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August 30, 2004

Garbage IN / Garbage OUT
by John Mackenzie

NASCAR Dads

"In order to make sure jobs stay here in Ohio and America, we're going to make sure countries treat us the way we treat them."
 - President George Bush campaigning in Troy, Ohio

Oh my... heaven forbid countries remotely begin to treat us in the same manner in which we've treated them. The prospects in that realm of blowback remain very serious. Granted, the President was referring to Trade Policy and not Foreign Policy. Although peering through the Foreign Policy looking glass, things do not appear any better:

Within Military Order #1, the President granted himself the POWER, in clear violation of international law, to detain indefinitely any Non-US citizen anywhere in the world.

Lovely, no wonder our new buddy Moammar Kadafi announced he would give up his efforts to develop weapons of mass destruction. He was, after all running the largest underground Chemical / Biological facility on the planet. Still no word on what precisely the "Inspectors" have found.

Some would suggest this is the moral equivalent of negotiating with dictators and yet, the majority of planet's inhabitants outside our borders seem to believe it's something altogether grotesque and malignant. 90+ % of those polled around the globe do not care for George Bush and his policies and believe that his audacious remark above is akin to the self declared "God's Cop" in a now borderless world.

This is how our leadership is perceived.

Was The Hague to issue a similar decree... Henry Kissinger might want to consider relocating to some distant galaxy (and btw, why is the proper spelling of Kissinger in my spellchecker?).

Back in Lima, Ohio... the President's (aka the PEZ, due to his nature of dispensing with reality, the truth and the facts) remarks were not well aligned with sanity or reality:

"This economy of ours has recovered from recession, corporate scandal and attacks, and yet there are parts of your state that are running behind the national economy."

"I understand that, I understand that, which means you better get somebody in office who has a plan to continue economic growth."

"We're no going to play politics with your wallet, we said if we're going to provide tax relief, everybody who pays gets relief."

The globalization panacea, again, rears its Hydra's Head:

"One reason the farm economy around the country is strong is because we're selling soybeans to China, we're selling corn around the world. We've opened up markets. We can compete with anybody, any time, any place as long as the rules are fair."

Good lord, what a crock of crap, contrary to the PEZ, let's look at reality:

- The "Economy" has not recovered, the Financial Hedge Fund Economy has merely been allowed to speculate wantonly within its own Capital Stocks. An "Economy" based upon the packaging of DEBT (CREDIT), charging exorbitant fee's to do so and then Securitizing it for sale (Packaging), followed by all sorts of kinky Derivative Machinations to "Insure" these WMD's against "Disaster".

- Corporate Scandals are on the rise and are not declining.

- "Attacks "...that appear to have been preventable by your Administration.

- "Economic Growth" is another fantasyland ride. We should be far more concerned with preserving what we have and becoming far less dependent on others for about everything we consume. 70 + % of our crude oil are imported. We are quickly absorbing far too much of the rest of the worlds Savings in order to maintain Consumption.

- The tax break you're yammering on about... yes, 80 + % went to those making more than your current salary as the PEZ. May I suggest this is a gross income redistribution dislocation, even for a Keynesian Socialist. Another utter fraud.

- "We can compete with anybody, any time, any place as long as the rules are fair." Since when is life fair? Protectionism worked for this nation a throughout its history. In fact its most prosperous years were under "Protectionist Policies", but alas... that was BEFORE we debased our internal productive capacity and abandoned saving for the future.

I'm not a NASCAR Dad, I do enjoy watching Speed-Vision for Formula One and Super Bikes, and I've yet to vote in a Presidential Election. My reasoning is thus; America is one giant Cluster ____ of Corporate Multinational Kleptocrats that front "choice" as Democracy. Golly gee, no thank you, when given the lesser of two Evils representing the same figurehead, unrepresentative of the AVERAGE AMERICAN... yeah, I'll pass.

And the Alternative...

Must admit, I did look at John Kerry, another front man for the machine; that quite frankly, could turn the lights out in Washington DC and still run like the Energizer Bunny... I believe that's called Fascism, but I could be wrong.

"I will NEVER privatize Social Security. I will NOT cut Social Security Benefits. And I will NOT raise the Retirement Age."

John Kerry, Democratic PEZidential Candidate

Oh my. I simply can't trust a guy who says "NEVER "with respect to the future. It's a rule I have, kinda like the person who says, "Trust me"...

So there you have it NASCAR Dads, get out and Vote! Just say NO to Usama and remember that the PEZ will have your back at all times as long as everybody plays fair in the global sandbox. I'll stick to my perch on the porch waiting for enough of the rest of us Indians to figure out what the ____ 's up.

Bubbles Bull Horn, Then and Now

In contrasting Bubbles diametrically opposed mumblings, we'll begin with a review of his "Outlook for the Federal Budget and Implications for Fiscal Policy"

______________________________

Testimony of Chairman Alan Greenspan
Outlook for the federal budget and implications for fiscal policy
Before the Committee on the Budget, U.S. Senate
January 25, 2001

I am pleased to appear here today to discuss some of the important issues surrounding the outlook for the federal budget and the attendant implications for the formulation of fiscal policy. In doing so, I want to emphasize that I speak for myself and not necessarily for the Federal Reserve.

The challenges you face both in shaping a budget for the coming year and in designing a longer-run strategy for fiscal policy were brought into sharp focus by the release last week of the Clinton Administration's final budget projections, which showed further upward revisions of on-budget surpluses for the next decade. The Congressional Budget Office also is expected to again raise its projections when it issues its report next week.

The key factor driving the cumulative upward revisions in the budget picture in recent years has been the extraordinary pickup in the growth of labor productivity experienced in this country since the mid-1990s. Between the early 1970s and 1995, output per hour in the non-farm business sector rose about 1-1/2 percent per year, on average. Since 1995, however, productivity growth has accelerated markedly, about doubling the earlier pace, even after taking account of the impetus from cyclical forces. Though hardly definitive, the apparent sustained strength in measured productivity in the face of a pronounced slowing in the growth of aggregate demand during the second half of last year was an important test of the extent of the improvement in structural productivity. These most recent indications have added to the accumulating evidence that the apparent increases in the growth of output per hour are more than transitory.

It is these observations that appear to be causing economists, including those who contributed to the OMB and the CBO budget projections, to raise their forecasts of the economy's long-term growth rates and budget surpluses. This increased optimism receives support from the forward-looking indicators of technical innovation and structural productivity growth, which have shown few signs of weakening despite the marked curtailment in recent months of capital investment plans for equipment and software.

To be sure, these impressive upward revisions to the growth of structural productivity and economic potential are based on inferences drawn from economic relationships that are different from anything we have considered in recent decades. The resulting budget projections, therefore, are necessarily subject to a relatively wide range of error. Reflecting the uncertainties of forecasting well into the future, neither the OMB nor the CBO projects productivity to continue to improve at the stepped-up pace of the past few years. Both expect productivity growth rates through the next decade to average roughly 2-1/4 to 2-1/2 percent per year--far above the average pace from the early 1970s to the mid-1990s, but still below that of the past five years.

Had the innovations of recent decades, especially in information technologies, not come to fruition, productivity growth during the past five to seven years, arguably, would have continued to languish at the rate of the preceding twenty years. The sharp increase in prospective long-term rates of return on high-tech investments would not have emerged as it did in the early 1990s, and the associated surge in stock prices would surely have been largely absent. The accompanying wealth effect, so evidently critical to the growth of economic activity since the mid 1990s, would never have materialized.

In contrast, the experience of the past five to seven years has been truly without recent precedent. The doubling of the growth rate of output per hour has caused individuals' real taxable income to grow nearly 2-1/2 times as fast as it did over the preceding ten years and resulted in the substantial surplus of receipts over outlays that we are now experiencing. Not only did taxable income rise with the faster growth of GDP, but the associated large increase in asset prices and capital gains created additional tax liabilities not directly related to income from current production.

The most recent projections from the OMB indicate that, if current policies remain in place, the total unified surplus will reach $800 billion in fiscal year 2011, including an on-budget surplus of $500 billion. The CBO reportedly will be showing even larger surpluses. Moreover, the admittedly quite uncertain long-term budget exercises released by the CBO last October maintain an implicit on-budget surplus under baseline assumptions well past 2030 despite the budgetary pressures from the aging of the baby-boom generation, especially on the major health programs.

The most recent projections, granted their tentativeness, nonetheless make clear that the highly desirable goal of paying off the federal debt is in reach before the end of the decade. This is in marked contrast to the perspective of a year ago when the elimination of the debt did not appear likely until the next decade.

But continuing to run surpluses beyond the point at which we reach zero or near-zero federal debt brings to center stage the critical longer-term fiscal policy issue of whether the federal government should accumulate large quantities of private (more technically nonfederal) assets. At zero debt, the continuing unified budget surpluses currently projected imply a major accumulation of private assets by the federal government. This development should factor materially into the policies you and the Administration choose to pursue.

I believe, as I have noted in the past, that the federal government should eschew private asset accumulation because it would be exceptionally difficult to insulate the government's investment decisions from political pressures. Thus, over time, having the federal government hold significant amounts of private assets would risk sub-optimal performance by our capital markets, diminished economic efficiency, and lower overall standards of living than would be achieved otherwise.

Short of an extraordinarily rapid and highly undesirable short-term dissipation of unified surpluses or a transferring of assets to individual privatized accounts, it appears difficult to avoid at least some accumulation of private assets by the government.

Private asset accumulation may be forced upon us well short of reaching zero debt. Obviously, savings bonds and state and local government series bonds are not readily redeemable before maturity. But the more important issue is the potentially rising cost of retiring marketable Treasury debt. While shorter-term marketable securities could be allowed to run off as they mature, longer-term issues would have to be retired before maturity through debt buybacks. The magnitudes are large: As of January 1, for example, there was in excess of three quarters of a trillion dollars in outstanding non-marketable securities, such as savings bonds and state and local series issues, and marketable securities (excluding those held by the Federal Reserve) that do not mature and could not be called before 2011. Some holders of long-term Treasury securities may be reluctant to give them up, especially those who highly value the risk-free status of those issues. Inducing such holders, including foreign holders, to willingly offer to sell their securities prior to maturity could require paying premiums that far exceed any realistic value of retiring the debt before maturity.

Decisions about what type of private assets to acquire and to which federal accounts they should be directed must be made well before the policy is actually implemented, which could occur in as little as five to seven years from now. These choices have important implications for the balance of saving and, hence, investment in our economy. For example, transferring government saving to individual private accounts as a means of avoiding the accumulation of private assets in the government accounts could significantly affect how social security will be funded in the future.

Short of some privatization, it would be preferable in my judgment to allocate the required private assets to the social security trust funds, rather than to on-budget accounts. To be sure, such trust fund investments are subject to the same concerns about political pressures as on-budget investments would be. The expectation that the retirement of the baby-boom generation will eventually require a drawdown of these fund balances does, however, provide some mitigation of these concerns.

Returning to the broader picture, I continue to believe, as I have testified previously, that all else being equal, a declining level of federal debt is desirable because it holds down long-term real interest rates, thereby lowering the cost of capital and elevating private investment. The rapid capital deepening that has occurred in the U.S. economy in recent years is a testament to these benefits. But the sequence of upward revisions to the budget surplus projections for several years now has reshaped the choices and opportunities before us. Indeed, in almost any credible baseline scenario, short of a major and prolonged economic contraction, the full benefits of debt reduction are now achieved before the end of this decade--a prospect that did not seem likely only a year or even six months ago.

The most recent data significantly raise the probability that sufficient resources will be available to undertake both debt reduction and surplus-lowering policy initiatives. Accordingly, the tradeoff faced earlier appears no longer an issue. The emerging key fiscal policy need is to address the implications of maintaining surpluses beyond the point at which publicly held debt is effectively eliminated.

The time has come, in my judgment, to consider a budgetary strategy that is consistent with a preemptive smoothing of the glide path to zero federal debt or, more realistically, to the level of federal debt that is an effective irreducible minimum. Certainly, we should make sure that social security surpluses are large enough to meet our long-term needs and seriously consider explicit mechanisms that will help ensure that outcome. Special care must be taken not to conclude that wraps on fiscal discipline are no longer necessary. At the same time, we must avoid a situation in which we come upon the level of irreducible debt so abruptly that the only alternative to the accumulation of private assets would be a sharp reduction in taxes and/or an increase in expenditures, because these actions might occur at a time when sizable economic stimulus would be inappropriate. In other words, budget policy should strive to limit potential disruptions by making the on-budget surplus economically inconsequential when the debt is effectively paid off.

In general, as I have testified previously, if long-term fiscal stability is the criterion, it is far better, in my judgment, that the surpluses be lowered by tax reductions than by spending increases. The flurry of increases in outlays that occurred near the conclusion of last fall's budget deliberations is troubling because it makes the previous year's lack of discipline less likely to have been an aberration.

To be sure, with the burgeoning federal surpluses, fiscal policy has not yet been unduly compromised by such actions. But history illustrates the difficulty of keeping spending in check, especially in programs that are open-ended commitments, which too often have led to much larger outlays than initially envisioned. It is important to recognize that government expenditures are claims against real resources and that, while those claims may be unlimited, our capacity to meet them is ultimately constrained by the growth in productivity. Moreover, the greater the drain of resources from the private sector, arguably, the lower the growth potential of the economy. In contrast to most spending programs, tax reductions have downside limits. They cannot be open-ended.

Lately there has been much discussion of cutting taxes to confront the evident pronounced weakening in recent economic performance. Such tax initiatives, however, historically have proved difficult to implement in the time frame in which recessions have developed and ended. For example, although President Ford proposed in January of 1975 that withholding rates be reduced, this easiest of tax changes was not implemented until May, when the recession was officially over and the recovery was gathering force. Of course, had that recession lingered through the rest of 1975 and beyond, the tax cuts would certainly have been helpful. In today's context, where tax reduction appears required in any event over the next several years to assist in forestalling the accumulation of private assets, starting that process sooner rather than later likely would help smooth the transition to longer-term fiscal balance. And should current economic weakness spread beyond what now appears likely, having a tax cut in place may, in fact, do noticeable good.

As for tax policy over the longer run, most economists believe that it should be directed at setting rates at the levels required to meet spending commitments, while doing so in a manner that minimizes distortions, increases efficiency, and enhances incentives for saving, investment, and work.

In recognition of the uncertainties in the economic and budget outlook, it is important that any long-term tax plan, or spending initiative for that matter, be phased in. Conceivably, it could include provisions that, in some way, would limit surplus-reducing actions if specified targets for the budget surplus and federal debt were not satisfied. Only if the probability was very low that prospective tax cuts or new outlay initiatives would send the on-budget accounts into deficit, would unconditional initiatives appear prudent.

The reason for caution, of course, rests on the tentativeness of our projections. What if, for example, the forces driving the surge in tax revenues in recent years begin to dissipate or reverse in ways that we do not now foresee? Indeed, we still do not have a full understanding of the exceptional strength in individual income tax receipts during the latter 1990s. To the extent that some of the surprise has been indirectly associated with the surge in asset values in the 1990s, the softness in equity prices over the past year has highlighted some of the risks going forward.

Indeed, the current economic weakness may reveal a less favorable relationship between tax receipts, income, and asset prices than has been assumed in recent projections. Until we receive full detail on the distribution by income of individual tax liabilities for 1999, 2000, and perhaps 2001, we are making little more than informed guesses of certain key relationships between income and tax receipts.

To be sure, unless later sources do reveal major changes in tax liability determination, receipts should be reasonably well-maintained in the near term, as the effects of earlier gains in asset values continue to feed through with a lag into tax liabilities. But the longer-run effects of movements in asset values are much more difficult to assess, and those uncertainties would intensify should equity prices remain significantly off their peaks. Of course, the uncertainties in the receipts outlook do seem less troubling in view of the cushion provided by the recent sizable upward revisions to the ten-year surplus projections. But the risk of adverse movements in receipts is still real, and the probability of dropping back into deficit as a consequence of imprudent fiscal policies is not negligible.

In the end, the outlook for federal budget surpluses rests fundamentally on expectations of longer-term trends in productivity, fashioned by judgments about the technologies that underlie these trends. Economists have long noted that the diffusion of technology starts slowly, accelerates, and then slows with maturity. But knowing where we now stand in that sequence is difficult--if not impossible--in real time. As the CBO and the OMB acknowledge, they have been cautious in their interpretation of recent productivity developments and in their assumptions going forward. That seems appropriate given the uncertainties that surround even these relatively moderate estimates for productivity growth. Faced with these uncertainties, it is crucial that we develop budgetary strategies that deal with any disappointments that could occur.

That said, as I have argued for some time, there is a distinct possibility that much of the development and diffusion of new technologies in the current wave of innovation still lies ahead, and we cannot rule out productivity growth rates greater than is assumed in the official budget projections. Obviously, if that turns out to be the case, the existing level of tax rates would have to be reduced to remain consistent with currently projected budget outlays.

The changes in the budget outlook over the past several years are truly remarkable. Little more than a decade ago, the Congress established budget controls that were considered successful because they were instrumental in squeezing the burgeoning budget deficit to tolerable dimensions. Nevertheless, despite the sharp curtailment of defense expenditures under way during those years, few believed that a surplus was anywhere on the horizon. And the notion that the rapidly mounting federal debt could be paid off would not have been taken seriously.

But let me end on a cautionary note. With today's euphoria surrounding the surpluses, it is not difficult to imagine the hard-earned fiscal restraint developed in recent years rapidly dissipating. We need to resist those policies that could readily resurrect the deficits of the past and the fiscal imbalances that followed in their wake.

______________________________

If you're like me, you just read a lot of "promise" followed by many carefully leveraged "cautionary notes" and are scratching your head wondering just how this "assessment "foundered.

At the time it was perceived to be an endorsement of the Bush $1.6 trillion, 10-year tax cut plan, eschewing his proponent favor for using budget surpluses to pay down the national debt first. Instead, Bubbles made it appear much more likely that we would pay off the National Debt much sooner than expected.

Of course, let us not forget the "touting" of the Fed's Monetary "Powers" and as such, Interest Rates would be a far more effective vehicle for "Jumpstarting" the Economy and that avoiding a potential threat of Recession.

Well, reality set in about twelve days short of three years later, albeit in a carefully worded two-liner:

______________________________

January 13, 2004

Alan Greenspan Says That the 2001 Tax Cut Was a Mistake

People like me who have enormous respect for the intelligence and judgment of Alan Greenspan have long been puzzled at his approval of the Bush administration's 2001 tax cut. It never fit our picture of who the man was and what he thought. Now, thanks to Paul O'Neill's reports of his discussions with Greenspan, we have a satisfactory answer:

Alan Greenspan said at the time that the 2001 tax cut was a mistake:

p. 162: May 22 [2001]... Greenspan arrived at the Treasury for breakfast with O'Neill. Their secret trigger pact had come up one vote short.... "We did what we could on conditionality," O'Neill said with momentary resignation.... "The first big battle is over, really. I think we fought well, we made our points vigorously." Greenspan said that wasn't enough. "Without the triggers, that tax cut is irresponsible fiscal policy," he said in his deepest funereal tone. "Eventually, I think that will be the consensus view."

______________________________

Friday's rather disturbing news from Bubbles, the Maestro of Malfeasance may have sent a few Sun City pilgrims to the local emergency room:

______________________________

Remarks by Chairman Alan Greenspan
At a symposium sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming
August 27, 2004

I am pleased to be here this morning to discuss the economic implications of population aging and to provide a general overview of some of the issues that will be covered in much greater detail over the next two days.

The so-called elderly dependency ratio--the ratio of older adults to younger adults--has been rising in the industrialized world for at least 150 years. The pace of increase slowed greatly with the birth of the baby-boom generation after World War II. But elderly dependency will almost certainly rise more rapidly as that generation reaches retirement age.

The changes projected for the United States are not as dramatic as those projected for other areas--particularly Europe and Japan--but they nonetheless present substantial challenges. The growth rate of the working-age population in the United States is anticipated to slow from about 1 percent per year today to about 1/4 percent per year by 2035. At the same time, the percentage of the population that is over 65 is poised to rise markedly--from about 12 percent today to perhaps 20 percent by 2035.

These anticipated changes in the age structure of the population and workforces of developed countries are largely a consequence of the decline in fertility that occurred after the birth of the baby-boom generation. The fertility rate in the United States, after peaking in 1957 at about 3-1/2 births over a woman's lifetime, fell to less than 2 by the early 1970s and then rose to about 2.1 by 1990. Since then, the fertility rate has remained close to 2.1, the so-called replacement rate--that is, the level of the fertility rate required to hold the population constant in the absence of immigration or changes in longevity.

Fertility rates in Europe, on the whole, and in Japan have fallen far short of the replacement rate. The decrease in the number of children per family since the end of the baby boom, coupled with increases in life expectancy, has inevitably led to a projected increase in the ratio of elderly to working-age population throughout the developed world.

The populations in most developing countries likewise are expected to have a rising median age but to remain significantly younger and doubtless will grow faster than the populations of the developed countries over the foreseeable future. Eventually, declines in fertility rates and increases in longevity may lead to similar issues with aging populations in what is currently the developing world but likely only well after the demographic transition in the United States and other developed nations.

* * *

The aging of the population in the United States will significantly affect our fiscal situation. Most observers expect Social Security, under existing law, to be in chronic deficit over the long haul; however, the program is largely defined benefit, and so the scale of the necessary adjustments is limited. The shortfalls in the Medicare program, however, will almost surely be much larger and much more difficult to eliminate. Medicare faces financial pressure not only from the changing composition of the population but also from continually increased per recipient demand for medical services. The combination of rapidly advancing medical technologies and our current system of subsidized third-party payments suggests continued rapid growth in demand, though future Medicare costs are admittedly very difficult to forecast.

Although the sustainability of fiscal initiatives is generally evaluated for convenience in financial terms, sustainability rests, at root, on the level of real resources available to an economy. The resources available to fund the sum of future retirement benefits and the real incomes of the employed will depend, of course, on the growth rate of labor employed plus the growth rate of the productivity of that labor.

The growth rate of the U.S. working-age population is expected to decline substantially over the next two decades and to remain low thereafter. But the fraction of that population that is employed will almost surely be affected by changes in the economic returns to working and, especially for older workers, improvements in health.

Americans are not only living longer but also generally living healthier. Rates of disability for those over 65 years of age have been declining even as the average age of the above-65 population is increasing. This decline in disability rates reflects both improvements in health and changes in technology that accommodate the physical impairments associated with aging. In addition, work is becoming less physically strenuous but more demanding intellectually, continuing a century-long trend toward a more-conceptual and less-physical economic output. For example, in 1900, agricultural and manual laborers composed about three-quarters of the workforce. By 1950, those types of workers accounted for one-half of the workforce, and though still critical to a significant part of our economic value-added, today compose only about one-quarter of our workforce.

To date, however, despite the improving feasibility of work at older ages, Americans have been retiring at younger ages. But rising pressures on retirement incomes and a growing scarcity of experienced labor could eventually reverse that trend.

Of course, immigration, if we choose to expand it, could also lessen the decline of labor force growth in the United States. As the influx of foreign workers that occurred in response to the tight labor markets of the 1990s demonstrated, U.S. immigration does respond to evolving economic conditions. But to fully offset the effects of the decline in fertility, immigration would have to be much larger than almost all current projections assume.

* * *

It is thus heightened growth of output per worker that offers the greatest potential for boosting U.S. gross domestic product to a level that would enable future retirees to maintain their expected standard of living without unduly burdening future workers. Productivity gains in the United States have been exceptional in recent years. But, for a country already on the cutting edge of technology to maintain this pace for a protracted period into the future would be without modern precedent. One policy that could enhance the odds of sustaining high levels of productivity growth is to engage in a long overdue upgrading of primary and secondary school education in the United States.

We obviously cannot attribute recent productivity trends to a high level of national saving. Rather, the effectiveness with which we have invested both domestic saving and funds attracted from abroad is the apparent source of our decade-long rise in productivity growth. As I have noted previously, the bipartisan policies of recent decades directed at deregulation and increasing globalization and the innovation that those policies have spurred have markedly improved our ability to channel saving to its most productive uses, and as a byproduct increased the flexibility and the resiliency of the U.S. economy.

It is, of course, difficult to separate rates of return based on the innovations embedded in new equipment from the enhanced returns made available by productive ideas of how to rearrange existing facilities. From an accounting perspective, efficiency gains, broadly defined as multifactor productivity, have accounted for roughly half the growth in labor productivity in recent years. Capital deepening accounts for most of the remainder.

All else being equal, domestic investment would raise future labor productivity and thereby help provide for our aging population. But the incremental benefit of additional investment may itself be affected by aging. With slowed labor force growth, the amount of new equipment that can be used productively could be more limited, and the return to capital investment could decline as a consequence. Yet it is possible that the return to certain types of capital--particularly those embodying new labor-saving technologies--could increase.

Although domestic investment has accounted for only half our recent productivity gains, its contribution has historically been much larger. Should the pace of efficiency gains slow, it would fall to the level of investment to again become the major contributor to productivity gains. Investment, however, cannot occur without saving. But maintaining even a lower rate of capital investment growth will likely require an increased rate of domestic saving because it is difficult to imagine that we can continue indefinitely to borrow saving from abroad at a rate equivalent to 5 percent of U.S. gross domestic product.

A key component of domestic saving in the United States in future decades will be the path of the personal saving rate. That rate will depend on a number of factors, especially the behavior of the members of the baby-boom cohort during their retirement years. Over the post-World War II period, the elderly in the United States, contrary to conventional wisdom, seem to have drawn down their accumulated wealth only modestly. Apparently retirees spend at a lesser rate and save more than is implicit in the notion that savings are built up during the working years to meet retirement needs. Perhaps, people mis-estimate longevity or desire a large cushion of precautionary savings. Moreover, often people bequeath a significant proportion of their savings to their children or others rather than spend it during retirement. If the baby-boom generation continues this pattern, achieving a higher private domestic saving rate is not out of reach. Even so, critical to national saving will be the level of government, specifically federal government, saving.

* * *

A doubling of the over-65 population by 2035 will substantially augment unified budget deficits and, accordingly, reduce federal saving unless actions are taken. But how these deficit trends are addressed can have profound economic effects. For example, aside from suppressing economic growth and the tax base, financing expected future shortfalls in entitlement trust funds solely through increased payroll taxes would likely exacerbate the problem of reductions in labor supply by diminishing the returns to work. By contrast, policies promoting longer working life could ameliorate some of the potential demographic stresses.

Changes to the age for receiving full retirement benefits or initiatives to slow the growth of Medicare spending could affect retirement decisions, the size of the labor force, and saving behavior. In choosing among the various tax and spending options, policymakers will need to pay careful attention to the likely economic effects.

* * *

The relative aging of the population is bound to bring with it many changes to the economy of the United States--some foreseeable, many probably not. Inevitably it will again require making difficult policy choices to balance competing claims. The decade-long acceleration in productivity and economic growth has seemingly muted the necessity of making such choices. But, as I noted earlier, history discourages the notion that the pace of growth will continue to increase. Though the challenges of prospective increasingly stark choices for the United States seem great, the necessary adjustments will likely be smaller than those required in most other developed countries. But how and when we adjust will also matter.

Early initiatives to address the economic effects of baby-boom retirements could smooth the transition to a new balance between workers and retirees. As a nation, we owe it to our retirees to promise only the benefits that can be delivered. If we have promised more than our economy has the ability to deliver to retirees without unduly diminishing real income gains of workers, as I fear we may have, we must recalibrate our public programs so that pending retirees have time to adjust through other channels. If we delay, the adjustments could be abrupt and painful. Because curbing benefits once bestowed has proved so difficult in the past, fiscal policymakers must be especially vigilant to create new benefits only when their sustainability under the most adverse projections is virtually ensured.

* * *

Responding to the pending dramatic rise in dependency ratios will be exceptionally challenging for the policymakers in developed countries. While I do not underestimate the difficulties that we face in the United States, I believe that, given the political will, we are better positioned than most others to make the necessary adjustments.

Aside from the comparatively lesser depth of required adjustment, our open labor markets should respond more easily to the changing needs and abilities of our population; our capital markets should allow for the creation and rapid adoption of new labor-saving technologies, and our open society should be receptive to immigrants. These supports should help us adjust to the inexorabilities of an aging population. Nonetheless, tough policy choices lie ahead.

______________________________

Wake up America, your country needs you.

So much for all the "Surplus" blather back in January of 2001.

I'd like to pose some simple questions to the Maestro. Questions, I believe the average thinking American is going to want to have a clear and concise answers in which to base their "Savings" decisions upon.

Question 1

While Budget Surpluses were claimed during 1998/99 why has the Total Federal Debt risen dramatically in each concurrent year and is now bumping its head at its most recent "adjustment" to $7.384 trillion?

Question 2

How is it that in March of 2000, the Administration clearly stated they were running Budget Deficits after claiming MASSIVE Cash Surpluses in "Custodial" Trust Accounts?

Question 3

Precisely how does the Government intend to repay the Trillions they have already "Borrowed" from these Trusts.

Question 4

How will the "$44 Trillion Abyss" Professor Larry Kotlikoff refers to America's under-funded entitlement liabilities be funded?

Question 5

What, specifically is our Governments Plan for reducing spending to bring financial solvency back within its reach?

Question 6

If the National Debt Ceiling is to be raised yet again from the existing $7.384 trillion is the Social Security "Trust" Funds going to Finance the increased Government spending?

Question 7

Would you like to re-purchase all of the Treasury Bills, Notes and Bonds within the Social Security Trust Fund?

Personally, I'd like the Federal Reserve step up and swap any trusts holding United States Treasury Issuances of any Duration for the Gold sitting in the Fed's vaults. Feel free to have congress enact legislation which restores THEIR ability to COIN MONEY and REGULATE the value thereof, but give us our damn gold back before all those "Promises" the Fed's Treasury sold to Social Security, Medicare/Medicaid and the rest of the globe turn to dust.

Who knows... perhaps Congress might restore GOLD to its true "Free Market" VALUE, but after you end up with all that confetti. I'm tired of being on the receiving end of this Wilson Era Socialism. It's old, tired and a bunch of non-sense.

John Mackenzie

John Mackenzie manages private capital - Email: m2jrmfl@bellsouth.net

Copyright © 2004-2005 John Mackenzie

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