Thursday, April 14, 2011

Demographics are destiny

There is a problem with the 'entitlement' programs that go beyond the loss of liberty by exchanging what should be a citizen's concern, that is caring for the elderly, sick and poor, for a government program.  That is bad enough, to put your personal citizen's responsibility into the hands of government and expect one of the least efficient actors in any Nation (that is government) to provide the care of the most efficient (that is charity).  Even beyond the degrading aspects of pushing those who are old or ill into the welcoming hands of red tape bearing bureaucrats is something even more fundamental that has been a problem with these programs for decades.

The problem?


When I speak of demographics, I go beyond just the easy to identify 'Baby Boom' generation that is a budget buster in all regards to 'entitlements'.  That is simple calculation to see how many will survive to get those 'entitlements' and then look at the workforce to support them.  As bad as this generations long Ponzi Scheme is, and it is horrific beyond all counts, it is based on a concept of a set age for receiving benefits.  That age has now been adjusted for SSA once, and the proposal by Rep. Paul Ryan and others would seek to move it even higher.  And yet that flies in the face of demographics.  Which part of demographics, in particular?  Life Expectancy.

In a previous review of this topic in Insurance, assurance and prosperity, I examined the underlying demographic trends of the 20th century prior to SSA and then past its enactment.  When looking at the capability of SSA or other entitlements to be 'sustainable' it must be acknowledged that there is an active worker to recipient ratio that changes due to the number of people in each category.  Life expectancy, if it remains stable, then allows for a determination of the average age of death for an individual citizen, so that half the population reaches that age and 'entitlements' are only provided for the remaining half (this concept works for all the 'entitlements' that are age dependent).

Thus if there is an increase in life expectancy, the 'expected' ratio of those utilizing an age-based entitlement will expand as more people live beyond the set age limit.  This was a phenomena not unknown even in the 1930's and the 20th century had seen only one serious time when life expectancy dropped globally, and that was due not to war but the Spanish Flu outbreak post-WWI.  Here are two graphs encompassing that data:

US Life Expectancy

Source: CJ Seymour, The Coming Great Depression

Global Life Expectancy

Source: Working Paper on Inequality and Mortality: Long-Run Evidence from a Panel of Countries
By Andrew Leigh and Christopher Jencks
Harvard University

Creating any system based on providing money or services to an elderly population then must take into account the change in the number of elderly over time.  Will it be steady, decrease or increase over time?

Progressive politics sells itself on 'steady-state' analysis in which nothing changes in underlying particulars.  Thus when doing a forecast of taxation increases Progressives do not look at how behavior will change to avoid such taxes, which is a part of human nature.  Income from increased taxes never reach expected amounts and, quite contrarily, often go down per percentage point added in comparison to previous tax percentages.  On 'entitlements' the feel good idea of there always being a set number of elderly misses the point that there is no set number of elderly in a growing, thriving society, and that to keep a demographic balance requires there to be no social, medical or family-type changes, so as to maintain the set ratios of the enactment of the 'entitlement'.

Another factor when looking at increased life expectancy is the change in the amount of time each person spends in the labor market to provide work to pay taxes to 'sustain' the entitlement.  Here I will take a paragraph from my previous work:

Clearly this is not 'insurance' but some sort of 'assurance' by the government. Insurance is payment to plans that will pay out if something happens: you are paying in the bet that something will happen to you, and the insurer takes such payments in the bet that they will not. Those that live in the modern, industrialized United States have some great expectation that they will live to see 'retirement age' and then live for a decade or even two after that. If one lives to be 85 or so, 20 years can be expected at the end of not doing much in the way of work. Add that to the 18 years or so of education to get to High School level, and nearly 40 years of one's life is spent not working at a job, about 45%. Compare that to the 20 years spent (approx.) and retiring at age 63 and that is only 20 years or 31% of one's life spent in learning and 'retirement'. At this point in time, via SSN, the Federal Government is mandating that an individual, to be eligible for payout from the system, is to spend 14% more of their life in leisure than their grandparents. Great work if you can get it, which you can in the US.

Currently it is not as bad as 85 years, but only 78 years (via the CDC using 2007 figures).  So the 'adjustment' to put in place circa 2030 of 70 years of age for SSA doesn't even match the original program's matching of life expectancy back in 1937.  Thus demographics will kill SSA even with a slow change to a 70 year old use system as there will be a large percentage of the population living past 70 that will overburden the system.

Here there is an additional factor to consider in and that is the delta change in life expectancy over time.  Which is to say: how many years does it take to up the life expectancy on average by 1 year?

If you answered that as 6, then you are looking at the beginning of the 20th century, and if you answered 4, then you are looking at the end of the 20th century.  The delta change, that is the change to the rate of change, is increasing over time.  So a static analysis applied today using a 4:1 ratio means that by 2030, a mere 19 years away, we will have added 4 years and change on to the life expectancy.  Thus the average life expectancy will be about 82 in 2030, and broken out by sex that will put women in their mid-80's and men in their late 70's, unless that break-out changes over time, as well, with improved health care for men.

Politicians hate demographics because it impacts population based programs in a major way over time.  Yet all projections are done either using static analysis or set change rate analysis, and none are done with behavioral changes or dynamically increasing change rates over time.  Thus no matter how much anyone 'wants' government to 'help' on 'social security' it will fail not due to the meanness of any political party or due to the lack of competence in running such programs, but due to the pure population dynamics reflected in demographics.

Part of the adjustment to living longer and having a better chance of surviving child birth and a child surviving past age 5 is to have a smaller family size.  That part of demographics begins to reduce the expected increase in overall population size as fewer children are born due to their high survival rates.  All the way into the late 19th and even early 20th century it was a common occurrence for a child to die at birth or before reaching age 5.  After the introduction of large scale sewer systems, public health systems to clean up water supplies and antibiotics (plus treatment of childhood diseases) that began to change and was remarkable throughout the 20th century that contrary to the population boom expectations and dire consequences, the demographic lines for population expansion globally were starting to plateau out. 

Here the entrance of India to becoming a modernized economy and China modernizing and instituting a 'one child policy' started the shift from youngster oriented world demographics to middle-age demographics with Europe and Japan shifting to old-age demographic types.  Family sizes in Europe plummeted from highs of 5 children in the poorer countries early in the century to lows of barely 2 children in those same countries by the end of the century.  The more 'developed' parts of Europe were seen as slowly losing their native populations starting in the early 21st century.  In the US this changed from a 3.2 children per family to 2.6 children per family, which is enough to maintain and even marginally increase population size over time, but not enough to get back to the early century's 4-5 children per family in the US.  That latter was the era which SSA was cast, so by post-WWII the demographics to sustain the program were already in jeopardy.

Thus there are two vectors at work which are not amenable to politics save in a negative way, which is to say destroying the public health infrastructure and forcing large families via edict, that are only indirectly related to economics but drive the economics of programs like nobody's business.  Increasing life expectancy happens when general health conditions for a population improves and this is more due to public health initiatives (clean water, sewage treatment and vaccinations) which are relatively low cost and easy to do.  The upshot of those initiatives, however, is a better understanding of diseases, how they change and spread, thus leading to better treatments of them.  That gets you a more capable medical system, overall, which is somewhat higher cost but able to extend life past the onslaught of early childhood diseases and then geared towards the diseases of the elderly.  Due to these factors and grand-parents living much, much longer lives, the breakup of the 'nuclear family' happened not so much due to 'liberation' movements but due to the grand-parents able to live longer, healthier lives and care for themselves better, longer. 

In theory these should be the relatively rich segment of the population, able to better prepare through their mid-adult life with a smaller family and increase marginal savings so as to grow their investments over time.  That is the case with many elderly, but with SSA as an 'entitlement' that they 'paid into', savings started to actually decrease over time.  The government forcing a 'retirement age' (and that is only upon the non-wealthy who can retire whenever they want or NEVER as the case may be) and then put 'means testing' on getting medical 'entitlements' meant that a system of gutting the savings of seniors to get 'entitlements' started via enforced 'retirement' when many were still able to contribute in meaningful jobs up to their last day before 'retirement'.  Plus the idea was that they had an extra decade or more of life still ahead of them... supported by younger, poorer working families.

This brings up some salient questions:

1) Is there any way to actually have such an 'entitlement' system at all?  Not one that depends on age as a determining factor, especially old age, no.  At some point early in this century we will pass the 3:1 ratio for adding an additional year on to life expectancy and after that it will be 2:1.  Thus for every two years of time you get an added year of life expectancy.  When that ratio reaches 1:1 you have near immortality.  Barring a total collapse of civilization or even a partial collapse of the Nation State system and impoverishment of the wealthy, this isn't changing any time soon.  Either of those events would set humanity back a couple of generations and see a massive decline in global life expectancy as the technical infrastructure to address public health and diseases go into decline or collapse.

2) Is the concept of 'retirement' even valid given the trends?  No.  Gerontocracies, that is governments run by the aged for the aged, is a trend in parts of Europe (Germany, France, parts of Scandinavia) and a force in Japan and Russia.  These countries are facing a greater than 1:1 worker to elderly ratio, and anything that raises the number of elderly as a proportion of society then obviates any 'retirement' concept: there are too many non-working people to sustain society and the economy.  That is a broad over-generalization, of course, but even when factoring in automation and productivity increases, the consuming of high productivity items will also tend to keep pace with output per person, and the number on the old age side then factor in as a major consumer of all goods in the economy.

3) Is the concept of 'old age' viable any more?  To a degree, yes, so long as the keys to stopping the degradation of DNA in cells isn't found, it will continue to be a generally viable concept.  What is interesting is the amount of work going into that 'Holy Grail' of generalized ageing, and our understanding of ageing as a 'disease' is slowly taking root.  If the government can keep from ruining the economic system, it is possible to see a 'cure' for this 'disease' within the span between now and 2030.  As a disease ageing is generalized, wide-spread and pandemic: everyone gets it.  Thus there must be keys to it that are, strangely enough, easier than going against an auto-immune disorder like MS or Type I Diabetes or Lupus.  As ageing was not seriously approached as a 'disease' in the 20th century, the early discoveries in the 21st that do see it as a 'disease' hold much promise.  And that 1:1 ratio is not all that far off, even for the middle-aged in our modern times.  Until that 'cure' is found, the general degradation of an individual's body can be put off (that is life extended) by working on secondary problems and maintaining a generally healthy life, longer.  Better diet assuredly played a major role in the change rate of change for life expectancy.

4) How can we address the cost of health care that is ever spiraling?  The cost of health care, that is the physical addressing of needs, office space and even most medications have remained affordable for decades in the US.  What has changed is the health care 'system' with the intervention of the government in the 1960's with Medicare and Medicaid.  These two systems do not pay off to the cost of procedures and medications.  The 'discount' that seniors get is a cost-shifting via government to practitioners and hospitals which then must raise costs elsewhere.  Even more interesting is that each time this question is posed it can be compared to treatments available in 1970-72 and, adjusting for inflation, the medications of that era are very cheap and the procedures once rare, then (like open heart surgery) are now widely available and relatively cheap.  The cost is in the provisioning system for these items, not in the skills or equipment to do them, or even the cost of medication production for that era-specific suite of medications.  Of course better, faster and even cheaper ways to do heart surgery have arrived, as well as medications that could not even be dreamt of in the 1970's.  You are, today, getting more effective and, thusly, more cost effective medications and procedures today, than your counter-parts did in the 1970's either as inflation adjusted costs or real costs.  The delta in health care is the provisioning via 'insurance' and from the government, both of which add on overhead, accounting costs and burden to the system in order to get 'discounts' that then get cost-shifted through the entire system, raising costs.  To remove the inflator of overhead and accounting, it is necessary to remove the middle-men who add cost but no value to the system.  In this the pure 'outpatient, seen on demand clinic' is now appearing at a very low cost per visit to address this need that government and insurers cannot meet.

5) What happens to the 'social safety net' in this new age of increased life expectancy?  It vanishes.  When your effective 'old age' passes 80, you are no longer in any real need of a 'social safety net' as you should be spending your adult life learning how to work and to adjust to ever changing working conditions.  This means that concepts that have been cherished as part of the Progressive agenda, like a minimum wage, become unsustainable as one cannot put any real 'floor' on wages when a person is expecting to work for decades.  Upwards achievement at some aspect of work related life, given 5-6 decades of working life, means that there is no floor that is meaningful to an individual: we will all be seeing that life is long and that no one can extend your childhood for decades at a time.  This is not a mean-spirit concept, one that seeks to impoverish the young as we are already doing that via the 'social safety net' and set-age systems that don't work, which then cost-shift debt from the old to the young.  Once the ceiling is removed, that is 'old age' becomes a concept that is not very related to life expectancy, then there is no reason for a 'floor' economically: very few people are so incompetent as to have NO viable work skill that will allow them even a modest advancement throughout life.  Even so, for those there is this thing known as 'charity', which is fellow citizens helping each other with the lowest of possible overhead cost, directly.  Only those who are mean of spirit and hard of heart say that they cannot trust their fellow citizens in times of need.  Look at Japan's recent earthquake and tsunami and ask yourself: would you help your fellow man at such times?  If so then why on Earth are you not doing so NOW?  It is not your fellow man that is hard of heart, but you who ask such a question and contribute nothing to charity and doubt the good will of your fellow citizens at every turn.


In summary the concepts of demographics are vital moving forces in society, as they effect more than just population size or even cohort size and type, but extend deeply across time to change the nature and outlook of individuals within society.  Semi-valid concepts from the late 19th century cannot cope with modern, dynamic analysis of demographic changes, and even those that came to be in the 20th century that did not address demographic changes, are now put seriously at peril by them.  Japan went from a young, vibrant but militaristic culture in the beginning of the 20th century to a pacifistic, ageing culture in the late 20th century: their entire nature as a society had changed in profound ways that influenced their demographics.  Such changes in society also play parts in Europe, Asia, Africa, South America and everywhere technology helps to improve public health even modestly.  The basics of clean water, sanitation, vaccination and wholesome food are huge movers in demographic profiles: in Ancient Rome the demographics changed significantly when these public works were put in and the Nation went from a Republic to an Empire.

Some ideas we have from the past of old age are in rapid flux, and yet our governmental systems are lagging and badly, unable to adjust to the changes even in a single decade, not to speak of five or six of them.  The ideas that came with old age, that of some 'retirement' are more a product of politics than any reality: in the past people before the Progressive era made their own retirement whenever they could, and that was not dictated to by government.  Today the original employees of Microsoft made millions, often billions, of dollars and many retired... only to find retirement dull and that they wanted to make new careers and businesses for themselves.  The rich can retire whenever they want, which is why we have the 'idle rich' as a fantasy.  In reality the rich go from business to business, or simply re-invest their money in new companies, new ways of doing things, and into our society by doing that.  Yet, today, a car is car, no matter what the cost, and the value of a roof over one's head is stable, no matter how impoverished or rich the trappings are.  You can only live in one house at a time, drive one car at a time, and only take in so much entertainment at one sitting: the rich have more options, but are not necessarily leading richer lives for all those options.  And many of the 'rich' are small business owners, taking little pay for themselves so they can support their company.  Yet their 'income' via the business makes them 'rich', even though they have a modest house and car, they may employ tens, hundreds, thousands or more people.  It is the rich, investing in companies large and small, that created the tools and means necessary to bring us an affordable, decent life.  They are only villains when they use their power to gain favor to no longer be treated equally by government: those companies must go as they are predators on the body politic and society, no matter what 'good' they do they erode the moral character of the economy by their ends.

And when your life is extended past 80 years of age, and an 80 that is well kept and vibrant, who is to say that you won't be amongst the 'rich'?

Why ask government to punish you through taxes when you can build society via charity and providing jobs and actually doing something worthwhile with your life?  You will still have weekends for the golf course.

Friday, April 08, 2011

Simplicity budgeting

The following is cross-posted from Dumb Looks, Still Free on 15 FEB 2011.

With the latest White House budget put out by President Obama, there is little in the way of actual spending cuts or regulatory reform going on, and much in the way of increasing spending and taxation. This as the government nears its debt limit ceiling.


The lack of 'Hope & Change' in this budget for FY 2012 has been noted by many on the Left and Right, and that the Administration lacks the ability to actually show that anyone in the Administration understands the ramifications of the 2010 elections are plain: Stop The Spending. Yes, Stop The Spending is meeting Stuck On Stupid.

Interestingly enough the budget process for FY 2012 (not the FY 2011 work that is due soon) will be different than what has been going on since the 1960's, as outlined in this Politico article by Jake Sherman & Jonathan Allen on 01 DEC 2010:

House Republicans are devising a plan to simplify spending decisions by considering government funding bills on a department-by-department basis in the new Congress, according to Republican insiders.

The move would facilitate cutbacks in government programs and, GOP aides say, enhance oversight and accountability for individual agencies, fulfilling promises made by Republicans on the campaign trail and in their Pledge to America. But it would also threaten to complicate an already tattered appropriations process on the House floor and in negotiations with the Senate, which is why the mechanics of the transition are still under discussion.

In a speech to the American Enterprise Institute earlier this year, Speaker-designate John Boehner (R-Ohio) outlined the idea that he, Republican transition chief Greg Walden (R-Ore.) and rank-and-file Republicans are now working to implement.

"Let's do away with the concept of 'comprehensive' spending bills. Let's break them up, to encourage scrutiny, and make spending cuts easier. Rather than pairing agencies and departments together, let them come to the House floor individually, to be judged on their own merit," he said at AEI more than a month before the midterm election. "Members shouldn't have to vote for big spending increases at the Labor Department in order to fund Health and Human Services. Members shouldn't have to vote for big increases at the Commerce Department just because they support NASA. Each department and agency should justify itself each year to the full House and Senate, and be judged on its own."

This is the way budgeting used to be done before the Cold War got into full swing: Congress decided the budget for each part of government separately. The unitary budget process creates a huge ball of wax and the 'take it or leave it' form of governing, in which much bad can be packed into a bill that covers the entire federal government. It is a way to hide spending and force 'compromise' not only amongst parties in Congress but with the President. It is also highly irresponsible as each part of government should receive a separate review and be divided from other agencies to see if it is carrying out its duties in an effective manner consistent with its enabling legislation and the Constitution.

Doing it this way, piece by piece, affords opportunities for savings, reductions or changes in the way an agency works, and a review of an agency each and every year in a way that unitary budget process requirements do not meet. By allowing pork to be packed into a unitary budget, good oversight and control of the fiscal side of government, by Congress, is over-ridden by political needs to 'get things funded'. Congressionally Directed Actions put in by individual Congresscritters means that those items are not properly budget for in the Operations & Management portions of those agencies getting such funds. All accounting for those funds must be done on the set operational budget that does NOT include the earmarks. This stretches staff and reduces proper Congressionally mandated oversight on spending and puts a direct line by individual Congresscritters into government departments. By removing the opportunity for political abuse of the unitary budget process, the actual abuse is expected to diminish.

Beyond that salutary effect, however, there is something even better with this process: cutting budgets of individual departments or agencies, or even requiring that they schedule to reduce their overall size or disband completely. This form of budgeting to remove an agency is rarer, still, as Congress so rarely does this as to make such times noticeable, as I pointed out in another piece. That is the formal 'tell the agency it is time to tidy up and go home' form of Congressional budgeting. There is the other form when no spending is coming forth via the budgetary process to fund a department or agency: shutdown.

With the unitary budget process that is an all or nothing affair: either the entire government is funded or it isn't. That is a game of 'chicken' with the government held hostage to it. Thus an 'across the board' cut to all departments becomes an all or nothing affair if you use this process. When you go to piecemeal budgeting, then you get individual parts of the government segregated out for funding. This is a powerful legislative tool as it can serve very well in the hands of those seeking to remove power from government via the expedient means of not funding those parts with the power. Congress is obligated to fund very little of the federal government: servicing the debt, DoD, salaries in the three branches, the Mint, USPTO, parts of Commerce and the IRS, a piece or two of Interior, government archives, duties related to the border on immigration and naturalization as well as the orderly processing of goods individuals at the border, a postal system, plus any necessary buildings for those activities. Those are the mandatory parts of the budget, per year. Everything else is discretionary, and I do mean EVERYTHING including 'entitlements' as individuals have no contractual right (via Megan McArdle) to expect anything from SSA, Medicare or Medicaid:

Well, sort of. The first thing to point out is that legally, changing social security benefits would not be default, because (as the Supreme Court has already ruled), beneficiaries have no legal, contractual right to their benefits. They enjoy them at the sufferance of Congress, and Congress has the perfect right to change them. Doing so will not affect our status as a borrower adversely in the eyes of people we actually borrow money from. Indeed, it might enhance it. The first thing a lender wants to know is not whether you are a good person, but whether you are likely to repay the money they lend you; they are interested in the former only insofar as it implicates the latter.

During the Johnson Administration the system lost its 'lock box' with 'account' concept as all funds were available from SSA to the general fund by putting Treasury Bills in their place for future promise of payment. So servicing the debt includes those bills held by SSA. More importantly is that all the 'entitlements' are at the sufferance of Congress and are, thusly, discretionary spending.

Putting 'entitlements' to the end of the line after the mandatory funding parts, and then dealing with the rest of the discretionary budget, first, allows for a few things to be done.

First, austerity packages to federal departments and agencies can be created and passed by the House to demonstrate that it 'gets the message' of 2010.

Secondly the Senate is put into a position of a House unwilling to bump spending up for anything and it is the Senate then faced with the 'pass it or lose it' deal. This is so because a House can clearly say that in not passing a spending bill for something like, say, the EPA or Dept. of Agriculture, that the Senate clearly is in the 'clean sweep' mode and just wishes to do away with them. Then the House thanks the Senate for its fiscal responsibility and does NOTHING further on that department or agency. It passed what it had to pass and the Senate is free to pass that. Really, who is going to 'lobby' for the Dept. of Education beyond the Teacher's Union? Who will actually be HURT if the Dept. of Agriculture goes under? Monsanto?

Third the Senate, faced with either austerity or nothing, passes austerity and puts THAT on the President's desk. He has the exact, same choice as the Senate: if he wants a part of government to go away, he can simply not sign the bill. And get THANKED by the House for his fiscal rectitude.

Yes, games will be played on the 'if you agree to pass this bitsy program then I will pass/sign that bitsy program' but that would only be with the Senate. The House can say that austerity is the rule from here on out, and get used to it.

The group of Republicans following the Tea Party elections of 2010 offer enough of a block to be able to block parts of the budget as they have already demonstrated on things like the Patriot Act. This puts Democrats in the nasty position of having the 'chance' to show up the fiscally responsible House members by joining with the few remaining fiscally irresponsible Republicans to try and pass a 'bi-partisan' budget that is not responsible.

Mind you that is a career ender for 2012, which would see a return of those following their constituents and an angry populace voting out the irresponsible House (and Senate) members.

By doing it this way the line gets clearly drawn about who is serious about fiscal responsibility and who isn't.

And because 2012 will be looming, angering the voting public really isn't such a hot idea and that may even sway the irresponsible ones just a smidgen.

Then you tackle 'entitlement' reform... because everyone, up and down the line, will see that you are serious about cutting spending EVERYWHERE which will include 'entitlements'. Be a shame if the Senate or President didn't want to fund those, no?