We are constantly being massaged to believe that if someone in charge were doing his job, the economy would be back on the tracks chugging along. But, I believe there is a fly in the ointment that cannot be ignored. It’s the economic concept of “dead-weight loss”.
In a nutshell, dead-weight loss represents the difference between what we would pay for something if we had to pay cash versus buy on credit.
Is there any doubt you would pay less for emergency room services at a hospital if you didn’t have insurance or you had to pay out of pocket? What about the price of your house or car? If you didn’t have access to credit would you pay $350,000 for a large but poorly built house? Didn’t you willingly over-pay for your car because it had zero % financing and the monthly payments fit your budget?
And, what about those Christmas presents under the tree. Would you really have paid the amount your spouse spent in an orgy of spending to fulfill a fantasy? Hell no, you wouldn’t. Economists call this “dead-weight loss”.
American health care is nearly 18% of GDP, which is nearly double what European socialized democracies pay. Many of our best and brightest people go into health care and it is our biggest employer at 14% of the workforce. If we hit the numbers of our socialist comrades in Europe, health care would be 10% of GDP and 8% of employment. And, if health care was a truly competitive and productive sector the U.S. would be at 7% of GDP and employ 5% of the workforce. We are overspending by hundreds of billions of dollars and millions of workers are in employed in health care rather than growing food or inventing the next iPad.
If we continue systematically through every sector of our economy we would find similar savings to be achieved in education, highway construction and government services of all types. Another way to get at the number would be to focus on market segments where there is easy availability of credit. This includes government fiscal and monetary stimulus which force feeds dollars into every nook and cranny such as student loans, SBA guarantees and the like. It represents a false prosperity that leads to dead-weight loss. If we were not printing money so the banks could lend it out and if governments balanced their budgets there would be far less money to spend. Unfunded liabilities for pensions and all manner of debt will eventually require additional funding.
Every trillion dollars of spending equals 10 million jobs. If we suddenly reigned in health care spending and reduced government deficits tens of millions of people would be displaced. What would they do? The plain and simple fact is that government largesse over many years has created a gradient that has encouraged the migration of millions of workers into sectors of the economy that are now infected by dead-weight loss. This inevitably creates bubbles in the economy. When things change there is a bursting of the bubble. Reaction to popped bubbles results in even more dead-weight loss.
Government has painted itself into a corner. In every case in the past, government has used inflation as a way to get itself out of the mess. It pays off old debt with cheaper dollars and it prints money to continue the pensions and false employment. To solve this problem with restraint would displace millions and that is politically untenable.
My criticism of government should be extended to the private sector. Corporate owners achieve the same effect by encouraging massive influxes of illegal immigrants and outsourcing jobs to low cost countries to solve their problems. It contributes to unemployment. And, there are millions of underemployed working in call centers who cannot find jobs in the economy.
Taken as a whole, we have serious structural problems in the economy that cannot be solved by mere tinkering. There is a disconnect between worker skills and education and what the economy needs. We import more than we export and wealth creation has gone into reverse. Our economy cannot sustain itself without the addictive fix of easy credit.
Politicians who purport to have a fix for these problems are simply not leveling with the American people. We are stranded on one side of a raging river at the bottom of a chasm. To cross that gap will be extremely difficult and painful. Anyone who thinks it can be achieved by waving a magic wand will be disappointed in the magic act.
Right now we do not have leaders willing to step up and help us deal with problems because there is a general lack of understanding of the nature of the problem. And, we have not yet sobered up and realized that we are careening down a slippery slope and the rocks are rushing up toward us. Dead weight loss is really the cognitive dissonance between what we as individuals do in our actions and the abstract thoughts we use to perpetuate our addictions and fantasies. We haven’t bottomed out yet. There will be no positive change until that inflection point is reached.