Aging Populations and Replacement Birthrate

Posted by PITHOCRATES - April 28th, 2014

Economics 101

(Originally published July 8th, 2013)

Trying to follow a Baby Boom with a Baby Bust creates Problems in Advanced Economies with Large Welfare States

In the late 1960s began a movement for zero population growth.  It called for women to have only enough babies to replace the current population.  Not to have too many babies that would increase the population.  Nor have too few babies that the population declines.  Something that women could easily do because of birth control.  And, later, abortion.  The drive behind this was to save the planet.  By keeping large populations becoming like a plague of locusts that devour the earth’s resources and food until the planet can no longer sustain life.

China did these zero population growth people better.  By promoting a negative population growth rate.  Limiting parents to one child.  They did this because during the days of Mao’s China the country set some world records for famine.  Their communist state simply couldn’t provide for her people.  So to help their communist system avoid future famines they tried to limit the number of mouths they had to feed.  Of course, trying to follow a baby boom with a baby bust creates other problems.  Especially in advanced economies with large welfare states.

China’s one-child policy and the preference for boys have led to a shortage of women to marry.  Some Chinese men are even looking at ‘mail-order’ brides from surrounding countries.  But China is going to have an even greater problem caring for her elderly.  Just like Japan.  Japanese couples are having less than 1.5 babies per couple.  Meaning that each successive generation will be smaller than the preceding generation.  As couples aren’t even having enough children to replace themselves when they die.  Leaving the eldest generation the largest percentage of the overall population.  Being paid and cared for by the smallest percentage of the overall population.  The younger generation.

States with Aging Populations are Suffering Debt Crises because they Spend More than their Tax Revenue can Cover

As nations develop advanced economies people develop careers.  Moving from one well-paid job to another.  As they advance in their career.  Creating a lot of income to tax.  Allowing a large welfare state.  Which is similar to a Ponzi scheme.  Or pyramid scheme.  As long as more people are entering the workforce than leaving it their income taxes can pay for the small group at the top of the pyramid that leaves the workforce and begins consuming pension and health care benefits in their retirement.  And there is but one requirement of a successful pyramid scheme.  The base of the pyramid must expand greater than the tip of the pyramid.  The wider the base is relative to the top the more successive the pyramid scheme.  As we can see here.

Babies per Generation - Constant Replacement Birthrate

Generation 1 is at the top of the pyramid.  It is the oldest generation.  Which we approximate as a period of 20 years.  In our example Generation 1 are people aged 78-98.  They’re retired and collecting pension, health care and other benefits.  Some combination of Social Security, Medicare, Medicaid, food stamps, heating assistance, etc.  All paid for by Generation 2 (58-78), Generation 3 (38-58) and Generation 4 (18-38).  Each generation is assumed to bring 6 children into the world.  So these couples are not only replacing themselves but adding an additional 4 children to further increase the size of the population.  Which really makes running a pyramid scheme easy.  For if we assume each member in Generation 1 on average consumes $35,000 annually in benefits that Generations 2 through 4 pay for that comes to $555.56 per person annually.  Or $46.30 per person monthly.  Or $10.68 per person weekly.  Or $1.53 per person daily.  Amounts so small that Generations 2 through 4 can easily pay for Generation 1′s retirement.  Now let’s look at the impact of a declining birthrate with each successive generation.

Babies per Generation - Declining Replacement Birthrate

When all couples in each generation were having on average 6 children this added 1.9 billion new taxpayers.  Which greatly reduced each taxpayer’s share of Generation 1′s retirement costs.  But thanks to birth control, abortion and the growing cost of living each successive generation has fewer babies.  Generation 2 only has 3 children.  Enough to replace themselves.  And add one new taxpayer.  Generation 3 has only 2 children.  Only enough to replace the parents.  Providing that zero population growth that was all the rage during the late 1960s and the 1970s.  While Generation 4 only has 1 child.  Not even enough to replace the parents when they die.  Causing a negative population growth rate.  Which is a big problem in an advanced economy with a large welfare state.  For instead of adding 1.9 billion new taxpayers they only add 217.5 million new taxpayers.  Greatly increasing each taxpayer’s share of Generation 1′s retirement costs.  Instead of paying $555.56 per taxpayer they each have to pay $5,384.62 annually.  Or $448.72 per taxpayer monthly.  Or $103.55 per taxpayer weekly.  Or $14.79 per taxpayer daily.  Numbers that prove to be unsustainable.  The state simply cannot tax people this much for Generation 1′s retirement.  For if they did this and added it to the rest of government’s spending they’re taxing us to fund it would take away all of our income.  This is why advanced economies with aging populations are suffering debt crises.  Because their spending has grown so far beyond their ability to pay for it with tax revenue that they borrow massive amounts of money to finance it.

If you want a Generous Welfare State you need Parents to have More Children

If you carry this out two more generations so every generation only has one child the per taxpayer amount tops out at $14,736.84 annually.  Or $1,228.07 per taxpayer monthly.  Or $283.40 per taxpayer weekly.  Or $40.49 per taxpayer daily.  Amounts far too great for most taxpayers to pay.  This is what an aging population does in a country with a large welfare state.  It makes the population top-heavy in elderly people who no longer work (i.e., pay taxes) but consume the lion’s share of state benefits.  When couples were having 6 children each across the generations there was a ratio of 84 taxpayers per retiree.  When there was a declining replacement birthrate that ratio fell to 15 taxpayers per retiree.  If we look at this graphically we can see the pyramid shape of this generational population.

Generational Population - Constant Replacement Birthrate

With 84 taxpayers per retiree we can see a nice and wide base to the pyramid.  While the tip of the pyramid is only a small sliver of the base (Generation 4).  Making for a successful Ponzi scheme.  Far more people pay into the scheme.  While only a tiny few take money out of the scheme.  This is why Social Security and Medicare didn’t have any solvency problems until after birth control and abortion.  For these gave us a declining replacement birthrate over time.  Greatly shrinking the base of the pyramid.  Which made the tip no longer a small sliver of the base.  But much closer in size to the base.  That if it was an actual pyramid sitting on the ground it wouldn’t take much to push it over.  Unlike the above pyramid.  That we could never push over.  Which is why the above Ponzi scheme would probably never fail.  While the one below will definitely fail.

Generational Population - Declining Replacement Birthrate

If you want a generous welfare state where the state provides pensions, health care, housing and food allowances, etc., you need parents to have more children.  For the more children they have the more future taxpayers there will be.  Or you at least need a constant replacement birthrate.  But if that rate is below the rate of a prior baby boom the welfare state will be unsustainable UNLESS they slash spending.  The United States has a replacement birthrate below the rate of a prior baby boom.  While the Obama administration has exploded the size of welfare state.  Especially with the addition of Obamacare.  Making our Ponzi scheme more like the second chart.  As we currently have approximately 1.75 taxpayers supporting each social security recipient.  Meaning that it won’t take much pushing to topple our pyramid. We’re at the point where a slight breeze may do the trick.  For it will topple.  It’s just a matter of time.

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Sperm Donor must pay Child Support for Lesbian Couple’s Child

Posted by PITHOCRATES - January 26th, 2014

Week in Review

Proponents of same-sex marriage say there is no difference with it and traditional marriage.  And that same-sex couples can be parents just as traditional couples can.  There’s just the matter of getting a child.  As a same-sex couple cannot conceive a child.  But as long as women give up their unwanted babies for adoption instead of aborting them a same-sex couple should be able to adopt a child.  Or a lesbian couple could find a sperm donor (see Court: Marotta is a father, not merely a sperm donor by Steve Fry posted 1/22/2014 on cjonline).

A Topeka man who donated sperm to a lesbian couple is the presumptive father to a baby one of the woman bore and is subject to paying child support, a Shawnee County District Court judge ruled Wednesday.

In her written decision, District Court Judge Mary Mattivi said that because William Marotta and the same-sex couple failed to secure the services of a physician during the artificial insemination process, he wasn’t entitled to the same protections given other sperm donors under Kansas law…

Marotta contended he was only a sperm donor to a same-sex couple seeking a child, but the Kansas Department for Children and Families argued he is a father who owes child support to his daughter. The girl is 4 years old…

The Kansas Department for Children and Families filed the case in October 2012 seeking to have Marotta declared the father of a girl Schreiner bore in 2009.

Marotta opposed the action, saying he didn’t intend to be the child’s father, and that he had signed a contract waiving his parental rights and responsibilities while agreeing to donate sperm in a plastic cup to Schreiner and Angela Bauer, who was then her partner. Marotta contacted the women after they placed a Craigslist ad seeking a sperm donor.

The state has been seeking to have Marotta declared the child’s father so he can be responsible for about $6,000 in public assistance the state provided, as well as future child support.

This makes a good case against same-sex couple adoption.  For without a blood tie to the baby it is apparently easy to walk away from it.  Even if one made a commitment to raise a child together.  Like with this lesbian couple.  The partner to the mother of the baby left.  Without providing for that baby.  So the mother and baby became wards of the state.  Which is why the state went after the sperm donor for child support.  Even though he had an agreement with the lesbian couple that he would have no responsibility for their child.

There are strict guidelines for adopting a baby.  To make sure the child goes to a good home.  With parents who have the financial wherewithal to raise a child.  Apparently there is no such requirement for the donation of sperm.  Which can place a child in a home with parents who do not have the financial wherewithal to raise a child.  At least it would appear so.

A marriage between a man and a woman is about children.  To conceive and bring children into the world.  In a partnership that facilitates the raising of children.  To give them a last name.  A stay-at-home mother gets added to her husband’s employer benefits.  So she can stay at home and work without pay while being covered by her working husband’s benefits.  Where a mother and a father can both raise their children.  Each teaching them what they uniquely can.  Giving them as complete a childhood as possible.  Tied forever to their children by blood.  This is what marriage is for.  Children.  All the employer benefits of marriage.  All the legal advantages of marriage.  All the tax advantages of marriage.  They’re all there for one reason.  To facilitate the raising of children.  So parents raise their children.  And not the state.

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Target had offered Health Insurance to Part-Time Workers but Few Enrolled

Posted by PITHOCRATES - January 25th, 2014

Week in Review

To pass Obamacare the left pointed to all those people who did not have health insurance.  Like these part-time workers at Target (see Target ends health care coverage for part-time workers in U.S. by The Associated Press posted 1/22/2014 on The Star).

Target Corp. says it will no longer be offering health care coverage for its part-time workers.

The discounter is citing new options now available through health care exchanges under the U.S. Affordable Care Act.

Target, based in Minneapolis, said the majority of its part-time workers who have been eligible for its health care insurance coverage don’t enrol[l]. In fact, less than 10 per cent of its total employees of 361,000 take advantage of the part-time plan. It said it will stop covering the part-time workers beginning April 1…

Target said that employees who average between 20 and 31 hours per week will continue to be eligible for other benefits, including vacation, dental, disability and life insurance. Its part-time employees also will still qualify for store discounts and its 401(k) plan.

First of all it should be noted that Target offers a lot of benefits to part-time workers.  Something you wouldn’t believe the way all corporations are excoriated in the mainstream media.  They are evil incarnated.  They hate their employees.  Forcing them to work for pauper wages with no benefits.  Well, here’s one that is offering some pretty nice benefits to part-time workers.  Not too shabby.

We needed to pass Obamacare into law because there were some 50 million people who did not have health insurance.  Well, as it turns out some people were choosing not to have health insurance.  Such as the young and healthy.  And about 90% of Target’s part-time labor force.  If that held true throughout all part-time workers who are part-time for non-economic reasons (i.e., they choose to be part-time) that’s about 16.9 million people who choose NOT to have health insurance.  If you add in the 16-19 year-olds (i.e., the young and healthy) in the labor force that total comes to about 22.5 million who probably choose NOT to have health insurance.  Or about 45% of the total who don’t have health insurance.  And there are probably more who choose NOT to have health care.  (See tables A-1 and A-8 of the December Employment Situation Summary posted on the Bureau of Labor Statistics for employment numbers).  Which means the left is overstating the number of people who don’t have health insurance but want it by about 182%.  Or more.

We may have problems that drive up the cost of health insurance but most people who want it have it.  Or had it.  Until Obamacare took the policies they liked and wanted to keep away.  Other people who don’t have any insurance may be between jobs.  And health insurance plans.  As the Obama administration said the 6 million or so cancellations were just likely people between health insurance policies.  As people are always cancelling one policy and buying a new one.  So it would appear that we have completely remade the American health care system to fix a problem that wasn’t really there.  For there would have been far cheaper ways to provide health insurance to the relative few who didn’t have it but wanted it.

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FT193: “Democrats are more unified than Republicans because they put their hatred of Republicans ahead of their policy differences.” —Old Pithy

Posted by PITHOCRATES - October 25th, 2013

Fundamental Truth

Democrats believe Republicans should be like a 1950s Housewife and be Pretty but Express no Thoughts of their Own

What did we learn from the government shutdown?  Well, if you listened to the left you learned that there is a civil war going on in the Republican Party.  And perhaps there is.  For there are two factions in the Republican Party.  Those the Democrats like and can push around.  And those who refuse to be their bitch.

The Tea Party would be in that latter category.  And the Democrats really hate them.  Because they won’t play ball.  Like the establishment Republicans.  Who argue with and debate the Democrats.  Put on a little kabuki theater to shut the constituents up back at home.  Then vote with the Democrats.  And thank the Democrats for the occasional spoils hand-me-down.

You see, the Democrats know how to be a good Republican.  You act like a 1950 housewife.  With Democrats, of course, being the 1950s husband.  Republicans are to look pretty and agree with the Democrats.  They’re not supposed to express a thought of their own.  The Democrats promise them all sorts of things.  To honor their agreements.  To be faithful.  Then go out and break their promises and whore around.  Because in their world Republicans are second-class citizens.  Just like the 1950s housewife.  At least as liberal Democrats see the 1950s housewife.

Extorting Everyone via Obamacare has more Political Dividends than Extorting only Seniors

Washington changes people.  Well, it changes Republicans.  Where power corrupts them.  While absolute power seduces Democrats.  Which is their ultimate goal.  Even when they campaigned for their first election.  They want power.  All the power they can get.  So they can become a ruling class.  An aristocracy.  Where they can do whatever they want.  And live the good life.  At the expense of the masses.  Like it used to be in feudal Europe.  Where who you knew was all that matter.  And a good last name set you up for life.

Power.  It’s all that counts.  And with power comes privilege.  The Democrats see themselves as a privileged elite.  Or at least they think they should be.  Which explains why working Americans have to pay high premiums and pay high deductibles for a basic Obamacare health insurance policy with no subsidies while members of Congress get a generous subsidy for their gold-plated policies even though they earn more than $100 grand a year.

In fact the Affordable Care Act is all about power.  Not health care.  Forcing people to turn to government for their health care makes all people dependent on government.  And much more willing to vote for Democrats who want to raise taxes and expand benefits rather than Republicans who want to ‘throw Grandma off the cliff’.  As the left accuses Republicans of wanting to do.  For it’s one thing extorting seniors.  But it’s another extorting everyone.  Which has far more political dividends than extorting only seniors.

Empowering the Ruling Class is the One Priority Democrats put above all Others

So you have the Democrats trying to make all Americans dependent on government so they can extort them whenever they want more.  If they want more money they threatened whatever the people are dependent on.  Saying if we don’t raise taxes the Republicans will prevent the Democrats from giving them these benefits.  With establishment Republicans onboard for the occasional spoils hand-me-down.  While the Tea Party Republicans are trying honor the promises they made to their constituents.

Was the attempt to defund Obamacare a wise move?  When the Republicans only controlled the House of Representatives?  Especially with the Republicans fighting among themselves?  Time will tell.  But what was clear is that the Democrats are more unified than the Republicans.  Why?  Is it because there is no dissension in the Democrats’ ranks?  Like there is with Republicans between establishment (i.e., Democrats in Republican clothes) and the Tea Party?  No.  It’s not that.  For there is dissension in the Democrat ranks.  But unlike the Republicans, they don’t let this interfere with their ultimate aim.  Power.

The Democrats never lose sight of the big picture.  The acquisition of power.  Democrat primary elections can be brutal.  In 2008 when Bill Clinton was trying to get Senator Ted Kennedy to endorse Hillary Clinton instead of Barack Obama he said, “A few years ago, this guy would have been carrying our bags.”  A racial slur.  But that was all forgotten after the election.  With Hillary Clinton even taking a post in the Obama administration.  Because empowering the ruling class is the one priority they put above all others.  And you do that by destroying the opposition.  The Republicans.  In particular the Tea Party Republicans.  Whatever the cost.  However it hurts the American people.  This is what unifies the Democrats.  Their love of power and their hatred of Republicans.  Which lets Democrats forget things like racial slurs.  While those Republicans who fight for the people get attacked by members of their own party.

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Shutting Down Government and Taking Hostages

Posted by PITHOCRATES - October 3rd, 2013

Politics 101

Democrats close National Parks and Deny Cancer Treatment for Children to win Political Contest

The politicians have shut down the government.  And the executive branch (i.e., President Obama’s branch) is really trying to make the shutdown hurt.  In fact they are gleeful.  For the president had his ass handed to him over his redline comment on Syria.  Having been ridiculed on the international stage he is trying to show how tough he is with people he can push around.  Americans.

So President Obama has closed national monuments.  To really annoy the people.  Even World War II veterans (men who know a thing or two about courage and bravery and being tough) coming to see the outdoor World War II monument.  Yes, he closed that, too.  But he didn’t stop there.  His executive branch even tried to close Mount Vernon.  The privately owned and privately operated Mount Vernon.  Proving the politics that motivate the president and the Democrats.

When a reporter asked Senator Harry Reid if he would approve a spending bill that would let children with cancer to participate in an experimental treatment program he said ‘no’.  Because if he did that would mean the other side would have won.  When you’re talking about winners and losers, though, you’re not doing what is best for the American people.  You’re doing whatever you can to win.  Regardless of what’s best for the people.

The Obama administration refused additional security in Benghazi so they wouldn’t offend their Muslim Hosts

The Democrats are playing hardball.  Acting like petulant children who can’t get their way.  And they don’t care who they hurt in the process.  Children throwing tantrums rarely do.  Pity they couldn’t show this same toughness when it comes to real enemies of America.

President Obama and the Democrats have unleashed every invective in the dictionary against the Republicans.  Calling them terrorists and their actions jihad.  Yet they bend over backwards not to offend those waging jihad against America.  To this day they still call the Fort Hood massacre workplace violence.  After the Boston Marathon bombing they held off calling it an act of terrorism.  And refuse to call the bombers Muslim even though they were Muslims fighting a jihad for Islam.

When the American ambassador in Libya requested additional security for their mission in Benghazi the Obama administration refused the request.  As they didn’t want to offend the sensitivities of their Muslim hosts in Benghazi by showing that we were worried about our safety there.  For President Obama won the War on Terror with the killing of Osama bin Laden.  So there was nothing to worry about.  And there was an election coming up.  So not only were they worried about their Islamic host’s sensitivities they were worried about how a ramp up of security in Benghazi would look back at home.  As they were getting a lot of miles out their campaign slogan.  “Osama bin Laden is dead.  And General Motors is alive.”  Which led to four dead Americans in Benghazi.

The Democrats hold Social Security Recipients Hostage whenever they can’t get What they Want

Of course, what government shutdown would be complete without scaring old people?  Yes, they have brought up Social Security.  Because those Social Security recipients are hostages to the government.  If the government doesn’t get what they want the government threatens to take away their benefits.

The government shutdown does not affect Social Security.  But tying the current fight in with the future fight over raising the debt limit helps the Democrats.  For they buy a lot of votes.  Which isn’t cheap.  Each year federal spending increases to pay for new and/or expanded federal programs that buy votes from those they make dependent on government.  This is the Democrats’ great fear.  That they won’t be able to raise the debt limit.  So they can continue to buy votes.  Which they must do as they can’t win in the arena of ideas.

Which is why they’re already playing the Social Security card.  Taking Social Security recipients hostage.  Threatening them that if they don’t pressure the Republicans to stop trying to be responsible they will make them pay.  And stop issuing their checks.  Which further proves how political everything is.  First of all, we pay into Social Security.  There is a Social Security Trust Fund that is supposedly holding our money.  Which means one of two things.  Either they’re withholding our own money from us.  Or Social Security is really a Ponzi scheme after all.  And the Trust Fund is empty.  Filled with nothing but federal IOUs.  Yes, they’ve spent that money to buy more votes.  So not only have they spent more than the government can pay.  They’ve also raided our retirement accounts.  To buy votes.  Which is what Obamacare is all about.  Buying votes.  To get even more Americans dependent on the government.  So the government can hold them, too, hostage to get what they want.

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Aging Populations and Replacement Birthrate

Posted by PITHOCRATES - July 8th, 2013

Economics 101

Trying to follow a Baby Boom with a Baby Bust creates Problems in Advanced Economies with Large Welfare States

In the late 1960s began a movement for zero population growth.  It called for women to have only enough babies to replace the current population.  Not to have too many babies that would increase the population.  Nor have too few babies that the population declines.  Something that women could easily do because of birth control.  And, later, abortion.  The drive behind this was to save the planet.  By keeping large populations becoming like a plague of locusts that devour the earth’s resources and food until the planet can no longer sustain life.

China did these zero population growth people better.  By promoting a negative population growth rate.  Limiting parents to one child.  They did this because during the days of Mao’s China the country set some world records for famine.  Their communist state simply couldn’t provide for her people.  So to help their communist system avoid future famines they tried to limit the number of mouths they had to feed.  Of course, trying to follow a baby boom with a baby bust creates other problems.  Especially in advanced economies with large welfare states.

China’s one-child policy and the preference for boys have led to a shortage of women to marry.  Some Chinese men are even looking at ‘mail-order’ brides from surrounding countries.  But China is going to have an even greater problem caring for her elderly.  Just like Japan.  Japanese couples are having less than 1.5 babies per couple.  Meaning that each successive generation will be smaller than the preceding generation.  As couples aren’t even having enough children to replace themselves when they die.  Leaving the eldest generation the largest percentage of the overall population.  Being paid and cared for by the smallest percentage of the overall population.  The younger generation.

States with Aging Populations are Suffering Debt Crises because they Spend More than their Tax Revenue can Cover

As nations develop advanced economies people develop careers.  Moving from one well-paid job to another.  As they advance in their career.  Creating a lot of income to tax.  Allowing a large welfare state.  Which is similar to a Ponzi scheme.  Or pyramid scheme.  As long as more people are entering the workforce than leaving it their income taxes can pay for the small group at the top of the pyramid that leaves the workforce and begins consuming pension and health care benefits in their retirement.  And there is but one requirement of a successful pyramid scheme.  The base of the pyramid must expand greater than the tip of the pyramid.  The wider the base is relative to the top the more successive the pyramid scheme.  As we can see here.

Babies per Generation - Constant Replacement Birthrate

Generation 1 is at the top of the pyramid.  It is the oldest generation.  Which we approximate as a period of 20 years.  In our example Generation 1 are people aged 78-98.  They’re retired and collecting pension, health care and other benefits.  Some combination of Social Security, Medicare, Medicaid, food stamps, heating assistance, etc.  All paid for by Generation 2 (58-78), Generation 3 (38-58) and Generation 4 (18-38).  Each generation is assumed to bring 6 children into the world.  So these couples are not only replacing themselves but adding an additional 4 children to further increase the size of the population.  Which really makes running a pyramid scheme easy.  For if we assume each member in Generation 1 on average consumes $35,000 annually in benefits that Generations 2 through 4 pay for that comes to $555.56 per person annually.  Or $46.30 per person monthly.  Or $10.68 per person weekly.  Or $1.53 per person daily.  Amounts so small that Generations 2 through 4 can easily pay for Generation 1’s retirement.  Now let’s look at the impact of a declining birthrate with each successive generation.

Babies per Generation - Declining Replacement Birthrate

When all couples in each generation were having on average 6 children this added 1.9 billion new taxpayers.  Which greatly reduced each taxpayer’s share of Generation 1’s retirement costs.  But thanks to birth control, abortion and the growing cost of living each successive generation has fewer babies.  Generation 2 only has 3 children.  Enough to replace themselves.  And add one new taxpayer.  Generation 3 has only 2 children.  Only enough to replace the parents.  Providing that zero population growth that was all the rage during the late 1960s and the 1970s.  While Generation 4 only has 1 child.  Not even enough to replace the parents when they die.  Causing a negative population growth rate.  Which is a big problem in an advanced economy with a large welfare state.  For instead of adding 1.9 billion new taxpayers they only add 217.5 million new taxpayers.  Greatly increasing each taxpayer’s share of Generation 1’s retirement costs.  Instead of paying $555.56 per taxpayer they each have to pay $5,384.62 annually.  Or $448.72 per taxpayer monthly.  Or $103.55 per taxpayer weekly.  Or $14.79 per taxpayer daily.  Numbers that prove to be unsustainable.  The state simply cannot tax people this much for Generation 1’s retirement.  For if they did this and added it to the rest of government’s spending they’re taxing us to fund it would take away all of our income.  This is why advanced economies with aging populations are suffering debt crises.  Because their spending has grown so far beyond their ability to pay for it with tax revenue that they borrow massive amounts of money to finance it.

If you want a Generous Welfare State you need Parents to have More Children

If you carry this out two more generations so every generation only has one child the per taxpayer amount tops out at $14,736.84 annually.  Or $1,228.07 per taxpayer monthly.  Or $283.40 per taxpayer weekly.  Or $40.49 per taxpayer daily.  Amounts far too great for most taxpayers to pay.  This is what an aging population does in a country with a large welfare state.  It makes the population top-heavy in elderly people who no longer work (i.e., pay taxes) but consume the lion’s share of state benefits.  When couples were having 6 children each across the generations there was a ratio of 84 taxpayers per retiree.  When there was a declining replacement birthrate that ratio fell to 15 taxpayers per retiree.  If we look at this graphically we can see the pyramid shape of this generational population.

Generational Population - Constant Replacement Birthrate

With 84 taxpayers per retiree we can see a nice and wide base to the pyramid.  While the tip of the pyramid is only a small sliver of the base (Generation 4).  Making for a successful Ponzi scheme.  Far more people pay into the scheme.  While only a tiny few take money out of the scheme.  This is why Social Security and Medicare didn’t have any solvency problems until after birth control and abortion.  For these gave us a declining replacement birthrate over time.  Greatly shrinking the base of the pyramid.  Which made the tip no longer a small sliver of the base.  But much closer in size to the base.  That if it was an actual pyramid sitting on the ground it wouldn’t take much to push it over.  Unlike the above pyramid.  That we could never push over.  Which is why the above Ponzi scheme would probably never fail.  While the one below will definitely fail.

Generational Population - Declining Replacement Birthrate

If you want a generous welfare state where the state provides pensions, health care, housing and food allowances, etc., you need parents to have more children.  For the more children they have the more future taxpayers there will be.  Or you at least need a constant replacement birthrate.  But if that rate is below the rate of a prior baby boom the welfare state will be unsustainable UNLESS they slash spending.  The United States has a replacement birthrate below the rate of a prior baby boom.  While the Obama administration has exploded the size of welfare state.  Especially with the addition of Obamacare.  Making our Ponzi scheme more like the second chart.  As we currently have approximately 1.75 taxpayers supporting each social security recipient.  Meaning that it won’t take much pushing to topple our pyramid. We’re at the point where a slight breeze may do the trick.  For it will topple.  It’s just a matter of time.

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Public Sector Costs are Bankrupting Detroit and Illinois

Posted by PITHOCRATES - June 8th, 2013

Week in Review

Public sector pay and benefits are crushing state governments and cities.  The City of Detroit is probably going to file bankruptcy.  And the State of Illinois just saw its bond rating cut (see Illinois Bond Grade Cut as Lawmakers Can’t Fix Pensions by Tim Jones & Brian Chappatta posted 6/3/2013 on Bloomberg).

Illinois had its credit rating cut one level after lawmakers failed to restructure state pensions saddled with almost $100 billion in unfunded liabilities…

The retirement systems cover state workers, teachers, university employees, judges and lawmakers…

“It is disgraceful that this year’s legislative session ended without a new pension plan,” Treasurer Dan Rutherford, a 58-year-old Republican who is running for governor in 2014, said in a statement. The failure “costs the state millions of dollars each day, plus these downgrades could continue to make borrowing additional funds even more expensive…”

Illinois’s growing pension deficit is “unsustainable,” Fitch analysts led by Karen Krop, a senior director in New York, said in a statement. The inaction by lawmakers raises questions about the state’s ability to deal with “numerous fiscal challenges.” They also cited a growing backlog of unpaid bills and borrowing to cover operational costs, indicating another cut may be forthcoming.

These public sector workers have pay and benefit packages unlike those in the private sector.  Which has to pay for the pay and benefits of both the private and public sectors.  So they keep raising taxes on individuals and businesses.  And our politicians never worry about the long-term consequences.  But they can only tax so much.  People can only pay so much in taxes before they can no longer pay their own bills.  So they start borrowing.  And the more they borrow the more risky they are to loan money to.  The more in debt they go and the greater their spending obligations the higher the interest rates they have to pay to get investors to take a chance on buying their bonds.  Because there’s a very good chance something like this will happen (see Detroit to offer creditors less than 10 percent of what city owes -report by Steve Neavling posted 6/7/2013 on Reuters).

Detroit Emergency Manager Kevyn Orr plans to deliver grim news to the city’s creditors next week: Take less than 10 percent of what the city owes or risk losing it all in a bankruptcy proceeding, the Detroit Free Press reported on Friday…

In his report, Orr stated that the city has run annual deficits of $100 million and more since 2008. Detroit is believed to owe about $17 billion in debts and liabilities.

So on the one hand they beg and plead for investors to loan them money.  So they can pay the overwhelming costs of their public sector in the face of a shrinking tax base.  And then when their finances get so bad that they can’t even service their debt any more they say, “Thank you for your money when we could not raise any ourselves.  And because you took that great risk for us we will reward you by screwing you out of 90 cents of every dollar you loaned us.  But stick around after the bankruptcy.  For once we shed this debt we will need to borrow more to pay for the overwhelming costs of our public sector.”

Detroit had annual deficits of $100 million.  Illinois has $100 billion in unfunded liabilities.  Is it any wonder Fitch lowered their bond rating?  For the state of Illinois has a greater financial problem than the City of Detroit has.  The State of Michigan gave Detroit an emergency manager to fix their problems.  They even offered to buy a city park.  Belle Isle.  To help Detroit get out of the mess they put themselves into.  But Illinois cannot help Illinois.  Only the federal government can.  But will they?  If they do you know California will demand a bailout, too.  As will every other state and city with a crushing public sector cost will.  But the federal government can’t bail out everyone.  Not when they have their own trillion dollar deficit problem to fix.

No.  There is only one way to fix the problems these cities and states are having.  They have to cut their public sector costs.  Which means someone else besides the bondholders will have to take a haircut to put these states and cities back into the black.  Meaning the public sector can no longer enjoy the kind of benefits people in the private sector haven’t enjoyed in decades.

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The Public Sector and the Tax Base

Posted by PITHOCRATES - June 3rd, 2013

Economics 101

All Government Bureaucracies Grow Bigger and Pay their People Very Well

Big cities throughout the United States are suffering financially.  They are drowning under the costs of their public sector employees.  For when the Great Recession hit tax revenues fell.  People lost jobs and paid less income taxes.  People out of work spent less in the local stores causing a fall in sales taxes.  People drove less and paid less gas taxes.  Home values plummeted, reducing property taxes.  Tax revenue fell at all levels of government.  Leaving the big cities unable to pay their bills.  With less help from the governments above them.  While their infrastructures crumbled.  And they struggled to furnish basic city services.

Governments don’t make anything.  They just have people doing things.  So there are little economies of scale.  Just a lot of people.  The public sector includes every worker in the city paid by tax revenue.  The mayor, city council, school teachers, police officers, firefighters, garbage collectors, boiler operators, electricians, janitors, building inspectors, meter readers, bus drivers, etc.   And all the civil servants and bureaucrats that push paper.  Requiring a huge payroll.  And lots of benefits.  In a large city with a population of 1.5 million those costs can look like this:

Public Sector Costs 1

All government bureaucracies have two things in common.  They always grow bigger.  And pay their people very well.  So the above table has three columns.  Showing the growth of the public sector.  (Assuming a constant population to simplify our math).  From 1% of the city population to 2% then to 3%.  So the number of city employees goes from 15,000 to 30,000 to 45,000.  By the time you add in pay, holiday pay, vacation pay, sick days and health insurance the active employee costs are huge.  Going from $1 billion to $2 billion to $3 billion.  Today it is not uncommon for a big city with a population of 1.5 million to have 45,000 public sector workers.  So we will build on that figure.  And add in retiree costs.

As City’s Population Declines so does its Tax Base

Another big perk of working in the public sector are the great pensions.  Something that has long since disappeared in the private sector.  While most of us have to put money away in a 401(k) public sector workers can count on a generous pension during a long retirement.  Perhaps getting as much as 80% of their base pay.  Plus they keep their health insurance.  Which is unlike the health insurance most of us get in the private sector.  For it covers everything.  With few co-pays.  And only the best name-brand pharmaceutical prescriptions.  This is why people want to work in the public sector.  And why they want to retire from the public sector.  Because no one else pays as well.

Public Sector Costs 2

Public sector workers retire long before their counterparts in the private sector.  Allowing them to live a long retirement.  And because they live so long into retirement the city ends up paying for almost as many retirees as they do active workers.  Putting great cost pressures on these cities as more of their workers retire.  Within as few as 2 decades the cost of retired workers can go from $648 million to $1.9 billion.   When we add this cost to the cost of their active workers we get the total cost of the public sector.

Public Sector Costs 3

As time passes and more people retire from the public sector we can see how the cost of the public sector (active and retired) rises from $3.7 billion to $4.4 billion to $5 billion.  Which, of course, the people living in the city have to pay.  The taxpayers.  They pay income taxes, property taxes, sales taxes and a variety of other taxes and fees.  Who by the time the number of retirees reach 40,500 must pay $3,336 per year.  Or $278 per month.  Or $64.15 per week.  Or $9.16 each day.  Just to get a true feel of how much this is do the following exercise.  Each day take a $10 bill out of your wallet or purse and throw it away.  This will approximate the cost of the public sector you pay for.  Until the people start leaving the city.  And as the population declines so does the tax base.  Requiring each person to pay a larger share of the public sector cost.

To pay for an Expanding Government you need a Growing Population

If a city starts losing population it doesn’t reduce the need to pay the bloated public sector.  Both active and retired.  So the fewer people remaining in the city have to pay a larger share of the public sector cost.  Because the public sector union isn’t going to allow the city to lay off any workers.  So it’s up to the taxpayers.  But as the population shrinks it becomes more painful to do.

Public Sector Costs 4

By the time the population falls to 500,000 the amount of taxes a person must pay to support the public sector amounts to a house payment.  Or $192.46 per week.  Or $27.49 each day.  Can you imagine taking three $10 bills out of your wallet or purse every day just to throw them away?  Probably not.  Because no one would.  Cities just can’t keep increasing the tax burden on their people.  For there is a limit.  And when a city reaches it they start borrowing.  Which is how cities go into debt.  And flirt with bankruptcy.  Because of these bloated public sectors.  That grew when the cities grew.  But they didn’t shrink as their populations shrank.

We have ignored corporations in our exercise.  Which increase the tax base.  But we have also excluded additional costs.  Buildings, vehicles, equipment, housing assistance, food assistance, fuel for city vehicles, car insurance, property insurance, liability insurance, lawsuits, etc.  If we factor these things in the numbers will only look worse.  As the cost of the active and retired workers increases there’s less money to pay for the basic city services.  So they deteriorate.  Which when added to the higher taxes chase even more people out of the city.  Reducing the tax base further.  Leaving even less money for the basic city services.

When the population declines so does the city.  As the public sector workers consume a greater percentage of the shrinking tax base cities suffer increasing urban decay.  As there is little money for anything but the public sector workers and their benefits.  For when it comes to paying for government population is key.  You need a growing population to pay for expanding government.  To spread the costs of a bloated public sector over as many people as possible.  And you can’t do that with a declining population.  Which is why big cities flirt with bankruptcy during bad economic times.  For they can pay for their bloated public sectors only during the best of economic times.  And only during the best of economic times.

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Trend Analysis GM and Toyota 2005—2008

Posted by PITHOCRATES - January 29th, 2013

History 101

GM’s Problems were caused by Franklin Delano Roosevelt and his Ceiling on Wages

The GM bailout is still controversial.  It was part of the 2012 campaign.  It was why we should reelect President Obama.  Because Osama bin Laden was dead.  And General Motors was alive.  But the bailout didn’t fix what was wrong with GM.  Why it went bankrupt in the first place.  The prevailing market price for cars was below their costs.  And what was driving their costs so high?  It was labor.  It was the UAW wage and benefit package that made it impossible for GM to sell a car profitably.

GM’s problems go back to Franklin Delano Roosevelt.  The country was suffering in the Great Depression with double-digit unemployment.  He wanted to get businesses to hire people.  To reduce unemployment.  And pull us out of the Great Depression.  So how do you get businesses to hire more people?  Hmmm, he thought.  Pay people less so businesses have more money to hire more people.  It was brilliant.  So FDR imposed a ceiling on wages.  Why did FDR do this?  Because he was from a rich family who didn’t understand business or basic economics.

Of course there was one major drawback to this.  How do you get the best talent to work for you if you can’t pay top dollar?  Normally the best talent can go to whoever pays the most.  But if everyone pays the same by law you might as well work at the place closest to your house.  Or across from the best bars.  No, if a business wanted the best workers they had to figure out how to get them to drive across town in rush hour traffic and sit in that traffic on the way home.  A real pain in the you-know-what.  So how to get workers to do that if you can’t pay them more?  You give them benefits.

Toyota doesn’t have the Legacy Costs that Bankrupted an Uncompetitive GM

And this was, is, the root of GM’s problems.  Those generous pension and health care benefits.  Things we once took care of ourselves.  Before our employers started providing these.  And the UAW really put the screws to GM.  Getting great pay, benefits and workplace rules.  For both active workers.  And retirees.  Even laid-off workers.  Such as the job bank.  Where GM paid workers who had no work to do.  It’s benefits like this that have bankrupted GM.  Especially the pensions and health care costs for retired workers.  Who outnumbered active workers.  Those people actually assembling the cars they sell.

It’s these legacy costs that have made GM uncompetitive.  Toyota, for example, didn’t suffer the FDR problem.  So their costs for retired workers don’t exceed their costs for active workers.  In fact let’s compare GM and Toyota for the four years just before GM’s government bailout (2005-2008).  We pulled financial numbers from their annual reports (see GM 2005 & 2006, GM 2007 & 2008, Toyota 2005 & 2006 and Toyota 2007 & 2008).  We’ve used some standard ratios and plotted some resulting trends.  Note that this is a crude analysis that provides a general overview of the information in their annual reports.  A proper analysis is far more involved and you should not construe that the following is an appropriate way to analyze financial statements.  We believe these results show general trends.  But we offer no investment advice or endorsements.

GM Toyota Current Ratio

We get the current ration by dividing current assets by current liabilities.  These are the assets/liabilities that will become cash or will have to be paid with cash within 12 months.  If this ratio is 1 it means current assets equals current liabilities.  Meaning that a business will have just enough cash to meet their cash needs in the next 12 months.  If the number is greater than 1 a business will have even a little extra cash.  If the number is less than 1 a business is in trouble.  As they won’t have the cash to meet their cash needs in the next 12 months.  Unless they borrow cash.  Toyota’s current ratio fell slightly during these 4 years but always remained above 1.  Falling as low as 1.01.  Whereas GM’s current ratio was never above 1 during these 4 years.  And only got worse after 2006.  Showing GM’s financial crash in 2008.

The GM Bailout did not address the Cause of their Bankruptcy—UAW Pensions and Health Care Benefits

There are two basic ways to finance a business.  With debt.  And equity.  Equity comes from outside investors (when a business issues new stock).  Or from profitable business operations.  Which typically accounts for the majority of equity.  Profitable business operations are the whole point of running a business.  And it’s what raises stock prices.  To see which is providing the financing of a business (debt or equity) we calculate the debt ratio.  We do this by dividing total liabilities by total assets.  If this number equals 1 then total assets equal total liabilities.  Meaning that 100% of a business’ assets are financed with debt.  And 0% with equity.  Lenders do not like seeing this.  And will be very reluctant to loan money to you if your business operations cannot generate enough profits to build up some equity.  And that was the problem GM had.  Their business operations could not generate any profits.  So GM had to keep borrowing.

GM Toyota Debt Ratio

GM went from bad to worse after 2005.  Their debt ratio went from 1.02 in 2006.  To 1.24 in 2007.  And to 1.94 in 2008.  Indicating massive borrowings to offset massive operating losses.   And how big were those losses?  They lost $17.806 billion in 2005.  $5.823 billion in 2006.  $4.309 billion in 2007.  And in the year of their crash (2008) they lost $21.284 billion.  Meanwhile Toyota kept their debt ratio fluctuating between 0.61 and 0.62.  Very respectable.  And where lenders like to see it.  As they will be more willing to loan money to a company that can generate almost half of their financing needs from profitable business operations.  So why can’t GM?  Because of those legacy costs.  Which increases their cost of sales.

GM Toyota Cost of Sales

GM’s cost of sales was close to 100% of automotive sales revenue these 4 years.  Even exceeding 100% in 2008.  And it’s this cost of sales that sent GM into bankruptcy.  Toyota’s was close to 80% through these 4 years.  Leaving about 20% of sales to pay their other costs.  Like selling, general and administrative (S,G&A).  Whereas GM was already losing money before they started paying these expenses.  Thanks to generous UAW pay and benefit packages.  The job bank.  And the even greater costs of pensions and health care for their retirees.  It’s not CEO compensation that bankrupted GM.  It was the UAW.  As CEO compensation comes out of S,G&A.  Which was less than 10% of sales in 2007 and 2008.  Which was even less than Toyota’s.

GM Toyota S G and A

GM’s costs kept rising.  But they couldn’t pass it on to the consumer.  For if they did the people would just buy a less expensive Toyota.  So GM kept building cars even though they couldn’t sell them competitively.  And sold them at steep discounts.  Just to make room for more new cars.  So the UAW could keep building cars.  Incurring massive losses.  Hoping they could make it up in volume.  But that volume never came.

GM Toyota Automotive Sales as percent of 2005

Toyota continued to increase sales revenue year after year.  But GM’s sales grew at a flatter rate.  Even falling in 2008.  It was just too much.  GM was such a train wreck that it would have required a massive reorganization in a bankruptcy.  Specifically dealing with the uncompetitive UAW labor.  Especially those pensions and health care benefits for retirees.  Which the government bailout did not address.  At all.  The white collar workforce lost their pensions.  But not the UAW.  In fact, the government bailout went to bolster those pension and health care plans.  So the underlying problems are still there.  And another bankruptcy is likely around the corner.

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FT152: “Liberals who expand the welfare state tell us not to feed wild animals because it makes them dependent on handouts.” —Old Pithy

Posted by PITHOCRATES - January 11th, 2013

Fundamental Truth

Before there was Money People Traded Things they made with their Human Capital

Which came first?  Money?  Or stuff to buy?  Was there stuff in a store before someone walked in with money to buy it?  Or without anyone having any money to buy stuff would a store owner stock his or her shelves with stuff no one could buy?  It’s a regular chicken and egg question.  Liberal Democrats would say money came first.  Because they believe in Keynesian stimulus spending.  Put more money into people’s hands and they will buy more stuff.  Thus stimulating economic activity.

But if money was all that we needed to stimulate economic activity the government could just print money and hand it out to the people.  Who will take that money and go to the stores to buy stuff.  But here is where the illusion of money creating economic activity ends.  If the government just printed money and gave it to the people no one would have to work.  Which is everyone’s earnest desire.  This is why people buy lotto tickets.  To get money to spend without having to work anymore.  But if no one worked anymore because they could get money from the government printing presses instead of getting it in a paycheck in exchange for work what would these people buy?  If no one had to work anymore who would make the stuff we find on store shelves to buy?  Of course no one would.  So those store shelves would be empty.  And with nothing to buy all the money in the world would be worthless.

So this isn’t a chicken and egg question.  Stuff to buy came long before money appeared on the scene.  Before money people bartered.  They traded things for other things.  Meaning that if you wanted something that you didn’t have you had to create something yourself to trade.  This is barter.  People with human capital (talent and ability) create something they are good at.  They create more than they need.  And take their surplus to meet other people to trade with to get those other things they want.  Things other people made using their human capital.

Search Costs made the Barter System Costly and Inefficient

Money was a solution to a problem.  As the economy got more complex with more things to trade it got more difficult to find people to trade with.  If you made product A and wanted product B you had to find someone who made product B who wanted product A.  Imagine you make vacuum cleaners.  And you want a television.  You go to market looking for people to trade with.  Let’s say you find 3 people who make televisions.  But none of them want a vacuum cleaner.  So you would have to go to another market.  And find other people who made televisions.  Until you found one that wanted a vacuum cleaner.

This time spent trying to find someone to trade with is called search costs.  Which made the barter system costly and inefficient.  For all of that time spent looking for someone to trade with was time not spent making vacuum cleaners.  Giving you less to trade with.  Allowing you to trade for fewer things.  One way to reduce search costs was to bring a third trader into the picture.  Someone that wanted a vacuum cleaner but made smartphones.  Not televisions.  If a television maker wanted a smartphone you could trade a vacuum cleaner for a smartphone.  Then trade the smartphone for a television.  Making barter a little more efficient.  By reducing search costs.  But it could still be very difficult to find three people to trade with.

This is where money comes in.  It serves as that third trader.  You would simply trade your vacuum cleaner for money.  Then trade your money for that television.  Greatly simplifying trade.  By removing half of the trade equation.  All you had to do was to find what you wanted.  And then trade your money for it.  You didn’t have to worry about what the other person wanted.  Because once they got your money they could go and trade it for whatever they wanted.  Money makes trade easier.  As long as it was something that could hold value.  A handful of dirt was not good money because anyone could scoop it up from the ground.  Gold, on the other hand, was very good money.  Because it was very difficult to get gold out of the ground.  Thus it was scarce.  As well as being durable, divisible, fungible, etc.

People Today share their Every Thought on Social Media for Validation that they Matter

Based on this let me ask you another question.  Does Keynesian stimulus spending end recessions?  No.  Because giving people money to spend allows them to spend that money without creating something of value first.  And creating more money out of nothing makes money less scarce.  And less valuable.  Like picking up a scoop of dirt from the ground.  You create too much money and people will return to the barter system.  Because something they create with their human capital will have far more value than a continuously devalued dollar.  Best of all, in a barter system there can be no Keynesian stimulus spending.  Because there is no money.  And no inflation.  Making Keynesian stimulus spending impossible.  For there will only be people creating things with their human capital to trade with other people doing the same.

Those in government, though, don’t give up their Keynesian ways.  For they like spending money.  And being able to create it out of nothing allows them to spend a lot.  Which gives them a lot of power.  By getting people dependent on government benefits.  For once they are they keep voting for those who promise to give more.  And for those who promise not to reduce their current level of benefits.  Allowing a lot of people to withdraw from half of the economic equation.  Instead of using their human capital to bring value to market to trade for other value they let their human capital wither away.  Giving them little reason to get out of bed in the morning.  For when it comes down to it, people want to have a purpose.  They want to matter.  Which is why people today share their every thought on social media.  For validation that they matter.  For others to acknowledge that what they think and say is smart, funny, witty, insightful.

Wild animals are beautiful creatures.  We are attracted to them.  And would like to approach them in the wild.  To gain their trust.  We sometimes feed them because we want to help them.  Because life in the wild is no picnic.  It’s hard.  Brutal.  And these animals are just too cute to suffer.  But the Left frowns on this.  They don’t want us to feed the animals.  For if we make them dependent on us they will never be able to return to a normal life in the wild.  They won’t be able to live without those handouts.  The Left understands this.  Yet they have no problem with making people dependent on government benefits.  Giving them no reason to get out of bed.  Destroying the economy in the process.  Making it ever harder for these benefit recipients to return to the workforce.  Leaving them no purpose in life.  Save one.  To vote Democrat.

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