The Rise of Populism

Jonathon Chait explains the recent rise of populism within the Democratic Party:

Were Clintonites Wrong About the Economy?, Freakoutonomics, by Jonathan Chait, New Republic: In 1993, mere months into the Clinton era, the new administration went to war with itself. Liberals in the Cabinet argued that the central problem of the U.S. economy was the vast middle class that was not seeing its income improve--a problem, they said, that could only be addressed through massive public investment. Moderates, including Robert Rubin, then the chairman of the National Economic Council, replied that the central problem was restoring economic growth, which could only come about by slashing the budget deficit. The moderates won. Their triumph was ... bitterly mourned in Locked in the Cabinet, the memoir of liberal Labor Secretary Robert Reich. President Clinton's first major economic address "mentions education, and job skills," lamented Reich, "but the real heart of the message is the importance of reducing the deficit."

By the end of the Clinton years, the centrist ideology that emerged victorious from this skirmish came to be known as "Rubinomics" ... This economic vision encompassed several elements: fiscal responsibility married to controlled progressive investment, a belief in the importance of cultivating Wall Street's confidence, and a suspicion of populism. But, at its deepest level, it reflected an assumption that economic growth could be harnessed to the benefit of all Americans, not just the rich.

When Clinton left office, the Rubinites looked like prophets. Everything they hoped for had come true. Businesses invested more. Incomes grew, and not just for the rich. Families at the middle of the income distribution saw their incomes grow... The poverty rate fell...

Today, however, the Rubinites have been thrown into doubt. ... The economy is growing ..., but, essentially, all the gains are going to the rich. ... ...[F]iguring out just why this is happening, and what to do about it, has begun to unravel their confidence in the moderate remedies that not long ago seemed unassailable. ...

Conservatives, for their part, have grown enraged that the public does not adequately appreciate the economic bounty it is enjoying under Bush. The Wall Street Journal editorial page dubbed the current recovery the "Dangerfield economy" (meaning it gets "no respect") and speculated that people only believe the economy is bad because they have been fed misleading reports by the biased liberal press. ...

The most obvious mystery is: Why is this happening now? ... For a long time, ... the ... leading theory ... was something called "skill-biased technological change." The theory, in a nutshell, is that the development of new technologies, especially computers, has made mental skills more important. ... Therefore, the theory goes, workers with college educations have thrived, and those without have suffered. It's a nice theory, and one that seems intuitively correct. It also vindicates the basic free-market model, in which rising wages for those at the top are simply a natural reflection of their rising relative economic value.

But confounding evidence has piled up in recent years. First, Europe, which is exposed to the same changes in global trade and technology, has not seen anything like the increase in inequality found in the United States. Second, the salaries of those workers who ought to be best positioned to gain from technological change have not risen much at all. ... Third, the whole pattern of rising inequality does not suggest a split between the educated and the uneducated. The rise in inequality isn't between the top one-fifth and everybody else; it's between the top one-hundredth and everybody else. As a matter of fact, over the last five years, college graduates have watched their wages drop...

If the skill-biased technological change theory were true, then the answer to rising inequality would be to make your workers more skilled. That is exactly what the Clinton administration did... And ... that continues to be the Bush administration's answer to inequality. Whenever economists associated with the administration are asked about the rising gap between the very rich and the not very rich, they inevitably cite skill-biased technological change, offer up some anodyne musings about the need for education, and quickly change the subject.

If, on the other hand, you reject the theory of skill-biased technological change, you are left with an altogether more discomfiting explanation. Rising inequality must not be the logical outcome of the free market, the invisible hand working its magic. Instead, it must reflect the rising social, economic, or political power of the rich.

Economists, especially those on the center left, have lately been paying renewed attention to explanations for rising inequality that center around the lack of bargaining power for labor. First, the purchasing power of the minimum wage has withered away, reducing wages for workers at or near the bottom. ... Second, labor unions have shriveled. Less than 8 percent of the private-sector workforce belongs to a union, down from more than 20 percent three decades ago. And, third, globalization has thrown much of the workforce into competition with low-paid overseas labor. ...

It would be an exaggeration to say that the Rubinites have acceded to the labor-liberal worldview. But there are a lot of straws in the wind. ... The Democratic Leadership Council--once thought of as labor's arch-foe within the Democratic Party--has embraced the idea of a "card-check" system to make it easier for workers to form unions. And moderate liberal economists have, in sundry ways, tempered their enthusiasm for free trade with deeper worries about the dislocating effects of trade. ...

Even Rubin himself has begun saying some highly unRubin-like things. In his interview with The Nation last summer, he mused about the ... ways global trade can bring down incomes for unskilled workers in advanced economies. ...

Since the outset of the Clinton administration, the party's economic populist wing has been on the defensive. Democrats have fought against the most plutocratic and fiscally irresponsible Republican plans, but they have done so from a standpoint of resolute centrism. They had strong confidence in an economic model that was, at its core, conservative: unfettered free trade, fiscal restraint. They believed these ideas would benefit all Americans, and they did. But something has changed in the way the U.S. economy works. And, even if it's not yet entirely clear what has happened or how we can best address it, the intellectual balance of power in Democratic circles is already shifting ...[to] the populist side...

I'm wary of the populist path, but have nothing better to offer, and that's the problem. Paul Krugman called for:

smart, bold populism. All we need now are some smart, bold populist politicians.

But Brad DeLong worries:

What populist policies that we can think of would be smart? And how can we make our high politicians allergic to populist policies that are stupid?

We can't, but even if there are no populist policies at all, politicians will still find a way to implement stupid policies. That's what they do. Are stupid populist polices worse than stupid non-populist policies? I don't know. Maybe, maybe not. But unless economists can come up with something better, and so far we haven't, rising inequality "provides as good an argument as you could possibly want for a smart, bold populism."

Comments

[Lafayette]

Chait: "But, at its deepest level, it reflected an assumption that economic growth could be harnessed to the benefit of all Americans, not just the rich."

This is Rubinomics? That by "trusting Wall Street" and "reducing the deficit", America would spur economic growth thereby benefitting ALL Americans? The trickle-down effect?

Rubin would be amazed, I suggest. When 80% of the wealth generated by the US economy goes to only 20% of the population (of which, I am sure, Rubin belongs), how is the "American public" served?

By reducing unemployment a couple of points? That's peanuts compared to the capital value the economy is creating destined for the upper levels. It is the proverbial "sop for the masses".

The distortion of wealth creation is so endemic, so wide spread, so unfair that only a real taxation of the rich (and redistribution of the revenues) will produce a more fair American society.

(The data is glaring: Infant mortality rates highest, access to basic medical care lowest, access to free university schooling (and therefore opportunity) lowest, etc., etc., etc. - ad nauseam.)

[ilsm]

There is a huge amount of "reserve" for public works and infrastructure.

It is the the $3.3 Trillion of the federal debt held as intragovernmental assets.

This money was collected for the future of SS and from fees and taxes which were for infrastructure and the needs were delayed to keep from going to the T Bill farm or taxes for cash.

The deficit reduction team from Rubin through Snow have used this to cover federal cash needs and keep interest rates down and not crowd out.

The fallacy is that most of the economy is growing in imports. Imports crowd out our labor.

It is time to look at the supply of T Bills and recognize that it is wrong to pay interest to people who should be paying taxes.

The supply of T bills improves the wealth of the few.

And the wealth of the many is suffering through ignoring the infrastructure and the propaganda that conflates all federal finance problems from profligrate debt financing to SS and medicare in the same breath (see 31 Oct WSJ editorial propoaganda).

[cuerposinorganos]

Who's afraid of populism?

I know that the word populism has a specific historical context, and this is why we all think it is a bad bad thing. But so did the words conservative and liberal before they became neo-conservative and neo-liberal. Perhaps in any of these cases we are obliged to examine the policies proposed rather than the -ism printed on the banner, without prejudicing the question in advance by wondering how stupid these policies might turn out to be.

What if we took populism in a simpler sense: as doing things that directly benefit most people. Would, as an earlier poster suggests, cleaning up the mafia state then count as populism? And how about my favorite populist platform plank -- a 100% inheritance tax for everything above $200,000, that is then divided and equally distributed (not spent) by the government. This sounds like populism to me, though somebody will perhaps tell me how stupid the idea is.

[kharris]

"If, on the other hand, you reject the theory of skill-biased technological change, you are left with an altogether more discomfiting explanation. Rising inequality must not be the logical outcome of the free market, the invisible hand working its magic. Instead, it must reflect the rising social, economic, or political power of the rich."

Much as I sympathize with the sentiment, this statement is simply not true. "If it isn't A it must be B" is only true in a system in which there are only two possible causes. We have no reason to believe that is the case in the US economy. Chait doesn't help himself, his readers, or the effort to consider whether the exercise of power is at the root of greater disparity in wealth and income, by writing nonsense like this.

[save_the_rustbelt]

More retirees are losing their health care every day, and pensions are melting away.

How long do you think the voters are going to put up with this?

Paulson now has formed a shadow government to roll back investor protections.

What is next?

[ken melvin]

The mental exercise of thinking involves a good bit of trial and error. Though our current economic system evolved as much from trial and error as any thing else; trial and error on the social-economic scale involves lots of best thinking lest we repeat mistakes on the order of magnitude of past centuries. The one thing most evident is that we need a model more suited to today’s reality. The best minds of the past were dealing with another reality. Ours need be dealing with today’s. The shift is encouraging.

[Lafayette]

cuerposinorganos: "What if we took populism in a simpler sense: as doing things that directly benefit most people."

Well, then, might we not find the original concept of democracy as the founding fathers had intended?

Don't forget, their perspective was an aristocratic landed gentry that benefitted most whilst the lower classes did all the work (sometimes as indentured servitude). In fact, they were all mostly landed gentry. (So, it is somewhat a mystery thier concern for liberty ... after all, their lot was a great deal better than most. However, that they found a colonial population willing to rebel against King George was somewhat of an amazing feat.)

The difference between that and the 80/20 rule that I mentioned is ... er, what? And, especially when a Latino (who's Spanish is perfect but English is faulty) is treated like scum by his/her multi-billionaire employer?

cuerposinorganos: "Would, as an earlier poster suggests, cleaning up the mafia state then count as populism?"

It is insufficient to throw names at the problem. A state that spends its money not the way you would want is not necessarily a Mafia.

After all, who elected the "crooks"? And, reelected them. If you don't like the way an administration functions, you change it. Look at the make-up of the House of Representatives and how many millionaires are there. It would amaze you. What care, concern or understanding can they possibly have of anyone who is below the lower middle class level?

"And how about my favorite populist platform plank -- a 100% inheritance tax for everything above $200,000, that is then divided and equally distributed (not spent) by the government."

Why shouldn't it be spent? Do you think US infant mortality is going to correct itself if we "give" the poor more money. No, they'll simply spend it on the next Robbie Williams album.

Chances are, a mother that is better educated will understand neonatal care if instructed. But, who will give that instruction if the state does not provide it?

The state must provide base services: Security (of the community and the nation); Justice (state and federal); Health (basic services); Education (primary/secondary schooling but also higher-level).

Consider one insidious fact: Who are dieing in Iraq? Typically the black and white poor who joined the Army that promised them, in the bargain, an education. Instead they got ... well, you get the idea.

Had the education been free, the nerds in the White House might have thought twice before launching themselves into the neo-conservative war? Probably not. Autocrats rarely give a damn for the "poor slobs" who labor below them. Law of the jungle.

[baileyman]

What kind of populism? This is a no-brainer. We need large amounts of public investment in public capital assets, infrastructure if you will, of all types. These assets yield benefits to the users, and the users are individuals and businesses. So the yield is spread broadly rather than narrowly as we have today. Surely bridge repair and maintenance is needed, but also public schools, single-payer healthcare, public higher ed, rail-trail conversions, mass transit, alternative energy and efficiency investment, expanded legal infrastructure for co-op enterprise (including takings of private enterprise for conversion to local co-op), public jobs for those in need (plenty of local cleanup needs and park work to do), day care and expanded school hours and days, among many others. All these yield benefits broadly. How else to avoid a situation of "private splendor and public squalor"?

[Idaho_Spud]

Let me see if I understand this correctly:

"Populism" which seems to be a backlash against plutocracy, is very bad.

"Plutocracy" is a much lesser social ill that may or may not require remediation.

[save_the_rustbelt]

I've been spending a great deal of time in Michigan, and almost everyone Dem campaign ad at the Congressional and state assembly level promises a spirited fight against outsourcing.

Whether there is any power behind the outsourcing is another matter.

Reagan gets blamed for trickle-down, but Rubin really pushed it into high gear.

[georgist]

Don't forget, their perspective was an aristocratic landed gentry that benefitted most whilst the lower classes did all the work (sometimes as indentured servitude). ... The difference between that and the 80/20 rule that I mentioned is ... er, what?

The only difference is that many of the US founders favored direct [land] taxation as a means of funding government, including Jefferson, Paine, etc. Alexander Hamilton and his landowning buddies changed that.

[evagrius]

I was amused by the notion that "mental skills" are now
supposedly more important and valuable than, I take it, "physical skills".

It's obvious that some of these thinkers have never done a day's worth of physical labour. If they had, they would have noticed quite quickly that "mental skills" are as necessary for physical labour as physical skills.

My first job on leaving high school was in a fruit cannery. I had to obtain funds for going to university.
The work was physically tough and mentally demanding since one had to act quickly to move the produce down the canning line, all this done in over 120 degree heat at times. Stacking hot cans on a pallet took skill and quickness. There were women who stood for hours in plastic coveralls, sorting and cleaning fruit, all in the heat. Everything was quick, quick, quick. I used to come home exhausted.

I learned a very good lesson- always, always respect the labour of those who are called "unskilled" by their "betters". They may be "uneducated" but they're not stupid.

It's that arrogance by those who should know better that calls forth a need for "populism".

[dry fly]

In my part of the world - the upper Midwest, places like Minnesota, Wisconsin, 'the Dakotas', and even the bordering Prairie Provinces of Canada - 'populism' isn't a dirty word.

It was the basis behind the 'Non-partisan League' of the Dakota's & Minnesota... LaFollette's 'Wisconsin Experiment' and even the spark the lead to the formation of the NDP in Canada.

The movement was based on busting trusts & throwing entrenched corporate interests out of the state houses.

They expanded voter participation, increased regulation of banks & railroads (both were near monopolistic industries with their foot on the throats of the locals) and in general made state gov't accountable to the citizenry.

What's not to like about that?

[Adam]

There's nothing wrong with promoting the welfare of the common man. I just think that trade protectionism or anything that disincentivizes some of our top earners from doing business would be a big mistake. Lets examine our assumptions and the realities and make sure that we are working with an accurate economic model before we go tampering with globalization.

[Bruce Webb]

"Smart bold populism"

Sounds quite a bit like "Unleash your inner FDR"

You start with the basics. Social Security is not proof of failure of Big Government, Social Security is the most popular Big Government program ever for three reasons:

1. It works
2. It is overfunded going forwards
3. It is entirely funded by those who benefit from it

And if anyone challenges any one of those points get in their face and demand that they give you facts and even more importantly figures.

I have been suggesting (okay screaming from the rooftops) that we let our inner Franklin grab Cousin Teddy's Big Stick, tie a Social Security bow on it and shove it sideways up the rear of the Economic Right. It is not enough to defend Social Security, it is time to show that it is pretty much the only government program that actually works as designed and is funded at a sustainable level.

It is the wedge issues of all wedge issues (after Iraq) and has the same fundamental dynamic. People who tell you Social Security is broke are liars or bone ignorant, just as people who told you Iraq was winnable are liars or bone ignorant. And you can't flinch from the fact that in both cases you are talking over 90% of the American population.

The impulse among Progressives has been to sit back and welcome those who admitted early on that Social Security "crisis" was overhyped and maybe they really should not have just dismissed the professional opinion about needed levels of occupation troops from the fricking Army Chief of Staff.

But like the Dixie Chicks, I am not necessarily Ready to Make Nice. A bunch of people from the moderate to liberal wings of this country simply screwed the pooch on this one and frankly should be embarrassed. They simply turned their back on the New Deal and allowed a bunch of nutty Randites to define the field of battle, and sadly enough were aided and abetted by some Neo-Classicist economists who should have been reading more History and Marketing and a little less Multi-Variate calculus.

"What there is a thing called Madison Avenue? And it effects the prices of the goods we buy? What executive compensation committees often set pay at excessive levels because they can? And because they expect their counterparts to return the favor? Who knew?? Nothing like that came up in Econ 101!"

Mark runs the very best econoblog out there. I love this site because Mark and most of his readers and posters are willing to listen, even to ranters like me.

Social Security is not Broke: By the numbers I put that up in November 2004. They changed some of the numbers in the next two Reports but didn't change the reality. It STILL isn't broke.

Unleash your Inner FDR: Social Security as Opportunity
"Time for Politics". That is how I opened this post from October 2005 and I still believe it.

There are blowhards on the Internet? Who knew?? But this blowhard is still angry. I don't like being lied to, whether that is about the state of affairs in Iraq or about the health of the Social Security system. There was only so much we could do on Iraq, tragically the reality of that had to dawn on Americans one by one. But nobody declared War on Social Security except some lying bastards at Cato, AEI, and Club for Growth.

The Right is on the defensive over Iraq and Income Inequality. It is now past time to bring out the Big Stick.

Unleash your Inner FDR. Whack that Economic Mole/Troll.

(Oh did this sound "shrill"? Feature, not a bug).

[Lafayette]

ilsm: "The fallacy is that most of the economy is growing in imports. Imports crowd out our labor."

Look up and read David Ricardo's Theory of Comparative Advantage.

Imports/exports are a driving force of the world's economy. Troglodytes think it is of no benefit to the economy.

[Ken Houghton]

Economics consistently points out that income inequality leads directly to market irrationality.

Perhaps economists themselves should note that more publicly, more often.

[Lafayette]

Idaho spud: "Plutocracy" is a much lesser social ill that may or may not require remediation. "

Perhaps in Idaho.

Plutocracy is a bane on social harmony, because it generates a class of super-rich, which if allowed to employ thier wealth to manipulate general elections can cause real harm to not only the nation but the economy. (Particularly when nations do not understand the need for balanced election coverage, that all opinions should be heard, and that a sound-bite cutely wrapped into 30 seconds of TV-time is NO substitute whatsoever for debate.)

How can plutocracy be justified? How many BMWs can a plutocrat fit in his/her garage? There is only so much that a person can spend on one's needs. Limitlessness tempts plutocrats into endeavours that are not the least bit healthy, either to themselves or thier families.

Fortune is a fickle mistress.

[anne]

[Mark, there is something wrong with Typepad for comments are not listing or not taking or just slow. I have no idea why.]

[Lafayette]

Chait: "First, Europe, which is exposed to the same changes in global trade and technology, has not seen anything like the increase in inequality found in the United States."

Once again, we are back to an important dichotomy between the US and Europe. The former adulates the heroes of capital accumulation (the Buffets and Gates), whilst Europe concerns itself for more for social harmony.

So, Europe shares the burden of economic recession more equitably. Its inability to optimize resources, as the US does, hampers its ability to grow quickly out of a recession. (Other factors, such as constraining work regulations, are yet to be sorted out ... but that will come in time.)

An example: If you become unemployed on the US East Coast, you can seek far and wide till the West Coast for a job. If you are unemployed in Bordeaux, it is not in Berlin that you are likely to find a job. This particular economy of scale is not afforded to Europeans, except for the exceptional minority of multinational executives.

[dry fly]

Look up and read David Ricardo's Theory of Comparative Advantage.

Do that.

Then look at the factors of production: capital, labor, materials and 'intangibles' (i.e. technology & know how).

Then tell me where is our advantage?

In today's economy there is basic parity in all but labor... a company in China has access to the same capital, raw materials at same basic prices & technology a company here in the US has. The only difference is 'labor'... where in China you can hire a pretty good factory worker for $1000 a year total cost (warm bodies for half of that) compared to about $30K total cost in the US (warm bodies also for about half of that).

Not much different in white collar world either. In India you can hire a pretty good engineer for about $5K a year total cost compared to about $100K per year total cost in the US. Warm body discounts also apply.

So what do you think is going to happen to us in comparative advantage terms as these balance out?

And don't say it doesn't matter because most of the economy is 'non-tradables'... with the trade deficits we are running (oil & manufactured goods primarily but increasing agricultural products & services now too)... that would be like looking at a sinking ship & not worrying because the hole in the bottom of the boat because it is only a small percentage of the surface area of the hull.

And I'm not suggesting aggressive protectionism would work all that well either - I think it gets us to the same place doing nothing gets us - to a far lower overall standard of living than we now enjoy - just through a different path.

The result though would be a very different distribution of pain between doing nothing and some forms of protectionism. Protectionism I believe would tend to bring down the whole curve (wealthy & poor alike) while the current trends are clearly making some very rich and a many far less well off as the pressure from globalization clips away at high wage industries here.

I think if there is ONE advantage to a limited protectionist policy is it may slow the decline sufficiently here in the US such that wages might increase more over there. There will still be a convergence to a global standard of living over time but it could be more orderly... with less steep down leg here & more ramp up over there.

As STRB has pointed out - a slow and orderly decline in standard of living is the best we can hope for as the alternative would create social & political backlash that would be most undesirable.

I would LOVE to hear real economists at least discuss this - it is a view I think a lot of us in the trenches see but don't hear from policy makers or academics.

[Idaho_Spud]

Lafayette,

Sorry I forgot to punch in the sarcasm mode ;) Clearly the author of the original article was more fearful of populism (where the little guy might get the opportunity to share the fruits of his own labor) than plutocracy (which the author seemingly frowns upon, but does not really address)

In Idaho, you need to be a certain religion to get a piece of the action, so in fact it is a sort of meritocracy ;) /sarcasm.

[Lafayette]

Chait: "Europe, which is exposed to the same changes in global trade and technology, has not seen anything like the increase in inequality found in the United States."

Once again, we are back to an important dichotomy between the US and Europe. The former adulates the heroes of capital acquisition (the Buffets and Gates), whilst the latter concerns itself for social harmony.

So, Europe shares the burden of economic recession more equitably. Its inability to optimize resources, as the US does, hampers its ability to grow quickly out of a recession. (Other factors, such as constraining work regulations, are yet to be sorted out ... but that will come in time.)

An example: If you become unemployed on the US East Coast, you can seek far and wide till the West Coast for a job. If you are unemployed in Bordeaux, it is not in Berlin that you are likely to find a job. This particular economy of scale is not afforded to Europeans, except for the exceptional minority of multinational executives.

[save_the_rustbelt]

Whatever the causes, in a world of 24/7 news and torrents of information, the middle class is not going to tolerate a society where most of the income and wealth is directed at a small elite that just happens to "own" the government via buying influence.

[evagrius]

Adam;

" I just think that trade protectionism or anything that disincentivizes some of our top earners from doing business would be a big mistake."

Adam, these "top earners" that you're discussing. Would these be individuals who are "working hard" using their "mental skills" or are they the individual who are benefiting from the hard work of others, ( through rent)?

I'm getting tired of reading praises for these "top earners" who don't seem to have to contribute in any substantial way to the society they belong to, ( I'm thinking of such fine individuals as Paris Hilton , the Bush Twins etc;).

Lafayette;

"How can plutocracy be justified? How many BMWs can a plutocrat fit in his/her garage? There is only so much that a person can spend on one's needs. Limitlessness tempts plutocrats into endeavours that are not the least bit healthy, either to themselves or thier families."

The Japanese have a saying; " You can only eat one bowl of rice at a time, you can only sleep on one tatami mat at a time", ( " one bowl, one tatami").

Greed is a peculiar passion leading its sufferers to harm themselves and others in vicious way. Traditional societies have long had cautions against greed, recommending that one live very moderately, ( see the Stoics).

[Lafayette]

IS: "Sorry I forgot to punch in the sarcasm mode ;) Clearly the author of the original article was more fearful of populism (where the little guy might get the opportunity to share the fruits of his own labor) than plutocracy"

No harm done.

Populism is a recurrent social phenomenon. It typically arises when economic recessions occur, because the worst hurt are the very poor. It is easy to manipulate these people with rousing rhetoric that seems plausible yet remains empty of any real solution to their misery. (Lenin was a master of it.) In fact, the poor in such circumstances are not necessarily looking for a solution, but will accept a sympathetic ear if that is all they can get. Which is the case most of the time.

Katrina showed us well enough how distanced the plutocrats can become from the populist crowds. The poor are not even on their radar and when they do show up, they are considered a notch above "road kill".

The last time that populism ever worked its evil was when the Bastille was taken. This act not only sparked the downfall of a King, but also the onset of a vengeful attack on the Church as well as the pillaging and the guillotining of an entire aristocratic class. The American Revolution was a field day compared to that of the French variety.

Did French aristocracy, wallowing in its excesses deserve extinction? (Go see Sophia Coppola's "Marie Antoinette".) Perhaps not.

Some will say that this cannot possibly happen in America. History does not often repeat itself in the same way. But, it does repeat itself given the right conditions.

[georgist]

dry fly:

A comparative disadvantage in labor implies an advantage in capital and land. What matters is _relative_ rather than absolute productivity.

You argue that free trade will lead to a decline in our standard of living, but by the same logic, one could state that wages are being driven down by technical progress and increased capital investment. Yet standards of living have risen enormously over the centuries.

[ilsm]

"Imports/exports are a driving force of the world's economy. Troglodytes think it is of no benefit to the economy."

I am no troglodyte.

My point was not imports bad, as your point was import/exports are good.

The observation is the lack of balance between growth in imports fueled by easy money and lacking investment; and lack of growth relatively in exports because of lack of investment.

[Lafayette]

"the middle class is not going to tolerate a society where most of the income and wealth is directed at a small elite that just happens to "own" the government via buying influence."

But, the 80/20 rule of distribution of wealth existed before they came and will exist after they leave (in two years).

There is NO common desire to do "something". Perhaps because most think that if they can become a plutocrat they will no longer give a damn? That is the "American Dream", isn't it.

It is also a bit of self-delusion. The chances of going from the bottom 5% in wealth to the top 5% inyour lifetime are about the same as winning a lottery. Which is why a LOT of lottery tickets are sold ... ; ^ )

[georgist]

Lafayette:

Did French aristocracy, wallowing in its excesses deserve extinction?

Before arguing that the French aristocracy did not earn their fate, you may want to read up on what they did to Jacques Turgot in order to stop his Limoges experiment. If Turgot's reforms had succeeded, the revolution would probably have never happened.

[ken melvin]

The Bastille may account for much of Europe’s socialist thinking. Hardly think that the pressure of populism wasn’t as effective as ‘economics’ in bringing about change in politics and economic thinking, i.e., there’s no vacuum seal on thinking be it economic or other. Maybe - political pressure causes their minds to follow.

[Arne]

Bruce Webb is right to be angry about Republicans who have tried to control the debate about SS with false statements, and
1. It works
3. It is entirely funded by those who benefit from it
but it is not overfunded going forward. For the past 23 years productivity has pushed the trust fund up faster than anyone predicted, but the impact of Boomers retiring will overwhelm that effect.
2. Benefits will continue to rise whatever happens,
but 'overfunded going forwards' is a pipe dream.

[dry fly]

But, the 80/20 rule of distribution of wealth existed before they came and will exist after they leave (in two years).

Except there is no real natural law supporting '80/20'... nothing saying '99/1' or '9999/1' isn't possible (or even improbable). The eight-twenty is just a convenient meme.

These ratios bounce around in history - if they get too unbalanced heads roll. We are getting more unbalanced here all the time if you consider workers vs super wealthy... while at the same time our workers are falling more in line with global wages if you consider their incomes vs say Shanghai (Shanghai has had a 400% increase in wages over the last decade I'm told by buddies working there - however a skilled worker still only makes equivalent of about $2000 a year at the top end - a long way for them to rise & us to fall).

A rapid convergence would be politically unsustainable here. Barricades would be the only growth industry.

Political populism beats the hell out of barricades in the streets.

[maria]

People can wring their hands all they want, but in the final analysis you cannot make people more intelligent than they are. If so many Americans are unable to discern their best interests, well meaning do-gooders cannot force them to do so. I have to suspect that things don't hurt enough yet for Americans to demand a different system of things. You have to recall that Vietnam appears to have taught Americans nothing whatsoever, since they repeated the stupidity very recently. Dumb people get exploited. Draw your own conclusions.

[Bruce Webb]

Ah but it is my pipe dream.

Low Cost returns a fully funded system. In fact I have prettty conclusively shown that is its function. The Low Cost Alternative year in, year out produces the same outcome: a Trust Fund with a flat Trust Fund ratio. Which is to say a Trust Fund whose income equals its cost with a constant reserve (over 3 years right now).

Details and links to the tables and figures can be found in this November 2004 post:
http://bruceweb.blogspot.com/2004/11/what-is-low-cost-alternative-what-does.html
The shape of the curve found in figure II.D7 for Alternative I (Low Cost) remains constant and has since 1997 at least. The economic projections used to produce it indeed have varied but the outcome never does. Which strongly suggests that Low Cost is being fixed to the curve. It would be too much of a coincidence for the most "optimistic" projection to always produce a Trust Fund that was fully yet never over funded.

Which fact begs a closer examination of the economic numbers. And my inspection each year since 1997 shows that the economic numbers for the out years have systematically been suppressed. Future growth rates as projected in the 1997 Report were far stronger than those projected in the 2006 Report. Inserting the former numbers for the latter would in fact generate an overfunded Trust Fund. And to say the least the reasons for the changes are undermotivated. In the face of better than expected growth the Trustees systematically released Reports with lower growth going forward. Once again evidence that the numbers are being fitted to the curve.

People are perfectly free to review the individual Reports for themselves. Giving easy access to the Tables and Figures was the whole point of bruceweb.blogspot.com . The economy has been returning better numbers than 1997's fully funded Low Cost and show every sign of continuing that trend. A reasonable reading of the 1997 Report was that if the economy came in at or above the Low Cost alternative for the next 10 years that Social Security was in fact over funded going forward. Well it did. The fact that economic projections were suppressed each and every year after that, generally based on nothing but an apparent need to fit them to a predetermined curve doesn't shake my faith in my original reading of that 1997 Report.

Until or unless someone gives me a cogent explanation of why the economy will not in fact return better numbers than current Low Cost (and despite constant entreaties no one has) I'll stick to the data based conclusion I drew in 1997. Social Security is over funded going forward.

People can feel free to disagree. But I suggest they bring numbers.

[Richard]

"The Bastille may account for much of Europe’s socialist thinking. Hardly think that the pressure of populism wasn’t as effective as ‘economics’ in bringing about change in politics and economic thinking, i.e., there’s no vacuum seal on thinking be it economic or other. Maybe - political pressure causes their minds to follow."

But the execution of socialist programs really only happens after WWII, and may be more a product of the fear of the tyrany and vicious excess of mass movements than it is a response to the Bastille. Well, ok, the French may have a certain fascination with the revolution, but hardly the rest of Europe.

[Movie Guy]

baileyman - This is a no-brainer. We need large amounts of public investment in public capital assets, infrastructure if you will, of all types. These assets yield benefits to the users, and the users are individuals and businesses. So the yield is spread broadly rather than narrowly as we have today. Surely bridge repair and maintenance is needed, but also public schools, single-payer healthcare, public higher ed, rail-trail conversions, mass transit, alternative energy and efficiency investment, expanded legal infrastructure for co-op enterprise (including takings of private enterprise for conversion to local co-op), public jobs for those in need (plenty of local cleanup needs and park work to do), day care and expanded school hours and days, among many others. All these yield benefits broadly. How else to avoid a situation of "private splendor and public squalor"?

What's your per annum dollar estimate for your no-brainer?

[Movie Guy]

evagrius - I was amused by the notion that "mental skills" are now supposedly more important and valuable than, I take it, "physical skills".

It's obvious that some of these thinkers have never done a day's worth of physical labour. If they had, they would have noticed quite quickly that "mental skills" are as necessary for physical labour as physical skills.

I learned a very good lesson- always, always respect the labour of those who are called "unskilled" by their "betters". They may be "uneducated" but they're not stupid.

It's that arrogance by those who should know better that calls forth a need for "populism".

Well said.

[georgist]

public investment in public capital assets, infrastructure if you will, of all types. These assets yield benefits to the users, and the users are individuals and businesses. So the yield is spread broadly rather than narrowly as we have today.

ROTFL!! Public infrastructure benefits landowners, not users.

[dissent]

"There's nothing wrong with promoting the welfare of the common man. I just think that trade protectionism or anything that disincentivizes some of our top earners from doing business would be a big mistake."

Most of the top earners today are making their money investing in China, which implies disinvesting in the U.S. They are closing factories here and throwing Americans out of work. The 'extraordinary economic growth' everyone jabbers about re: China is just one aspect; the other is disinvestment in America and the decline in our middle class.

I say those top earners should take a hike. They need to find some new skills. After all, how many millions of Americans have had their careers destroyed because of these 'top earners'? Welcome to the 'new skills' party, 'top earners'.

Be grateful if this gets worked out in policy changes. If not, I wouldn't be surprised to see the citizenship of some of these CEO's and 'top earners' stripped. Go for the global gusto: You're a citizen of the 'global economy', you don't need that American passport anymore.

[Movie Guy]

georgist - You argue that free trade will lead to a decline in our standard of living, but by the same logic, one could state that wages are being driven down by technical progress and increased capital investment. Yet standards of living have risen enormously over the centuries.

Let's narrow that down to this century and the United States of America.

The loss of perhaps $1 trillion per year in offshore production and related skills, including the growth in offshore of high tech, is improving the standards of living of average working Americans?

And where is the investment flowing today?

[Movie Guy]

dry fly, Nov 1, 2006 8:11:06 AM

That's a good post.

It's apparent, though, that help isn't on the way. We're busy quibbling over income inequality, a distraction pushed forth by a group of economists and a few analysts.

We're on a train racing to the bottom of the valley and we're pretending that we can walk up the other side of the mountain while taking on more debt in the process and firing those who know how to maintain the train, tracks, and engine.

Our Little Engine that could...may not make it out of the valley. The tracks are greased, after all. And few are left to operate the Little Engine let alone understand how it was manufactured or why.

Oh, but do puff, Little Engine. Puff with all your might before they scrap you, too.

[georgist]

MG:

The loss of perhaps $1 trillion per year in offshore production and related skills, including the growth in offshore of high tech, is improving the standards of living of average working Americans?

Sure it is - just walk into a Wal-Mark and look at the prices of Chinese imports. There is some short-run dislocation, of course, but in principle, it's no different than any other productivity shock. Don't confuse the situation of _some_ individuals with the overall result for society.

[Lee A. Arnold]

Mark, have you reviewed the following book? Brad DeLong mentioned it but I couldn't find his review.

GROWING PUBLIC: Social Spending and Economic Growth Since the Eighteenth Century, by Peter H. Lindert (Cambridge 2004)

Haven't read it. Just got my copy. Here is the back cover blurb:

"Growing Public explores the links between economic growth and social policies... Taxes and transfers have been debated for centuries, but only recently are we able to see the total picture of the evolution of social spending. Lindert finds answers in economic history and the logic of political voice, population aging, and income growth. Contrary to traditional belief, THE NET NATIONAL COSTS OF GOVERNMENT SOCIAL PROGRAMS ARE VIRTUALLY ZERO. [my caps] This book not only shows that no Darwinian mechanism has punished the welfare states, but it uses history to explain why this surprising result makes sense. Contrary to the intuition of many economists and the ideology of many politicians, SOCIAL SPENDING HAS CONTRIBUTED TO, RATHER THAN INHIBITED, ECONOMIC GROWTH. This book examines the question of whether social policies that redistribute income impose constraints on economic growth."

Can't wait to see. Some of the chapters:

3. Poor Relief before 1880
5. The Rise of Mass Public Schooling before 1914
6. Public Schooling in the Twentieth Century: What Happened to U.S. Leadership?
7. Explaining the Rise of Social Transfers Since 1880
8. The Public Pension Crisis
9. Social Transfers in the Second and Third Worlds
10. Keys to the Free-Lunch Puzzle
12. How the Keys were Made: Democracy and Cost Control

Full of charts and graphs! Looks like an economic history book, massive research biblio. The index makes no mention of institutional theory or transactions costs.

[Movie Guy]

georgist,

You are talking retail, no value added. I am talking about much bigger inputs into the future of the nation.

The notion that the U.S. can displace large chunks of its production base replacing such with services, particularly more low income retail services as a substitute have not played out well. All evidenced by the U.S. trade deficit and U.S. household debt loads.

We can pretend this one away for much longer.

[Movie Guy]

But that doesn't change the outcome. We're in trouble.

[save_the_rustbelt]

Lafayette:

I think this era is different because..

The middle class made, or felt that they made, progress for an extended period of time after WWII, and'

the media reminds us daily who has what, and

such phenomena as losinga pension after XX years of work is something to be bitter about.

Whether the common folks can muster enough steam to have an impact is questionable. I think economic disgust is going to have a major impact on elections in Ohio, we will see what spreads.

[bakho]

Chait gets it wrong. Bill Clinton grew up poor and around poor people. Clinton understood better than most elites that what matters most to Americans is a job. A job is more than just salary. A job is a connection to social networks, a training opportunity to acquire new skills, a resume builder and in some cases access to health care and other perks. The purpose of controlling deficits was to keep interest rates low and allowing unemployment to sink. Unemployment sank. Unemployment sank far below the comfort level of many economists who argued that it would be inflationary.

But Clinton programs did not stop at jobs and deficit reduction. "Make Work Pay" was more than a slogan. Under Clinton the minimum wage increased, the EITC increased. Economic development zones were started in urban areas. For the first time in decades, unemployment among blacks dropped below 10%. The poverty rate declined significantly. Clinton tried but failed on health care, and had he been successful, could have significantly improved the outlook for those on the bottom rungs.

People don't want a government handout or make work. People want real jobs that pay and Clinton found ways to encourage job creation and to make work pay. The wealthy did very well under Clinton.

There are positive steps to be made and they are the ones that Congressional Democrats have proposed that have been blocked by Republican leadership.,

Increase the minimum wage.
Expand health care coverage to more people.
Reform health care to control costs.
Reduce the costs of student loans.
This is just a start on what has obviously been missing for the past 6 years.

[georgist]

You are talking retail, no value added.

I was talking consumption, not jobs. Most workers are also consumers.

We're in trouble.

It's true that wages are stagnating and returns to investment are not increasing (as evidenced by low interest rates and the change in investment flows), but how do you explain the productivity numbers? Is the reported growth real?

[dryfly]

Here's an interesting take...

India struggles to fill talent void

A year ago, iSuppli, a market research firm, concluded that billing rates for design work in India were on average about one third what they were in the United States. India's rates have only gotten higher since the research was completed. iSuppli concluded that "job switches by employees and 'employee poaching' by competing companies" were major reasons for rising salaries.

"We've got forecasts that say that by 2010 or 2011, the wage structure will be at parity with other world markets on an average basis," says Greg Delagi, vice president and general manager of DSP systems at Texas Instruments, which has been in India since 1985.

Sherwani thinks the surge in salaries exacerbates the inequalities in India's class system and endangers the social structure. He'd like to see semiconductor companies, government and universities collaborate better on manpower planning and producing enough hardware engineers.

Same story, different continent: More education. Everyone is chasing the same brass ring.

Somewhere along the way we have to figure out how to pay the folks who grow the food & take away the garbage well enough they don't strangle & eat the hardware engineer & his employer.

This thing is broken worldwide. Maybe populism needs to go global too.

[Arne]

It is not possible to post comments at bruceweb, so apologies for being off the populist topic. The trust fund ratio has not only grown less than Low Cost predicted, it has grown less than Intermediate Cost predicted. chart I agree the SSA has lowballed economic forecasts and the trust fund will not likely run out by 2052, much less 2042, but the demographics prevent it from being truly overfunded.
We should not fight disinformation with overly optimistic estimates, or we will lose credibility.

[donna]

It is not populism we need - it is progressive values.

The weealth collects at the top because our economy is stagnant - there is no investment.The rich are rich, and just keep collecting their wealth, instead of re-investing to create new growth.

"Money is like manure - it's no good unless it is spread around, encouragin young things to grow". Otherwise it sits around in big, stinking piles.

If the rich won't voluntarily give up their greed, it must be forced from them, and that can only happen with a government that has plans for our economy, and our country to PROGRESS. Not take over other countries or fight useless wars for oil, but to create new things, take care of existing infrastructure, and value ALL of its people and THEIR progress.

Not populism. Progressivism.

[Movie Guy]

georgist,

We in much bigger trouble than that. Much bigger.

Productivity numbers? I assume that you also know that producitivity figures are not the same as improvements in job efficiency measurements which should not be confused with overtime payments that reduce productivity costs due to the lack of benefit payments to other workers. Same story for temp workers - few if any benefits. And then there is the matter of declining benefits and benefit costs to employers, including employees who opt not to sign on for shared health care coverage and costs.

[Arne]

I left out that the trust fund has grown less than LC or IC for 2004 and 2005. It did grow faster than even LC in many prior years.

says...

The Republicans blocked increasing the minimum wage this summer and fall?

[dryfly]

It's true that wages are stagnating and returns to investment are not increasing (as evidenced by low interest rates and the change in investment flows), but how do you explain the productivity numbers? Is the reported growth real?

Ya productivity is real.

But MG is right - value added is the key to prosperity, more important than raw productivity.

The trouble with productivity is it measures STUFF per manhour not VALUE per manhour. We ASSUME we are making value but that isn't necessarily so... if you make lotsa junk or sell lotsa a junk - it still shows up as high productivity but no one pays you anything for it.

In a world where we are increasingly borrowing & importing - that poses a long term problem.

You really can't take productivity to the bank - you can't pay workers with it & they can't buy groceries with it. It's the VALUE of the stuff you make & then trade for that allows you to do all that.

In short value is sellable & productivity may or may not be sellable - depending on whether the stuff you made/sold has value somebody wants.

And value is an arbitrary thing, determined by 'the market'.

I fully believe we have had a boom in productivity - I see it everyday in factories & offices I call on (compared to say 25 years ago).

I am far less confident we are going to be able to produce value we can trade to support our standard of living. Increasingly I see our highest productivity inputs as cost centers not value producers (cost centers like logistics, marketing & overhead).

The two issues (productivity & value) are related but are not identical. The populists tend to know this (are often closer to the production floor, mine or farm)... those tending to rip populists are often the farthest from those sources of production (academics, bureaucrats & politicians).

Populists can get it wrong but at least they know there is a problem - they feel the direct effects first. I'd have more respect for those who rip populists if they had some answers. Or even helpful questions.

[Peter Schaeffer]

I must admit to being impressed that the original article, and the comments, failed to mention the elephant in the room. No, not the one associated with the current failed administration.

The elephant is, of course, immigration. Could it just possibly be that almost zero border control, even after 9-11 might have something to do with falling wages, rising prices (particularly housing), and soaring profits/executive compensation?

How about freeway gridlock, dying public schools, rising crime, overburdened public hospitals, air/water/power shortages, taxes, etc.?

Has anyone noticed that this is the first recovery with falling median incomes, declining labor force participation, and reduced health care coverage? Has anyone looked at the data showing massive displacement of American workers by immigrants since 2000?

For the record, the trade/dollar policies of the current administration are also partially responsible for the economic woes of ordinary Americans. Of course, these policies were inherited from Clinton (NAFTA) so I wouldn't make too much of any partisan division in this context.

To really understand the U.S. economy, listen to Lou Dobbs. He is saying what the left/right elites don't want to hear. Globalization is failing the American people.

[Movie Guy]

dryfly,

Right. Well said.

It's interesting that these key points are seldom raised. Certainly not by those who are hugging the globalization-at-all-costs game. That Kool-Aid is mind dulling.

I remember how the explanation game was played early on. Oh, don't worry about that value added production. We don't want that old economy stuff. We'll replace it with services.

And now some of those services not requiring geographic presence are also being imported.

Yeah, that was a plan.

[Movie Guy]

Peter Schaeffer,

Yes, the matter of illegal immigration has been discussed on this blog. A number of posts. And quite a few different points of view.

Interestingly, there is no category called immigration along the right margin of the blog.

[Ethan Jacobs]

I think Cuerposinorganos at 4:34 this morning hit at least one of the nails on the head -- a 100% inheritance tax at some bracket. I do think, however, that the $200,000 lower limit for the 100% bracket is probably too low.
Under the income tax system we allow the big earners to keep much of their earnings because, well after all, they "earned" it didn't they? Well maybe: even Bill Gates's dad noted that Bill wouldn't have the money he has if he had been born in West Africa. He has that money because all of our taxes produce a (reasonably) democratic society and a (reasonably) vibrant economy most of the time.
Under the inheritance tax system, however, no such logic prevails. Why should we allow all the Bill Gates, JRS. of our nation to inherit great piles of money? Wouldn't it be better to let them inherit only small piles of money -- $1 mill, $10 mill, $100 mill, take your pick -- and thus encourage them to adopt the inventiveness and entrepreneurship exhibited by thier ancestors? How else are we going to encourage them to get off their otherwise rich duffs and do something creative for the economy?
As for the argument that the family farm or the family business could not be kept in the family: remember when the repeal of the estate tax was about to be vetoed by Clinton and the estate tax opponents couldn't find a single farm family which had actually lost the farm because of the estate tax? Besides who says the next generation can run the business as well as well or better than the present generation?
Yeah, Populism - the Wave of the Future.

[fiskhus jim]

The Republican "Tide That Lifts All Yachts" is always suspiciously yellow and warm.

[ken melvin]

Illegal immigrant workers and offshoring have the same effect.

[fearlessmanateehunter]

I have never heard such pseudo intellectual elitist nonsense in my entire life...

says...

"I have never heard such pseudo intellectual elitist nonsense in my entire life..."

Perhaps the best post thus far.

[georgist]

Under the income tax system we allow the big earners to keep much of their earnings because, well after all, they "earned" it didn't they?

ROTFL. Most of the income tax code consists of loopholes and tax breaks for _unearned_ income.

[Bruce Webb]

"The trust fund ratio has not only grown less than Low Cost predicted, it has grown less than Intermediate Cost predicted."

Ah but I never claimed that the trust fund ratio grew at all. What I pointed out in my post was that the result of Low Cost is always the same: a flat trust fund ratio through the 75 year window. Whether that ratio is flat at 300, 400 or even 500 doesn't matter, it still adds up to fully funded with a fixed reserve.

The change in the actual level of these flat Trust Fund ratios is due to the changes in assumptions, the question is what would be the ratio if you had maintained the same projected numbers and other assorted assumptions from the 1996 Report to the 2006 Report. This is a little difficult to do in practice due to the change from using Real GDP as your lead number to Productivity in 2001, itself in my view an effort to add some obfuscation to what was clearly a healed systeme.

Given the changes in assumptions comparing levels of the flat ratio is to miss the point. The real question is whether the economy will or will not return numbers better than Low Cost. If it does the Trust Fund is overfunded, if it doesn't beat Low Cost but does come in better than Intermediate Cost then the date of depletion gets pushed back in time. The fact is that Low Cost has been a better match for the real economic numbers as they roll in, that in most recent years the real economy has outperformed Low Cost.

If this trend goes on, if the economy on average returns better numbers than Low Cost then the system if overfunded. It is interesting to note that the actual year end 2005 balance in the Trust Fund exceeded the amount projected in the 2005 Report. Yet the projected health of the system regressed. As Max S discovered this was entirely due to a change in assumed interest from 3.0% to 2.9%. In dollar terms the Trust Fund beat Low Cost for at least the first projected year. Sometime soon we will be able to compare actual year end 2006 balance to that projected under Intermediate and Low Cost. If the dollar figure is bigger than Low Cost's projection then it is fair to say the system is overfunded on a year to year basis.

Given these real bottom line improvements it is incumbent on opponents to defend the economic numbers of Intermediate Cost and not my duty to debunk them.

[Lafayette]

"Social Security is the most popular Big Government program ever for three reasons:
...
3. It is entirely funded by those who benefit from it"

There is no social security program on earth that is funded by current contributions to finance future payments. Considering both wage and consumer price inflation over a period of at four decades, then it is obvious that present contributions finance current disbursements by the SS.

The disequilibrium occurs as a population ages and the ratio of workers to retirees starts to immigrate south. Just do the arithmetic. If demographics are unfavorable, meaning women have less children because they'd rather work and earn money, then the only way to make up the shortfall is by net immigration of workers from abroad.

But, this is a vicious circle, since they too inevitably join the retirement crowd. So? So, the retirement age must be extended, or retirees return to work at least part-time.

This latter is not a bad idea, since many in fact enjoy work as long as it is not too taxing physically. One can actually say that a light work regime might keep them living longer and, no doubt, the money would come in handy even if the work is not all that well paid. Many service sector jobs could be filled in this manner and, indeed, are being filled.

[evagrius]

Lafayette;

"So, the retirement age must be extended, or retirees return to work at least part-time.
This latter is not a bad idea, since many in fact enjoy work as long as it is not too taxing physically. One can actually say that a light work regime might keep them living longer and, no doubt, the money would come in handy even if the work is not all that well paid. Many service sector jobs could be filled in this manner and, indeed, are being filled."

Well, I'll wait to see you become a "greeter" at Wal-Mart in your old age. That job will keep you moving, right?

Better than you putzing around the ol' golf course.

Sheesh! The arrogance you display!

You belittle the name Lafayette!

[Bruce Webb]

Interestingly a higher flat Trust Fund ratio is not better for the health of the Trust Fund than a lower one. That higher level implies a greater relative reliance on interest earnings than from income from FICA. Which is to say one that has fundmentally departed from Pay/Go to one more reliant on transfers from the General Fund.

The ideal Trust Fund ratio is one that will ensure payout through a statistically significant risk to FICA income via a downturn in wage income. It will be interesting to debate where that level actual should be: 200%, 400%? Much will depend on then current payroll gap is, if any. But of course we will never get to that debate until we seriously grapple with the economic numbers of Intermediate Cost and Low Cost. Do people really think ultimate productivity is going to shrink to 1.7% (Intermediate Cost)? If so why? Is it really beyond possibility that productivity will come in above 2.0% (Low Cost)? If so why? That is significantly below the recent average. Or is the historical link between productivity and real wages, already weakened in recent years, just about to break down altogether?

But no one will ever engage at that level. No one ever bothers to defend Intermediate Cost's numbers, no one ever directly addresses Low Cost's numbers in relation to their own projections for productivity going forward.

I would gladly unlock comments for anyone that asks, I just don't have time for troll comment patrol. If Anne or any regular want to comment on the bruceweb just e-mail me. (I would have added Anne unilaterally if I had known her e-mail).

[Ken]

MG,
I have been looking at the treatment of Health Insurance for a while and I think this has something to do with why the majority of the population doesn’t see the economy as a plus. After all, CPI is low, productivity is high, UE is very low and wages and benefits have risen.

The cost of health insurance has still risen above inflation. About 8% a year by 2005 numbers.

http://www.chcf.org/documents/insurance/HealthCareCosts06.pdf#search='health%20care%20costs%202006'

This isn’t reflected in CPI.

This little blip is from the BLS

>Although medical insurance premiums are an important part of consumers' medical spending, the direct pricing of health insurance policies is not included in the CPI. As explained below, BLS reassigns most of this spending to the other medical categories (such as Hospitals) that are paid for by insurance. The extreme difficulty distinguishing changes in insurance quality from changes in its price forces the CPI to use this indirect method<

So looking at the recent ECI data we see a rise in Health Benefits of 1.1% and we know that both out of pocket (4.3%) and H Insurance (8%) are outpacing the employer payout. The balance of that is being paid by employees.

Now BLS reports gross wages. Of course that’s before the payroll deduction for health Insurance. And the employer reports health insurance expense, which from their perspective is only rising at 1.1%/year because the employee is eating the inflation.

It all looks great. Wages are up, Benefits are Up and inflation is only 2.5%.

That’s why we don’t have demand pull inflation. Consumers arent holding those wage gains. Its on the balance sheets of the insurance companies.

Because of regulation this ends up in relatively safe fixed investments. This supports the market prices of those investments.

[albiegf13]

If I were the Dictator, I would increase the retirement age up to, say age 97. There, I fixed the Social Security problem. That wasn't so hard was it? Now, what else do you need to fix? Bentleys for everyone.

[Arne_not_anne]

Do I need to change my name?
SS would not be solvent if it were purely PAYGO, chart, so the trust fund ratio absolutely is a critical parameter. How large it needs to be depends mostly on demographics, but also on productivity and lifespan and unemployment and ...
Fully funded requires that benefits be less than income (including interest). It matters not if the economy continues to produce more income than LC if we also end up with more benefits than LC (which is what happened in 2005).
There is no crisis. We should not make any changes now. But SS is not overfunded. 10 years from now we will have a better handle on how much of a change we will need to make to continue beyond 2040.

[save_the_rustbelt]

"...ROTFL. Most of the income tax code consists of loopholes and tax breaks for _unearned_ income...."

As much as I dislike the IRC, this is not an accurate description at all.

[georgist]

As much as I dislike the IRC, this is not an accurate description at all.

It is fact. Just open the tax code to a few random pages - or check the personal finance section at your local library.

[Lord]

I was reading DeLong's World GDP and looking over the numbers and the one thing that stood out above all was how prosperous the period 1950-1970 was. Population was doubling at periods of as low as 33 years yet gdp per capita was doubling as fast as 20 years. Even though population doubling has slowed to 40 years, gdp per capita is only doubling in 30-40 years. We may be better off then our parents and grandparents in absolute terms but we are far from as well off in how fast we are improving. This, I think, is the angst that is out there. Even with a long boom from 1980-2000, the world is not improving at a rate as fast as that of our parents and grandparents. Even though US gdp per capita has held up well throughout these times, inequality has grown so large that most are not getting much better off at all, certainly not nearly as fast as we once did.

[save_the_rustbelt]

georgist:

Other than being a CPA and spending a chunk of my career as a tax professor, I think I will take your advice and run right down to the public library and read a Suze Orman book.

The next time I lecture on the conceptual framework of the IRC I'll invite you to sit in. Not that I'm defending it mind you.

[ilsm]

Bruce Webb,

All the talk about the trust fund!!

The SS Trust Funds is about 21% of the reported 2005 federal debt (1.7 T over 7.9T).

It has been squandered, covering the cash needed for the general fund revenues shortfalls.

When the SS receipts are no longer greater than outflows, SS becomes pay go.

Either the general revenues, read that income taxes, will cover the cash need or the SS tax will go up or payouts go down. Or some combination of the latter two.

The excess receipts have been spent.

Gore was right to want to discuss pay go.

His problem was rather than hire an accountant he hired economists.

The issue is cash flow accounting.

The congress has taxed employment to pay what income taxes should cover and they will never make good.

Populism is necessary and more consideration of how the money is spent and how it was and will be raised.

All dollars going to washington end up in the same trough.

A populist one would be preferrable to one where the rich get paid interest for money thery lend the US government that should have been taxed away.

I will go on reading Age of Reason and figure out when the US mass will go off as the French after Thomas Paine came along.

[dryfly]

Here is a good one - off topic sort of - then not really.

Understand I'm an independent agent - help engineer, sell, then service products produced by small manufacturers for larger OEMs... I'm on a number of databases so have people contact me all the time to sell for them... increasingly they are offshore. Got this just a few minutes ago (typo was real):

About Us: We are a pirate owned manufacturer located in China. Two of the owners received their college education in the US. We know our business and we are best at what we do. With 17 years of experience in Plastic Injection Molding and assembly we have successfully helped US and European businesses in reaching their cost saving goals. Our proven track record of cost saving and high quality will assist our representatives in enhancing their relationship with their clients.

Your Commission: You can forget about the “Typical” “Standard” or “Competitive” rates. Our representatives deserve the best. The average commission rate is 11.3% out of Total Sales Volume NOT Gross Margin! Many make more. We greatly appreciate our independent representatives by rewarding them with straight-forward and high commission rates.

Good Cause: We quarterly make donations to a local orphanage and a Nursing home for the disabled and mentally challenged. Our representatives’ efforts are not only helping their clients by outsourcing cost effective and high quality products in China also they are bringing hopes to the people who need the most.

They might actually be nice guys - God bless them if they are - but I'm seeing more theatre of the absurd the last few months than I've seen in my whole life.

Something really weird is going on out there in the big wide world.

[georgist]

save_the_rustbelt:

*yawn* The tax code has a conceptual structure? That's news to me.

"Roughly ninety percent of the tax code pertains to exemptions and deductions alone."

Now, income tax regulations make up 83 percent [of the tax code]

with the eliminate of 90 percent of the tax code, businesses would have little incentive to get involved in government via lobbying and politics because their major activity — i.e., getting favorable tax breaks — would be no longer exist.

"If you look at the 75 percent of the people that are what we call wage and investment taxpayers -- 83 percent of the tax code doesn't apply to them whatsoever."

[save_the_rustbelt]

Where your job is going......

NEW DELHI (Reuters) - New Delhi is the most attractive city in the world for companies looking to set up offshore back office operations thanks to its cheapness and a large pool of skilled labour, a new survey by a U.S.-based consultancy says.
The next six slots in the league table produced by outsourcing consultancy neoIT are also filled by Indian cities -- Bangalore, Hyderabad, Mumbai, Pune, Chennai and Kolkata.
"The labour pool remains a huge advantage in India -- you don't have to spend lots of money training people up," Sabyasachi Satyaprasad, a senior director at neoIT, told reporters in New Delhi.
Vietnam's Ho Chi Minh City is the most attractive non-Indian destination for offshoring jobs, followed by Manila, Shanghai and Moscow.
NeoIT, which has offices in ……..

[save_the_rustbelt]

georgist...

All of that is probably true, but none of it proves your case.

The IRC is a mess, but not a random mess and there is a framework to it.

So what tree are you barking up, and what are you trying to prove exactly?

[dryfly]

Where your job is going......

STRB - I have guys from India after me too. One called late last week - wants to meet later this month.

India isn't just software & back office anymore, they are quickly becoming a force in mfg too.

[johnchx]

Movie Guy wrote:You are talking retail, no value added.

I'm not sure I understand what you're driving at here. Taken literally, this statement is obviously false. Value added by the retail sector accounts for 6.6% of GDP, more than construction and mining combined, and just a little less than health care (6.9%) or durable goods manufacturing (7.0%). (Value added by industry, as a percentage and in real 2000 dollars.)

Can you clarify?

[johnchx]

kharris wrote: Much as I sympathize with the sentiment, this statement is simply not true. "If it isn't A it must be B" is only true in a system in which there are only two possible causes. We have no reason to believe that is the case in the US economy.

Heartily seconded.

One of the things that makes talking about the current state of the national and global economy difficult is the sheer number of inter-related things that are happening -- or have happened -- at more or less the same time.

Is immigration of low-skill labor affecting the wages at the low end of the scale? Probably. Is trade affecting the income distribution picture? Yes, in a number of different ways: by creating winner and loser industries, by creating winner and lose factors (again low-skill vs. high-skill labor comes to mind), and by increasing the scales of the largest businesses (thereby magnifying the winner-take-all effect). Have technologies (NOT necessarily what we think of as "tech," like computers, but production techniques broadly conceived, including the organization of processes) increased demand for skilled relative to unskilled labor? Probably yes. Are unions weaker today than they were in, say, 1970? You bet. All of these things -- and more -- have happened or are happening now. All of them contribute to the current picture.

It isn't A or B. Its A and B and C and D and several more that I haven't even thought of yet...and we don't yet have a very clear picture of how much of a role each plays.

[johnchx]

dryfly wrote: Then tell me where is our advantage?

It doesn't sound like you understand comparative advantage. Don't take this as a dig: the key idea seems to be either very poorly communicated by economists or very difficult to grasp. Possibly both.

Ricardo's key insight was this: two nations can benefit from trade if the domestic price ratios in one country are different from the domestic price ratios in the other. This is true even if the prices of all goods are higher in one nation than in the other.

(Ricardo's presentation was in terms of the ratios between the prices of two goods, but more modern treatment of the same idea focues on ratios between factor prices. The example I'm going to present follows this, focusing on the prices of skilled and unskilled labor. You can substitute wine and rice if you're traditionally inclined.)

For example: in the U.S., the ratio of the price of skilled labor to the price of unskilled labor is about 5:1 (I'm comparing the median hourly wage of a number of skilled occupations, like computer programmer, of around $35, to the median hourly wage of janitors, around $7.) Now, in China, I have no idea what the wages and ratios are, so I'll make up some numbers to illustrate. Let's say unskilled labor in China can be had for $0.50 per hour, and skilled labor for about $5.00 per hour, so the ratio is 10:1.

Everything costs more in the US, but the US has a comparative advantage in skilled labor. In the US, you can "buy" 2 hours of skilled labor for 10 hours of unskilled labor, while in China, 10 hours of unskilled labor "buys" the services of only one hour of skilled labor.

This creates a trading opportunity: I can buy one hour of US skilled labor (for $35) and export it to China in return for ten hours of unskilled labor (value in the US = 10 x $7 = $70). Profit!

The same thing works in reverse: China can export ten hours of unskilled labor (value in China = 10 x $0.50 = $5) and exchange it in the US for two hours of skilled labor (value in China = 2 x $5.00 = $10.00). Profit!

The key point is that comparative-advantage trade is driven by differences in domestic price ratios, and is completely unaffected by the absolute level of prices in the trading countries.

[johnchx]

dryfly wrote: The trouble with productivity is it measures STUFF per manhour not VALUE per manhour. We ASSUME we are making value but that isn't necessarily so... if you make lotsa junk or sell lotsa a junk - it still shows up as high productivity but no one pays you anything for it.

I'm not sure I understand this point of view. The BLS-published figures on labor productivity are based on the market value of the output produced. The figures on real productivity are corrected for inflation -- is that what you're objecting to? Or am I missing your point entirely?

[reason]

johnchx...

The problem with Ricardo's model is that in his day there was a gold standard, so exchange rates adjusted to trade imbalances quasi-automatically. Today's international financial system is broken. Yes eventually different relative inflation rates will equalise things, but it may take a while and debt deflation could knock the applecart over in the meantime the way things are going. It is not the -6%(+) trade inbalance you should look at (bad enough as it is) but the ration of imports to exports. That tells you how out of whack everything is. Trade based on comparitive advantage, still needs the absolute price levels to be set in such a way as to balance trade flows.

As to productivity, my problem is that in an 80% Service economy, I doubt we are comparing like with like. (Favourite example electronic answering versus dealing with a human, more is being asked of the consumer these days, looks like an improvement in productivity but is actually a transfer of costs.) There are enormous changes in relative prices, with associated substitutions, going on which make the measure of inflation very difficult to do in a meaningful way.

[James Kroeger]

But Brad DeLong worries:

What populist policies that we can think of would be smart? And how can we make our high politicians allergic to populist policies that are stupid?

We can't, but even if there are no populist policies at all, politicians will still find a way to implement stupid policies. That's what they do. Are stupid populist polices worse than stupid non-populist policies? I don't know.

Well, Mark, the Tax-Cut Populism that the Republicans have been promoting for more than a couple of decades has been very effective for them politically. Even though the fundamental theoretical principles upon which Tax-Cut Populism is based are utterly flawed, we still have Democrat Economists like Brad DeLong expressing fear only of populist prescriptions that might hurt the feelings of rich people.

Re: the Brad DeLong link you provided... In explaining his political-economy positions, at no point did he mention having any feeling of moral obligation to help those who exist at the bottom rungs of the economic ladder. He did mention a concern about "idealistic fantasy." In other words, he has completely abandoned the possibility that economists and governments might be able to devise an economic agenda that would OPTIMIZE the material welfare and economic SECURITY of the lower classes.

What Brad DeLong does not comprehend yet is that this ultimate goal of Progressive Populists can be achieved WITHOUT IMPOSING ANY REAL SACRIFICE ON THE WEALTHY. In fact, in REAL terms, the material welfare of the wealthy can only be optimized when the material welfare and economic security of the poor is optimized.

I think he'd maybe see things differently if he took the time to read and reflect on the merits/flaws of this.

[save_the_rustbelt]

dryfly:

I voted absentee for the first time and I voted overwhelmingly Democrat for the first time.

The Dems out here are being referred to as "lunch pail Democrats."

Will they work miracles? No.

Will they bring balance to the discussion? I hope so.

[baileyman]

Movie Guy: What's your per annum dollar estimate for your no-brainer?

Off the top of my head, we spend som 8% of GDP on security related issues where most advanced countries are nearer 4%. Perhaps part of their spending is in reaction to ours. Choose 4% then to reinvest in projects with yield, then let's look around for more. Somewhere between an additional 4% and the difference with Sweden may be our neighborhood.

georgist: ROTFL!! Public infrastructure benefits landowners, not users.

Woah, this is unkind. I am quite sympathetic with the Georgian point of view and have posted similar opinion before. Next time I'll insert SWTGPOV. In a short post, I did not also say that while removing transfers to the few on one hand it would be dumb to replace them with transfers to a different few on the other. And not all public infrastructure benefits the landowners. A beneficial public health system is infrastructure. A working legal system is infrastructure. An internet is infrastructure. Maybe I should buy land near these?

My point is if you look at this national enterprise as if it's a membership organization, then ask what the benefits of membership are (American Express?). We should demand greater public return on our investment, and that seems to me to be populist.

[Bruce Webb]

"There is no social security program on earth that is funded by current contributions to finance future payments. Considering both wage and consumer price inflation over a period of at four decades, then it is obvious that present contributions finance current disbursements by the SS."

Once again I never said that. Nor to react to ilsm have I ever insisted that the Trust Fund is particularly material. Social Security is, was, and will always be a PayGo system. The Trust Fund balance and the Trust Fund ratio simply act as canaries in the coal mine. If the Trust Fund balance is increasing in any given year it means we are taking in more income than we are putting out in costs meaning the probability for maintaining PayGo over the long term is positive over the short term. If the projected Trust Fund ratio is flat it means the probability for maintaining PayGo over the long term is positive over the medium term.

I am not new to this topic. I really have been studying these numbers and reflecting on the import of these graphs for literally a decade. Airy dismissals at conceptual top levels are not cutting it anymore. Bring numbers and explain why we are not going to beat Low Cost. Show an understanding of what Low Cost actually means and the numbers that underpin it.

Progressives have a chance to crush the Economic Right on Social Security. It is a total winner. But you have to know the difference between Table V.A1 and Table V.B1 and understand exactly why they moved GDP from Table V.B1 to Table V.B2 in 2001, why they introduced 'Infinite Future Horizon' and a whole new table IV.B6 in 2003. It is not easy but the fact remains. If you are not totally familiar with the real numbers and figures of the Social Security Reports you are reliant on the same second hand lazy media that gave you Iraq. And look at how good a job they did with that.

If everything you know about Social Security has been gained second hand then not only do you know nothing you actually know less than nothing. Read the Reports in sequence, examine the ways the numbers for future years have been changed from Report to Report, determine for yourself whether those changes were justified or simply a way to achieve some predetermined outcome.

But don't patronize me. Bring numbers. Defend Intermediate Cost or abandon all projections derived from it. If you don't know what Inverted Yield Curves are then you don't have much business talking about the Long Bond. If you don't know what a Neg-Am loan is then you really shouldn't be advising people on financing their home. Yet everybody and his brother thinks they are experts on Social Security without any first hand knowledge of the terminology or the data.

Social Security is overfunded going forward. I have numbers. Do you?

[georgist]

Woah, this is unkind. I am quite sympathetic with the Georgian point of view and have posted similar opinion before.

Arguing for massive public infrastructure spending without being specific about its funding sources or the incidence of its benefits is just stupid. The Keynesians hae been proven wrong - "public investment" did not help Japan when they committed economic sepukku by doing away with their land taxation.

[Arne]

"If the projected Trust Fund ratio is flat it means the probability for maintaining PayGo over the long term is positive over the medium term."
Wrong.
If the trust fund is positive and flat it means you are using the interest and that you are NOT maintaining PAYGO.

[calmo]

Good morning Bruce,
I need to tell you that you've been on my mind esp with the latest GDP number. Most of us here appreciate your work and hardly need this reminder:I am not new to this topic. I really have been studying these numbers and reflecting on the import of these graphs for literally a decade. but there may be a few who don't know what a bus (not a tricycle) you are on the SSTF.
The 1.6 gdp will soon show up in the productivity number that is so important to the solvency calculations that precipitate the 'crisis' debate.
My view is that we are on the cusp of some very disappointing productivity numbers. So bad in fact that I hope the SSTF's methodology of smoothing these figures out over decades (ok, but atleast several years, even more than peak-to-peak periods from what I can understand.) remains intact.
What is the lowest productivity number the fund can tolerate without an adjustment in the payment/benefit schedules?

[Bruce Webb]

Well Arne that builds in the assumption that that interest is not earned. Personally I advocate diversifying the Trust Fund into other assets but arguing that the returns on investment should not be considered income under a PayGo system is kind of economically perverse. PayGo simply means that you have enough income from all sources to meet current cost. Interest on the trust fund bonds is income just as it would be if the trust fund was invested in school bonds. Like any investment that return is rendered externally.

Now as I pointed out there is a risk when the Trust Fund Ratio gets too big, flat or not, but that risk is primarily political and not economic. If the Trust Fund ever approaches the point that interest alone starts approaching cost then Social Security becomes a victim of its own success. There would no longer be an economic argument for collecting FICA, after all the assets are there and the interest is real, but Social Security increasingly becomes a dead weight on the General Fund.

Oddly enough an overfunded Trust Fund invested solely in special treasuries is just as big a risk to Social Security viability as an underfunded one, perhaps more so. There is a set statuatory solution to insufficient income to pay scheduled benefits, by law benefits are cut to the level that income supports. There is no equivalent automatic mechanism on the upside, the only solution is abrogration of the debt which raises serious questions of equity. If the government borrowed the money it has a legal and moral obligation to pay it back.

There is a solution long term. Diversification of the Trust Fund into other asset categories. But the longer that step is delayed the greater the pain and strain as those interest payments pile up in the Trust Fund and then start earning interest themselves.

Jan 2006: http://bruceweb.blogspot.com/2006/01/interest-on-interest-threat.html

[Bruce Webb]

Hi Calmo.

2.0%. That is the ultimate productivity number assumed by fully funded Low Cost. And this assumes that productivity never comes in above 2.2% between now and 2012,

http://www.ssa.gov/OACT/TR/TR06/V_economic.html#wp188118

Alternately you could accept Intermediate Costs ultimate 1.7% number and close the whole gap with a 2.02% immediate increase in FICA. Of course some combination is possible, any growth above 1.7% long term serves to shrink the payroll gap.

In fact the surest sign that the system was healing itself was the steady drop in the payroll gap from 1996 to 2004. http://www.epi.org/content.cfm/issueguides_socialsecurity_changes
As I noted at the time there is a word for a problem which left unaddressed requires an ever shrinking solution. That word is not 'crisis'. True enough the reported gap is up from 1.89% to 2.02%, but that increase was accomplished by some pretty gratuitous changes in assumptions about future labor participation by the elderly and teens (2005) and a decrease in assumed interest (2006). Absent those changes the payroll gap would have continued to shrink.

Unless of course someone out there has numbers to show otherwise.

[Arne_not_anne]

"that builds in the assumption that that interest is not earned."
I was working for a definition of the difference between pay-as-you-go, endowed, and something in between. By fully funded I mean the trust fund never drops to zero.
I assume that the interest is earned, is available, and is critical in determining the long term health of SS. When SS detractors say expenses exceed income in 2018 they are committing grevious fraud, but that is when we move to the that something in bewteen. If/when the trust fund is used up, we move back PAYGO (which is where we were in 1983).
All of the charts on my blog are backed up with data from the SS reports, sometimes comparing different year reports, sometimes IC to LC. The SSA says we start using the interest in 2017 when the ratio of workers to beneficiaries drops to 2.8 (LC says in 2022 when the ratio drops to 2.7).
Low Cost is fully funded only because the ratio is assumed to start increasing (from a minimum of 2.32 in 2035) before the trust fund is used up. Demographics are more important than productivity once the Boomers start retiring.