ECONOMIC FUTURECAST:

A CORNUCOPIA OF MATERIAL PROSPERITY

FUTURECASTS online magazine
www.futurecasts.com
Vol. 3, No. 1, 1/1/01.
(Vol. 1, No. 1, 8/1/98)

       Homepage 21st Century futurecast  Government futurecast  International futurecast

The Triumph of Entrepreneurial Capitalism:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Only by properly adopting and adapting to their own conditions the essential American virtues of economic and political freedom and individual liberty will other nations be able to establish entrepreneurial capitalism and keep up with the economic prosperity of the United States.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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  1) The degree of economic success experienced by economic entities in the 21st century will be largely dependent on their ability to incorporate the entrepreneurial spirit into their operations. The value of economic entities will depend less on their physical assets and more on their managerial skills.

  All around the world, efforts are being made to provide stock markets that enable successful startups to "go public" and raise the funds they need for expansion.

  The 21st Century futurecast is for a vast acceleration in the rate of technological change. The ability to understand technology and stay abreast of the flood of technological developments will be increasingly essential for good management. The ability to see the opportunities and threats of technological change will be increasingly decisive.

  The value of "human capital" at all levels is everywhere being increasingly recognized. The critical need to maintain skilled managerial cadre - especially at the Chief Executive Officer level - assures that critically skilled executives will continue to enjoy skyrocketing pay increases. Those that fail to measure up are increasingly subject to dismissal.

  Asian nations start the 21st century generally burdened by rigid forms of autocratic, corrupt crony capitalism. Europe is generally burdened by rigid welfare capitalism that imposes restraints on competition from within as well as from outside the European Union. These restraints are substantially greater than those imposed by the United States.

  Despite much recent progress, European markets remain much less flexible and efficient than in the U.S. Rules that hinder product competition, and red tape that hinders small start-up firms, remain a serious problem.

  Neither in Asia nor Europe are there financial systems as conducive to the raising of private equity capital as in the United States. Only by properly adopting and adapting to their own conditions the essential American virtues of economic and political freedom, limited government - especially property rights and rule of law - and individual liberty will other nations be able to establish entrepreneurial capitalism and keep up with the economic prosperity of the United States.

  Slowly - grudgingly - politicians all over the world - both in rich and in poor nations - are being forced by inexorable market forces to adopt policies that facilitate capitalist commercial operations -- policies similar to those in the United States. The Asian Contagion crisis seems to have spurred the spread of multiparty democracy, legal reforms, and individual liberty - contrary to the expectations of the usual skeptics and perennial forecasters of capitalist failure.
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  During the 1990s, worldwide share ownership increased tenfold, from about 100 million to about 1 billion shareholders. Even Communist China now anxiously encourages share ownership.
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  Foreign multinationals know that they have to succeed in the huge U.S. market to succeed globally - and thus must adopt commercial methods successful in the U.S.
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  However, much remains to be done. Because needed reforms have frequently been only grudgingly and partially adopted, any worldwide economic slowdown could bring renewed financial reverses in nations like Indonesia, S. Korea, and even in mighty Japan. Russia is still kept afloat solely by high oil prices.
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  The absence of property rights and rule of law in third world and former communist states is especially detrimental. One author has recently estimated that the amount of their "dead capital" - real estate held without property rights adequate to support private credit - is more than $9.3 trillion. See, De Soto, "Mystery of Capital." Most of the blame for the intractable poverty and famine in third world and some former communist states rests squarely with their own horrendous governance practices or conflicts. The rich capitalist nations need feel little blame for these deplorable conditions.
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   However, the removal of barriers to trade would certainly help.

The Politics of Entrepreneurial Capitalism:

 

 

The right to fail is essential in an environment of rapid economic change.

 


Market-based solutions will, as always, have the best chance for long-term success.

 

 

 

 

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  2) The inherent inefficiency of government dominates the Government futurecast  for the 21st century. The success of government economic policies will depend on the extent to which governments can refrain from providing protection for favored business or labor entities or micro managing economic systems to fend off the business cycle.
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  Big business and big labor will continuously strive for favorable restraints on economic competition. Economic growth will always be retarded when government intervenes to pick the winners and losers and permits restraints on commerce. The right to fail is essential in an environment of rapid economic change.

  "Crony capitalism" is far from dead, but it is under substantial retreat in Asia - and elsewhere.

  Economic policy will be successful to the extent that it facilitates commerce and encourages new entrepreneurial initiatives. The International futurecast is that market pressures and natural popular aspirations will lead to further worldwide triumphs for the essential American virtues of economic and political freedom, limited government - especially property rights and rule of law - and individual liberty. Market-based solutions will have the best chance for long-term success.

  The Euro, the internet, and the need to be competitive in global markets, have loosed competitive pressures in Europe that are forcing rationalization of economic policies. Tax levels are coming down, and restraints on part-time and temporary employment are being reduced to increase needed labor market flexibility. Financial markets are being integrated.
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  Even Communist China continues with various reforms - including changes in its education system designed to encourage greater imagination and initiative. The political results of this - some decades hence - should be interesting.

 The Golden Straitjacket:

 

 

 

 




Any administration that abuses this advantage, to an extent sufficient to undermine international faith in the dollar, will be doing a great disservice to the American people.

 

 

 

 

 

 

 

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  3) A stable currency and a balanced budget are required if governments want their international trade and payments accounts to remain in balance so that their people may prosper. Imbalances in international trade and payments have never been cured by devaluation alone - and never will be. Devaluation may be a required response to failures of economic policy - but only the reform of those policies can bring international trade and payments accounts back into balance.

  In many ways, the Euro has been a great success - surprising a number of skeptics. However, the arcane way in which Euros are created and circulated through the various national banks - and the desire to show economic expansion since adoption of the Euro - resulted in a degree of monetary expansion in Euro-land that initially dragged down the value of the currency, pushed up inflation rates, and threatened European prosperity.

  The United States enjoys great advantages because the dollar is the world's reserve currency. To a certain extent, we can export dollars to balance the purchase of valuable goods and services. Any administration that abuses this advantage - to an extent sufficient to undermine international faith in the dollar - will be doing a great disservice to the American people.

  The dollar currently accounts for about 2/3rds of official global foreign exchange reserves - and these reserves are at their highest levels in history and growing rapidly.
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  Greenspan tightened monetary policy and raised interest rates in a presidential election year. Wow!
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  However, this politically risky course was made essential by the extent of monetary expansion during the Asian Contagion and then again just before the feared Y2K crisis. In both the U.S. and Europe, recent increases in inflation rates - and the surge in energy prices - indicate that such monetary maneuvers had reached their limit, and that monetary expansion had to be substantially reduced if the Fed were not to begin to lose control as in the 1970s. (See, "The Conundrum of American Monetary Policy," below.)
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  (Vol. 6, No. 1, 7/1/04.) Heavy reliance on monetary expansion and budget deficits during the recent recession period is going to provide yet another example of the limits of such policies. Inflation is heating up at a pace that is greater than indicated by official statistics, and will prove more difficult to control.

 No Repeal of the Business Cycle:

 

 

 

 

 

 

 

 

Protectionist politicians like Pat Buchanan and Dick Gephart pose the greatest threat to continued economic prosperity.

  4) Man and his activities being inherently imperfect, there can be no repeal of the business cycle. However, economic downturns should be relatively mild unless exacerbated by government economic policies or the financial effects of war.
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  Protectionism (the trade war of the 1920s and 1930s) was primarily responsible for the Great Depression (with a major assist from the financial and economic aftereffects of WW-I). The monetary inflation of the Vietnam War era was primarily responsible for the double digit price inflation of the 1970s and the harsh recession that followed it (with a major assist from the financial effects of the Cold War).
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  The overall prosperity of the post WW-II period has been stimulated by constant efforts to reduce the obstacles to international commerce. This market-based trade policy constitutes one of the greatest achievements in the history of American government economic policy. In the late 20th century, we have returned to the substantially open trading system of the late 19th century - and we are thus enjoying a similar period of economic growth. During the last two decades, prosperity has also been boosted by the Federal Reserve Board's emphasis on a strong and stable dollar.
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  As long as these economic policies are maintained, economic disruptions can be kept relatively mild and short. Pat Buchanan, Dick Gephart, and protectionist politicians of that type pose the greatest threat to continued economic prosperity.
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 Tax Policy Creates the Most Dangerous Financial Bubbles:

 

 

 

 

 

 

 

 

Those economists foolish enough to doubt that high levels of debt are dangerous should note the difficulties that were experienced by the stricken Asian nations.

If our adversaries had sent a team of saboteurs into the country, they couldn't have done more damage to our economy than the Congress of the United States does routinely through the tax code.

 

Unfortunately, a more rational tax system is unlikely.

  5) Currently, powerful noxious tax incentives have created the most dangerous "bubbles" threatening the stability of our economy. The tax code contains such economic abominations as high marginal tax rates and the double taxation of dividends.
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  Noxious tax incentives have, over the decades, seriously distorted commercial flows. Vast amounts of time and money are wasted in efforts to avoid taxes. Contempt for the law is bred by the "Politics of Envy" that has shaped the tax code. The "asset inflation" that currently constitutes one of the most serious financial bubbles is, in part, a response to those powerful noxious incentives in the tax code. Managers are forced to provide a return on investment in the form of asset appreciation rather than income. Dangerous levels of debt are routinely incurred by our corporations in response to the "double taxation" of dividends.

  In 2000, we saw some of the impact of these tax incentives. Stock markets continue to reward rapidly growing companies with dangerously high price/earnings ratios - punish severely each disappointment - and continue to grossly undervalue good profitable companies that aren't in a position to enjoy consistent and rapid growth. Aside from the costs of market volatility - vast sums that should more efficiently be distributed to shareholders as dividends are instead often being wasted in futile efforts to achieve rapid growth.
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  Moreover, major accounting frauds - such as that of Enron - that are designed to artificially boost share prices are much more difficult when shareholders expect to get most of their return on investment in the form of dividends.

  Because of the tax code, the entire economy is dangerously over-extended with debts that will prove especially burdensome during the next serious recession. Those economists foolish enough to doubt that high levels of debt are dangerous should note the difficulties that were experienced by the stricken Asian nations, and that are currently being experienced in Japan.
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  The tax code reflects not only the financial needs of government, it also reflects a variety of social engineering schemes, the "Politics of Envy," and a host of special interest demands for loopholes. Marginal tax rates of combined federal, state, local, and payroll taxes of about 50 percent burden middle class professionals, skilled employees, and small businessmen. This imposes a substantial disincentive on some of our most productive people - distorting their activities and sometimes driving them to early retirement. If our adversaries had sent a team of saboteurs into the country, they couldn't have done more damage to our economy than the Congress of the United States does routinely through the tax code.
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  This foolishness substantially inhibits economic growth and will make future recessions far deeper and longer than they would otherwise be - perhaps even equaling the severity of the 1980 - 1982 recession. Unfortunately, a more rational tax system is unlikely.
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Tax Reform Efforts will be Disappointing or Short Lived: 

 

 

If the overall tax burden can be reduced over time, the economy should generally be able to bear its tax burdens, and government will have the use of vastly increased financial resources as a result of our growing prosperity. 

  6) Tax burdens substantially in excess of 20 percent of gross national product cannot fail to cause severe and dangerous distortions in the economy. The total tax burden today is over 30 percent. At these levels, all suggested reforms have severe problems.
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  A national sales tax or value added tax, while theoretically the best economic alternative, at these levels will provide powerful incentives for smuggling and black markets, and will cause widespread disrespect for government and law. It will also - inevitably - be followed by a "fairness" campaign advocating income taxes on the rich. This - inevitably - will be slowly extended to the middle class, so that we would wind up with both sales and income taxes. A flat tax could provide the benefits of simplification, but would remain flat and simple only until the next "fairness" campaign. This is what happened after the 1986 tax simplification effort.
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  Indeed, continued complexity is essential if the tax code is to contain sufficient loopholes to avoid smothering entrepreneurial activities. If the overall tax burden can be reduced over time, as a percent of Gross National Product, the economy should generally be able to bear its tax burdens, and government will have the use of vastly increased financial resources as a result of our growing prosperity.
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 The Shape of the Next Recession is Already Evident:



Each prudent officer and director must make sure that their economic entities can withstand a recession as severe as that of 1980 - 1982.

  7) Tax and regulatory costs creeping upwards, overcapacity growing in such markets as autos and commercial real estate, Asian governments moving so reluctantly to change policies of crony capitalism that they may not have the job done before the next American recession, growing asset appreciation and debt bubbles: It is not difficult to ascertain the shape of the next recession. Nevertheless, Europe and America remain prosperous, and the coming recession should be relatively mild.

   A taste of the dangers of the capital asset bubble was provided by the performance of stock markets during the last recession.

  The business cycle has not been repealed. There is enough distortion in the economy - and enough leverage (excessive debt) - so that any recession could turn fairly ugly. Each prudent officer and director must make sure that their economic entities can withstand a recession as severe as that of 1980 - 1982.
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 Energy, and Oil, will remain Abundant:

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 


The cost for automobile mileage and other energy uses will decline substantially. 

  8) There will be 15-to-20 years proven reserves of oil at the end of the 21st century - just as at the end of WW-II and in the 1970s - and just as at those times, "experts" will be warning of energy shortages. (This is basic stuff - from Economics 101.)
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  Because of long lead times on both the supply and demand sides of the oil and broader energy markets, there are obvious pendulum swings to these markets. In the 1970s, oil supplies were tight - [as this was written in 1998] they are overly abundant - and prices are unsustainably low. Another period of shortage will occur in the first quarter of the 21st century, the duration of which will vary inversely with the extent of government efforts to deal with the problem.

  Well, FUTURECASTS hopes none of you expected oil to stay below $15 per barrel.
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  Efforts to increase the efficiency of energy usage - to develop new sources of energy (both alternative and hydrocarbon) - and conservation efforts were all severely depressed by the long period of cheap energy that has just ended. This is just one more example of how ineffective governments are when they attempt economic management without the aid of market mechanisms. It's going to take some time to gear up in response to current higher energy costs, but the energy markets will easily succeed where governments have routinely failed in this chore.
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  Of course, high energy costs will have a restraining influence on worldwide economic growth during the next few years. However, the higher energy prices go - and the longer they stay high now - the further our energy dollar will go in subsequent years. The Fed not only has the tough current task of arranging a "soft landing," but must then maintain a rate of growth slow enough to keep energy prices from surging. (As of 2004, it obviously has failed at this difficult chore.)

  By the end of the 21st century, between 2080 and 2120, proven oil reserves will still be vacillating around the 15-to-20 year range, and will spend most of the time within that range. Prices of oil may be substantially higher, but technology will be making greater use of alternative energy sources, and will be squeezing much more work out of each energy dollar. Not counting taxes, and adjusting for inflation, the cost for automobile mileage and other energy uses will decline substantially.
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Health Care Industry Problems will Worsen: 

 

 

 

Except for those reforms based on market mechanisms, reform efforts will invariably make matters worse.

 

 

 

 

 

 

 

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  9) Health care will become increasingly expensive, impersonal, and error-prone. While continuing to benefit from great scientific strides, heavy and increasing government involvement will make health care the most troublesome sector of our economy.
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  Expenses will continue to rise at rates substantially in excess of inflation. The industry will become increasingly bureaucratized. It has been suffering the noxious side effects of government involvement for 50 years already, and will continue to suffer from that affliction well into the 21st century.
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  The government has so badly screwed up the health care market over the course of the last half of the 20th century that there can no longer be any easy answers to rising health care costs. There will be a series of health care reform efforts. However, except for those reforms based on market mechanisms, reform efforts will invariably make matters worse.

  Health care costs are once again rising at rates well above the rate of inflation - substantially fewer students are applying for nursing and medical schools - the Health Care Financing Administration now imposes about 130,000 pages of regulations on health care providers - and one third of all Medicare dollars go for administrative expenses. Hospitals already expend six figure sums for consultants who do nothing but make sure Medicare services are properly reimbursed.
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  Incredibly, even in the face of these problems, Congress is still busy expanding Medicare entitlements. An aging population can only make matters much worse. The problem of rising Medicare and other health care costs will explode upon us during the first quarter of the 21st century.
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  These are some of the results of government health care efforts that the politicians don't want to discuss.

 Economic statistics are already very bad - and will keep getting worse:

 

 

The effects of taxes and regulation distort accounting practices and undermine the validity of private entity financial reports.

 

The accounts of government entities are works of fiction. 

  10) The increasing complexity and globalization of economic systems will make official statistics even more misleading than they are today.

  • Gray and black markets are not counted, even though they are often a sizable proportion of a nation's economy, and provide a sizable proportion of working class and under class income. Best estimates for the cash gray market in the United States start at a minimum in excess of $1 trillion.
  • Productivity has been increasing at an accelerating rate not reflected in the statistics -- the methods for measuring productivity are indirect and inherently inaccurate, and they omit advances in quality and variety.
  • Savings rates are not nearly as important as the efficiency with which savings are used -- and they omit the vast increase in asset values - especially for homeowners.
  • The real value of investments depends more on such factors as managerial skills, the overall commercial environment, and location, than on mere funds invested.
  • International trade statistics are becoming increasingly meaningless.

  Accounting is, at best, a nebulous practical art. The effects of taxes and regulation distort accounting practices and undermine the validity of private entity financial reports -- the accounts of government entities are works of fiction.

  The Earth now has a trade deficit of about $250 billion. We just have to get those Martians to stop shooting down our technology exports.

Environmental costs:

 

 

 

 

 

 

Economic externalities:
(from Vol. 2, No. 4, 11/1/99)

 

 

 

 

 

 

 

For a variety of reasons, we have decided to prohibit private suits in nuisance against those who degrade these commonly held resources, so we are condemned to struggle throughout the 21st century with the horribly expensive and inefficient regulatory decision making mechanisms offered by government.

 

 

 

 

 

 

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  11) Environmental problems will continue to grow out of the worldwide increase in population and economic activity. However, most of them will be adequately handled by technological solutions that, at present, do not exist even in our dreams.

  Threats to the broadly optimistic view of substantially probable outcomes presented by FUTURECASTS are well known, and provide the basis of much "scare tactic" literature. They include such possibilities as the renewal of protectionist trade wars, runaway budgetary entitlements, military conflicts between great powers, and substantial nuclear conflicts. Widespread environmental degradation is probably the most likely - and deserves the increasingly serious attention it is receiving.

  The environmental costs of economic activities pose problems that are especially difficult because they are "external" to market allocation mechanisms.
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   The market allocates only scarce resources. It neither allocates abundant resources nor puts a price on subjective "value." Thus, "value," by anyone's standard, will always average more than market value.
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  On the one hand, this is good, because those who buy goods and services in the market can generally be confident that they have gotten good value - perhaps even a bargain - for their money.
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  On the other hand, this can be bad, because we are left without any automatic mechanism for restricting the use and degradation of abundant resources. We are thus dependent on government to protect our collective interests in resources such as air and water that can be said to be held in common.
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   Of course, we know how inefficient and ineffective the government decision making process can be, but we have no better choice. For a variety of reasons, we have decided to prohibit private suits in nuisance against those who degrade these commonly held resources, so we are condemned to struggle throughout the 21st century with the horribly expensive and inefficient regulatory decision making mechanisms offered by government.
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  What everybody owns, nobody owns.
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  The "externality" nature of environmental costs has been analyzed extensively during the last three decades and is familiar to all, so FUTURECASTS will just note a few of the other factors that shape the environmental struggle.

  • Technology has created much of the problem - and offers much of the solution.
  • Economic development creates much of the problem - but only prosperous nations have the resources to actively fight the environmental battle.
  • Concern for the environment has spread admirably, and many nations have made real progress with their environmental problems - but the continued growth of the human population overwhelms all these efforts on a worldwide basis.

  However, a modicum of prosperity, freedom and education - especially for women - tends to reduce population growth and increase public support for environmental concerns. If political and economic freedom - and thus economic prosperity - continue to advance as expected by FUTURECASTS, then expectations that worldwide population growth will end - and even give way to a slow decline in population - will be fulfilled - prosperity will spread further across the world - and we should be making some real headway against our environmental problems by the end of the 21st century.

The conundrum of American monetary policy:
(from Vol. 2, No. 4, 11/1/99

   Modern (Keynesian) economic theory is invalid - but monetary expansion pursuant to that policy works to prevent recessions -- up to a point.
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  Inflation is a pleasant experience -- up to a point.
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Inflationary policies have always been able to achieve pleasant results -- up to a point.

  That's why inflationary expansion of the money supply has periodically been resorted to by thousands of governments in hundreds of nations despite the inevitable noxious effects of inflation. Almost as soon as governments learned to coin money, they learned to clip the coinage. They did not need Keynes to induce them to seek the short term benefits of "monetary policy."
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The time must ultimately come when the Federal Reserve Board will have to choose to either try to maintain a strong economy with a weakened currency - an effort that must ultimately fail - or to suffer a recession as part of the process that will be necessary to strengthen a weakened currency.

  The time must ultimately come when the Federal Reserve Board will have to choose to either try to maintain a strong economy with a weakened currency - an effort that must ultimately fail - or to suffer a recession as part of the process that will be necessary to strengthen a weakened currency.
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  A strong dollar gives the Federal Reserve Board the power to accelerate monetary expansion to deal with economic crises - but acceleration of monetary expansion can weaken the dollar. Because of the status of the dollar as the world's primary reserve currency, "monetary policy" works for the United States -- up to a point that is much longer than for "soft currency" nations, and somewhat longer than for lesser "hard currency" nations.

  The Fed can only be as strong as the dollar.

  There is a time gap between the time when the printing presses are accelerated and the time when prices begin to rise. That's what tempts nations to inflate their money supply and why inflation has proven initially pleasant enough to afflict peoples on thousands of occasions throughout history.
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  Most economists now concede - what should always have been obvious - that Keynesian efforts to avoid economic downturns by accelerating the rate of monetary growth work only in the short term and then ultimately causes price inflation. "Stagflation" and "liquidity traps" ultimately thwart Keynesian economic policy.
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   John Kenneth Galbraith recognized this fact, but responded to it by stupidly advocating price controls. He contended that price controls could limit inflation so that monetary expansion could continue. He insisted that price controls worked during WW-II.
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  However, he neglected to mention why plans to maintain price controls for awhile after the end of the war were blown away as soon as peace returned - and that price controls were becoming increasingly ineffective as the war dragged on, anyway. The disastrous experience with energy price controls during the 1970s should not have come as a surprise to anyone. The morass of administered prices under Medicare is a living reminder of the stupidity of price controls.
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  Paul Krugman insists that modest rates of inflation - between 2% and 4% - can be managed and can successfully stimulate economies out of liquidity traps such as afflict Japan in the 1990s and today. He points to the prosperity in the United States in the two decades after WW-II as an example of managed inflation.
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  However, he neglects to mention that the United States possessed two thirds of all the world's gold reserves at the end of WW-II - and "managed" its inflation only by expending most of that huge hoard to prevent the devaluation of the dollar. In the early 1970s, diminished gold reserves became inadequate to maintain the value of the dollar. The United States was quickly afflicted with dollar devaluation - vicious swings of the business cycle - and double digit inflation, interest rates and unemployment.
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  Krugman offers no other examples of inflations that were successfully "managed," even though the effort has been made thousands of times.
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  Low levels of inflation inhibit capital growth. Higher levels actually destroy capital. Inflation doesn't prevent unemployment - it ultimately causes unemployment.
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  Nevertheless, Keynesians like Krugman and Lester Thurow still wait in the wings - waiting for the next substantial recession - which must inevitably come. They will offer the politicians of the day something the politicians will dearly want -- a way to delay the onset of the recession until after the next election. They will provide intellectual cover for the inflationary expansion of the money supply as a means to delay the onset of  recession.
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  Whenever this policy is again tried, it will succeed -- but only up to a point. After that point - as in the 1970s - the Piper will have to be paid.

  Other Forecasts:
(from Vol. 1, No. 1, 8/1/98)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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  1) Our grandchildren and great grandchildren will have prosperity and a lifestyle that is beyond our wildest dreams.
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  2) The Dow will hit 50,000, in inflation adjusted dollars. (This is a very conservative forecast.)

  That's 50,000 in the next century - not in the next decade. This decade should see considerably slower growth in stock market values than did the recent rerun of "the gay 90s."

  3) The high and continuously increasing costs of campus-based academic institutions will soon cause them to be substantially displaced by on-line alternatives. (Microsoft U.?)

  Distant learning options are expanding explosively. Educational institutions - at all levels - are scrambling to take advantage of the opportunities and respond to the threats of information technology.

  4) The federal government will lose the battle against cigarettes just as it lost the battle against alcohol and is losing the battle against drugs. Only the tax collector will gain from this effort.
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  Our government won three great worldwide military conflicts this century because it only faced other governments. Against profit-oriented markets, it must lose unless it is willing to impose the kind of draconian measures that the nation has refused to tolerate. Aside from giving the politicians more money to spend, high taxes on cigarettes will just give the mafia types another product to smuggle, and will breed disrespect for the law in most of the smokers who must bear the cost of this futile effort.

  Social ostracism, intense negative publicity, and the higher prices are all having impacts on usage, which has fallen about 20 percent in the United States - but children are still attracted to the "forbidden fruit," and cigarette companies - now ensconced as important revenue sources for government - are thriving.

Aging Populations:
(from Vol. 2, No. 3, 10/1/99)

   Demographic forecasts are, by their nature, the most accurate aspect of the study of the future. However, knowing the population trends and interpreting their implications are two very different things.
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   The heavy trend towards aging populations - especially in the economically more advanced nations - is a near certainty. This trend will undoubtedly have a major impact on the 21st century. As usual in these matters, there are many who see dire consequences.
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  However, while real problems will definitely arise - especially for health care and terminal care services - predictions of economic burdens sufficient to cause generational conflict and economic collapse will not be realized. Predictions of economic dominance by China and India will prove false unless vast additional changes are made in their current economic and political systems.
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  Such predictions are based on several classic fallacies. The Malthusian fallacy of extrapolation, and the Marxist stupidity - the labor theory of value - are involved here. There is also static analysis - which is oblivious to the power of capitalist markets to force change.

  •   It is the average period of fragility - not the growth of the over 65 population segment - that is important. Those between 65 and 75 are increasingly healthy enough to keep working as needed or desired.
  •   It is management operating in an environment that facilitates commerce and provides economic freedom - not labor or capital - that is important. Labor and capital will always seek out and serve successful management.
  •   It is government's ability to remove tax, social security, pension, and other impediments to employment of those over 65 - not the size of the segment over 65 - that will determine the extent of the economic problems caused by our aging population.

 The period of fragility:

   The average period of fragility will not increase in proportion to the increase in average lifespan. Indeed, its growth will be sufficiently limited so that it will fall far behind.
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 Major advances in the treatment of bone loss and cognitive loss problems will have a major impact.

   Among the welcome medical advances during the early decades of the 21st century will be effective treatments for bone loss and memory loss and other cognitive problems associated with aging. A major effort to deal with bone loss problems is an essential part of the space program, and several promising approaches for dealing with Alzheimer's disease and other cognitive loss problems are currently being pursued. Major advances in just these two areas will have a substantial impact on the average period of fragility - and there will be additional advances here and elsewhere as the century proceeds.
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 Economic burdens:

 

 

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  Even today, labor shortages in the United States are forcing favorable changes in employment practices. Businesses are changing employment policies to encourage hiring and continued employment of older workers, as well as of women and minorities. Also, many older people are finding employment in consulting or in other types of self employment or through temporary worker agencies that permit them to adjust their hours and conditions to suit their circumstances.
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Needed workers, both skilled and unskilled, will be obtained from those nations that must export labor because of their failure to facilitate commerce.

 

 

 

Rigid and welfare state systems will continue to have more trouble with unemployment than with labor shortages.

  In addition, volunteer labor among the elderly is substantial and provides a wide range of valuable services to the nation. The elderly are also substantial participants in the nation's huge gray market, where earnings escape the notice of economists - and of the tax gatherer and providers of pension and social security payments, also. Best estimates for the cash gray market in the United States start at a minimum in excess of $1 trillion.
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  Shortages of young workers, both skilled and unskilled, are no problem for flexible capitalist economic systems. For example, Europe gets all the young unskilled labor that it needs from Algeria and Turkey, and the United States draws upon all of Latin America. India provides both skilled and unskilled labor wherever it is needed. These nations must export people because their own economic systems fail to facilitate commerce sufficiently to employ their people to produce products for export.
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  The rigid and welfare state economic systems of Japan and Europe - as long as they remain less flexible than the United States - will continue to have more trouble with unemployment and underemployment than with labor shortages. Europe, at least, has responded to the pressures loosed by the Euro, the internet, and the need to be competitive globally, with significant financial, labor market and tax reforms.
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   In a functioning capitalist system, retired people don't have to live off their savings. In the United States, they can live off the income from their investments. They can receive pension fund payments based on the earnings of pension fund investments. Thus, the length of retirement is irrelevant. Those people with enough income from investments and pensions to lead idle lives in retirement have their money working for them, and so cannot be a burden in a capitalist system. Because of rising equity values in securities markets, private businesses, and homes, the elderly have far more savings on which they can draw for their retirement years than the raw data indicate.
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 Institutional rigidity:

  Japan is enmeshed in the rigidities and problems of a mercantilist system. Mercantilism didn't work very well in Adam Smith's time, so it is not surprising that it still doesn't work very well today.
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 Hopefully, the markets will keep hammering at the rigidities of Japan and Europe until those governments are forced to change sufficiently to permit prosperity.

 

The baby boomers will force removal of restraints on continued work for the elderly who want or need it.

   The imbalance of savings over consumption in Japan is due, in part, to the lack of a realistic capitalist return on investment for those savings. Mercantilist policies and "industrial policies" have prevented the formation of efficient investment markets. These and other rigidities make it far more difficult for Japan to deal with the problems of its aging population. Europe's capital markets also still leave much to be desired, although in both Japan and Europe the problems have been recognized and significant changes are being implemented.
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  Hopefully, the markets will keep hammering at the rigidities of Japan and European nations until those governments are forced to change sufficiently to permit prosperity. 
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  Even in the United States, institutional rigidity has been a real problem, especially with respect to policies that punish work. However, when the baby boomers start to reach retirement age, those that need to continue to work or want to continue to work would not be amused by such restraints. As has occurred throughout the last half of the 20th century, what the baby boomers want, the baby boomers get. Politicians are already falling all over themselves to curry favor with the aging boomers. The noxious restraints on the employment of the aging are being quickly removed.
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 Social Security:

 

 

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   Obviously, the continued improvement in productivity will provide additional resources with which to deal with the problems of aging as well as with all other problems. Since the end of the Cold War, prosperity has returned. It is already materially pushing back the crisis in our retirement programs even though our spineless politicians have not been able to bestir themselves to action. Of course, when the next substantial recession arrives - as it eventually must - our inability to make needed changes during prosperous times will inevitably make the situation much worse.
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 It is obvious that increases in retirement age limits, not increases in payroll taxes, is the proper response to current social security problems.

   Obviously, the mathematics change radically if the age of formal retirement rises to 68 years of age in the next couple of decades, and to 70 years of age by 2050, and those people who have to keep working or want to keep working can generally stay active and productive even longer. Payroll taxes have already reached punishing levels, especially for the young. It is obvious that increases in retirement age limits, not increases in payroll taxes, is the proper response to our current social security problems. All this is obvious, even if Congress is afraid to acknowledge it.
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  However, even without increases in retirement age limits or payroll taxes, the social security system is not in danger. It will simply begin to draw on general revenues to make up any shortfall in social security taxes - revealing the true nature of the program to be, as it has always truly been, not a pension program, but a welfare program directed primarily at the middle class.
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 The fallacy of static analysis:

 

 

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  Pessimists always underestimate the power of the market to adjust and induce people to do the right things - whether they want to or not.  People are tremendously resilient, ingenious, and flexible. They will respond appropriately to market pressures long before the economic problems posed by our aging population reach disastrous proportions.
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  As Churchill said, you can always depend on Americans to do the right thing - after they have tried everything else. (At least in democracies, the people do feel they have enough of a stake in things to want to do the right thing.) 
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     Maintaining economic flexibility is a major requirement for dealing with all changes, including aging. The U.S. can - and will - leave Europe and Japan further and further behind if they do not restore flexibility to their economic systems.

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Copyright 2001 Daniel Blatt