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The Daily Reckoning | Sunday, December 23, 2012 Bill Bonner on the development of “Couch Potato Nation,” Readers weigh-in on the end of the world...and the end of the state, Plus, all this week’s reckonings archived for your festive consumption... --------------------------------------------------------------- CUSTOMER SERVICE ANNOUNCEMENT: My records say we could owe you, dear subscriber, exactly $1,044 in subscriber benefits. You are eligible to claim this amount due to your loyalty as a subscriber. However, you have only until midnight December 28th to let me know whether you want to receive these benefits... or simply let them expire. Please let me know as soon as possible. To learn how to claim these benefits, simply click here. Sincerely, Andrea Michinski Customer Service Director, Agora Financial Joel Bowman, checking in today from Agora Financial’s H.Q. in Baltimore, Maryland... Joel Bowman A quick programming note before we dive into this week’s feature essay, archives and a special “video of the week” installment. As you may or may not have heard, the world did not end on Friday. And so, in light of this non-development, Christmas will go ahead as scheduled. Markets will trade a half day tomorrow, then close Tuesday. Your editor, meanwhile, has a long haul flight back to Argentina on Christmas Day. Look for our wordy ramblings from the other end of the Americas on Wednesday. OK... That’s it with the scheduling. Bill Bonner has this week’s feature column below. Please enjoy... [Note: The following column originally appeared in these pages on Thursday, December 20.] The Daily Reckoning Presents The Internet Is a Dud Bill Bonner The Welfare States of the Developed World are “long growth.” Without it, their finances are doomed. First, a little background... Generally, investors will pay more for a dollar’s worth of earnings from a stock than from a bond. Stocks are riskier than bonds, in the sense that share prices tend to go up and down more, depending on company results. But investors believe this ‘risk premium’ is worth it, because there is more ‘upside’ in stocks; they will grow with the economy. Over the long run, therefore, the rate of return on stock market investing should more or less reflect the stream of dividends received, plus the rate of growth in the economy. If the economy doesn’t grow, however, the risk premium becomes a costly artifact of an earlier age. Pension and insurance funds, too, count on growth. They collect money. They invest it and make projections based on what they consider a likely rate of return. The difference between what they collect in premiums...and what they need to invest to cover their costs and payouts...is profit. As of 2012, the typical pension fund — such as those operated by state and local governments — was banking on a rate of investment return as much as four times higher than the GDP growth rate. If growth does not pick up, these funds will go broke. Private households, pension and insurance funds all are on one side of the trade, betting that growth rates will recover to those of the ’80s or ’90s. If so, disaster might be averted. Higher growth rates will permit governments to keep the rate of debt growth in line with revenue increases. But if growth doesn’t recover, public finances all over the planet are doomed. Over the last 4 years the number of people on disability has risen more than 7 times faster than the number of people with jobs. The number of people on food stamps has increased by 17 million during Obama’s term in office. From the beginning of Obama’s first term to the end of it, approximately 4.6 million jobs disappeared. But the number of additions to food-stamp and disability roles jumped 21.2 million. Why were so many more people suddenly disabled? Was there a plague that struck the nation? Were millions crippled in a nationwide auto pile-up? Of course not. Instead, in a low-growth economy, $1,000-a- month without working had begun to look pretty good. “You get what you pay for,” said Milton Friedman. You pay people to be disabled. You get plenty of them. Everybody’s worried about the fiscal cliff. But there’s a much bigger cliff coming up, and it’s the “Entitlement Cliff.” In the four years since Obama took office, entitlement participants have grown exponentially. Driving through East Baltimore recently, I saw slews of billboards with ads by shyster lawyers encouraging poor people to get in on disability payments or to sue their employers or their landlords. Here’s one of the billboard ads: DENIED DISABILITY? Call THE FIRM. The Cochran Firm. Johnnie Cochran was the lawyer who successfully defended O.J. Simpson. Now his firm has 30 offices around the country helping people get on disability. Apparently, he’s been pretty successful at this too. More and more people are finding ways to get paid without contributing to useful output. This is just another part of the reason that growth slows: much of the society’s energy is diverted to unproductive uses. I had not gone to East Baltimore for pleasure. I was going there to waste energy. Specifically, the state of Maryland required me to have my auto emissions checked. Practically everyone with an automobile is now required to drive where he doesn’t really want to go...wait in a line he doesn’t really want to be in...and pay $14 to have his auto emissions checked. As Bastiat reminds us, there are always unseen consequences as well as those that are obvious. For every ‘bad’ auto the test uncovers — whose emissions are unnecessarily noxious — many more good autos are forced to drive miles and miles they didn’t otherwise have to drive, just to take the test. At the test station I used there were six lines of traffic...about six cars in each line...and each idling its motor while waiting to move forward. “It’s worse than that,” my secretary volunteered. “The test doesn’t work on newer cars, or at least some models of them. So, you get there...they take your $14 and they just waive you through.” But emissions testing is now a part of the complex economy. Entire industries are devoted to it. Employees are trained to do it. And lobbyists work hard to keep the whole thing going, whether it really makes any sense or not. Once again, it was Milton Friedman who pointed that “there is nothing as permanent as a temporary government program.” And so, a part of the nation’s energy — time, money, fuel, capital, engineering ability — is now taken up by emissions testing. Little of this shows up as government spending. It is the private sector that spends the money. You may think of the security checks in airports if you want to find a parallel. Millions of people spend millions of hours per year — an immense ‘investment’ of energy — merely keeping people who had no intention of blowing up airplanes from doing so. Or, think of filling out your tax forms. It is a cost imposed by government, but not included in the federal budget. How much of the economy’s energy is sapped by these unproductive activities? Nobody knows. But it must be a lot. Every business now has its own overseers and regulators. Every one spends time and money complying with complex regulations — many of which did not exist a few years ago. According to the latest estimate, Americans spend 6.1 billion hours just complying with tax legislation. And think of the new paperwork blizzard Obamacare has imposed. Think of the law firms and accountants who work full time trying to figure out how to comply with Fatca, Dodd-Frank and other financial regulations. Google Dodd-Frank and you get 5,460,000 hits. Each one is an attempt to understand, influence, implement or comment on this legislation. And most of this activity occurs in the private sector of the economy, where it is recorded as positive increments to the GDP! But it is a huge diversion of resources, taking them away from what might otherwise be useful and productive activity. An article in Cato Institute’s “Regulation” magazine, Fall 2012, shows the cost of the 10 Top Regulations Affecting Small Businesses. These are: Energy Conservation Standards, Affordable Care Act Menu Labels, Transportation’s Hours of Service Rule, Affordable Care Act Vending Machine Labels, NLRB’s Union Notification Standards, Education’s Gainful Employment Rule, EPA’s Fracking Regulations, Dodd-Frank Regulation Z, Affordable Care Act Physician Fee Schedule, Dodd-Frank Regulation E. Together these cost small businesses $3.5 billion annually, according to the study. And they add 28.7 million hours of paperwork. We don’t have to decide whether Dodd-Frank or emissions testing or airport screening is good or bad...necessary or unnecessary...we only have to recognize that much of our energy is now spent on things that reduce output. As another measure of how much time and energy is wasted, data from the Mercatus and Weidenbaum centers show that budgets for the main federal regulatory agencies multiplied 14 times between 1960 and 2007, in constant dollars. The payoff from all this extra investment is hard to measure; most likely it is starkly negative. Nor do we have to single out the US as particularly wasteful. France is worse, with more than 50% of the nation’s GDP spent by the government. But all mature economies drift towards unproductive activity like old elephants heading for the burial ground. Either they don’t know what happens there. Or they feel compelled to go in that direction anyway. Regards, Bill Bonner for The Daily Reckoning What to Expect in 2013... Between 2004-2007, Bill Bonner and Addison Wiggin did their best to alert their loyal readers to the dangers of the housing bubble well before the mainstream said anything about it. Well, today, they see something even worse looming just over the horizon. It’s not often our Reckoner-in-Chief agrees to appear on-screen, but this was just too important. Click here (or the image below) to see what they’re talking about now... The Daily Reckoning’s Video of the Week... Never Mind the Government Theatrics In this episode of RT’s Capital Account with Lauren Lyster, Joel Bowman and Eric Fry discuss everything from fiscally-charged government theatrics to perceived risk to the importance of viewing the world opportunistically. It’s a rare treat to see them both on the same stage. Check it out below... ALSO THIS WEEK in The Daily Reckoning... Promises Will be Broken By Bill Bonner When wealth was easy to identify and easy to control — that is, when it was mostly land — a few insiders could do a fairly good job of keeping it for themselves. The feudal hierarchy gave everybody a place in the system, with the insiders at the top of the heap. But come the industrial revolution and suddenly wealth was accumulating outside the feudal structure. Populations were growing too...and growing restless. The State is Doomed...and Other Reasons to be Optimistic, Part II By Joel Bowman The free market conversation is dynamic and exciting and full of promise and possibility. Its opposition, by contrast, will be remembered by future generations as a sad and unfortunate episode in the bawling infancy of our development as a species. So let The State drive off the “fiscal cliff.” And good riddance to it! Investing In The US — Still The Best Of The Bunch... By Chris Mayer Lakshmi Mittal is the head of the largest steelmaker in the world, ArcelorMittal. It is a company he built up through many savvy acquisitions. As a result, Mittal is one of the richest men in the world. He also has a global perspective second to none, having run businesses in many different countries. So when he said he may invest in a steel plant in Alabama, I listened. “Mittal Upbeat on US Growth Prospects,” a Financial Times headline reads... The Irreversible Plight of the Aging Welfare State By Eric Fry Eighteen years ago, Morgan Stanley’s Investment Strategist, Byron Wien, quipped, “Unless Europe engages in an extensive program of restructuring, in 20 years it will be a vast open-air museum.” But Europe did not restructure herself. Instead, she clung tenaciously to her beloved Welfare State. As a result, the museum’s doors are now open...and what a delightful museum it is! A Strange Way to Earn 6 Times More Income... With the help of a little government-backed money, a few smart Americans are hauling in private annual dividends as high as 13%... It all stems from a special “ace in the hole” that could help you substantially grow your wealth — even in today’s ugly market. After all, this is the same technique that’s helped pull America out of the fire before. Click here for the full story. The Weekly Endnote... And now, it’s over to a few readers for some thoughts, ideas and rumors... First up, Reckoner Royals85 writes, in response to Bill’s Promises Will Be Broken piece... The political solution to this problem will be something akin to crisis initiation. SS, Medicare and military spending are government’s crisis. The solution will be to get rid of those “entitlements”, which will mean ’Ma and ’Pa gotta go. The pols need the military to protect their sorry butts when the public finally realizes they’ve been had, big time! Good day. Next up, Reckoner Tragg comments in response to our little The State Is Doomed series... A fine article. Most people see the growing oppressiveness of Washington as a sign of the growing strength of Washington. In fact, it is a sign of weakness. In the old days, Washington did not need to be so ruthless because most people accepted the ruling ideology. All that has changed in recent times. As the ruling ideology continues to crumble, the government is trying to offset it by using more coercion. There is little chance that this increased coercion will do anything other than buy the government just a little more time. The ruling ideology will most likely continue to crumble. Meanwhile, Reckoner Slobo wonders... For the past couple of years I’ve been thinking (and occasionally saying, to incredulous open-mouthed stares) that the US is in serious danger of breaking up, with the first state to go likely being Texas. After all, our own Declaration of Independence was an overt act of secession, which for not very convincing reasons has now become “unthinkable.” We often hear that the Civil War “settled that.” In fact, it settled nothing, neither philosophically nor legally. And finally, Reckoner Christopher chimes... It would not necessarily be a disaster if America broke up. With such a huge territory like the USA under a single government, it is very difficult to control the size of government. If the country broke up into several entities and one of the emerging entities wanted to raise taxes through the roof, it would be deterred by the possibility that its citizens would vote with their feet and go elsewhere. By contrast, with the whole country under just one government, the government in Washington can raise taxes through the roof and people have nowhere to go. In fact, this is what happened to the Roman Empire long ago, and explains why the Roman Government just kept growing and growing. --- Feel free to email any thoughts you have on the matter to the address below and... ..enjoy your weekend. Cheers, Joel Bowman Managing Editor The Daily Reckoning ---------------------------------------------------------------- Here at The Daily Reckoning, we value your questions and comments. 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