Costs of Living, Today and 1958

An old friend posted the following on her facebook page which showed the cost of living in 1958. On the one hand, it seems that things were so much less expensive, on the other, factors like efficiency gains, and inflation make a $ to $ comparison pretty tricky.

1958 Cost of Living
From GetTV facebook page

As a result, I decided to go do some digging, first to spot check some of the 1958 data, and then capture some 2012-2014 data to use as a comparison. Getting back to the $ to $ comparison, I pondered using CPI, but decided to go with household median income as the factor for normalization.  Being  a 10.003 multiplier is a bit higher than CPI 8.06[1958-2013] it makes the increases harder hitting, but being most households require 2 FT incomes today, the harder hitting aspect seems justifiable.

Take a look at the spreadsheet and source data.

Going down the list, a few things stood out.

1. Female median income has shot through the roof,  being over 300% higher than it was in 1958. Granted, gender inequality is still at play, but labor participation rates are much much higher.

2. Real estate has gotten insanely expensive. Elizabeth Warren brought this up as an anti-family thing / loss of reserve capability a ways back in her book “A Fighting Chance“.  While her conclusions are entirely reasonable, its interesting to note that from a real estate rental point of view, the reverse effect, albeit slight, has occurred. Namely, back in 1958, it was a much better deal to buy than to rent as mortgage payments were under half the cost of renting, where as today’s declining rents have made it near equal.

3. Tax rates are much much less than they were back then, and not just the 91% top marginal rate, but pretty overall, folks are paying much much less. Then again, folks were serious about getting rid of WWII debt, and they were serious about investing for the future too. Alas, neither is much of a priority today, unless one is talking about govt spending on programs one likes or doesn’t like depending upon party affiliation.

4.  Per-capita health spending is in crazy land. We went from $134 per-capita in 1958 to nearly $9000 per-capita, and for that huge amount of spending, we get an increase of life span of about ten years.

5. Tuition has gotten crazy, both at the Ivy League as well as the state level. Back in 1958, taxpayers saw technical colleges and universities as a means of investing for the future and most states subsidized tuition 100% or very close to it. In recent years, most states have cut their share of tuition more and more. Higher ed is no longer an investment in the next generation, but more so, an entity to be cash-cowed. We do so at our peril.

6. The costs of food have dropped multifold. Its no wonder that its near impossible to make money in the dairy industry anymore, short of having a boutique offering or massive scale. Similar things could be said for other staples, albeit nothing was hit as hard as milk as far as price deterioration goes.

As far as the the why aspect goes, crony capitalism, global competition, and Baumols curse have all played a role as to where we are today.  Short of some black swan or science fiction type event, we are stuck with Baumol, he isn’t going anywhere fast. Global competition is a hard read, its a pig in a poke as to predicting where it will lead within the 3 big cost issues…. but crony capitalism, that we can do something about, the question is whether there is any will to do so.

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Math is not Partisan, but People are

Math is truly independent, it is no respecter of political party. Alas, the left and the right selectively omit key parts of the equation to swing their respective constituencies and folks go right along with it. Such is a useful thing to rally ones own troops, but its about the worst possible thing if you really want to solve a given problem… like the deficit.

Yes, Obama increased spending the least of any President since Eisenhower. Yes, he spent less than GW Bush did as well….  but only during Bush’s last fiscal year, and definitely not if you consider the total spending over an 8 year period. Also, being budgetary restraint is not typically associated with the left, I sort of doubt that would have happened, had it not been for the Republican house.

Yes, Mr Ramsey makes a point that insurance companies will need to charge more if they can no longer cut people off, and have to insure folks with pre-existing conditions…. but only by omitting the savings due to increased risk pool size, non-recoverable EMTALA / related charges, and the 80/20 rule.

Yes, Obamacare will reduce premiums and/or the rate of premium increases… but only within the realm of apples to apples comparisons. It is very likely to increase premiums for those who held stop loss policies, and/or policies which excluded or capped spendy conditions / courses of treatments, and or flat rate policies in contrast with policies based upon individual family makeup… which is in all likelyhood, a great number of current low cost policies.

Yes, by choosing EMTALA over preventative care, significantly costs are shifted to Medicaid and Medicare…. but math is politically incorrect. As the population experiences substantially longer life spans via preventative care, the costs of social security benefits will increase, potentially multifold and completely blow through the savings from Medicare and Medicaid.

Yes, trickle down economics, referred to as voodoo economics by Reagan works…. if you are on the upper side of the Laffer curve (70%+ top marginal rates of the 50’s and 60’s) and capital is in short supply. If you are on the lower part of the curve and have excess capital supply, it not only doesn’t work, its exceedingly counterproductive.

Yes, according to a GAO report, Obamacare will raise the national debt 6.2 trillion… over a 75 year period, but only if every cost saving measure currently in Obamacare is repealed in the very near future.

Yes, according to the same GAO report Obamacare will shrink the deficit by 1.5% every year…. but only if every cost savings measure including the SGR in reference to the Balanced Budget Act of 1997 are followed. Alas, SGR override  (the doc fix) is probably one of the only things we can count on congress to do every year.

All of that being said… In the old days of politics, it was standard practice to mislead the voters, but one could count on the politicians seeing the big picture. Today, I’m becoming more and more convinced that not only are politicians misleading voters, they themselves are starting to actually believe the sound-bit falsehoods themselves.  Just as you can’t solve the deficit by only cutting, you can’t solve it either by only raising taxes. It will take both… and if politicians intentionally refuse to see the big picture, the only thing sure to happen is that the deficit will increase.

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On the Deficit

Yes, the deficit is a big deal…

According to usgovernmentdebt, the US Govt in 2013 takes in 2.7 trillion, and spends 3.7 trillion, so we have a deficit plus other borrowing of 1.2 trillion. The sequester cuts in 2013 work out to be 42 billion as far as cash outlays go.

Alas, folks don’t normally think in large numbers so it never hits home.Lets look at this in a more meaningful fashion, by working in $100 million increments. Kudo’s for open desktop mechanic for the idea.

*            Year 2013                    *
*                                         *
   27,000 income
   37,000 spending
   12,080 new debt + borrowing + interest
    - 420 actual cash reduction via sequestration 

and as an fyi, the national debt in $100 million units is
*                                         *

#### Apparently even usgovernmentdebt is math challenged, as some of the data is actual, some is projected/estimated, some is out of date, and the math doesn’t add up worth a hoot… But the relative magnitudes are the bigger deal for the sake of this discussion.

Thus, we do have a problem, and its definitely not one we should put our head in the sand over.

Its an especially sad deal as it could be solved without too much difficulty, much less human carnage other than within the political/lobbyist domain. It doesn’t take much observation to see insane levels of duplication and/or policies fostering massive inefficiency. On the other hand, such duplication and inefficiency issues are partisan, and should they revolve around golden gooses to to speak, they are untouchable.

Back in my business consulting days, I could walk into a plant, and go wowzers, look at all the money needlessly leaking out the door… but horrors that anyone would stop the leak, that is until the entity was to the point of having to close up shop. The golden goose idol ruled the roost, that is until the last possible minute before going under. Its the same problem with government, its not really a revenue issue, its not really a spending problem either, its a philosophy problem. Until you remove the idol, you won’t change policies / regs which foster wastage. Unless you rip out the regs first, any attempts at budget revision are like trying to dam up a river with a finger. It will flow right around it, and if the current is fast enough, it will rip the finger right off.





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Throw Money at a Problem and Hope it Goes Away

Back when I was a Republican, this is what I accused Democrats of doing. The thing is, its not just a Democrat thing. It now seems that throwing money and crossing ones fingers is an approach of both parties. Advocating greater govt investment in higher ed without addressing the structural problems that drive costs much higher than the cost of inflation is a clear example of throwing money from the Democrat side.The proverbial cut taxes, decrease regs is likewise pretty much just throwing money at the jobs problem…

The thing is, there is an element of truth in the throwing money approach… ie, it can work, especially in the short term, but it often has longer term unintended consequences. The most blatant and recent example is QE1, QE2, and likely soon to be QE3. From a success point of view, worldwide CDS exposure has shrunk big time, banks have recapitalized, and the stock market is nearly back to where it was in spring 2008. The problem of course is that quantitative easing is a bandaid, it buys time, but eventually it comes loose… If it provides enough time for the structural problems underneath to resolve themselves, it can be a very good thing.

From a Republican perspective, cutting taxes rather than govt spending provides for greater scaling. Ie, a dollar spent privately returns much more than a dollar spent by Uncle Sam. An analysis of post WWII tax policies and GDP states that for each 1% of a GDP tax increase, GDP will decrease somewhere between 2.5% and 3%. This is one of the big motivators behind GOP economic thinking… and is often mistakenly soundbited to mean that private investment outdoes govt spending 2.5:1 or more.

One could easily counter this, by simply considering the last decade. Had it not been for govt spending, the GDP would be in the toilet, and the jobs situation would be loads worse.

The bottom line of course is that many other factors are at play… if customers dont have money, whether cash or credit, it doesnt matter how much a business invests to try to get them to buy. Likewise, if a competitor can operate at a small percentage of ones fully burdened costs, no amount of investment or efficiency gains can make up for the difference.

Lastly, there is the issue of moral hazard. Throwing money at a problem may well serve to bolster a business as usual approach with no urgency to consider, much less address underlying structural problems. We see this with the reluctance to regulate creative financial products post bank bailout. We see it in higher ed with spiraling costs and a focus on luxury dorms and boatloads of overhead all the while teaching remains stagnant and tuition shoots through the roof.

So what is the answer? Money must continued to be thrown at problems in the short term, both by govt spending and minimal if any tax increases… not doing so would crash the GDP even worse than had nothing been done in 2008. Debt reduction needs to be addressed too, but over the long term or it too will crash the GDP. Bottom line, the unintended consequences and the moral hazards of throwing money must be addressed. Continuing with business as usual while waiting for some type of positive black swan to magically appear is not the answer.

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The Pharmacy and the Bridgeport

Some years back, a friend rented out an old pharmacy on a small towns mainstreet. He chose its location as the rent was super low due to the mass exodus of retail shops common to many small towns and the fact there was no basement under the rear part of the store. In fact, the rear of the store was merely a floor over a big cement slab… in other words, pull up the floor, and its perfect for a massive bridgeport mill.4727561752

It was pretty interesting, in that he left the drugstore signage in place, and pretty much did nothing as far as facility improvements. A pharmacy could have moved back in should he leave with no problems… other than putting down a floor over the base concrete in the back.

If memory serves, he spent 3 years in the pharmacy before having a building built to contain not only the single Bridgeport he started with, but 4 very large machining centers, an EDM machine, a couple 20 ton injection molding machines and warehouse and office space. A few years after that he had some 30 employees working 2 shifts cranking out parts left and right… it ended when an out of state corporation made him an offer he couldn’t refuse.

Today, it seems many firms want a custom building just for them right from the get go. It also seems govt also wants to go down that path by making the financial path of new construction a lot easier than merely making do with what one can find at any number of deserted main streets. Certainly a turn key buildings makes for one less headache for a startup to deal with, and likely is vastly more energy efficient than converted retail space to say nothing of the potential headaches of small town zoning / conditional use permits. Likewise, its politically an easy sell to provide construction jobs right now, rather than a spreadsheet projecting a need for employees down the road. Yet… is this really where government gets the best bang for a buck?

Most startup firms, especially ones pushing the envelope a bit are not going to make it. Is it better to have an govt funded albatross building which may sit unused for years even though it provided short term construction jobs? It might be better for govt to provide an easier path for startup firms, ie rather than providing construction loans or even seed funding.

If the govt is really serious about new firms, perhaps they should consider providing services to comply with the myriad of govt regs? In other words, let one part of govt duke it out with other parts of government on the part of the startup. Such would leave the startup fairly free to focus on their core function rather than appeasing agency after agency and form after form? This would have the added value, that when a business transitions from $100K in sales a year to $1 million, that all their initial regulatory ducks were in a row.

Business incubator programs typically focus on real estate… when often times boatloads of unoccupied real estate just sit there. Likewise, many startups get buried before they start with regulatory compliance overhead. Imagine if their was an incentive to hire the first 5-10 employees via fee reduction, or even exemption, rather than the 50% or more overhead added to each employee’s payroll cost?

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Credentialling is Bogus

I was doing some repair work on a printer, and I came across this dudes blog where he proceeds to shoot holes in credentials and certifications. He is 100% right on the mark with this…

Credentialling and licensing is the same stupidity that state government (often with GOP sponsors) keeps pushing towards for more and more occupations all the time. For sure, no one wants a bozo changing out medical gas cylinders… but I’m not sure that a multiple choice exam followed by each and every installer paying the state $30 every year is going to amount to a hill of beans safety wise.

The thing is, if one is really concerned about the hazards of an given occupation, the answer is not certification via multiple choice exams and huge gifts to credentialling outfits and testing firms. Likewise, the answer is not X numbers of hours of education, or a gift to some educational entity by requiring mandatory training that only they can provide…

The bottom line questions are “Can Joe safely and efficiently do the work entailed by X profession?” and secondly “Can Joe continue to do so year after year, especially as the profession changes. The challenge of course is finding this out in the most efficient way possible…

As it is right now, there is no carrot other than from competition for dollars, being the chosen educational provider gets lunch for free on fine china courtesy of politicians.

One way to force the issue would be to require bonding on the part of the educational institute, such that if Joe screws up, they have to eat the cost. Likewise, rather than paying the educational provider by the hour, tie their compensation to data driven measurements of Joe’s safety efficiency prior to the class, and then the efficiency gained post class over a 1 year period… Granted, in such a high stakes environment for the provider, a significant carrot would be required for them to take on such an approach. On the other hand, the status quo of Joe’s mere memorizing trivia and paying through the nose for a piece of paper is near useless and pretty darn expensive to boot. With huge risk, and a huge carrot, competition just might drive home really efficient and cost effective education rather than politicized money distribution disguised as education.

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Lower Taxes, Decrease Regs and Magic

The majority of talking points on tv I’ve picked up from the GOP is lowered taxes, decreased regs, and its like magic, gas is cheap and unemployment is 5% overnight… Um sure.

Rather, I think the above path would mean a depression worse than 1929 in short order… I am not cynical enough to think that the GOP’s intent is the intentional destruction of USA, leaving it at third world 2.0 economic status. As such, there must be some logic, and some type of plan as to how that would play out successfully for all, or at least a significant number.

Such is what I asked a conservative friend, and the answer was that feedback from the free market thru pricing signals / supply / demand etc would solve many of the problems organically.

My response was that such assumes that the system is closed, that no alternatives exist, and that wealth is unlimited. Furthermore, I do agree that price signals make sense, that is until heavy duty manipulation enters into the ball game and renders them near useless.

I came up with the following counter arguments as to the free market, price signals, and a limit on wealth.

1. A competitor will come in and counter jacked up prices, thus mitigating their effect. This could work, but only if the market lead times were short enough for such to be viable. Ie, if I start a company today to compete with current or next gen Viagra, its going to take at least ten, if not twenty years or more before I can make any money off of it.

2. Over a very long period of time, the effects of price manipulation, and/or drastically shifting import/export mixes would ebb and flow such that they would average out. The net effect of this is that world prices for goods, materials, and labor equalize. Ie, all end up on a somewhat level playing field…. the exception being if we were to compete with a Keynes based economy.

3. Wealth is very much limited, in that many potential paths have such a high risk element combined with exceedingly low payback aspects that no investor in their right mind would enter the playing field. Case in point, our nations electrical grid has been in trouble for years… and yet nothing has really been done to address such, and likely nothing will be done until a massive section crashes and burns. The financials just dont make sense, as you cant predict when the system will collapse enough on a massive scale to justify a number of quarters of horrible returns.

By the same token, the conservatives are not entirely in error… the bit about lowered taxes can work, provided the taxes are high enough. Ie back in 70’s when taxes were nearly double what they are today, lower taxes could work. Otoh, when taxes are as low as they are today, debt is as high as it is, the Laffer models fall flat. People cant work enough to generate enough taxes… unless we switch to 80-120 hour work weeks.

There is some sweet spot between where we are today tax wise, and where we were in the 70’s. I think HW Bush had things pretty much right on the mark, and thus the economy did well during the Clinton era. We even had a surplus!

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The Immoral Nature of Not Raising the Debt Ceiling

BusinessWeek has a fascinating article entitled “The Debt Debate, What About Honor”. In a nutshell, the authors premise that an intentional failure to pay ones obligations was dishonorable, and that conservatives proposing such was counter to their core beliefs. As one might expect, being that honor/purity is a key aspect of conservative values, the negative feedback was pretty intense. More than a few commentors called it idiotic, and that they were cancelling their subscription etc.

Most of the comments said something like the following… “yes, we must pay our obligations, ie what we owe to the bondholders etc, but we must stop spending. You dont give more booze to a drunken sailor.” Such is a reasonable response, but it requires one to separate loan payments, from previously made contractual obligations.

If major retailer comes to a mfgr, and says, I’m placing an order for 100,000 widgets over the next year, and I will guarantee I will take all of them, and I will pay you 1/12th every month, irrespective of sales volumes… If the retailor has a great track record of honoring its obligations, the mfgr will add staff, inventory, etc and commit to the contract. Likewise, with such a guarantee, an operating line of credit to make such happen is pretty likely. If the retailor is a startup, or has a marginal track record, and offers no guarantee, no way no how would any mfgr do so, as all the risk is on their shoulders, and likewise, it would be near impossible to secure an operating line of credit.

The US govt has long held the stance of a reliable and secure retailer in the above example. If they say they are entering into a contract, and the go ahead is given, bailing on said contracts midstream is unthinkable. States depend on fed money, govt contractors depend on fed money, etc etc. The government has stood behind its contractual obligations, short of any specific outs written into the contract. For the govt to arbitrarily say… sorry guys, we decided not to pay you, as we dont want to, is unthinkable, and will cause untold amounts of damage throughout the system.

Imagine with all the schools starting in August, how many will be in real trouble if they recieve 56% or possibly quite a bit less federal money than what they were expecting. Imagine the sticky deals where schools are mandated to do abcdef by law, and yet will not recieve any funds to do so. Imagine the ripples in agriculture if all of a sudden all the subsidies and price supports evaporate overnight just as harvest time rolls onto the scene. Imagine the morale of our military when they only receive about half of their paycheck.

The bottom line issue is this… you dont show up at the vendor at 4:59PM the day the payment is due, and then say sorry, we dont want to pay you, as we’d need to get another loan, and dont want to do that. Rather, when you write the funding bills, you cut this, or cut that, and simply dont enter into any contracts you aren’t willing to pay for. Granted, on a practical level, it’s very difficult to cut any programs when putting the budget together, but such is the job politicians are elected for. If they dont, there is always another one wanting to step into the fray.

Contractual obligations which are life safety critical (bullets for soldiers, medicare payments for life support etc) should always be held at a higher priority than loan obligations, that is, if one truly values life in actions rather than just words. Creditors recieve interest in return for a risk of not being paid… the greater the risk, the greater the interest. Yes, in the ideal world, loan obligations would be honored, but if the govt has to pick and choose who to pay as they have no money at all, human life should rank much more than financial agreements.

Then again, the argument that the govt is out of money is a bogus one… taxes are at their lowest point in 50 years, and investors are more than willing to buy more debt. Yes, debt is too high, government spending is too high, and yes the spending spree does need to be reveresed, but it can and should be done with honor during the budgeting process, not by playing a fast one, and using a crisis to intentionally bail on ones committed obligations.

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If Default Occurs, by the Numbers

Here is one of a number of breakdowns if the US was to instantaneously switch over to a cash in cash out basis, and would have to prioritize spending.


In a nutshell, the federal government would have to shrink 44% overnight….

Then again, such an analysis assumes a number of things.

  • That all income comes in at once, and all expenses come in at once… and they dont.
  • That there is zero cash on hand. However there is, albeit there is the question as to how long incoming revenues? on hand could last. The best I can figure is a total switch to cash in – cash out won’t occur until mid month a week or so.
  • That the treasury can prioritize who gets paid. The GAO says that debts can be liquidated, but really nothing about prioritization. Any attempt at prioritization by the treasury would end up in court forever, short of it being voted into law.

Some folks may feel that social security and medicare are safe, being they are paid from the trust funds… and they are in a sort of convoluted fashion. However, the supreme court deemed them not a property right, so it is exceedingly likely that they will be lower priority than paying the creditors in China and Japan. Then again, any congress person voting against paying someones social security check would be committing political suicide… thus, a bill to set such priorities would likely be bundled with paying middle east contractors or some other golden calf.

A more realistic scenario is…. govt screws around until the last hour, could be August 3rd, could be as late as Aug 23rd, and then the debt ceiling will be raised… and sadly if the GDP takes a header which is a fair possibility, it will have to be raised a whole lot more than what is currently proposed. The exception to this is if institutional investors (Wall Street, China, Japan) feel they are not well protected, they will force govt to act sooner rather than later.

An interesting observation of the power of institutional investors might be drawn from the date the debt ceiling is raised. If by chance it should occur before Aug 3rd, they are scared to death and very powerful. Otoh, if it drags on until defaults start to occur in drips and drabs, either they are exceedingly well protected somehow, and/or their ability to influence government has dropped multifold since 2008. If by some chance, the debt ceiling doesnt get raised… it becomes clear they have found the ultimate in protection. The tea party, no matter how vocal is nowhere near as poweful as the trillions of dollars at stake.

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Liberal and Conservative Values on Defense Spending

If one looks at the following defense spending data in isolation, it appears to be insanity^3.

Data from Stockholm International Peace Reseatch Institute

The thing is, defense spending is driven not by statistics or economics, but one of moral values. Ie, risk analysis defined spending based upon probability and consequences doesnt justify our spending 6X more than China (who pretty much bankrolls our economy), unless one starts playing moral games with the consequences factors.

In the post cold war era we live in now, a proportional response is preferred over nuclear action, even though economics alone would dictate otherwise. Ie, nuclear annihilation of an enemy even though it might be a very tiny fraction of the cost of troop engagement is anathama to the purity(disgust) aspect of morality. As such, while one could reduce military spending multifold, having the majority of ones efforts being limited to nuclear is problematic to both liberals and conservatives. A secondary issue of such a stance is the economic costs with the massive numbers of troops and defense contractors who would become unemployed.

Many on both sides have suggested that we return to the age old practice of isolationism… There is no question that having military bases scattered throughout the world is insanely expensive, to say nothing of the wars in the middle east. Some might say we have air to air refueling and thus we dont need as many bases. On the other hand, the KC-135 is approaching vintage status, (first flew in 57), albeit it is projected to be in service until 2040.

The counter to isolationism is that worldwide oils price and supply have a direct effect on our economy. Any actions affecting the worlds oilfieds and/or pipelines or even Gulf of Mexico oil leases could likewise cause major disruptions in the price and/or supply of oil. The reason this is a big deal to many is the US consumes about 24% of the worlds oil production… mess with oil nearly anywhere, and our way of life as we know it gets messed with severely.

This is compounded in that we are only 4% of the worlds population, and emerging economies oil usage is increasing exponentially. At the same time easily recovered and affordable oil is becoming more and more scarce all the time. Yes, the Bakken fields and other potential sites within the US boundaries might provide more than enough oil for our needs, but its recovery may not be economically feasible.

The private sector cannot justify the long term risk and investment needed for what may likely be a very small return due to massive drops in demand due to the resulting high price of oil. By the same token, a multiyear government program on the scale of the Apollo might work, but would also include substantial risk and waste… and thats without political partisanship and meddling.

A liberal response to such is it should be a priority to reduce our dependence upon foreign oil. Such makes good sound bites, but folks have been saying we need an energy policy since the 70’s and virtually nothing has happened… as cheap oil drives the economy. Ultimately though, geology is likely to force the issue, probably a lot sooner than most realize.

This is where the values on defense spending divide liberals and conservatives. (some comments from gailtheactuary’s blog)

Insisting that the US has some kind of right to burn all or most of the world’s remaining oil wastefully is dangerous, myopic nonsense. The US has in fact neither the right nor the might to do this comprehensively. Furthermore, the US has no pressing need to do so and could maintain a very good standard of living (equivalent to the West European standard) on about a quarter of its current oil consumption.

In contrast with

Might makes right. Pretty much every single time. God fights on the side with the biggest artillery. It is indeed dangerous, but the point is to make it dangerous to the competition, not your kids. It’s certainly not myopic nonsense. It’s the opposite. It positions to dominate the inevitable.

… Point being, regardless of the level of life, or of society, you will always want your kids to be in the dominant configuration. That’s why it’s not myopic. It positions to dominate the inevitable, regardless of what society that is dominated looks like.

And there in lies the heirarchy and peergroup value sectors that divide liberals and conservatives.

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