Our Overdrawn Reality Budget

Things that can't go on forever don't - but it can take a long time.

There's a saying that reality always bites back.  People can deny reality for a while, but eventually it catches up to them.

For example, it is simple reality that the average-salaried person has to be able to afford a house of average cost.  When average housing prices rise out of reach for the average wage-earner, eventually they have to crash, because prices that high simply cannot be afforded and will have to come down.

But price correction can take a surprisingly long time to come about.  Starting in the 1970s, housing prices mostly rose, faster at some times than others, and with occasional drops in economically-depressed regions, but the national trend was always the same.  A great many policy failures contributed to this imbalance - government regulations requiring second incomes to be considered, government-subsidized loans, politically-correct affirmative-action requirements that gave loans to poor people who couldn't afford them - but for a long time it seemed to be working just fine.

It took forty years before reality finally bit back with the 2008 housing-market crash - and even now, there are quite a number of regions where the average income can't come close to buying the average house.

Which raises a disturbing question: how many areas are there where we have been continually denying reality, and running up a reality debt that will eventually come due?

The Storm Before The Storm

The Wall Street Journal brings us this interesting vignette:

Brian Harmon had just finished spending over $300,000 to fix his home in Kingwood, Texas, when Hurricane Harvey sent floodwaters completely over the roof. The six-bedroom house, which has an indoor swimming pool, sits along the San Jacinto River. It has flooded 22 times since 1979, making it one of the most flood-damaged properties in the country. Between 1979 and 2015, government records show the federal flood insurance program paid out more than $1.8 million to rebuild the house - a property that Mr. Harmon figured was worth $600,000 to $800,000 before Harvey hit late last month. [emphasis added]

"It's my investment," the 49-year-old said this summer, before the hurricane. "I can't just throw it away."

All of us have sympathy for the Houstonians and Floridians who have been wiped out by the recent storms; many of us want to help them.  Is it reasonable, though, to help people rebuild in the same place twenty-two times? 

A sensible person - or a sensible government - might decide after, say, the sixth flooding, or maybe the third, that this is not a good place to build a house.  Mr. Harmon understandably doesn't want to throw away his investment, and nobody is asking him to: but, when writing him an insurance check for the twenty-second time, can't we require him to build his new house somewhere else?

In fact, we can't: with few exceptions, current law requires the recipients of federal flood insurance to put their new house back precisely where the old house was, no matter how idiotic that might be.  There have been a few attempts to buy out particularly flood-prone towns and move everybody; these days, though, they fall prey to postmodern complaints of "environmental racism" since many such towns are occupied mostly by poor people and minorities.

Meanwhile, on the coasts, millionaires receive the implicit massive subsidy of federal flood insurance.  Why federal insurance?  For the obvious reason: no sane private insurance company is going to offer affordable insurance on a house that has flooded twenty-two times.  Insurance companies may not be angels, but our government is definitely playing the fool by rushing into such an absurdly imbalanced market.

How much of this can we afford?  We're a very rich country; can we afford to repeatedly rebuild towns and cities which, like New Orleans, are simply in the wrong place at national expense?  Or will the Chinese eventually cut off our credit cards?

Keep Calm and Carry On Exploding

Hardly a week goes by, it seems, without another murderous Islamic terrorist atrocity in Europe.  Every time, we see the same cycle - the same candles and teddy bears, the same heartrending stories, the same psychotic dissociation of Islam from the atrocities it inspires, the same promises that the police will work harder - and then it's all over until next week's explosion.

The Muslim mayor of London explained his perspective very well: he said that terror attacks are "part and parcel of living in a big city."  He's clearly correct, today, but it wasn't that long ago that terror attacks were not part of the background of life anywhere in the Western world.  Queen Victoria would not be amused.

There is, in fact, a way to deal with them, and we've already seen how it works.  Shortly after the First World War, America was racked by a series of terrorist attacks by anarchist immigrants.  Bombs were mailed to politicians, businessmen, and law enforcement, and planted in major cities as well as the home of Attorney General Mitchell Palmer.

Attorney General Palmer appointed a young J. Edgar Hoover to take charge of a new division of the Justice Department, which eventually became the FBI.  Through the winter of 1919-1920, the Palmer Raids rounded up hundreds of suspected radicals; dozens were deported.

Today, the Palmer Raids are criticised as an offense against civil liberties, and even at the time judges were often uncooperative.  However, Palmer and Hoover clearly understood the difference between citizens who enjoy civil rights versus immigrants who are here only under sufferance: citizens were quickly released while immigrants were deported as briskly as possible.  While the bombings did not entirely cease, they dropped off so precipitously that the scare soon ended.  In effect, the Palmer Raids mostly solved the problem by getting rid of most of the noncitizen potential  terrorists and scaring off the marginal ones.

At this point, Islam is so rooted in England that it would be impossible to deport all Muslims, and difficult even to deport all the known radicals.  As Mr. Trump once again had the prescience to point out, to criticism from all sides, the perpetrator of the most recent bombing was indeed arrested and released two weeks ago, free to go on his merry murderous way.  Islam in America is new enough that it would still be possible to fix the problem this way - but President's Trumps efforts to simply stop the problem growing, never mind fixing it, keep getting stymied by the courts and media.  Eventually it will be too late.

Mayor Khan is right to say that civilization can survive a certain level of violence - London suffered under a series of major IRA bombings in the 1970s through the 1990s, which while killing many people did not even manage to derail the Thatcher boom.  What level of random terror can a city sustain and still function?  Do we really want to find out?

The Expensive College Scam

It's widely reported that college prices have increased enormously compared to inflation and general wealth.  Yet, apparently contrary to economic laws, there seems to be little slackening in student demand for college degrees.

This is because Americans have viewed education as the surest route to success for longer even than there's been an America.  When Massachusetts was still mostly a howling wilderness, the Puritans, in between dying from starvation and fighting off Indian attacks, took the trouble to found "New" (Harvard) College, barely 16 years after the Pilgrims landed; three years later it was upgraded to a University.

College degrees remained the province of the wealthy few until after World War II, when the G.I. Bill provided tuition at government expense for military veterans - which included nearly all American men of college age.  The number of degreed Americans jumped markedly, and we headed into the two decades of the postwar boom.

The financial advantages of a college degree versus not having one were so obvious that it's become an ingrained part of received wisdom: get a degree, make more money.

But there's a logical flaw hiding in this apparently plain connection: Is there something about the sort of people who successfully complete a college degree which makes them more likely to be successful, with or without the degree?  Before the war most graduates were successful, but most graduates also had to either have very wealthy parents or be conspicuously brilliant, two factors which promote success independently of a sheepskin or lack thereof.

What's more, nearly all college degrees back then were for inherently high-education professions: doctor, lawyer, preacher, engineer.  The nature of these jobs requires specialized training.

Do such professions as business, policing, even elementary teaching?  There is nothing inherent to these jobs that can't be taught by experience or apprenticeship, yet today, a full-fledge college degree is required even to walk in the door.

Just because you have a degree, though, doesn't mean your job will pay well: nearly 30% of people with two-year associate's degrees make more than people with full four-year bachelor's degrees.  The proper lesson is that degrees are not equal: it matters enormously what degree you choose.  But the government lets you run up student loans regardless of whether you are getting trained in computer engineering or womyn's studies.

This brings us to the host of modern jobs that are actually non-jobs, because the "work" they involve is not economically useful or is even destructive.  How many well-educated bureaucrats work hard every day making more rules that kill new jobs and economic development?  Any job whose training ends in the word "studies" is, almost by definition, an economically destructive non-job - and every year, there are more of them.

America's current fixation on a college education is particularly foolish when you consider the advantages of many forms of non-college education, such as apprenticeship programs in skilled trades like plumbing and electrical work.  Unlike computer programming, fixing your stopped toilet or leaky faucet cannot ever be outsourced to India or performed by a robot.  These jobs may not be behind a desk or have high status, but they certainly pay well and are almost guaranteed to exist fifty years from now in much their present form - unlike most white-collar work.

So unless your child is a straight-A AP student, what's wrong with encouraging a career path that both costs less and earns more?  Yet next to no American parents are willing to admit that their child isn't a potential future Supreme Court nominee, even though by definition half our children are below average.

How many expensive, destructive non-jobs and non-degrees can our society afford?  When will the billions of dollars of unpayable student loan debt be found to be too much?

Pensions: The Ultimate Straw

All these expensive denials of reality have, so far, failed to permanently collapse our economy.  So far, we've been able to afford their silliness and wastefulness.

But these issues are dwarfed by the pension problem that virtually every government entity suffers under: the overwhelming cost of pensions promised to current and future retirees, whose amounts cannot legally be cut and yet which are too vast for the underlying tax base to ever pay.

Consider the state of Illinois - not a small state, and not a poor one either.  And yet, as a policy study reports:

In 2015, Illinois’ state pension debt reached a record $111 billion. Government-worker pensions already consume one-fourth of the state’s budget. And every day Illinois goes without a solution to its pension crisis, the state’s pension debt grows by over $20 million.

The state’s pension crisis threatens to burden taxpayers with massive, ever-escalating taxes to bail out a system that is simply not sustainable.

The authors of this study fully understand the economics involved in the excessive, unpayable promises made to government employees over many decades.  However, in prescribing the solution as higher taxes, they are forgetting a very important detail: people can move.

There's no question that people are willing to pay higher taxes in return for a pleasant place to live or greater economic opportunity.  Mayor Michael Bloomberg famously said that "New York City is a luxury good;" taxes there are enormous, yet there doesn't seem to be a shortage of New Yorkers.  The same is true for residents of Silicon Valley and most of coastal California.

Does the state of Illinois have the same attractions as the Big Apple and the Bay Area?  Exactly how much are people willing to pay to live in the numerical murder capital of America, whose only defense is to point out that other cities are more dangerous per capita?

The government bean counters forget that taxes can only be extracted from people and businesses who are actually there and who are alive.  How effective is, say, Detroit at collecting taxes, when half the city has been abandoned?

We have yet to see an entire state destroyed by excessive taxation.  History does show examples of countries that were destroyed that way - the people rebelled, and the nation was torn apart by civil war.  Those tend to end in a totalitarian dictatorship of some kind, as people tire of both the violence and of inefficient government.

Nobody wants to see old folks starving, but at the same time, nobody wants all their hard-earned money to be taken by the government regardless of the nobility of the government's stated purpose in grabbing the money.

America's drafts on the Bank of Reality are already beginning to bounce; we just have a hard time noticing.  At the same time as we read these dire predictions, our lives seem normal and comfortable enough: the lights are on, the house is warm, the streets are orderly, our paycheck arrives on time.  May the day the bill comes due be long delayed!

Petrarch is a contributing editor for Scragged.  Read other Scragged.com articles by Petrarch or other articles on Economics.
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