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This Goldman Sachs report on Global Aging provides important insight into the future. (Thanks to More than Zero for the pointer.) Author Maureen M. Culhane writes
The world's population is aging. Over the next 50 years...each worker will have to support twice as many elderly people as he or she does today...
She presents a table showing that in the U.S. the ratio of workers to elderly dependents (people aged 65 or over) will fall from 4.0 today to 2.3 in 2050. In Japan and Europe, the ratio starts lower and falls even further, to between 0.9 (Spain and Italy) and 1.7 (United Kingdom).
What this suggests to me is that public pension systems will collapse unless either:
Discussion Question. What factors could lead the elderly population to be even larger than is now projected?
This is an article from 1998, but I only saw a reference to it recently on More Than Zero.
Whether analyzing military capabilities, cultural viability, or economic potential, these seven factors offer a quick study of the likely performance of a state, region, or population group in the coming century.
...These key "failure factors" are:
- Restrictions on the free flow of information.
- The subjugation of women.
- Inability to accept responsibility for individual or collective failure.
- The extended family or clan as the basic unit of social organization.
- Domination by a restrictive religion.
- A low valuation of education.
- Low prestige assigned to work.
Discussion Question. Development economics tends to try to identify factors that enable a country to succeed, and this has proven difficult. Does it help to turn the question inside out and focus on factors that correlate with failure?
Jeff Sachs says that the solution for Argentina is dollarization.
The correct approach to solving Argentina's problems in 2001, and now, would have been to end speculation over devaluation. I favored the approach of "dollarization", or replacing the Peso by the US dollar and thereby ending the fear of a future change of the exchange rate. Instead, the government closed down the banking system, so that depositors could no longer convert their pesos into dollars!
I believe that the conventional wisdom among economists is quite the opposite. That is, Argentina's attempt to peg its peso to the dollar caused problems. As neighboring currencies fell in value, Argentina's exports became uncompetitive.
Conventional wisdom is to focus on Argentina's budget and trade deficits. Sachs' view is that the key is to restore confidence in the banking system.
Discussion Question. Is Argentina's problem illiquidity (a temporary inability to repay its debts) or insolvency (it took on too much debt relative to its capacity)? How does your answer to this question affect whether or not you agree with Sachs?
I won't go as far as James Miller, who called it the Stupidest Article Ever, but this MSNBC report on anti-growth environmentalists in Eastern Europe is disturbing.
“We don’t want to stop progress,” says Trebicky, responding to an oft-heard criticism of sustainable development advocates. Instead, he says, they want the right kind of progress — for example, more organic agriculture and less intensive, chemical-based farming.
Right. Set back farming by several decades, but don't stop progress.
Discussion Question. Does there always have to be an "ism" to oppose market economics and growth? Before it was Communism. Is environmentalism the new militant ideology?
The United States is doing a poor job of leading in economic policy, according to Joseph Stiglitz.
But, while preaching free market doctrines abroad, the US bails out its airlines and increases agricultural subsidies at home. Even before these increases, subsidies to agriculture by the advanced industrial countries were enormous - exceeding the total incomes of sub-Saharan Africa.The rich effectively close their markets to many goods that represent the comparative advantage of the poor. Argentina's economic position today, indeed, would be vastly different if America and Europe opened their markets to its agricultural goods. The same can be said for country after country in the developing world.
Stiglitz makes an excellent point that our trade distortions consist of more than just tariffs. Corporate welfare, farm subsidies, and other pork are equally bad. Moreover, our willingness to indulge special interests at home regardless of the adverse affect on foreign producers or domestic consumers sets exactly the wrong example for other countires.
Discussion Question. If farm subsidies were reduced and NAFTA was passed under President Clinton, why should the forces of free market economics be suffering setbacks under President Bush?
Megan McArdle uses an article by Jane Bryant Quinn as a jumping-off point for making the rarely-heard case against government involvement in health care. Discussing the idea of "single-payer" health insurance (meaning that the government would consolidate the health insurance industry into a single payer), McArdle says,
I think that this may be the first time I've ever heard an apparently otherwise reasonable human being argue that the way to slim down bureacracy is to hand a project over to the government. Has anyone ever heard of any situation in which this was the case?
Discussion Question. The government gives the tax subsidy for health care to employers, not to individuals. How many ways does this distort the way the health care economy?
Hal Varian discusses the controversy over accounting for stock options.
Suppose you are the sole owner of a company worth $1 million, and you want to hire a chief executive. The candidate for the job says, "Give me half ownership, and I'll make your company twice as valuable." Even if this person succeeds in doing so, it would be a wash for you, since you would end up owning half a company worth $2 million.
This way of looking at stock options is to focus on dilution. The alternative, which I prefer, is to treat them as compensation.
To me, Varian's example sounds like a start-up phase company. It does not sound like a large public company. A large public company does not necessarily have to issue more shares in order to provide stock options. It could buy its stock in the market and sell it to executives who exercise options.
Supporters of the current accounting treatment for stock options argue that they are reflected in the reporting of diluted earnings per share. However, as Varian points out, investors are not encouraged to look at diluted earnings per share when they value companies. As he puts it,
much of the problem would go away if people paid attention to diluted earnings per share rather than basic earnings per share.Earnings per share made sense before options compensation became widespread, but that time has long passed and the financial news media should recognize this change.
Stock option proponents say that stock options help to align the interests of investors and employees. However, there are other ways to do this, including stock grants and performance-based bonuses.
In fact, I believe that stock options are used not to ameliorate potential differences in perception between investors and employees but instead to exploit such differences. I believe that the whole idea of stock option compensation is to foster the illusion that a company is getting something for nothing.
Stock options are an attempt to obtain effort from employees without any cash outlay. For stock options to be preferable to cash, either employees have to value them more highly than cash or investors have to undervalue their cost relative to cash. I believe that the latter is the case, because of the failure to treat options as compensation in earnings statements. The desire to sustain this illusion is what makes the proponents of stock options go ballistic at the prospect of appropriate accounting treatment for them. Without the fiction that companies are getting something for nothing, stock options would lose their magic.
Discussion Question. Varian asks, "which definition of earnings per share is a better predictor of future stock prices: options-expensed earnings per share or diluted earnings per share?" Is that the right question?