Posted by on April 6, 2014

Between Two Generations

Presumably everyone has seen the Between Two Ferns video with President Obama and Zach Galifianakis by now. If you haven’t, then here it is. At the very least, it confirms that Obama is a much better amateur comedian than he is an amateur President.

Some of you might be wondering why the Leader of the Free World is taking time out from weighty matters of State to appear on a comedy video. The first reason is that appearances like this burnish Obama’s “cool” image, which is a not insignificant part of his voter appeal. The sad reality is that a significant part of the voting population makes political decisions the way it chooses jeans or handbags: it goes with what is trendy. And there is no doubt about it, Obama is way cooler than anybody in the GOP.

But there was also a serious policy reason for his appearance and this is the need to persuade the young “invincibles” to sign up for Obamacare. The economics of Obamacare are, in part, based on the premiums from the young and healthy being used to subsidize the care of the old and sickly. Of course, this only works if the young are good lemmings and they willingly march into the sea. Hence President Obama taking time out to promote the advantages of sea water for small rodents.

Which brings me to my point: Although a tremendous amount has been written about Obamacare, I don’t think that much attention has been paid to its intergenerational effects. Some of the biggest “entitlement” programs, such as Social Security and Medicare, have the effect of transferring money from the young to the old in America; the Economist recently stated that “60% of America’s social spending goes to elderly households, many of which are not poor”. Add to this the swelling national debt, the cost of which will fall almost entirely on the young, and the wealth transfer from the young to the old becomes even more exaggerated. Given these two powerful sources of transfer, it is more than a little perplexing that another program to rob young Peter in order to pay elderly Paul has been implemented with so little protest from Peter.

This is even more surprising in the current context. Bloomberg has recently reported, in an article entitled Millenials Mired in Wealth Gap as Older Americans Gain, that the wealth of older households has now fully recovered from the ravages of the financial crisis. Young households, on the other hand, with larger exposures to the still-languishing housing market and smaller exposures to the booming stock market, are still roughly 30% behind where they were in 2007.

Young people may be “invincibles” but, when it comes to voting for Democrats who support policies detrimental to them, maybe they should start thinking about becoming “invisibles”.

China (Part 3)

Making timing predictions are always very tricky, but there appears to be growing signs that China’s “Minsky moment“ is approaching.

Here is another chart of China’s surging debt since the financial crisis, this time focusing on the private sector. If you added to this the growth at the local government level, much of it undertaken for infrastructure and real estate projects which temporarily boost GDP (and meet centrally mandated growth targets) but which will ultimately prove uneconomic, then the picture becomes even more frightening. It is clear that the Chinese program for recovery from the financial crisis consists of creating a debt bubble.

I have frequently observed that debt doesn’t go away, it just moves around. When debt booms in the private sector, the economy grows with it, generating strong tax revenues and reduced unemployment expenditures; the government pays down borrowings as the private sector’s debt load expands. When this debt-fueled boom inevitably goes bust, the debt shifts to the public sector through bailouts and deficit spending. The former is what happened during the Clinton administration in America and is clearly happening now in China; struggling Spain, which entered the financial crisis with a low level of public debt following a long real estate boom, is an excellent example of the latter. China’s fiscal position will shortly look much worse after the country is forced to bail out its banking sector, which has so far borne the burden of economic stimulus, and to stimulate the economy directly.

(Just in case there are still any doubters about the inevitability of a Chinese detonation, here is the proof. This kind of nonsense only happens when the fin de siècle is near. And please note that the guy is a real estate developer. Of course.)

Student Loans

Student loans crossed the $1 trillion mark in 2013, growing by more than 12%. In fact, while most forms of household debt decreased from 2007 to 2012, student loans grew each year. Education borrowing is now the second largest form of personal debt, behind mortgages but easily outpacing credit cards and automobile loans. Ninety per cent of student loans are provided by Uncle Sam, using underwriting criteria that would have made Countrywide scoundrel Angelo Mozilo blush through his perma-tan.

Student loans already have the highest default rates of any form of household debt and the rate has been growing rapidly (from 8.5% to 11.5% in the last two years). These default rates are probably grossly understated since many of the recent borrowers are still in school and have not yet started to repay.

Analysis by the Federal Reserve Bank of New York shows that, of the recent growth in debt outstanding, a third was from very weak borrowers (FICO scores less than 620) and over a third was from weak credits (FICO scores of 621 to 680). Stronger credits are decidedly in the minority, with debt to the most creditworthy basically flat-lining.

Even worse than how much money is being borrowed is what it is being used to study. The latest figures I have seen (from 2010) show the four most popular bachelor degrees as being social sciences and history, psychology, visual and performing arts, and communication and journalism, for a total of about 435,000 graduates. Engineering, computer science and math are way down the list, with a combined total of only about 145,000 (and I shudder to think how low this number would be without foreign students and the children of recent immigrants). Meanwhile, American business continues to report that one of its biggest problems is the inability to hire appropriately trained personnel; there are currently 4 million job openings in American unfilled because of the lack of qualified applicants. I guess that those sociology majors just aren’t cutting it in the working world.

(This disparity is so obvious that it even, briefly, broke through President Obama’s usually impenetrable screen of political correctness and left-wing nostrums. In January, Obama was heard to utter “Folks can make a lot more, potentially, with skilled manufacturing or the trades than they might with an art history degree”. After howls of protest from the chattering classes, a stronghold of Obama-ism, an apology was issued and the truism was withdrawn. Peace reigns again on the Isle of Denial.)

Like every subsidy, student loans have helped inflate the prices of the targeted industry. The Economist reports that the price of a college education has risen at four times the rate of inflation since 1978, even faster than the cost of healthcare, another sector grossly distorted by government intervention. Much of this money has gone into activities little related to education, including a doubling of the ratio of administrators to teachers and a sharp increase in professorial compensation. Not surprisingly, a study by political scientists reported in the Financial Times found that 87% of the professors at selected universities described themselves as “liberals”, a group whose power to find self-serving rationalizations for government programs is unmatched.

Although there might be an economic argument for government-sponsored student loans, there is certainly no case for this monstrosity. This is a slow-motion train wreck in the making and, as usual, the politicians are doing nothing about it. Unlike sub-prime mortgages, there will be no doubt this time that the disaster was entirely Made-in-Washington.

The End of Prohibition

A while ago, I watched a documentary entitled The House I Live In by Eugene Jarecki. The subject is the War on Drugs, launched by Richard Nixon and furthered by every president since then. The statistics, as reported in THILI, are impressive and depressing: over $1 trillion spent and more than 45 million arrests since 1971, and yet illegal drug use continues at unchanged levels. In the words of one of the interviewees: “It would be one thing if it were draconian and it worked, but it’s draconian and it doesn’t work. And it just leads to more.”

As I have commented before, America has grown fond of fighting unwinnable battles, both foreign and, in the case of drugs, domestic. It appears that, at least when it comes to marijuana, the government is getting ready to throw in the towel. Two states, Colorado and Washington, have just voted to fully legalize recreational use of marijuana. Twenty states (and, since our political leaders should be denied nothing, the District of Columbia) allow the use of marijuana for medical reasons and a further 14 states are predicted to allow this use by 2018; as anyone who has walked down Venice Beach in California knows, this is not far removed from full legalization. A recent Gallup poll has 58% of Americans saying that recreational use of weed should be legalized.

This, of course, is devastating news for two groups. The first is the Mexican cartels. A recent Economist article cites a study by a Mexican think tank that estimates cartel revenue from US marijuana sales at $2 billion per year, almost as much as the cocaine trade; much of this revenue will evaporate with competition from legal sources. This money buys a lot of guns to carry on the cartels’ running battles between themselves and with the Federales, battles that have claimed 60,000 lives over the last 6 years. This fact has led three straight Mexican Presidents to ask their neighbor to the north to consider “market alternatives” to the ban on drugs.

The second group is the law enforcement industry in America, which relies on drug busts for much of its raison d’être and, through the Asset Forfeiture Program, its revenue. Although one can’t help but sympathize with the foot soldiers in this battle, the ordinary cops who are given the futile task of enforcing these laws, the overall incentives for this industry are perverse. Another recent article in the Economist, which discusses the growing “militarization” of the police in America, attributes much of this to the War on Drugs. And there is no doubt that all the cash floating around the drug industry is a major contributor to police corruption.

The question is when does America take the next step and start to legalize “harder” drugs? The first thing to say is that, by decriminalizing marijuana, America is already taking action against hard drug use. In economics parlance, marijuana and hard drugs are “substitute goods”. When the cost (including the risk) of one substitute good declines (in this case, weed) then the consumption of the other substitute good (heroin, for example) falls as users shift to the cheaper and less risky alternative. Contrary to the popular belief that allowing soft drug use would put users on a “ladder” to harder drugs, economics predicts the opposite effect. Evidence from the Netherlands supports this conjecture. To quote a recent article from the Economist, “Decriminalization of marijuana use has also played a role in limiting Dutch heroin use, since it separates the use of cannabis from the use of harder drugs”.

There is also evidence, cited in the same Economist article, that controlled and decriminalized use of heroin in the Netherlands and Switzerland is slashing drug-related deaths, HIV and crime. It also appears to be slashing hard drug use, with new cases of addiction falling to close to zero in the Netherlands in the late 2000s and the aging population of Hippie addicts gradually shrinking.

Bill Bryson’s book One Summer: 1927 America, the praises of which are sung below, begins its chapter on Prohibition with the harrowing story of Wilson B. Hickox, a well-off businessman who decided to have a nightcap in his hotel room in New York City on June 23, 1927. He was dead within minutes of strychnine poisoning, the result of an alcohol “denaturing” program mandated by a government so intent on denying its citizens a drink that it was willing to take a few casualties on the way. The actor Philip Seymour Hoffman is a recent casualty of a similarly misguided policy; his heroin overdose probably would have never happened without the haphazard quality of illegal production. How many more lives, especially those of non-users, have to be ruined before people realize that the costs of outlawing drugs greatly exceed the costs of using them?

Putins Who Live in Glass Houses

When Putin asserted his Hitleresque right to defend “oppressed” Russian speakers everywhere, one wonders how his own Muslim populations took it? Muslim peoples make up 14% of the Russian population and some of them – such as the Chechens, Circassians and Dagestanis – are more or less in open revolt against Putin’s government. In fact, when it comes to restive and “oppressed” minorities, Putin’s Russia is virtually the world champion. Does he really want to promote cross-border government meddling with minority populations? Really, Vladimir? Because I am pretty sure that the CIA would be happy to dust off its mujahideen connections from the Soviet war in Afghanistan. Politics have made stranger bedfellows, and the enemy of my enemy is still my friend. At least for a little while.

(By the way, I am not advocating any such action following Putin’s annexation of the Crimea. The test for me always has to be the vital interests of the United States and I don’t think the Crimea rises to that level. A military incursion into east Ukraine, justified as a protection of local Russian speakers, would be a different matter. This would be an implicit threat to the Baltic Republics, NATO and EU members, and would bring back very bad memories for the Poles. Putin should be left in no doubt that this would be a step too far.)


I have a confession to make. One of the reasons for the drop off in my blog production is that I have become obsessed with television series. There is just so much good stuff on TV, now and in the Netflix archives, that it is hard to tear myself away: The Wire, Breaking Bad, The Sopranos, Boardwalk Empire, True Detective, House of Cards and, most shamefully of all, The Game of Thrones.

And what is the implication of this for cinemas? With so much great content, and the continuously improving quality of television screens and internet feeds, only fanatics like me continue to pay the equivalent of $19 a ticket to go to a movie in London. The final blow: the traditional stigma among actors, directors and writers about working for television is clearly breaking down, which means that it is no longer necessary to go to your local big screen if you want to see the likes of Mathew McConaughey.

If I owned a chain of cinemas, I’d be very worried.

Bill Bryson

I don’t know how popular Bill Bryson is in America, although this transplanted American is hugely popular in his adopted country of England.

I have just finished reading One Summer: America 1927 and it shows, once again, how superb writing can take the most seemingly unpromising topic and make something great. Skipping through, and somehow tying together, Charles Lindbergh, Babe Ruth and his ravenous appetites, Herbert Hoover and the great Mississippi flood, Mount Rushmore, the advent of radio and television, the Jack Dempsey and Gene Tunney fights, Prohibition and the unabashed corruption of Chicago politics, the interest rate decision that put the pedal to the floor for the stock market, Sacco and Vanzetti, “Silent Cal” Coolidge, the early days of Il Duce, the Black Sox Scandal, and many, many more fascinating vignettes, this book is a great read.

Another example from Bryson is his take on the English language, entitled The Mother Tongue: English and How it Got That Way. Read this book and you will wonder how we ever succeeding in imposing this infinitely illogical language on the rest of the world. I just wish that the book had existed back in my High School days so that I could have used it to explain away my appalling spelling and grammar. It was never really my fault.

Parting Shot

If we are to win the electoral battle, we have to start using ridicule more for political purposes. We need more people like Tim Hawkins, with his Obama joke and his version of the Candy Man. And the avowedly atheist and libertarian, and immensely talented, Penn Jillette is a national treasure too little used by a Republican Party wedded to the religious right.

Roger Barris, London

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