The Wrongologist

What’s
Wrong Today:

This is
not a column about the State of The Union speech. It is about unemployment. However,
let’s reflect on Mr. Obama’s closing argument:

His speech
was followed by Republican Marco Rubio’s response, which can be characterized
as: If we have our way, the government isn’t going to help you.

Our
government is made up of citizens. Our citizens form governments to get things
done for each other. If our governments can’t help us, then we cannot help
ourselves.

Washington
is completely disconnected from the quiet desperation of many American
lives. Politicians recite the talking points supplied by the lobbyists that
have captured them with political donations. They ignore that 23% of us have been fired in the last
four years.  

That factoid comes from a newly
published study from Rutgers University called Diminished
Lives and Futures: A Portrait of America in the Great-Recession Era.
The study included 1090
Americans, and it contains a series of devastating statistics from a survey
they conducted in January 2013. Here are some highlights:

• Nearly one-quarter
  (23%) of all survey respondents were laid off from either a full-time or part-time
  job over the past four years
• Fewer women report layoffs than men by a margin of 19% to 27%
• 22% of white, non-Hispanic respondents
  were laid off during and
  after the recession compared to 31% of blacks
  and Hispanics
• 19% of workers age 55 and older were laid off from a job compared to 23% of workers ages 34 to 54 and 28% of workers ages 18 to 34
• 35% of those who were laid off found a new job within six months of active pursuit and 16% found a new
  job in two months or less
• 33% of the respondents say they spent more
  than seven months seeking a new job and 1 in 10 were looking for more than two
  years. Some Americans have yet to find new work after being laid off — 22% say
  they were unable to obtain a new job
• Nearly 66% of workers age 55 and older say
  they were actively seeking a job for more than one year or have not yet found a
  new job, while 33% of those younger than 55 say the same

The figure below is from the Study. It illustrates
how closely the recession’s layoffs have touched average Americans. At the center of the circle are 23% who
lost a job.

In the next ring are 11% who know someone
else in their immediate family who lost a job to layoffs. Together, the data
indicate one-third of American households, approximately
39 million people, lost work as a result of the recession during the
past four years.

Another 26% were not
affected in their household, but did know a member of their extended family who
lost a job (parent, cousin, aunt, or uncle). Another 13% did not have a family
member affected, but knew a close personal friend who lost work, and another 5%
say they know a friend of someone in their immediate household who lost a job.

Overall, just 21% of Americans do not fall into one of these
circles.

More
depressing news: Of the people fired who managed to get another job, 48%
took a step down in position, with 46% taking a job below their skill or education
level. A whopping 54% reported their
new job pays less.  A third took over a 30% pay cut to get a new
job.  Another third got hit with an 11%-30% cut in pay.

That’s
economic devastation for millions of Americans, even though they are working. 

And 56% of
Americans now have less in savings than before 2008. 38% reported they are
tapped out financially. Over half of people said they were running through
their savings just to get by and 30% said they were borrowing money.

Of the
almost one quarter of working America fired in the last four years, a full 22% cannot
find another job. That’s roughly eight million people. But it’s worse than
that. The BLS December JOLTS
report, or Job Openings and Labor Turnover Survey
shows there were 3,617 million job openings in December 2012, below the pre-recession levels of 4.7
million, although they have increased 65% from July 2009. Below is
the graph of the official BLS job openings.  

Since there
were 12.2 million unemployed in December 2012, that means we have 3.4 unemployed
per job opening. 

And in
conclusion:

If the
Study can be scaled up to the country, one-third of American households lost paychecks
over the past four years. A full 79% of America knows someone personally who
lost their job.   

Washington,
including Mr. Obama last night, have glossed over how truly decimated the
American middle class is, economically. This Study brings it home. 

Faced with
a Republican Party that is by turns, nihilistic and filled with zeal for small
government and fewer taxes, pragmatism about adding jobs will be met with
rhetoric about unleashing America’s businesses from regulation and how even
lower taxes will spur new jobs and new investment.

The
Wrongologist often asks: What kind of
society do we want to be? It should be intolerable
in our society that politicians won’t work together to return our
unemployed to work after 5 years.

Had the great
jobs slaughter affected just K Street and Wall Street, it would have been
solved in a great bi-partisan rush by our politicians.  

But, it’s
clear that Washington’s position is let the American worker be damned.

And damned
we are.     

 

What’s
Wrong Today:

According to the Center on Budget and Policy Priorities (CBPP), the federal government is projected
to spend less money in the next decade on non-defense discretionary programs
than at any point since 1962.

What is non-defense discretionary spending? The Center for American Progress (CAP) defines it this way:

This is an outcome of
the Budget Control Act of 2011 (BCA).
The Budget Control Act
was enacted in August 2011. It sets a
cap on the total amount of funding (budget authority) that may be
provided each year for discretionary programs, as well as separate “sub-caps”
for defense and non-defense discretionary programs.  The resulting levels
of discretionary funding, as projected by the Congressional Budget Office (CBO)
for the ten fiscal years from 2013 through 2022, are $1.5 trillion below the CBO baseline that was in place when the
112th Congress took office.  

That baseline
reflected the final fiscal year 2010 funding levels for discretionary programs
and is adjusted for inflation in subsequent years.

See the CBPP chart
below:

The CBPP goes on to
say that 40% of the $1.5 trillion in savings comes from defense, while the
other 60% comes from reductions in domestic and international programs. The
$1.5 trillion in reductions will produce lower interest payments on the debt. The interest savings amount to about $250
billion, bringing the total deficit reduction achieved to date to more than
$1.7 trillion.

The $1.5
trillion in budget reductions discussed here do not include the additional budget
cuts that will be made if sequestration takes place. Under the BCA caps, non-defense
discretionary funding will be 15% below the 2010 level by 2022.  Defense
funding will also be about 10.5% below that level.

Still think we have a
spending problem? Specifically, what more should we cut? Medicare? Medicaid?
Social Security? Defense?

We actually have three problems to solve: Our revenue problem, our social spending cost inflation
problem, and our defense spending problem. Let’s unpack them:

Our
Revenue Problem:

We need to consider
taxes and revenue along with spending. It is not true that only CEO’s and
hedge-fund managers are paying the lowest
effective tax rates
since the 1950’s, (a period before Medicare and Medicaid); but it’s
true about the rest of us too.
Check out this chart that graphs Federal Government expenditures and Current
Receipts as a percentage of GDP. Grey areas are periods of recession:

We have a revenue
problem to go along with our spending problems, despite what our Republican
friends tell us, a clear-cut and inarguable revenue problem.

As a percentage of
GDP, only South Korea, Turkey, Chile, and Mexico raise less revenue than the
United States. Simply put, we are taxing at a historically low level.

Our
Social Spending Cost Problem:

If you ask Americans what
spending they want to cut, they do not say that we ought to ravage people’s
retirement security. According to CBPP,
91% of entitlement spending goes to the elderly, the disabled, or people who
worked at least 1,000 hours in the last year. Much of the rest goes to people
who worked enough to be receiving unemployment benefits.

As the Wrongologist wrote
last week:

There is no denying
that inflation in medical spending is a major problem that, unchecked, will continue to crowd out spending for all
other purposes. But, these people are not “takers” in the
Mitt Romney/Paul Ryan sense.

So, should we start
slashing the earned benefits people have paid into in Medicare and Social
Security? Should we stockpile surplus cat food for our elderly?

We ought to raise our
taxes before we even think about doing that.

Our
Defense Spending Problem:

The CBPP points out that because of the
wind down of the Bush Wars, projected defense spending is already down by $500
billion. The BCA shaved another $487 billion off projected
Pentagon spending. Adjusted for inflation, we are still spending a tremendous
amount on the military, but it isn’t rising. If the Sequester goes into effect,
that takes another $500 billion away from the Pentagon. But, we will still spend more in 2013 than we
did in 2006, during the height of the Iraq War.  

Despite the fact that
there is room for it to go down further, the Defense Department thinks the cuts
in the sequester go too far.

The
question is: How much should we be spending on Defense? Would Conservatives say
less? Doubtful. In order to bring down military spending as much as it needs to
come down, first, we need to change our national defense strategy: We need the
Secretary of Defense and the Chairman of the Joint Chiefs to be able to go to
Congress and answer “Yes,” when they are asked: “Does this
reduced budget provide you with the resources you need to accomplish the mission
you’ve been given?”

Therefore,
the Politicians must first adjust the military’s mission.  

And
in conclusion:

Overall, it’s misleading to argue that our budget woes are just a result of too much spending.
And, to the degree that it has some truth, Americans don’t agree with the
Republicans’ solutions.

Under Mr. Obama we
have seen:

• The
  lowest effective tax rate on the middle class since the 1950s

• The
  lowest non-defense discretionary spending on record

• A
  big shift away from government jobs on the local, state, and federal level to
  private sector employment 

Ask
Republicans if that is what they expected from a free-spending liberal
socialist.

This
is the Obama administration’s record. The Obamanauts also know that they must
make compromises to get Republican votes on deficit cutting.

That
is why Mr. Obama wants to take a balanced approach to dealing with our deficit.

That’s what the American
people voted for in November and what they continue to support today.  

 

The Hill has reported that President
Obama is about to sign off on a new review of US nuclear weapons strategy that will reduce our nuke arsenal by
one-third, resulting in billions in savings to the Pentagon and Energy
Department.

The
recommended reductions were included in a classified directive compiled by defense
and national security officials inside the White House, according to a report
by the Center for Public Integrity issued Friday. 

The
agreement opens the door to billions in military savings that could help ease
the federal deficit and possibly improve prospects for an additional arms deal with
Russia. The position is supported by the State Department, the Defense
Department, the National Security Council, and the intelligence community, the
US Strategic Command, the Joint Chiefs of Staff and Vice President Joseph
Biden.

The
smaller ballistic missile arsenal will also be targeted at a limited number of
emergent threats, including North Korea and Iran. 

Russia remains
the sole US target that still requires potential use of a large number of
nuclear warheads to achieve damage that military planners deem adequate. The
Pentagon says all of this can be accomplished by 1000-1100 warheads, instead of
the 1,550 allowed under the New START treaty that was ratified in December, 2010.

From a declassified
version of a Secret report
to Congress in December:

Why? Because
it cannot destroy US missile-carrying Ohio-class submarines at sea.

According
to Hans Kristensen, a nuclear arms expert at The Federation of American Scientists (FAS), Russian
arms reductions make US targeting revisions feasible now. A decade ago, the US military was targeting 660 Russian
missile silos with multiple warheads. Now, the number of such silos is
less than half that, and in a decade, it is unlikely to exceed 230.

The New
START Treaty

The New START
treaty divides nuclear weapons into “strategic”
and “tactical”. It limits each side to deploying no more than 1,550 strategic
nuclear weapons by 2018, but uses a counting rule that pretends strategic
bombers carry only a single warhead, instead of up to 20. So the actual
arsenals after the treaty takes effect are likely to be closer to 1,900, a
number that Obama’s advisers now think is too high.

Below is a
good summary of the New START Treaty:

New START
imposes no limits on “tactical” nuclear weapons in each country, those that are
held in storage or considered for short-range use, a number estimated by
independent experts as roughly 2,500 in the United States and 3,500 in Russia.

Under a new nuke deal envisioned by the
administration,
Russia and the United States would agree not only to cut deployed strategic warhead
levels below 1,550 to around 1,100 or fewer, but also, for the first time, begin
to reduce the size of the tactical inventories.

New
Obama Team buys the Strategy:

Key
members of Obama’s new national security team are on board with the reduction
strategy. John Kerry on Jan. 24th at his confirmation hearing:

Secretary
of Defense Nominee Chuck Hagel drew fire from Republicans at his Jan. 31 confirmation
hearing for signing the Global
Zero
report that said current stockpiles:

The report
indicates that an appropriately sized force would consist of just 900 total
strategic weapons on each side, not 5,000.  But Hagel told the hearing that the report
simply provided illustrative scenarios, not recommendations. He affirmed the
report’s conclusion that “we have to look at” the value and cost of continuing
to keep land-based missiles and he made no promise to build all 12 new
missile-carrying submarines sought by the Navy.

When Hagel
is confirmed, the White House will sign the directive and send it to the
Pentagon for action. It will give the department the green light to begin
cutting down the nuclear force. 

Additional cuts will save
billions of dollars

The
financial savings from reduction could be substantial. To comply with New START,
the Pentagon has been pulling warheads from land-based missiles and making
plans to decommission some of the missiles themselves; it is also planning to
reduce the number of missile tubes aboard its Trident submarines.

By pushing
the arsenal size even lower, it could close perhaps two of its three land-based
missile wings and cut at least two of the 12 new strategic submarines it now
plans to build, saving up to $8 billion for each one. Eliminating a single wing
of 150 missiles would save roughly $360 million a year, or more than $3 billion
over a decade.

And the cuts are on
the military side of the budget, contributing to a partial fulfillment of that
part of the Sequester.

Good
News or Bad News?

This
proposed change will draw fire from congressional Republicans. They oppose
cutting the US arsenal out of concern that it could diminish America’s standing
in the world. 

Last year,
House Republicans wanted more nukes: They added a measure to the 2013 Defense
Authorization Act calling for a new
ballistic missile shield for the Eastern Seaboard. House members
argued the shield was necessary to deter potential nuclear attacks from North
Korea and Iran. 

Republican
concern is understandable.
We’re only spending about $600 billion a year on defense, roughly 6 times what
the Chinese plan to spend next year.

It’s
clear we’re on the verge of collapse.

But reduction is the
right thing to do, practically and strategically. If Mr. Putin reciprocates
with Mr. Obama, they can walk down arms reductions to the point at which they
can involve China, UK, and France and possibly, India and Pakistan.  

Israel and North
Korea would remain special and difficult cases.

The reduction could make
negotiation with Iran slightly easier and might, if US domestic politics concurs,
allow Mr. Obama to walk back the Iranian nuclear crisis. The chart below is
from the Ploughshares Fund:

An FAS
report, Trimming Nuclear Excess: Options for Further Reductions of U.S. and
Russian Nuclear Forces, says that even with these reductions over the next
decade, the United States and Russia
will continue to possess nuclear stockpiles that are many times greater than
the rest of the world’s nuclear forces combined.

There is no way to make sure
nuclear weapons are never used. Hoping, praying, and trusting human nature is
insufficient.

We need to
make sure there is no way for anyone else to win. This is the doctrine of Mutually
Assured Destruction (MAD). Even with reduced warheads, MAD would still be in place with:

• China
• Russia
• North
  Korea
• Iran
• Pakistan

Which
enemy have we forgotten? For all of our chicken Hawk friends out there: What is
the problem with implementing this directive?

No more Saturday junk mail for us…

What’s
Wrong Today:

Yesterday, the Wrongologist tackled
Social Security and the myth that it is causing our deficit. He called out Pete
Peterson, the “Fix The Debt” coalition, Erskine Bowles and Alan Simpson as among
the principals gearing up their fog machines.

We know that part of the effort to
weaken Social Security is to scare millennials into thinking that Social
Security will not be there when they retire. Usually, the right says we need to
“strengthen” Social Security, but the details are always vague.

So along comes The Can Kicks Back, an
effort backed by Messrs. Peterson, Simpson and Bowles (Bowles and Simpson are
on the Advisory Board) to gin up a
generational war in the cause of deficit reduction. Their website says:

Wait, there is more:

Here is what Dean
Baker said in 2009 about Pete
Peterson: (emphasis by the Wrongologist)

The Wrongologist prefers calling them “Deficit
Scolds”. By any name, they are not interested in fixing the health care system.
That would involve confronting powerful interest groups like the insurance and
pharmaceutical industries and the doctors’ lobby. They are not particularly
interested in generational equity either.

This is just an excuse for their real
agenda: Mobilizing support for cutting Social Security and Medicare.

No doubt younger
Americans are nervous. They
are in debt; many are out of work and on their parents’ couches. People in
their 30s and 40s can’t afford to buy homes nor have children. So, it should be
easy to set 100,000 members of one generation off against another.

The real downside for the younger
generations could be competing with older Americans who are forced to work longer
than they originally planned because their retirement income from pensions,
401Ks and real estate holdings were depleted during the Great Recession. There
could be fewer jobs available since normal age attrition will be less than in
previous decades.

Some
studies show that the collapse of the housing market and the resulting stock
market plunge reduced the wealth of older workers and retirees by close to $15
trillion. Most of those who will wind up depending
on Social Security are hard-working people who tried to do everything right.

While
there has been a stock market recovery, there
could be a wealth transfer to the young through lower cost housing, since
they will be able to buy housing stock for a far lower price than they would
have expected to pay 5 years ago.

But let’s not let that get in the way
of the narrative which holds that the baby boomers are the richest generation
in history. That they are working as hard as they can to screw over the young for
their own benefit.

These
“Fix The Debt” millionaires are con artists. They are trying to preserve
America for the young. However, that would be for their heirs.

That’s
how the moneyed elites turn their families into Plutocrats.

 

What’s Wrong Today:

If you
want to preserve Social Security, you have to take on the deficit scolds.

The “Fix
The Debt” people, plus Messrs. Bowles and Simpson and their fellow travelers, try
to mislead us on Social Security, which they conflate with the growing costs of
Medicare and Medicaid.

They have
been very successful in bringing their message to the main stream media. For
example, Fareed Zakaria wrote an essay for Time,
The Baby Boom and
Financial Doom.
Here is what Zakaria says:

Well, those facts may seem hard for Mr.
Zakaria to dispute, but they don’t have much to do with Social Security, and
Social Security doesn’t have much to do with the deficit. Zakaria says:

“In 1900, 1 in 25 Americans was over the age of 65. In 2030, just
18 years from now, 1 in 5 Americans will be over 65.” This could mean that many senior citizens are in need of saving money for daily living, that is why senior discounts are highly important in this area.


This sounds like “Gosh, the population of old people is soaring. It’s going to
cost me five times as much to pay for “the old” if we don’t do something.”

Maybe not. In 1900, people had large
families because a lot of their kids died. This by itself would tend to make
the ratio of under 65’s to over 65’s larger than today. Also, back then, people
over 65 died earlier. But Zakaria doesn’t really want us to return to higher
infant mortality and a shorter old age. Maybe he’s only pointing at the
problem:  “How are we going to support
all these old people?”

“In 1960 there were about five working Americans for every
retiree. By 2025, there will be just over two workers per retiree.”

Did you know that today, the ratio is 3.1 working Americans for
every retiree? Perhaps that makes the jump to “2 (really 2.1) working Americans”
seem less scary. Perhaps that might make you ask “how are only three of us
supporting each retiree? The answer is that “we” are not supporting those
retirees. They paid for their Social Security themselves. Here is the
Wrongologist’s personal example:               

                                                   SS                         

          Paid
in by Wrongo:         $127.3k               

          Paid
in by employer:      $120.6k               

                    Totals                   $247.9k

At 66½,
the Wrongologist began drawing Social Security @$ 2.2k per month. At that rate per
month, his social security account will go into deficit when he turns 81. By 90, he would have cost the government $190k, assuming he pays the government
approximately 20% in taxes due. So, there can be some real deficit creation,
assuming he lives a long life. But, not every Social Security recipient lives
to 80, much less 90.

But, as in the example, Social Security
is paid for by the people who get the benefits. It is their money. It has nothing to
do with the federal budget. The population numbers sound scary because they are
meant to sound scary, but the fact remains that workers can continue to pay for
their own Social Security by simply
agreeing to increase their payroll taxes.

A few more
facts: The Social Security Administration projects Social Security
outlays to rise from around 5% of GDP today to around 6% of GDP in the mid-2030s
and then fall back below 6% (when the Baby Boom bulge disappears).

That 1%
gap can be closed by modest increases in taxes, increases in the level of income
taxed, more aggressive means testing of the benefit, further delaying the age
of eligibility, without resorting to cuts in benefits. For example, a 2% increase
in payroll taxes would entirely close the expected funding gap. Extending the eligibility
age is the only oppressive option.

Is
Social Security adding to the Federal Deficit?

The Social
Security program currently has a cash deficit.  That is, the payroll tax
that finances it is not generating sufficient revenue to pay current
benefits.  As a result, the federal government is borrowing money to pay
Social Security benefits.

On its
face, it sounds like the Social Security program is contributing to the
nation’s debt.  However, that is not the way Social Security is financed.

The
Congressional Budget Office (CBO) explains that our nation
has two types of debts; that owed to the public and that the government owes
itself.  Debt to the public is owed to investors who have purchased
Treasury securities.  Debts the government owes itself are IOU’s held by
various government trust funds that have had surplus revenues in the
past. 

Social
Security ran a surplus from 1984 through
2009 (taking in more payroll tax revenue than was paid out in benefits). 
Of the estimated $16.3 trillion of accumulated federal debt through the end of
2012, the Social Security Trust Fund is owed $2.7 trillion by the US government.

So, this is money the government owes
itself.
The Social Security Trust Fund is an asset on the books of the Social Security
Administration.  That is, this part of the government has a legitimate claim
on the US government.

When the
Social Security program runs a cash deficit, the Social Security Trustees
request repayment of some of the Treasury securities they purchased when the
program was in surplus.  Because the federal government is currently in
deficit, the Treasury Department must borrow the money to make these repayments
to Social Security. 

However, the new borrowing will not
increase total debt. This transaction is more like refinancing existing
debt than accumulating new debt. If you owe a $5,000 credit card bill and you
take a home equity loan to pay off the credit card, your total debt has not
changed; you have refinanced the debt, transferring it from one financial
instrument (and one creditor) to another. 

The same is
true when repaying the Trust Fund.  The fund’s assets are composed of
debts already accounted for as part of the nation’s total debt.  When the
Treasury borrows to pay current Social Security benefits, the debt owed to the
Social Security Trust Fund is repaid, refinanced, and transferred to whoever
purchases Treasury securities.

So, the
current cash deficit in the Social Security program is not contributing to the
nation’s debt or its deficit.  This will be true so long as the Social
Security Trust fund holds Treasury Securities that are already counted as part
of the debt (current forecasts suggest
this will be true for 20 more years).

So, a 66 year old person can collect
Social Security for 14 years (until 80) without
adding to the federal deficit.

The Social Security Administration can
fund its current shortfall between Social Security receipts and payments without adding to the federal deficit
for another 20 years.

Let’s also consider Medicare. Here is more
from the Wrongologist’s personal example:

                                              Medicare

          Paid
in by Wrongo:          $66.3k

          Paid
in by employer:       $65.2k

                    Totals                  $131.5k

Despite
what he paid in, just one serious illness with hospitalization will easily blow
through $131k of Medicare reimbursements, so it is partly on the budget and the unfunded portion of cost will add to the deficit. 

Medicaid,
however, is entirely on the budget;
it is welfare. Medicare
and Medicaid expenditures are projected to rise to 7.4% of GDP from current
levels of about 5.5% by the mid-2030s, mostly because of rising health care
costs. But, unless we want
to go back to higher infant mortality and more homeless people dying in the
streets, this is a problem we must address.

The way to address these uncontrolled
costs is not by cutting the programs and throwing sick people onto the streets.

Sensible deficit hawks shouldn’t mix
Social Security with the health programs; they should focus their efforts
instead on reducing the growth in health care costs.

That
simply has not been a focus of either political party: Democrats are now the
party of smallish government and tax cuts for most people, while Republicans
are the party of limited government and tax cuts for everyone.Deficits have to be faced.

And neither party is committed to preserving
the social safety net.

Simple, rational
arguments are required in order to carry the day for Social Security.

What’s
Wrong Today:

Time Magazine calls the chart below
the scariest
environmental fact in the world. That is hyperbole, but the combination of
China’s dependence on Coal and its lack of renewable water resources must be a nightmare for China’s
central planners.

Coal
Consumption in China:

Coal
consumption in China grew by 325 million
tons, or more than 9% in 2011, continuing its upward trend for the 12th
consecutive year. China’s coal use totaled
87% of the world’s 374 million ton increase in coal use. Of the 2.9
billion tons of global coal demand since 2000, China accounted for 82%.

China now
accounts for 47% of global coal consumption, almost as much as the entire rest
of the world combined. Add the two amounts to get total annual global
consumption:

Robust demand for coal in China is the result of a 200% increase in Chinese
electric power generation since 2000, which is fueled primarily by coal.
China’s coal demand has increased at 9% per year from 2000 to 2010, significantly higher than global growth
excluding China, which averaged only 1%. Platts, the premier provider
of energy-related information, reported that China
imported 289 million tons of coal in 2012, up 57.9% over the prior year.

China is
now burning almost as much coal as the rest of the world combined. And despite support from Beijing for
renewable energy and a dawning understanding about the dangers of air
pollution, coal use in China is poised to continue rising to support its
industrial growth and demand for electric power.

The reason
why coal is so popular in China is that it’s very, very cheap. And that’s why,
despite the danger coal poses to health and the environment, neither China nor
any other developing nation is likely to turn away from it.

Water
Consumption in China

CNN
reports that China contains only 7% of the world’s
potable water but must feed almost 20% of the world’s population.
Meanwhile, its people are living longer and eating more, especially more
water-intensive food,
such as meat and dairy.

Earlier
this year, Greenpeace released
a study implicating
China’s reliance on coal power for its water problems. Despite Greenpeace’s obvious
agenda, the reality is that Beijing plans to build 16 new coal-fired power
stations in four provinces by 2015; which will end up consuming billions more cubic
meters of water.
Shale gas also uses up copious amounts of water, and academics have
warned
that water shortages could hamper China’s shale gas production ambitions.

The
clearest message is that water shortages are a chief constraint on energy and
power. Cooling a coal power plant without water is not easy.

Look at
this chart taken from the IEA report, page 518, figure
17.9:

65% of
China’s water use is for irrigation, and 23% for industry, mostly in coal production/power
generation. Notice how much of China’s coal industry is in areas with water
troubles. You can’t mine the stuff or use it in a power plant without copious
amounts of water. You can’t recover shale gas as an alternative to coal without
water. So while China has the world’s biggest shale gas reserves at 36 trillion
cubic meters, much of it is in the Sichuan Basin, which the chart above shows
has stress or vulnerability to water scarcity.

Non-renewable
aquifers are being depleted throughout China. Under the latest five-year plan,
in north and eastern China, home to Beijing, Tianjin and Shanghai, water use
has outpaced supply, prompting the construction of the South-to-North Water
Diversion Project, which aims to transfer water from the wet south to the dry
north. However, the Guardian says the water along
the project’s path is contaminated by pollution and that it’s barely
usable, even after treatment.

Water may have
to be rationed more severely by price, as will electricity. That will be an
extra cost/tax, a loss of competitive advantage, and a drag on GDP growth.

Water-adjusted
GDP may become a new economic term.

So,
where is this heading?

Combining
the realities of the demographic pressures discussed yesterday and the clearly growing
inability to mine/use its coal resources, China has serious economic problems
just over the horizon that may be difficult to solve.

There are
many moving parts in their plan. They seem committed to continuing their
significant annual GDP growth. And in order to grow:

• They
  need to solve their looming worker shortage

• They
  need to bring more electrical power plants on line

• To
  fuel those plants, they need more coal and more water

• To
  feed their growing urban middle class, they need water to meet the demand for more
  meat and dairy

• They
  must enhance the safety net for the
  world’s largest elderly population which will reach 300 million (the
  size of the US) by 2025

How they
solve all of these simultaneous equations will determine what kind of society
they will become and what level of economic power they wield in the first half
of the 21st Century.

 

From an IMF
Working Paper released this January: (emphasis by the
Wrongologist)

What
is the Lewis Turning Point? Sir
Arthur Lewis, a Nobel economist, found in 1954 that industrial wages rise very quickly once the supply of
excess rural labor is exhausted. The Lewis Turning Point is when the supply
of workers dries up and city wages soar. It is when labor turns the tables on
capital, and profits crash.

Crossing the Lewis Point would have far-reaching
implications for China, most
notably, inflation. Without the
flow of excess rural labor, wages are going to go up in China, causing chronic
inflation. When wages go up, productivity levels fall.   

The corollaries to increased
wages and lower productivity are slower GDP growth, higher consumption, lower
savings and a deteriorating current account surplus. In fact, the world
economy is rebalancing before our eyes: China’s
current account surplus has fallen from 10% of GDP to just 2.5%, although still
a large number.

The IMF paper concludes that the transition to a labor
shortage economy will occur between 2020 and 2025. At that point, China’s demographic
dividend will be exhausted. The IMF report says the reserve army of peasants
looking for work peaked in 2010 at around 150 million. The numbers are now declining.
The surplus will disappear soon after 2020. A decade after that, China will face
a labor shortage of almost 140m workers, surely the biggest jobs crunch the
world has ever seen.

Combine
this problem with the statistics for China’s elderly: They will number 200
million in just three years and top 300 million by 2025. By 2042, more than 30%
of China’s total population will be over 60. The implications for China’s social
policy and the growing need for safety net spending are obvious.

Ambrose
Evans-Pritchard of the Telegraph writes: (emphasis by the
Wrongologist)

The process
is under way. It may explain why Chinese equities are trading at a third of
their 2007 peak in real terms. Manufacturing pay has risen 16% a year over the
last decade in the East Coast hubs of Shenzhen, Beijing, Shanghai and Tianjin, although
it slowed in 2012.

Boston Consulting
Group says that “productivity-adjusted wages” were just 22% of US levels as
recently as 2005. They are forecasted to be 43% by 2015.   

As the
Wrongologist reported
in December, labor cost is a key reason why General Electric, Ford, Caterpillar
and others are “re-shoring” to the US some manufacturing from China,
though cheap shale gas, a weaker dollar, and lower shipping costs also play a
part.

Remember, this is still just a thesis, not
a fact.
But, the numbers do seem to confirm that labor shortage and wage pressures are
having an impact on China’s macro economy. Japan hit this inflection point
fourteen years ago, but by then it was already rich, with $3 trillion of net
savings overseas. China has hit the wall a quarter century earlier in its
development path.

Of course, this is the Chinese dilemma: If they hadn’t practiced
population control, it would have been standing room only in the country by
now.  

This is a
dangerous moment for Beijing. The Lewis Point tests catch-up economies like
China: What happens when they can no longer rely on cheap labor, copied
technology, and export-led growth to keep the game going?

Success on
the global level depends more on technology, the rule of law and the free flow
of ideas. Failing to add these attributes to China’s portfolio will cause a slide
into a middle income trap, where others have gone. The Soviet Union failed. The
Philippines, which was richer than Korea in the 1950s, failed. Most of Latin
America failed in the 1960s and 1970s, although it seems that Argentina and
Brazil are succeeding this time.

However, there is no global labor shortage. The Wrongologist wrote in October, 2011,
citing the book, The Coming Jobs War:

• Of the 7 Billion people on earth,
  5 Billion are aged 15 and older
• Of that 5 billion, 3 billion say
  they work, or want to work
• Today, there are only 1.2 billion
  full-time, formal jobs in the world
• This is an 1.8 billion job
  shortfall compared with the 1.2 billion who are working

Of
the 3 billion who work or want to work, 50% are currently seeking a formal job,
while another 10% are looking for part-time work.

So,
China could quite
easily import cheap labor from anywhere, if they wish to remain on the cheap
labor, export-led growth path. However, their culture is a barrier to
succeeding with immigrant labor.

Alternatively,
they could outsource. Again, outsourcing is not in their current management bag
of tricks.

One thing
is for sure: China, with a shrinking work force, the threat of both inflation
and lower GDP growth, is not likely to displace the United States as the globally indispensable leader.

We are
certain to see at least one last cycle of high Chinese growth before their aging
crunch, inflation and the coming credit hangover combine with toxic and
possibly, permanent effect.

Food for
thought. Make mine moo-shu.

 

Next, we will
examine China’s need for coal, their coming water shortage, and how those forces will
act as yet another brake on China’s GDP growth.

What’s
Wrong Today:

Last Thursday, the Pew
Research Center for the People & the Press reported on a survey that finds that a majority of the public says that the federal
government threatens their personal rights and freedoms. Pew found that
53% think that the federal government threatens their own personal rights and
freedoms while 43% disagree. The telephone survey was conducted between Jan.
9-13 among 1,502 adults and has a 95% confidence limit.

From the survey:

The belief that the
federal government is a threat grew by 6 percentage points, increasing from 47%
to 53% since Pew conducted the survey in 2010. In earlier surveys between 1995
and 2003, (see below) the majority of those surveyed rejected the idea that the
government threatened people’s rights and freedoms.

The increased view that the
federal government threatens personal rights and freedoms was driven by conservative
Republicans. Currently, 76% of
conservative Republicans say that the federal government threatens their
personal rights and freedoms and 54% describe the government as a “major”
threat, this is up by
14%, from 62%
of conservative Republicans saying
the
government was a threat to their freedom 3 years ago. Today, 54% of Republicans
are in the “major threat” category vs. 47% in 2010 and they represent by far
the highest percentage with this view in any ideological group surveyed.

By comparison, there
was little change in opinions among Democrats; 38% say the government poses a
threat to personal rights and freedoms, up from 34%, while 16% view government as a
major threat.

Among
moderate and liberal Republicans surveyed by Pew, 57% view the federal
government as a threat to personal rights and freedoms and 32% say it is a
major threat.

Their
opinions, like those among Democrats and independents, are little changed from
March 2010.

62% of gun-owning
households see the government as a threat, compared with 45% of those without
guns; the belief that the government
is a “major threat” is unchanged in both groups since 2010, despite the debate
about increased gun control. The view that the government is a threat
has increased in both gun-owning and non-owning homes in the last three years,
however.

So,
why has this happened?

Pew went deeper into
the forces driving us crazy:  Their
survey finds continuing widespread distrust in government. Only 26% trust the
government in Washington to do the right thing just about always or most of the
time; 73% say they can trust the government only some of the time or volunteer
that they can never trust the government. 

Only 20% of Americans
say they are basically content with the federal government; another 58% say
they are frustrated while 19% say they are angry.

This reflects a long
term decline in America’s trust in government. View Pew’s timeline at Public Trust in Government: 1958-2013.

Pew didn’t report on the corrosive,
cumulative efforts by some in the media to undermine trust in government. They didn’t define “freedom”. Some think Obamacare is a government
threat to freedom, others might think it is the Patriot Act. You might think
it’s Citizen’s United, another may say it is intrusive gun regulations.

Although three
out of four may think the government is a threat, most will not agree on precisely
what constitutes the threat. The daily rant by Fox News, Rush, Beck and Hannity;
warning us that government is stomping on our rights and taking away our
freedoms helps explain why conservative Republicans mistrust our government.

Here are the top 10 threats
to our freedoms according to the
Wrongologist:

• An
  obstructionist congress

• Citizen’s United

• Our state of continuous war for the last decade

• Warrantless
  wiretapping and indefinite detentions, assassinating American citizens without
  due process

• State
  governments purposely trying to suppress voting

• The
  NDAA and the Patriot Act, Homeland Security

• Whistleblowers
  being prosecuted, banks and other financial institutions not being prosecuted

• The
  assault by states on women’s rights and sexual orientation

• The
  ubiquitous data collection on all aspects of American life by the federal
  government

• A
  mainstream media that never challenges a talking head

Your list is probably different.
None of us likes all of what the government does, nor should we.

Government
by definition is a threat to individual liberty. So are local police forces, city
councils and state governments. Wherever there is power, there is limitation of
personal freedom.

The
forfeiture of individual sovereignty is the price of admission to society. That does not mean necessarily that we
must weaken the federal government. We have a system of checks and
balances and despite what the Tea Party and Rush would have you believe, they
can and do work most of the time.

We have
the ability to decide how much our government interference we want in our
lives. This should never be a settled question. Of necessity, it must be
debated ad infinitum.

This is at the heart of American
governance.

What’s Wrong Today:

From Techpresident.com:

The result
is that organizingforaction.net,
organizingforaction.com and organizingforaction.org have all been
registered to enterprising individuals who snapped up the domains on January
18, the
day the news broke about the new Obama group.

What
happened? The group plans to utilize the power and sophistication of the
Obama For America (OFA) data warehouses to build support for a variety of issues,
including gun control and immigration. They
liked calling the new effort Organizing for Action because it kept a linkage to
the old OFA.

But they
hadn’t purchased the domains prior to their launch.

And it
gets better: Clicking on organizingforaction.net
takes you to: The National Rifle
Association homepage!

The LA
Times identified Derek Bovard, a 40-year-old in Castle Rock, Colo. as the
registrant for Organizingforaction.net.
The Times reports that Bovard was watching
Fox News on the
morning of Jan. 18 when he saw the news that President Obama’s advisors were launching a new advocacy group called Organizing for Action.
Bovard snapped up the domain name. He then proceeded to configure the site so
all hits are directed to the website for the National Rifle
Assn.

The Times
quoted Bovard:

Other
websites with the OFA domain are already taken. OFA.org belongs to the Assn. of Horticulture Professionals,
“the leading horticulture educational association in the United States.” OFA.net is the home of the
Orthopedic Foundation for Animals. And OFA.com belongs to a Dutch electronics company.

Organizingforaction.com
and Organizingforaction.org
were acquired on Jan. 18 by Michael Deutsch, a registered Republican who lives
in Wellington, Fla. Both currently direct to a blank page with an email
contact.

Bovard
said he was surprised that OFA had not secured its domain name ahead of time: “Organizing
for Action is not that organized, I guess”.

Hilarious.
One of the smartest teams on the planet didn’t even get its new domain
registered. 

Rookie
fail by the Obamanauts.