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There Are More Cliffs Than Just Fiscal…

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    December 27, 2012

    The fiscal cliff is not the only cliff we’re racing toward; there are others.

    The fiscal cliff dominates the mainstream news, but it is more like a bump on the pathway to the real cliff. In essence, the path has turned down and we’re picking up momentum, gaining speed as we head for the cliff.

    The real cliff is the gap between what has been promised and what can plausibly be collected in tax revenues: $86 trillion but one recent estimate, over $120 trillion by other guestimates. The difference is caused by the relative rosiness of the projections to control Medicare and Medicaid spending. Lower estimates assume we can stop the growth of these programs in the long-term, something that has not yet happened for the reason that the system lacks any controls to do so.

    This gap widens by $7 trillion a year. That is, the promises to present and future retirees and beneficiaries goes up if we count the promises made not just for 2013 but for the future.

    This $7 trillion is twice the entire Federal budget and roughly 50% of the nation’s GDP. Understood in this way, we can see that raising taxes by $200 billion or cutting expenditures by $200 billion is not going to keep us from hurtling off the real fiscal cliff in a few years.

    The fiscal cliff is only one edge we’re racing toward; there are others. One is a Constitutional Crisis cliff that is just beyond the fiscal cliff, because the Constitution has failed to limit the power of concentrated wealth (the financial Aristocracy) and failed to resolve the Tyranny of the Majority: 50+% of the voters are now dependent on Federal transfers, while 25% pay 90% of the Federal income taxes. Those collecting benefits will naturally vote for what they perceive as their immediate self-interest, which is raising taxes on the minority until the minority rebels.

    The only other option is to print the needed $100 trillion, which will destroy the nation’s currency and economy. Either way, the 50+% will find the promises made are empty. Either the oppressed 25% opt out (“when belief in the system fades”) and tax revenues collapse or everyone’s $1,500 transfer from the Federal government will buy a single loaf of bread. Either way, we will face a political crisis.

    We have been trained to ridicule any suggestions that technology won’t/can’t save us,but the one undeniable truth about technology is that it destroys 90% of the jobs in the industries it revolutionizes. Agriculture, for example. Music stores. Travel agencies. Some other employment sectors are only cut in half, for example admin assistants. The range of job losses triggered by advances in technology is between 98% and 50%, depending on the rigidity and inefficiency of the industry being transformed.

    For forty years we have counterbalanced this loss of employment by borrowing and spending money on labor-intensive consumption: more healthcare, more retail, more tourism / hospitality, more government. But even these sectors are starting to come under technological pressure, despite the political moats that have been dug around healthcare, education, defense, housing, etc.

    The pressure is not just technological, it is financial: the game of borrowing ever-more money to fund all this labor-intensive consumption is almost over. Right now we have a structural deficit of $1.3 trillion, and simply keeping it at this level will require politically impossible limits on the growth of government spending. Meanwhile, tax revenues have topped out. As tax rates go up, people change their behavior to pay less taxes. As a result, tax increases always raise far less money than static, linear projections estimate.

    Many claims for technological revolutions are overblown and unrealistic. High school physics, chemistry and biology, bolstered by an interest in keeping up with scientific advances (via mainstream science magazines such as Scientific American), is more than enough to analyze claims of “scientific revolution” with a grounded skepticism. To take but one example: all those stories about nano-robots being introduced into our bloodstream to chomp away at our clogged arteries. What will fuel these little machines? Some recent work suggests they can use glucose as a fuel, but even this ignores the reality that the clogged arteries are a symptom/result of lifestyle choices, not the cause per se of heart disease. In one field after another, horrendously costly “cures” are actually being directed at symptoms, not causes.

    With even a modest foundation of scientific understanding, many of the claims for “revolutionary” technological advances founder on basic limits of the real world or the cost and difficulty of scaling up a technology to the point that it is both affordable and broadly applicable.

    I recently saw an article hyping an advance that could eliminate batteries in pacemakers–the aforementioned glucose-fueled electronics. But given that perhaps 1% of the global populace can afford a pacemaker, how “revolutionary” is this advance? It seems extremely marginal compared to indoor plumbing, clean water, eliminating malaria, etc.

    What technology reliably accomplishes is a wholesale reduction of human labor and jobs. What it no longer does is create new labor-intensive industries.

    We thus face an inequality cliff that is (unsurprisingly) connected to the fiscal and constitutional cliffs: how do we transfer wealth from the productively employed few to the many unemployed/ under-employed without creating a society of dependents? We have “fixed” this problem by borrowing or printing trillions of dollars. That “solution” has now entered the marginal-return death spiral.

    We will have to come up with a new social contract built on community rather than a debt-dependent Central State and its cartel/fiefdom partners. Hoping that technology will solve that knotty problem for us is delusional, as technology only further reduces human employment.

    This essay was drawn from Musings Report 49. The Musings are sent weekly to subscribers and major financial contributors (those who contribute $50 or more annually).

    NEW VIDEO: Gordon Long and I discuss my new book Why Things Are Falling Apart and What We Can Do About It:

    Images: Flickr (licence attribution)


    About The Author

    Charles Hugh Smith writes the Of Two Minds blog (www.oftwominds.com/blog.html) which covers an eclectic range of timely topics: finance, housing, Asia, energy, longterm trends, social issues, health/diet/fitness and sustainability. From its humble beginnings in May 2005, Of Two Minds now attracts some 200,000 visits a month. Charles also contributes to AOL’s Daily Finance site (www.dailyfinance.com) and has written eight books, most recently “Survival+: Structuring Prosperity for Yourself and the Nation” (2009) which is available in a free version on his blog.