Month: July 2019

Demography is destiny

Posted on by j.giglio

The world is undergoing a dramatic transition due to the confluence of disruptive forces such as accelerating technological change and globalization. But another important factor that often gets overlooked will shape society and the global economy over the coming decades: The life expectancy of humans is increasing. Fertility rates are falling, and the world’s population is growing gray.

This unprecedented demographic shift has major implications for U.S. fiscal policy. Entitlement programs will be increasingly strapped as the number of beneficiaries increase and the number of working people who pay for the benefits shrinks.

Due to advances in medical science and technology, people – especially the well to do – expect to live longer, better lives than they might have imagined even three decades ago. According to the Census Bureau, the average American born today can expect to live to about 80, up dramatically from the average of 68 in 1950.

Additionally, the Census Bureau notes that whereas the average American woman in 1950 had 3.5 children during her lifetime, the figure today has fallen below two. The causes of declining fertility include the rising social status of women, widespread availability of birth control, and the growing cost of raising children.

French sociologist and philosopher Auguste Comte coined the aphorism “demography is destiny” with dubious finality almost 200 years ago. But that does not suggest that destiny is immutable, nor is it inevitable. Just as aging individuals must adjust their lifestyles to maintain personal vitality, societies with aging populations must adjust policies to preserve and promote their economic prosperity.

Demographic trends can have big implications. This shift from a predominantly young to predominantly older population has both broad macro-economic implications and important financial consequences. Consider that many U.S. entitlement programs were created with the assumption that there would be a relatively small group of old people and a large number of working-age people, followed by an even bigger cohort of children.

According to the Census Bureau, 47.8 million Americans are 65 and over. This figure is projected to nearly double to 83.7 million by 2050. Just 10 years ago, 12.5 percent of the population was 65 and over. Today, it is 15 percent, and is projected to reach 21 percent in just 20 years. By 2030, one in every five U.S. residents will be over 65. For decades this was the age when people were expected to end their careers and embrace a life of leisure, following Andrew Carnegie’s advice to spend the first third of life getting educated, the second third getting rich, and the last third giving money away.

As the baby boomer generation retires, fertility rates keep falling and life expectancy continues to increase, there will be too many beneficiaries and too few taxpayers. In 1950, the American economy had 8.1 people of working age for each person of retirement age. Recent figures indicate that this “dependency ratio” as the demographers call it, has shrunk to just over 5-1. By 2030, the Census folks estimate it will have fallen to 3-1.

Caring for large numbers of elderly people will put severe pressure on government finances. More specifically and painfully, the U.S. may be facing major tax increases, significant budget cuts, or most likely some combination of the two to secure the future stability of old age entitlement programs. In particular, Social Security and Medicare, which provides health insurance to the aged, will rise as a share of gross domestic product as baby boomers retire.

With the retirement of baby boomers and the rising number of elderly in the population, the nation will face a slow-motion train wreck absent changes in government fiscal policy. The good news is the slow motion part, which gives Americans enough time to take on the challenge of real entitlement reforms that will allow the country to successfully navigate this demographic transition.

Deficits And Debt

Posted on by j.giglio

As chairman of the Joint Chiefs of Staff from 2007 through 2011, Admiral Michael Mullen was particularly vocal about saying that the greatest threat to U.S. national security was budget deficits. He pointed out that interest on the debt will nearly equal the defense budget and jeopardize the ability to properly resource the military.

In economic terms, the national debt – the sum total of annual budget deficits – now exceeds $22 trillion. The nonpartisan Congressional Budget Office (CBO) projects a deficit of $896 billion for 2019, about a 15 percent increase over the $779 billion deficit in 2018. The CBO predicts deficits will keep rising in the next few years, topping $1 trillion in 2020 and never dropping beneath that that amount through 2029.

Federal debt held by the public is projected to grow from 78 percent of gross domestic product in 2019 to 92 percent in 2029 and 144 percent in 2049, which would be the most in American history. The prospect of such large deficits and debt poses substantial risks, sayeth the CBO.

In case you missed it, neither Democrats nor Republicans seem to care much. Putting the federal government’s fiscal house in order currently commands the attention of few national politicos. They behave like Scarlet O’Hara in “Gone with the Wind,” who reacted to adverse circumstances by saying, “I can’t think of this now… I’ll think about it tomorrow.”

Democratic presidential candidates have presented plans such as Medicare for All, Free College, and the Green Leap Forward. They advocate increasing taxes on the rich to address wealth and income inequality, social problems and any number of other things, but not to reduce deficits and debt. They don’t appear to be worried by deficits and accumulating debt, and seem to think a magic money tree will fund their spending initiatives.

Republicans also usher the idea of taming deficits out of the room rather quickly, accepting bigger deficits in exchange for tax cuts they argue will promote economic growth and fill budget shortfalls over the long term. The theory is that the debt is manageable so long as the economy grows at a faster pace than the feds’ borrowing costs.

President Trump campaigned in 2016 on eliminating the then-$19 trillion national debt in eight years, but the White House spending plan for the next decade calls for adding another $10.5 trillion to the $22 trillion federal debt – and that assumes continued economic growth.

Doing nothing about government red ink shifts the burden to future generations. The theory is that it is wrong for the current generation to enjoy the benefits of government spending without paying for them.

The CBO estimates the federal government will spend more on servicing outstanding debt in 2020 than on Medicaid, and more than on national defense by 2025. Many Democrats and Republicans deny this is a problem, arguing that the U.S. can simply borrow more to fund unrestrained spending. They appear unconcerned that the government’s debt payments may crowd out a good portion of the spending they want.

The Treasury Department’s Office of Debt Management forecasts that starting in 2024, all U.S. debt issuance will be used to fund the U.S. net interest expense, which will be anywhere between $700 billion and $1.2 trillion or more. If this happens, the U.S. will be engaging in the ultimate Ponzi scheme, in which new debt issuance is used exclusively to fund interest on the debt by around 2024.

Out of control spending will haunt the taxpayers for years to come. Obviously, there is no political gain in being a good fiscal steward.

Nota bene what Edmund Burke wrote in Reflections on the Revolution in France in 1790: “Society is indeed a contract. It is a partnership… not only between those who are living, but between those who are dead, and those who are to be born.”