Yikes. I’ve finally gotten used to criminal CEOs, dot com tulip crazes, overcapacity in the telecom biz, and now I have to worry about BAD KARMA? Time to sell all my posesessions and go find that ashram my friends went to in the 60s.
Just to address the pensions issue, from an actuarial perspective:
- There’s nothing particularly wrong with pension schemes assuming a 9% long-term rate of return. A pension fund’s liabilities are typically of the order of 30 to as much as 70 years in duration. A mature and ongoing pension fund should not be a forced seller of assets, so short-term negative capital growth is not a problem. Over the 30-70 year time horizon, 9% per annum is not particularly unrealistic when it comes to equity return.
Personally I’d favour more like 6-8%, but that’s because I have a pretty optimistic view of inflation. It’s the real yield that matters, not the nominal yield, and I bet the actuaries behind those 9% returns have a similar assessment of their real yield to me.
You have to remember that a DB pension fund can easily outweigh a company’s turnover. This means that taking full account of short term capital shifts can in itself apparently wipe out a company’s profits for the year even though the true position hasn’t changed. This kind of instability we can all live without. It’s far better to avoid changing your basis year after year and look at the lifetime of the liabilities instead.
As an aside (from a UK point of view - I don’t have the US statistics): pension funds own about 40% of UK equities and life companies another 30% in respect of their policyholder’s saving schemes. That makes 70% of the market that is invested for the long term and owned (albeit indirectly) by ordinary people. This is what gives the market the stability that it does have and recent falls have in large part been fedback into by forced sales (actual or potential) by these large investors, in a kind of vicious circle.
- Defined benefit schemes are not inherently better or worse than defined contribution ones. Either way you get out what you put in. A major reason for the bad rap the DC schemes get is that companies view the change from DB to DC as a cost cutting exercise. They therefore contribute less to the DC scheme than they used to contribute to the DB one and are somehow surprised when it ends up providing a smaller benefit. Well no shit, Sherlock! If they would just put in as much as they used to for the DB scheme then the expected benefit under realistic assumptions would be exactly the same under the DC as it was for the DB. The only difference would be that the beneficiary would be exposed to both the downside and upside risks of investment and other variables.
In short, the changes to pension schemes are consistent with belt-tightening by employers, but this is a long way from signalling a depression.
In fact, the balance between salary and benefits tends to follow a 10-20 year cycle. From a position of high benefits/low salary we gradually shift to lower and lower benefits with higher salary, because the employees lose sight of the value of the benefits and the company recruitment and retention strategy focuses on salary instead. Then a few people start to retire on really shitty pensions, the media takes notice, there is an explosion of bad publicity and the whole things shifts the other way.
The presence of poor short-term growth in the stockmarket really hastens this trend, since companies tend to focus on the short term.
UK again: in the 1960s it was all DC schemes, the 1970s to late 1980s it was all DB. In the late 1980s to present day it has all gone DC but there has recently been signs that the shift is once again around the corner.
pan
Well to be more precise what you have to worry about is, to quote one of my links, “the state’s worst fiscal crisis since the Great Depression,” a crisis with far-reaching implications both for public services and, ultimately, private “biz.”
Do you have a problem with figurative language or are you just trying to impress us with your sense of humor? If the former, I’ll try to be extremely literal whenenver I notice one of your posts; if the latter you might want to try adding a smilie lest anyone mistake you for an boorish ass.
**
That’s funny, because this sounds like an obtuse generalization to me… Of course the economy today is nothing like in the 1930s. For one we can expect the Fed not to make any depression we come across into a “Great Depression” by clamping down on the money supply. But saying “bad karma” when you apparently meant “state level fiscal crises” doesn’t really build a case for the doom and gloom you seem to be expecting. Krugman sees it coming, but then of course every time Bush sneezes Krugman predicts the end of civilization as we know it. The fact is that the fiscal crises are a symptom of a slow economy, not the other way around. Government can either try and spend its way out of such situations or cut taxes and let the actual engines of wealth creation get running again. Cuts in the education budgets are unfortunate but they are not the end of the world, they will not put a halt to all job creation in the US.
Comparisons to the Great Depression are the inevitable hyperbole during such times but they are, more often than not, just that. If all you are capable of is relaying the handwringing over at NYTimes then so be it. However, if you think that there really is a case for the next big depression then I suggest you make it.
Azael: What sounds like an obtuse generalization to you? That gross historical analogies are not palatable to me, or that our economy is facing some seriously bad karma?
“Gloom and doom” is your own generalization and I’m not sure whether it accurately characterizes my personal views or not (I tend to be an optimist). More relevant though, it may well characterize the views of several economists including Krugman. Krugman’s not predicting the “end of civilization as we know it”–an obtuse generalization if ever there was one :rolleyes:. He’s arguing that Bush’s policies exacerbate the economic straits that we’re in.
The states’ fiscal crises have to do with more than the slow economy: they also have to do with the fact that many states used the boom times to deliver taxcuts while simultaneously authorizing spending increases that the public wanted (schools, parks, libraries). In effect they were banking on endless prosperity, something that most rational people knew was impossible.
The ability of taxcuts to stimulate an economy depends largely on what kind of taxcuts are being contemplated. The taxcut proposed by Bush, even according to CBO analysis, has a very marginal stimulative effect–both b/c of its delayed structure and b/c it primarily benefits those who already spend themselves silly. A payroll taxcut would be a different story–but Republicans don’t seem to favor those ;).
As to states: clearly the taxcuts that helped to get the states into trouble in the first place didn’t stimulate the “engines of wealth” sufficiently to preclude the worst fiscal crisis in 70 years. So so much for that shibboleth. And since good-paying blue collar jobs are vanishing in the US, education is crucial to creating the kind of workforce that can take advantage of newer post-industrial opportunities. Cutting education at such a time, especially when education spending has already failed to keep up with population growth, makes no economic sense at all. Most Americans are well aware of this: it’s just that they wanted to have their cake and eat it too. Politicians should have been more honest with their consituencies, but then they do have a tendency to think of re-election more than the longterm (or even shortterm) prosperity, economic or otherwise.
As to “handwriging” at the New York Times, what precisely in the Egan article would you dismiss as handwringing? This was straightforward reporting on issues that will impact every American. Are you seriously contesting the value of linking articles from the New York Times?
Finally, do I think there is a case “for the next big depression”? I’m not sure at this point. That’s one of several reasons why I rejected the analogy to the 1930s. In a longterm sense the entire global economy faces some very serious problems: 1) overproduction 2) the trade imbalance between rich countries (where people can actually buy things) and poor countries (where people subsist by producing but cannot afford to buy much). If the Chinese and other subsistence-wage workers to whom most industrial jobs have shifted could afford to buy American goods and services I would be optimistic about the future. I think Henry Ford himself would be worried.
The US has long been the buyer of last resort for the world’s overproduction; a lot of that capacity to buy has been fuelled by low interests rates and skyrocketing credit card debt. Right now I’m paying 0% on my credit cards, and I’ve re-financed my mortgage (thanks to timely advice from Krugman 
): so you can’t stimulate me to do anything more that get myself into serious hot water by racking up more and more debt, and ignoring the possibility that either my husband or myself might face a pay freeze or job loss.
We’re now seeing a record number of bankruptcies among individuals, job losses in the economy overall, and states are broke and are cutting jobs as well as services that are crucial to our longterm wellbeing (as well as to our sense of what is humane). These are bad signs, but I’m not sure whether they portend “the next big depression.”
I trust to pantom on those kinds of predictions… 
Well, I read through the articles Mandelstam cited. As I expected, they’re light on data and heavy on stuff I already knew: significant state revenue shortfalls lead to significant cuts in both essential and non-essential state services. Much of it seems to be cuts in areas that I don’t exactly consider vital to the health and welfare of the nation (state veterinarians, book-mobiles, etc.) but of course there are also serious cuts in vitally important services such as health care for the low-income and education. This only stands to reason since I believe most of budgets of state governments are in important areas such as these.
Is this the “worst fiscal crisis for states since the Great Depression”? I dunno, but there’s not nearly enough data in either of these op-ed pieces to support a conclusion either way. I don’t expect this is, though. Part of the reason they’re in this mess has already been addressed: many states cut taxes and squandered money during the 1990’s like it was never gonna end. In my mind, this is a problem of state fiscal policy, not a problem of the economy per se. Economies can’t help the buffoonery of politicians 
Later today I’ll start pulling up some hard data regarding the State of Oklahoma’s fiscal situation. I think our state is in a situation that is comparitively average as compared with the rest of the states… there are some states in better shape, and some in worse shape. In Tulsa, we’re using volunteers (primarily the elderly) to serve as substitute teachers and requiring teachers to janitor serve as janitors, as well as cutting health insurance money for the poor left and right. But I think some hard, concrete numbers might make the whole picture a little clearer.
I’d also like to take this opportunity to state that whoever performed Tulsa’s sales tax revenue forecasts for 2002 was a nitwit
Desdinova, Egan is a reporter, not an op-ed writer. The Times doesn’t publish op-ed pieces of that length. Krugman, as you may know, is a regular columnist and his piece is indeed, as I said originally, “polemical.”
How bad the fiscal crisis is for each state or the 50 taken as an aggregate–whether the worst since the GD, or, as Egan says, since WW2, ought to be answerable in fairly empirical terms–though I certainly don’t know where the relevant info is available on the web, if at all.
I totally agree with you that state folly is the biggest single contributor to the problem. Since the mid 1990s I’ve lived in two different states and both were (in slightly different ways) very foolish.
As I see it, a better indicator of how bad things are is not the unemployment rate (which is false-as others point out, it does not count discouraged workers), but the state’s financial conditions. By any measure, this is terrible! California has a $30 billion deficit, Massachusetts $3 billion. The fact that states must balance their budgets means that taxes will go up massively-and this will result in huge job losses-holdonto your hats!
If the De,mocrats succeed in blocking Bush’s tax cuts, we will have a massive depression, beginning late this year.
Funny, how the Democrats are all of a sudden worried about budget deficits!
Where have you been living for the last decade or so ralph? The Democrats have been worried about budget deficits since the advent of the DLC. Does the name Bill Clinton and the words 'budget surplus" mean anything to you?
Personally I don’t believe we’ll have a “massive depression” late this year; but I do wonder on what grounds you believe that Bush’s tax cuts would manage to forestall it.
Also, as the Times article suggests, many states are not raising taxes: they’re cutting services instead. (Though that will also have an effect on job losses.)
Mandelstam: you trust me??!!?? Yikes!
Anyway, reason why I said that (depression by 2015 or later) was
1 - the standard reasoning that post-2010 the boomers (that’s me) start to retire. I figure it’ll take a while before the bill for that gets onerous.
2 - the continual cutting of pay and benefits. The reason why I consider the switch to defined contribution plans important is because of what kabbes pointed out: that this is being used as a way to cut pension contributions. It’s a signpost representing all the different ways that companies are cutting back on pay and benefits for workers.
Just as during the sixties it was obvious that unionized workers couldn’t go on forever attempting to get pay raises and benefit increases that could put them ahead of everyone else without causing prices to rise to the moon, so too today it should be obvious that companies can’t continue to cut and cut and cut in a vain attempt to gain a teeny competitive advantage over a rival without eventually eviscerating the entire economy. (No applause for the alliteration, please.)
Well, I’m still running some other numbers, but here’s Oklahoma’s total retail trade figures for the past decade:
Year Total Retail Trade Change
1989 $15,439,677,049
1990 $16,250,152,350 5.25%
1991 $16,330,427,804 0.49%
1992 $17,164,929,522 5.11%
1993 $17,688,706,056 3.05%
1994 $18,675,151,152 5.58%
1995 $19,210,585,292 2.87%
1996 $20,131,515,306 4.79%
1997 $20,897,102,074 3.80%
1998 $21,405,018,056 2.43%
1999 $22,897,900,766 6.97%
2000 $23,640,620,246 3.24%
2001 $24,947,714,997 5.53%
2002 $24,873,414,416 -0.30%
(forgive the formatting, I’m cutting and pasting from Excel here)
This data is taken from Oklahoma’s clearinghouse for data of any sort, http://origins.ou.edu
For the moment, I’m just going to have to assert that Oklahoma was only moderately affected by the recession of 1991 (compared to the rest of the U.S.). On the other hand, Oklahoma was catastrophised by the “Oil Crunch” of 1982-1983. Anyway, total retail trade was up only 0.5% between 1990 and 1991, but declined 0.3% between 2001 and 2002. Worrisome, but hardly time for the Joads to pack up and head west, huh?
Caveat: this data is not adjusted into “real” dollars, these are nominal counts, and are estimated based on retail sales tax collections.
Retail sales, of course, are only a portion of how the state government makes its money. The other two primary sources are the state income tax and various excise taxes (there is no statewide property tax, and I’m ignoring revenue directly provided by the federal government). Excise taxes I can’t tell you much about, but I’m working on putting together some info on Oklahoma’s per capita personal income figures (as well as figures for the U.S. as a whole and the other states). I’m running into some simple specification issues, nothing that can’t be resolved easily but it’ll take a bit o’ time. Much of this data will be coming from the Bureau of Economic Analysis (http://www.bea.gov)
Ralph124c, “false” is a bit of hyperbole, the Bureau of Labor Statistics doesn’t claim anything about the official unemployment rate that it isn’t. If you’d like figures that include all “discouraged workers” (plus everyone else defined to be “marginally attached to the labor force” you can go here:
http://www.bls.gov/webapps/legacy/cpsatab12.htm
Take a look at the complete data series for “U-6.” If you don’t like the fact that the data isn’t seasonally adjusted, just look at the annual figures. Or you can seasonally adjust them yourself, I’m sure they’re using some variation of the Census Bureau’s X-12 ARIMA program.
**pantom **
“Mandelstam: you trust me??!!?? Yikes!”
Sure I do. At any rate I always feel like I learn something from reading your posts :).
“Anyway, reason why I said that (depression by 2015 or later) was
1 - the standard reasoning that post-2010 the boomers (that’s me) start to retire. I figure it’ll take a while before the bill for that gets onerous.”
What do you say to the theory that with the continual greying of the population, specialized geriatric services will be one of the employment waves of the future? What kind of incentives/investments/subsidies would a forward-thinking government make in order to have older people be well off enough to grow the industries and professionals that service their needs as they live increasingly longer, older lives?
“Just as during the sixties it was obvious that unionized workers couldn’t go on forever attempting to get pay raises and benefit increases that could put them ahead of everyone else without causing prices to rise to the moon, so too today it should be obvious that companies can’t continue to cut and cut and cut in a vain attempt to gain a teeny competitive advantage over a rival without eventually eviscerating the entire economy.”
Right, and I see this as but another aspect of the trend I was describing above. A lot of the gains made via outsourcing factory labor have already been made; the latest trend is to do the same with more professional and skilled kinds of labor; and, at the same time, to squeeze the workers that remain. All of this means that there are fewer dollars for consumption here in the States (though more–and ever richer–billionaires). Yet even the better-paid professional workers in the developing world won’t be able to buy the Lexuses, and the computers, much less to eat at our restaurants, hotels, etc. So what’s the answer? A self-imposed law in which billionaires require themselves to purchase hundreds of cars, thousands of pieces of software, and to book empty hotel rooms in cities all over the country? Or perhaps an economy that reflects our deepening inequality, with average Americans employed providing luxury goods and services that only the super-rich can afford?
I’m extremely pessimistic about the wealthy doing anything on their own to make things better for the poor. Whenever I hear about the wealthy doing good things, I am vividly reminded of stories of New York’s wealthy elite throwing parties in the great Depression, one of which featured a “treasure hunt” in which each guest was given a pail of sand and a shovel, and inside each pail of sand were gems worth thousands of dollars.
The wealthy truly do not give a shit about the poor, or the economy, or even their own long-term economic health. (Henry Ford was the only wealthy person who ever showed the least bit of sense in that regard.) They just want more money now.
I don’t see the poor rioting in the streets even if times do reach Depression-level awfulness. The labor unions are not the power they used to be, politically, in fact, there’s no one representing workers generally in politics, which is part of the reason why the tax burden is being shift to the poor from the wealthy.
Widespread economic discontent, even if it doesn’t produce enough dissatisfaction to get people rioting in the street, might lead to the formation of some kind of lobbying organization for workers generally. All the people working in offices and malls and so forth might just be willing to contribute to and vote along lines suggested by somebody who really represents their interests in Washington, as the current legislators clearly do not.
Mr Burns: “Here we go with the fat cat bashing…”
Rich Uncle Pennybags: “What do you expect? These yokels are pure Baltic Avenue… uh, oh, I’m late for the Short Line Railroad!”
Well, I think it’s a bit of an exaggeration to state that Henry Ford was the only wealthy person to show some concern about the poor. John Rockefeller and Andrew Carnegie both donated millions of dollars for the public good. I’m sure I could find quite a few modern day examples of generous wealthy people if I decided to look. While I think most people would agree that there is a mental and cultural disconnect between the wealthy and the poor in America I don’t think that it’s fair to tar the entire upper class with accusations of callousness.
Labor unions have been losing power IMO because of the continuing shift in our economy from an industrial one to a service based one. Fewer manufacturing jobs means = less cohesiveness among the working class = diminishing union power.
Well, I find it unlikely at this point. The government’s safety nets, IMO, make living poor today less onerous than it was a 100 years ago. This, IMO, combined with current day citizen laxness at the voting booth (whether from despair, apathy, disinterest, or whatever) makes the future possibility of a large, organized, lower class voting block unlikely.
In my opinion, American culture has changed too much. Large scale voter participation and involvement won’t return until times are really bad.
Mandelstam: a revived Democratic party and union movement, obviously. Any republican nation sorts itself into approximately half left and half right, and as the years go by first one side & then the other gains the advantage. After WWII and the Depression, there was a worldwide revulsion against the right wing. My parents and my wife’s parents devotion to the Democrats is downright religious for this reason. With the fall of the Berlin Wall, which was preceded if you remember, by a long period of stagnation and inflation (“stagflation” as it was called back then) there was and is ongoing a worldwide revulsion against the left wing.
Something will happen, somewhere along the way, somewhere in the world, that will trigger a turn back to the left. It will probably be accompanied by, if not an outright Depression, a very deep and miserable recession. This recession, even though it doesn’t quite meet the “official” definition (two quarters in a row of declining GDP) has lasted long enough that it’s threatening to turn into something worse. It would surprise me if it did, because it is early in the big historical cycle for it IMO, but if it does, it will mean the start of the turn back to the left, I would think.
Life, I’ve become increasingly convinced as I get older, ain’t nuthin’ but a big soap opera. In the really big scheme of things, us mere mortals only get to see one or two episodes of it.
Link to an interesting article that backs up what you said about outsourcing professional work:JP Morgan Outsources Stock Analysis
Looking at that first question, Mandelstam, I have no answer. The problem with all the old people that will be around when I get old is that there’ll be so many of us. That does mean there’ll be a nice market for the services you describe, on the one hand, from those oldsters who have the money to pay for it, but on the other, I don’t see how the government would ever be able to afford to subsidize these services to any great extent for the great mass of the rest, given the difficulty I believe they’ll have just funding our basic retirement.
It’ll be a real crisis, IMO, and I don’t know how anyone will solve it.