The United States crises

The United States, though being the wealthiest, most influential and most powerful country in the world, for all its strengths, has its weaknesses as well. Being an economist, I want to discuss three points in particular that I’m worried about concerning the U.S’s future and status as a superpower. In this article, I argue that if the U.S government keeps on maintaining the same policies as the last 20 years, it will gradually wane and may even go bankrupt.

1) Medicare, Social security, and healthcare expenditure: Right now, it is projected that over 77 million baby boomers will retire within the next 2 decades. This will have a dramatic affect on the cost of Medicare and Social security. The congressional budget office predicts that if we maintain the same level of health care benefits, health care costs will soar to about 40% of government spending in 2020 and gradually cause the U.S debt level to be 100% of its GDP, if we extend it to 2085, the projection is that debt will reach 600% (!) of U.S GDP. That is truly a scary number. It is directly a result of a pay-as-you go system, where seniors retire and push the costs of their retirement to future generations. To close the fiscal gap, the solution is to cut medicare benefits by 2/3s (a scary thought), double income taxes (another scary thought) or cut government spending by 134% (not feasible nor possible). Another solution is to privatize social security and medicare entirely, or to raise retirement age to around 70. Either way, something has to be done in the near future.

2) Taxes: Despite Americans thinking that they pay too much tax, actually from an economists point of view, they don’t pay enough. The optimal amount of marginal tax rate in the highest bracket is determined to be about 40-50% (where marginal revenue is equal to marginal benefit). Right now, with the Bush tax cuts, they are about 35%. When you compare taxes in the U.S to that of Canada or Europe, Americans actually pay much less tax. Another thing is that the U.S has no VAT (value added tax) at the federal level. Some states have no income tax, no sales tax, or both. The US provides farm and gas subsidies that are much higher than other developed countries (which is same thing as not getting enough tax). All these low taxes have the effect of not producing enough revenue for the government. As a result, we run into the same problems as in 1), how can the federal government or state government pay for retirement and healthcare benefits without having enough tax revenue. At current levels, clearly it’s unsustainable, and its clear that eventually taxes will have to be raised.

3) Pensions: State governments are in crisis right now, not only is the country in a recession, but they have to pay large amounts of pension benefits to many people, part of this is due to a loophole where the highest salaried government job determines what pension you get. As a result, people can ‘double dip’ and earn six figures while also receiving six figure pensions. Clearly this is unsustainable, and the reason why many states are on the brink of defaulting. California for example, has already had to slash its budget on many expenditures such as education, raise tuition levels, etc, and it’s still in a big hole. Again, mostly because of unsustainable pension payouts. New Jersey is predicted to be the first state to default, according to its expenditures, in the next decade, pension payouts will constitute 100% of the state expenditure (!).

All of these points raise truly terrifying prospects for the future generation of Americans. The situation in the U.S is bleaker than that of many other developing countries, because of the way Americans have been living on a life of low taxes, a pay as you go health care system, and broken pension costs. Eventually these issues will have to be dealt with, if politics prevent any of these solutions that I mentioned, then the U.S will be on its way to bankruptcy, and having unimaginable debt levels. Truly, something will have to give eventually, it’s only a matter of time. Let us hope that politicians will (eventually) put country ahead of politics, and aim to reform the broken pension, health care, and tax systems.

Edit: Now that it’s certain that current tax rates will continue (actually lower because of the 2% reduction in payroll taxes), the projected deficit with current spending levels and tax rates is projected to be $55 trillion by the time that a person my age will retire (around 2050).

L.J. Kotlikoff, 2006, “Is the United States bankrupt?” Federal Reserve Bank of St. Louis Review, 235-250.
Alan Auerbach, “Deja vu all over again: On the dismal prospects for the federal budget”, NTJ 2010.


Political views

Related to my previous post on equality, given the light of the recent elections in Toronto, and the hostility towards the newly elected conservative leaning mayor, I feel I am somewhat a minority as a moderate.

Canada historically has been fairly liberal compared to the United States, their country was formed by a group of government officials at a table, Confederacy, establishing the beginnings. In contrast, the US was established through a war of freedom and independence. Naturally, it is not surprising that Americans tend to be more conservative and right leaning in their views towards freedom and equality. Canada is contrasted as a capitalist-socialist country. I use the term socialist as the definition of socialism is an ideology that the government should provide utilities, social welfare, and own enterprises that compete on the market. This is all true for Canada, especially the last one (ie. Petro Canada, LCBO, etc). So for me to say that liberals are socialist, that’s because they generally are.

At my college, the University of Toronto, being an academic university in a left leaning city, it is not surprising that the majority of my colleagues are liberal. And why not, college students have the most to gain from liberal policies. Most don’t work and don’t pay any taxes, and are progressive, wanting to help everyone.

I used to be a liberal as well. But gradually, the impact of my internship and economics and exposure to American politics have left me to be a political moderate, or in Canada, a ‘conservative’. The reasons are fairly simple to me, but may not be to many of my colleagues. Younger people tend to be more progressive. Yes, liberal policies sound good on the outside. It sounds good to be able to help everyone, to make everyone more equal, to support progressive causes, to have the government supply services, improve roads + transportation + public goods + healthcare, to have the rich give to the poor. That all sounds good right? The Democratic party is so forward thinking to take care of everyone and support equality.

Then I looked a bit deeper into things. The more power you give to government, the more authority they will have over you, and the less freedom you have. The more you try to make everyone equal, the more it tends towards communism. The more you let government supply, the less you let business and private enterprise supply. And private businesses tend to be more efficient than government. Remember the government doesn’t have to make profit and because of this, they have no incentive to serve the people whereas businesses do in order to gain revenue. And of course, higher taxes to pay for these new services and expansion of government. Remember that when you tax high income individuals, you are taxing the economically most productive workers in the economy, and taking their hard earned money away to give to poor people who presumably have more incentive to be lazy and unproductive because of this redistribution of wealth. I would rather have private enterprise supply those services, and have the government do less, cut spending, cut taxes, and keep the inequality gap the way it is. It may sound like I’m being bigoted and selfish, but when I think of the idyllic time of the 1950s, a great prosperous time, it was mostly conservative policies and atmosphere that worked the way it should.

And so, the new mayor Rob Ford takes office, and I hope that Toronto should become more conservative if he enacts his policies, as I know politicians often lie and deceive. Most of my colleagues are disgusted at his election, as they should be as liberals, but as for me, I don’t have a problem with it, I just want to implore more people to realize the long term implications of their ‘progressive’ views, what it entails and that Mr Ford fulfills his promises.

To further expand on what I’ve said before about the role of government in society, there’s always a tradeoff in the role of government. I personally believe that the government should only provide services that the majority of people would want. For example, defense, healthcare, and education are common public goods that the government provides because most people want them. At the same time, people also have the choice of going with a private good instead (except in the case of defense). Medicare competes with private health insurance, though it only benefits a segment of people (people over 65). Private universities provide a higher quality education at a higher cost than public universities.

On the other hand, too little government means that inequality and corruption will abound. A good example is the United States during the late 1800s – early 1900s, where people like J.P Morgan and John Rockefeller amassed huge sums of wealth, while poor people were literally dirt poor. You think today’s inequality is bad? Back when there was no social security and safety net, the top 1% earned about a million times more than the average worker. J.P Morgan was so powerful that his wealth and influence could actually be measured as a percentage of the US GDP, he had a sizable influence during President Roosevelt’s administration, and he single handedly saved the US financial system from collapse during the Panic of 1907. In this era, huge monopolies such as US Steel and Standard Oil existed, basically causing widespread corruption in all levels of the government and private enterprise. In the absence of government intervention, this kind of corruption and inequity will be tremendous. This is what pure capitalism with no government intervention would have looked like. What we see in the USA right now is reformed capitalism, or capitalism with post-FDR social reforms in place, to mitigate this kind of greed and inequality (though it still exists).

The main thing is that if you want the government to provide you a service, then the majority must agree, the service must also be provided to everyone, and the cost comes from taxpayer’s pockets. On the other hand, if the majority disagrees, and if that service is one that benefits you more than others, then it is efficient to have a private company provide you that service. Consider the example of getting your driveway paved. Suppose the government raises taxes in order to provide a service to everyone of getting their driveway paved whenever they want. Clearly, some people are better off than others because some people have bigger driveways, get their driveways dirtier more often, etc. In other words, it’s not efficient for the government to provide this service. It’s better off to do it yourself or to hire a private company to do it for you, at your own extra cost.

Ted Sorenson once said that “The difference between Republicans and Democrats have always been that the former cares more about property, and the latter cares more about people”. I would extend that to say that the difference between liberals and conservatives is that liberals believe more in social welfare at the cost of higher taxes, and conservatives believe more in individual responsibilities at their own personal cost.

General Politics

Disadvantages of being Canadian

Let me just the say that what I’m going to say in this post doesn’t by any means imply that I hate Canada in any way, only that I’m dissatisfied with living here. Alot of comparisons are obviously going to be made relative to our American neighbors. I’ve lived in Canada since I was 4, and I must say that for all its strengths there are just some things I can’t stand about Canada:

1) High prices/taxes

We have to pay higher prices on everything, this isn’t including tax yet, but everything from cars to houses we pay much more than Americans do on the same items. Alot of items we can’t even get here in Canada, so I have to look on, not .ca to find them only to see either that the shipping cost to Canada is outrageous (Free Shipping to Continental US as usual) or “We only ship to 48 contiguous states”. Yes not only do Americans pay less – alot of offers and opportunities aren’t even available to us (take Hulu as an example).

So we pay more for items in the first place (+ shipping + handling + duties), AND we have to pay higher taxes. Some states in the US (NJ, OR, etc) don’t even have state taxes. What do we get here? A freaking 13% (soon to be higher) tax on everything. That’s ON TOP of the high prices that we pay to begin with. This accounts for the high gas prices ($4/gallon is pretty common here in Toronto), insurance ($3000/yr is common for students) and everything else. Canadians must be rich to afford living here.

2) Government is corrupt and doesn’t care about Canadians / Canadians don’t give a shit

Well this ties in with my first point. The Canadian government is corrupt as hell. That’s why I never vote for any of them, because the new boss is the same as the old boss. So we pay high taxes. Let’s see what the government has done for us recently:

-Increase taxes next year: Thats right, HST is coming next year, because McGuinty decided that raising taxes during a recession is a great idea, and Provincial government approved it.

-Increase tuition next year: Thats right, because McGuinty decided that students aren’t suffering enough and need to pay more for substandard education (you’ll see why).

-Increase TTC fees next year: That’s right, as if we weren’t paying high enough fees for that crappy TTC service, they decided to increase the metropass and fare prices.

You’d think that all these high increases would go to something useful. But I can say from personal experience, the government isn’t making good use of our taxpayer dollars. People say that universal healthcare in Canada is good; I can say that the quality is crap. A while ago, I was going in for treatment for a bump on my skin that I didn’t know what it was; not only did I have to wait long lines for the treatment, but I had to go 3 doctors because none of them knew what it was. First doctor prescribed me some cream: turns out it didn’t work. Next 2 doctors I told them what didn’t work; they gave me the same cream. I don’t think any of them are competent nor do they care about their patients at all. So is quality of healthcare good? no.

Next, construction of roads. It’s nice to have roads renovated and repaved, but taking 3+ years of road construction is ridiculous My street, St Clair West, has been under construction ever since I got to Toronto. It’s been getting worse and worse. Recently, looks like every major road is under construction, and from what I can see there hasn’t been any changes. It took me 45 minutes to get through the traffic on my street. That’s unacceptable. They constantly cut down three lanes to one to increase traffic and here’s a plan sure to get you pissed: they block off all other roads leading to the street you want to get to only leaving one path. So obviously all the cars is on that one path to get through and you wait a long ass time to get somewhere you could’ve walked to in 10 minutes.
So are our taxpayer dollars being spite wisely on road construction? nope.

Another peeve I have is that for all this crappy treatment we receive from the government, Canadians don’t seem to care. As far as I know, the government can keep increasing prices / taxes and Canadians won’t give a shit. Why? Our neighbours in the south have been receiving tax cuts for the past 8 years and we’ve been receiving tax hikes and you don’t feel the least bit outraged at that discrepancy? Sure, I see around UofT demonstrations for tuition freezes and everything, but do they actually work? My bet is no. You can march all you want, the government doesn’t care and neither do other Canadians – we are all happy taking our price hikes up the ass from the government. I read in the paper recently how the 407 highway or the company that owns the toll road, charged many Canadians for using the road – even if their car has been in the garage for the past 8 years, or the license holder has expired. I think I was most surprised about the line that said “Many Canadians gave up and paid the fees anyway”. Are you kidding me? Can you not sue the 407 highway for unnecessary charges? Why would you pay for something that you never incurred? I don’t understand the mentality – the lack of ‘fight’ that Canadians have.

3) Unions are too powerful

The city union workers are too powerful and this is again, something you wouldn’t see in the US. Let me tell you something – when your job is to provide a public service to the Canadian people, you are NOT allowed to go on strike. Hear me? You get paid a high wage to driving your bus or taking out garbage, and you are NOT allowed to go on strike – or shouldn’t be anyways. Public services like transportation, education, etc are provided to Canadians as a part the contract of living in Canada – these services should always be provided. Those points I spoke of above – those outrageous fees – we pay those because we expect to receive service and these services are so essential that their workers should be banned from going on strike. Thank god I’m not from York University – if I was a student there and I lost a semester of my money and time because of some workers that went on strike – I would be out of this country for good. Why doesn’t the government do anything about that? These are essential services that you provide to the Canadian people – make sure that these ‘Union’ workers do their job and are banned from going on strike.

4) Housing prices are outrageous

I may be speaking particularly about Toronto – but the housing prices here are outrageous and unsustainable. Do you know why?

-Because no Canadian (oh wait I forgot Canadians love high prices) are willing to pay hundreds of thousands of dollars more to live in Toronto when they can live in the GTA for much much less and take a 30 min longer commute.

-Toronto’s housing prices do not reflect the city. Is this Manhatten? No. Beverly Hills? No. What makes Toronto so special? There’s nothing of value I see in these homes and that’s why I think it’s not sustainable and it’s due to a housing bubble rather than common sense.

-Toronto’s population growth is low. Therefore sometime in the future, demand will level off and prices will come down. Common sense that some people *my parents* can’t seem to see.

-You can purchase a similar condo or home south of the 49th parallel for 1/4th the price or 1/8th the price or much much less (see this book for how you can do that). No sane Canadian (but then again we love paying high prices) would want to stay here when they can purchase a similar home in NY, FL, CA, etc for much cheaper. At least those Chinese investors are thinking big – and buying up all that valuable real estate for entrepreneurship.

5) Weather sucks

Well yeah. I’ve never seen such unpredictable weather in my life. In one day you could be driving through rain, sunshine AND snow. It’s really annoying to have heavy drizzle for 30 secs then bright sunshine the next. I mean, I know the Irony because I work for Environment Canada, but cmon this weather is just ridiculous…I hate it and it gets worse and worse as you go north. Maybe it’s just East Coast (which I’m also tired of). West Coast sunshine and drizzle is where it’s at…

So in short, that’s why I’m not proud of being Canadian – you can tell from this post that I’m itching to move south soon and I am planning too after I graduate – but I was put in this situation because of my parents, not myself. My intuition has often been good about these things and I’m not going to start doubting myself now. And I’m really sick of the corruptness of the government and inaction of Canadians to stop these things from happening. Whatever happened to free thought? We’re being good socialists and letting the government get the best of us here.