Tuesday, October 12, 2004

5 Nails in our Economic Coffin

Self-inflicted wounds will do what Osama can't ...

"5 big questions for the last debate

Promises to grow jobs or protect retirees don't mean much without specifics. Here's what I need to hear from Bush and Kerry on the financial issues they haven't yet touched.

By Jim Jubak

I give up. After months of campaigning and one vice presidential and two presidential debates, it’s clear that no candidate for national office is going to talk about the economic issues that I want to hear about.

Why? Not because these issues are unimportant or peripheral to the lives of most Americans. On the contrary, they’re even more important than how to stimulate job growth or the future of Social Security. Unless we address the five problems I outline below, we don’t stand a chance of coming up with effective policies on the economic issues the candidates are talking about.

U.S. voters deserve the whole economic truth and nothing but the truth from President Bush and Sen. Kerry, especially since we’re about to vote on who will lead this country for the next four years. Complex issues should be discussed on the stump and in debates, not filed away as position papers that no one ever reads.

So here are the economic issues that I think are most critical to our future -- and that no one is talking about in this election.Check out your options.
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Unchecked pork-barrel spending
On Oct. 6, House and Senate negotiators approved $145 billion in tax cuts to fix what they claimed was a $50 billion tax problem. The original goal was to compensate U.S. exporters for the loss of tax breaks that the World Trade Organization had declared illegal and that had led the European Union to impose retaliatory tariffs.

Once again, Congress demonstrated that once it starts spending money -- and a tax cut is an expenditure -- it can’t stop handing out the goodies, like $20 billion in tax cuts on foreign earnings, $500 million in tax breaks for railroads and $26 billion in tax breaks for “exporters” like oil and gas producers who don’t export anything.

Reining in Congress isn’t impossible. A first step is to get the candidates to pledge to veto pork-barrel spending bills. Without fiscal restraint from Congress and the president, Alan Greenspan and the Federal Reserve wind up with all the economic power that counts. When is the last time you voted for Greenspan or any other Federal Reserve member?

Outsourcing and offshoring of jobs
The demographic logic isn’t hard to follow: A 28-year-old worker and a 55-year-old worker who lose their paychecks because their jobs have been sent abroad face very different problems. The younger worker isn’t likely to have as many financial obligations as the older employee, and he has a much longer time horizon to make up lost financial ground after retraining, which can take up to two years to complete.

Neither candidate has even broached a plan on how to fill that gap for demographically challenged workers. And that seems a terrible oversight given the rapidly aging U.S. workforce.

The failure of private pensions and health benefits
Fixing Social Security is relatively simple (raise the taxable income ceiling, raise the retirement age, raise the tax rate or lower benefits). It’s the government health-care trust funds that are in the really deep red ink.

That’s an especially big problem for the older population, because it’s those workers who are most likely to have a private, defined-benefit plan. (Younger workers probably never had a defined-benefit plan to begin with and commonly rely on plans such as 401(k)s.) If their private pension plan falters and their payments are reduced or wiped out, the U.S. Pension Benefit Guarantee Corp. (PBGC) will pay a maximum benefit of only $44,386 (in 2004) to workers who retire at 65. It does not, however, pay or guarantee any health-care benefits to retirees.

The PBGC has already been overextended by the steel and airline industries’ consolidation and bankruptcies, and it was never intended to meet the needs of an entire generation as the country made the tough transition from one type of retirement coverage to another.

The decline of the U.S. dollar
The financial crisis that gets all the attention is the government’s $415 billion deficit. That’s a startling figure in absolute terms but, as 3.6% of the Gross Domestic Product, we’re not in the historical danger zone yet. (The trend is certainly troubling since the government has gone from a surplus of 2.4% of GDP in 2000 to a deficit of 3.6% in just four years. And, mind you, all these figures use government accounting which is, shall we say, creative.)

At 3.6% of GDP, the government deficit is much smaller than the U.S. trade deficit (or the current account deficit, to be precise), which now stands at 5% of GDP. To keep accounts in balance, the United States ships money overseas in exchange for goods, and since the U.S. household savings rate is now a paltry 1.5% of disposable income (down from a high of 11% in 1984), the money that we ship abroad is usually borrowed.

That works as long as foreigners are willing to sell us their things for dollars, but over time, it’s a good bet that the constant flow of dollars overseas will lead to a cheaper dollar. Some part of the current run-up in oil, which is priced in dollars, may indeed be related to oil producers’ desire to get more dollars for their oil. A falling dollar makes U.S. goods cheaper for overseas customers to buy, which is how trade deficits eventually get resolved.

But a cheaper dollar also means that U.S. consumers wind up paying more for everything they buy from abroad, whether it’s oil or computer chips or flip flops. The question isn’t whether the dollar will decline, but how fast and by how much. Estimates by economists range from 10% to 30%. At the high end of the range, a dollar decline would produce massive cost increases for some American consumers. The burden is likely to fall hardest on low-income households and fixed-income retirees who stretch the buying power of their retirement checks by buying cheaper imported goods.

The need for national economic security.
No one is talking about the threat to the extraordinary era of domestic economic peace that the Unites States has enjoyed for the last 60 or 70 years.

The foundation of that peace has been the promise that each generation of Americans would be better off than the preceding generation. That made possible the intergenerational transfer of wealth from young to old that is at the heart of our existing Social Security system and the rising national debt. It was OK to pay the oldsters more out of the pockets of younger workers, for example, because those younger workers knew their future was going to be more comfortable than that older generation's present.

But that implicit economic contract is in danger. Looking at my own two young children I feel that there is a real possibility that their generation won't do as well as mine did. It's hard to overestimate the dangers of breaking this implicit contract with younger workers just when an aging society and growing twin deficits makes the international transfer of wealth much more critical -- and much more burdensome.

While we're all worrying about how to pay those bills, we also need to be debating a plan that would give the bill-paying younger generation hope for their own future.


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