The economics of long lives

Gerardo P. Sicat writes: My comments are occasioned by the passing away of my mother-in-law last Saturday, at the age of 102 years and eight months. My own mother, who passed away a few years back, had lived up to the ripe age of 96 years.

Both mothers were born in the decade of the 1910s when life expectancy at birth was likely well below 60 years. Then, antibiotics and public health standards were very low and incomes and facilities also much worse.

Long lives. Barring the occurrence of accidents, catastrophes, wars and other life-shortening natural events , the economic and social milieus in which we live, in addition to one’s genes, have much to do on how long one eventually lives.

The improvement of incomes (through economic development and growth) help to lengthen lives, for this affords the individual better nutrition, infrastructure (social, physical and economic), and improved leisure and comfort.

At the other end, developments in the medical sciences and the advancement of public sanitation have life-extending influences on everyone.

The economics of life. Economists have advanced the proposition that in general, people balance the incomes they earn against their total expenditures in their lifetime. However, during specific stages of their lives, the patterns of income and expenditure differ.

In the last stage of life, that income earning capacity declines and eventually stops. As one lives beyond those productive years, the net earnings beyond the expenses of the past (which are savings) represent the sustenance that tide us over to the end of life.

Development and the improvement of social networks. The network of support for old age in traditional societies is often the family or the clan. As productive life ends and infirmities develop, the family becomes the principal support for their old folks.

With economic development, society through government, finds ways of extending social support networks to supplement the role of the family.

The most important feature of such social support networks are social security and universal medical insurance. Social security is paid for by taxation of individuals, otherwise, it becomes unsustainable for a society to bear.

Universal medical insurance is often undertaken through the insurance principle of actuarial equivalence. In this setup, the premiums collected are calculated to match the benefits received.

Government-sponsored social support networks affect the life cycle income. They help to augment the capacity to generate savings for the individual. For instance, social security contributions can raise the saving process. As a result, they enlarge the stream of pension incomes in the post-retirement stage.

In the Philippines,the social security fund thus generated can only provide a stream low pension payments.

The average pensioner in the Philippines receives less pension incomes compared to the “miracle” economies in East Asia.  Her husband was hardworking, competent and brilliant. He would become the chief magistrate of the land. He had also taught law for years to supplement his government pay. After the husband died, she continued to receive his social security pension.

Two decades later, as if by an act of God, legislation granting pensions for survivors of members of the judiciary. For my mother-in-law, this changed the situation very much. The cost of senior sustenance was more than adequately covered. However, when her final illnesses worsened and her medical condition became serious, that pension and previous savings from it were easily and totally consumed.

My mother’s case was uniquely different from my mother-in-law’s. From the beginning, she was the traditional housewife. Her life’s income was integrated with that of my father who was a small proprietorial businessman.

When my father died,  my mother continued the business. But she had no no social security pension like most small businessmen. She survived on what little remained.

During the 1970s, my mother migrated to the US where she joined my sisters who had migrated right after John F. Kennedy’s immigration liberalization.

In the US, my mother was very useful although she did not secure formal employment. As an elderly person, she received some welfare benefits from the State where she lived enabling her to sustain her own upkeep in old age even as she lived with her children.

EU’s circular economy can help the union thrive.

Brittany Lyle writes:  Hawaii’s electricity prices are higher than anywhere else in the nation. The burdensome cost of power, paired with the island state’s plentiful sunshine, has led to an unparalleled adoption of residential rooftop solar energy. On the island of Oahu, where 80 percent of the state’s population lives, more than 12 percent of Hawaiian Electric Co. (HECO) customers have rooftop solar systems — about 20 times the solar penetration rate of any mainland utility. As homes increasingly morph into mini power plants, some residents are winding down their HECO bills to net zero.

Bloomberg writes:  For years, China’s leaders have wanted the world to acknowledge their economy’s leading role in the global system. This week they got their wish. Sadly, the circumstances weren’t ideal.

The crash in global stock markets began with gloom about China’s prospects and muddle over what the authorities in Beijing intend. Global markets may be calming down, but the confusion hasn’t gone away. The Chinese government and its critics all need to think a bit more clearly about what is going on.

In the past few days, China has been a whipping boy for everyone from Japan’s finance minister to U.S. Republican presidential hopefuls.  Its central bank is accused of waging a currency war with its devaluation of the yuan two weeks ago. Before that, critics chided Chinese authorities for perpetuating a stock-market bubble by intervening extensively in equities; this week’s sell-off accelerated when the government declined to prop them up.

The world doesn’t seem quite sure what it wants from China’s leaders. Critics scold Beijing for boosting stocks, then panic when they don’t. They insist market forces be allowed to set the yuan, then howl when those forces push it down. They tell China to accept slower growth as the price of rebalancing its economy, then clamor then for stimulus when the economy slows.

To be sure, there’s confusion in Beijing as well. Leaders have promised to shift the economy onto a more sustainable growth path that’s based less on exports and more on services and domestic demand. But they’ve held to an unreasonably high growth target.

There’s an underlying tension in that mix: The leadership is sincere about its desire for markets to allocate capital more efficiently, yet mostly in order to preserve the power and position of the Communist Party. Party needs come first.

Beijing’s reluctance to surrender more fully to market discipline is understandable given the daunting list of challenges leaders face. But they’re only storing up problems for the future.

The government is paying the price now for having artificially boosted stocks earlier. The central bank is thought to be spending an estimated $40 billion a month to keep the yuan from falling further and prevent capital flight. Authorities are reportedly considering raising an additional $161 billion in bonds to fund new infrastructure projects. Some of these may make good sense, but the fact that Beijing is directing the program raises doubts..

More forthrightness now would buy China goodwill from markets when the government really does need to intervene — as the U.S., Japan and the European Union have all repeatedly judged to be necessary. Chinese leaders should remember that the currency that matters most is their credibility.

According to official statistics, China’s unemployment rate has remained at an exceptionally steady 4.0-4.3% since 2002, despite massive change in the economy over that period. A new National Bureau of Economic Research paper analyzing national household survey data from 1988-2009 suggests that the official index may have significantly underestimated the actual urban unemployment rate.  

From the abstract:  The rate averaged 3.9% in 1988-1995, when the labor market was highly regulated and dominated by state-owned enterprises, but rose sharply during the period of mass layoff from 1995- 2002, reaching an average of 10.9% in the subperiod from 2002 to 2009.

The survey does not cover more recent data, so their research does not show whether the labor market has deteriorated as the Chinese economy has slowed. But their figures do point to the large, lasting impact of the mass closures of bankrupt state-owned companies in the 1990s. The unemployment rate was just 3.9% from 1988-95 and then climbed steadily upwards. State firms had played the biggest role in China’s north-east and so their closures dealt the region a particularly heavy blow, with its unemployment rate averaging 12.5% from 2002-9.

Just how worrying are these findings? The data comes from the urban household survey, which is conducted by the National Bureau of Statistics.  Their unemployment index is more volatile than the registered jobless rate, making for a closer fit to the ebb and flow of economic cycles in China.

But if the official rock-steady 4.1% jobless rate is trusted by no one, the conclusion that China suffers from chronic unemployment of more than 10% is also worthy of a large dose of skepticism. As the authors readily admit, there is a major gap in their data. The survey only covers people who hold local hukou, or residency permits, and therefore excludes the tens of millions of migrants who stream to cities for work every year. In Shanghai, for example, some 14m residents hold local hukou, but another 10m people live and work in the city on a permanent basis. The latter are outside the remit of the urban household survey.

There is also good reason to think that the 10.9% unemployment rate exaggerates the problem.

The dataset doesn’t reflect rural migrant workers, even though they have been a huge source of urban labor in the last decade, making up as much as half of China’s urban workforce today.  That could mean that the actual unemployment rate is lower.   On the other hand, nearly 60% of rural migrant workers work in construction and manufacturing (link in Chinese). Given China’s slowing economy and sluggish export demand, they might soon be pushing the true unemployment rate up. 

Reporting on the new unemployment index for CBS Moneywatch, Robert Hanley notes that China’s economic slowdown has been apparent in the rising instances of labor unrest in recent years:

“Maybe unemployment is worse than I thought

Wolfgang Streeck writes:  Now the dust has temporarily settled over the ruins of Greece’s economy, it is worth asking if there wasn’t a brief moment when the actors had found a way to cut the eurozone crisis’s Gordian knot. At some point in July German finance minister, Wolfgang Schäuble, appeared to have realized that his dream of a “core Europe” with a Franco-German avant-garde would vanish into thin air if Greece was allowed to remain in the economic and monetary union. Rewriting the rules of the union to accommodate the Greeks, Schäuble realised, would pull the euro southwards, and France, Italy and Spain with it – forever breaking up the European core.

His Greek equivalent Yanis Varoufakis, for his part, may have learned from his encounters of the third kind with the Eurogroup that the only role there was for Greece in the Europe of monetary union was that of an underfed and overregulated welfare recipient. Not only was this incompatible with Greek national pride; more importantly, what the governors of Europe would be willing to offer the Greeks by way of “European solidarity” would, at best, be too little to live on,   The deal Schäuble offered in the last hour of July’s battle of the euro might have been worth exploring: a voluntary exit (an involuntary one not being possible under the current treaties) that gave Greece the freedom to devalue its currency and return to an independent monetary and fiscal policy, plus emergency assistance and some restructuring of the national debt, outside of the monetary union to avoid softening its rules by creating a precedent. A generous golden handshake might have also been an idea, protecting Germany from being blamed for having plunged the Greeks into misery or driven them into the arms of Vladimir Putin.   Future of Eurozone

The Rocky Road to Globalization

The Economist reports:  When  the economics textbooks of the future are written, America’s ban on crude-oil exports will be a fine example of the perverse effects of protectionism. Similarly, a new decision by Barack Obama’s administration to allow American firms to sell some oil to Mexico will earn an honorable footnote in the story of the ban’s demise.

Geology, engineering, economics and politics are all at stake. In the fuel-hungry 1970s, America banned crude-oil exports in an effort to stabilize domestic prices. The country’s oil refineries are still configured to deal with the heavy, sour crude oil it used to import. Now, thanks to the shale revolution, American oil imports have plunged just as production has soared. Oil from shale is another kind of crude, light and sweet. It is not ideal for America’s refineries, which must make costly tweaks to deal with it. But the ban means this oil can’t be exported, either.

That archaic rule now keeps the price of America’s domestically produced oil, signalled by the West Texas Intermediate (WTI) benchmark, at a hefty discount—currently over $5 per barrel—to the world price. That has become particularly painful since OPEC’s decision in November to stop trying to curb production, which has sent prices tumbling. American oilmen are fuming: their potential export markets are being sacrificed, they argue, to the interests of America’s petrochemical industry, which enjoys artificially cheap feedstock thanks to the ban.

Others would benefit too.  Free trade in crude would boost American output, investment, jobs, pay, profits and tax revenues—and GDP by $86 billion.  With American crude bringing prices down, most likely the cost of fuel would fall a bit—for Americans, and also for other consumers.

The administration’s decision will test this theory. Mexico’s national oil company, Pemex, has long wanted to send its heavy crude to America, and import the same number of barrels of lighter American oil.  The Commerce Department has now decided to treat Mexico as part of the domestic American market, as far as oil is concerned.

The extent of the exemption is still unclear. But this is not the first breach of the ban. The definition of what constitutes crude oil owes more to art (and bureaucratic fiat) than science. What is heavy crude?  What is light?

The ban undermines America’s moral authority at the World Trade Organisation, where the administration has berated China, for example, for imposing export bans on scarce minerals. Higher American crude-oil exports would also hurt petrostates such as Russia and Iran.

The details will still be tricky. America’s cossetted crude-oil consumers would be willing to see an end to artificially cheap raw materials in exchange for other concessions. These could include laxer environmental rules, or a change in an even more archaic law, the Jones Act, which bans foreign ships from carrying cargo between American ports. This law delights ship-owners and unions, but imposes a hefty cost on anyone wanting to send a tanker from, say, a refinery on the Gulf coast to a port in the north-east.

Such a wholesale solution to this elderly quirk in the world oil market may still be some time off. But by lowering trade barriers for Mexican oil, the Obama administration will make America richer, improve the functioning of the world oil market and highlight the potential benefits of still more dramatic reforms. 

IMF chief Christine Lagarde on Friday welcomed Europe’s decision to agree a new 86-billion-euro bailout for Greece, but warned that Athens’ debt is still too high.

“I remain firmly of the view that Greece’s debt has become unsustainable and that Greece cannot restore debt sustainability solely through actions on its own,” she said.

And, while Lagarde called the agreement hammered out in Brussels “a very important step forward,” she warned it was too soon to say whether the IMF would provide funds to take part in the bailout.

“We look forward to working closely with Greece and its European partners in the coming months to put in place all the elements needed for me to recommend to the fund’s executive board to consider further financial support for Greece,” she said.

For this to be the case, she said, Greece’s European creditors would themselves have to provide “significant debt relief, well beyond what has been considered so far.”