in the case of the UK, US or Japan, this is the government) making a payment. It is like an undated government IOU. Imagine that a government pays a civil servant. As the monetary sovereign they can do so by creating brand new Outside Money. The government then typically seeks to destroy an equal amount of Outside Money to offset this monetary expansion, and this process of money destruction is called monetary sterilisation. Why do governments sterilise their money creation? The typical answer is to maintain confidence in the currency. After all, if a government went out increasing the stock of outside money exponentially it is quite conceivable that recipients might begin to become concerned that this Outside Money may not be a good store of value and so seek to turn it into goods and services at higher prices (and so lack of confidence could show up in the form of inflation), or they could seek to turn it into other peoples’ currency (and as such show up in currency depreciation) or real assets (and as such show up in real asset inflation). VIEWPOINT | MAY 2016 J25287 Issued May 2016 | Valid to end August 2016 Page 3 of 8 Figure 1: How Outside Money is created and removed from the economy Source: Columbia Threadneedle Investments, May 2016. Figure 1 shows stylized balance sheets of the non-bank private sector (of which the civil servant is part), the commercial banking system, the central bank and the government before this hypothetical civil servant is paid (column 1), immediately after but before the money is pulled back out of the system (column 2), and then after the two different forms of monetary sterilisation (columns 3a and 3b). The government has two routes to sterilise the monetary expansion. First, it can issue debt in the form of new bonds to the private sector (column 3a). By selling bonds to the private sector the government will successfully take the new Outside Money out of circulation, and replace this Outside Money with bonds that cannot be so easily spent. Secondly, a government can tax (column 3b). Taxation is a form of monetary sterilisation – with tax revenues effectively torn up in order to maintain confidence in the currency. In the UK, by virtue of having signed the Maastricht Treaty, the sterilisation action will always happen simultaneously or before the payment to the civil servant. But this outline of how Outside Money works remains valid. Figure 1 illustrates not only how Outside Money works, but also a couple of other things. Firstly, it shows why it is peculiar to worry about debt sustainability from a fiscal (rather than a monetary) perspective. Government debt can be seen to be no more than an instrument for monetary sterilisation: a means by which zero-coupon perpetual government IOUs (Outside Money) are removed from circulation and replaced with interest-bearing government IOUs with a specified maturity (although they will at that point again become perpetual zero-coupon government IOUs). The prospect that a monetary sovereign might be unable to sell government bonds is real, but untroubling from a financing perspective; the prospect of a bond market strike is instead troubling only from a monetary perspective. VIEWPOINT | MAY 2016 J25287 Issued May 2016 | Valid to end August 2016 Page 4 of 8 Secondly it illustrates that when debt-sterilising rather than tax-sterilising, the private sector ends up with a larger balance sheet. Government bonds are treated as assets, although they are claims against the rest of the non-bank private sector who don’t own bonds. Given that taxation tends to be progressive in democracies, it would appear likely that the distributional consequences of debt sterilising rather than tax sterilising would be to leave upper deciles of the income distribution holding more bonds and having paid fewer taxes. That is to say, that there will likely be higher levels of wealth inequality under a government that prefers to maintain confidence in the currency via debt sterilisation, all else equal. Now that Outside Money has been outlined, with debt issuance and taxation explained as instruments of monetary sterilisation, quantitative easing can be seen to be a pretty straightforward reverse-sterilisation operation. As government bonds are bought by the central bank, so the monetary base (in the form of Reserves and Currency, eg Outside Money) becomes inflated. While the bonds are held by the central bank they are effectively cancelled: they do not perform their monetary sterilisation duties and there is no net interest cost of holding them to HM Treasury over and above the cost of remunerating holders of Reserves (which would need to occur even if cancelled). Figure 2 helps show the relative scale of Inside and Outside Money. The dark blue section shows M4 as a percentage of GDP as a decent proxy for Inside Money and the light blue section shows Outside Money as a percentage of GDP. Two things jump out. First, there is a lot more Inside Money than Outside Money. Secondly, the acceleration in growth of Inside Money was spectacular in the years leading up to the Global Financial Crisis, and the collapse thereafter has been precipitous. The expansion of Outside Money in the form of QE has but cushioned this contraction in the money stock. Figure 2: UK Inside and Outside Money 1986-2016 Source: Bank of England BankStats, May 2016. * Monetary financial institutions sterling M4 liabilities to the private sector seasonally adjusted. With circa 250% debt to GDP many have asked whether Japan’s debts are too big to ever repay (Figure 3). Government debt is rarely repaid. Bonds issued to sterilise a government’s fiscal expenditure mature and are typically repaid by the proceeds of issuance of new bonds. VIEWPOINT | MAY 2016 J25287 Issued May 2016 | Valid to end August 2016 Page 5 of 8 And so the debt issued by the British government to finance the Napoleonic Wars has never been repaid. But pursuing this line is to miss the point. We have already seen that government debt is no more than an instrument for monetary sterilisation: it is a means of reducing the number of IOUs in the system, by replacing them with long-dated IOUs that can’t be easily spent. As such, the issue of debt to GDP should not be seen as a fiscal constraint: a government can’t run out of government IOUs. That said, uncontrolled debt growth could conceivably become a medium-term threat to monetary stability (eg, people might stop accepting government IOUs as payment). Uncontrolled debt growth comes with the uncontrolled growth in debt service obligations. And these debt service obligations come in the form of the creation of more Outside Money which in turn needs to be sterilised. Figure 3: UK government debt to GDP / Japan government debt to GDP Source: Columbia Threadneedle Investments and Bloomberg, May 2016. Despite high levels of debt to GDP, Japan’s debt service costs are today amongst the lowest in the world, owing to low interest rates. In a scenario where inflation rises and policymakers want interest rates to rise, the stock of debt could become problematic (as maturing debt is refinanced with bonds carrying higher coupons) if nominal GDP growth is sufficiently absent (so that debt-to-GDP rises ever-higher). Essentially, the threat to Japanese monetary sustainability from its stock of government debt is the threat that people will stop accepting yen from the government as payment. As long as the government has the power to enforce demand for yen in the form of a requirement to pay taxes, this possibility appears de minimis. VIEWPOINT | MAY 2016 J25287 Issued May 2016 | Valid to end August 2016 Page 6 of 8 We have seen that when a central bank purchases government debt it unwinds past monetary sterilisations. Debt bought by the central bank is effectively cancelled for the duration of the QE programme. In the two charts within Figure 3 we can see the degree to which these QE programmes have impacted the UK and Japanese government’s debt to GDP metrics. In the case of the UK, the QE programme (running contiguously with fiscal expansion) had the effect of helicopter money. This can be seen from Figure 4. The table outlines the impacts of QE, of helicopter money (where debt is purchased by the central bank and written-off), and a combination of QE and fiscal expansion. Given that debt is effectively cancelled from the moment it is bought by the central bank from a monetary and fiscal perspective, the debt service and monetary effects of QE and helicopter money appear the same. Figure 4: Comparing quantitative easing, helicopter money, and fiscal expansion combined with quantitative easing Source: Columbia Threadneedle Investments, May 2016. The big difference arises when it comes again to tighten policy. By cancelling government bonds bought, the central bank cannot so simply resterilise the unsterilised Outside Money stock. If it wishes to calm inflation quantitatively it can auction central bank bills, term deposits and implement reverse repo programmes, all of which put upward pressure on shorter-term interest rates. And so it is left with the option of either raising short-term rates by more than they would otherwise need to rise under the QE scenario, or persuading the government to gift the central bank with large amounts of government debt that it can then sell to the market (which may be tricky politically). The economic effects of quantitative easing are still being debated, but it is fair to say that they are presumed to be positive to date. In the case of helicopter money, there would be a direct fiscal expansion financed by central bank purchase of (and cancellation of) government bonds. VIEWPOINT | MAY 2016 J25287 Issued May 2016 | Valid to end August 2016 Page 7 of 8 This direct fiscal spend would be economically expansionary, unless the announcement of helicopter money represented a shock to households and firms that was sufficiently significant to offset the fiscal stimulus. The economic effects of fiscal expansion combined with new quantitative easing appear identical to those of helicopter money. The market effect of the recent experience of QE has been lower discount rates, a weaker currency, and a strong environment for risk assets. We might guess that the market’s reaction to helicopter money would be similar, but given that past episodes of dominance by the fiscal authority over the central bank have been associated with fiscal indiscipline and high inflation, there is a reasonable chance that markets could react in a meaningfully different and negative way. The truth is that we just don’t know. Hyperinflation Helicopter money is often associated with incidence of hyperinflation. In their study of the 56 incidents of world hyperinflation during the last 300 years, Hanke and Krus found hyperinflation to be ‘an economic malady that arises under extreme conditions: war, political mismanagement, and the transition from a command to market-based economy to name a few’. By contrast, monetary financing has been used widely in the developed and developing world over time without ending in hyperinflation. Until the US Fed Accord in 1951 the US operated a policy of fixing long-term bond yields, and as such expanding or contracting Outside Money depending on private sector demand for these instruments. Canada used monetary financing for 40 years until 1975 under a free-floating exchange rate regime without calamitous macroeconomic effects, and India operated a policy of debt monetisation until 2006. Further examples abound. Indeed, of the 152 central bank legal frameworks analysed by the IMF, 101 permitted monetary financing in 2012. This is not to say that helicopter money is a desirable policy. It would be, in the opinion of this author, a backwards step. But neither is it to be necessarily associated with hyperinflation. Conclusion With the unknown market impact of helicopter money, with prospective policy tools in the hands of central banks narrowed through debt cancellation, and with the economic benefits associated with helicopter money rather than straight fiscal expansion de minimis, it is not clear why policymakers will choose the path of helicopter money. Perhaps the real lesson is that monetary policy has its limits and that in the event of an economic slowdown, aggregate demand is best supported by fiscal rather than monetary policy. In the event that new fiscal expansion requires supplemental monetary support in the form of additional QE, that is a decision that could be made at some point in the future. So, in conclusion, helicopter money is not a weird and wacky new form of money. Indeed, once we understand how money works helicopter money looks pretty straightforward. The prospective economic, monetary and fiscal effects of helicopter money (absent the stickershock of a new unfamiliar policy being implemented) look identical to a normal fiscal expansion supplemented with additional QE. As such, it could be argued that the UK, US, and Japan have all already effectively experienced helicopter money. It is harder to say the same about the Eurozone, consisting as it does of government entities that are not monetary sovereigns. Indeed, the Eurozone is much more complicated. VIEWPOINT | MAY 2016 J25287 Issued May 2016 | Valid to end August 2016 Page 8 of 8 Important information: For investment professionals only, not to be relied upon by private investors. Important Information: Past performance is not a guide to future performance. The value of investments and any income is not guaranteed and can go down as well as up and may be affected by exchange rate fluctuations. This means that an investor may not get back the amount invested. This material is for information only and does not constitute an offer or solicitation of an order to buy or sell any securities or other financial instruments, or to provide investment advice or services. The research and analysis included in this document has been produced by Columbia Threadneedle Investments for its own investment management activities, may have been acted upon prior to publication and is made available here incidentally. Any opinions expressed are made as at the date of publication but are subject to change without notice and should not be seen as investment advice. Information obtained from external sources is believed to be reliable but its accuracy or completeness cannot be guaranteed. This material includes forward-looking statements, including projections of future economic and financial conditions. 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Toby Nangle wrote:
– MAY 2016 J25287 Issued May 2016 | Valid to end August 2016 Page 1 of 8 Once we understand how ‘money’ works, ‘helicopter money’ is straightforward. But what effect might it have on markets? We equate ‘helicopter money’ with monetary financing. On an ex post basis, the UK, US and Japan can be thought to have experienced de facto monetary financing already, and it didn’t come with an explosion of inflation. The evidence doesn’t suggest that new helicopter money, if implemented, would spark inflation either. Monetary financing isn’t a wacky new policy and is easy to understand once you look at ‘money’ the right way. We should treat government debt and taxation as two forms of monetary sterilisation rather than financing operations. There are not clear advantages to announcing a policy of helicopter money over announcing a traditional debt-sterilised fiscal expansion. Indeed, it could end up being a backwards step. Central banks in Europe and Japan have experimented in recent quarters with slightly negative interest rates. In doing so they have broken what many had assumed was a zero lower bound for nominal interest rates, and also given some indication as to where the true lower bound may lie (which is to say around where rates now sit). The question as to how central banks will respond to the next recession has arisen amongst academics and investors. One option being discussed is ‘helicopter money’. Helicopter money refers to the situation where a central bank finances the fiscal expenditure of a government. Or in common parlance, the government prints money instead of raising taxes or debt to fund spending. To many this evokes the sort of policy that brought Toby Nangle Co-Head of Global Asset Allocation & Head of MultiAsset, EMEA VIEWPOINT | MAY 2016 J25287 Issued May 2016 | Valid to end August 2016 Page 2 of 8 hyperinflation to Zimbabwe or the Weimar Republic – and as such provokes meaningful alarm. In this piece I will outline why the implementation of quantitative easing during periods of fiscal expansion in the UK, US and Japan have effectively already delivered ex post helicopter money, and why true helicopter money appears less attractive as a policy option than additional levels of traditional debt-financed fiscal expansion, supplemented if need be by further quantitative easing. But in order to make this clear, it is necessary to look at what money actually is and how it works. What is money? We tend to think of money in the bank and money in our wallets as the same thing. That we do so attests to the success of the monetary system in place. Rather than both being money, one (the bank deposit) is ‘Inside Money’, while the other (the bank note) is ‘Outside Money’. These are not fungible and are instead like oil and water. Inside (bank) Money is imagined into existence by banks in the process of creating a loan. Outside (government) Money is imagined into existence by the monetary sovereign (in the case of UK, the US or Japan, this is the government). Inside Money Imagine that you go to your local high street bank for a loan. In granting the loan the bank creates a deposit in your account. This deposit is a liability on the bank’s balance sheet against which it holds an asset (a loan to you). If you choose to transfer your (borrowed) deposit to another depositor of the same bank (let’s say, if you bought a house from me and I was also a customer of the same bank), the liability (eg, the deposit) never leaves the bank. If you transfer my (borrowed) deposit to a depositor of another bank, your bank would need to settle the transfer (at the BoE) – but the liability would never leave the banking system. And so, Inside Money exists only on a bank ledger and can never take physical form. Inside Money, to be specific and a trifle more technical, is the short-dated liability of the banking system. Changes in bank lending practices do not change Outside Money a jot. Outside Money Outside money (government money) is money that is imagined into existence not by a bank making a loan, but by the monetary sovereign (in the case of the UK, US or Japan, this is the government) making a payment. It is like an undated government IOU. Imagine that a government pays a civil servant. As the monetary sovereign they can do so by creating brand new Outside Money. The government then typically seeks to destroy an equal amount of Outside Money to offset this monetary expansion, and this process of money destruction is called monetary sterilisation. Why do governments sterilise their money creation? The typical answer is to maintain confidence in the currency. After all, if a government went out increasing the stock of outside money exponentially it is quite conceivable that recipients might begin to become concerned that this Outside Money may not be a good store of value and so seek to turn it into goods and services at higher prices (and so lack of confidence could show up in the form of inflation), or they could seek to turn it into other peoples’ currency (and as such show up in currency depreciation) or real assets (and as such show up in real asset inflation). VIEWPOINT | MAY 2016 J25287 Issued May 2016 | Valid to end August 2016 Page 3 of 8 Figure 1: How Outside Money is created and removed from the economy Source: Columbia Threadneedle Investments, May 2016. Figure 1 shows stylized balance sheets of the non-bank private sector (of which the civil servant is part), the commercial banking system, the central bank and the government before this hypothetical civil servant is paid (column 1), immediately after but before the money is pulled back out of the system (column 2), and then after the two different forms of monetary sterilisation (columns 3a and 3b). The government has two routes to sterilise the monetary expansion. First, it can issue debt in the form of new bonds to the private sector (column 3a). By selling bonds to the private sector the government will successfully take the new Outside Money out of circulation, and replace this Outside Money with bonds that cannot be so easily spent. Secondly, a government can tax (column 3b). Taxation is a form of monetary sterilisation – with tax revenues effectively torn up in order to maintain confidence in the currency. In the UK, by virtue of having signed the Maastricht Treaty, the sterilisation action will always happen simultaneously or before the payment to the civil servant. But this outline of how Outside Money works remains valid. Figure 1 illustrates not only how Outside Money works, but also a couple of other things. Firstly, it shows why it is peculiar to worry about debt sustainability from a fiscal (rather than a monetary) perspective. Government debt can be seen to be no more than an instrument for monetary sterilisation: a means by which zero-coupon perpetual government IOUs (Outside Money) are removed from circulation and replaced with interest-bearing government IOUs with a specified maturity (although they will at that point again become perpetual zero-coupon government IOUs). The prospect that a monetary sovereign might be unable to sell government bonds is real, but untroubling from a financing perspective; the prospect of a bond market strike is instead troubling only from a monetary perspective. VIEWPOINT | MAY 2016 J25287 Issued May 2016 | Valid to end August 2016 Page 4 of 8 Secondly it illustrates that when debt-sterilising rather than tax-sterilising, the private sector ends up with a larger balance sheet. Government bonds are treated as assets, although they are claims against the rest of the non-bank private sector who don’t own bonds. Given that taxation tends to be progressive in democracies, it would appear likely that the distributional consequences of debt sterilising rather than tax sterilising would be to leave upper deciles of the income distribution holding more bonds and having paid fewer taxes. That is to say, that there will likely be higher levels of wealth inequality under a government that prefers to maintain confidence in the currency via debt sterilisation, all else equal. Now that Outside Money has been outlined, with debt issuance and taxation explained as instruments of monetary sterilisation, quantitative easing can be seen to be a pretty straightforward reverse-sterilisation operation. As government bonds are bought by the central bank, so the monetary base (in the form of Reserves and Currency, eg Outside Money) becomes inflated. While the bonds are held by the central bank they are effectively cancelled: they do not perform their monetary sterilisation duties and there is no net interest cost of holding them to HM Treasury over and above the cost of remunerating holders of Reserves (which would need to occur even if cancelled). Figure 2 helps show the relative scale of Inside and Outside Money. The dark blue section shows M4 as a percentage of GDP as a decent proxy for Inside Money and the light blue section shows Outside Money as a percentage of GDP. Two things jump out. First, there is a lot more Inside Money than Outside Money. Secondly, the acceleration in growth of Inside Money was spectacular in the years leading up to the Global Financial Crisis, and the collapse thereafter has been precipitous. The expansion of Outside Money in the form of QE has but cushioned this contraction in the money stock. Figure 2: UK Inside and Outside Money 1986-2016 Source: Bank of England BankStats, May 2016. * Monetary financial institutions sterling M4 liabilities to the private sector seasonally adjusted. With circa 250% debt to GDP many have asked whether Japan’s debts are too big to ever repay (Figure 3). Government debt is rarely repaid. Bonds issued to sterilise a government’s fiscal expenditure mature and are typically repaid by the proceeds of issuance of new bonds. VIEWPOINT | MAY 2016 J25287 Issued May 2016 | Valid to end August 2016 Page 5 of 8 And so the debt issued by the British government to finance the Napoleonic Wars has never been repaid. But pursuing this line is to miss the point. We have already seen that government debt is no more than an instrument for monetary sterilisation: it is a means of reducing the number of IOUs in the system, by replacing them with long-dated IOUs that can’t be easily spent. As such, the issue of debt to GDP should not be seen as a fiscal constraint: a government can’t run out of government IOUs. That said, uncontrolled debt growth could conceivably become a medium-term threat to monetary stability (eg, people might stop accepting government IOUs as payment). Uncontrolled debt growth comes with the uncontrolled growth in debt service obligations. And these debt service obligations come in the form of the creation of more Outside Money which in turn needs to be sterilised. Figure 3: UK government debt to GDP / Japan government debt to GDP Source: Columbia Threadneedle Investments and Bloomberg, May 2016. Despite high levels of debt to GDP, Japan’s debt service costs are today amongst the lowest in the world, owing to low interest rates. In a scenario where inflation rises and policymakers want interest rates to rise, the stock of debt could become problematic (as maturing debt is refinanced with bonds carrying higher coupons) if nominal GDP growth is sufficiently absent (so that debt-to-GDP rises ever-higher). Essentially, the threat to Japanese monetary sustainability from its stock of government debt is the threat that people will stop accepting yen from the government as payment. As long as the government has the power to enforce demand for yen in the form of a requirement to pay taxes, this possibility appears de minimis. VIEWPOINT | MAY 2016 J25287 Issued May 2016 | Valid to end August 2016 Page 6 of 8 We have seen that when a central bank purchases government debt it unwinds past monetary sterilisations. Debt bought by the central bank is effectively cancelled for the duration of the QE programme. In the two charts within Figure 3 we can see the degree to which these QE programmes have impacted the UK and Japanese government’s debt to GDP metrics. In the case of the UK, the QE programme (running contiguously with fiscal expansion) had the effect of helicopter money. This can be seen from Figure 4. The table outlines the impacts of QE, of helicopter money (where debt is purchased by the central bank and written-off), and a combination of QE and fiscal expansion. Given that debt is effectively cancelled from the moment it is bought by the central bank from a monetary and fiscal perspective, the debt service and monetary effects of QE and helicopter money appear the same. Figure 4: Comparing quantitative easing, helicopter money, and fiscal expansion combined with quantitative easing Source: Columbia Threadneedle Investments, May 2016. The big difference arises when it comes again to tighten policy. By cancelling government bonds bought, the central bank cannot so simply resterilise the unsterilised Outside Money stock. If it wishes to calm inflation quantitatively it can auction central bank bills, term deposits and implement reverse repo programmes, all of which put upward pressure on shorter-term interest rates. And so it is left with the option of either raising short-term rates by more than they would otherwise need to rise under the QE scenario, or persuading the government to gift the central bank with large amounts of government debt that it can then sell to the market (which may be tricky politically). The economic effects of quantitative easing are still being debated, but it is fair to say that they are presumed to be positive to date. In the case of helicopter money, there would be a direct fiscal expansion financed by central bank purchase of (and cancellation of) government bonds. VIEWPOINT | MAY 2016 J25287 Issued May 2016 | Valid to end August 2016 Page 7 of 8 This direct fiscal spend would be economically expansionary, unless the announcement of helicopter money represented a shock to households and firms that was sufficiently significant to offset the fiscal stimulus. The economic effects of fiscal expansion combined with new quantitative easing appear identical to those of helicopter money. The market effect of the recent experience of QE has been lower discount rates, a weaker currency, and a strong environment for risk assets. We might guess that the market’s reaction to helicopter money would be similar, but given that past episodes of dominance by the fiscal authority over the central bank have been associated with fiscal indiscipline and high inflation, there is a reasonable chance that markets could react in a meaningfully different and negative way. The truth is that we just don’t know. Hyperinflation Helicopter money is often associated with incidence of hyperinflation. In their study of the 56 incidents of world hyperinflation during the last 300 years, Hanke and Krus found hyperinflation to be ‘an economic malady that arises under extreme conditions: war, political mismanagement, and the transition from a command to market-based economy to name a few’. By contrast, monetary financing has been used widely in the developed and developing world over time without ending in hyperinflation. Until the US Fed Accord in 1951 the US operated a policy of fixing long-term bond yields, and as such expanding or contracting Outside Money depending on private sector demand for these instruments. Canada used monetary financing for 40 years until 1975 under a free-floating exchange rate regime without calamitous macroeconomic effects, and India operated a policy of debt monetisation until 2006. Further examples abound. Indeed, of the 152 central bank legal frameworks analysed by the IMF, 101 permitted monetary financing in 2012. This is not to say that helicopter money is a desirable policy. It would be, in the opinion of this author, a backwards step. But neither is it to be necessarily associated with hyperinflation. Conclusion With the unknown market impact of helicopter money, with prospective policy tools in the hands of central banks narrowed through debt cancellation, and with the economic benefits associated with helicopter money rather than straight fiscal expansion de minimis, it is not clear why policymakers will choose the path of helicopter money. Perhaps the real lesson is that monetary policy has its limits and that in the event of an economic slowdown, aggregate demand is best supported by fiscal rather than monetary policy. In the event that new fiscal expansion requires supplemental monetary support in the form of additional QE, that is a decision that could be made at some point in the future. So, in conclusion, helicopter money is not a weird and wacky new form of money. Indeed, once we understand how money works helicopter money looks pretty straightforward. The prospective economic, monetary and fiscal effects of helicopter money (absent the stickershock of a new unfamiliar policy being implemented) look identical to a normal fiscal expansion supplemented with additional QE. As such, it could be argued that the UK, US, and Japan have all already effectively experienced helicopter money. It is harder to say the same about the Eurozone, consisting as it does of government entities that are not monetary sovereigns. Indeed, the Eurozone is much more complicated. VIEWPOINT | MAY 2016 J25287 Issued May 2016 | Valid to end August 2016 Page 8 of 8 Important information: For investment professionals only, not to be relied upon by private investors. Important Information: Past performance is not a guide to future performance. The value of investments and any income is not guaranteed and can go down as well as up and may be affected by exchange rate fluctuations. This means that an investor may not get back the amount invested. 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Saturday, February 27, 2016
Trump Is the Ultimate Insider
KIMBERLEY A. STRASSEL wrote in the WSJ:
The Donald’s rivals have given him a pass on his greatest vulnerabilities.
863 COMMENTS
There’s an old saying that “to catch a fish, you need to think like a fish.” And there’s a modern translation of that for today’s GOP: To beat a Donald, you need to think like a Trump voter.
We don’t know if Mr. Trump is unstoppable, because nobody has actually gone after him. To the extent his Republican rivals have nipped at his heels, they’ve done it in obvious, conventional ways. They’ve argued he’s not a real conservative. They’ve pointed to his lack of policies. They’ve worried about his temperament and electability. Those arguments probably do resonate with the 50% or 60% of the primary electorate who—obviously and conventionally—care about principles, and winning.
Donald and Melania Trump in Palm Beach, Fla., Feb. 28, 2015. PHOTO: CAPEHART/GETTY IMAGES
But those arguments don’t speak to Trump supporters. The Nevada entrance polls show the billionaire won voters who are angry with the federal government, who want an “outsider” in the office and who want “change.” They don’t care about policies. They want someone to “stick it to the man.”
And therein lies Mr. Trump’s vulnerability. Because, you see, Donald Trump is the man. An outsider to the elite society that Washington inhabits? An avenging angel of a faltering working class? Laugh. Out. Loud. This is the man who was born to a silver spoon, who self-selected a life strictly in the company of the rich and powerful, and who built a fortune by using his connections and sticking it to the little guy.
Of all the Republicans on the stage, he is the only insider. Ted Cruz is not to be seen regularly in the company of hotel and casino magnates, movie producers, celebrity athletes and others with privileged access to Washington brokers. Marco Rubio did not have Bill and Hillary Clinton at his wedding. John Kasich would have to beg for an audience with people who jump to return Mr. Trump’s calls.
It was amusing in the CBS debate on Feb. 13 to hear the titan complain that the audience was stacked with “special interest” donors. He’d know. He likely recognized them from lunches at his golf clubs. This is a guy so disconnected from and uninterested in the average American that he refers to his voters in generic stereotypes. “I love the poorly educated,” he gushed after the Nevada caucuses. You can almost picture him, like Felonius Gru in “Despicable Me,” surveying his crowds of identical Minions. Though at least Gru knew that one is named Kevin.
Nor is Mr. Trump outside of, or even slightly opposed to, Washington business as usual. It’s how he does business. Americans are angry at Beltway back-scratching, logrolling and backroom agreements. This is the art of the deal. In explaining his $100,000 contribution to the Clinton Foundation, Mr. Trump bragged: “When they call, I give. And you know what, when I need something from them . . . I call them. They are there for me.”
Where are the ads playing that tape? Where are the ads questioning whether a President Trump would turn down that buddy who asked to keep his federal Nascar-track-owner tax break? Or asking what he’d barter away in an ObamaCare “reform” deal? Mr. Trump will get stuff “done” in Washington, all right. He’d put today’s backroom Beltway culture on steroids.
And all the angry little people won’t be Mr. Trump’s concern. They never have been. His rivals have made much of the billionaire’s attempt to use eminent domain to build a limousine lot—knocking him on property rights. But the better version of the tale is of how the billionaire used city officials to condemn the house of an average American, further underwriting his casino business.
This is a repeating theme. Mr. Trump likes to claim it was only “killer” lenders who lost their shirts in his Atlantic City casino bankruptcies. But state lawmakers have claimed that local, small- and medium-size business owners also got stiffed and hundreds more lost their day jobs. Mr. Trump by contrast sucked out his money and boasted about his “great timing” in ditching the investment.
Or how about the thousands of average folk who poured their savings into Trump University, to attend what some participants, who are now suing, describe as sham real-estate seminars. (A Trump attorney has insisted “no one was defrauded.”) The Atlantic in 2014 reported on a 41-page “playbook” for Trump University, which directed school staffers to “Set the hook” and convince attendees to sign up for additional courses, like the “Trump Gold Elite” package at $34,995.
You can bet all this is directly related to Mr. Trump’s unwillingness to release his tax returns. The billionaire likes to suggest that release will be about proving he has lots of money. More interesting will be how he made and kept it. How many exclusive tax breaks and shelters and write-offs are nestled within? How many get-rich schemes? Who lost so that Mr. Trump could be a winner?
In the rural America in which I grew up, conservatives like to apply a basic candidate test: Would I want to have a beer with that dude? (Barack Obama: No. Harry Reid: Ew. Hillary Clinton: Please.) Right now, a lot are thinking they’d enjoy knocking back a brewski with someone as colorful as Mr. Trump. What they seem not to have realized is this: Mr. Trump would never, ever have a beer with them. He’s never been interested in people who can’t help him—99% of America. And Coors Light doesn’t come in gold cans.
Mr. Trump’s rivals have the means to slow him. But they’ll first have to remember just who the voters are that they are talking to.
Write to kim@wsj.com.
Tuesday, January 26, 2016
The Demand for Villains
Thomas Sowell wrote in RealClearPolitics on January 26, 2016:
The latest tempest in a teapot controversy is over a lack of
black nominees for this year's Academy Awards in Hollywood.
The assumption seems to be that different groups would be
proportionally represented if somebody were not doing somebody else wrong. That
assumption carries great weight in far more important things than Academy
Awards and in places more important than Hollywood, including the Supreme Court
of the United States.
In an earlier era, the groupthink assumption was that groups
that did not succeed as often, or as well, were genetically inferior. But is
our current groupthink assumption based on any more hard evidence?
Having spent decades researching racial and ethnic groups
around the world, I have never yet found a country in which all groups -- or
even most groups -- are even roughly equally represented in most endeavors.
Nor have I been the only one with that experience. The great
French historian Fernand Braudel said, "In no society have all regions and
all parts of the population developed equally." A study of military forces
around the world failed to find a single one in which in which the ethnic
makeup of the military was the same as that of the society.
My own favorite example of unrepresentativeness, however, is
right at home. Having watched National Football League games for more than 50
years, I have seen hundreds of black players score touchdowns, but I have never
seen one black player kick the extra point.
What are we to conclude from this? Do those who believe in
genetics think that blacks are just genetically incapable of kicking a
football?
Since there have long been black colleges with football
teams, have they had to import white players to do the opening kickoff, so that
the games could get underway? Or to kick the extra point after touchdowns?
Apparently not.
How about racist discrimination? Are racists so inconsistent
that they are somehow able to stifle their racism when it comes to letting
black players score touchdowns, but absolutely draw the line when it comes to
letting blacks kick the extra point?
With all the heated and bitter debates between those who
believe in heredity and those who believe in environment as explanations of
group differences in outcomes, both seem to ignore the possibility that some
groups just do not want to do the same things as other groups.
I doubt whether any of the guys who grew up in my old
neighborhood in Harlem ever went on to become ballet dancers. Nor is it likely
that this had anything to do with either genetics or racism. The very thought
of becoming a ballet dancer never crossed my mind and it probably never
occurred to the other guys either.
If people don't want to do something, chances are they are
not going to do it, even if they have all the innate potential in the world,
and even if all the doors of opportunity are wide open.
People come from different cultures. They know different
things and want different things.
When I arrived in Harlem from the South as a kid, I had no
idea what a public library was. An older boy who tried to explain it to me
barely succeeded in getting me to get a library card and borrow a couple of
books. But it changed the course of my life. Not every kid from a similar
background had someone to change the course of his life.
When Jewish immigrants from Eastern Europe arrived in New
York in the 19th century, they were even poorer than blacks from the South who
arrived in Harlem in the 20th century. But the Jews crowded into public
libraries because books had been part of their culture for centuries. New
York's elite public high schools and outstanding free colleges were practically
tailor-made for them.
Groups differ from other groups all over the world, for all
sorts of reasons, ranging from geography to demography, history and culture.
There is not much we can do about geography and nothing we can do about the
past. But we can stop looking for villains every time we see differences.
That is not likely to happen, however, when grievances can
be cashed in for goodies -- and polarize a whole society in the process.
Sunday, January 17, 2016
Is U.S. Heading Toward Recession?
We've been accused of being Pollyanna-ish in our views,
which tend toward the optimistic when it comes to the flexible, naturally
buoyant U.S. economy.
And, to be sure, the stronger employment growth — payroll
jobs increased an average 230,000 a month last year — and the decline of the
unemployment rate to 5% are both positive signs.
But not everything is going so well — starting with the
stock market. The S&P 500 has skidded 8% since Jan. 1, its worst start
ever. As USA Today reckons, $2.3 trillion in shareholder wealth has been wiped
out — a huge hit that will be felt across the economy.
Even before the market decline, however, clouds were
gathering. Retail sales fell 0.1% in December and were up just 2.2% year over
year. And Friday's announcement by Wal-Mart that it's closing 269 stores — 154
of them in the U.S. — can only be bad news.
Then there's China. Its stock market index has plummeted
more than 40% since the middle of 2014 as the nation's once-booming export- and
investment-driven economy goes bust. Around the world, factories and businesses
built to satisfy China's insatiable demand for raw materials and capital goods
have fallen silent.
For the U.S., that was a lot of lost momentum going into the
new year.
The Atlanta Fed's widely followed gauge of current economic
output suggests fourth-quarter annualized GDP growth was just 0.8% or so —
within spittin' distance of recession territory.
So, yes, as we start 2016, a recession is a real possibility.
Add to that the likelihood of three or four Fed rate hikes this year, and the
economy's brakes will be on.
What do we do? The standard Keynesian answer is to boost
consumer spending by redistributing money from the 1% to the middle class and
by more government "stimulus." After all, consumers are two-thirds of
all spending. So they need to be stimulated for the economy to grow, right?
Wrong. This would be a huge mistake — as it was in 2010.
What really ails the economy right now is a lack of business investment. That's
real stimulus. Investment creates consumption by making products to consume,
and the income with which to buy them.
Unfortunately, orders for nondefense capital goods, a proxy
for business investment, have fallen 11 straight months, averaging a 3.4%
year-over-year decline every month in 2015 — a sign of extraordinary weakness.
How can this be after years of record-low interest rates and
stock market gains?
Obamanomics has created the most anti-business environment
in postwar history. Businesses face a record onslaught of regulation, a
world-high 35% tax rate, higher minimum wages, hostile legislators who
routinely demonize profits and success, an erratic Fed and growing uncertainty
about the U.S.' political future. Why invest?
The bigger point is, recessions don't just happen; they're
made. And it looks like we're making one now.
Read More At Investor's Business Daily:
http://news.investors.com/ibd-editorials/011516-790183-us-economy-loses-momentum-going-into-2016.htm#ixzz3xVPHamYJ
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Saturday, December 26, 2015
How Demographics Rule the Global Economy
http://www.wsj.com/articles/how-demographics-rule-the-global-economy-1448203724
Ever since the global financial crisis, economists have groped for reasons to explain why growth in the U.S. and abroad has repeatedly disappointed, citing everything from fiscal austerity to the euro meltdown. They are now coming to realize that one of the stiffest headwinds is also one of the hardest to overcome: demographics.
Next year, the world’s advanced economies will reach a critical milestone. For the first time since 1950, their combined working-age population will decline, according to United Nations projections, and by 2050 it will shrink 5%. The ranks of workers will also fall in key emerging markets, such as China and Russia. At the same time the share of these countries’ population over 65 will skyrocket.
Previous generations fretted about the world having too many people. Today’s problem is too few.
This reflects two long-established trends: lengthening lifespans and declining fertility. Yet many of the economic consequences are only now apparent. Simply put, companies are running out of workers, customers or both. In either case, economic growth suffers. As a population ages, what people buy also changes, shifting more demand toward services such as health care and away from durable goods such as cars.
FertilityNumber of children born per woman
Demographics help explain why a historically weak recovery in the U.S. has nonetheless seen the unemployment rate drop by half. The economy doesn’t need as many new jobs to employ the smaller net flow of entrants into the workforce. For example, home builders are simultaneously suffering from shrinking demand since the homeownership rate is declining, and from labor shortages as the baby boomers retire.
Karel Peltram, owner of Peltram Plumbing in Auburn, Wash., has about 100 employees, which is down from the market peak in 2007. Nonetheless, he is short of workers. Three have recently retired, and three more are approaching retirement, including his estimator for multifamily units. “I’m going to have a hard time replacing him. I just don’t have anyone available with that knowledge yet,” he says.
Mounting pensions are an important reason peripheral European countries like Greece have such intractable debt burdens and why Germany is so reluctant to stimulate its own economy despite a balanced budget. Meanwhile, the movement of so many people into the highest-saving period of their lives has produced a bulge of excess savings that has held down interest rates and inflation, making it difficult for central bankers to use their traditional tools to revive economic growth.
Demographic forces are assumed to be slow-moving and predictable. By historical standards, though, these aren’t, says Amlan Roy, a demographics expert at Credit Suisse. They are “dramatic and unprecedented,” he says, noting it took 80 years for the U.S. median age to rise seven years, to 30, by 1980, and just 34 more to climb another eight, to 38.
There is no simple answer for how business and government should cope with these changes, since each country is aging at different rates, for different reasons and with different degrees of preparedness.
Automation can boost workers’ productivity and support the burgeoning ranks of the elderly. Assumptions about aging also need to change. The typical 65-year-old today is roughly as healthy as a 58-year-old was four decades ago and can thus work longer.
Older, richer countries can boost their immigrant intake from low-income economies primarily in Africa and Asia, which will make up a growing share of the world’s working-age population—if they can overcome political opposition.
Population questions have long preoccupied economists. In 1798 Thomas Malthus, a British essayist, argued that humanity would reproduce faster than food production could rise, leading to destitution and starvation. He was wrong. The Western world’s population grew rapidly over the 19th and 20th centuries, with a dip in 1918-19 because of World War I and the Spanish flu pandemic. But rising agricultural productivity proved more than capable of feeding the extra mouths.
When U.S. population growth slowed in the 1930s, Alvin Hansen, a Harvard University economist and an influential disciple of John Maynard Keynes, said this caused businesses to invest less because they had fewer workers to equip and because elderly consumption patterns favored personal services over capital-intensive homes and durable goods.
In a landmark 1938 speech, Mr. Hansen said this had mired the U.S. economy in “secular stagnation,” producing “sick recoveries which die in their infancy and depressions which feed on themselves and leave a hard and seemingly immovable core of unemployment.” He advocated expanded government spending to restore full employment.
Mr. Hansen spoke too soon. The population slowdown of the 1930s was a temporary aftereffect of the 1918 flu pandemic and a clamp down on immigration in 1924. World War II led to an explosion in government spending that restored full employment, and the baby boom after the war’s end put to rest fears of declining population. The U.S. fertility rate, or number of children a woman has over her lifetime, leapt from 2.3 in the 1930s to 3.6 in 1960.
Indeed, population around the world took off as advances in health care and nutrition caused child mortality to plummet and life expectancy to soar. Fear of overpopulation became widespread, epitomized by Paul Ehrlich ’s “The Population Bomb” in 1968 and the Club of Rome’s “Limits to Growth” in 1972.
But right about then, fertility rates began to drop, in both advanced and underdeveloped countries. With a lag, some of Mr. Hansen’s predictions began to come true, most prominently in Japan. In 1996, its working-age population began to shrink, and, a few years ago, so did its total population.
Japan is an extreme case, but the rest of the advanced world and many emerging economies are following similar paths. By 2050, the world’s population will have grown 32%, but the working-age population (15 to 64 years old) will expand just 26%.
Among advanced countries, the working-age population will shrink 26% in South Korea, 28% in Japan, and 23% in both Germany and Italy, according to the U.N. For middle-income countries it will rise 23%, led by India at 33%. But Brazil’s will edge up just 3% while Russia’s and China’s will contract 21%.
Among rich countries, the U.S. remains demographically fortunate: Its working-age population should grow 10% by 2050. But it will still shrink as a share of total population from 66% to 60%. The demographic drag on growth, in other words, will last decades.
Growing BurdenOne measure of a country’s demographic stress is the “dependency ratio,” or the ratio of children and elderly to working-age people.
Michael Green, who manages a hedge fund, Ice Farm Capital, that seeks to profit from demographic trends, cites one statistic that suggests Mr. Hansen’s prediction is now coming true: The combined population of the southwestern states (California, Nevada, Arizona, New Mexico and Texas), long the country’s fastest-growing, is now expanding just 1.5% a year, lower than in the 1930s.
Less labor, less growth
A country’s long-term “potential” growth rate depends on two things: the number of workers, and how productive they are. Slower population growth directly chips away at the number of workers.
In 2008, the same year Lehman Brothers failed, the first baby boomers qualified for Social Security, and since then, the number of beneficiaries has ballooned, from 41.4 million to 49 million.
U.S. Labor Force Participation RateShare of working-age population working or looking for work
This is an important reason the U.S. labor force has grown only 0.2% a year since 2008, compared with 1.2% in the prior decade, and the labor-force participation rate—the share of adults over 15 years old either working or looking for work—has slumped to 62.4%, the lowest in nearly 40 years, when women were far less likely to be employed outside the home.
This originally seemed the result of the long-term jobless giving up the hunt for work and dropping out of the labor force. But back in 2006 a team of economists at the Federal Reserve predicted this would happen because of long-range structural factors: The aging baby boomers would start retiring; the number of working women would level off; young adults would stay in school longer; and some unskilled workers would bow out. Those economists now predict the participation rate will fall further to 61% by 2022. That is the main reason Fed officials think the U.S. potential growth rate has dropped to 2% from 3% in the decades before the crisis. Some economists are even gloomier.
Saving, interest rates
People’s saving habits change as they age. In their 20s and 30s, they borrow and spend for children and home as they are starting their careers. In their 40s and 50s, those obligations recede and their incomes rise, so they save more. Once they retire, they live off their savings and government support.
When Carla Ponce and her husband got married in 1987, they didn’t save anything at first. They bought a house in Las Vegas with no down payment. “With two kids, my husband between jobs, we could barely pay the mortgage,” she recalls. They moved to Kenosha, Wis., plowed the profit from their Vegas home into a new home, and Ms. Ponce began steadfastly socking away 10% of everything she earned as an account clerk for the county government. Now 56, she continues to save so that in four years she can join her husband in retirement, buying a boat as a rare indulgence.
This pattern, multiplied across many countries, has a powerful economic impact. How much a country saves is heavily influenced by the difference between the share of its population aged 40 to 65 and the share over 65. For the U.S., eurozone, Japan and six other major economies, that difference rose steadily from the early 1980s to the present, according to Michael Gavin of Barclays, and even more for China, which explains why China runs such a large trade surplus: Chinese households consume less than they earn so they can save for their retirement.
Workers such as these, bicycling to a factory in Zhongshan, China, will be scarcer in the future. PHOTO:GILLES SABRIÉ FOR THE WALL STREET JOURNAL
Because capital markets are global, excess savings in one country spill over to another via interest rates. Mr. Gavin argues the rising number of mature workers relative to elderly retirees is a key reason that inflation-adjusted interest rates have steadily declined in recent decades, and are now negative in most advanced countries. Those demographic influences are about to reverse.
This coincides with another demographic factor: Consumption habits change as people age. Younger households spend more on homes, cars and their children’s education. For the typical American between 35 and 44, 8% of total consumption goes toward mortgage interest, compared with just 3.6% for someone over 65. By contrast, the typical over-65-year-old devotes 13% of total spending to health care, compared with 6% for a 35- to 44-year-old.
Lowering interest rates works by encouraging consumers to “pull forward” purchases they might otherwise have waited to make. But the elderly have less future consumption to pull forward. William Dudley, president of the Federal Reserve Bank of New York, has argued the aging of the baby boomers has made the economy less responsive to the Fed’s monetary medicine “because such age groups tend to spend less of their incomes on consumer durables and housing.”
These demographic shifts will have a profound effect on individual companies, anointing new winners and losers. For some, such as Mr. Peltram, the plumber, it means being squeezed between retirements of current workers and shortage of young apprentices. For Seiyu, Wal-Mart Stores Inc.’s Japan unit, it means coping with a shrinking customer base. It opened an outlet on the main shopping street in Otsu, Japan, in the 1970s when Japan was growing rapidly. At its peak the street boasted 45 shops. As the population has aged and shrunk, the shops dropped to just 30, says Takehiko Terada, head of the street’s trade group. Seiyu shrank its floor space before finally closing in April. “It was shocking,” he says.
Mr. Green of Ice Farm says Abercrombie & Fitch Co. ’s sales and stock price aren’t languishing because of disenchantment with “ripped jeans or skinny models,” but because its target demographic of teenagers is shrinking. Other companies in similar straits are Lululemon Athletica Inc., whose key demographic is women aged 35 to 50, and Anheuser-Busch InBev’s Budweiser and Harley-Davidson Inc., whose core customers are white, baby-boomer men. By contrast, pharmaceutical companies will reap a windfall; the average American goes from 3.3 prescriptions in his 50s to 4.4 after 65.
Fixing the problem
Population trends over the next 35 years are challenging but aren’t set in stone. Government policies and changing social attitudes can raise fertility. In October China scrapped its one-child policy. Still, evidence from places like Singapore, Australia and the Canadian province of Quebec that have offered cash grants to encourage bigger families and more generous child support for working mothers shows how difficult it is to boost fertility rates; in all, they remain well below the replacement rate of 2.1. Even with higher fertility, it would be decades before population trends changed meaningfully.
As Jens Weidmann, president of Germany’s Bundesbank said, “Because Germany’s birthrate has been falling for decades, those who would now perhaps be thinking about having children were never actually born.”
Companies running short of workers can turn to automation to adjust. China became the world’s factory floor thanks to a seemingly limitless supply of rural workers. But with the excess supply now shrinking, Chinese wages are climbing sharply and many Chinese exporters are turning to robots to lift productivity.
Another route is to boost immigration. This faces several problems, though. The biggest suppliers of immigrants to the U.S., such as Mexico and China, are themselves aging, and the cohort that traditionally sought a better life abroad is shrinking. Mexico’s fertility rate has dropped from 5.4 in the late 1970s to 2.3 now and by 2030 will be 1.9, the same as the U.S.—and below replacement rate.
The countries with high fertility are mostly in Africa and Asia. In 2050 India will be the world’s most populous country, Nigeria will be third and Indonesia fifth, according to the U.N. Most, though, will still be poor. Indeed, low-income countries will make up 14% of the world’s population in 2050, compared with 9% now. These are, therefore, the countries that are likeliest to provide immigrants.
In many rich countries, worker-hungry businesses are eager for more immigrants. But to stabilize the elderly share of advanced countries’ population would require an immediate eightfold increase in immigration from less-developed countries, according to the International Monetary Fund. This isn’t politically feasible given the resistance even current levels of migration have generated.
Probably the most promising way to cope with an aging population is to encourage today’s workers to work longer. This has already been proven in Japan where 22% of those over 65 work compared with 18% in the U.S.
That suggests there is plenty of potential for workers in Europe and the U.S. to retire later.
Business will have to adapt to an older workforce. In 2007 the German car maker BMW AG redesigned a gearbox production line to fit the older profile of workers it expected in 2017. Among the changes: wooden floors and special shoes to ease joint strain; flexible magnifying glasses for working with small parts; and larger typefaces on computer screens. The changes brought the productivity of older workers up to that of younger workers at minimal cost and have since been applied across the company.
Indeed, several studies have found that older workers are as, and often more, productive than their younger colleagues. As the Bundesbank’s Mr. Weidmann notes, “The young can run faster, but the old know the shortcuts.”
—Miho Inada contributed to this article.
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