Friday, July 16, 2010

Healthcare and Pension - Unkept Promises?

The US deficit situation is dire. The option proposed is a drastic cut in healthcare and pension. Aside from the economic imperative, we need to ask if it is fair.

It was an unfair promise
One can say that American workers (including knowledge workers) overestimate their contribution, at least compared to the workers (note-1) globally. On the flip side, we can say that the wages the world over are depressed.  In whatever terms, option of cheaper workforce existed. Prior to the tech boom, such a workforce was not accessible (note -2). Thus the dependance on American workforce was higher which reflected in the wages and benefits. We may conclude that on the whole, American workers were promised higher benefits in terms of healthcare and pensions.

But it was a promise nevertheless
But whatever the promise was, the benefits were promised to the workforce. It gave the population a feeling of comfort about their future. It is possible that this comfort allowed them to spend more than otherwise acceptable. To renege on this commitment can be viewed, to a large extent, as a betrayal of the population.

On the other side, I cannot see why the ratings agencies cannot consider this as a default? At the very least it is restructuring and definitely not a behaviour fitting a AAA institution. The problem, I think, is how a government and its people are perceived. The sovereign ratings refer the ratings of the government. Can we think of government as different from its people? In spirit of the political set up, no. But reality suggests differently. 

Political setup is far removed from the general population
The political establishment is no longer a true representative of the general population. There has been a systematic undermining of legitimate political rights of the general population as I argue in my book. That we are discussing openly laws or portions of laws being thwarted by big institution is a disgusting reality. Just today, Barry Ritholtz highlights on the Times covers about lobbying efforts.

In such a scenario, is it fair that government should be seen as acting in connivance with the general population? I don't think so. This does turn many assumptions about "investment grade" upside down. Even then, I do not see investors discussing these issues.

Worse, the population is too naive to understand
The final straw is the reluctance of the population to understand. As if it is in a deep slumber, the general population does nothing! To a certain extent, they deserve it. 


Notes
  1. For the purpose of the discussion we adjust for productivity - implying we are comparing workers with similar productivity level.
  2. The tech boom combined with globalisation enabled better access to such cheaper workforce option. It is one possible causes that may have resulted in wage stagnation in US.