The Real Trouble Begins When Rising Inequality Splinters the Elites

If others in our class are still rising while we're stagnating, we sense a great disturbance in the financial and political Force.

Rising economic inequality tends to generate political instability for all the obvious reasons: the rich get richer, the poor get poorer, the rich say let them eat brioche and next thing you know, the ungrateful wretches are tearing down the Bastille and a youthful army officer has to restore order with a whiff of grapeshot. After which he launches a war of conquest that kills hundreds of thousands and bankrupts nations.

So yes, economic inequality can generate quite a spot of bother.

Historian Peter Turchin identified "the degree of solidarity felt between the commons and aristocracy," the sense of purpose and identity shared by the top, middle and bottom of the wealth/power pyramid, as a key ingredient of social unity and political stability.

One measure of this unity of purpose and identity is the degree of inequality between commoners (the lower 90% of American households by wealth/income), the top 10% professional/technocrat class that owns 74% of the wealth and pays almost 80% of the federal income taxes, and the Power Elite aristocracy (the top .1%).

Turchin discusses instability and wealth inequality in his well-researched book War and Peace and War: The Rise and Fall of Empires.

History supports two narratives of rising inequality leading to social disintegration and political instability: one is inequality between the top classes and everyone else, and the the other is rising inequality within the top classes.

When the pie starts shrinking and there aren't enough slices to satisfy the rising expectations of the top class, the elites splinter in profound political disunity. In other words, when the offspring of the top 10% earn MBAs from respected universities and can only find internships, their parents become extremely dissatisfied with the status quo.

Josh and Maddie living at home or being subsidized by Mom and Dad was not part of the expected payoff for reaching the top tier of American society. Toss in a stock market crash or two, a medical emergency with co-pays larger than the GDP of small nations and a slump in business/fees/bonuses, and what people who expected to live comfortably on Easy Street are experiencing is downward mobility.

Many in the bottom 90% are also experiencing downward mobility, but their expectations tend to be less elevated than the professional/technocrat class.

Studies have found that our sense of wealth is less a matter of the actual dollar amount and more a matter of how we measure up to our peers. If our entire class is experiencing stagnating income, we're less likely to feel a sense of social inequity.

But if others in our class are still rising while we're stagnating, we sense a great disturbance in the financial and political Force. If our neighbor's kids are landing partnerships (due to superior connections, of course) while Josh and Maddie struggle to escape Intern-Hell, we sense a huge gulf opening that isn't necessarily reflected in income/wealth statistics.

As this chart shows, income of the bottom 90% has been stagnating for decades.

Here's another look at the same dynamics:

While the top .1%'s share of the pie has been rising, everyone else's share has declined:

Slowly but surely, the downward mobility of the upper class is fracturing the expectations and sense of social justice of those who own 74% of the wealth and take home 50% of the income. This class has the expectations, the sense of injustice, the wealth and the income to cause political trouble.

Once the upper class fractures, you get profound political disunity.

Of related interest:

When the Aristocracy Leaves the Commoners in the Dust, The Empire Is Doomed(October 8, 2015)

Following in Ancient Rome's Footsteps: Moral Decay, Rising Wealth Inequality(September 30, 2015)

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Sorry, "Feel the Bern" Fans: President Sanders Won't Change Anything

Fans of Obama learned the hard way that hope and change are quietly dumped the moment you enter the Imperial Presidency.

The appeal of Bernie Sanders is clear even to those who don't "feel the Bern": maybe, just maybe something will actually change in Washington.Fans of The Donald have the same hope.

A vote for Hillary is a vote for the status quo--for fake-sincerity speeches fine-tuned by the latest polls, for simulacra reforms that leave Wall Street and the rest of the Empire untouched, and for the astonishing hypocrisy of a visionless politico who amassed a vast fortune on the coattails of her aging-Lothario hubby attempting to fan the flames of class warfare.

As tempting as it is to hope that an outsider president such as Bernie or the Donald might change the trajectory of the Empire, this is a vain and futile hope.

This is partly the result of the limited domestic powers of the Imperial President and partly the result of the momentum of the Empire and the pressure that will be brought to bear on anyone, insider or outsider, who attempts to change the course of the ship of state.

Get money out of politics? The president is powerless. Congress passes the laws, and the Supreme Court shreds any attempt to limit political contributions. Any bill that does pass has loopholes big enough for truckloads of cash to breeze through.

How about taxing the rich? Well, for starters, the wealthy already pay most of the federal income taxes: According to the Congressional Budget Office, the top 1% paid 39% of the personal income taxes in 2010 while earning 15% of the before-tax income, and the top 20% paid 93% of the federal income taxes in 2010 while earning 52% of before-tax income. So the rich are already taxed heavily, and those that aren't bought a loophole from Congress that no president can close.

Tax codes can't be changed at the whim of the President; Congress passes tax laws, and yes, contribution-loving Congress is open for business when it comes to buying tax breaks.

How about changing U.S. foreign policy? Long before he is sworn in, President-elect Sanders will get the treatment: the lives saved by all those drone strikes, the risks of upsetting our many allies, our many treaty commitments, the dangers of appearing weak in these critical times, the enormous value of the intelligence gleaned by the NSA and the rest of the National Security State, and of course the famous nuclear launch capability that rests with the president.

Don't hold it against Bernie or anyone else when they cave under this pressure.The president is a figurehead, a PR spectacle with limited powers to change the course of the state or nation. Yes, Bernie could end various undeclared wars, but the pressure to maintain drone strikes (and everything else we don't even know about) will be unremitting.

Whatever the president proposes domestically is just that--a proposal. Congress has to approve programs, budgets, tax codes and the rest of it, and what's left after all the pork-barrel additions, lobbying and campaign contribution buy-ins? Should anything untoward actually get passed (don't hold your breath), the Supreme Court strikes down anything that threatens the status quo.

Other than glad-handing and managing whatever undeclared wars he's been let in on, President Sanders won't change anything important because he can't change anything important. Neither can any other president.

Political theater is just that--theater. Fans of Obama learned the hard way that hope and change are quietly dumped the moment you enter the Imperial Presidency.

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A Fatal Accident Waiting to Happen: U.S. Healthcare

U.S. healthcare isn't just an historical accident--it is a fatal accident waiting to happen.

Many of the systems we take for granted are historical accidents. Either based on legacy systems hundreds of years old (higher education) or assembled in a short-term, ad hoc fashion (post-1940 national defense/ national security), these systems have expanded into vast patronage systems that are completely out of touch with 21st century needs, costs or realities.

The U.S. healthcare system was not planned; it is largely accidental.

As Jeff Deist of the Mises Institute and I cover in our recent conversation on The US Healthcare Debacle (21:23) (YouTube version), the system of employers providing healthcare insurance began as a means of offering a bit of extra compensation in the 1940s era of wage/price controls.

This historical accident is at the heart of the current system's dysfunction. Those without jobs are covered by the government at horrendous expense, and those with coverage are terrified of risking it by moving to less secure employment or self-employment: The New Shackle of Serfdom: Clinging to Healthcare Insurance (September 22, 2015).

By removing the consumer from the equation, pricing is now purposefully opaque. The cost for a test or procedure is all over the map, and insurers have few incentives to demand truly transparent pricing.

Meanwhile, the federal/state healthcare programs of Medicare and Medicaid are riddled with the same lack of transparency and are vulnerable to fraud, over-billing and paying for needless tests, medications and procedures.

Few seem to know that the cost of these two behemoth programs exceeds the Pentagon's budget.

This contraption of private insurance paid by employers, co-pays paid by employees and state programs guarantees paperwork consumes an estimated 40% of all healthcare expenditures. How is that for inefficiency and needless expense?

Employees and the self-employed are expected to pay their co-pays and fees but without giving them true choice. Most regions are served by two or three insurers, i.e. a cartel. The "choice" is purely illusory, and the result is soaring costs.

Healthcare in 2015 ($4 trillion) accounts for almost 23% of U.S. GDP. ($17.4 trillion)

source: Annual U.S. Healthcare Spending

Some will quibble that the U.S. spends "only" $3.3 trillion on healthcare, but the salient question is: how much of this enormous expense is "fat," i.e. waste, needless or counterproductive tests, meds and procedures, paperwork, claims, counter-claims, fraud, cartel collusion, government patronage and protection of private profiteering, etc.?

I present the photo of human blood that has been spun in a centrifuge as a metaphor for U.S. healthcare. Red blood cells (heavier) are on the bottom. Above is the serum, which is normally clear and yellow tinged. This serum is opaque and buttery looking due to very high fats (hyperlipidemia).

It is abundantly clear to anyone who peeks beneath the surface of America's state-cartel healthcare system that roughly half of all expenditures are needless, counterproductive, profiteering, fraud, etc., compared to a system that was actually designed to be efficient, transparent, and that gave consumers real choices, real power and real responsibilities.

U.S. healthcare isn't just an historical accident--it is a fatal accident waiting to happen. Anyone who thinks this system is effective and sustainable will be disabused of that fantasy within the next decade.

The US Healthcare Debacle (21:23) (YouTube version)

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Four Ticking Global Time-Bombs Few Even Hear

A few charts help us grasp the magnitude of the four global time-bombs.

The geopolitical and financial risks facing the global economy are well-known.Hot wars and currency meltdowns garner headlines around the world.

But few even hear, much less discuss, four ticking global time-bombs:

1. The demographic time-bomb.

2. The public health time-bomb.

3. The food/water/soil time-bomb.

4. The oil-export time-bomb.

Each is largely self-explanatory:

1. The demographic time-bomb: as the global economy melts down, the realization that the pensions and healthcare promised to hundreds of millions of elderly cannot be funded out of tax revenues will upend the social contract in countries rich and poor.

As the chart below depicts, as the population of elderly rise, so do the non-communicable lifestyle diseases of aging. The costs of treating these lifestyle diseases (metabolic syndrome, heart disease, high blood pressure, etc.) soar as the population and incidence of these diseases both rise.

Global Aging 2010: An Irreversible Truth:

This Standard & Poor’s study warns that “no other force is likely to shape the future of national economic health, public finances, and policymaking as the irreversible rate at which the world's population is aging... The cost of caring for [the elderly] will profoundly affect growth prospects and dominate public finance policy debates worldwide.”

2. The public health time-bomb: 100 million diabetics and 500 million pre-diabetics in China, 80 million diabetics and hundreds of millions more pre-diabetics in India, and another 100 million diabetics in the developed world will overwhelm a global healthcare system that is already struggling to provide care for an aging population.

Diabetes Is a Major Public-Health Crisis in China

No Answers in Sight for India’s Diabetes Crisis

The Global Diabetes Epidemic (New York Times)

3. The food/water/soil time-bomb:the world's success in feeding its exploding population of humans and their favored animals has generated a complacent confidence that we can always grow more food, even as the weather gets increasingly wonky and global supplies of fresh-water are strained to the breaking. Loss of soil and the depletion of mineral fertilizers are also global issues.

It's not just the rising number of human mouths to feed--it's the rising appetite of humanity for grain/protein-fed animals and fish. Raising livestock requires abundant fresh water and feed. Even the most efficient meat sources (other than insects, of course) require three or four times their weight in feed; less efficient meat sources need ten times their finished weight in feed.

Fish such as salmon don't live on algae--they eat other fish. Their fish food is rich in protein, and so in effect, salmon and similar farm-raised fish sit atop a food-chain pyramid.

The risk that multiple crop failures around the world could strain global grain supplies and trigger geopolitical crises as costs soar are under-appreciated outside agricultural policy circles.

4. The oil-export time-bomb: as the populations of oil exporting nations rise, they consume so much of their dwindling oil production that there's little left to export.

The technologies of fracking have given oil/gas production in the US a mighty boost, and this may well continue increasing supply for a time.

But the larger global energy picture is dominated by the Export Land Model, which describes how oil exporting nations, which typically have rapidly rising populations and undiversified economies dependent on oil exports, begin consuming more of their oil domestically while production stagnates.

The net result is there may be plenty of oil still being pumped, but very little is available for export.

That leave oil importing nations without enough energy to sustain their industrial economies.

While it's possible to invest enough in alternative energy to keep some infrastructure working, globally, total alternative energy is a scant few percentage points of total energy consumption.

Even if we take global leader Germany, famous for generating large quantities of electricity from alt-energy sources--is Germany ready to replace its vehicle fleet with electric cars and trucks? How about building enough alt-energy capacity to recharge 30 million vehicles?

That is quite a tall order for a wealthy industrial power. What sort of challenge awaits the 2.6 billion residents of oil importers China and India?

This chart of the thermodynamic (i.e. energy) population equivalent--the human population plus our billions of energy slaves-- reveal the staggering size of industrial civilization's reliance on fossil fuels.

These charts help us grasp the magnitude of the time-bombs:

Many people look to technology to solve these problems before the bombs go off. Perhaps miraculous advances in artificial photosynthesis and biochemistry will solve all these global crises. But a healthy skepticism is in order, for all sorts of wondrous technologies that work in the lab and small-scale experiments fail to scale, i.e. become cheap enough and reliable enough to spread quickly around the world.

Technologies require vast quantities of capital and energy to spread throughout the global economy. Capital and energy are precisely what will be in short supply as demands on resources, tax revenues and social safety nets skyrocket.

This essay is drawn from Musings Report 42. The Musings Reports are emailed weekly to subscribers ($5/month) and major contributors ($50+/annually).

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The Problem Isn't Student Loans--It's Higher Education

Forgiving skyrocketing student debt won't solve the real problem, which is the soaring costs imposed by a cartel that is failing to prepare students for the economy of tomorrow.

Everyone understands soaring student debt is a problem: burdened with $1.3 trillion in student loans, young people are unable to start businesses, buy homes and start families. The high cost of housing and meeting regulations to launch businesses add additional burdens, but the weight of $1.3 trillion in debt right out of the starting gate is crushing.

The "solution" being pursued by the federal government is obvious: take over most of the student debt and then eventually bury it in the zombie-loan graveyard (i.e. defaults are ignored but the debt isn't officially written off), write it down via forgiveness programs, or some other mechanism to reduce the burden.

If this wasn't the plan, then why has federal ownership of student loan debt skyrocketed from zero to $900 billion in a few short years?

This is a decades-old problem that's finally reaching critical mass: student debt has leaped from less than $500 billion in 2006 to $1.3 trillion today, a mere 9 years later:

The problem isn't student loans--it's the explosive rise in the costs of higher education. This chart depicts the exponential rise of higher education costs:

Apologists claim the student-loan crisis is the result of underfunding of colleges by states. While it's true that some of the cost burden has been shifted from taxpayers to students, the real problem is soaring costs of the higher education cartel, which fixes prices via the artifical scarcity of accreditation.

The extraordinary rise in administrative staffing and costs and the boom in building costly temples of higher education are well-known. This chart depicts the rise of the educrat class, at the expense of teachers/professors:

I cover the rise in costs and the the equally extraordinary failure of the higher education cartel to prepare students for work in the emerging economy in my book The Nearly Free University and the Emerging Economy: The Revolution in Higher Education.

So the problem is two-fold: it isn't just the insane cost of higher education that's the issue; the cartel is failing to prepare students for an economy that requires the 8 essential skills in addition to whatever technical skills are needed in a particular field.

Consider the study Academically Adrift: Limited Learning on College Campuses which concluded that "American higher education is characterized by limited or no learning for a large proportion of students."

New Analysis Shows Problematic Boom In Higher Ed Administrators:

In all, from 1987 until 2011-12--the most recent academic year for which comparable figures are available—universities and colleges collectively added 517,636 administrators and professional employees, according to the analysis by the New England Center for Investigative Reporting.

“There’s just a mind-boggling amount of money per student that’s being spent on administration,” said Andrew Gillen, a senior researcher at the institutes. “It raises a question of priorities.”

The ratio of nonacademic employees to faculty has also doubled. There are now two nonacademic employees at public and two and a half at private universities and colleges for every one full-time, tenure-track member of the faculty.

The number of employees in central system offices has increased six-fold since 1987, and the number of administrators in them by a factor of more than 34.

Paying a bloated institution for the privilege of sitting through four years of lectures, online courses and a few labs no longer makes sense for the vast majority of students. What makes sense is dispensing with the entire bureaucracy of the cartel and costly campuses altogether, and designing directed apprenticeships which combine the best of online coursework with on-the-job training in workplaces.

The top research universities (numbering around 125 out of thousands of colleges and universities) can continue to train the relatively small cadre of academics and researchers the economy can support. (Just issuing STEM (science, technology, engineering, math) degrees doesn't magically create jobs for the graduates.)

The vast majority of student are better served by mastering the 8 essential skills required in the emerging economy--skills that students can acquire on their own, a process of accrediting yourself that I address in detail in Get a Job, Build a Real Career and Defy a Bewildering Economy.

Forgiving skyrocketing student debt won't solve the real problem which is the soaring costs imposed by a cartel that is failing to prepare students for the economy of tomorrow.

Of related interest:

Jobs data cannot prove that college is a "good investment"

Student Debt Grows Faster at Universities With Highest-Paid Leaders, Study Finds

Even the Most Educated Workers Have Declining Wages

Everything I've Written On Education Comes Down To Cultural Capital And Skills

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