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Dangerous Direction

Vincent Viewpoints Headerby Ken Vincent, Columnist & Featured Contributor

[su_dropcap style=”flat”]A[/su_dropcap]LAN GREENSPAN, former chairman of the Federal Reserve said recently that the rapid growth in social spending by the US is a very dangerous policy. Social program expenditures are now 19.2% of GOP, up from 14.5% in just 10 years. While I didn’t always agree with Greenspan when he was at the Fed., I certainly agree with him on this.

It is interesting that we hear a lot about Social Security and Medicare programs going broke. Programs that we all paid money into only to have it siphoned off by the elected officials sworn to protect it. However, we never hear about the other “entitlement” programs going broke. When did any official even hint that the food stamp program or the housing subsidy program may go broke? Are the programs supporting undocumented aliens running out of money? Is the federal government running out of free cell phones? What about the program that pays women to have children out of wedlock, or the one that pays for abortions? How is it that all those programs, and many others, have bottomless pits of money and the ones that citizens paid into are going broke? How is it that we can’t support our military or increase funding for the education of our youth, but the social programs have no economic limits?

Greenspan suggests that our economic debates should be centered on bringing this social spending under control and not worry so much about monetary policy. Monetary policy doesn’t much matter if the country can’t pay it’s ballooning debt, caused largely by this social spending explosion.


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Ken Vincent
Ken Vincenthttp://sbpra.com/KennethVincent/
KEN is a 46 year veteran hotelier and entrepreneur. Formerly owned two hotels, an advertising agency, a wholesale tour company, a POS company, a leasing company, and a hotel management company. The hotels included chain owned, franchises, and independents. They ranged in type from small luxury inns, to limited service properties, to large convention hotels and resorts. After retiring he authored a book, “So Many Hotels, So Little Time” in which he relates what life is like behind the scenes for a hotel manager. Ken operated more that 100 hotels and resorts in the US and Caribbean and formed eight companies. He is a firm believer that senior management should share their knowledge and experience with the next generation of management.

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2 CONVERSATIONS

  1. Assume it’s true that social spending programs have increased from 14.5% to 19.2% of GDP in 10 years. But over that time, the proportion of the population age 65 years and over has increased by 21.9%. And economic growth today is running at about half of the average for post-War recoveries. Indeed, the social spending trends are not good. The food stamp program has seen enrollment jump from 25.6 million to over 45.4 million today during the last 10 years while program payouts to participants have more than doubled and are 242% the level they were 10 years ago. The number of workers on disability has increased from 6.4 million to 8.9 million over those years. Census Bureau figures show that 42.6 million persons were enrolled in Medicaid in 2008. By April of 2015, the number of enrolled persons under Medicaid and CHIP had grown to 71.1. million, a 66.8% increase. And so on.

    But in all likelihood, substandard GDP growth is at least partly responsible for this dismal trend. Economic growth can cure a lot of what ails you. It provides higher incomes that generate higher tax remittances that help overcome deficits. It provides personal income that supports moving people off of public assistance and into productive work. It stimulates consumer spending that helps fund state government through sales tax revenues. It can also pump up asset prices that add to the wealth effect of household balance sheets, leaving consumers more willing to spend and thus reducing the urgency of correcting excessive fiscal recklessness. It would postpone the day of fiscal reckoning that is surely coming. All of which would be great if we had any economic growth to speak of. But sadly, we don’t. Real GDP growth since inauguration day 2009 up to the second quarter of 2015 is below 2.1% per year.

    Here’s the unnoticed aspect of monetary policy mismanagement I find most troubling. Over that same 10 years, the labor force participation rate (LFPR) of seniors 65 years and older has increased from 15.2% to 19.0%. And among those new entrants to that age bracket over the past four years, the LFPR is 25.1%. That means that seniors entering their senior years are almost twice as likely to be in the work force today as their counterparts were ten years ago.

    What would account for that? To me, the zero interest rate policy (ZIRP) pursued by
    the Federal Reserve is the primary cause. A worker retiring in 2006 with a half million dollars saved and parked in a low-risk federal money market fund invested primarily in 30-day Treasury bills, the primary investment vehicle for such funds, would have received a monthly income of $1,979.00 based upon the average annual 30-day Treasury yield in that year of 4.75%. Today, that same retiree saver would receive just $25 a month in income because 30-day Treasuries are yielding an average return of only 0.06% per year thus far in 2015. The reckless ZIRP program is “forcing” seniors to remain working well past the years they would otherwise have been inclined to exit the work force. This is a complete disgrace.

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