Welcome to the Pale Gray Dot

By John Mauldin

“The afternoon knows what the morning never suspected.” 

“It's paradoxical that the idea of living a long life appeals to everyone, but the idea of getting old doesn't appeal to anyone.” 

“Deng Xiaoping made a calculation. He bet on demographics. What he knew was that China had this enormous population of young, underemployed people, people who he could move from the farms to the coast and put them to work in factories, and that would be the lifeblood of China's economy.”

– Evan Osnos

(My comment on that quote: He launched this policy after he went to Singapore in 1978 and saw what Lee Kuan Yew had done and then went back home to duplicate that effort, albeit in a manner that would work within the Chinese system. But he did ride the tidal crest of demographics.)

In February 1990, the Voyager 1 space probe reached the outer edge of our solar system. NASA commanded it to take a last image of Earth from 3.7 billion miles away. The planet is only a small speck from that distance.

Seeing that image, Carl Sagan profoundly called our home a “pale blue dot” in the vastness of space. Since then, we inhabitants of that pale blue dot have been turning gray at a rapid pace. The resulting demographic changes may appear insignificant against the backdrop of the cosmos, but they are increasingly visible here at ground level.

The aging of the world’s population is already having profound effects on the global economy, and it is only getting started. Today we’ll consider those changes, drawing partly from research conducted by the intrepid volunteers for the demographics chapter of my new book.

(This letter will print a bit longer because of the large number of charts and graphics.
And I apologize for the late delivery of what is supposed to be a weekend letter. I was somewhat distracted by life. My intention is to be better in the future.)

It is important to understand the profound shift in demographics that is going to cause sweeping changes over the next few decades. Those changes will broaden the scope of our study of economics and investing; they will alter our understanding of sociology; and they will radically affect politics and governments. Precisely what these changes will be is difficult to discern and predicting them requires some guesswork, but the one thing we don’t have to guess about is the demographic shift itself. Everyone who will be over 20 years old in 2035 has already been born. Moreover, birth rate trends don’t tend to change radically but evolve slowly.

We’ll begin with the big picture. Experts think global human population first hit 1 billion around the year 1800. The next billion took another 120 years, arriving in 1920. It took only 40 years to add a third billion, by 1960.

From that point the growth curve turned higher, and now we’re approaching 7 billion. What next?

Here we enter the realm of guesswork. I wanted to begin with this chart because it shows just how widely the estimates can vary. The UN’s “low variant” line shows human population peaking around 2040 and falling below 6 billion by 2100, while the “high variant” has the population at 14 billion and still rising in 2100.

The gap between 6 billion and 14 billion is greater than the total number of people alive today. The gap is that wide because demographic projections require many assumptions. Most of them pertain to small changes in population, but they can combine to make a dramatic difference over time.

Unknowable future events may also bend the population curve. Baby booms and busts, wars, famines, epidemics, medical breakthroughs, and more are all potential game-changers. The late-20th century acceleration in population growth was mainly a result of modern vaccinations. Other technologies could have – and I think will have – similar impacts in the future.

Technology can cut the other way, too. We now have the capacity to wipe out entire nations and even the human race with nuclear weapons. Some scientists think our excessive antibiotic use will create drug-resistant superbugs that could kill millions. I don’t expect such events, but we can’t rule them out, either.

For now, at least, we are making new humans faster than we are losing them. The result is a growing global population. But the growing total population masks the shrinking population in much of the developed world.

The Gray Wave

Even as world population is increasing, it does not follow that every country and continent is growing at the same rate, or even growing at all. Presently we find the highest growth rates in sub-Saharan Africa and parts of the Middle East. The lowest growth is in Eastern Europe, Russia, China, and Japan.  Notice the countries shown in shades of blue below. They are actually shrinking in population.

If you want your nation’s population to grow, you need a higher fertility rate and/or longer life expectancy. Africa has both those factors on its side, though fertility rates are beginning to decline there, too.

Conversely, national leaders can shrink population by reducing fertility rates or lifespans. China’s one-child policy was an example of the first, but even China can’t hold back the benefits of modern medicine and agriculture. Lifespans are growing almost everywhere. (China will be the first nation to grow old before it grows rich, a truly new phenomenon – and one that has serious potential for destabilizing the country.)

Globally, the combination of falling fertility and longer lifespans means that the population is slowly growing older. This will bring something remarkable in the next few years: the world will shortly have more people over age 65 than it has children under 5.

You can see in this chart of UN projections that the elderly population is growing much faster than the child population is shrinking. To use a scientific term, that’s really weird in the context of the last 10,000 years of human experience. The disparity between numbers of old and young will get worse, for the simple reason that (unlike interest rates) fertility rates can’t fall below zero. Meanwhile, our ability to extend life on the other end can grow considerably.

The chart above comes from an excellent and very lengthy (175 pages) US Census Bureau report titled “An Aging World: 2015.” It is chock-full of interesting data that I can’t begin to summarize. You can read it yourself at the link if you want to get into the demographic tall weeds, a safari free of charge thanks to US taxpayers.

Sadly, little else about this story is free of charge. The aging population dynamic means we will have fewer younger people supporting a larger number of older people. Consider also that children too need care, so the real problem will be lack of middle-aged people to support both children and the elderly.

Globally, the old-age and youth dependency ratios aren’t as bad as you might expect. Here is another chart from the “Aging World” report:

By 2050, for every 100 working-age (20-64) people, there will be almost 80 children and retirees who will require support. That sounds bad, but notice how little the ratio actually changes from now until then.

The problem is that we have not arranged ourselves on the planet in neat, homogeneous groups. In fact, most of the children are going to be in Africa and the arc around the Indian Ocean while most of the retirees will be in the developed world and China.

China’s one-child policy is creating an ugly, upside-down pyramid. Each worker in that generation in China will end up supporting two parents, four grandparents, and probably one or more of the worker’s own children, too. That is just not a formula for a successful transition to a more dynamic economy when more than half the population of China is still stuck in a subsistence lifestyle. Life at or near the Chinese coast is far different from that of the interior.

The demographic reality is that the working-age Chinese population almost literally falls off a cliff starting in the next few years. The first chart below shows working-age numbers in China, and the second chart shows China as compared to the US, Japan, Ireland, and Spain. Notice that China still has a higher percentage of working-age people than the other countries do, but these other countries have grown relatively rich before they have grown old. China does not have a Social Security program or anything close to the safety nets that have been created in the developed world. The Chinese are known for their propensity to save, but if you are part of the one half of the nation that exists on a subsistence income, you find it really hard to save.

On Your Own

I’ve said this before, but it’s worth repeating: “retirement” is a new concept. For most of human history, people worked as long as they were physically able and died soon thereafter. And in much of the world that is still the case. Traditionally, the intervening period between no longer being able to work and dying was longer for people who had large families to care for them – which is one reason fertility rates were so high.

This state of affairs began to change in the 19th century when the advent of mechanized agriculture began to allow a farmer to feed his own family and still have food to sell. The work time of farm families was somewhat freed up, and more time could be devoted to helping the elderly to live longer.

At some point, supporting retirees went from being a family responsibility to a task shared between family and society. Governments created programs like Social Security in the US that guaranteed some minimal income to older folks. Businesses did the same with pension plans. Families were still the backstop, though, along with whatever savings retirees had accumulated.

For a century or so, this three-legged stool worked fairly well. People who reached retirement age could stop working and lean on some combination of (a) their family (mainly their children), (b) their own savings or pensions, and (c) government

Now that’s starting to change. By choosing to have fewer children, we unwittingly sawed one leg off that three-legged retirement stool. It’s hard to depend on descendents who don’t exist.

Worse, the other two legs are starting to crumble, too. Defined-benefit pensions are rare in the private sector and unstable for government retirees. Individual investors tend to lose their money in market crashes and are often lucky just to break even. Even government plans like Social Security are in increasingly questionable shape.

And the data in the US is pretty stark. The average savings of a 50-year-old is only $42,000. The average net worth of somebody between 55 and 64 is $46,000. A couple at age 65 can expect to pay $218,000 just for medical treatment over the next 20 years. Eighty percent of people between 30 and 54 believe they will not have enough money to retire. One in three people have no money saved for retirement at age 65, and almost 40% are 100% dependent on Social Security. And we wonder why Social Security is the political third rail?

None of this is good news if you are approaching retirement age. Your stool is wobbly at best and possibly falling apart. That’s not comfortable. What do you do?

My own answer is pretty simple: don’t retire. But that’s easy for me to say. I’m fortunate to have work that I enjoy and that is not too physically strenuous. I’ve also found ways to stay healthier than many people my age. But at some point I may become unable to work. Then I will have to draw on my assets to provide whatever I need. (I even have seven children who in theory might help, but so far the assistance has been going the other direction.)

The demographic statistics say I’m the exception. Most people don’t have seven children or the financial assets to support themselves through their retirement years.
Many people will work past what we now consider retirement age because they have no other choice.

Ironically, the research pretty much universally shows that many people working past normal retirement age do so for their own personal reasons rather than out of necessity. The data in the United Kingdom, which is not much different from the picture in the rest of the developed world, suggests that almost half the people working past traditional retirement age are doing so simply because they don’t want to stop working. And many people who say they are “retired” still work long hours just to “keep busy.”

Retirement planning will be a big problem in the developed world, where total population is shrinking. If this challenge is anything like those of the past, technological and entrepreneurial solutions will emerge. However, for Japan those solutions are not showing up fast enough to help their radically aging population. Kodokushi or “lonely death” refers to the Japanese phenomenon of people dying alone and remaining undiscovered for a long period of time. First noticed in the 1980s, kodokushi has become an increasing problem in Japan, attributed to economic troubles and Japan's increasingly elderly population. It represents upwards of 5% of total deaths – about 30,000 people a year.

The Coming Retirement Crisis

Before you reach for the razor blade, there may be better answers. At Rob Arnott’s conference last month, I listened to a presentation by Alicia H. Munnell, a Boston College economist who was previously Assistant Treasury Secretary in the Clinton administration.

Her title was both stark and optimistic: “Falling Short: The Coming Retirement Crisis and What to Do About It.” You can follow the link to see her slides. She runs quickly through the bad news we already know:

  • Workers aren’t saving enough money for the retirement income they’ll need.
  • They need more than they think because they are living a lot longer.
  • Retirement age is rising, but not as much as life expectancy is.
  • Retirees also need more because healthcare costs are high and rising.
  • Low interest rates reduce what retirees can withdraw from savings.
  • 401(k)s aren’t working for most people because people make mistakes.

Munnell offers three solutions that she calls “straightforward.” They are that, but they aren’t what I would call easy for most people to wrap their heads around.

  1. Work longer to build assets and shrink the retirement period.
  2. Save more via Social Security and employer plans.
  3. Consider the house as a retirement asset.

On the first item, she makes a very interesting point that I haven’t seen anywhere else. You can work longer and still enjoy retirement as long as your parents and grandparents did.

Assuming you started work at age 20, rising life expectancy means that if you retire at age 70 in 2020, you will have the same work/retirement ratio as someone who retired at age 65 in 1940. My generation is enjoying better health in our later years than our parents did. We work longer simply because we can and because we enjoy it.

By Munnell’s calculations, simply working until age 70 will do the trick for most people. The extra working years will give your savings more time to accumulate. Your Social Security benefits will also be higher once you do retire.

Now, I can punch all kinds of holes in this logic. We’ve already established that most people’s self-managed retirement assets don’t grow as they should because people make investment mistakes.

Also, there’s no guarantee Social Security will keep awarding higher benefits to people who delay retirement. Further, people with health problems or physically demanding careers might not be able to work until 70, or even 65.

I think Munnell would acknowledge all these points. She goes on to say we should shore up Social Security by raising payroll taxes. She thinks an additional 2.68 percentage points of tax would do it. She also suggests investing some Social Security assets in equities. Another plank in her plan would see 401(k) plans made automatic and mandatory.

But while I acknowledge paying for the growing Social Security and entitlement benefits that are already on the books is going to require more tax revenue, it is not clear that increases in taxes are going to be easy to achieve. Further complicating the script is the possibility that throughout the developed world we’ll see something like a generational conflict in which young people resist being bled to pay for the comfortable retirement of the elderly. But the elderly vote en masse, and that is not something that younger people typically do. That said, voting trends can change.

Munnell’s last suggestion is to use the house as a retirement asset, either by selling and downsizing, or by getting a reverse mortgage. Fair enough.

The retirement problem is not just a US issue. Much of Europe is going to be going through dramatic changes in their entitlement and retirement programs as budgets and debt get blown out in the coming five years. Ask a retiree in Greece how life is going. Greece’s situation is going to be visited on more than a few countries in Europe. And if the United States doesn’t get its fiscal act together, sometime in the middle of the next decade a very nasty reality will come crashing down upon us.

Lifespan Inequality?

Last week I ran across another study that brought up a new point. We all know that the figures on life expectancy are averages. Any given person will probably live longer or die sooner than average. Some factors are within our control; others aren’t.

(By the way, you can get a statistical, if somewhat dubious, look at your personal life expectancy by visiting DeathClock.com. You just answer a few questions, and then it calculates the precise year, month, and day when you are scheduled to check out.
That may be more information than you want, of course. You can also treat it as a challenge. [Past performance is not indicative of future results. Your mileage may vary.] Since my Death Clock says September 4, 2046, which would leave me one month shy of 98, I am hoping that my friends in the life regeneration business are as successful as they predict they will be between now and then.)

But, back on topic, a Stanford University study led by economist Raj Chetty analyzed 1.4 billion federal tax returns along with Social Security mortality data to determine the relationship of income to life expectancy. You can read the full study in the Journal of the American Medical Association. Some key findings:

First, higher income is associated with greater longevity. Among men, the richest 1% live an average of 14.6 years longer than the poorest 1%. The wealthiest women live 10.1 years longer than the poorest.

Second, the gap is growing wider. Between 2001 and 2014, life expectancy grew 2.34 years for men and 2.91 years for women in the top 5% of the income distribution. Men and women in the lowest 5% income group had only a negligible change in the same period.

Some have jumped on this data as one more reason why we must do something about income inequality. The rich aren’t just getting richer; they’re living longer, too. This does seem unjust.

On the other hand, is it really a surprise that people with lots of money live longer? They tend to have healthier diets, get better healthcare, have more immediate access to emergency healthcare, live in safer neighborhoods, and avoid hazardous careers. I’m surprised the difference is only 2–3 years, frankly. I’m not sure anything a government can do can change this.

The real surprise to me was how quickly lifespans can increase. In a single 13-year period, we (at least those in the upper income levels) somehow managed to generate an additional two or three years of life. That’s great news! Now let’s do the same for the other 95%.

The lifespan increase also suggests that the kind of life extension that my good friend Patrick Cox discusses in his forthcoming book isn’t so outlandish.

If one (admittedly favored) group can, in just a little more than a decade, add 2–3 years to its lifespan without consciously trying, imagine what concerted efforts could do. Such efforts are underway right now in labs all over the globe. It is perfectly reasonable to think that the next decade will bring advancements that add many years to our lifespans. Medical cures for obesity, heart disease, and cancer are all foreseeable within the next 10 years (though lifestyle will continue to be an issue). Advances in medical biotech will lead to a radical extension in lifespans – and healthspans.

As with all new technologies, these will be expensive at first. They won’t be instantly available to everyone, everywhere. But neither was penicillin, or the polio vaccine, or heart transplant surgery. They took time to spread. I expect life-extension technology to propagate faster, though, for the simple reason that it makes economic sense to keep people alive and productive as long as possible. This will be doubly true in a world with fewer young people. Further, much of the new life-extension technology is going to have the same scalability as digital technology has had. We all know how phones and computers get better and cheaper. Medical care is beginning to ride the same technological wave as our favorite digital devices.

Having said that, we must recognize that extending lifespans will aggravate the Graying World problem. If we persist in saying that everyone can retire at 65 or 70, while extending typical lifespans to 100 or more, the dependency ratio will skyrocket. Workers will be supporting their parents and multiple layers of grandparents.

That formula obviously won’t work – but it won’t have to if we can make tomorrow’s 80-year-olds as healthy as today’s 60-year-olds. People might be able to keep working until 85 and be happy about it.

Along just these lines, I have just finished reading and writing a foreword to Pat Cox’s new book, The Methuselah Effect, which should be available within the next month. (Trust me, I will let you know when. You really do want to read this book. I think it’s the best book on the state of the art in antiaging that we’ve seen yet.)

Deflationary Future

Let’s turn back to long-term population growth. If fertility trends continue, I can foresee a day when most of the world will be reproducing at below-replacement rate. Total population will have to peak at some point and then begin to fall.

Economics is the study of scarcity and how we manage it. For centuries we’ve managed it by having more babies and putting them to work. That era may be ending soon. Then what?

In a world with a static amount of goods and services and a shrinking number of people to buy them, the natural response will be falling prices – deflation, in other words. Is that where we are headed? That may just become the case in the developed world. In the developing world we’re going to see three billion more people enter the middle class over the next five years. They are going to want to buy refrigerators, cars, better food, more online access, etc. etc. Won’t prices be rising?

Maybe. We may find that technology gives us an ever more abundant world. Or we may find that technology gives us new ways to spend our money, soaking up whatever excess supplies the robots build for us. Some science fiction writers imagine a world where even the robots are consumers.

Next week, though, we are going to look at the hard mathematics of how demographics will affect the evolution of economics over the next decade. Depending on where you live, that math portends either an exciting boom or a long slow slide into economic stagnation. But even stagnation doesn’t necessarily mean that lifestyles don’t improve. Nominal GDP in Japan hasn’t grown all that much for 25 years, but I think it is hard to argue that Japanese lifestyles haven’t been improved by the rise of new technologies. (The Japanese enjoy far better internet access than we do, for starters.)

One thing is certain: life here on the Pale Gray Dot will change considerably in the coming decades.

Dallas, Houston, Abu Dhabi, Raleigh, and SIC

I will be speaking in Dallas on April 28 for the 14th annual Commerce Street Bank Conference. Then the next week I will again speak in Dallas for the seventh annual Inside Retirement conference, May 5–6. They have a great lineup of speakers, but I am most excited about getting to hear and maybe even talk with my personal writing hero, Peggy Noonan. I will admit that I’m a total fan boy of anything she writes. And her column this week was outstanding. She writes about “The Moment When 2016 Hits You.” Anyone who has been observing the political scene – and particularly with a sense of history – knows we are in a period of real political upheaval. We have lost our anchor, which might be a good thing given the fact that we were going nowhere fast, but now we are going full steam ahead into uncharted waters, and both major parties must regroup.

Then on May 10 I fly down to Houston to speak at the S&P Dow Jones Art of Indexing conference. The conference is for financial advisors and brokers who are trying to understand how to manage risk while maximizing returns in the current environment. I will be in Abu Dhabi the third week of May and then come home and almost immediately go to Raleigh, North Carolina, to speak at the Investment Institute’s Spring 2016 Event. I’m looking forward to hearing John Burbank and Mark Yusko (who will also be at my own conference the same week) and then being on a panel with them.

Afterward, I make a mad dash for the airport, arrive back in the Dallas late Monday night, and make final preparations for my Strategic Investment Conference, where upwards of 700 of my closest friends will gather to discuss all things macroeconomic and geopolitical. It is really going to be a great week! If you won’t be going to the conference, you can have the next best thing: recordings of the speakers, delivered just a few days after SIC 2016 ends. You can order your set here.

As I have been writing about the problems of demographics and aging and composing a forward for Patrick Cox’s book, I’ve been thinking about my own personal journey into aging. I will turn 67 later this year, and I have to confess that I feel much better than I expected to when I contemplated being 67 a couple of decades ago. Part of that is a healthier physical workout and diet regimen than my parents and their generation had, and part of it is the cocktail of supplements and nutraceuticals that Patrick Cox has discovered at the very bleeding edge of bioscience. You won’t see those goodies in any hyperbolic ad promising you amazing results in one month, but the stuff coming down the road within the next five to ten years will be amazing.

I know that so far nobody has gotten off this planet without dying. But as I said earlier, my genetics and lifestyle should get me into my mid-90s. I think the biotechnological breakthroughs will get me into my hundreds and with a relatively robust healthspan. And I optimistically tell myself that I have about a 1% chance of making it to 150. Yes, you scoff, but if you looked at the science as I have, you’d agree that I might actually make it. I think my children have a better than even chance of getting to 150.

The question is not whether we will be able to regenerate new organs – I am 100% convinced that will happen within the next five years, and then we will see a cascade of new restorative processes.

The question is whether researchers will be able to get all of the “critical path” organs into a state of rejuvenation in time. For a number of organs, there is a clear path to getting new stem cells into them so the renewal process can begin. For other organs, it’s a head scratcher. It will be a few years before we begin to test the first processes on real people, and my guess that will happen in Japan, since they have the most enlightened rules about using stem cell procedures. I wonder how much Tokyo apartments will be renting for in 10 years.

Your not planning to go gentle (or willing) into that good night analyst,

John Mauldin

Brazil’s Impeachment Drama

The vote is part of a growing regional swing against left-wing populism.

By Mary Anastasia O’Grady

Sunday’s special session of the lower house of the Brazilian Congress was a raucous affair as it met to vote on a motion to impeach President Dilma Rousseff of the Workers’ Party (PT). She is accused of using loans from state-owned banks to cover up a budget deficit her government created in violation of the Brazilian Constitution’s fiscal-responsibility law. After more than nine hours the motion won the 342 votes needed to pass.

Ms. Rousseff’s defenders said that it was a purely political attack by adversaries who are as corrupt as she is. In fact, her problems go much deeper.

With a constitution that gives the government almost unlimited power to intervene in the economy, it is hardly surprising that Brazil’s political system is riddled with conflicts of interest. But if this were a case of routine graft, Ms. Rousseff would likely have had success in her attempt to lure representatives from smaller parties to her side. As it stands, even if she had survived this vote, there are at least seven other impeachment petitions that will follow.

Brazil’s Congress is legendary for its lack of party discipline, and only three weeks ago it was widely believed that Ms. Rousseff could defeat the impeachment motion by offering lucrative posts in her government to opposition congressmen. But she wasn’t counting on the swelling wave of popular outrage against the PT machine.

This vote was a national referendum on the PT effort to bring bolivarianism—both its socialist economics and its political absolutism—to Brazil. It’s why House Speaker Eduardo Cunha scheduled the session on a Sunday. The nation was watching on television as each deputy voted on camera.

Even before the votes were counted, there were reports that the pro-impeachment side had the two-thirds majority necessary to prevail. The final result is evidence of the strong anti-Rousseff sentiment across the nation.

The petition now moves to the Senate which will decide with two simple-majority votes whether to suspend her and then set up an impeachment tribunal. After that a two-thirds majority vote in the Senate is needed to remove her from office. If she ultimately were cleared, Ms. Rousseff would resume her role as president, but during her suspension Vice President Michel Temer of the Brazilian Movement for Democracy Party would be in charge.

Ms. Rousseff only narrowly won re-election in October 2014 in a runoff against Brazilian Social Democratic Party candidate Aécio Neves. She pulled out that victory by using the power of her incumbency to ramp up the PT’s signature populism, particularly in the poor north of the country. But that year the economy did not grow at all. Last year gross domestic product contracted 3.8%. This year it is forecast to shrink again by at least 3%.

The pain is self-inflicted. The PT’s increasing protectionism and control over the economy badly damaged investment flows. Worse, government profligacy and money printing are expected to drive inflation—a tax that hits the poor the hardest—to 10% this year. That’s unacceptable to a nation that still remembers the hyperinflation of the early 1990s.

The fiscal-responsibility law was designed to ensure that reckless government spending could not happen again. So the charge that Ms. Rousseff violated that important law to cover up her populist spending binge with loans from government banks leaves many Brazilians feeling that she defrauded them.

A middle class that benefited from the stability of the Brazilian real after 1999 and was beginning to believe that Brazil had left tropical populism behind is outraged. If it is blaming the party at the helm this is hardly a political conspiracy.

Brazilians are now part of a regional backlash against the leftist ideas of the Foro de São Paulo, a Latin American conference founded in 1990 by former President Lula da Silva, Ms. Rousseff’s predecessor and mentor, to coordinate Marxist movements in the post-Soviet world.

Ms. Rousseff is fighting for her political life because her alleged constitutional violations were part of the PT’s strategy to use state resources to consolidate power in the spirit of Hugo Chávez’s Venezuela, Evo Morales’s Bolivia and Rafael Correa’s Ecuador.

Even at the outset of the regional swing to the left it wasn’t easy to sway Brazilians in that direction.

The nation still carries the psychological scars of the 1964-85 military government. Civil society is a rich mosaic of legal, trade and agricultural associations and media and religious groups that jealously guard free speech, civil liberties and institutional independence.

Economic freedom may be constrained by a large regulatory state. But the productive sector is free to accumulate resources by way of voluntary transactions in the market, which means that it has political independence and the motivation to protect it.

Lula and Dilma are great admirers of Fidel Castro and they have used the Brazilian state to promote the Cuban model throughout the hemisphere. But at home, as these impeachment proceedings demonstrate, Brazilians are having none of it.

Insulting Erdogan

Merkel Falls Flat over a Satirical Poem

A Commentary by Stefan Kuzmany

 Merkel meeting with Erdogan in Istanbul last October.       DPA / Merkel meeting with Erdogan in Istanbul last October.

A satirical poem targeting Turkish President Recep Tayyip Erdogan has become an affair of state. Chancellor Angela Merkel's handling of the crisis has been abysmal and shows that she is losing her grip on power.

The man has been penalized enough already. If you have to rely on support from Mathias Döpfner, head of the Springer Verlag publishing house, and Dieter Hallervorden, who leads a cabaret theater in Berlin, you're not in great company. If you become famous, if you make history, with a few repugnant lines of clumsy poetry and not with your significant television skills, you have lost control over the popular interpretation of your own work. If the high point of your fame consists of calling the Turkish president a goat fucker and triggering an affair of state, you are not to be envied.

But Jan Böhmermann, author of the deeply insulting lyrical attack on Turkish President Recep Tayyip Erdogan, has little to fear should he face trial for violating German laws prohibiting the insulting of foreign institutions and representatives. Even if he were convicted, the absurdity of a prison sentence seems highly unlikely. And he would likely be able to afford a fine, particularly given the possibility that Döpfner and Hallervorden would take up a collection to help him pay.

The only one who really stands to lose is German Chancellor Angela Merkel. In fact, she has already lost. Despite the current focus on the satirist, Böhmermann himself is rather unimportant. The real issue is the chancellor's own power.

It is a curious axiom in the history of political scandals that politicians only rarely stumble over the actual mistakes they make. More often, they trip over their futile and increasingly unsustainable attempts to cover up or eradicate those mistakes. The cascade of missteps made by Merkel in recent months has now found its ignoble low point in the Böhmermann Affair.

Many would say that Merkel's first and greatest error was that of opening Germany's borders to the refugees stuck in Budapest in September 2015. That accusation will not be made here: The chancellor chose a humane response to a dramatic situation. She found support among German citizens who had never before even considered voting for her and in doing so, developed a new following. At the same time, though, she neglected and ultimately lost an older bloc of voters -- the conservative, foreigner-skeptic and at least latently Islamophobic protectors of the German culture. And she relied on the empathy of Germans and -- perhaps out of hubris -- on the assumption that other EU member states would follow her lead. Wrongheaded faith in her own persuasive power was her first mistake.

Trying to Satisfy Everybody

Yet once she became aware of the anger within her own Christian Democratic Union, and within its Bavarian sister party, and once she realized that Europe -- particularly Eastern Europe -- was in no mood for solidarity, she tried to back step on the first mistake without losing the support of her new fans. She began working on a deal with the Turkish government that would allow her to keep the German borders open while reducing the numbers of refugees arriving. The deal essentially called for transforming her dubious partner Erdogan into the European Union's bouncer. She wanted to maintain the image of welcoming openness while eliminating the incentives to come. She wanted to satisfy everybody. That was her second mistake, made while trying to correct the first.

It almost looked like she would succeed. Even as Merkel's confident rhetoric led many of her well-meaning new supporters to believe that she still welcomed refugees with open arms, the Turkey deal allowed her to make an about-face in the crisis, thus appeasing critics within her party. The Balkan border closures, which Merkel publicly criticized but which she privately likely welcomed with a certain sense of relief, likewise also contributed to the change of mood.

German gymnasiums slowly emptied of refugees and peace finally returned to the country.

If only the Turkish president wasn't such a choleric bully! He passes up no opportunity to show the world what he thinks of freedom of opinion and of the press: Nothing. He is equally fond of demonstrating how much he cares of those who would criticize that stance: Not at all. Unless his extraordinarily delicate honor is involved. Then, his rage knows no boundary.

It is noteworthy that Erdogan's other, more serious transgressions are being largely overlooked in the current public perception: his potentially corrupt dealings; his alleged support for Islamist terrorists; his bloody operations targeting the PKK, which are likely the product of domestic political calculations; his meddling in the already difficult relationship with Russia; and most recently, his bellicose rhetoric surrounding the Nagorno-Karabakh conflict.

Wide Awake Germans

All of it is complicated, but it is also far away. Yet when the Turkish president places newspapers under state administration and when charges are filed against myriad critics for insulting the president, journalists are suddenly on point. When he then goes even further by having the accreditation of German journalists refused, having the German ambassador summoned multiple times for nothing and now even demanding that Berlin file charges against a German television personality, it is so clearly undemocratic that anger quickly boils over.

This despot wants to take a German comedian to court? Germans are wide awake.

And here, in this relatively preposterous affair, Merkel committed her third mistake. It is a mistake that could ultimately cost her the Chancellery.

Merkel apparently sought to take the wind out of Erdogan's sails by hastily having her spokesperson announce that the Böhmermann poem was "consciously injurious." She could have thrown her support unmistakably behind Böhmermann, as one might expect from a chancellor charged with defending the German constitution. His poem was very clearly meant as satire; none of the uncomely imputations therein should be taken -- nor were they meant -- seriously. The chancellor, of course, knows as much. Yet by adopting Erdogan's viewpoint, she has essentially allowed him to determine what should be viewed as satire in Germany and what not. Now, the chancellor must decide if German prosecutors should be allowed to open a case over the insulting of a foreign head of state -- but because she already described the poem as "injurious" via her spokesman, she has very little room for maneuver.

Erdogan, like the troll that he most certainly is, isn't satisfied. Rather than wait for Merkel's decision, he went ahead and filed a criminal complaint against Böhmermann himself. That case will move ahead no matter what Merkel decides.

A Chancellor Without Power

Merkel's attempts at appeasement have not borne fruit. On the contrary, the entire country can now plainly see that Erdogan has put Merkel under his control and can lead her around like a big cat in the circus.

And now, Germans aren't just wide awake. They are electrified.

Merkel, though, never really had much use for an electorate that was wide awake. The wonderful peace has once again been disturbed. If she allows legal proceedings to go ahead, she will lose more than the support of the new voting bloc she won over last fall: From conservative Turkey opponents to the very last of Merkel's new fans, everybody will suddenly realize the shameful extent of Merkel's kowtowing to her egomaniacal refugee-crisis partner. If she puts a stop to the legal proceedings, there is a risk that an insulted Erdogan will withdraw from the refugee deal -- and the horrific images from Idomeni are merely a foretaste of what then would take place at EU borders elsewhere. Many people will once again try to reach Europe and Germany, no matter how great the risks. Many will die. Merkel's already problematic attempt to solve the refugee crisis will have come crashing down around her.

In fact, it doesn't matter much how the chancellor ultimately decides. She has already lost. And a chancellor whose decisions no longer matter has forfeited her power.

Editorial Commentary

Panama Papers: Fresh Questions About Tax Evasion

Does crime pay if the proceeds are invested legally and profitably?

By Thomas G. Donlan

If you wonder about high taxes in the U.S. and around the world, take a look at some of the lessons of the so-called Panama Papers. The easiest one is that bank- and corporate-secrecy laws make it possible to hide income and wealth—whether earned in criminal enterprises or legitimately—from local tax collectors.
As President Barack Obama observed recently, when some people evade taxes, other taxpayers have to make up the lost revenue, so the rates go up. The president, of course, was not talking about gardeners and housekeepers working for cash, especially not in Beverly Hills, Chicago, or Washington, D.C. His attention was fully focused on international businesses.
“It’s not that they’re breaking the laws; it’s that the laws are so poorly designed that they allow people, if they’ve got enough lawyers and enough accountants, to wiggle out of responsibilities that ordinary citizens are having to abide by,” Obama said. He should have said that the laws are well designed by politicians and the people who pay them to make taxes easy to evade.
It’s a problem that is worse in poor countries. The Organization for Economic Cooperation and Development has estimated that developing countries lose three times as much to tax evasion as they receive from foreign aid. No matter where it happens, kleptocracy may have a lot to do with it: Tax evasion can be a breeze for a politically connected businessman, a central banker, or a finance-ministry official in a place where bribes take the place of taxes.
The Smell of Money
All the money isn’t stashed abroad: A ripe smell rises from the available U.S. statistics. Zillow, the online database of real estate, reports that 58% of real estate transactions in the last quarter of 2015 worth more than $3 million were made by limited-liability corporations, many of which are registered anonymously.
There are many legitimate reasons to use such a corporation, and there are several states where they can be registered as anonymously as in foreign tax havens. But extreme concern for privacy can be a sign of extreme attempts to hide ill-gotten gains.
Another bad sign is an high affinity for cash deals: RealtyTrac, another database, says 58% of property purchases in New York City were done for cash last year, as were 56% in Miami and the surrounding county.
The fuss over the Panama Papers should underscore the suspicion that underground economies are like icebergs—bigger than they seem. Unfortunately, the president and many others refuse to understand that there’s more to the shadow economy of secret offshore shell corporations than just tax evasion, political corruption, and money laundering.
A lesson of the Panama Papers is that business income-tax rates in many important countries—led by the U.S.—have met the Laffer curve. Rates that are too high are providing powerful incentives to do business under the table to evade tax collection.
Such rates are in part the result of the earnest desire of generations of politicians, from Woodrow Wilson to Obama, to have a “fairer” tax code—meaning, of course, a tax code that extracts more from business and the wealthy so that the government can invest more on its priorities. They see no virtue in a code that gently treats all income—or wealth or consumption—alike.
On one tax issue, the president says that corporate rates should be reduced. But he’d only cut the top rate from 35% to 28%, intending to leave the U.S. corporate tax as one of the highest in the world and to toughen the tax on foreign-source income. We say the right rate is zero—to leave taxes on business income to those who receive it as dividends or capital gains, and to force legions of tax lawyers and accountants into more productive work.
Productive Profits
Let’s not forget to think about what happens to the wealth—maybe $5 trillion, or some say as much as $30 trillion—stashed in tax havens and shell corporations. Set aside for the moment the sources of the funds and consider the uses.
Even serious criminals—drug dealers and the like—are trying to increase their wealth, so they must launder their ill-gotten gains and then invest them. As the U.S. Treasury explained last year, it’s a three-step process of placement, layering, and integration.
“First, the illegitimate funds are furtively introduced into the legitimate financial system. Then, the money is moved around to create confusion, sometimes by wiring or transferring through numerous accounts. Finally, it’s integrated into the financial system through additional transactions until the ‘dirty money’ appears ‘clean.’ ”
Once laundered, it’s a fairly safe bet that most of the money goes into closely held legal investments, such as real estate, art, investment partnerships, and hedge funds.
Since the banks and shell corporations pay interest to the depositors, we can assume that they invest the money. Although we can’t be sure what goes on behind the secret curtains, we may assume that they invest the money profitably, if not always in complete compliance with every law.
Criminal Enterprise
Now comes the question that most people never ask: Will owners controlling, say, a billion dollars deposited in Bermuda, the Bahamas, Luxembourg, or wherever, invest that money more profitably than the government that would like to tax it?
Is that a tough question? Let’s see: Which type of investor is trying to create more wealth, and which type of investor is spending money to create jobs?
After eight years of governments around the world trying to invest their taxpayers’ money to create jobs to recover from the Great Recession, we should stop wondering. The results have been dismal in the U.S., Europe, Japan, and China.
Many politicians and political economists say that governments just didn’t do enough spending to stimulate their economies. Another possibility is that their countries taxed too much, borrowed too much, and didn’t allow enough homegrown private investment.
Tax evasion is never patriotic, but it can be more practical than the tax collector.

Tax transparency

Two rights, wrong policy

A push to publish people’s tax returns pits transparency against privacy. Which should win?

THE “Panama papers”, a vast data leak on the use of offshore tax havens by the rich and powerful, have already claimed the scalp of Iceland’s prime minister. Now they are seriously embarrassing Britain’s leader. David Cameron will not—and should not—lose his job over revelations that his family has made use of offshore tax arrangements. But the Panama papers have led to clamorous demands that politicians should be required to make their tax returns public. Mr Cameron revealed six years of tax data on April 10th, the first time a British prime minister has done such a thing.

Questions about how much information should be made available on people’s tax affairs stretch beyond Britain. In America, where presidential candidates are used to public scrutiny of their returns, Donald Trump has been batting away requests that he release his tax records.

The debate also extends beyond politicians: in Norway, Sweden and Finland, everyone’s tax returns are available online. Working out where the line should be drawn on requiring the publication of individuals’ returns is not easy, because it brings into conflict two basic principles: transparency and privacy.

Arguments for Scandinavian-style radical transparency fall into two categories. The first is that it will reduce bad behaviour. People who know that their details can be scrutinised by friends and associates will report their income more meticulously, and hesitate before using convoluted schemes to minimise the taxes they pay. One study found that business owners declared 3% more income when Norway made its returns searchable online in 2001. The second is that more information will mean better choices: by individuals as they decide which jobs to pursue or wages to push for, and by policymakers as they examine issues such as equal pay.

The opposing camp musters several responses. Bad behaviour simply changes its form, rather than being eliminated: even those nice Scandinavians are fond of using foundation-owned corporate structures to reduce tax bills, for example. And transparency is as likely to encourage nosiness as better policy choices: in full-frontal Norway, many complain that the exercise does little more than furnish “tax porn” for the idly curious. A trove of aggregate data on income distribution and gender pay gaps is publicly available in many countries.

In defence of privacy
The case for privacy is not purely utilitarian: it is important in its own right. To justify putting everyone’s tax information in the public domain, the case must be made that it is the best way to achieve a greater good. That case is not compelling enough. A simpler code and more resources for the tax authorities are better ways to reduce tax-dodging than nosy neighbours and social shaming.

What of a narrower disclosure requirement, for politicians and others in positions of authority?

People in public office have less entitlement to privacy, the argument goes. Those who make the laws should show that they are not subject to conflicts of interest. If today’s systems for preventing conflicts are not working (Britain’s register of MPs’ interests has clear gaps), the remedy is to strengthen them rather than to throw tax returns into the breach. When it is only public figures who see their tax affairs spread out for the delectation of the multitudes, many people with useful skills will refuse to enter the public arena. Some 68% of British respondents told YouGov pollsters this month that they think all senior MPs should publish their tax returns; a growing number will no doubt do just that. But it should be a choice, not an obligation. The case that transparency should trump privacy is not convincing.

jueves, abril 28, 2016



The Task Ahead for Brazil

Camila Villard Duran

Rousseff brazil

SÃO PAULO – Brazil is confronting a triple crisis: a severe economic downturn, a corruption scandal that has ensnared the commanding heights of the economy and politics, and a government crisis that may soon culminate in the impeachment of President Dilma Rousseff. Regardless of whether Rousseff is removed from power, the key issue raised by the impeachment threat – her management of fiscal policy – underscores the need to overhaul Brazil’s economic institutions.
At the heart of the impeachment charges against Rousseff is an accusation that she violated Brazil’s Fiscal Responsibility Law. In 2014, facing re-election, Rousseff stepped up the practice of running overdrafts in public commercial banks in order to pay for social programs. In essence, she “borrowed” R$55.6 billion ($15.6 billion) to help her government meet its primary-surplus target while sustaining social transfers – and thus ensure her election victory.
In 2015, however, the federal accounting tribunal (TCU) rejected her accounts and accused Rousseff of committing fiscal irregularities. After the TCU decision, she decided to “pay” off these “loans” in December 2015.
Where did this money actually come from? So far, the impeachment debate has focused on politics, rather than on this precise economic and institutional concern. But if this type of fiscal legerdemain is not to recur, it is crucial to rethink Brazilian institutions, notably the central-bank’s relationship with the government.
Technically, a significant part of the repayment of this “borrowed” money came from the distribution of central-bank gains. But what gains? The accounting rules applied to the Central Bank of Brazil (BCB) allow for bi-annual transfers of gains (and losses) to the Treasury, which include unrealized profits. Currently, one of the most important sources is the accounting valuation of foreign-exchange reserves on the BCB’s balance sheet.
Brazil has more than $355 billion in reserves. I have argued elsewhere that the accumulation of reserves, despite its economic costs, gave Brazil political leverage internationally, by reducing its dependence on multilateral organizations. Since 2015, foreign-exchange reserves, combined with a complex regulatory environment, are also supporting domestic fiscal policies, with problematic implications for monetary policy and its autonomy.
A 2008 law created a procedure called “foreign exchange equalization,” similar to a swap. The BCB transmits to the Treasury the carrying cost of foreign-exchange reserves (the difference between their profitability, including changes in exchange rates, and the average funding cost) and the result of the currency swaps carried out in the domestic market (which are settled in local money).
Due to the US dollar’s sharp appreciation relative to the real in 2015, the foreign-exchange equalization result was more than R$45 billion higher than in 2014. This “gain” was deposited in the Treasury’s account at the BCB. In fact, the Treasury issued only R$1.5 billion in new bonds to cover the fiscal gap in 2015, with R$49.8 billion coming from “other sources” in the Treasury’s account at the central bank.
But such a massive distribution of a central bank’s gains can generate potential conflicts with its mission. A monetary authority is supposed to manage the money supply effectively, not generate gains. The BCB’s increasing gains, based on unrealized profits, risk seriously undermining its autonomy.
That autonomy is not based on law. The BCB’s governors have no fixed-term mandate and are supposed to follow the provisions of the National Monetary Council, a politically appointed body. But, since the adoption of inflation targeting in 1999, a certain degree of operational autonomy has been crucial to maintaining the credibility of monetary policy.
So what happened after the BCB transferred its unrealized profits to the Treasury? The government’s “repayment” of its “loans” caused liquidity to grow, forcing the BCB to intervene to meet its key interest-rate target. But open-market operations can be conducted only with Treasury securities: Brazil’s Fiscal Responsibility Law prohibits the BCB from issuing its own.
The combination of all these rules is damaging Brazil’s institutions. The Treasury has no incentive to increase the public debt by issuing more bonds for monetary policy. And even if the Treasury had issued R$40 billion in bonds within a week of the “settlement” of Rousseff’s “loans,” the government could legally have decided not to issue new securities, after all, blocking the proper functioning of monetary policy.
The only institutional answer, formulated recently by Finance Minister Nelson Barbosa, has been to introduce the possibility of central-bank remuneration of bank reserves. The BCB could then complement, or even replace, Treasuries’ repos, thereby framing its actions as money management and relocating it in the central bank.
Although I agree with Barbosa that monetary, not fiscal, instruments would better address this liquidity problem, the manipulation of reserves is less effective than securities in this regard, because reserves (and term deposits) are usually non-tradable. In fact, the crucial reform is to permit the BCB to issue its own securities.
Central bank bonds are a critical tool – especially for emerging countries – for managing the domestic monetary effects of huge amounts of foreign assets, particularly with respect to liquidity. Such instruments can ensure the central bank’s autonomy in managing money, while stimulating the development of the local bond market.
Brazil has an opportunity to restructure its key economic institutions, by combining the creation of new monetary tools with an overhaul of the relationship between the BCB and the Treasury. Once the immediate political crisis diminishes, Brazil needs to turn its attention to this reform imperative.