Much has been written about the ills of our country–particularly in the economic arena. If one wanted to get depressed, there are innumerable statistics available at your disposal: a gross public debt level approaching 100% of GDP, federal deficits of 10% of GDP, millions of home owners upside-down on their homes, trade deficits for the past 40 years, a congress who refuses to deal with unfunded social security and Medicare liabilities… the list goes on and on. However, if I could pick one thing that encapsulated the problems in our country it would be the California prison system.
There are many ways in which the California prison system is relevant to economic woes of our country. First of all, the sheer size of it should be an embarrassment to a Western country (or state). The size of our correctional system goes a long way to explaining fiscal woes and indebtedness more generally. The prison system also betrays a certain softness of the US population–“softness” refers both to the comfort that people have (and feel entitled to) in the US, and to the idleness and immorality that allows/drives people to pursue lives of drugs and crime. Finally, the prison system illustrates the difficulty our government has in making tough decisions–and the system has been built up around a soft, idle, and immoral people. While the US has some of the hardest working people in the world they are exceptions. And in my experience, even the hardest workers still refer to themselves as a shadow of the men and women they admired when they were growing up.
Some eye opening statistics for California prisons are:
- California prison population – 169,000
- California cost per prisoner – $45,000/year
- Annual cost for California prisons – $7.6 billion/year
- 600 out of every 100,000 adults in California are in prison and $4 out of every $1000 of California’s GDP is spent on prisons.
The last statistic is perhaps the most damning–other Western countries incarceration rates range from 50 per 100,000 (Sweden) to 135 per 100,000 (United Kingdom.) That means that California (and the United States in general) has an incarceration rate of 5 to 10 times that of other Western countries. This is a key example of our inability to make tough decisions: other countries have either a low incarceration rate or low costs per prisoner. We have developed a system with both high incarceration rates and high costs per prisoner. Consider the implications of locking up 0.6% of the working population and paying another 0.4% of GDP to keep them under lock and key!
Another area that illustrates our inability to make tough decisions is the war on drugs. Drug arrests and drug related arrests play a larger and larger role each year in our correctional facilities. Most countries decide to have either very strict cultural and legal punishments for drug use, or spend significantly less resources persecuting and imprisoning drug users. Our country on the other hand does neither–our culture and legal punishments are not strict enough to effectively dissuade drug use, and yet we dedicate huge resources to a war on drugs that puts many thousands more behind bars each year.
Perhaps the most relevant economic side effect of our prison system is its implication for our GDP and our debt. If we are spending money incarcerating Americans, we are losing on two fronts: the first is the cost of keeping people in prison is money that is spent on a service (prison guards, administration, maintenance, etc.) that we cannot export; the second way we lose is that the people kept in prison provide very little in the way of GDP– modern prisoners do not, for example, work on chain gangs repairing or installing infrastructure.
One can intuitively understand that while prisons may be a necessary part of society, the more resources dedicated to it, the less that is available for all other areas of the economy. A quick comparison with other Western countries indicates that it is possible to have an advanced society which spends a fraction of the percentage the US does on incarceration. And while one dollar spent on prisons counts the same in GDP data as a dollar spent constructing an iPhone or catching and processing salmon, that same dollar has a radically different affect on the short and long-term health of our country.
There is an economic identity that says that domestic investment must equal the sum of net private saving/borrowing, net government saving/borrowing, and the current account surplus/deficit. For every dollar we go into debt we depend more and more on the foreign funding of our investment. Ultimately, this leads to a road where our domestic investments are owned by foreigners. Ultimately, the import/export balance of goods and services plays a crucial role in our national level of debt, and gross indebtedness acts as a decent predictor for future economic misery.
On this topic, one has to wonder about the correlation between incarceration rates and the trade deficit. While it is difficult to say whether it is the chicken or the egg, it is at least an attractive explanation to say that as jobs moved offshore, we have imprisoned a percentage of the people who would have been employed by those jobs. Broadly speaking, the US ran a trade surplus from WW1 until the late 1960s and has run a trade deficit since then. Figure 1 shows incarceration rates from 1910 to present, and also the current account balance and trade deficit since 1920. The current account deficit that developed after 1970 reflects the deteriorating trade deficit that occurred as other countries competitively devalued their currencies.
Figure 1: US Incarceration rates and the current account deficit. Red line displays current account deficit after 1960 and trade deficit/surplus before 1960. Low incarceration rates accompanied trade surpluses, while high incarceration rates accompany trade deficits and current account deficits. St Louis Fed, Commerce Department, Bureau of Justice Statistics
Proposing a specific solution to this dilemma is obviously beyond the skill and scope of this article. However, it seems whatever the solution, it needs to be inspired. With a problem this large, it seems that the solution needs to be sufficiently awesome to inspire a huge population of citizens away from lives of crime and sloth. What is a force that is great enough to provide such inspiration? Currency collapse and war are the two that come immediately to mind. Since these powerful forces are both negative outcomes, I put the question to you gentle reader: is there a sufficient force out there that is made of positive energy?
Today’s markets were dominated by green again today. Most notably, gold broke to new all-time highs, and silver closed near 30 year closing highs. Equity markets were mixed while government bond prices were higher across the board and the yield curve flattened by 4 basis points. Energy prices finished mixed–oil down late in the day and natural gas up late in the day. Grains were mixed as corn continued its rally but wheat and soy pulled back.
