How Does A 25 Year Old Look At Economic Policy In The Age Of Obama?

Since the election, I've been trying to ponder the worldview of the twenty-somethings who voted for the re-election of Barack Obama.  According to a nationwide exit poll conducted by Edison Research, the 18 to 29 cohort voted for Obama by 60% to 36%.  Is there any possible theory that can make sense of this overwhelming support?

The obvious hypothesis is that the twenty-somethings accepted Obama's sales pitch.  A fair summary of that pitch was: "free stuff."  Prominent examples touted during the campaign included:  stay on your parents' health care until you are 26; SNAP (food stamps) for all; extend unemployment insurance again and then again; continue a subsidy for student loan interest; add lots of subsidies for the uninsured under Obamacare.  Sandra Fluke toured the country for the campaign stressing the importance of contraceptives available under health care plans without any deductible  - that could save you $100 per year right there!

Meanwhile, did any twenty-somethings notice that on the current trajectory of public spending, the 18-29 cohort is completely screwed?  Government debt, entitlement and insurance obligations are rapidly accumulating up to a crushing level, and Obama is doing absolutely nothing about it.  Forget the fake $16 trillion cash in cash out basis debt -- soon to be at least $20 trillion after four more years of Obama -- that everyone cites.  The twenty-somethings also must pay for their own $1 trillion of student loans, and the retirements (social security and Medicare) of the baby boom generation, and must discharge every other unaccounted-for insurance obligation the government has taken on (readers of this blog are familiar with the long list).  Add those obligations to the bonded debt and the real number faced by the twenty-somethings is at least $100 trillion. Obama resists the very idea of touching any of these accumulating obligations.

Since there are about 60 million people in the 18-29 cohort, $100 trillion of total obligations comes to about $1.7 million apiece.  Compared to this gigantic hole being dug for the twenty-somethings, the "free stuff" on offer in the campaign was completely insignificant.  The $1.7 million per head is a fair approximation of the total lifetime earnings that one of these twenty-somethings can hope to achieve.  And don't forget, the Federal government will still need to pay its ongoing expenses as well; and so will the states and local governments.  It's not looking like there's going to be much left for food.  Sorry!  But you did save $100 on your contraceptives.

A letter to the editor of Barron's, making its way today around the internet, summarizes the intergenerational transfer that the twenty-somethings have signed on for with their votes for Obama:

This 50-something, white, conservative Republican wishes to thank America’s youth for sacrificing their financial futures and standard of living so that boomers, such as my wife and I, can look forward to a long and comfy retirement, which we could easily have afforded on our own. Now we have the youth as our guarantors and providers of a little something extra. . . . 

Prior to Obama’s re-election, I believed that it was morally wrong for my generation to pass a crushing national debt on to the next one. . . . With the president’s electoral crushing of Mitt Romney [with overwhelming support from the 18-29 cohort], my overriding sense of morality and guilt have vanished. Thank you, kids!

So are the twenty-somethings just dumb -- selling their votes for $100 each while they get stuck with a per capita obligation of around $1.7 million?   I like to believe that voters in the aggregate are not dumb, so I'm searching for an alternative theory.  The best alternative theory that I have imagined to explain the votes of these young people is this: when you are in a Ponzi scheme, the best thing you can hope for is that it implodes as soon as possible.  The longer it goes on, the more will be lost and the more destructive the final implosion will be.   Perhaps Obama is just crazy (or incompetent) enough to blow this whole thing sky high in the next four years.  This theory is not completely crazy.  A prompt implosion of our existing entitlement Ponzi scheme would not be a bad result for the 18-29 cohort.  They could stop paying for the entitlements now in return for the entitlements not being around for them when their turn comes.  Probably very few of them expect the entitlements as currently configured to last another 30+ years anyway.

But that's attributing a level of cynicism and sophistication to the twenty-somethings that I don't believe they had in this vote.   And is there a plausible scenario in which the United States has a prompt implosion that enables leaving the unsustainable obligations behind?  Unfortunately, when a sovereign can pay its obligations in its own currency, history does not offer many examples of prompt and total implosion.  (The best example may be Russia after the Soviet Union, and the restart from that implosion is not an example that is worthy of emulating.)  The far more common scenario is protracted, slow, painful decline.  Think Argentina -- from one of the richest countries in the world to lower middle class over 70 years, with multiple bouts of extreme but not quite hyper inflation along the way.  Our future? 

Conclusion:  If I were 25 I would be shouting from the rooftops that this must end now!  Are any of them going to wake up any time soon?

Don't Try Showing Up The Regulators

In the minds of the regulators, there is no worse behavior than not showing them sufficient deference and servility, sometimes known as lese majeste.  So what if the various regulatory bureaucracies that litter our lives have never accomplished anything worthwhile?  So what if the highly-regulated like Madoff frequently give full access to their files to the SEC and still conduct multi-billion dollar frauds without fear of detection?  The people must submit!

Latest to incur the wrath of the regulators is Intrade, the internet political betting site, based in Ireland, where up until now you could place a bet on the outcome of elections for president, senate, governorships, and so on.  Intrade has established a well-deserved reputation for accuracy of its predictions.  In the weeks before the recent election, they had Obama to win trading in the range of 60 to 70, versus Romney at 30 to 40.  And I have never heard any allegation that they failed to pay off appropriately.  A useful service, with full financial integrity, completely outside the control of the regulators -- We can't have that!

According to this press release, on November 26 the Commodity Futures Trading Commission sued in Federal court in Washington to shut Intrade down, at least as to taking bets from Americans.  Reason?  "The CFTC's ban on off-exchange options trading."  Here is the quote from the CFTC's Director of Enforcement:

It is against the law to solicit U.S. persons to buy and sell commodity options, even if they are called ‘prediction’ contracts, unless they are listed for trading and traded on a CFTC-registered exchange or unless legally exempt. The requirement for on-exchange trading is important for a number of reasons, including that it enables the CFTC to police market activity and protect market integrity. Today’s action should make it clear that we will intervene in the ‘prediction’ markets, wherever they may be based, when their U.S. activities violate the Commodity Exchange Act or the CFTC’s regulations.

Perhaps it never occurred to you that a contract betting on the outcome of a political election is a "commodity option"?  Clearly, you have not read the pages of impenetrable definitions in the Commodity Exchange Act or the CFTC's regulations, nor have you followed the vast expansions of CFTC jurisdiction in the infamous Dodd-Frank law.  If you had, you would have known that "commodities" under the jurisdiction of the CFTC include not just things, but also "all services, rights, and interests . . . in which contracts for future delivery are presently or in the future dealt in [sic]," but of course, "except onions."  Does a contract betting on the presidential election seem like an onion to you?  OK, proceed.

It is quite clear that Intrade and CFTC regulation are completely incompatible.  Not only does the CFTC require that all trading take place on one of its exchanges, but also they only allow the trading of contracts as to which they have vetted the terms word by word.  Intrade uses the internet and creates hundreds of contracts for specific races in short periods of time.   Too bad, that won't work.  You are gone.

Meanwhile, I can state with one hundred percent certainty that there are right now multiple Ponzi schemes in regulated enterprises operating right under the CFTC's nose and the CFTC is missing every one of them.  Those schemes will come to light when the operators run out of new investor funds, and not before.  When a big enough one blows up, the CFTC will promptly call for stricter regulation to better enable them to "police the markets," or something like that.

Intrade was showing them up.  Now Intrade, and the American people, are the losers.  Can anyone give a reason why the CFTC should not be eliminated?

The War On The Economy Resumes

With economic growth remaining anemic, could intentional government suppression of economic activity have anything to do with it?  Now that the president is safely re-elected, the government is resuming what I call the War on the Economy.  Elements of the War on the Economy include things like blocking major profitable (and thus wealth-creating) projects (e.g., Keystone Pipeline), diversion through government subsidies of economic activity into wealth destroying ventures like green energy, encouragement of labor unions, massive new regulations to block economic activity, wild overspending on unproductive activities by the government, and I could go on and on.

I truly think that these people believe that economic activity and wealth creation come from the tooth fairy and that it doesn't make the slightest bit of difference whether or not the government is standing with its foot on the economy's neck.  If we need more money, we can just take it from the rich.  Our leaders have never spent even a moment wondering why the U.S. got rich when other countries did not; or, for that matter, why countries like Argentina and Venezuela (and ancient Rome) were once somewhat rich and then got poor again.

To take one of the bigger examples of government wealth destruction in the War on the Economy, let's consider EPA regulations relating to coal power plants.  This morning's New York Law Journal has a column by Michael Gerrard of Columbia University on the EPA's resumption of the process of enacting new regulations now that the election is past: "Obama Reelection Clears Path for Numerous New EPA Regulations."   Gerrard is a nice enough guy (I once debated him at a Federalist Society forum on global warming back in 2010), but also a seriously committed environmentalist true believer.  However, I have no reason to think that his summary of the EPA regulatory agenda is inaccurate.

Do you remember all of the campaign nonsense about Obama's "all of the above" energy strategy?  And of course, during the campaign, you didn't hear a peep from the president about his war on coal.  Well, here's Gerrard's take on the next steps:

The reelection of President Barack Obama means that a long list of new regulations will be issued by the Environmental Protection Agency (EPA) in the coming months. Some had been held up because of their political sensitivity, and others were still in process, but many will soon be ready for further action.

Is there anything here that might have a noticeable effect on economic activity?  How about item number one: 

GHG  [greenhouse gas] emissions from new electric generating plants. On March 27, 2012, EPA announced proposed new regulations setting GHG standards for new electric generating plants. The standards could be met by modern natural gas-fired plants. They could not be achieved by coal-fired power plants unless they were equipped with carbon capture and storage, a technology that is not yet commercially available.

You read that right.  The EPA has a proposed regulation under which it plans to make all new coal-fired electric power plants illegal, unless they can somehow come up with a new technology that doesn't yet exist.   When will that take effect?  "[EPA] plans to issue the final rule by April 12, 2013."

How about existing coal-fired power plants?  According to Wikipedia, existing coal-fired plants produced some 36% of electricity in the United States in the first part of 2012.  Well, yes, they plan to wipe those out as well, although they haven't said exactly how and when:

GHG emissions from existing electric generating plants. . . . EPA has not announced what these standards will look like or when they will be announced; since existing coal-fired power plants are the largest source of GHGs in the United States, such standards are likely to receive a great deal of attention in the second Obama term. However, on Nov. 13 Gina McCarthy, EPA's assistant administrator for air and radiation, told the National Association of Regulatory Utility Commissioners that implementation of any such rule is at least several years away.

Are you comforted by the fact that they say it will be "at least several years" until they wipe out 36% of our electric generating capacity?   Then there are the 91,000 people employed as coal miners in 2011 according to the EIA.  I guess those people have "at least several years" before they go on government hand-outs.

Meanwhile, the idea that the United States can control world temperatures by unilaterally shuttering its coal-fired electric generating capacity is completely quixotic.  People want electricity, coal is cheap, and if we won't use it someone else will.  You've probably heard about China building a new coal power plant every week, 50 or so a year.  But they're not alone.  How about Germany?  Germany!  Yes, in the wake of the Japanese nuclear meltdown at Fukushima, Chancellor Merkel of Germany announced that they will be closing all of their nuclear power plants.  And replace them with what?  She didn't think that one through.  They talk fantasy about "renewables," but the real option is coal.

Here we have the EPA, so let's shoot ourselves in the foot.  As long as they think it's a good idea just to order large swaths of the productive economy shut, I wouldn't be expecting a period of rapid economic growth any time soon.

Christie Realizes He Is Getting Outbid

A few days ago I predicted here that Governor Christie of New Jersey would promptly up his $29.4 billion demand for Federal disaster aid for the hurricane as soon as he saw the $40 billion demand of Governor Cuomo of New York.  This is a matter of state pride!

Sure enough, from  this morning's Wall Street Journal:  " Gov. Chris Christie on Wednesday put the total cost of recovery and protection against future storms at $36.8 billion, up from $29.4 billion last week.  The estimate included an additional $7.4 billion in mitigation and disaster-prevention expenditures, the governor said."  "Mitigation and disaster-prevention" means exactly what?  A giant sea wall?  No amount of money is going to make those barrier islands safe.  New Jersey has well over 100 miles of them.  $7 billion won't even make a start.  It's just a game to see how much of the free money you can get.

Nobody yet has the idea of telling people the one thing that makes any sense: if you build on the barrier island, you're on your own.

Out Of Control Student Loans

Once the Federal credit card gets behind something, how far and fast can it blow up and explode?  The student loan programs give a good example.  This is a trillion dollar or so Federal problem that you may never have thought was a problem.

I have located here something called the Federal Student Loan Programs Data Book from 2000, that gives a good summary of the financial status of the student loan programs from inception through that year.  It's a pdf - I hope the link works.  According to this book, the first Federal student loan guarantee program began in 1966.  By 1989, cumulative loan volume had reached $102 billion.  By the end of FY 2000, an additional program had been added, and the cumulative volume of the two was about $330 billion. 

Now to today.  According to this site, total outstanding student loan debt is now over $1 trillion.  Zero to one trillion in about 36 years.

Any chance of getting the trillion back?  Well, we can check in on how it's going so far.  From the web site ZeroHedge, we find the chart below just put out by the Federal Reserve.  It seems that the 90 day delinquent rate on these loans had reached about 6% by 2003, and then gradually crept up to about 9% and leveled off there in 2010 - 2011.  Early in 2012 it seemed to drop to 8.5% (election coming up?), but now suddenly when they report the Q3 2012 numbers it shoots up to 11%.

Oh, wait a minute, do you have to read the footnotes?  Here's what they say in footnote 2:

As explained in a Liberty Street Economics blog post, these delinquency rates for student loans are likely to understate actual delinquency rates because almost half of these loans are currently in deferment, in grace periods or in forbearance and therefore temporarily not in the repayment cycle.

This implies that among loans in the repayment cycle delinquency rates are roughly twice as high.

So the real delinquency rate is actually 22%, and rising like a rocket.  Get ready to lose half or so of the trillion.  Of course, that's only the equivalent of one year's Medicare spending.

More Convictions In The Long Island Rail Road Disability Pension Scam

Generally at the Manhattan Contrarian we try to limit our focus to the big scams of, say, a trillion dollars and up -- Federal financial statements, the "poverty" rate, and so on.  But if the conduct is egregious enough, we're willing to consider even small ones in the billion or so range.

The New York Post reports this morning on two additional convictions in the Long Island Rail Road disability pension scam.  That brings the total of guilty pleas in the scam to 6.  It's a start, but only a small one.  The number of participants in the scam seems to be well over 1000, and the amount stolen per person around $1 million and up each.  This is not small time.

The basic idea is that if you are honest, you can retire and get your already generous pension, but if you are in the know, you can get a "disability" pension, which means you can retire earlier, get a higher payout formula, and also exemption from at least state and local income taxes.  One small hitch -- you are supposed to be disabled. 

But the most amazing thing is how universal it was.  According to this report from the National Legal and Policy Center, the scam started in the 1990s, and by 2000 and after, the percent of LIRR workers retiring with disability pensions was in the range of 93 - 97%.  Is there any chance that this was not orchestrated by the labor unions?

My big question:  Who are the 3 - 7% who were actually honest?  I guess it's good to know that there are at least a few such people still out there.

According to the Post story, the Federal prosecutors have offered an amnesty program to the estimated 1600 remaining scammers, in which they can avoid prosecution by admitting wrongdoing and foregoing future disability payments.  In other words, even though you have been collecting fraudulently for 5 or 10 years or more, you don't even have to give back a dime.  Way too lenient in my view.  But the Post says that only 44 of the 1600 have taken it so far.