Because We Can Becomes Because We Can't

Why are health care costs so high? Why are so many poor people obese?  Why do pre-schoolers have iPads?   Because we can.

We have created the greatest model for the creation of economic wealth the world has ever known.  It has allowed many people to be very rich.  It has also allowed many, many more people to have a standard of living that is the envy of the world.  Most people in the United States would be considered to be in the top 2% of income earners in the world.  In fact, if you were born into poverty, is there any other country besides the United States that you would choose if you could?  I wrote about this in "Perspectives on Poverty" earlier this year and cited an article by Walter Williams.  Dr. Williams makes the case rather well.

Imagine you are an unborn spirit whom God has condemned to a life of poverty but has permitted to choose the nation in which to live. I'm betting that most any such condemned unborn spirit would choose the United States. Why? What has historically been defined as poverty, nationally or internationally, no longer exists in the U.S. Let's look at it.

Forty-three percent of all poor households actually own their own homes. The average home owned by persons classified as poor by the Census Bureau is a three-bedroom house with one-and-a-half baths, a garage and a porch or patio.

-- Eighty percent of poor households have air conditioning. By contrast, in 1970, only 36 percent of the entire U.S. population enjoyed air conditioning.

-- Only 6 percent of poor households are overcrowded; two-thirds have more than two rooms per person.

-- The typical poor American has more living space than the average individual living in Paris, London, Vienna, Athens and other cities throughout Europe. (These comparisons are to the average citizens in foreign countries, not to those classified as poor.)

-- Nearly three-quarters of poor households own a car; 31 percent own two or more cars.

-- Ninety-seven percent of poor households have a color television; over half own two or more color televisions.

-- Seventy-eight percent have a VCR or DVD player; 62 percent have cable or satellite TV reception.

-- Eighty-nine percent own microwave ovens, more than half have a stereo, and a more than a third have an automatic dishwasher.

The bottom line is that there is no other country in the world that more people have the ability to become rich than in the United States.  However, even if someone does not become rich directly, the entire population is lifted up by the economic growth and wealth that we have created.  As President John F. Kennedy once famously stated, "A rising tide raises all boats".

However, despite all that we have been blessed with, it is not enough.  It never is enough.  That also explains where we are as a country today.  We are used to having it all.  We still want it even when we can't afford it so we borrow to get it.  We don't stop to worry about paying because that is tomorrow.  We all just want to live for today.  We all just live for for ourselves.   It is all about ME, ME, ME. It is also the subject of an excellent article by one of my favorite writers, Michael Lewis (Moneyball, The Blind Side, The Big Short), in Vanity Fair magazine entitled "California and Bust".  Lewis explores the weakest link in our societal fabric-the budgets of our local governments and focuses on the the weakest of the weak-California cities.

Lewis weaves the story from Meredith Whitney (who has predicted a wave of municipal bankruptcies over the next few years) to Arnold Schwarzenegger to the Mayor of San Jose, California to the City Manager of Vallejo, California which declared bankruptcy in 2008.  Vallejo shows just how bad it can get.  When it declared bankruptcy it owed 1,013 claimants over $500 million and had just $6 million to dole out to them.  The lion's share of the amounts were owed to current and former city employees.  They will get about 25 cents on the dollar based on the approved bankruptcy plan.  The value of Vallejo real estate dropped by 66% between 2006 and 2010.  The entire social fabric literally was ripped apart by the pay and benefits for the public sector workers in the city.

San Jose, California is the 19th largest city in the United States. Mayor Chuck Reed, a Democrat, took office in 2006 after serving on City Council beginning in 2002.  Lewis recounts his conversation with Mayor Reed.

He hands me a chart. It shows that the city’s pension costs when he first became interested in the subject were projected to run $73 million a year. This year they would be $245 million: pension and health-care costs of retired workers now are more than half the budget. In three years’ time pension costs alone would come to $400 million, though “if you were to adjust for real life expectancy it is more like $650 million.” Legally obliged to meet these costs, the city can respond only by cutting elsewhere. As a result, San Jose, once run by 7,450 city workers, was now being run by 5,400 city workers. The city was back to staffing levels of 1988, when it had a quarter of a million fewer residents. The remaining workers had taken a 10 percent pay cut; yet even that was not enough to offset the increase in the city’s pension liability. The city had closed its libraries three days a week. It had cut back servicing its parks. It had refrained from opening a brand-new community center, built before the housing bust, because it couldn’t pay to staff the place. For the first time in history it had laid off police officers and firefighters.

By 2014, Reed had calculated, a city of a million people, the 10th-largest city in the United States, would be serviced by 1,600 public workers. “There is no way to run a city with that level of staffing,” he said. “You start to ask: What is a city? Why do we bother to live together? But that’s just the start.” The problem was going to grow worse until, as he put it, “you get to one.” A single employee to service the entire city, presumably with a focus on paying pensions. “I don’t know how far out you have to go until you get to one,” said Reed, “but it isn’t all that far.” At that point, if not before, the city would be nothing more than a vehicle to pay the retirement costs of its former workers. The only clear solution was if former city workers up and died, soon. But former city workers were, blessedly, living longer than ever.

The numbers are not much better at the state level in California.  There is no better example of how distorted our priorities are than the comparison of what is being paid in pay and benefits to the state's prison-system employees compared to what California is investing in higher education.

In 2010, for instance, the state spent $6 billion on fewer than 30,000 guards and other prison-system employees. A prison guard who started his career at the age of 45 could retire after five years with a pension that very nearly equaled his former salary. The head parole psychiatrist for the California prison system was the state’s highest-paid public employee; in 2010 he’d made $838,706. The same fiscal year that the state spent $6 billion on prisons, it had invested just $4.7 billion in its higher education—that is, 33 campuses with 670,000 students. Over the past 30 years the state’s share of the budget for the University of California has fallen from 30 percent to 11 percent, and it is about to fall a lot more. In 1980 a Cal student paid $776 a year in tuition; in 2011 he pays $13,218. Everywhere you turn, the long-term future of the state is being sacrificed.

Lewis seeks the answer of why we have driven ourselves over the cliff and comes face to face with the answer in one of my favorite areas of academic interest-nueroeconomics.

Dr. Peter Whybrow a neuroscientist at UCLA explains that human beings are neurologically ill-designed to be modern Americans. The human brain evolved over hundreds of thousands of years in an environment defined by scarcity. It was not designed, at least originally, for an environment of extreme abundance. “Human beings are wandering around with brains that are fabulously limited,”  

“We’ve got the core of the average lizard.” Wrapped around this reptilian core, he explains, is a mammalian layer (associated with maternal concern and social interaction), and around that is wrapped a third layer, which enables feats of memory and the capacity for abstract thought. “The only problem,” he says, “is our passions are still driven by the lizard core. We are set up to acquire as much as we can of things we perceive as scarce, particularly sex, safety, and food.” 

 “What we’re doing is minimizing the use of the part of the brain that lizards don’t have,” says Whybrow. “We’ve created physiological dysfunction. We have lost the ability to self-regulate, at all levels of the society.  

We have provided more and more of everything because we can. We are embarking on an era where tough decisions will have to be made. No longer will we be able to say "because we can". We will have to get used to the answer being "because we can't." The time has come to self-regulate.  It has to start with the size of government and the immense payments we are making to individuals in public sector pay, benefits and individual entitlements. 

Read the entire article.  Lewis is particularly entertaining in writing about his meetings with Schwarzenegger.  However, it almost seemed that Lewis was either too tired or too depressed to properly frame the conclusion.  The result- I thought the end of the article was a little bit like driving over a cliff.  It was on you before you even knew it.  Perhaps that is the real point after all.