A Failed Paradigm

Well I was going to write this as a “magnum opus” but it was too depressing. I got as far as the outline and a few notes, so that’s what I’m posting. The short summary is that the noble experiment of the United States is failing. Some of the failures are pervasive in the Western world, because they are the failures of the neo-liberal socialist system that took over after the end of World War II, led notably by the British.

I’ve mentioned many of these issues individually in previous posts, so there’s some duplication and links to old posts.

The Redistribution State

  • The Welfare Cliff. See “Class War.” Subsidies withdrawn as income rises provide a financial disincentive for work. As people’s contribution to society increases, their income falls. This is a built-in “fail.”
  • Entitlements. We all know that the cost of future entitlements is both unfunded and unaffordable. Printing money isn’t going to help this problem – strip out the issue of money and you are left with the problem of physically delivering the services to which people feel entitled. Manufacturing productivity has soared, thanks to technology. Services have not benefited nearly as much. Where are the doctors and nurses that Obamacare promises going to come from, given a growing retiree population and a shrinking workforce? The numbers just don’t add up.
  • The 47%. California is probably the best example of this syndrome, where the bulk of tax is paid by a very few people. Then those who don’t pay tax feel free to vote for more government spending – as far as they are concerned it is costless, but the real problem is that the system is horribly vulnerable to the vagaries of a few taxpayers – not only can leave, of course, but more to the point their incomes can be very volatile.

The Great Cartels

Per Wikipedia: “A cartel is a formal agreement among competing firms. It’s a formal organization where there is a small number of sellers and usually involve homogeneous products. Cartel members may agree on such matters as price fixing, total industry output, market shares, allocation of customers, allocation of territories, bid rigging, establishment of common sales agencies, and the division of profits or combination of these. The aim of such collusion (also called the cartel agreement) is to increase individual members’ profits by reducing competition.”

Just because the agreements aren’t public doesn’t mean they don’t exist. In some cases, they are public and people don’t realize what they are – Obamacare legislation, all  2,700 pages (plus regulations to come) is a cartel agreement in which the government is a participant.

  • Healthcare
  • Education
  • Legal
  • Finance
  • Defense
  • Public Safety

Financial Repression

  • Investment returns. The Fed’s financial repression, as John Hussman points out, makes the risk-adjusted returns on all asset classes converge on zero.
  • Pensions and Retirement.  This means that pension funds cannot possibly make the 8% or whatever returns on which they are counting. They’re done, just a matter of time. This includes Calpers and the other government pension horrors.
  • The Black Hole. Government debt is now so large that the government cannot possibly afford for the Fed to end the repression of interest rates. However, this ensures that the economy cannot be allowed to grow.
  • Japan Syndrome. It looks like Abe-san is going to lead the country into financial hara-kiri by raising inflation and therefore interest rates. Each 1% of interest costs 6-7% of tax revenues. Default is inevitable if he keeps his word.

Wars

Rackets, pure and simple. They go on and on without resolution.

  • Drugs. Can’t stop this one because the highly profitable drug trade supports terrorism, which in turn justifies huge expenditures on other wars. This is the root of most evil in the world today. Not drugs – the war on drugs. Yes, wide availability of drugs might kill a few idiots – a cheap price compared to the slaughter that results from the profits supported by the barriers to entry into the business.
  • Terrorism/Foreign. The death, anguish and futility just makes me sick.

Social Fragmentation

Divide and conquer, said Julius (although the idea came from the Greeks, in all fairness). He was right then and it still works. Politicians use technology now to slice and dice the electorate and destroy any social cohesion that might still exist.

  • Race
  • Religion
  • Wealth

Government

  • Corruption. Money, they say, is the mother’s milk of politics. More accurately, of politicians. Bribing politicians is the most profitable business strategy of all, by a long shot. Not only do our politicians sell their votes, they sell them cheaply. A 2009 study published in the American Journal of Political Science, for example, found that for the average firm lobbying Congress, across industries and various measures of financial performance, each additional $1 spent on lobbying was associated with $6-to-$20 in new tax benefits. Similarly, a 2010 working paper by Hui Chen and two co-authors found that $1 spent on lobbying was associated with an additional $24–to-$44 in corporate income.
  • Competence
  • Monopoly Rents. Government establishes monopolies – for example, in education. Unions then run with those monopolies. Price goes up and quality go down.
  • Civil Rights. The US is essentially a police state where any citizen can be imprisoned or executed without trial.
  • Pseudoscience, Propaganda and Dissent. Pseudoscience is used to further political goals, and is buttressed by aggressive propaganda and the suppression of dissent.

Globalization and Competitiveness

  • Workforce participation. People drop out of the workforce because it makes no sense for them to work. They are better off – see the welfare cliff – not working. They have to make a lot of money to justify working, and they simply don’t have the skills even if they wanted to. As a result, the jobless rate is misleading.
  • Education, literacy and skills. Paradoxically, even in a time of high unemployment and a shrinking workforce, there is a shortage of skilled workers. In some cities such as Los Angeles 30-40% of the population is functionally illiterate.
  • The service economy. Has gone too far. The trade deficit rolls on, because services are difficult to export. This means that the debt builds up year after year. Japan has limped along for years because it runs a trade surplus and therefore its debt is internally funded (well until the last few months). The US does not have this luxury and the external debt is its Achilles heel.
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