Pensions Dull America's Global Edge, Economist Says
Federal, state and local governments, along with many private companies, are struggling to get their finances in order, and many are looking at one major cost: pensions. Many pensions in the U.S. aren't sustainable, one economist says, and they've been dulling America's competitive edge for years.
"Companies have to make investment decisions, and having inordinate or very sizable pension costs means that their business strategy inherently has to change," says Dambisa Moyo, who has worked for investment firm Goldman Sachs and the World Bank.
"This has made American companies relatively uncompetitive when compared to their international counterparts, which have much more flexibility in the labor space and have not had the burden of pension costs anywhere to the degree that Western industrial companies have."
Moyo, the author of How the West Was Lost: Fifty Years of Economic Folly — and the Stark Choices Ahead, tells Morning Edition's Steve Inskeep that the problem with U.S. pensions is the way they're structured.
How the West Was Lost
By Dambisa Moyo
Hardcover, 240 pages
Farrar, Straus, and Giroux
List Price: $25.00
Read An Excerpt
"These are essentially what in financial terms were called 'out of the money options,' " she says. "They absolutely rested on the fact that we needed a larger, younger workforce that was always going to pay for an older generation."
But the shift in demographics means many more old-age pensioners are relying on a much smaller and shrinking work base, she says: "And we knew this, but it's one of these very convenient things that policymakers have been able to kick to the future."
Many corporations have been cutting pensions in recent years, either walking away from them — often illegally — or negotiating to get rid of them, or some have been handed off to the federal Pension Benefit Guaranty Corp.
Dambisa Moyo was named as one of Time's 100 most influential people of 2009. She was born in Lusaka, Zambia, and earned a Doctorate in Economics from Oxford University. Helen Jones Photography/Helen Jones Photography hide caption
Moyo says companies are doing this simply because "something has to give." And although the private sector seems to have come to terms with that idea "very begrudgingly," there isn't much clarity on how the public sector is handling it.
But "arguably the biggest problem that the United States faces over the medium term," she says, is Social Security — which Inskeep calls "the biggest of all pension plans."
Social Security, Medicare and Medicaid combined account for around 40 percent of the U.S. budget, she says.
"Your programs have to be viable, and something has to give," she says.
How the West Was Lost
Fifty Years of Economic Folly- and the Stark Choices Ahead
Excerpt: 'How the West Was Lost'
How the West Was Lost
By Dambisa Moyo
Hardcover, 240 pages
Farrar, Straus, and Giroux
List Price: $25.00
Much ado has been made of the seemingly inevitable economic decline of the industrialized West — the United States, in particular — and the 'rise of the rest', led by China. While most of this debate has tended to centre on historical patterns of imperialism and strategic and military considerations, canonical models of economic growth also offer a framework that highlights just how the West continues to misallocate the key ingredients necessary for long-term sustainable economic success and growth, to its detriment.
The evolution of growth theory has been a fascinating one, and one that cannot adequately be expounded in the short space that this book allows. An earlier incarnation in the economics literature began with the Harrod-Domar idea, which identified growth as solely a function of one input — capital.
In 1956, Robert Solow, an American professor at the Massachusetts Institute of Technology, built on this one-input model by demonstrating that labour too played a crucial and determinate role in delivering growth. For 'his contributions to the theory of economic growth,' Solow was awarded the Nobel Prize for Economics in 1987, and for a time the Solow model, which saw growth as determined by capital and labour, remained the backbone of the macroeconomic growth literature for many years.
However, it must have come as something of a surprise that when these seemingly logical explanations for growth were subjected to empirical scrutiny, the accounted for only 40 per cent of a country's economic prosperity. There was a missing component; and a large one at that. This hitherto unidentified factor — the 60 per cent — has come to be known as total factor productivity, a catch-all phrase which encompasses technological development as well as anything not captured by the capital and labour inputs, such as culture and institutions. Thus canonical economic models point to three essential ingredients which determine economic growth: capital, labour, and total factor productivity. These are the pistons which drive the cylinders of economic growth. Finely tuned and working in unison, they motor an engine of near limitless power.
Perhaps nothing illustrates the might, the sheer potency, of these three components coming together better than the American moon landing in July 1969. The gauntlet thrown down by President Kennedy in 1961, to land a man on the moon by the end of the decade, could not have been more ambitious. Goaded by the seemingly more adept Russian space programme, which was first with an object — Sputnik-1 (1957) — first with a living creature — Laika the god (1957) — and, of course, first with a man — Yuri Gagarin (1961) — Kennedy captured the spirit of the times in his famous words: 'We choose to go to the moon in this decade and do the other things not because they are easy, but because they are hard.'
The history of the Apollo programme, its personalities, its spirit of adventure, remains one of the most celebrated moments in American (and world) history, and rightly so. But it is also the supreme example of the confluence of capital, labour and technology, each at the height of its powers and all of them working as one. America had the capital, it had the labour, and, ultimately, it had the technology. The facts and figures speak volumes.
In terms of capital, the costs of the Apollo project were astronomical. The annual budget of the National Aeronautics and Space Administration (NASA) increased from US$500m in 1960 to a high point of US$5.2bn in 1965 — representing 5.3 per cent of that year's federal budget (5 per cent of today's US budget would be around US$125bn). As a reference point, the Vietnamese war is thought to have cost around US$111bn (US$686bn in 2008 dollars). All told, the final cost of the Apollo project was between US$20bn and US$25bn in 1969 dollars (or approximately US$135bn in 2005 dollars).
Cash was only one component of the Apollo challenge. To realize its goal America had to draw upon the two other essentials: labour and technology. Luckily for America, it could.
To this end, a huge army of personnel were enlisted. By 1966, NASA's civil service list had grown to 36,000 people from the 10,000 the agency employed in 1960. NASA's space programme would also require that the agency call upon thousands upon thousands of outside technicians and scientists. From 1960 to 1965 individuals working on the programme increased by a factor of 10, from 36,000 to an astonishing 376,000. The more critical point here was not that NASA needed to find such a vast amount of talent, but rather that it could. And where the talent did not exist, NASA created it. Private industries, research institutions and universities provided the majority of these personnel. It was this labour force that would invent and build the technology which would catapult America to the forefront of the space race and put Neil Armstrong and Buzz Aldrin on the moon — an accomplishment often cited to this day as the greatest technological achievement in history.
The technological feats of the Apollo programme were truly awe-inspiring. While marveling at the wonder, the approximately one fifth of the world's population that watched the live transmission of the first Apollo moon landing would have struggled to appreciate the phenomenal behind-the-scenes technological brilliance that had made this possible
The idea of a lunar landing had been through ten years of trials, prototypes and numerous setbacks in order to make it a reality. From the huge Saturn rockets that had the power to lift a US destroyer into space, to the lunar module that landed two 150-pound men on the moon, and to each of the hundreds of thousands of components and parts that had yet to be researched, designed, built, and tested, the apparatus of the Apollo was breathtaking in its vastness and complexity.
It did not stop there: the programme spurred advances in many areas of technology peripheral to rocketry and manned spaceflight, including avionics, telecommunications and computing, as well as in the fields of engineering, statistical methods, and civil, mechanical and electrical engineering. This is the power of ideas. Beyond the immediate machine or contraption the spill-over effects are the real gains of technology. And because once an idea is out it can be used and improved upon by anyone, anywhere, an idea has the marginal cost of zero.
Excerpted from How the West Was Lost by Dambisa Moyo. Copyright 2011 by Dambisa Moyo. Published by Farrar, Straus and Giroux. All Rights Reserved.