Sunday, July 4, 2010

Unstructured Thoughts on Structural Problems

Here are some unstructured thoughts on structural problems and malinvestments that I see. As long-time reader know, I belong to the Garage Logic University school of economics.

The whole housing "boom" was a malinvestment. Detached single-family homes are a malinvestment (vs. denser solutions) and lead to built-in dependency on oil, malinvested commuting times, too many furnaces, ACs, washers, dryers, roofs, siding, lawns, garage doors, automobiles, etc. Pushing homeownership is another malinvestment (even without the credit risks) as it reduces labor mobility, a US characteristic that has served us well. A big part of the euro-zone problems is the lack of intercountry mobility, while here people move for jobs from state to state quite often.

There is a structural problem (connected to the real estate industry kidnapping the American Dream and making it a single-family house). We are structurally short oil. This has translated to (1) permanent trade deficits with a number of hostile countries and (2) enormous military expenses to secure the flow of oil (please have no illusions about Iraq and the ~stan countries). I do not know what the solution would be here: Manhattan project, market forces, managed market approach (ie communicating that the excise taxes on gasoline will go up by 20% every year for the next X years).

College education is a malinvestment for many of the students (and the taxpayers who subsidize them). The generous (6-year) graduation rate is 56% as of 2008. This means that 44% of the enrollees possibly waste years and thousands of dollars (I say possibly to account for people who enrolled just for a class or non-traditionals). Of the 56% that graduate, there are plenty that majored in practically useless subjects, from Art History to Medieval Lit to Photography to "Interdisciplinary Studies", whatever that is. Sadly, the government policies will only increase malinvestment there: subsidies for college education are only going up and the government policies are based on the assumption that more people need to "go to college". This is pure malinvestment, as the likelihood of actual benefits accruing to the new marginal student is very low. The system is failing both the students and society as a whole. We really should face up to the fact that a "degree" does not ensure real world success, and, in some case, might actually impede it. Success in highly structured predictable environments, such as colleges or doctoral programs, can lead to both false confidence and inability to think independently.

We have other massive malinvestments, too: large federal bureaucracies that run large federal programs (for example, why do we have HUD or Dept of Education? Solve any issues in these areas at the local level.) There are too many others to list. On the other hand, we have the SEC and the DOJ completely asleep at the wheel with the frauds, including C-level, that became apparent with the crisis.

There are other structural problems besides malinvestments. There is a demographic tidal wave that is starting to hit now. As noted management guru Peter Drucker had once said, demographics is the future that has already happened. Ours is not pretty. The current crisis has only sped up the day of reckoning for the endless promises made by our election-cycle driven politicians. Now is the time to make decisive, drastic steps (raising the retirement age to 75-80 and truly reforming healthcare, for example): of course, the failure of leadership is astounding, but not surprising.

The demographic tidal wave can be offset some by immigration. The structural problem with the current system is that it does NOT favor skilled immigration. Many other "first world" countries have independent professional immigration programs, while our system creates disincentives for educated, law-abiding people to stay around, while, through lack of enforcement and promises of amnesty, keeps the low skilled people here as they have nothing to lose (even Obama's aunt ignored deportation orders). Between the crisis and the work visa quotas and kinks, many highly educated friends that were employed in brand-name places had to move (for some, 10 years after coming to the US for undergrad): this is not the sort of out-migration we want.

We also have a structural problem with healthcare at all levels (privately purchased coverage, employer-provided, government-provided). The upcoming reform does nothing to lower the cost of care: it neither reduces demand, nor does it increase supply. Healthcare is the millstone around the neck of small businesses (both for starting one up, and for attracting talent), and instead of moving away from the employer-based system (that originated by "great" government policies in the 40s), the current disastrous bill is expanding it. Also, when looking at real incomes, one sees that the increases in productivity have not resulted in increases in incomes: but employers have been absorbing higher and higher HC costs. So one can infer, non-scientifically, that the increases in productivity over the last 20 years have been expropriated by the HC complex. Then there is the problem of % dollars spent on actual care vs. % dollars spent on paperwork, administrators, and trial lawyers. There is also the unresolved basic fairness problem of paying for the care of the irresponsible (including the "clusters" of acute and chronic diseases associated with smoking and obesity, both largely "lifestyle choices").

And, happy Fourth, it's a holiday after all.

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