Pretty soon, you reached the card’s credit limit. No problem — you just got another credit card, and another, and another … and all of a sudden, you owed Visa, Master Card, American Express and a host of department stores more than 10 grand.
But you really didn’t have to worry. If you were young and irresponsible during the 60s, 70s or 80s, the vast engine of capitalism would come to your rescue. Jobs were plentiful, and you could work your way out of debt.
That’s the way it worked for individuals, and that’s the way it worked for our country. As former Vice President Dick Cheney noted, “Reagan taught us that deficits don’t matter.”
That dubious lesson wasn’t lost on states and municipalities. Assuming that economic expansion would never end, that incomes would always rise, and that tax collections would grow apace, governments acted accordingly.
That led Colorado lawmakers to stand smilingly by as the state’s pension fund, the Colorado Public Employees Retirement Association, lifted pension payouts to unsustainable levels. As the New York Times noted last Friday, the average PERA pensioner retires at 58, and collects a monthly check of $2,834 for life.
According to their actuaries, PERA can support such payouts if its investment portfolio increases at a compounded annual rate of 8 percent during the next three decades.
That might seem reasonable, judging from past experience. Before the collapse of financial markets two years ago, PERA’s investments had returned an average of 10 percent annually for more than 20 years. One might assume that 8 percent is an appropriately conservative number, a target easily achieved by sophisticated investment managers.
But suppose, as Pimco’s Bill Gross opined recently, that our current situation is the new normal.
Suppose that our structural unemployment rate is around 8 or 9 percent, and is unlikely ever to improve. Suppose that economic growth remains anemic — forever. Suppose that we’re caught in a demographic trap from which we can never escape. Suppose that we can’t pay off our debts, public or private, without serious sacrifice.
That means, Gross says, “half-sized” asset returns compared to the past.
Total public and private indebtedness in the United States has doubled from 150 percent of GDP in 1970 to 300 percent today.
That’s not because we’re feckless spendthrifts but because “lacking an accelerating population base, all developed countries promoted the financing of more and more consumption per capita in order to maintain existing GDP growth rates.”
Today’s American economy depends upon consumption for 70 percent of GDP. But with an aging population, a declining birthrate, and population growth rate of less than 1 percent, this may become the century of our discontent. Older consumers spend less, and we’re neither making nor importing enough young consumers to snap up the new cars, vacations and granite countertops that drive a consumer economy.
So what do we do?
Gross says that governments at all levels need to shift gears. He’s calling for an end to “cyclical policy errors that thrust Keynesian consumption remedies on a declining consumer base.”
That sounds like arcane financial money speak, but its meaning couldn’t be clearer:
None of the usual economic stimuli will work, because we’re not in a cyclical downturn. While we weren’t paying attention, the economy’s fundamental structure changed irreversibly.
We don’t make many appliances these days, so those wages and profits no longer flow into our economy. Afraid of living to 90 and becoming destitute wards of state, once big-spending baby boomers will keep their broken down appliances and scarred Formica countertops forever.
“It’s the economy, stupid,” James Carville noted in 1992, distilling conventional wisdom about national elections into four words.
Good economy = incumbents get re-elected.
Bad economy = throw the rascals out.
That may change. With a static economy, demography will trump everything else — if voters understand where their interests lie.
Aging Tea-Partiers should fight for more government spending on Social Security and Medicare, a national bailout of state pension plans, radical reductions in military spending, and more immigration — you’ve gotta pay for those retirees somehow.
Hazlehurst can be reached at firstname.lastname@example.org or 719-227-5861.