‘Politics’ Category Archives

7
Feb

Skewed: Income Inequality in America

by admin in Politics

This is a very thoughtful graphic by Jaelynn Ficarra of www.financedegreecenter.com.

Graphic: http://www.financedegreecenter.com/income-inequality/

 

12
Oct
11
Aug

Mischa’s World – What Are the Trends That Will Shape the Future?

by Riaan Nel in Politics

I was recently asked by a client what trends I think will shape our investment future?  I started listing the trends I believe will have a major impact on his investments going forward, but this lead me to think more broadly about the issues.  In thinking about my answers I started envisioning the future of my beautiful five year old little girl, Mischa.  What will the world be like in which she will live?  The future is of course critically important to all of us because we will spend the rest of our lives there.   In my post today I want to share what I believe to be the most important trends that will profoundly change our lives tomorrow and beyond – the world Mischa will call home.

 

1. Demographics

The world is undergoing significant demographic changes. This is not really new – the story of humanity is the story of demographic change – changes in human populations over time and space in terms of size, structure, distribution, births, migrations and aging. The technological progress of Europeans and their consequent migration and occupation of much of the world is a prime example of this powerful force.

The aging of the West will be a demographic trend that will be a dominant theme in my little Mischa’s life. By 2030 the world population will have increased to 8.3 billion people up from 7.1 billion in 2012. According to The National Intelligence Council’s report Global Trends 2030 the aging of populations represents a tectonic shift for the West, but also for developing or emerging countries. Today more than 80 countries have a median age of 25 years or less. By 2030 this tally will drop to 50. The high-income countries of the world will reach as a group a median age of 42.8 years by 2030. This aging will impact Western Europe and Japan more than the US; however, we will not escape the consequences of an aging population.

Since January 2011 the Baby Boomer generation in the US started turning 65. Almost 10,000 Baby Boomers a day are turning 65 – 4 million per year! This will continue for 18 straight years. Countries with aging populations face slower GDP growth or stagnation. Older populations also tend to be less innovative negatively impacting economic growth. The aging populations will place ever increasing pressure on entitlement programs like Social Security and Medicare, which again will place ever increasing pressure on the federal budget. In 1950 there were 16 workers for every retiree. In the 1970’s the ratio changed to 5 to 1. According to Research Affiliates the ratio today is 3.5 to 1 and is projected to drop below 2 to 1 by 2050 according to data from the US Census and UN. In 2050 Mischa will be 42, entering the prime of her spending years. Her income and concomitant standard of living will be dented by having to help pay for the entitlements of this burgeoning class of retirees. Of course, we cannot predict what types of technological and innovative breakthroughs there will be between now and then that could fundamentally transform our economy producing more than adequate growth to sustain such an aging population. This notwithstanding, over the next few decades our country will undergo profound changes as the Baby Boomers retire changing the structure of our economy.

This ballooning age cohort will increasingly withdraw money from savings to live on whereas in the past they have added money to savings through their retirement plans. It is an open question what impact this will have on our capital markets. If there are higher taxes, and a slower economic growth environment, combined with a smaller group of working Americans compared to the retired and retiring Baby Boomers, it will have to dent savings flowing into the capital markets. This of course coinciding with savings being pulled from the economy by retirees taking income.

As I mentioned, the growth of retirees will place significant pressure on our federal budget, making it more difficult to pay off our debt and keep our deficits in check. Although I am in the school of thought that believe that deficits and the country’s debt is overblown over the short to medium term, I do believe it is a critical issue needing redress over the long-term. Reforming our entitlement system and our burgeoning debt will be no easy task. In the end the realities of an aging population will force us to cut benefits to retirees in some way, as well as increase taxes. The problem cannot be solved by only increasing taxes or only cutting entitlements. The pressure on the federal government will be immense in coming decades to also cut discretionary spending. In the end we will also have to accept a smaller projection of hard power since we will be forced to cut our defense budget as well.

2. The Rise of The Rest

Fareed Zakaria’s 2008 book The Post-American World and the Rise of the Rest describes another important trend that will significantly impact Mischa’s life. America’s share of the global economy will decline on a relative basis, along with the West, while the so-called emerging world’s share will increase. (The “emerging markets” or “developing countries” are those in blue below, with the developed world in pink.)

There was a time that the US represented half of global GDP.  In 2011 the US represented 22% of the world’ GDP.  The emerging markets’ share was 36%.  It is this share that will continue to grow vis-à-vis the US, Europe and Japan.

Much of the expansion of “the rest” will be in Asia. The rise of the emerging world will cause a diffusion of power in the world. This diffusion of power will start to reverse the historic rise of the West since 1750 and restore Asia’s weight in the global economy and world politics. Don’t get me wrong, America will remain a dominant and extremely powerful country. Although there are many theories about the decline of America I want to emphasize that the decline of American power will only occur on a relative basis. In many respects, especially with regard to hard power, we will remain a force to be reckoned with.

From Mischa’s perspective though, the point I want to make is that the rise of the rest will lead to an unprecedented expansion of middle classes across the globe. Many models predict that there can be a global middle class of around 3 billion people world-wide by 2030. The rapid expansion of middle classes will of course increase pressure on the world’s resources due to an explosion in demand for consumer goods. The larger middle classes around the globe will coincide with individual empowerment and increased competition for high paying jobs. Individuals belonging to the upper middle classes of emerging countries will be mobile and in an integrated globalized world they could go anywhere to compete for jobs. Bright professionals from all over Asia, India, Eastern Europe, Turkey and South America will compete with Mischa for jobs. A well-paying job will not be the birthright of an American graduate in the future (actually it’s not even anymore!)

3. The Food-Water-Energy-Climate Nexus

The third trend I believe which will have a major impact on Mischa’s future is the increasing nexus among food, water, energy, and climate change. In a monumental shift due to an increase in the global population, expansion of middle classes and growth in urbanization (middle class people tend to live in cities) demand for food, water and energy will expand rapidly. Analysts studying this trend are not necessarily predicting scarcities; however, policy makers will have to plan carefully. These interrelated issues will have to be thought about in a proactive and holistic manner to come up with lasting solutions. These are important issues that will impact my Mischa’s life and standard of living. It is beyond the scope of this posting to wade into the issue of climate change – which is such an emotional issue. Moreover, I don’t know enough about the empirical proof of human causation when it comes to climate change. That being said, I think there is little doubt that a general warming trend is affecting weather and ecosystems. This will no doubt have a critical impact in the supply and cost of our three most critical resources – food, water and energy.

4. Mischa’s World

My first and most sacred duty is that of Mischa’s father. One of my most important functions as a dad – besides security, basic needs, and psychological development – is to prepare my daughter for the future. I will have to help her become an independent, critical thinking, and self-sufficient woman in a world where her economic opportunities will be diminished by an America growing at a slower rate compared to previous eras; burdened by the pressure of ever increasing entitlement spending for our aging population, and the struggle to get our long-term debt trajectory manageable. She will live in a world of increased migrations and competition from abroad. The Partnership for a New American Economy found that 76% of patents from America’s top 10 patent-generating universities in 2011 had a foreign-born inventor. Luckily for us many of them stay, but native born Americans will have to understand competition in the future is going to be fierce for well-paying jobs. Mischa’s world will also be a warm place with food, water, and energy being major factors she and her fellow Americans will have to contend with when it comes to public policy.

This is the world I have to prepare her for.

6
Jan

Obama’s Leadership Failure

by Abe Townsend in Politics

 

 In my debut article on World-Political-Economy I will tackle the controversial issue of Obama’s leadership during the “fiscal cliff” negotiations.  I want to start by thanking the editor of this site, Riaan Nel, for allowing me to become a regular writer.  I am aware that I’m slightly more political than Riaan, but he wanted to bring a bit of outspokenness to the site as it relates to political issues.  Well, I’ll try my best!

Recently Robert Samuelson wrote an excellent article for Real Politics with the same title as my article.  I agree with Samuelson that the last minute cliff hanging negotiations (pardon the pun) is a massive failure of presidential leadership.  Let’s face it, at the heart of the issue is the reality that the Federal Government can no longer fulfill all the promises it has made to various constituencies. Samuelson correctly points out that some promises will be reduced or disavowed, and that only the president can submit these questions to the American people to discuss.  A national discussion on these questions is imperative, but Obama doesn’t want to tell people things they don’t want to know.

The current level of Federal spending cannot be sustained, even if we raise all taxes significantly.  This fact casts our crisis as a crisis of spending, not a crisis of revenue.  I’m okay with making higher taxes on the wealthy part of a comprehensive plan to deal with our unsustainable spending; however, Obama’s narrative is that we can fix the problem with a few adjustments to spending here and there, and, with making the rich pay their fair share. 

He is not being honest to the American people.  He should be upfront and explain to the American people that in 2012 Social Security, Medicare and Medicaid accounted for 44 percent of non-interest federal spending.   According to The Heritage Foundation in the coming decades, the cost of these programs will leap from 8.4 percent of gross domestic product (GDP) to 18.6 percent of GDP-an increase of 10.2 percent of GDP.  Without reform, this increased cost would require raising taxes by the current equiva­lent of $12,072 per household or eliminating every other government program. Funding all of the prom­ised benefits with income taxes would require rais­ing the 35 percent income tax bracket to at least 77 percent and raising the 25 percent tax bracket to at least 55 percent.

Although many believe that Americans ages 55 and over should be exempt from any reforms.  However, this is more than an issue of finance.  This is a moral issue.  To quote Brian Riedl from The Heritage Foundation:

“Americans need to decide whether they want a future in which older Americans have an automatic claim on one-fifth of the future income of their grandchildren-who will be raising their own chil­dren and paying off their home mortgages. Under the current system, retirees will spend one-third of their adult lives in taxpayer-funded retirement while national security, education, health research, and antipoverty programs fight for the few remain­ing tax dollars.”

30
Oct

The Perils of the Fiscal Cliff

by admin in Politics

Here is a link to John Mauldin’s piece on the fiscal cliff at www. mauldineconomics.com:  http://www.mauldineconomics.com/frontlinethoughts/the-perils-of-the-fiscal-cliff 

Excerpt:

Given that within a few weeks a very large debate will erupt in Congress about how to deal with the “Fiscal Cliff,” with both sides displaying economic models that demonstrate the clear superiority of their chosen solutions and the utter disaster that will ensue if the opposition’s plans are enacted, I think we will find it useful to look at some of the underlying assumptions. Given the fact that almost everyone, including your humble analyst, has concluded that if the tax increases and spending cuts were to be enacted as the legislation currently dictates, a rather serious recession would follow in short order, it might help us to look at some of the assumptions behind that assessment.