martes, 24 de noviembre de 2015

martes, noviembre 24, 2015

Greenspan: More And More People Producing Less And Less
              

       
- Alan Greenspan is worried that the rise in entitlement spending is eating up savings and therefore reduce business investment.   
     
- While the rise in entitlements is real, this is mostly a demographic and healthcare cost issue, and the US is better placed than most advanced nations to tackle these.
       
- Worries that it affects savings and business investments seem overblown in an era of secular stagnation.

Alan Greenspan, the former Fed chairman, was once regarded as a demi-God by the financial markets. While he did notice the froth in stocks as early as December 1996 when he argued that:
Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets. We can see that in the inverse relationship exhibited by price/earnings ratios and the rate of inflation in the past. But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?

But he didn't really do much about that, and he clearly failed to see the bubble in housing and he was an active proponent the deregulation and self-regulating powers of markets.

So his status has changed quite a bit after the financial crisis, and although at an advanced age (89!), he still has a significant audience and comes up with dire warnings from time to time.

His latest warning is a grave concern about entitlements. His big worry is that:
More and more people producing less and less
Greenspan found an inverse relationship between entitlement spending and gross domestic savings, and this has grave consequences, in his view:
If savings are not being created, therefore investment is not occurring, therefore productivity is not growing, therefore the rate of growth in the economy is held back, Greenspan said in an Oct. 27 interview in Washington. He said his calculation is "reassuring as a mathematician and an economist, which is what I am.
Here is that inverse relationship:

Now, the grave concerns of Greenspan have three dimensions:
  1. The rise in entitlements
  2. The decline in savings
  3. The relationship between the two
Let's look at these in turn, starting with entitlements. These have risen from 5% of GDP in the 1960s to 15% today. There are two main components of this rise:
  • Demographics, the share of people covering social security is rising.
  • Medicare, spending on healthcare has increased
Here is The Economist:
The hard truth is that an ageing population and rising health costs are inexorably pushing up the cost of Social Security (pensions), Medicare (health care for the elderly), Medicaid (health care for the poor) and the subsidies in Obamacare (see chart 1). The total cost of these entitlements will rise from 9.8% of GDP this year to 11.6% by 2023 and 13.6% in 2035, which would push the deficit sharply higher.
The social security part isn't really where the problem is. Whilst the number of beneficiaries will grow by 1.5M per year for the next two decades, outlays here only rise from 5% of GDP in 2013 to 5.9% in 2031, hardly a crisis.

This isn't terribly surprising. Compared to most other advanced nations the US has seen much less of a rise in life expectancy and a much faster growth in its population (mainly through immigration), so its demographic development is much better, economics wise.

The biggest problem by far is the rise in healthcare cost. The US:
We're spending more than twice the amount on health care compared to several other countries including Germany, Canada, and France, where actual health outcomes have been better for years.
As The Economist noted, stemming these cost is difficult, for various reasons:
The principal source of rising entitlement spending is "excess-cost growth": the tendency of health spending per head to grow faster than per capita GDP because of ageing, the continuous introduction of costly treatments, the industry's perverse incentives (which reward doctors for providing more, rather than better, procedures), and labour intensity, which makes it hard to raise productivity.
But some progress is being made:
For the most of the past five decades health spending has grown by three percentage points above GDP per person every year, but since 2010 the gap has fallen close to zero, according to Goldman Sachs (see chart 3). Both private and public costs have slowed. Medicaid spending grew by 9% a year from 2001 to 2009, but has been flat since. Medicare spending also grew by 9% a year in that period, but has risen by only 3% a year since. In 2010 the CBO said the two would cost $1.5 trillion, or 6.4% of GDP, in 2020. This year it lowered that total to $1.3 trillion, or 5.8% of GDP.
The Economist suggests that part of this is due to the aftermath of the recession, when people lost their insurance. Perhaps that was true in 2013, but it surely isn't today:



Some parts of the slowdown in the inexorable rise in healthcare spending might actually be due to Obamacare changing incentives, although it's too early for any definite judgment.

So some progress is being made, but given the enormous difference in healthcare spending between the US and all other advanced nations, for sure this is where attention should be focused.

All in all, given the favorable demographics and outsized gains possible in reigning in healthcare spending, we don't see reason for despair in the rise in entitlements.

What seems positively absurd is to suggest, as Greenspan did, that there is a causal relationship between the rise in entitlements and the savings rate, and that the decline in the latter reduces business investment.

The mechanism by which this is supposed to work is a rise in interest rates, due to a lack of savings. But in fact, exactly the opposite is happening, and for quite some time as well:

(click to enlarge)

Moreover, companies are raking in record profits and sitting on record levels of cash, they don't exactly lack the funds to invest. What has happened is that as income shifted from low to high savers, demand only kept going by increasing debt by the former.

After the financial crisis, increasing debt to keep up consumption seems a dead alley for some time to come (in fact, the opposite happened as households deleveraged).

Deleveraging households increased savings, one reason why interest rates have ratcheted downwards yet another notch. So to argue that there aren't funds for investment is unwarranted, in our view.

In fact, the whole secular stagnation debate argues that the problem is basically the opposite, that of a secular rise in savings versus investment, hence the decline in interest rates.

One has to keep in mind this is a phenomenon that plays out on basically a world scale, as financial markets are globalized. The excess savings are not generated in the US (witness the persistent current account deficit), but elsewhere.

But even so, there is simply no evidence that the rise in entitlements, which is mostly a demographic development and the result of disappearing low skilled manufacturing jobs, is producing lack of funds for investment.

If Greenspan is worried about "more and more people producing less and less" a bigger worry seems the rise in automation. According to a Bank of America report:
Robots will take over 45pc of all jobs in manufacturing and shave $9 trillion off labour costs within a decade
Historically, capitalist societies have been able to absorb rapid technological change but whether adjustment can be made on a sufficient scale when technological change has gone from linear to parabolic remains very much to be seen.

It is perhaps somewhat ironic that one of the main countervailing forces working against this sweeping automation is the very same demographic crunch which makes labor scarce and which has Greenspan so worried.

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