Math Depends Upon Assumptions

Glenn Reynolds, Instapundit, discusses aging in his USA Today column.  He is in favor of extending lifespans. One of the arguments he gives is:

If we could extend healthspan by 20 years — so that 85 is the new 65 and 90 is the new 70 — people could retire that much later, and those pension obligations would pose a much less pressing problem. [emphasis added]

Agreed.  If folks worked longer and kept roughly the same retirement span then personal, corporate, and governmental finances would brighten considerably.  Unfortunately, that is not what has happened historically.  Here is a chart we used to help students understand the changes in retirement over generations:

Retirement Age versus Life Expectancy

Year	Average Male Retirement Age	Average Male Life Expectancy	Years in Retirement
1950	66.9	65.5	0
1960	65.2	66.8	1.6
1970	64.0	67.0	3.0
1980	63.0	70.1	7.1
1990	62.6	71.8	9.2
2000	62.3	74.1	11.8
2005	61.7	75.2	13.5

We are not positive where this comes from as it was just class information but we think at least part of it comes from Mark Perry at Carpe Diem so a general h/t to him.  Over 55 years the life expectance went up by almost 10 years but the retirement age went DOWN by over five.  It seems unlikely that increasing the life expectancy by 20 will increase the retirement age much if at all.  Increasing our lifespan seems more likely to darken finances, especially public finances.

We would support increasing our useful lifespan too.  You can’t play too much handball.  But increasing our lifespan is more likely to exacerbate the entitlement problem than solve it.  What do you think is the probability of Congress increasing the age for receiving Social Security to 85?

 

How Can This Be Right?

Kevin Williamson is his usual perceptive self at NRO when he says:

The Republican apparatus may be cowardly, craven, and more than a little corrupt, but it is not the main obstacle toward achieving meaningful conservative reform. The main obstacle toward achieving meaningful conservative reform is the same as the main obstacle to the success of the Libertarian party: Americans do not want what they are selling. The tasks of conservatives is to explain to Americans why they should. It will not be easy.

What is amazing is that he is right.  It has not been easy and it seems to get harder.  Kevin covers the the positive side of what Deidre Mccloskey calls the Great Enrichment.  Although he knows it well, in this article he does not bother to take the time to cover the failure of the alternative that we see so starkly in Venezuela.  Here is the December 2016 Venezuela travel warning from the US Government.  Here are some stories on the economic disaster in Venezuela.  Remember that Venezuela has the world’s largest oil reserves.

So we know that capitalism works and socialism doesn’t.  Why were the 2016 presidential nominees from both parties so repulsed by capitalism?  Why is capitalistic success a hard sell and the hope that socialism won’t fail for the umpteenth consecutive time an easy sell?  We try to stick at it but it is a challenge to point out the obvious over and over again.  We give Kevin credit for creating new and pointed ways to make the obvious obvious.

Ending Slavery

Richard Brookhiser has a history lesson for The Donald on avoiding the Civil War in the current (5/29/17) NRODT.  One part, ending slavery by buying them, fits into our expertise from almost 40 years ago.  We believe there was a financial opportunity to avoid the Civil Was that politics failed to find.  Here we only consider the financial cost but the human cost of the Civil War, like slavery, is huge.

Sidebar One: We wrote this paper for a grad class in economic history almost 40 years ago.  We don’t have the references or the exact details anymore so we are painting with a broad brush.  End Sidebar One.

It seems simple because the Civil War was extraordinarily expensive that the government could buy out the slaves and avoid the Civil War and everybody would be at least as well off.  For example, here is an estimate of the actual cost that comes in at over $6 billion.  So when Richard quotes estimates from $600 to $900 million it is easy to wonder why there was a war.

Sidebar Two: There is strong evidence of an efficient market in slaves.  Given the pertinent characteristics like age and gender, the value of a slave can be reasonably estimated based on prices of actual sales.  According to the census there were almost 4 million slaves in the US in 1860 so Richard is estimating an average cost of $150 to $225.  Of course, individual prices would depend on pertinent characteristics.  A 20 year-old male will be worth more than a 60 year-old female.  End Sidebar Two

The problem with this analysis is that it is after the fact or ex-post.  Nobody expected that the Civil War would be as long or costly as it was and both sides thought they would win.  The analysis needs to be ex-ante.  What did folks think the Civil War would cost before it started?  They, see Sidebar, expected it to last a few months and cost a small number of millions.  The financial solution, and this was discussed, was to free the slaves at birth and death (B&D).  The  B&D solution reduces the costs in two ways.  First, babies are cheap because they are not productive for several years.  Second, it reduces the present value of the expenditures because the amounts are paid later.  It also provides a plausible way out for both sides because it doesn’t end slavery immediately.  For the same reason, it will have negative reactions too.

The bottom line is that it would have worked.  The present value of B&D expenditures was less than the expected cost of the Civil War.  It was not easily avoidable but it was avoidable.    James Buchanan might have been worse that our Immediate Past President.

Corbyn Tries Rhyming

UK Labour leader Jeremy Corbyn is looking for ideas.  It looks like Jeremy is going for ideas that have been well tested.  The WSJ reports:

In a throwback to the politics of the early 1980s in Britain, the manifesto listed commitments to nationalize railways and water companies and to increase taxes on corporations and the top 5% of earners.

The 128-page document also promised to raise the minimum wage and to create a National Investment Bank with regional branches to finance small-business lending, policies the party hopes will strike a chord with voters wearied by years of sluggish earnings growth and a long squeeze on public spending.

So Jeremy plans to nationalize, tax, and try and pick winners.  It is about as full blown socialism as it gets.  We know what will happen.  Socialism has destroyed Venezuela.  Do we really need a link for Venezuela?  OK but you really need to read more.  Remember that it has the largest oil reserves in the world.  Maggie saved the UK from socialism a few decades ago:

On moving into 10 Downing Street, Thatcher introduced a series of political and economic initiatives intended to reverse high unemployment and Britain’s struggles in the wake of the Winter of Discontent and an ongoing recession.^{[nb 1]} Her political philosophy and economic policies emphasised deregulation (particularly of the financial sector), flexible labour markets, the privatisation of state-owned companies, and reducing the power and influence of trade unions. Thatcher’s popularity during her first years in office waned amid recession and high unemployment, until victory in the 1982 Falklands War and the recovering economy brought a resurgence of support, resulting in her decisive re-election in 1983.

There seems to be disagreement about who said, “History doesn’t repeat itself but it sometimes rhymes.”  Everyone would want credit for such an insight.  We see the socialist, fascists, Communists, and others trying slightly different versions.  It doesn’t work and it won’t.

The persistence of socialism given its record of failure is amazing.  It is easier to understand the hostility towards capitalism despite its success.  Envy is a powerful force in the world.

Chuck Connors And George

George Will recently compared the life of billionaires a century ago to the middle class today.  We remembered the Rifleman, played by Chuck Connors (one of twelve people to have played in both MLB and the NBA), being pejoratively referred to as sodbuster by the ranchers.  George’s insight that being a billionaire a century ago would be a lower quality of life than what most middle class folks in America face today.  George also reminds us that because of inflation a billion dollars in 1916 is worth $23 billion today.

Our point is that we spent a few hours busting the sod as part of a landscaping project this weekend.  The lives of lives of those folks a century or more ago was tough, really tough.  Work was really work.  We did about 800 square feet.  The work for acres is hard to imagine.  As George points out life expectancy was short and Chuck played a widower.

You might switch with a billionaire from a century ago if you had certain preferences.  For example, if you wanted lots of servants you might switch but if you like electronics you would not.  On the other hand, it would take very interesting preferences to want to switch from 2017 middle class America to middle class America of a century or more ago.  Nasty, brutish, and short would be a good comparison to current life.

FaceBook Fun

Yesterday we were understanding the Blue States suggesting that they we wrong rather than evil.  Today we have evidence of how wrong.  On our Facebook feed there was a picture of Ike and the following words (It doesn’t copy so we had to transcribe.  We’ve taken it out of all caps):

Dwight D. Eisenhower, corporate tax rate: 90% [source?  This seems way high.]

Why?  Because high corporate tax rates create incentives for big business to spend [non-existant] earnings and expand (i.e.:  new locations, new hires, new equipment, and product R&D) which are deducted from taxable earnings, thus driving wealth [income rather than wealth is taxed] to a lower tax bracket [individual tax rates are extremely high in this period].  Better to spend a majority of earnings on expansion than horde it and pay Uncle Sam 90% of it.  It’s not Communism,  it’s responsible economics.

Well, this gives us a lot to talk about.  We have made a few comments in the text.  Then let’s start with it’s not Communism.  OK, it is not Communism but not being Communism is not enough to make it a good idea.  It was and still is bad economics.  Harry and Ike’s years are subject to Williamson’s lament.  They did lots of good things as president but they missed lots of economic opportunities.  High taxes on corporations and individuals were part of the problem.

Second, let’s talk about economic performance during Ike’s years as president.  We will round it off to calendar 1953 through 1960.  During those eight years there are are three years of really substandard performance, less that one percent real GDP growth, there are three years of Obama plus of 1.99 percent to 2.74 percent, and two really good years.  Considering the war-torn state of most of the rest of the developed world, this is very unimpressive.  It is no surprise that JFK had other ideas.

Third, much of it can be understood as confusion about income, wealth, and timing.  Income is taxed but wealth is not other than the death tax.  When you tax the income isn’t left to spend.  If you were to tax ninety percent of it there would be little left.  New locations and new equipment are assets rather than immediate expenses so they don’t reduce taxes.  More likely they lead to higher future income.  That is good for lots of folks but it is less likely to happen in a high tax environment.  High corporate tax rates will discourage such investments because there is less cash available and a lower after tax return.  New hires only impact income as they earn wages.    Corporations will minimize hiring in a high tax situation.

There are lots of folks that don’t understand economics.  Ike had problems with economics.  Because folks liked him the Blue state folks want to adopt him.  How about if they (and we) go for JFK instead?  We understand that Reagan’s successes are too recent for the Blue State partisans to accept but JFK should be OK.

 

Sassy With Sasse

Ben Sasse has an editorial in the WSJ that is well worth reading.  We think he got one thing confused in discussing the nature of change in the economy.  He says:

We are entering an era in which we’re going to have to create a society of lifelong learners.

We have seen the history of lifelong learners going back at least to the journals of Arthur Young (b. 1741) that we read as a grad student.  They provided information to help farmers.  Centuries ago, almost everyone was a farmer and they learned to farm better.  More recently, as Sasse points out, you got a job in the city that you held until death (usually) or retirement.  What Sasse misses is that these folks were lifelong learners but usually in a narrowly defined area.  To name a few, the jobs of car mechanics, teachers, and accountants have changed enormously over the past 40 years.  Compare the 1977 Pontiac Firebird to today’s cars.  A car mechanic would be required to learn to continue to work.

For teachers and accountants there are similar technological changes.  When we first taught class in the 1970s, exams were copied by mimeograph and collated by hand.  It was a labor intensive process that required a lead time of weeks.  Our computer had a tape drive without random access.  Most of the programs were written by the faculty.  The only classroom device was an overhead projector.  Communications with students once they left the classroom was almost impossible.  It was wildly different environment when we retired in 2015.

Folks have been adding to their human capital for centuries.  What Sasse seems to recognize but express imprecisely is that now there will be bigger and faster changes that folks will need to adapt to.  We think individuals are up to the challenge of a new twist in lifelong learning.  Are the institutions?