Commentary

Licata: Vermont and the nation face structural economic changes

Editor’s note: This op-ed is by Tom Licata, founder of Vermonters for Economic Health and a candidate for the Vermont House of Representatives.

“What is critical to keep in mind is that this situation is part of a broad, multiyear process driven by national and global realignments. It’s a secular phenomenon that needs to be better understood and navigated — by recognizing its structural dimensions…. Unfortunately, the approach in too many industrial countries [and states such as Vermont] has been to kick the can down the road, seemingly hoping for a series of immaculate economic recoveries.”

Yes, I understand that this – from Mohamed El-Erian, CEO of Pimco – is a mouthful.

But, it is a mouthful that needs to be understood, especially by gubernatorial hopefuls Lt. Governor Dubie and Senators Shumlin or Racine, other Vermont legislative candidates and Vermont’s various public stakeholders and business leaders.

What we are experiencing today is nothing short of the structural changes that transpired during the 1920s through 1940s; which were followed by decades of unprecedented prosperity and growth in the United States. Today’s structural changes will not be followed by such good fortune.

The 1920s ushered in a booming American economy, followed by the stock market crash of 1929 and followed by a multi-year deflationary period and depression in the early 1930s. After a seeming period of brief recovery, America fell into a “second depression,” in 1937-1938, which was followed by America’s entrance into World War II and, emerging from this conflict, America’s preeminence and predominance was unmatched, as it accounted for nearly 50% of the world’s output, owned 66% of the world’s gold, produced 80% of the world’s automobiles and had 50% of the world’s oil. And talk of a demographer’s dream, 1946 witnessed 330 babies delivered every hour! Let the good times roll.

My, how times have changed.

Similarly, the 1990’s ushered in a booming internet-driven economy, followed by the dot-com bubble and stock market crash of 2000. This was followed by the recession of the early 2000s, the 9/11 terrorist attack and wars in Afghanistan and Iraq. Our government’s policy-makers responded to these events with record low interest rates and poorly constructed housing and other policies that helped create yet another bubble, our debt bubble…and the rest is history, as we now find ourselves rummaging through the ruins of our own, self-inflicted destruction. Pogo, the character of the long-running comic strip, may have said it best: “We have met the enemy and he is us.”

Simply put, we have lived beyond our means and the solution is to methodically manage an orderly reduction in our standard-of-living. Without such action, a disorderly reduction is inevitable.

Facing us is a deflationary debt-depression, which may be the precursor to a kind of supra-inflation economic period, as tens-of-trillions of dollars of government, corporate and household debt and unfunded liabilities ravage our economy and threaten our way of life, standard of living and even our national security. Simultaneously, emerging countries around the world are challenging our once dominant, near economic monopoly of post WWII. China, next year, will become the leading manufacturer in the world, a distinction held by the U.S. for some 110 years.

Erskine Bowles, President Obama’s Co-Chairman of his “Fiscal Commission” recently said this: “We face the most predictable economic crisis in our history. It is truly going to destroy the country from within…and it is basic arithmetic.”

Professor Carmen Reinhart, an economist at the University of Maryland and co-author of the book “This Time is Different: Eight Centuries of Financial Folly,” recently presented a paper at an annual policy symposium, organized by the Federal Reserve Bank of Kansas City. Like Mr. El-Erian’s warning of a “multiyear process,” Dr. Reinhart warns of economic turmoil that may last another decade, if not longer.

These long-term structural problems require structural solutions:

For Vermont, this means policies to promote long-term planning; moving to a four year Governor’s term and biennial budget cycles. It means policies to promote economic growth, and the enactment of pro-growth permit, tax, education and land-use reforms. It means moving to a defined contribution pension plan, ending the transfer of market-risk from state and teacher employees, to the taxpayer. Vermont’s current student/teacher ratio of 10:1 and student/adult ratio of 4.5:1 are both mispriced and unaffordable, moving to a 13:1 ratio would save some $100 million, as Vermont consolidates its smaller schools and districts. State asset sales should also be on the table.

As Mr. Bowles noted, “It is basic arithmetic.”

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  • Dan Allen

    >>>> from above >>>> structural changes that transpired during the 1920s through 1940s; which were followed by decades of unprecedented prosperity <<<<<

    Unfortunately, World War II might have been a critical step in the bridge from the 30s to prosperity. The decades of prosperity depended upon US-instigated destruction of Democracy in Iran, Indonesia, and Latin America. In other words, there are lots of ingredients to American prosperity besides the issue of government fiscal responsibility.

    In Vermont, fiscal responsibility is an avoidable battleground, since we always run a balanced budget. All sides agree the Vermont public is tapped out on taxes, so we are guaranteed to constrain spending. Seems like we are screaming agreement to one another.

    So what is the argument really about?

  • The Government, Education and Health sectors have a 2% unemployment rate, the rest of the nation 9.5%.

    The US spends 2 times as much per student on education and is in 20th place.
    The US spends 2 times per capita on healthcare and about 50 million are not insured and the care is not as good unless you have real good insurance.

    Clearly the Education and Health Sectors needs to be restructured.

    The US spends as much on defense as all of the rest of the world combined.

    The top 1% of households take in 17% of ALL the personal income. In the 50s, 60s, and 70s that used to be 10%. The 7% difference on $12 trillion of personal income in 2009 is about $840 billion/yr

    So what is the argument all about?

  • Scott Thompson

    It’s nice to see candidates making an attempt to understand what’s happening in the world, and then reflecting on the implications for us in Vermont.

    I wonder, though: maybe it’s true for the U.S. in general that we have lived beyond our means, but is it true of Vermont? When I look around, I don’t see too many people living high on the hog. “An orderly reduction in our standard of living” is what most people around here do all on their own when faced with mounting bills and dwindling income.

    Nor do I quite see how some of the structural solutions follow from the statement of the problems. For instance, pro-growth policies for an orderly reduction of our standard of living? If we’re in a downward slide, I would think we’d want to concentrate on deciding what we want to preserve before we throw open the doors to a big asset grab.

    Education is one such value in play. It’s a bizarre issue to follow. By and large, state officials love bashing it, and regular folks love supporting it. Admittedly, $100 million, if the figure is correct, is a lot of money. But it’s also only about $150 for every man, woman & child in the state. A whole lot of people seem to value education and the benefits it brings to society as a whole, at least enough to spend that much extra for some of the highest-quality public education in the U.S.

    And thank goodness, a good education can take us beyond “basic arithmetic”!

  • David Usher

    Politicians who promise a return to the robust economic days of a decade or more ago simply do not understand the realities of today’s and tomorrow’s economy.

    Private sector job growth in Vermont has been less than 1% during the past dozen or so years, a truly dismal record. Yet they all promise to create jobs. However, they seldom say that those jobs must be in the private sector.

    Meanwhile government at all levels has added jobs and spending thereby creating an unsustainable tax burden on Vermonters.

    We need to query the candidates for Governor and the Legislature. Why should we trust them to create more jobs (presumably in the private sector where they are needed) when the evidence of the last dozen years is contrary?

  • John Fairbanks

    What all these observers who chide us for living beyond our means neglect to mention is that, for the last 35 or so years, our “means” have, in terms of real purchasing power, been receding. We have been forced, not out of consumer lust, but basic necessity, to live on a long string of credit. A few very wealthy people have benefitted handsomely; the rest of us struggle. The first decade of this century has been particularly difficult as, for the first time in my lifetime (nearly 60 years), median household income actually dropped.

    Yes, we need structural change. As many writers have noted, economic prosperity was most widely-spread `way back in the 1950s, when unions were stronger, taxes were more fair (yes, and higher on higher-income earners), and public investment in basic needs like housing and education (it could be argued the GI Bill created the American middle class) was robust. We might want to look at that model, or, if that’s too far back, at the Clinton years, the longest run of economic growth in our history.

    But since 1980, a sort of Randite Social Darwinism has taken hold, even though its acolytes fail to grasp that spreading the wealth more widely creates a broader and sounder economic base for society as a whoel. Public investments have been slashed, the power of ordinary working Americans to secure decent wages, health insurance, and retirement savings has been cut dramaticaly, and iand we’re now talking about even killing off, slowly but surely, Social Security, practically the last remnant of the safey net.

    Let’s take a “free-market approach” we are told, cut taxes, cut regulation (oh, and fire those teachers), and all will be well. Oh, please. We de-regulated one industry – finance – and look what happened. We tore down Glass-Steagall, we regused to regulate derivatives, and the cowboys and con artists took over the drove us over a cliff. We slashed taxes on the upper end, shifting the burden to the middle and cutting the resources needed to help when things went wrong, and here we are.

    Spare me the lectures on living within our means and talk more about creating greater “means.”

    • Arthur Hamlin

      Bravo John!!

  • John Fairbanks

    Looking at some of the replies, let me note – So, education and health – teachers, nurses, etc. – need to be restructured so more people lose jobs to bring them into line with other industries?

    BTW, regarding the education spending number, I assume we’re using per capita. Another way of looking at it is how much a nation spends on education as a percentage of Gross Domestic Product. The US ranks 37th there.

    As far as scaling back our standard of living in an orderly manner, what? Okay, we may have to scale back the amount of things we buy, got that. But our standard of living has been scaled back for years now. We are harder pressed to make ends meet – never mind going hog-wild at the Best Buy – than we were in 1980. People have been working longer hours – until we lost our jobs in the Depression (let’s not kid ourselves) – and earning less, after inflation. Productivity increased, with little or no material benefit.

    What’s really at issue in the tax argument is the existence of social programs. I rarely hear or read someone call for lower taxes by cutting military spending, closing comfy tax loopholes (some written into legislation specifically to benefit a particular business), or doing away with big subsidies, like we give to Agri-Business. No, it’s almost always health care, education, and Social Security.

  • Dan Allen

    >>>> education as a percentage of Gross Domestic Product. The US ranks 37th there.<<<<

    I wanted to call BU$$&^%T, but a query to Mr. Google returned data attributed to the United Nations Human Development Programme, showing the United States tied for 37th in education spending in GDP.
    SOURCE:
    http://www.nationmaster.com/graph/edu_edu_spe-education-spending-of-gdp

    Rank Countries Amount
    # 1 Cuba: 18.7%
    # 2 Vanuatu: 11%
    # 3 Lesotho: 10.4%
    # 4 Saint Vincent and the Grenadines: 10%
    # 5 Yemen: 9.5%
    # 6 Brunei: 9.1%
    # 7 Mongolia: 9%
    # 8 Denmark: 8.5%
    # 9 Guyana: 8.4%
    # 10 Malaysia: 8.1%
    # 11 Cape Verde: 7.9%
    = 12 Saint Lucia: 7.7%
    = 12 Sweden: 7.7%
    = 14 Saint Kitts and Nevis: 7.6%
    = 14 Barbados: 7.6%
    = 14 Norway: 7.6%
    # 17 Israel: 7.5%
    # 18 Namibia: 7.2%
    # 19 Swaziland: 7.1%
    # 20 Kenya: 7%
    # 21 New Zealand: 6.7%
    # 22 Morocco: 6.5%
    = 23 Finland: 6.4%
    = 23 Tunisia: 6.4%
    = 25 Belgium: 6.3%
    = 25 Bolivia: 6.3%
    = 25 Cyprus: 6.3%
    = 28 Slovenia: 6.1%
    = 28 Jamaica: 6.1%
    = 30 Malawi: 6%
    = 30 Belarus: 6%
    = 30 Iceland: 6%
    # 33 Lithuania: 5.9%
    = 34 Switzerland: 5.8%
    = 34 Portugal: 5.8%
    = 34 Latvia: 5.8%
    = 37 Estonia: 5.7%
    = 37 United States: 5.7%
    = 37 Austria: 5.7%

    Wow, I do not admitting this strikes me as a potential problem. If anyone has an explanation for why this is good, bad, or indifferent, I am all ears (well, eyes). I am thinking we have a case where a lot more statistics and other information is needed to make a good judgment. But then again, maybe I am just ignorant, so if someone can educate me, I will try to be a respectful student.

    In case it will help, I will offer up the dummy answer, and say, "37th place on that list is not good for a super power. The United States, including Vermont, should try to move its ranking up by investing more in education. Alternative, we could lower and GDP but not lower expenditures in education, to boost our ranking in education spending per capita. I understand there are other statistics suggesting we are spending too much for education, but those statistics are misleading."

    I am truly, profoundly interested to know why the dummy answer is wrong or right. Any comments anyone offers will be appreciated immensely.

    Thanks.

    • John Fairbanks

      Here’s my point re: education spending/results. (Full disclosure, I began my professional life 34 years ago as a junior high school English teacher, but changed careers.)

      First off, part of the motivation for conservatives’ criticism of teachers is, frankly, political. Unionized teachers swim in a very deep pool of political support for Democrats, and the the Right hates that. Note they get far less incensed about defense contractors who rip off taxpayers for billions but are staunchly Republican.

      Second, we are all frustrated at the current situation, where kids come out of the public school system lacking basic skills. When I was a teaching assistant in grad school, I could not believe how poorly some of my freshmen students wrote. I, for one, am also tired of people running stupid experiments on our kids. I remember “new math” in 6th grade, open classrooms (argh) in the 70s, and more recently, “invented spelling” (ARGH!!). That kind of crap needs to go. Kids in classrooms should not be treated as automatons, but basic skills can be taught very well with traditional methods.

      And don’t get me started on the sorry state of our school systems when it comes to foreign languages, the arts, and so forth.

      That said, teaching is a crucial profession for our society’s success, yet we continually short-change schools in terms of resources, and the teachers themselves are among the lowest-paid licensed professionals anywhere. It’s a professional that does not attract enough of the best-and-the-brightest, and no wonder. Who wants to work that hard, catch all the flak they catch, and earn $26,000 to $60,000, or whatever the range is now? Heck, go to law school and double that (much more after a few years); go to business school and triple that (or more). Get a master plumber’s license and do better!

      Our society does not really value education, or, for that matter, or kids. We want schools to cost as little as possible, yet turn out children ready to compete with the best in the world. Parents, for their parts, fall down too often in motivating and teaching self-discipline.

      I would argue a big part of the answer is in DC. The federal government picks up a very small portion of the cost of education. If the feds paid for, say 20 percent of the cost, property taxes could go down, and schools would have far more resources.