Apparently our government has succeeded in making almost half of the population dependent upon it or others. Phil Izzo in the WSJ discussed a paper from the National Bureau of Economic Research: [...]
moral hazard
Absurdity is often an excellent way to make a point. Aesop thought so when he created the fable of the ant and the grasshopper. But just how much of a fable was it?
This email updates Aesop’s attempt at absurdity. Unfortunately for the country, other than the anthropomorphic elements, the fable is no longer a fable nor absurd. Much of it has already happened or now is entirely plausible.
THE NEW ANT and the Grasshopper, Two Versions:
**** OLD VERSION
The ant works hard in the withering heat all summer long, building his house and laying up supplies for the winter.
The grasshopper thinks the ant is a fool and laughs and dances and plays the summer away.
Come winter, the ant is warm and well fed. The grasshopper has no food or shelter, so he dies out in the cold.
MORAL OF THE OLD STORY: Be responsible for yourself !
**** MODERN VERSION
The ant works hard in the withering heat and the rain all summer long, building his house and laying up supplies for the winter.
The grasshopper thinks the ant is a fool and laughs and dances and plays the summer away.
Come winter, the shivering grasshopper calls a press conference and demands to know why the ant should be allowed to be warm and well fed while he is cold and starving.
CBS, NBC, PBS, CNN, and ABC show up to provide pictures of the shivering grasshopper next to a video of the ant in his comfortable home with a table filled with food.
America is stunned by the sharp contrast. How can this be, that in a country of such wealth, this poor grasshopper is allowed to suffer so?
Kermit the Frog appears on Oprah with the grasshopper and everybody cries when they sing, ‘It’s Not EasyBeing Green’. Occupy the Anthill stages a demonstration in front of the ant’s house where the news stations film the SEIU group singing, We Shall Overcome. Then Rev. Jeremiah Wright has the group kneel down to pray for the grasshopper’s sake, while he damns the ants.
President Obama condemns the ant and blames President Bush 43, President Bush 41, President Reagan, Christopher Columbus, and the Pope for the grasshopper’s plight.
Nancy Pelosi & Harry Reid exclaim in an interview with Larry King that the ant has gotten rich off the back of the grasshopper, and both call for an immediate tax hike on the ant to make him pay his fair share. Finally, the EEOC drafts the Economic Equity & Anti‑Grasshopper Act retroactive to the beginning of the summer.
The ant is fined for failing to hire a proportionate number of green bugs and, having nothing left to pay his retroactive taxes, his home is confiscated by the GovernmentGreen Czar and given to the grasshopper. The story ends as we see the grasshopper and his free-loading friends finishing up the last bits of the ant’s food while the government house he is in, which, as you recall, just happens to be the ant’s old house, crumbles around them because the grasshopperdoesn’t maintain it.
The ant has disappeared in the snow, never to be seen again.
The grasshopper is found dead in a drug related incident, and the house, now abandoned, is taken over by a gang of spiders who terrorize the ramshackle, once prosperous and peaceful, neighborhood.
The entire Nation collapses bringing the rest of the free world with it.
MORAL OF THIS VERSION:Be careful how you vote in 2012.
You might want to send this on to other ants like yourself. Don’t waste time with grasshoppers, they have no incentive to understand.
Dec 052011
A pathetic example of what liberalism has done to “help” the poor. How does the country break out of this cycle of dependency? What happens when the money runs out?
H/T Protein Wisdom
Jul 082011
Charles Hugh Smith calls what is coming The Great Reset. His article explains the what and whys of this reset. Below is part of his article which deals with three of these factors:
Since the Status Quo is unsustainable, there will be a Great Reset. The timing and nature of that Reset is up to us.
Yesterday I laid out why the Status Quo is financially unsustainable in The Promises That Cannot Be Kept. The unavoidable consequence of that is the nation will experience a Great Reset in which the promises of the Savior State are relinquished, either voluntarily or involuntarily.
As I discussed in July 4, 2011: The Cycle of Dependency and the Atrophy of Self-Reliance, our reliance on the Savior State has sapped our will and confidence, and hollowed out communities that have become dependent on the Savior State and its quasi-private partners, the corporate cartels of banking, defense, healthcare and so on.
The Great Reset will thus be a great shock to everyone who has grown dependent on Big Government and global Corporate America.
An unprecedented array of interconnected trends are converging that will force a Reset not just in the economy but in the American society and culture.
1. Peak Government and Moral Hazard. When the Savior State promises to “fix” any and all problems in the nation, such as banks making bad bets and becoming insolvent, it introduces a pervasive moral hazard into the culture. The defining characteristic of moral hazard is that it insulates a person from risk. That person will behave much differently than someone who is not insulated from risk.
In the case of finance, the person insulated from the consequences of his gambles will have an insatiable appetite for risky bets that would be viewed as insanely foolhardy by a person exposed to the full, real risk.
In broad brush, the financial crisis was caused by the Savior State backstopping all “too big to fail” banks and Wall Street bets. These financial institutions are essentially free to make stupendously risky bets and keep the gains, if any, while passing the losses back to the Savior State’s taxpayers. Imagine being given a stake at the roulette table where you get to keep your winnings but Uncle Sam makes good your losses.
Closer to home, the Savior State’s promises to fund our retirement and healthcare via modest payroll deductions has introduced a moral hazard that is reflected in the nation’s anemic savings rate: there is no need to save, because the heavy lifting of our retirement and healthcare will be done by the Savior State.
The numbers are something like this: the average Medicare recipient pays in $10,000 and extracts $250,000 in benefits. This kind of system is only sustainable if there are 25 workers for every retiree. Right now, there are roughly 2.5 workers for every retiree in the U.S., and if you consider only private-sector workers, it’s more like 2 to 1.
We are at Peak Government and Peak Promises.
2. Demographics. ”Pay as you go” systems like Social Security and Medicare only function sustainably if the retirees drawing benefits remain about 1/10th of the number of workers paying the taxes. Alternatively, the population must pyramid up every generation to maintain that 10-to-1 ratio.
The Baby Boom is roughly 76 million people, or about 25% of the population. There are about 139 million workers and about 310 million residents. The Baby Boom has started retiring en masse; all of my relatives and friends who work for state or local government are already retired well before the age of 60, and the first Boomers qualify for Medicare this year.
Once the Boomers are in the system, the worker-retiree ratio will be less than 2-to-1. This is completely unsustainable in a “pay as you go” system. Here are the charts:
3. The End of Work. The cheerleaders will claim the U.S. economy will generate 50 million new jobs in the next 20 years and thus stave off demographic collapse of entitlements, but there is scant evidence to support this claim and plentiful evidence to suggest we are also at Peak Employment in terms of civlian participation in the workforce.
I have addressed these issues many times:
End of Work, End of Affluence I: Cascading Job Losses (December 8, 2008)
End of Work, End of Affluence III: The Rise of Informal Businesses (December 10, 2008)
Endgame 3: The End of (Paying) Work (January 21, 2009)
The “End of Work” and the Coming Revolution in Education (June 7, 2011)
The full article is available here.
Jul 072011
Bill Bonner is his inimitable fashion reduces the welfare state to its simplest essence:
The debt ceiling is distraction. It’s just an American nuance to a genuine problem that is plaguing all the mature democratic/capitalistic economies. Greece, Britain, Ireland…dozens of other countries…and the US.
As regular readers of this Daily Reckoning know, It is a problem with the funding of the modern social welfare state…and the ‘social contract’ itself. The bargain is this:
The people give up 20% to 50% of their output…and sometimes, their lives…to their government.
In return, the government promises to make their lives better than they would be otherwise.
But how can the feds make the common citizen’s life better? If it gives them back in services only as much as they’ve paid in taxes, what’s the point? In fact, the government can’t even do that. It is a poor capital allocator. And there’s a huge amount of inefficiency and friction in the system. So, the government spends money unwisely. It gets a poor return. If people get half of what they pay for it will be a miracle.
When the system was first invented, in the 19th century, it worked well enough. GDP growth rates were high. Old people, regulations and government-provided services were few.
But as the system matured, over 150 years, it became zombified. That is, the friction, misallocation of resources, fixed costs, old people and parasites increased. The feds spent more and more. People got less and less for it. They didn’t want to raise taxes…because the voters would feel they weren’t getting their money’s worth. But the voters still wanted more and more ‘services.’ So, from approximately the end of the “30 glorious years” following WWII…in about 1980…to the present, the government was only able to expand services by borrowing.
And now, borrowing is becoming a problem. Wise…or lucky…countries such as Greece and Britain (not necessarily in that order) are now being forced to cut back. Either because they can’t borrow now…or they fear they won’t be able to do so in the future. Naturally, the zombies don’t like it. They’ve taken to the streets in Athens as well as London.
In London, the schoolteachers “interrupted” services all across England last week. In Greece, they didn’t even have to strike; they weren’t supplying much service anyway.
Where will this lead? We don’t know. But it’s a serious question.
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