Saturday, February 25, 2006

Growth slows, gap widens

While the nation's economy zips along at a respectable 3.5% in 2005, personal economies are not doing as well:
After growing rapidly during the boom of the 1990s, the net worth of the typical American family rose only 1.5% after inflation between 2001 and 2004, the Federal Reserve said in an update of a survey it does once every three years.
GDP grew a hair over 2.1% during the same period. The change was not felt equally, however, as the wealth gap was augmented:
The net worth of the [family at the 90%] rose to $831,600, a 6.5% increase from 2001, adjusted for inflation. In contrast, the net worth of the typical family [at the 25%] fell 1.5% to $13,300.
This evidences further the prescience of Herrnstein and Murray, who argued that the new global economy will be one sorted by intelligence, where opportunities for the most endowed expand exponentially, while those with less cognitive firepower find themselves increasingly relegated to a penury existence.

Other recent economic news does not strike me as encouraging. Americans actually spent more than they made last year, and the poverty rate has been on the rise for half a decade. Much of the recent economic expansion has been driven by a surge in real estate prices (another factor in the widening of the wealth gap). The US trade deficit hit a record $726 billion in 2005. Warren Buffet is worried we're giving foreigners a stake in our country (government debt) for cheap consumables that allow us to keep the good times rolling today by selling away our future.

Here's an analogy that illustrates what's happening as my simple mind understands it. I make $30,000 a year working. I spend $40,000 a year buying consumables (stuff that doesn't represent a future monetary benefit). I've been doing this for five years. Fortunately, I own a house that was worth $100,000 five years ago. Every year over the last five its value has been increasing by $11,000. To feed my consumption habits, I've been taking out a home equity loan for $11,000 on an annual basis. Thus, my net worth has been up $1,000 ($30,000income-$40,000spent+$11,000equity) for five years running. But what happens if the value of my house crashes? Or just stops appreciating? My standard of living will have to be adjusted downward drastically. If not, I'll fall into debt and the whole miasma will be compounded by high interest rates. This is not a happy situation. Eventually something's going to give.

Immigration patterns do not help either. Total GDP is growing (recall 2.1% from 2001 to 2004) over 50% faster than the growth of GDP per capita (which grew less than 1.4% from 2001 to 2004). In other words, the economic output of the nation as a whole is increasing a lot faster than the economic output per American is. Much of the GDP growth over this period, then, does not translate into a better standard of living for the average resident.

To grasp this concept, consider what would happen if the US gobbled up Mexico tomorrow. Total GDP would grow by almost 10% in a single day, but GDP per capita would plummet by 20% just as fast. Life would get vastly better for Mexicans as they enjoyed the full benefits of US prosperity and economic might. But the situation would deteriorate drastically for most Americans, especially those in the lower class who would find themselves competing with tens of millions of mestizos more than happy to do dirty work for $5.15 an hour with no benefits.

"So what," the good libertarian would ask. "Labor will be cheaper and businesses will make bigger profits." Indeed they would, at least in the short run (necessity being the mother of invention, places like Japan that are mechanizing rather than chasing the cheapest serf are going to create robots that can work more effectively and cheaply than even the most diligent cacique). But the profits of big business would be subsidized by Joe American. The Mexican laboring for minimum wage is now entitled to the full buffet that is the US welfare system and the costs that accompany it--$8,000 or so per year for each child (another $3,000 annually if the whelp needs ESL services), infrastructure use, medical services, police and fire, pollution, increased population density, linguistic barrier costs, ad infinitum. Just looking at two kids with ESL brings the taxpayer a bill of more than $20,000. We're lucky if the hard working Mexican is paying $5,000 in taxes.

I use the extreme example of combining the US and Mexico into Amerixico to illustrate what is in effect already happening, albeit at a considerably slower pace than our hypothetical overnight shift. One-fifth of ethnic Mexicans now live in the United States, and the number is growing everyday. It's great for the average Mexican, who goes from making five bucks a day to five bucks an hour. If I was in his situation, I'd probably do the same. It's also great for the Mexican government, which exports its social problems north of the border and gets $17 billion a year in cash in return. It's great for agro-business and other heavily labor intensive industries that enjoy an increased labor supply and therefore less powerful unions and lower wages. But it's terrible for the US native who is footing the bill while jobs are going to immigrants who do not spend the money in the local community but instead send it back home.

We should create a merit immigration system that imports people who are going to be net benefits rather than public costs in tandem with a barrier along the southern border to stop low-value adding illegal immigration. Stop pouring money into the fruitless Middle East and invest it in alternative energy development. Energy independence would keep the $200 billion or so we'll spend on foreign oil this year in the country and starve the terrorism beast. Making the coal-to-gas process economically viable would allow us to actually become a net energy exporter because we have so much coal. Support federal and state vouchers to improve educational efficacy and cut costs brought on by ineffective teachers and bloated administrative bureaucracies. Legalize euthanasia to blunt the entitlement tidal wave that is the retiring baby boomer generation. Provide financial incentives (e.g., phase the child tax credit and the child dependency exemption in progressively rather than regressively) for wealthy people to have more children and for poor people to have fewer ones to close the wealth gap and raise the national IQ.

(Economy)

1 comment:

Priscilla said...

It cannot have effect in reality, that is what I consider.