The Tough Choices We Face

04/02/2012 8:00 am EST

Focus: MARKETS

John Mauldin

Chairman, Mauldin Economics

The turmoil in Europe has gone from a wild boil to a simmer for now, but you mustn't take your eye off the long-term challenges in the US economy, warns John Mauldin of Thoughts from the Frontline.

Everyone knows by now that the US is facing difficult choices.

Depending on what assumptions you use, the unfunded liabilities of Social Security and Medicare are between $50 and $80 trillion and rising. It really doesn't matter, as there is no way that much money can be found, given the current system, even under the best of assumptions.

Things not only must change...they will change. Either we will make the difficult choices, or those changes will be forced by the market. And the longer we put off the difficult choices, the more painful the consequences.

Over the coming weeks, I'll be touching on the choices facing the US, having covered Europe in the first three letters of the year. In order to make the best of a difficult situation, we need to understand the consequences of the choices we make.

"Cut spending," say some. "Tax the rich," say others. "Cut out waste and corruption" is always a popular choice. "Do all of the above," intone others.

There are over 3,000 different tax programs that allow for deductions, as Congress has passed out income-tax benefits to almost everyone over the past 100 years. In fact, if we cut out all so-called "tax expenditures" (the deductions we get), the budget would be very close to balanced!

But there is some group that sees each one of those tax deductions as vital to the future of the republic. Some are quite big, like charity and mortgage-interest deductions, or agricultural subsidies. Others are small and focused on keeping specific industries competitive and even viable.

Your municipal bond interest-rate deduction keeps local funding and borrowing costs low. Local government interest rates would rise dramatically if that was repealed. Some, like the earned-income tax credit, are seen as a way to help out those with less income. All have their beneficiaries.

Who Took My Easy Button?
There is a television commercial in the US that offers an "easy button." Simply push it and the product you want will appear.

With regard to the problems facing the country in the next few years, there is no "easy button." There are no easy choices. And the choices we eventually make will have both short-term and long-term consequences.

Cutting spending will reduce GDP and tax revenues in the short term, as we see in Europe as countries struggle with "austerity." Raising taxes will also slow the economy for a time, and reduce potential private employment over the longer term.

If the choices were easy or obvious, even politicians in our admittedly dysfunctional political system could make them.

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If the US does not make a choice as to how to get its deficit under control in 2013, the political realities are that it will not happen until 2015, at best, and more likely 2017. By then, we will be in a situation that looks like today's Italy at best (if it's 2015) and Greece at worst (if we wait till 2017).

Greece is a disaster we all know about. Italy faces a very difficult set of choices that will mean recessions and slow growth, or eventual default. Or Germany has to allow the ECB to target Italian (and then, perforce, Spanish) bond rates to make it possible for Italy to pay back its debts while only suffering a recession, which will not be good for the value of the euro or the inflation level. (And this assumes that Greece and Portugal exit the euro, by the way.)

The US does not want to find itself in a situation where we are faced with the choice between a depression or the Fed monetizing the deficits and debt as we try to find a new balance. Both are disastrous, just in different ways. And not only for the US, but for the world.

Not dealing with the problem in the near future (in 2013) will necessitate far more draconian cuts in services that we see as essential (health care, military, education, and pensions), and far higher taxes than anything we can even contemplate today.

Are things really so dire? I would submit they are. It is simply economic reality. A country cannot run deficits that are 8% to 10% of GDP forever (and that is the path we are on, under rosy economic assumptions that assume no recessions in the next ten years).

In the US, we will soon cross over 100% of federal debt-to-GDP. At some point simply servicing the debt (paying the interest) will eat deep into the budget and decimate what we now think of as critical services and programs that we think of as fundamental rights.

When a crisis comes, nothing is off the table. All the sacred cows of today? Some will get led to the altar and sacrificed for the greater good of the others.

In one sense, the US is lucky. The basic choice we face can be stated simply: how much health care do we want and how do we want to pay for it?

If we want the health-care program in place today, then we either have to raise taxes or cut other programs. Or we have to seriously reform the US medical system and how much we pay for it. Or maybe all of the above. But raising taxes as much as we'd need to would seriously impact employment, both potential and real.

Here's a bit of data from the BLS, brought to my attention by Philippa Dunne of The Liscio Report. It needs no set-up:

"And in another set of forecasts...the BLS released its occupational projections through 2020. They make very glum reading. The five job titles with the biggest projected increases in numerical terms: registered nurses, retail salespersons, home health aides, personal care aides, and office clerks.

"Of those, the first requires no more than an associate's degree; the last, a high-school diploma; and the middle three, less than high school. Of the top 20 occupations, just five require an associate's degree or more.

"All together, 30% of the projected job openings over the decade will require less than a high-school diploma, and 40%, only a high school diploma. Less than 20% will require a bachelor's or more. Almost three-quarters will require no more than brief on-the-job training, and 85% will require no previous relevant job experience.

"All those politicians and pundits who love to talk about the need to educate the citizenry—along with the proponents of the job-skill mismatch theory of persistent unemployment—should check in with these projections. They paint a picture of a low-wage, low-skill labor force.

"And though the US is still a destination for world-class scientists and the producer of great innovations, it's hard to imagine how that can be sustained on the base of such an uneducated, unskilled labor force. We can only hope for some upside surprises."

And that squares with the anecdotal evidence I am getting from my kids. Now, let's put a personal face on the employment data. Long-time readers know I have seven kids, five of whom are adopted. Six are out in the labor force—or want to be. I have pushed them to get college degrees, for very good reasons.

My oldest son worked part-time for eight years doing manual labor while going to college to get that degree. He works for one of the large shipping companies, is a union member, and has seen his hours cut the last few years, except around the holidays when gifts are shipped. He has a son and supports his family. And can't make ends meet.

To meet him, you would think he could land a good job in a minute, but he can't even get an interview. It used to be that you placed an ad in the paper and people called and then came by the office. You met them and put a face to their application. Up until about 2000, I myself did that.

Then came the Internet. Now, every place wants you to fill out an application online. Employers sift through the resumes and find what look to be the top picks and then call them up for an interview.

How do you get to the top? Employers want experience in today's job market, where there are four people unemployed for every job opening. Those are the applications that get looked at first.

Henry did manual labor while going through school, an honorable and worthy job. But it did not get him any "experience" for an office or retail job. Even with his shiny new college degree, think he can get to the top of the pile of applications? There are lots of college degrees in the pile and they have "relevant" experience. What's a human resources person to do?

About 2000, when we needed someone to work for us and could not draw on anyone we knew, we started to go (at Tiffani's insistence) to this "new" thing called monster.com. You could post a job position and those interested would e-mail a resume.

Today, if you post a good job, even with very specific guidelines, you can quickly get several hundred resumes. Overwhelming, actually.

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I recently hired a new assistant, Mary, who may be one of the better staff I have ever had work for me. I "found" her because one of my other employees suggested her for some specific temporary work that needed to get done, as they had worked together before and she had the special knowledge we needed.

We kept finding work for her to do, and I needed an assistant and realized she was perfect. But would I have found her if I went to the Internet? Probably not, as she is not what I thought I was looking for. But how would I have known, just looking at a (virtual) piece of paper?

For fun, I started looking at job postings. Check out this one:

"Customer Service Professionals— Rock Star applicants only!...We are looking for the best of the best; average will not do!—Do you have exceptional problems solving skills?—Can you think outside the box?—Do you impress everyone you meet with your creativity and adaptability? Then we have the position for you! We're looking for dynamic, professional, creative problem solvers for our client in Hillsboro.—This position involves responding to unique...."

And what are they willing to pay this Rock Star applicant? A princely $12-15 per hour. Which may sound like a lot to my Chinese readers, but it's barely enough to support a household with children, even in Texas. And it certainly doesn't leave much in the way of "disposable" income.

When you survey the jobs available online, pay attention to how many people have looked at the job opportunity. If it has been up for a few weeks, it may have been viewed many thousands of times. There are four people looking for jobs for every job opening.

It is a tough world out there right now. Kind of like the 70s, when I was starting out. It took me a long time to get more than a few nickels to rub together. But we made it.

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