September 29, 2012

Saturday Morning Essay: The Frail Economy

Brought to you by Trader Joe's French Roast (Strong & Dark)...

One of the difficulties in blogging regularly is that my favorite posture for typing is to place my feet on the table with the wireless keyboard in my lap.  However, this is also the posture my cat Jewel likes best, and it is her considered opinion that she ought to be where the keyboard is.  I don't know if you've noticed, but cats have a kind of shamanistic quality that makes it seem, well, unholy to move them once they're settled in.  It upsets some delicate balance in the space-time continuum.

Anyway, a word on the economy, which is again faltering.  Precisely at the point where the incumbent political system (where the Democrats hold the White House, have a bare majority in the Senate, and are underwater in the House) need the economy to show signs of strength, it's softening up again, with incomes stagnating or falling, prices of food and energy rising, and job "growth" failing to keep pace with population growth.  While any reasonably objective observer can see this, plain as day, the political class cannot admit reality because the world of politics exists in an Alternative Reality defined by the virtual dimensions of the TV/Internet Miasma.  In the Miasma, any admission of the obvious is a one-way ticket to Palookaville.  Thus, in August or whenever that was, we were treated to two conventions of the big political parties in which the governing themes were taken directly from 1964 because no one really wants to talk about 2012 in the national arena.

Considering the various schemes and strategems of our federal leaders over the last twenty years or so, we can descry various approaches to maintaining the illusion of overall economic health. There was the Internet or Dot.Com Bubble, followed by the Housing Bubble, giving way finally to the Money-Printing Bubble.   Throughout these exercises in Potemkin Village Building, the rhetoric from Washington, D.C. and from its house organs, the New York Times and Washington Post, never really varied much.

Nevertheless, Actual Reality is not fooled, and this shows up in the Actual Real employment statistics, which simply locked up around the year 2002 and never progressed.  The employment rate of the general population is stuck in the low 60% range, and the overall quality of the jobs which the economy produces continues to decline.  This is the real reason that the big entitlement programs, Social Security and Medicare, are in such big trouble, although the deterioration of the latter is accelerated by the "legacy" expectation of the medical/pharmaceutical industries that their fields should be highly lucrative even if no one can afford them anymore. 

Despite the relentless money printing, inflation remains low (where not explained away by drought effects on crops or on oil shortages).  Interest rates on savings and Treasury bonds remain absurdly anemic.  There is a reason for this other than the libertarian trope of "manipulation by the Fed."  It takes economic activity, broadly based, to generate much in the way of a return on money, which is what interest on a passbook savings account is.  Treasury bonds compete, as an investment, with other forms of passive return, and there is no passive return anywhere to provide competition.

By analogy or metaphor, you might think of the U.S. economy as a very old and frail human being, who, though racked by pneumonia, fails to generate much of an elevated temperature.  The normal temperature does not indicate the absence of infection in such a case; it indicates a general lack of life force.  To extend the metaphor, the money printing which the federal powers have seized on as a way of pushing up the stock market (and providing some means for the vastly underfunded pension and insurance systems to generate a return, however evanescent) is like a feeding tube, designed to extend the life of a terminal patient for as long as possible.

I think that's all we're doing with such shenanigans.  The problem with gimmicks is that they're not a substitute for actual strength.  Take, for example, the parlous predicament of the Social Security "Trust Fund."  By law the "fund" (the accumulation of excess FICA taxes paid in over the last 30 years, currently about $2.4 trillion) must be invested in Treasury bonds.  As the current inflows from FICA taxes are insufficient to pay the swelling rolls of recipients, the deficiency is "funded" by this phantom account.  Since the "account" is earning such a low rate of return, the Social Security "Trust Fund" is now calculated to be completely exhausted by the year 2023, a little over a decade from now and about 14 years sooner than the rosy scenarios that the Bush Administration used to talk about.  Again by law, at that point Social Security benefits must be cut by 25% across the board, and that's the minimum.  Whether the other 75% is payable or not depends on whether the one-and-a-half bartenders, baristas and cocktail waitresses for each Baby Boom retiree can actually keep the game going.

And by then I'm sure bartenders and baristas will have been replaced by robots.  As for cocktail waitresses - we'll have to wait and see, but I hope not.