When Debt Makes Sense

…and when it doesn’t. You borrow to time-shift consumption, i.e. so that you can consume today rather than consuming in the future. There are times when that makes sense. For example, when what you’re purchasing, e.g. a house, is likely to appreciate in value. Or when you expect your earnings to rise so that it’s easier for you to pay off the loan in the future. It helps when there are no good ways to save, e.g. when there are no good investment opportunities or when the cost of saving is too high.

It makes no sense to borrow to pay ordinary operating expenses. That’s the context of this remark from the editors of the Wall Street Journal:

This is the same sorrowful spectacle Chicago’s school system put on last year. When it failed to get a state bailout for a looming pension payment in 2015, it borrowed some $600 million. Now, unable to pay back what it already owes, the system last week did a $725 million bond sale at an 8.5% interest rate, a large premium over what other borrowers can pay. Mr. Emanuel blames Mr. Rauner’s bankruptcy talk for the premium.

8.5% is a lot of interest and we’re presently experiencing a period of historically low interest rates. The CPS is paying such high rates because its credit rating is very low, which is another way of saying that investors wonder if they’ll be paid back. My back-of-the-envelope calculation says that’s $50 million a year. That might make sense if Chicago’s revenues were expected to increase over time but that’s not the case.

Chicago’s population has declined in every decade since 1950 except for the decade from 1990 to 2000. The smart money is on Chicago’s population declining in the present decade. Fewer people means less revenue for the city and fewer people to share the debt burden. If the real incomes of the people who remain are shrinking (as I suspect to be the case—that’s hard to ferret out), more debt is being borne by fewer Chicagoans who are decreasingly able to bear it.

Chicago’s public schools serve fewer students than they did in 2000 but not only do the real per student costs continue to rise the total real costs do as well. There’s something wrong with this picture.


Hillary’s Quandary

I wonder whether the pundits have realized yet the quandary in which Hillary Clinton finds herself. More public exposure doesn’t help her for any number of reasons not the least of which is that she’s thoroughly unpleasant. Just recently sending surrogates out hasn’t had the desired effect because her surrogates are unpleasant, too.


The Candidates of Anger

I don’t have a great deal to say about the outcomes of the New Hampshire primaries which I’m sure you’ve all read about other than to point out that the winners have something in common: they’re both the candidates of angry voters. There’s a lot to be angry about.

They’re angry that the jobs that Americans won’t do are in fact jobs that Americans are training their replacements to do. If anything gives the lie to the notion that the H-1B visa employees coming in have skills that can’t be found domestically, that’s got to be it. If they had the skills, they wouldn’t need training.

They’re angry that they’re being promised good jobs if only they get college educations only to find that there are no jobs for people with the skills they’ve gained and they’ve become slaves to the debt they acquired in the process of getting those college educations.

They’re angry that even in small town America even the most trivial chore has become difficult because the people supposed to assist them don’t speak English or are incomprehensible in English.

They’re angry that kids are being murdered by the government rather than helped by it.

They’re angry that invading Middle Eastern and Central Asian countries hasn’t made us any more secure and there doesn’t seem to be any way out.

They’re angry that nine years later most of the counties in the United States haven’t recovered from the Great Recession and that those that have are either in oil-producing states or the counties near Washington, DC or that state capitols are located in.

Do I need to go on? They’re angry.


Saving the Best for Last

In an article at the Wall Street Journal on the economics of illegal immigration it takes them a while before they get to the good part:

The labor shortage has caused some wages to rise. Carlos Avelar, a placement officer at Phoenix Job Corps, a federal job-training center, says graduates now often mull two or three jobs offers from construction firms and occasionally start at $14.65 an hour instead of $10.

At DTR Landscape Development LLC, the firm’s president, Dick Roberts, says he has increased his starting wage by 60% to $14.50 an hour because he is having trouble finding reliable workers.

One immigrant-heavy industry, construction, has added about 15,000 jobs in Arizona since 2011 and now has total employment of 127,000, according to the Bureau of Labor Statistics, half the number of 2006. Employment in farming, which also depends on immigrants, has rarely exceeded 9,500 since 2008, according to the bureau, whose numbers mainly cover workers on large farms.

Mr. Knorr, the pepper grower, says he planted just 120 acres last year, down from as many as 550 in years past, because he couldn’t find enough harvest workers.

Some peppers he was unable to harvest by Thanksgiving turned red on the vine—“chocolate,” in farmer parlance. That made them useless to salsa makers, who want only green peppers. He plowed the plants under.

He says mechanization is his future. He continues to pour time and money into a laser-guided device to remove stems from peppers, which pickers now do by hand in the field. Another farmer in the area developed a mechanical carrot harvester.

Mr. Knorr says he is willing to pay $20 an hour to operators of harvesters and other machines, compared with about $13 an hour for field hands. He says he can hire skilled machinists at community colleges, so he can rely less on migrant labor.

“I can find skilled labor in the U.S.,” he says. “I don’t have to go to bed and worry about whether harvesting crews will show up.”

Of course individuals and companies who’ve built their business models around an unlimited supply of new, cheap workers are going to have a painful transition ahead of them. That’s the one sentence description of the balance of the article.

The question is what kind of country do you want to have? A country of low wages and high immigration or one of higher wages and low immigration? It’s our decision to make. Or at least it should be. We know what Mark Zuckerberg, Bill Gates, and Warren Buffett want.


China’s Way Forward

At The American Interest Martin Wolf has what strikes me as a good post on the hazards facing China in its path to further economic development. Here’s a snippet:

A discontinuity in China’s economic growth is now far more likely than it has been for decades. Moreover, such a discontinuity might not be brief. The challenge facing policymakers is, after all, huge. They need to re-engineer a highly unbalanced and slowing economy without letting it crash. Many analysts, suspicious of Chinese statistics, think the situation is already far worse than official sources suggest, with growth running at closer to 4 percent than 6 percent.8 If so, the investment rate is even more radically unsustainable than now appears to be the case.

Something that goes unmentioned by Dr. Wolf: for China’s growth strategy to continue it much become much more dependent on its own domestic markets and I would argue that it must open those markets to foreign trade in a way that has never happened in China’s history. There just isn’t enough economic activity outside of China for economic activity inside of China to grow five-fold which seems to be the Chinese authorities’ target on the basis of trade.


One of These Things Is Not Like the Others

Matt Bruenig has a post at Demos featuring a number of graphs illustrating wealth inequality broken down by race (white, Hispanic, black). The graph above illustrates the racial wealth gap by percentile as of 2013.

Like Mr. Bruenig I present this graph without further comment. Interpret it as you will.


Why Would China Change to Suit Us?

The editors of the Washington Post seem to be under the same misapprehension that I’ve pointed out before:

President Obama’s policy since 2009, “strategic patience,” has failed. The policy has mostly consisted of ignoring North Korea while mildly cajoling China to pressure the regime. As the supplier of most of the isolated country’s energy and food, Beijing has enormous leverage. But Chinese President Xi Jinping appears even more committed than his predecessors to the doctrine that it is preferable to tolerate the Kim regime — and its nuclear proliferation — than do anything that might destabilize it.

Since the nuclear test, China has been saying that it will support another U.N. resolution on North Korea, but it is balking at significant new sanctions. Instead it calls for “dialogue,” by which it means negotiations between North Korea and the United States. This sounds reasonable; the problem is that talks on curbing North Korea’s nuclear program and missiles have failed repeatedly, and Mr. Kim is now insisting that the regime be accepted as a nuclear power.

What is needed is a return to the only non-military strategy that brought results: sanctions that strike at the regime’s inner circle. Mr. Kim and his cronies are still managing to import luxury goods from China, in spite of a U.N. ban; they still use Chinese banks to do business with the rest of the world. Those links could be curtailed if China, like Iran before it, were designated as a money launderer and U.S. sanctions were slapped on Chinese banks and other businesses that supply weapons and luxury goods.

so I’ll repeat myself. China has its own strategic objectives. It will not sacrifice those objectives to suit us and, short of a war that none of us should want, we cannot force China to do so.

Further, the United States has strategic objectives other than stopping the pipsqueak regime in North Korea from doing whatever it’s doing. How much are we willing to sacrifice those objectives over North Korea?


Are They Longing for Nuclear War?

Speaking of bass-ackwards, truculent policies, the editors of the Wall Street Journal are crestfallen at the advances being made by the Syrian Army with the assistance of Russia, Iran, et al.:

The Syrian disaster is becoming so painfully obvious that even members of the pro-Obama national security establishment are calling for the President to drop his let-it-burn policy. Veteran diplomats Nicholas Burns and James Jeffrey wrote last week in the Washington Post that the Syrian war “has metastasized into neighboring countries and the heart of Europe. It could destabilize the Middle East for a generation.” No kidding.

The duo called for more U.S. help for “the moderate Sunni and Kurdish forces” as well as “the creation of a safe zone in northern Syria to protect civilians, along with a no-fly zone to enforce it.” We wonder where these fellows were five years ago when we and Senators John McCain and Lindsey Graham were calling for precisely these steps, but maybe they can shame Mr. Kerry at the next Council on Foreign Relations meeting.

Since neither the rebels nor DAESH have an air force, a “no-fly zone” can only pertain to the Syrian government. Given the present reality that the force they’re trying to prevent from flying is the Russians, it seems to me that trying to establish a “no-fly zone” now brinksmanship of the most extreme kind, giving provoking nuclear Armageddon the old college try.

To what end? There has never been a viable moderate opposition capable of governing a unified Syria or even participating in such a government. The opposition has always treated Sunni Arab domination of Syria as a precondition for the cessation of hostilities.

They are also assuming without evidence that Assad is completely lacking in support among Sunni Arabs. I know of only one way to determine that conclusively. How about an internationally-supervised election?


Responding to North Korean Provocation

I think that the editors of the Wall Street Journal have dealing with the challenges presented by North Korea almost 180° wrong. Here’s their prescription:

China isn’t likely to squeeze its client unless it sees the U.S. and its allies doing more to isolate the North on their own. Such a policy would seek to end the regime through sweeping financial sanctions that prevent the Kim family from financing the tools of their tyranny, from weapons to whiskeys, and that impose stiff penalties on their enablers abroad. The strategy of begging China has been a failure.

What they’re ignoring is that China actually has interests of its own. China isn’t refraining from “squeezing” (as they put it) the North Koreans out of any great love for the Kim family. It’s because doing so would not further their interests.

Here are China’s interests:

  • the Chinese don’t want a mass stampede of refugees from North Korea coming into China
  • the Chinese don’t want a reunified Korean Peninsula allied with the United States

which I think are perfectly understandable.

Here’s my alternate plan. Start negotiating to pull U. S. forces out of South Korea. If the Chinese were more confident of a friendly unified Korea or at least a neutral one, I suspect that their support for the Kims would evaporate.

Sometimes the most truculent policy isn’t the one that accomplishes your strategic objectives. Americans don’t seem to understand that.


My Odyssey on Healthcare Reform

The debate about healthcare reform in the United States didn’t begin in 2009. It has been going on for more than 70 years. Although it’s forgotten by most Harry Truman’s Fair Deal included a provision for universal healthcare. That didn’t go much of anywhere and the discussion really began to heat up in the 1960s.

When the debates that culminated in the establishing of Medicaid and Medicare were going on, I supported something quite different, a system of clinics, run by the federal government, that would provide healthcare to needy seniors. Something else that has been forgotten is that before Medicare there were a lot of destitute or near-destitute seniors. I suspect that was a leftover from the Great Depression. Some areas of the country, particularly in the South, didn’t recover for a generation and the seniors of the 1960s had been adults in the 1930s and their lives had been blighted by the Depression.

There was a very simple reason for my preference. The United States had no experience in running a system like Medicare or Medicaid in which tax money was transferred in the billions to private providers but it did have experience in running a much more modest plan which seemed to be working and controlling costs at the same time: the VA system. Also, that plan wouldn’t have the spillover effects that Medicare has and which were obvious from its inception fifty years ago.

Such a system didn’t satisfy the ambitions of the progressives of the time (we called them “liberals” then) who really wanted British National Health. For reasons that have never been clear to me it was anathema to conservatives and libertarians of 50 years ago as well. A system of clinics to provide healthcare to qualifying seniors was “socialized medicine” but the VA hospital system wasn’t? The idea is beyond absurd.

In the 1970s I had the opportunity to live and work in Germany briefly, visiting France, Belgium, and the Netherlands. While there I learned that their systems didn’t lead inevitably to those countries becoming Soviet hellholes as most Americans seemed to believe and many believe still. For decades thereafter I supported a single payer system something on the order of France’s. That got nowhere and when Hillary Clinton bungled her opportunity to reform the U. S. healthcare system the door was once again closed on any sort of U. S. healthcare reform for another 15 years.

Shortly after the Congress began its annual exercise in kicking the can down the road called the “doc fixes” I abandoned my support for a single payer system. I have now concluded that the federal government is simply unwilling and incapable of controlling costs and any system in which costs are not controlled will inevitably collapse of its own weight. The present system, which I still find disrespectful to call “Obamacare”, is no exception. I think it will collapse for all of the reasons its critics have predicted but it’s still early days. By the time it collapses healthcare will comprise about 20% of the economy and the dislocation that collapse will produce is truly awful to consider.

So now I’m in despair. It’s far too late for a modest program capable of addressing the actual problems. Healthcare costs, inflated by Medicare, are simply too high. The U. S. is pretty obviously incapable of running a nationwide single payer system.

I suspect that workable reform must take place at the state level, as is the case in Canada and Australia, which will mean that some states will have state healthcare systems, some will have have state-based single payer systems, and some won’t have either one. Such an outcome is so unacceptable to both political parties that I don’t expect to see our system seriously reformed in my lifetime. The deadweight loss of our healthcare system will continue to grow, stunting economic growth in the other sectors of the economy, for the foreseeable future.