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Thursday, March 31, 2005

Berkeley's Chancellor on Prop 209: Minority Inclusion is a Public Good, Not a Private Benefit

For those of you who are interested in diversity issues, this is worth reading. The links to the original documents used to compile the report are in the text in italics just below the picture:

Anti-bias law has backfired at Berkeley

By Robert J. Birgeneau, UC Berkeley Chancellor 29 March 2005

Chancellor Birgeneau has said that, upon his appointment as Berkeley's ninth chancellor last September, he expected to find some surprises waiting, both positive and negative. One "surprising and, indeed, shocking negative discovery," he says, has been the absence of "good relationships across cultural lines within the student body." This situation is most evident among the Latino, African American, and Native American students on campus, he says, and is "caused in large part, I believe, by the dramatic drop in their numbers."

His growing concern about this problem inspired him to write an opinion piece, which was published Sunday, March 27, by the
Los Angeles Times. That text is reprinted here, accompanied by excerpts from an interview with Birgeneau recently conducted by Marie Felde of the campus Public Affairs office.

BERKELEY Nine years ago the people of California passed Proposition 209 in what I believe was a sincere effort to foster nondiscrimination in the state. However, 209's supporters do not see what I see every day as the new chancellor at UC Berkeley.

Instead of ensuring nondiscrimination, Proposition 209 has created an environment that many students of color view as discriminatory. That's because minority representation has dropped appallingly, and where there should be camaraderie across cultural lines, I have seen too much alienation, mistrust and division.

Proposition 209 has had its biggest impact on the enrollment of Latinos, Native Americans and African Americans. The situation for African American students is truly at a crisis point. Freshmen enrollment at UC Berkeley, for instance, has gone from 260 black students in 1997 to just 108 students this year. That's too small a number to form a supportive student community, and many of Berkeley's black freshmen view themselves as struggling against a hostile environment.

They tell me how difficult it is to be the only African American in a class when an issue involving multiculturalism comes up and all eyes turn to you; how much pressure it puts on an 18-year-old to be regarded as the sole representative of her race; and why it is a tragedy for California when there are only dozens of African American men in a freshman class of 3600.

Proposition 209 assumed that considering race or ethnicity in the admissions process would allow undeserving students into Berkeley. But it is significant that the graduation rates of African Americans before and after the proposition's passage have stayed virtually the same. Far from weeding out students who could not succeed, the elimination of race as a consideration in admissions has actually prevented many of California's most able students from the opportunity of a Berkeley education.

In my view, it is unrealistic to think that one can judge a person's likelihood of success at Berkeley without taking into account his race and gender. I spent many years on the faculty at MIT. For decades, women were significantly underrepresented in the undergraduate student body there. So MIT aggressively recruited young women and in the admissions process explicitly took into account negative environmental effects on their SAT scores. We found that it took at most two semesters for these women to catch up to their male peers. Most important, by the time of graduation the failure or withdrawal rate of these women was significantly less than that of their male classmates.

Although the situation is not directly parallel, I believe that at Berkeley we are similarly missing out on exceptional African American, Latino and Native American students who can not only succeed here, but whose participation can improve the education the university offers all its students.

Minority inclusion is a public good, not a private benefit. Indeed, the president of the University of Mexico once said to me that the single most important skill that a 21st century student must master is "intercultural competence" the ability, best learned via experience with and appreciation of other cultures, to navigate successfully in today's globalized society.

California's business community understands this. That is why several leaders from private industry have anonymously funded private academic preparation programs to identify and deepen the pool of eligible minority candidates for UC and UC Berkeley. We applaud this effort. Many Berkeley students are engaged in private efforts to recruit more students of color. This month we are opening a multicultural center on campus to bring students together to help overcome mistrust among races and ethnic groups at Berkeley.

We need, however, to do much more. As the premier public teaching and research university, we know we must lead the discussion on the unintended consequences of Proposition 209. I am initiating a broad-based diversity research agenda at Berkeley to study this and a myriad of related issues. Our goal is to find innovative ways to make this campus the inclusive and welcoming environment to which it aspires.

This call to action extends the efforts of previous chancellors and others at Berkeley. As the current chancellor, I feel a moral obligation to address the issue of inclusion head-on. Ultimately it is a fight for the soul of this institution. Inclusion is about leadership and excellence, principles that California and its leading public university have long represented and might again.

More info

"'The system is broken': Chancellor Robert J. Birgeneau discusses Proposition 209 and its consequences at UC Berkeley," an interview on diversity and inclusion that Birgeneau recently gave to Marie Felde of the campus Public Affairs office.

Q. Is it your opinion that Proposition 209 was a mistake?

Birgeneau: At the time that 209 was passed, it would have been impossible to determine whether or not it was a good thing or a bad thing. I think that people who supported it at the time 65 percent of the voters believed that it would lead to fairer treatment of the entire population. But in my view that has not turned out to be the case. I am an experimental scientist, and in my view the experiment with 209 has been done and my conclusion is that it has done serious damage.

Q. Are you suggesting that those who voted for 209 may not have known what they were getting into or what the consequences of its passage would be?

A. I think people voted for 209 idealistically and generally thought it would produce a fairer system. My conclusion, and the conclusion of many people around me, is that because it has resulted in a dramatic diminution in numbers of particular classes of California citizens, it has in fact created a system that is quite unfair.

Q. Proposition 209 said that college admissions, including admission to Berkeley, could not consider race, ethnicity or gender as a factor. What is the problem with that?

A. The practical consequence is that we have ended up eliminating many qualified African American students, so that in a typical classroom there may well just be one or even zero such students. That ends up creating a very difficult environment for those individual students.

Q. What do you suggest we do? Are you suggesting that we set aside Prop. 209? Can Berkeley on its own set aside the law?

Berkeley absolutely on its own cannot set aside 209. As long as 209 is the law we must obey the law and, of course, we are absolutely committed to obeying the law. I would like to understand more completely what the law allows us to do and what the law does not allow us to do. It may be that we could have more flexibility than we are taking advantage of at the current time.

Q. Ward Connerly and others would say Proposition 209 is very clear: You can't use race, ethnicity, or gender as a factor in making decisions, either about admissions or hiring. Why do you think this is not clear?

That is where we get into the intersection of a person's race and the circumstances under which they grew up. A person may grow up in circumstances that are strongly disadvantageous, and I think we need to understand those better.

Q. Berkeley's admissions policy, called comprehensive review, is supposed to take that into account. Are you suggesting there is a need for a change to the admissions policy?

This issue goes far beyond Berkeley. Take African Americans again as a specific group. The number of students that we find we are actually able to attract and admit here at Berkeley through our comprehensive review policy falls far short of the number of African American students that we know, through past experience, could do well here.

Let's look even more specifically at African American males. Our freshman class has fewer than 40 African American males in a student body of more than 30,000. Clearly, something is fundamentally wrong; the system is broken. An extreme example of this is that there is not a single African American in applied science and engineering in this year's freshman class. Now, Berkeley was recently ranked by the Times Higher Education Supplement in the U.K. as having the top engineering faculty in the world not just in California, not just in the United States, but in the world. Now we have a situation where not a single member of the African American community in California is able to profit from being taught by the world's best faculty in engineering. They deserve it and it's not happening.

Q. Asian American students are well-represented in the Berkeley student body, and many of them face disadvantages as well.

A. All the people of California take great pride in the achievements of our Asian American students; we are very happy that the Asian community is so well represented here. Unfortunately, the African American and Chicano/Latino and Native American communities are grossly underrepresented. My concern is not only the low numbers of underrepresented students relative to the population of California now, but with what we'll see if we project forward especially with regard to the Chicano/Latino community just 20 years. The students we are educating now, and who we hope will provide leadership in the future, are an even smaller percentage of what that population will be 20 years from now. My view is that as a public university we are not meeting our responsibilities in terms of the public good.

Q. What will Berkeley be doing on your watch to meet what you believe to be our public responsibility?

A. First of all, because we are a university and we do research, it is our intention to create new research programs to help us to understand the state of California in a post-209 environment, to understand the importance of multiculturalism, to understand the importance of diversity and its impact on our society as a whole.

Q. What do you expect to come out of that?

A. One of the fascinating aspects of living in a state like California is that we have brought so many different cultures together. This is a relatively new phenomenon, full of consequences that have not yet been understood. So it is very important to study the political, sociological, and cultural aspects of multiculturalism, and all the different ways they make a difference.

Q. You said in your Los Angeles Times opinion piece that you see on the Berkeley campus a climate that includes "alienation, mistrust and division" for underrepresented minority students. That sounds very troubling. What do you mean by it?

A. Overall, the spirit on this campus is outstanding, but for many of our underrepresented students, it is not outstanding. They feel totally isolated, as if they were being told they don't belong at Berkeley. Now, I'm a physicist, not a psychologist or a sociologist, so I can't explain all the origins of the unhappiness that I see among the underrepresented minority students but there is no doubt that a critical part of it is their very small numbers and the isolation of individuals.

Q. We are in the point in the admissions process where high school students will get an offer of admission to Berkeley. They will have a month to decide whether to accept. If I'm an African American or Chicano/Latino high school senior and I get an offer of admission to Berkeley, what are you going to tell me so I come to campus?

A. I'm going to tell you that this is an issue we really care about. That's what I'm doing now. We are empowering our students to tell you that this is a supportive environment. In fact, this issue is viewed with sufficient importance in the community outside of Berkeley that we now even have Bay Area businesspeople putting up funds in order to bring African American students on to our campus to see that, in fact, Berkeley is a great place to go to school.

    Posted by on Thursday, March 31, 2005 at 01:08 PM in Economics, Universities | Permalink  TrackBack (0)  Comments (0) 

    Weapon of Mass Deception Found in Snow

    Click on graph for larger version

    Sources for statements from U.S. Treasury Secretary John Snow:
    1. Snow Baffled by Resistance to Private Accounts, March 30.
    2. Secretary John W. Snow Prepared Remarks: FLIR Systems Portland, OR, March 28.
    3. Prepared Remarks before The Wilmington Club in Wilmington, DE, March 24.
    4. Prepared Remarks: Sam M. Walton College of Business, University of Arkansas, March 3.

    Comments from old site

      Posted by on Thursday, March 31, 2005 at 07:16 AM in Economics, Social Security | Permalink  TrackBack (0)  Comments (0) 

      Wednesday, March 30, 2005

      Another Snow Job on Privatization

      I've documented deceptive statements on Social Security solvency by U.S. Treasury Secretary John Snow in a previous post.  As I was writing this, Brad DeLong posted quotes from Snow and noted how disingenuous it is for him to say he is confused and cannot understand how anyone would oppose privatization.

      I want to highlight another deception in the same set of quotes that Brad refers to. In the quotes below, Snow first makes it clear that benefits will not increase for younger workers by qualifying his statements carefully. The inference is that benefits will decrease for younger workers. Then, he says that privatization will make younger workers better off.

      Here’s the lead from the story:

      BOZEMAN, Mont. (Reuters) - U.S. Treasury Secretary John Snow said on Wednesday he was confused by resistance to the Bush administration's plans to overhaul the Social Security system…

      He certainly is confused. Or worse. Listen to what else he says:

      Snow, in remarks to the Chamber of Commerce in Bozeman, said he believed personal accounts for young workers would be cost-free for the existing Social Security system and would not affect benefits to retirees or near-retirees.

      Cost free? Does he really believe that? And look how carefully this is worded – it won’t affect benefits for current “retirees or near-retirees.” What isn’t said is important. If they didn’t intend to cut benefits to workers who aren’t near retirement, he would say so. So they clearly understand benefits will have to be cut for younger workers.

      Then why does he say:

      It's a way to allow young people, and future generations, to do better than they otherwise would be able to do.

      If they are going to do better, then why doesn’t he say benefits will increase? Because they won’t, and that means young people won’t do better. So why is he saying they will?

      The more quotes I read from Snow and the rest of the administration’s sales team on their 60 stop tour, the clearer it becomes that the administration is willing to use deception, misleading statements, and whatever else is necessary in order to sell this proposal.

      They are making it very clear that privatization cannot stand on its own merits. It can only pass if they succeed in confusing and misleading people into believing their deceptions.

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        Posted by on Wednesday, March 30, 2005 at 08:28 PM in Economics, Social Security | Permalink  TrackBack (0)  Comments (0) 

        How Animals Do Business

        I found this story from Scientific American, April 2005 interesting:

        How Animals Do Business
        Humans and other animals share a heritage of economic tendencies--including cooperation, repayment of favors and resentment at being shortchanged
        By Frans B. M. de Waal

        ... The problem is that the crab grows, whereas its house does not. Hermit crabs are always on the lookout for new accommodations. The moment they upgrade to a roomier shell, other crabs line up for the vacated one.

        One can easily see supply and demand at work here, but because it plays itself out on a rather impersonal level, few would view the crab version as related to human economic transactions...Other, more social animals do negotiate, however, and their approach to the exchange of resources and services helps us understand how and why human economic behavior may have evolved....

        The article ends with:

        All economic agents, whether human or animal, need to come to grips with the freeloader problem and the way yields are divided after joint efforts. They do so by sharing most with those who help them the most and by displaying strong emotional reactions to violated expectations. A truly evolutionary discipline of economics recognizes this shared psychology and considers the possibility that we embrace the golden rule not accidentally, as Hobbes thought, but as part of our background as cooperative primates.

        The article is an attempt to provide an evolutionary basis for economic behaviors such as reciprocity, the division of rewards, and cooperation that serve to regulate individual optimizing behavior so that it is consistent with the shared interests of the group.

        The invisible paw.

        [Additional Reading: In the post Interesting Books on Economics below this one, one of the entries is:

        Economic Choice Theory : An Experimental Analysis of Animal Behavior by John H. Kagel, Raymond C. Battalio, Leonard Green, A fascinating look at how useful economic ideas are for describing animal behavior.]

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          Posted by on Wednesday, March 30, 2005 at 07:11 AM in Economics, Science | Permalink  TrackBack (0)  Comments (0) 

          Interesting Books on Economics

          Following up on the yesterday's post, here are some interesting books on economics from Bill Harbaugh's home page:

          Basic questions about preferences and the usual economic assumptions:

          Choosing the Right Pond by Robert Frank. Maybe it's not how much stuff you have, but whether you have more stuff than the other guy. For a more economic approach to questions of human nature, and in particular questions of status, Choosing the Right Pond is an excellent book. Frank attempts to resolve some "puzzles" that appear when economic theory is applied to real life.

          The Red Queen by Matt Ridley. The Red Queen explores the evolutionary history of sex and its effects on human nature. Through numerous examples from nature and human society, Ridley traces biologists and psychologists views on the significance and "goals" of things such as monogamy, gender and race bias, puberty, feminism and beauty. It serves as an excellent introduction to the realm of evolutionary psychology. For the non-scientist, it also serves as an introduction to evolutionary psychology.

          The Moral Animal , by Robert Wright The influence of human evolution on everyday life. Wright, a journalist (former editor of the Economist), has researched current trends and conclusions in the field, and has packaged them in an excellent book that explores the everyday phenomenon of marriage, childrearing and the like.

          Passions within reason: the strategic role of the emotions, by Robert Frank. Why getting angry and falling in love are rational, in different circumstances. So, if even our emotions are rational, why not analyze them using economic tools?

          Adam Smith's Wealth of Nations. You've probably heard of this one. Online version here.

          Adam Smith's Theory of Moral Sentiments. Smith's other book. It's very different. Online version here.

          Experimental Economics:

          The Handbook of Experimental Economics by John H. Kagel Alvin E. Roth (Editors). The industry standard introduction to the field. Assumes you know a bit about economics.

          Experimental Economics by Douglas D. Davis, Charles A. Holt. More of an emphasis on market behavior, explains relevant parts of economic theory.

          Economic Choice Theory : An Experimental Analysis of Animal Behavior by John H. Kagel, Raymond C. Battalio, Leonard Green A fascinating look at how useful economic ideas are for describing animal behavior.

          Politics, Policy, History:

          Stone Age Economics, by Marshall Sahlins. I haven't read this in years, but I remember it as an attempt to use economics to analyze behavior in primitive societies. Maybe there are more recent attempts to do the same, if so I'd appreciate hearing about them.

          The rise and decline of nations, by Mancur Olson.An intriguing explanation for the decline of civilizations from Rome to the U.S. (well, it was written when Carter was President) based on economic theories about how special interest groups affect political decision-making.

          Peddling Prosperity, by Paul Krugman. Examples of the interaction between economy theory and real world problems.

          Manias, Panics and Crashes : A History of Financial Crises, By Charles P. Kindleberger. "An informative and entertaining history of financial crises from the timeof the South Sea Bubble in the early eighteenth century to the worlddepression of the thirties and the mini-panics of the early seventies."(N.Y.: Basic Books, 1978).

          Against the tide: an intellectual history of free trade, Douglas Irwin. Some arguments for and against free-trade over history, from Aristotle to Adam Smith to Krugman.

          Game Theory:

          Game Theory Evolving, by Herbert Gintis. An excellent intro to what game theory is, with an evolutionary slant that makes for interesting reading. Starts with simple games, assumes you know some economics but no game theory.

          Thinking Strategically, by Dixit and Nalebuff. What game theory is and how it can help you succeed in business and life.

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            Posted by on Wednesday, March 30, 2005 at 06:48 AM in Economics, Reading | Permalink  TrackBack (0)  Comments (0) 

            CNN Money Gets the Consumer Confidence Headline Backwards

            Here's the headline on a story online at CNN Money:

            Consumer confidence falls
            Conference Board's consumer survey shows larger decline in March than forecast by economists.

            March 29, 2005: 10:43 AM EST

            This article is contradictory. The first line is consistent with the headline, but that's not the point of the story. Here's a quote from the story illustrating its main theme:

            Economist Mark Vitner of Wachovia Securities said that in recent weeks economists and investors had been preparing for a much weaker reading than the published consensus forecast of 103, due to a weak number from a similar survey by the University of Michigan as well as weaker-than-expected economic reports.

            "There was a huge sign of relief when the number came in above 100, and that's why the market rallied," Vitner said. "There was a thought that the combination of rising interest rates and higher gas prices would knock it below 100."

            The story doesn't say that consumer confidence shows larger decline in March than expected by economists. It says just the opposite.

            This consumer's confidence that the press can get even the most basic things correct, like a headline that accurately reflects the article it describes, continues to fall.

            [Update - In the comments, Scooter notes another instance, last weeks release of the CPI, where the press misreports what numbers mean:

            The headline was correct, but not the whole truth. The consensus forecast was 103.0, but the fear was that the number could come in much lower than that. Similar to equity analysts, economists have "whisper numbers." The headline should have read "...larger decline than expected, but not as bad as feared." Incidentally, the Gallup Poll survey of consumer attitudes and the weekly ABC / Wash-Post Consumer Comfort Index both showed sharp declines in the last couple of weeks.

            Yet, the point of the post -- that the press needs to do a better job -- goes without saying. Take last week's impressions of the CPI (core up 0.26% -- 0.3% after rounding), which was reported as a sharp increase.]

            Comments from old site

              Posted by on Wednesday, March 30, 2005 at 06:21 AM in Economics, Press | Permalink  TrackBack (0)  Comments (1) 

              Tuesday, March 29, 2005

              The Decline in Violent Behavior Among Adolescents in the 1990’s: Clinton or Doom?

              A colleague, Bill Harbaugh, is an expert in how children learn to make economic decisions. If you haven’t seen Bill’s research, I highly recommend that you take a look at it. He is an experimentalist and he has some really interesting papers on bargaining behavior in children, how risk attitudes and consumption choices change with age, economic experiments you can perform at home on your children, the development of rational choice behavior in children, and so on. In addition, he also does research on the economics of altruism and he has some interesting papers in this area as well.

              Here is Bill's brain:

              Bill told me about a link to data illustrating one of the hidden stories of the 1990’s, the broad improvement in children’s security during the Clinton administration and, so far, continuing into the Bush administration. This story, which is potentially good news for the Democrats in the battle between the parties over family values, has not received the attention it deserves.

              Consider the following graphs from Child Trends, an organization that is a “a 26-year-old nonprofit, nonpartisan research organization dedicated to improving the lives of children by conducting research and providing science-based information to improve the decisions, programs, and policies that affect children and their families.”

              First, here is a graph showing the decline in the percentage of high school students who report carrying weapons:

              Click on graph for larger version

              Next is a graph showing the decline in percentage of students fearing attack at school:

              Click on graph for larger version

              The third graph shows the violent crime victimization rate for adolescents. The rate increases in the mid to late 1980's, then begins falling sharply in the early 1990's:

              Click on graph for larger version

              And finally, a graph showing homicides, suicides, and firearm related deaths for youth aged 15-19 from 1970-2002. This graph shows a large increase in homicide and firearm related death rates in the late 1980’s and an equally dramatic decline beginning in the early 1990’s echoing the pattern in the previous graph:

              Click on graph for larger version

              Was it the policies of the Clinton administration that brought about the improvement in outcomes for teens, or was it something else?

              As Bill notes:

              There is no agreement about the causes of these improvements - and a lot of reluctance to admit that life for teenagers is actually getting better. But the trends are pretty dramatic. Suggestions for what is behind the improvement in outcomes range from smaller families, people waiting until they are older and better prepared to raise children, or the abortion of unwanted children - the ones who tended to get in trouble in the past.

              But no one with any familiarity with popular culture can ignore the explosion in sales of violent video games that occurs at the same time violent behavior by teenage boys starts to decrease. Is this just coincidence? While people are very comfortable with the idea that basketball and football keep boy's violent impulses under control, they have a hard time thinking about Doom and Quake in the same way.

              It's hard to see why video games shouldn't work at least as well as sports though. While only a few children win in real life sports tournaments, in video games the difficulty of the contest is automatically adjusted by the software. Everyone human can win, and experience the satisfaction of winning. The only losers in video games are software androids.

              So encourage your kids to play video games long and often and get all that aggression out. You won’t be sorry you did. At least we hope not.

              [Update: The day after this was posted, the AP ran the story "Children today doing better than parents were" with the sub-title "Kids engaging in less risky behavior, but still eating too much" which makes similar points about the improvement in children's well-being, but adds that they have also become more obese.]

              Update: This topic is discussed in the Washington Post.

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                Posted by on Tuesday, March 29, 2005 at 07:20 AM in Science | Permalink  TrackBack (0)  Comments (0) 

                Monday, March 28, 2005

                Bush Thinks About Social Security Reform

                Time to stick a fork in it?

                  Posted by on Monday, March 28, 2005 at 02:34 AM in Economics, Social Security | Permalink  TrackBack (0)  Comments (0) 

                  Why Does the Demand for Church Services Rise on Holidays?

                  Brad DeLong’s post on the extreme seasonal demand for marshmallow Peeps started me thinking about similar issues regarding church attendance on holidays.

                  Since the supply of church services at a particular time of day is essentially fixed save a few extra folding chairs here and there, and thus horizontal up until capacity, variations in attendance are due to variations in the demand for church services (so long as there is capacity remaining):

                  Why would that be? Crowding on holidays increases the cost of attending the service due to difficulty finding parking, seating, and so on.

                  Why do so many more people attend services at what is effectively the same or a higher price than on other days?

                  Is it because they are seen by more of their family, friends, and neighbors and get a bigger reward for attending? Are those days rewarded higher on judgment day? Do they take more away from the services on holidays? Is the opportunity cost of attending lower on holidays even though the crowding costs noted above are higher?

                  What explains the increase in demand?

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                    Posted by on Monday, March 28, 2005 at 01:35 AM in Economics | Permalink  TrackBack (0)  Comments (0) 

                    Sunday, March 27, 2005

                    Help for Angry Bear's Bunnies

                    For those poor bunnies at Angry Bear.

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                      Posted by on Sunday, March 27, 2005 at 09:27 AM Permalink  TrackBack (0)  Comments (0) 

                      Saturday, March 26, 2005

                      The Real Crisis is Administration Credibility

                      I get paid for nine months out of the year but have to live for twelve. So, obviously, during the nine months I get paid I have to build up a surplus. During those nine months I put the accumulated surplus into a lockbox for safekeeping, which is the bank in my case. This allows me to be ready for a period in the future when my income will be smaller than my expenses.

                      More concretely, suppose I save $15,000 during the nine months that end on June 15. On June 16 I withdraw $1 from my savings. Am I in the red? Am I now going bankrupt? According to crisis language adopted by the GOP I am.

                      Let’s start with a White House press release of a transcript of the President's remarks. As you read the quotes below, remember that the Social Security trustess intentionally built up a trust fund beginning in 1983 and fully expected and intended for it to be drawn down at some point, just as I draw down my funds in the summer. This is the president speaking on March 22:

                      In 2018, because the math has changed, more money will be going out than coming in for Social Security. People will be paying payroll taxes, but because baby boomers like me are retired and we're living longer and we're getting bigger benefits than the previous generation, the system turns into the red.

                      And it’s not just the president using this misleading crisis language. Look at the continued attempt by high level administration officials to conflate the year 2017 with the word bankruptcy to make the expected draw down in accumulated saving appear as some sort of impending crisis point.

                      Here’s a quote from Treasury Secretary John W. Snow on March 24, 2005 from his Prepared Remarks before The Wilmington Club in Wilmington, DE:

                      According to the new Trustees' report, the government will begin to pay out more in Social Security benefits than it collects in payroll taxes in 2017 – that's just 12 years from now. By 2041, when younger workers begin to retire, the system will be bankrupt.

                      The year 2017 is the point in time when we begin drawing down the accumulated surplus, just like I do in summer. If I’m not beginning to go bankrupt when I withdraw my $1 on June 16 (2017 for Social Security), then neither is Social Security. And these people know that.

                      Where did they get this idea? Let’s take a look at material on the White House web site. Go to the White House web site and click on "Economy." You will read this statement:

                      By 2018, Social Security will owe more in annual benefits than the revenues it takes in, and when today's young workers begin to retire in 2042, the system will be exhausted and bankrupt.

                      That’s just not true and it's yet another attempt to conflate 2018 with the work bankrupt. You'd think the White House web page would be free of such nonsense (and also update the date to 2017), but it isn’t.

                      Here’s a bit more. Read the following conversation the President had on March 22, 2005 in Albuquerque, New Mexico to see how widespread and persistent the attempt to mislead us is:

                      MS. VALDEZ: I am aware of that. I'm also aware that if the current system does not change, when I do become of age to retire, more than likely I will not have any money that I have paid into the system.

                      THE PRESIDENT: You know what's really interesting -- this is an appropriate state to say this, Pete -- that an interesting survey one person Jessica's age told me about said young Americans believe it's more likely they will see a UFO than get a Social Security check. (Laughter.) Kind of makes for an interesting dynamic, doesn't it, in the process.

                      MS. VALDEZ: Yes, it does.

                      THE PRESIDENT: See, if a lot of young Americans believe that, once they get assured that their grandparents are going to get their checks, the second question they'll ask -- the first question is, will my grandmother get the check? The second question is, what are you going to do for me, Congress? What are you going to do to make sure that I don't have a huge burden when I'm -- 20 percent payroll tax, perhaps? No benefits? UFO flying before checks fly? (Laughter.)

                      "UFO’s flying before checks?" Instead of using the opportunity to correct a misperception, the President chooses to reinforce the misperception concerning the state of the system’s financial position.

                      It was no slip of the tongue. He says it again at another stop the day before in Denver on March 21:

                      Somebody told me about a survey once that said 20-year-old Americans believe they're more likely to see a UFO than get a check. (Laughter.)

                      This has to stop. These people know better. Even the most generous interpretation of these events does not avoid the conclusion that this is an intentional ruse. As Brad DeLong has noted in his post George W. Bush: Liar or Fool?:

                      Does he simply not realize that the idea was that the Trust Fund would grow and then shrink?

                      I wouldn’t worry so much about all of this if we could trust the press to be vigilant. But we can’t. Look at how the AP reported the release of the trustee report on Social Security, a report that was widely picked up and reported verbatim by most national news agencies:

                      The trust fund for Social Security will go broke in 2041 -- a year earlier than previously estimated -- the trustees reported today.

                      Go broke? So we can't expect any help from what Max of MaxSpeak calls the "intellectual pygmies" in the press.

                      What is going broke? There is a bankruptcy here, but the bankruptcy is in the credibility of our elected officials and our press corps. That concerns me far more than whatever bumps in the road Social Security might encounter in the future.

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                        Posted by on Saturday, March 26, 2005 at 06:30 PM in Economics, Social Security | Permalink  TrackBack (0)  Comments (0) 

                        Friday, March 25, 2005

                        Mankiw Part 2: The Relative Price of Credibility

                        At the White House web site, there is a section called Ask the White House. In one part of this section, Greg Mankiw answers questions on the Economic Report of The President. Among the softballs lobbed at him are these three. Let's see if he hits them out of the park:

                        Justin, from Indiana, PA writes:

                        Dr. Mankiw I am an economics student at Indiana University of Pennsylvania. Your name is very familiar to me as we use your text for macroeconomics.

                        From everything that I have learned so far, I know that two ways to stimulate economic growth are to cut taxes or to increase government spending.

                        Each of these practices I know comes with risks if recovery is too slow.

                        My question is this; how economically dangerous is it to give a tax cut in the middle of a major military operation? I'm sure you know that President Bush will be the first person to do so since the Civil War. I am deeply concerned, not for myself, but for the financial stability of my children (20 years from now).

                        I suppose my real question is the following: In your highly educated, and off the record opinion, would I be better off moving to Canada?

                        I thank you very much for your time. I also thank you for making your text books so informative without being convoluted. Even I understood then (sic), and for that feat alone, you should win a prize.

                        Greg Mankiw

                        Let me begin by stating, on the record, that I hope you stay here in the U.S. (although Canada is a great friend). Our nation remains and will remain one of the most prosperous countries in the world.

                        On your economic question: the President's job is to set priorities - and restoring job growth was priority number one. However, he is committed both to getting America back to work and to reducing the budget deficit over time. The tax cuts were aimed to stimulate aggregate demand in the short run and promote sustained growth in aggregate supply in the long run. As the economy recovers, more tax revenue will flow in. Together with spending restraint, this will lead to reduced budget deficit.

                        That doesn't seem like a home run to me. Let's see how he does on the next one:

                        Michelle, from Houston, Texas writes:

                        I am concerned about the federal debt and that it may cause us to pay higher taxes in the future. How can you lower the debt now without raising taxes?

                        Greg Mankiw

                        The President has said many times that he is also interested in reducing the budget deficit and as a result the issuance of government debt. The fundamental question is how that goal is to be achieved. Some believe that raising taxes is the answer. The president believes that higher taxes would reduce the incentive to work, save and invest, which in turn would impede economic growth.

                        The alternative to higher taxes is spending restraint. The budget the President released last week puts high priority to defending the homeland and providing sufficient funds for national defense. Non-defense, non-homeland security discretionary spending grows at a rate of less than one percent. Through this spending restraint, he will reduce the budget deficit in half over the next five years.

                        Not so good there either. Okay, one last chance:

                        Valerie, from Bell Canyon, California writes:

                        Greg First of all, love your book. Secondly, what late 70's video game did you prefer: Asteroids or Space Invaders? Perhaps Galaga?

                        Greg Mankiw

                        My wife and I were big fans of Defender.

                        One for three on softballs.

                        The quality of his book comes up a lot for a government sponsored site. But they wouldn't shill for a textbook just because someone adopts the party line would they?

                        Let's take a look at that book. Here's an interesting quote (5th edition, page 266):

                        When George W. Bush was elected president in 2001, a major element of his platform was a cut in income taxes. Bush and his advisers used both supply-side and Keynesian rhetoric to make the case for their policy. During the campaign, when the economy was doing fine, they argued that lower marginal tax rates would improve work incentives. But then the economy started to slow: unemployment rose from 3.9 percent in October 2000 to 4.5 percent in April 2001. The argument shifted to emphasize that the tax cut would stimulate spending and reduce the risk of recession.

                        It's interesting how easily he adopted this "rhetoric" while hawking his book. Why weren't they arguing the tax cut would overheat the economy when the economy was at full employment?

                        Elsewhere (pg. 408), in discussing the budget surplus the administration inherited upon taking office, he states:

                        These surpluses arose from various sources. The elder George Bush had signed a tax increase in 1990, and Bill Clinton had signed another in 1993, Because of these tax hikes, federal tax revenue as a percentage of GDP reached its highest level since World War II. Then, in the late 1990s, productivity accelerated...

                        He then goes on to talk about how robust productivity growth was during the 1990’s. How can he argue that tax increases led to budget surpluses and did not hamper economic growth in the 1990's and argue the opposite as a spokesman for the administration's economic policy in his answers above?

                        Contrast this statement quoted above on the White House web site:

                        The tax cuts were aimed to stimulate aggregate demand... As the economy recovers, more tax revenue will flow in. Together with spending restraint, this will lead to reduced budget deficit.

                        with these statements from his textbook quoted in the previous post:

                        ...there was no credible evidence that work effort would rise by enough to cause tax revenues to rise in the face of lower tax rates...


                        when politicians rely on the advice of charlatans and cranks, they rarely get the desirable results they anticipate. After Reagan's election, Congress passed the cut in tax rates that Reagan advocated, but the tax cut did not cause tax revenues to rise

                        I think it’s fair to question the credibility of someone who would turn a government sponsored question and answer period into a sales pitch for his textbook without any consideration of the ethics of doing so, and then contradict the textbook he’s shilling for in an attempt to sell the administration’s economic policy.

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                          Posted by on Friday, March 25, 2005 at 09:17 AM in Budget Deficit, Economics | Permalink  TrackBack (0)  Comments (0) 

                          Wishful Thinking from the White House Web Site


                          This chart is from the Office of Management and Budget and is intended as an official and informative document (the OMB is an Executive Office of the President and these charts are on the White House web site).

                          Here's how they plan to get the job done:

                          This implies this administration is showing more fiscal restraint than the prior administration. This also implies that plans for non-security discretionary spending, a negative number in 2006!, will reign in the deficit.

                          A reality based budget is not what you hope will happen, which is what these charts show, but rather what actually did and will happen to the budget, which these charts do not show.

                          I couldn't find the reality based charts.

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                            Posted by on Friday, March 25, 2005 at 07:02 AM Permalink  TrackBack (0)  Comments (0) 

                            "Say, Whatever Happened to 'Freedom-From-Fear'?"

                            This is a cartoon by Herb Block that appeared in the Washington Post on August 13, 1951:

                            Click on Image for Larger Version

                            As Senator Joseph McCarthy's campaign against State Department and Justice Department officials continued, President Harry Truman spoke against "scaremongers and hatemongers" who "are trying to create fear and suspicion among us by the use of slander, unproved accusations, and just plain lies." "Say, what ever happened to 'freedom-from-fear'?" August 13, 1951. Reproduction from original drawing. Published in the Washington Post (31)

                            Unlike Truman, this president has not spoken against "scaremongers and hatemongers" who "are trying to create fear and suspicion among us by the use of slander, unproved accusations, and just plain lies."

                            The term "freedom from fear" appears in Truman's Address in New York City at the Opening Session of the United Nations General Assembly on October 23, 1946:

                            I submit that these settlements, and our search for everlasting peace, rest upon the four essential freedoms.

                            These are freedom of speech, freedom of religion, freedom from want, and freedom from fear.

                            Say, what ever happened to freedom of speech, freedom of religion, freedom from want, and freedom from fear?

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                              Posted by on Friday, March 25, 2005 at 12:15 AM in Politics | Permalink  TrackBack (0)  Comments (1) 

                              Thursday, March 24, 2005

                              Fire Insurance is not Welfare and Neither is Social Security

                              [Update: See also "The Need for Social Insurance" posted 4/2/2005]

                              Robert Samuelson, and many others, appear to believe that any time there is a transfer of income between individuals or groups it is welfare. This is wrong. According to Samuelson:

                              Welfare is a governmental transfer from one group to another for the benefit of those receiving. The transfer involves cash or services (health care, education). We have welfare for the poor, the old, the disabled, farmers and corporations. Social Security is mainly welfare...

                              Not it isn’t. Social Security is mainly a means of insuring against economic risk. It is fundamentally an insurance program, not a saving program, and as such it is not "mainly welfare."

                              Just because an economic activity transfers income from one person or group to another does not make it welfare. Fire insurance transfers income. Some people pay premiums for their whole lives and collect nothing. Others, the unlucky few who suffer a fire, collect far more than they contribute. Does that make it welfare? Of course not.

                              Social Security is no different, it is an insurance program against economic risk as I explain in this Op-Ed piece. Some people will live long lives and collect more than they contribute in premiums, some will die young and collect less. Some children will lose their parents and collect more than their parents paid into the system, others will not. But this does not make it welfare.

                              Is gambling welfare? Gambling transfers income from one person to another. Does that make it welfare? Loaning money transfers income when the loan is paid back with interest. Are people who receive interest income on welfare?

                              There is an important distinction between needing insurance ex-ante and needing it ex-post. Insurance does redistribute income ex-post, but that doesn't imply that it was a bad deal ex-ante (i.e., when people start their work lives).

                              Thus, by this definition, farm subsidies are welfare. Steel tariffs are welfare. R&D tax credits are probably even welfare, and so is AFDC. All of these are pure ex-post redistributions. That is fundamentally different from the purchase of insurance.

                              Angry Bear agrees with me on this and the two of us have been independently saying the same thing (in fact, I first encountered AB in a Google search on Social Security, insurance, and risk). As AB said (the full text is well worth reading):

                              What does all of this have to do with Social Security? Those who are hard-working, fortunate, and not too profligate will have a large nest egg at retirement and Social Security will account for only a small portion of their retirement portfolio. This is tantamount to paying for insurance and then not needing it. This happens all the time -- every year someone fails to get sick or injured and, while surely happy in their good health, would have been better off not buying insurance. That's the nature of insurance: if you don't need it, then you'll always wish you hadn't purchased it. Only in the context of retirement insurance is this considered a crisis.

                              On the other hand, those with bad luck or insufficient income will not have a nest egg at retirement. Because of Social Security, instead of facing the risk of zero income at retirement, they are guaranteed income sufficient to subsist.

                              This is precisely like the insurance example I worked through above: people with good outcomes will wish they hadn't paid into the insurance fund; those with bad outcomes will be glad they did. Ex-ante, everyone benefits from the insurance. Overall, society is better off because risk is reduced; because people are risk-averse, the gains are quite large.

                              When I think of welfare, I think of pure money transfers from one group to another without any economic basis for the transfer. In such cases, one person’s gain arises from another’s loss. But economic activity that results in the exchange of goods and services is different. It is not a zero sum game. One person’s gain does not come at the expense of someone else.

                              The main feature of Social Security is not welfare as Samuelson asserts. The main feature is insurance against economic risks and as such it makes us collectively better off. Calling it welfare when it isn’t is misleading and causes unnecessary class distinctions and resentments from the losers ex-post. More importantly, it ignores and obscures the important role Social Security plays in society as insurance against the economic risks we all face.

                              If you think you are so rich and powerful that you don’t need such insurance, consider this. The stock market collapse of 1929 at the onset of the Great Depression wiped out substantial quantities of wealth. The typical stock was worth only one sixth its pre-crash value once the bottom was reached. Whatever insurance existed in the stock market evaporated as the crash unfolded.

                              It wasn’t the poor jumping out of windows on Wall street. If you think it can’t happen to you, think again.

                              [Update: Maxspeaks also comments on Samuelson's piece in Robert No-Relation-to-Paul-Samuelson-Doesn't Get Social Insurance and notes his failure to understand Social Insurance. "Why are so many Washington Post columnists intellectual pygmies?" he asks...]

                              [Update: A question that comes up repeatedly in response to the fire insurance analogy is why it is that with fire insurance only the losers are compensated, whereas with Social Security everyone is compensated. Why isn't there any distinction between the winners and the losers (means testing).

                              I talk about this a little bit in the comments to this post and note some of the political realities involved in the decision to give everyone “ownership” in the system. On the economic side, there are market failure issues that lead to a need for government intervention to ensure that people have sufficient resources available upon retirement. There are both moral hazard and lemons market problems in the private sector, e.g. moral hazard because the government won't let us starve and lemons market issues due to private information on health status that gives a person a better idea about longevity than the market can assess. You could solve the latter by making medical records public, but you'd still be left with other market failures and less privacy. Thus, the argument is two-pronged. First, there is a need for Social Insurance to ensure against economic risk. Second, market failure in the provision of retirement insurance and retirement saving lead to a need for government intervention.

                              The other comment is that the payout is too generous making it a retirement savings account rather than insurance against poverty. I totally agree that the level of socially acceptable insurance is an open question. What you might see as a retirement savings account, I might see as nothing more than a poverty level guarantee due to different normative judgments. The acceptable level of social insurance is an area that we can debate, but it is ultimatately a normative question. Some thoughts on this are at The Visible Hand: Adam Smith on Equity.

                              A final comment is in response to comments on the redistributive aspect of the insurance system. The contributions to the system may go beyond what is justified by the probability of a person going broke (in terms of their contribution versus expected payout). It would be possible to adjust the payments so that contributions are actuarially fair, but the politics of such a change are dificult.

                              However, the redistribution question is separate from the efficiency question. Paying in more than is actuarially justified does not necessarily imply income redistribution so long as each income group gets back what they pay into the system. In any case, the redistributive questions do not overturn the arguments concerning the need for a social insurance program.]

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                                Posted by on Thursday, March 24, 2005 at 10:17 AM in Economics, Social Security | Permalink  TrackBack (0)  Comments (6) 

                                What Taking Personal Responsibility Means to the GOP


                                  Posted by on Thursday, March 24, 2005 at 10:08 AM in Economics, Social Security | Permalink  TrackBack (0)  Comments (0) 

                                  Wednesday, March 23, 2005

                                  Bush Budget Policy: Interest Rate Risk and Limits to Foreign Policy

                                  If you have any doubt about the increasing debt burden under recent Republican administrations, here's a picture of how the debt to GDP ratio has changed since 1950. Note the red lines, which are time periods of rising debt burden, occur during the Reagan, Bush I, and Bush II administrations.

                                  Source: National Debt History by President
                                  [The source states: The data plotted here were taken directly from the White House web site and plotted without modification.]

                                  Click on graph for larger version

                                  Do deficits and how they are financed matter for the U.S.? Here's a statement about South Korea's increasing reluctance to absorb further increases in U.S. debt from the New York Times on February 22 of this year:

                                  FRANKFURT, Feb. 22 - The dollar fell sharply in foreign-exchange trading today after the Bank of Korea disclosed its plans to step up its purchases of securities denominated in other currencies.

                                  Other central banks have said they are considering diversifying their holdings away from the dollar, but South Korea's announcement is the most direct so far, further unnerving already jittery markets that see Asia's central banks as a primary anchor for the dollar's value.

                                  And, more recently, from Thomas Friedman's March 18, 2005 column in the New York Times:

                                  The excessive tax cuts for the rich, combined with a total lack of discipline on spending by the Bush team and its Republican-run Congress, have helped China become the second-largest holder of U.S. debt, with a little under US$200 billion worth. No, I don't think China will start dumping its T-bills on a whim. But don't tell me that as China buys up more and more of our debt - and that is the only way we can finance the tax holiday the Bush team wants to make permanent - it won't limit our room to maneuver with Beijing, should it take aggressive steps toward Taiwan.

                                  What China might do with all its U.S. T-bills in the event of a clash over Taiwan is a total wild card that we have put in Beijing's hands.

                                  As Thomas Friedman is saying above, as I show here, and Kash shows here and here, and as Calculated Risk shows here, the predicament we are in with respect to the substantial interest rate risk we now face and our need to consider the response of countries such as China and South Korea before reacting to international events out of fear they might dump our debt in retaliation is a direct result of this administration's policies. Our foreign policy should not be dependent upon the degree to which we have mortgaged ourselves to one party or the other, and we are unnecessarily exposed to the risk of rapid and large increases in interest rates.

                                  "Starving the beast" is a policy that is deceptive on many levels. Its normative depiction of the federal government with the all encompassing term "beast," as though it grows of its own accord without their feeding it is one attempt to deceive; its attempt to disguise the true agenda to cut government services by singing the virtues of tax cuts to an acquiescent choir is another.

                                  If this administration's goal is to cut government services substantially, then they should be honest and state their true intentions and produce a budget that is within the means they have set for themselves with their tax policy. Their inability to do so is exposing us, unnecessarily, to interest rate risk and limiting our ability to respond to international events.

                                  If they cannot do that, and it is doubtful that they can, then perhaps they should consider putting the "beast" on a small, disciplined, and healthy diet rather than trying to starve it to death.

                                  If you are interested in a fairly general treatment of the consequences of budget deficits along with some thoughts on intergenerational wealth transfers, the following Op-Ed piece that I wrote appeared yesterday:

                                  The Register-Guard, Eugene, Oregon, March 22, 2005, Guest Viewpoint: Deficits have long-term costs for U.S.,  By Mark Thoma

                                  The public has not always been as willing to accept government deficits as it is today. Before 1980, deficits were tolerated during wars and recessions, but persistent deficits were not routine.

                                  Because our heirs will inherit dams, airports, power grids, freeways, parks, sidewalks and so on, and because they are better off when our wartime enemies are defeated, some argue that it is fair to bill them for those assets by passing on debt of equal value to them.

                                  However, before 1980, we chose to keep the budget roughly in balance unless a war or a recession forced deficits to occur. Between World War II and 1980, public debt - the accumulation of all past deficits - fell as a percentage of the gross domestic product.

                                  The principles involved in combating recessions are similar to the strategies an individual might pursue to smooth out swings in income. One strategy is to borrow during bad times and repay during good times. This enhances the bad times and attenuates the good, leading to a much smoother path for income over time.

                                  The same is true of a government's fiscal policy. During recessions, the government runs a deficit to stimulate the economy, and then pays it off during the subsequent boom. If governments do this according to plan and adjust as needed, their budgets will be balanced on average and their economies will be more stable.

                                  But everyone knows how hard it is to keep a promise that today's excess will be followed by a strict diet tomorrow. Elected officials are no different, and it doesn't help that the promises were often made by their predecessors. Running deficits is much easier than raising taxes or cutting spending, especially when the deficit can be blamed on someone else and the public does not exact a political price.

                                  Should we care if the budget is balanced? Deficits have two main costs. The first is the effect on interest rates. When the government runs a deficit, it borrows money and competes with businesses and individuals for available savings. This increased demand for capital drives up interest rates unless new savings satisfy the increased demand.

                                  Deficit spending has the benefit of causing the output of goods and services in the economy to increase. The negative aspect is that interest rates are forced upward - reducing business investment, housing purchases and so on.

                                  The reduction in investment has long-lasting effects, because it lowers future economic output. Thus, deficit spending trades an increase in current output for a reduction in future output of goods and services.

                                  The second cost arises when deficits are financed by the foreign sector. Recently, 94 percent of newly issued debt has been purchased by foreigners, increasing their share of the total to 43 percent. Because of this, interest rates have remained low as the deficit has increased. But the cost of this is that the interest on the borrowed money will flow out of the United States. This is a drain on the economy.

                                  In addition, borrowing from abroad brings a risk of increased interest rates. If foreigners become uneasy about holding U.S. debt and begin trying to sell U.S. bonds, U.S. interest rates will rise quickly. This will weaken the economy, especially in states with interest-sensitive industries such as housing and manufacturing.

                                  As we think about Social Security and the assets our children will have available to them in their retirement years, we also should consider the debts we send them. I inherited a well-developed infrastructure and the security gained from winning World War II from my parents and grandparents, and I'm helping to pay their Social Security in return. Fair enough.

                                  I didn't inherit a rising debt burden when I was born, and I don't know what changed in the 1980s that justifies increasing the debt burden on those who were born after me.

                                  Mark Thoma ( is a macroeconomist and a member of the economics department at the University of Oregon. The views expressed are his own.

                                    Posted by on Wednesday, March 23, 2005 at 12:51 PM in Budget Deficit, China, Economics, International Finance | Permalink  TrackBack (0)  Comments (0) 

                                    Tuesday, March 22, 2005

                                    The Visible Hand: Adam Smith on Equity

                                    The Social Security debate is beginning to acknowledge the need for social insurance and the debate is shifting to how generous the social guarantee ought to be.

                                    The right is arguing that the guarantee ought to be just above the poverty level. According to this line of reasoning, anything more generous than a poverty guarantee undermines the individual's incentive to take care of their own needs prior to retirement and makes them dependent upon the state for their existence. For example, a little discussed but important feature of private accounts is a mandatory annuity upon retirement to guarantee an income just above poverty. The AP reports that:

                                    After a brief phase in, younger workers could invest two-thirds of their payroll taxes in the new personal accounts. They would be required to purchase an investment guaranteed to keep their income above the federal poverty level during retirement.

                                    Note an important feature of this statement. The administration has no plans to guarantee the elderly anything above this minimal "poverty annuity."

                                    What is a socially acceptable income guarantee for a citizen of the U.S.? This is a question of values and as such we cannot find the answer in economic theory. As I think about this, I have in mind a citizen who throughout his or her life contributed to society by going to work everyday, raising a family, doing charitable work, and so on, in short an outstanding citizen and valuable member of the community throughout his or her life.

                                    Imagine that person, perhaps your mom, who has saved diligently for her retirement years. However suppose her husband has passed away, her only child is lost in an accident, and unexpected health issues at age 70 wiped out the considerable stock earnings she had accumulated over the years. Left all alone and devoid of resources, what guarantee should society provide to such a person as she lives into her 80's and 90's? What type of life is society willing to tolerate for such a person?

                                    Adam Smith (1723–1790) is often cited in debates concerning the superiority of the private sector over government in the provision of goods and services, and his notion of an invisible hand is often used to justify a laissez faire approach to social problems.

                                    What did Adam Smith say about how we should treat our poorest citizens? Here's a quote from An Inquiry into the Nature and Causes of the Wealth of Nations, Book 1, Chapter 8: Of the Wages of Labour, pg. 32:

                                    Is this improvement in the circumstances of the lower ranks of the people to be regarded as an advantage or as an inconveniency to the society? The answer seems at first sight abundantly plain. Servants, labourers, and workmen of different kinds, make up the far greater part of every great political society. But what improves the circumstances of the greater part can never be regarded as an inconveniency to the whole. No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable. It is but equity, besides, that they who feed, clothe, and lodge the whole body of the people, should have such a share of the produce of their own labour as to be themselves tolerably well fed, clothed, and lodged.

                                    I don't think Adam Smith would have objected to a social guarantee that ensures people are "tolerably well fed, clothed, and lodged" as opposed to a poverty level guatantee for our disadvantaged and elderly citizens, and he recognized the need for government intervention into private markets when they do not provide adequate amounts of desired services. Those who espouse the virtues of the private market in every circumstance would be wise to heed Smith's words.

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                                      Posted by on Tuesday, March 22, 2005 at 12:18 PM in Economics, History of Thought | Permalink  TrackBack (0)  Comments (2) 

                                      Monday, March 21, 2005

                                      The Real Reason for Deficits

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                                        Posted by on Monday, March 21, 2005 at 10:08 PM in Economics, Social Security | Permalink  TrackBack (0)  Comments (0) 

                                        This is Your Brain on Mercury...

                                        The administration issued new rules for mercury emissions from power plants. Here are some comments, first from the Los Angeles Times:

                                        Mercury that falls into lakes, rivers and oceans accumulates in fish tissue, and fish consumption has been linked to neurological and developmental damage. An EPA analysis has found that about 600,000 babies born in the U.S. each year may be exposed to dangerous levels of mercury in the womb, primarily from mothers who have eaten fish.

                                        The Times quotes John Walke, a Natural Resources Defense Council attorney who previously worked for the EPA:

                                        This is, without a doubt, the most dangerous, dishonest and illegal air pollution rule I have ever seen come out of the agency.

                                        The Boston Globe continues the quotes from Walke:

                                        I'm still taken aback about how weak and unlawful the rule is...

                                        For a dangerous neurotoxin that poisons children and unborn children, the agency is allowing dirty power plants to pollute at excessive levels for the next two decades.

                                        Here's a map of current mercury pollution in the U.S.:

                                        This map and the new rules motivated me to wonder how to tell if someone is suffering from mercury poisoning. Here are the symptoms of prenatal exposure to methyl mercury at the lower levels likely to be encountered today:

                                        Delayed learning
                                        Shortened attention span
                                        Memory deficits
                                        Delayed language acquisition
                                        Poorer motor control or coordination

                                        Of course, Michael Leavitt, EPA administratorand a former Utah governor, defends the policy on behalf of the administration:

                                        ...Leavitt... said the new rule he plans to sign will lead to deep cuts in mercury pollution and the first limits on how much of the naturally occurring element comes out of coal-fired power plants. A main goal is preventing neurological problems in children who eat mercury-contaminated fish.

                                        "We view mercury as a toxic," he said. "We believe it needs to be regulated. . . It's a very serious problem." He added that mercury emissions are not increasing, as some environmentalists contend, and in fact have been cut in half in recent history.

                                        Here's a statement from the White House web site on what a wonderful steward of the environment this administration is:

                                        The Bush Administration's Environmental Philosophy

                                        • The focus is on results - making our air, water, and land cleaner.
                                        • We need to employ the best science and data to inform our decision-making [emphasis added] .
                                        • Our policies should encourage innovation and the development of new, cleaner technologies.
                                        • We should continue to build on America's ethic of stewardship and personal responsibility through education and volunteer opportunities, and in our daily lives.
                                        • Opportunities for environmental improvements are not limited to Federal Government actions - States, tribes, local communities, and individuals must be included.

                                        The best science and data? This statement from The Union of Concerned Scientists entitled Restoring Scientific Integrity in Policy says it well. The statement, which is signed by 62 preeminent scientists including Nobel laureates, National Medal of Science recipients, former senior advisers to administrations of both parties, numerous members of the National Academy of Sciences, and other well-known researchers says, in part:

                                        Thus in June 2003, the White House demanded extensive changes in the treatment of climate change in a major report by the Environmental Protection Agency (EPA). To avoid issuing a scientifically indefensible report, EPA officials eviscerated the discussion of climate change and its consequences.

                                        The administration also suppressed a study by the EPA that found that a bipartisan Senate clean air proposal would yield greater health benefits than the administration’s proposed Clear Skies Act, which the administration is portraying as an improvement of the existing Clean Air Act. “Clear Skies” would, however, be less effective in cleaning up the nation’s air and reducing mercury contamination of fish than proper enforcement of the existing Clean Air Act.

                                        My mercury is definitely rising.

                                        [pgl commented: Actually - I'm a believer in emissions trading IF done right. But your graph shows what is wrong with the national version of this. Done right, it equates marginal benefit across regions and equates marginal cost across firms. But that would have standards set regionally given the high density in some regions in the East and the low density. The Bush version has a national price so we get equal marginal cost across firms but very different marginal benefits across the region. Folks in Utah will get rich selling their rights to polluters in Pennsylvania. And they enjoy a clean enviroment as folks in Penn. will not.]

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                                          Posted by on Monday, March 21, 2005 at 01:44 PM in Economics | Permalink  TrackBack (0)  Comments (0) 

                                          Sunday, March 20, 2005

                                          Optimetrics (Part 2): After Tax Corporate Profits Since 1980

                                          In Optimetrics (Part 1): Does Presidential Party Explain Changes in Government Sponsored R&D from 1953-2002?, variation in government and privately sponsored R&D is examined over time and by party. The main result evident in the diagrams is that government sponsored defense spending shows the clearest evidence of partisan effects.

                                          The diagram below continues the look at time-series data over time and by party by looking at Corporate Profits After Tax with Inventory Valuation Adjustment (IVA) and Capital Consumption Adjustment (CCAdj) (obtained from the Fred II data set at the St. Louis Fed, data Series CPATAX) from the first quarter of 1980 through the third quarter of 2004. As I noted in Optimetrics (Part 1), this is a very simple optical approach that will, of course, omit many of the factors that would be included in a formal econometric treatment of this problem. Here's the diagram of after tax corporate profits over time (the letters R and D in the diagram denote the party of the president):

                                          Note: Click on image for larger version

                                          These data show clear indications of partisan variation through time. Up until 1993, corporate profits rise gently. Then, beginning with the Clinton administration in 1993, corporate profits begin rising slightly faster and continue this steeper ascent through 1997.

                                          Just after the onset of the second Clinton term in 1997, corporate profits halt their long rise and begin falling gently through 2001. In interpreting this episode it is important to remember that the House of Representatives switched from Democratic to Republican control in the 1995-1997 session for the first time since 1980 and Republicans remained in control through the end of the sample.

                                          In addition, the Senate also switched from Democratic to Republican control in the 1995-1997 session for the first time since 1988 (Republicans were in control from 1980 through 1987) and the Republicans remained in control through the end of the sample except for one brief period from 2001-2003 where the majority party, which switched back and forth between the two parties, had only 50 votes (50 votes was a majority due to independent senators).

                                          With the Bush administration took control in 2001 corporate profits begin rising sharply and continue rising through the end of the sample in 2004.

                                          These data make it very clear that corporate profits depend upon which party is in power (adjusting for inflation does not change the general picture and does not affect the distinct turning points evident in the diagram).

                                          In general, there is a presumption that Democrats are bad for big business. However, note that one of the most robust periods of growth in the sample, the first Clinton term, is during Democratic control.

                                          Also note that the period of rising profits under the Clinton administration came during a period of robust economic activity rather than during a period of economic slack as under Bush in the 2001-2004 period. During this time period, changes in tax law rather than robust economic activity explains the change in after tax corporate profits shown in the diagram.

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                                            Posted by on Sunday, March 20, 2005 at 10:08 PM in Economics, Taxes | Permalink  TrackBack (0)  Comments (0) 

                                            Why Tattoos are a Bad Idea

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                                              Posted by on Sunday, March 20, 2005 at 04:05 PM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (0) 

                                              Saturday, March 19, 2005

                                              Optimetrics (Part 1): Does Presidential Party Explain Changes in Government Sponsored R&D from 1953-2002?

                                              I have heard quit a bit about how spending on research and development (R&D) has varied over time according to which party holds the presidency. To examine this question, I will look at how private and government sponsored R&D has varied through time as a percent of GDP, and how government sponsored research has varied across defense, space, and civilian R&D categories. This is a very simple optical approach that will, of course, omit many of the factors that would be included in a formal econometric model.

                                              Let’s start with public and private R&D from 1953-2002. The data are the latest available on the NSF web site, and the last two years are preliminary data (there is a citation to the data at the end of the discussion). Here’s a graph of how total R&D relative to GDP, and its decomposition into public and private R&D relative to GDP, changes over time (just to be clear, R and D in the graph denote Republican and Democratic administrations, not research and development):

                                              Note: Click on image for larger version

                                              There are several noteworthy features in the diagram.

                                              First, there has been a consistent upward trend in the share of private sector R&D as a percent of GDP (green line). There is also a distinct change in the underlying trend beginning with the Carter administration.

                                              Second, government funded R&D (red line) begins to fall with the Johnson administration and continues its decline until the Carter administration at which point it levels off, and then increases slightly during Reagan’s first term. However, beginning with Reagan’s second term, government funded R&D begins dropping once again and the slide continues until very recently where there is some sign of stabilization.

                                              Third, the total of government and privately funded R&D (black line) shows episodes of change. The most obvious pattern in the data is the consistent decline until Carter takes office, the subsequent increase until the onset of Reagan’s second term, and then a more stable period followed by a decline until Clinton takes office. Under Clinton the upward trend recovers and is robust, but there are signs in the very latest (preliminary) data for 2001 and 2002 that the trend will not continue.

                                              It is not absolutely clear that a partisan story explains the dominant features in the previous diagram, but there are features that appear to be associated with presidential terms. What about the individual components of government funded research, is there a partisan story there? Here are two figures. The first is the percent of total research funded by the government:

                                              Note: Click on image for larger version

                                              Other than the clear decline beginning with the Johnson administration, the slightly steeper decline starting with Reagan’s second term, and a recent upturn, the main feature of this graph is the clear decline over time in the percentage of total R&D sponsored by the government.

                                              Finally, for government sponsored component of research shown declining in the previous graph, how have the defense, space, and civilian components changed over time in percentage terms? The following graph answers this question:

                                              Note: Click on image for larger version

                                              In this case, there does appear to be a partisan interpretation that fits the data. Changes in government sponsored R&D for defense (black line) is the best example of variation according to the party affiliation of the president. This series shows a sharp decline under Kennedy and Johnson counterbalanced by a sharp increase in government sponsored R&D for the space program. It also shows a distinct increase during Reagan’s first term, and a decrease beginning with his second term and continuing throughout the Clinton years.

                                              There is also the change in privately funded R&D at the onset of the Carter years evident in the first diagram. I wasn’t able to find or recall any specify polices enacted when Carter took office that would explain this, so if anyone has any ideas as to what might explain this I would appreciate the insight. The increase in private sector spending as a percent of GDP shown in the first figure (green line) continues beyond Carter’s presidency, so if it was a specific policy, it was one that remained in effect beyond Carter's term.

                                              There are additional turning points and periodic downturns or upturns in the various measures shown in the diagrams and any insight you might have on these episodes is welcome.

                                              [Source: Table D, series 173-175 for the first figure, and the data in Table 6 for the second two figures.]

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                                                Posted by on Saturday, March 19, 2005 at 07:20 PM in Economics, Politics | Permalink  TrackBack (0)  Comments (0) 

                                                Friday, March 18, 2005

                                                Starving the Truth: Kash is on the money about the deficit

                                                This continues and supports the very revealing posts by Kash (Responsibility for... and The National Debt...) over the last few days.

                                                When you hear politicians or the chair of the Fed attempting to obscure the cause of the deficit or to deflect blame, remember these simple charts showing how Federal government receipts and expenditures have changed over time.

                                                Here are Federal government receipts (taxes, etc.) as a % of GDP (Note that the dates shown in the figures are for October of each year):

                                                Here are Federal government expenditures as a % of GDP:

                                                The following observations are helpful in understanding changes in the budget deficit over time. First, government spending:

                                                1. Government expenditures rise sharply in the late 1970's through the early 1980's, then stabilize through 1992.

                                                2. From 1993 through 2000 expenditures decline noticeably and continuously.

                                                3. After 2001, expenditures increase, then decline slightly towards the end of the sample.

                                                Next, government receipts. If you look closely enough, you will see that receipts are largely the mirror image of expenditures since at least the mid 1980's. When spending rises, receipts fall, and vice versa. Some observations:

                                                4. Receipts rise quickly until around 1980, drop in the early 1980's, then stabilize through 1992.

                                                5. From 1993 through 2000 receipts increase substantially.

                                                6. After 2001, receipts fall precipitously.

                                                Why did the deficit problem improve and them turn into a surplus under Clinton? Simple. Expenditures as a % of GDP fell from 22.5% to 19.0% and receipts increased from 17.9% to 20.8% from the beginning of 1993 through the end of 2000.

                                                Why did the deficit problem get so much worse under Bush? Receipts fall from 20.8% to 16.6% and spending increases from 19.3% to 19.8% from the beginning of 2001 through the end of the available sample, September 2004.

                                                It is expected that in a recession receipts will fall and expenditures will rise, and that the opposite will happen in a boom. Thus, one explanation for the pattern in these data is changes in the course of GDP over time, or, according to Greenspan, failure to make accurate predictions.

                                                However, the strong correlation of both the patterns in the data and the turning points with changes in the party affiliation of the president indicates that political choices of the two parties has played a large role in the variation in the budget deficit over time.

                                                Kash is correct. The tax cuts Greenspan supported are responsible for the budget deficit. In addition, the slight increase in spending rather than a corresponding decrease to offset the tax cuts enacted when the GOP took control, and with Greenspans blessing, contributed as well.

                                                The spend and borrow party is currently setting this year's budget. Yesterday's news (Senate Endorses Tax Cuts on Social Security Benefits for the Wealthy) showed no sign that the current irresponsible budget policy will change.

                                                Update: Here is a nice graph from Calculated Risk discussed in the comments and linked in trackback. If you go to his page and click on the graph, a larger version will come up with the detail on the axes clear - the years run from 1971 to 2003. This graph is essentially the same data as above except that the Social Security surplus is removed from receipts:

                                                {Source data for first two graphs: The Fred II Data at the St. Louis Fed, series FGEXPND, FGRECPT, GDP.}

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                                                  Posted by on Friday, March 18, 2005 at 06:21 PM in Budget Deficit, Economics | Permalink  TrackBack (0)  Comments (0) 

                                                  Liberal Academic Indoctrination?

                                                  Following a recent trend, here's a question from my macro final (See DeLong's "Economics 113: Practice Exam for Second Midterm" and Sensitive Dependence of Answer on Grading Professor...):

                                                  4. Suppose that output is produced according to a Cobb-Douglas production function exhibiting constant returns to scale. Assume the national saving rate is s, the labor force grows at rate n, and capital depreciates at rate d.

                                                  (a) Express output per worker y=Y/L as a function of capital per worker k=K/L and describe the steady state for this economy.

                                                  (b) Suppose that changes in government policy increase the level economic risk faced by households which in turn causes an increase in saving, s. Examine the impact effect and the changes over time from this policy on output, consumption, and investment. Does the increase in the saving rate, s, increase household utility? Explain.

                                                  I presume my students knew the types of government policies I had in mind, many of which are described at "Increasing Economic Risk: Let Me Count the Ways."

                                                  Two of my colleagues have received email recently taking them to task for liberal bias over the examples they present when illustrating economic ideas. I had not heard of that happening before this year. So I'm wondering. Does asking this question and associating government policy with economic risk make me a liberal academic indoctrinating his students on the evils of privatization, or someone trying to give his students the tools they need to think about important contemporary economic issues?

                                                  I kind of favor the second interpretation.

                                                  A harder question would have been to ask how saving is affected by privatization. If you missed it, a good place to start on this question is National Savings and Social Security on Brad DeLong's site and Privatization: Becker v. Snow & A Dead Parrot at Angry Bear.

                                                  Mankiw says saving will increase. DeLong and many others say:

                                                  "There is a chance that the plan will further reduce America's already too-low national savings rate if the reduction in future liabilities is seen as less salient than the increase in the current deficit."

                                                  As for the question on the effect of the policy on utility, DeLong says what most are saying:

                                                  "I am one of those who believes that America's national savings rate is dangerously low."

                                                  and if he is right that privatization will reduce saving, this will move us further from the golden rule policy.

                                                  [Update: Pgl at Angry Bear has an excellent post on privatization, changes in risk seeking behavior, moral hazard, and how this affects Social Security.]

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                                                    Posted by on Friday, March 18, 2005 at 04:05 PM in Economics, Universities | Permalink  TrackBack (0)  Comments (0) 

                                                    Senate Endorses Tax Cuts on Social Security Benefits for the Wealthy: "We didn't know what we were doing" says GOP senator

                                                    Problems with budget deficits? For the GOP, the answer to budget problems is easy. Double the size of the permanent tax cut. From the New York Times:

                                                    ...But in a surprise move, the Senate voted to approve $34 billion more in tax cuts than Mr. Bush requested...

                                                    In addition to extending the cuts on capital gains taxes and dividend income, the move was intended to repeal an unpopular tax, enacted in 1993, on Social Security benefits for the wealthy.

                                                    "It provided a huge amount of tax cuts," said Senator Pete Domenici, Republican of New Mexico and one of a handful of members of his party to vote against the tax cuts. "We didn't know what we were doing."

                                                    ...The tax cut measure, offered by Senator Jim Bunning, Republican of Kentucky, nearly doubled the amount in the budget to pay for tax cuts, adding almost $64 billion to the $70 billion that Republican leaders originally proposed.

                                                    Finally, an honest statement on the budget from a senator. "We didn't know what we were doing." It's hard to disagree.

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                                                      Posted by on Friday, March 18, 2005 at 07:38 AM in Economics, Politics, Social Security | Permalink  TrackBack (0)  Comments (0) 

                                                      Nice Try Fred

                                                      A colleague of mine, Shankha Chakraborty, passed along one of the few attempts he's seen to put a positive spin on the Wolfowitz nomination. The article Sheep in Wolf's Clothing: Why Paul Wolfowitz may be a good choice to run the World Bank by Fred Kaplan, gives resaons such as:

                                                      ...this is a man who has displayed strikingly poor analytical judgment as deputy secretary of defense.

                                                      Wolfowitz is not an economist. He has had little experience in development work beyond a stint as Ronald Reagan's ambassador to Indonesia.

                                                      In support of the nomination, Kaplan states:

                                                      Wolfowitz is a sort of optimistic globalist who believes in the World Bank's essential tenet: that the developed world can improve the troubled, less-developed world with the aid of rational principles..."

                                                      So, he's optimitic and rational. His optimism and rationality are expressed by a Wolfowitz quote from the article:

                                                      "It's hard to conceive," Wolfowitz testified, "that it would take more forces to provide stability in post-Saddam Iraq than it would take to conduct the war itself and secure the surrender of Saddam's security forces and his army. Hard to believe."

                                                      It's also hard to believe that anyone supports this nomination. In a further attempt to find the "Wolf in sheep's clothing," Kaplan goes on to say:

                                                      He may be, in this sense, a latter-day Robert McNamara—a war-weary Pentagon master seeking refuge to wring the blood from his hands. McNamara suffered something close to a public breakdown when he moved from secretary of defense to president of the World Bank in 1967, as the Vietnam War spiraled out of control.

                                                      I don't see how hoping Wolfowitz will suffer "something close to a public breakdown" to "wring the blood from his hands" can be interpreted as a strong statement of support. There are better places to cleanse the soul than as head of the World Bank.

                                                      Nice try Fred, but I'm not convinced.

                                                      [Update:  Here's another positive spin story noted at Asymmetrical Information.]

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                                                        Posted by on Friday, March 18, 2005 at 07:02 AM in Economics, Politics, Press | Permalink  TrackBack (0)  Comments (0) 

                                                        Thursday, March 17, 2005

                                                        All the News That's Fit to Spin

                                                        From an editorial in the Washington Post:

                                                        WHAT DOES Jon Stewart of "The Daily Show" have in common with the Bush administration? They're both unabashed about putting out fake news. The Bush administration's version consists of video news releases -- government-produced, government-funded spots packaged to look and sound like regular television reports, complete with fake news reporters signing off from Washington. These are intended to be, and often are, aired by local television stations without any indication that the government is behind them. The Government Accountability Office found this kind of phony news to be impermissible "covert propaganda."

                                                        Note that the administration is defending this practice. I wonder if they have propoganda blogs.

                                                        It doesn't matter which administration started this sham, it's getting worse and it has to stop.

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                                                          Posted by on Thursday, March 17, 2005 at 09:00 AM in Press | Permalink  TrackBack (0)  Comments (0) 

                                                          Heads in the Sand or a Winning Hand?

                                                          Some thoughts on Social Security reform:

                                                          1. While I am far from ready to abandon the fight against the growing call for reform, I am not convinced we will win this battle (my thoughts on this). There are, perhaps, small to moderate issues to address as time passes and we should take corrective action if needed, but I do not see the evidence needed to support radical reform. If people have an ideological reason for wanting privatization they should be honest about that and not hide behind concocted evidence of potential system catastrophe.

                                                          So, I plan to keep fighting this battle, but my feeling is that the momentum is towards change. Even so, it is not at all clear to me that a consensus will build in congress over how to reform the system.

                                                          2. But if the momentum does begin to swing in the direction of reform due to a perception the system is in imminent danger, then the Democrats must have a counter plan ready. I like to call it Plan A because privatization is clearly Plan B. We need to send the message that we do have a plan, and a darn good one, far better than the privatization nonsense. It’s a fine political line though because calling for adoption of Plan A implicitly acknowledges the need for reform and I am not ready to give up on that battle yet. But by not having a plan that is public and well known, we risk being left in the dust should the political battlefront start moving towards change for the sake of change.

                                                          3. So, what is Plan A? What is the Democratic alternative to privatization. I’m not sure I know and I believe that is a problem. We need to take a page from the GOP playbook and speak with one “Rovian” voice, a single message delivered collectively for maximum impact. So what are the Democratic plans that can be unveiled if and when the time is right?

                                                          Here’s a clip description from Henry J. Aaron at the Brookings Institution of one proposal from Rep. David Obey (D-Wis.), but I haven’t had time to go through it closely yet:

                                                          Closing Social Security's projected long-term deficit - sooner rather than later - is desirable. But rather than undermining Social Security by diverting payroll taxes into private accounts, Congress should move to buttress the system. A plan introduced by Rep. David Obey (D-Wis.) would do just that. It would increase from 85% to 90% the portion of earnings subject to the payroll tax, adjust benefits for inflation more accurately than current methods do and dedicate to Social Security revenue from a tax on estates in excess of $3.5 million. This would close all of the projected deficit over the next 75 years, as estimated by the Congressional Budget Office.

                                                          What other proposals are out there? There's a nice post from Angry Bear on this issue, but are there additional proposals to consider? Which of the proposals is the front runner? Which proposal should we push if and when the time comes, or are all inadequate as currently formulated? Can we get away with a policy proposal that says do nothing, no reform is needed, or does that just make us look like we have our heads in the sand?

                                                          I don't know about you, but these are tough questions for me. I'm just not sure whether to fight with all my might against the idea that change is needed as that's what I believe, or accept that change is inevitable in this political climate and begin pushing the alternative to privatization, Plan A, whatever that might be.

                                                          Update: Late this afternoon Brad DeLong posted a reform proposal "A Genuinely Good Deal for Social Security" on his website. Also, since he mentioned Dimond-Orszag, here are links to those papers:

                                                          Borrowing from Future Social Security Benefits: The Administration's Proposal for Individual Accounts Peter R. Orszag, The Brookings Institution, Feb 9, 2005.

                                                          A Summary of Saving Social Security: A Balanced Approach Peter Diamond and Peter Orszag, The Brookings Institution, May 04, 2004.

                                                          Reforming Social Security: A Balanced Plan Peter Diamond and Peter Orszag, The Brookings Institution, Dec 2003.

                                                          Saving Social Security: Which Way to Reform? The Brookings Institution, Dec 10, 2003(Panel discussion with Peter A. Diamond, Edward M. Gramlich, Maya MacGuineas, and Peter R. Orszag; moderated by Henry J. Aaron.

                                                          There are a few more papers at

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                                                            Posted by on Thursday, March 17, 2005 at 08:37 AM in Economics, Politics, Social Security | Permalink  TrackBack (0)  Comments (0) 

                                                            Wednesday, March 16, 2005

                                                            Just Say No

                                                            Does economic risk matter? From a column by Nicholas Kristof of the New York Times:

                                                            Abortions fell steadily under Bill Clinton, who espoused that position, and have increased significantly during President Bush's presidency. (One theory is that economic difficulties have left more pregnant women feeling that they cannot afford a baby.)

                                                            Just say no to any further increases in economic risk. Just say no to ideologically based policy that ignores contrary evidence.

                                                            Compassionate conservatism? Just say no.

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                                                              Posted by on Wednesday, March 16, 2005 at 10:17 PM in Economics, Social Security | Permalink  TrackBack (0)  Comments (0) 

                                                              Wonk Wonk!!! Federal Funds Rate Futures

                                                              Have you seen this? It's from the Chicago Board of Trade (thanks to George Evans for telling me about this):

                                                              CBOT Fed Watch - March 16 Market Close

                                                              In advance of next week's Federal Open Market Committee meeting on March 22, the Chicago Board of Trade will be reporting daily rate change probabilities in the FOMC's federal funds target rate, as indicated by the CBOT 30-Day Federal Funds futures contract. The CBOT 30-Day Federal Funds futures contract is a key benchmark interest rate barometer that reflects the forward overnight effective rate for excess reserves that are traded among commercial banks in the U.S. federal funds market.

                                                              Based upon the March 16 market close, the CBOT 30-Day Federal Funds futures contract for the April 2005 expiration is currently pricing in a 100 percent probability that the FOMC will increase the target rate by at least 25 basis points from 2-1/2 percent to 2-3/4 percent at the FOMC meeting on March 22.

                                                              In addition, the CBOT 30-Day Federal Funds futures contract is pricing in an 8 percent probability of a further 25-basis point increase in the target rate to 3 percent (versus a 92 percent probability of just a 25-basis point rate increase).

                                                              Summary Table

                                                              March 15: 92% for +25 bps versus 8% for +50 bps.
                                                              March 16: 92% for +25 bps versus 8% for +50 bps.
                                                              March 17:
                                                              March 18:
                                                              March 21:
                                                              March 22: FOMC decision on federal funds target rate.

                                                              So, currently there is a 100% chance of a 25 basis point increase in the Federal Funds rate to 2.75% according to the CBOT 30-Day Federal Funds futures contract. In addition, there is an 8% chance of an additional 25 basis point increase to 3%. Looks like the market beleives, as I do, that gradualism will prevail.

                                                                Posted by on Wednesday, March 16, 2005 at 10:08 PM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (0) 

                                                                Lest We Forget: Life After the Great Depression

                                                                An earlier post discussed the need for social insurance against economic risk in general terms. This post focuses more narrowly on the story of individuals. The following account, and others at Case studies of unemployment, describe life before social insurance was instituted in 1935. That is followed by examples of market failure in the private provision of social insurance:

                                                                Cutting Down on Food

                                                                And as the assault on everyday living presses more and more inexorably, the families dig themselves in deeper. As Mrs. Cardani in New York put it to Mrs. Nelson, "You know what we do? If we pay the rent and there isn't enough left, you know what we do. If we're going to live honest, you know what we do." "We eat little--that's what we do," broke in her little girl, thinking her mother had not made herself clear. The Tiorsis of Boston "pulled in their belts." The Giaimos of Madison fed their children all the time on potatoes and bread, with beans for meat. The Monterey children in New Orleans picked up scraps of meat and vegetables cast aside the market. One winter the Bertleys of Atlanta with their four children managed on less than $5 a week for groceries. This meant that the family ate only two meals a day consisting of corn bread, salt meat and dried beans. When Mrs. Bertley had several fainting spells, they finally got her to a doctor who said that she was not getting enough to eat.

                                                                But let two of our Philadelphia mothers tell for themselves how they managed.

                                                                Mrs. White: "I just saw Harry and Joan starving to death before my eyes. Then the first time I ever got a card with "malnutrition" written on it from the school was after their father lost his $25 job and took at $21; and then last winter when he was out both Margaret and Brother got 'malnutrition' written on their cards again. The children seldom get any meat, perhaps on Sunday if I can manage it, and never any desserts."

                                                                Mrs. Kirk: "They are so used to going without food that they can't eat much when they do get it. They don't say much, but they know when there's nothin'."

                                                                Cutting down on food, then, is one thing the family does for itself. In every third of our neighborhood cases, the families had done it so radically as to prompt the investigator to remark upon it. The unmistakable evidences of malnutrition noted in case after case, and the prevalence among them of sicknesses that have roots in a weakened resistance, would not lead us to think lightly of this as something society should encourage as a recourse against unemployment.

                                                                If you have any doubt at all about the need for social insurance, read multitude of compelling accounts at this site of what life was like before such insurance existed.

                                                                [Copied from a later post] Here's an account from the Library of Congress of life after the Great Depression and the level of self insurance that existed for Mr. George R. He worked until age 71 at which time the company he worked for let him go. He's been retired two years when this was written. His story illustrates the problems with self-insurance:

                                                                American Life Histories:  Manuscripts from the Federal Writers' Project, 1936-1940[Mr George R.--age 73, unmarried]

                                                                Francis Donovan,
                                                                Thomaston, Conn.
                                                                Mr.George R -- age 73, unmarried 

                                                                "Sure, got plenty of time to talk. Got more time than money. It's gettin' so, I don't know what to do with an my time any more. Can't see to read. Got cataracts on both eyes. I can just about see to walk. People tell me I'm goin' to git smacked by a car crossin' the street one of these days. Well, I tell 'em, 'twon't be much loss. Not much loss. You get as old as I be, and no family nor close relations, and you ain't got much to look forward to but passin' on to the next world.

                                                                "Sure, I believe in it. Don't seem likely this here world is the best there is. Gits worse every year. When I was your age, 'twasn't a bad place to live Wa'n't no wars goin' on, everybody was workin' that wanted to work, folks were satisfied to live quiet and peaceful. Wa'n't no radios blastin' you out of the house, wa'n't no cars killin' thirty thousand people every year. That's what changed everything -- your automobile. Your automobile is what ruined this country, more ways than one. Every little squirt that makes as much as fifteen dollars a week has to have an car. And that's where most the fifteen dollars goes -- into the car. Who gits all the money? Why, the big gas companies. Big gas companies git all the money. Goes right out of circulation.

                                                                "Yes, I worked in the shop here 47 years. Retired me two years ago. They let a bunch of us old timers go all 'bout >the same time. Give us a little pension, but that's goin' to stop pretty soon now. And when it does I don't know how I'm goin' to git along. I could git me in old age pension, if I wanted to sign my life insurance away. Woman from the state come here some time ago I says, 'Nothin' doin'', I says. 'Think I'm goin' to sign away my chance for a decent burial?' I says 'That's all I got to look forward to.' She says, 'Well, I wouldn't look at it that way.' I says, 'Well, I would.'

                                                                "I don't know if I can come in on this Social Security or not. Seems to me I can, but I'll have to find out about it. I know they was takin' money out of my pay, down to the shop. Seems to me I ought to git somethin'.

                                                                "...I never seemed to be able to save any money either. Guess it just wa'n't in our family to save money I always made pretty good pay, but it just seemed to melt away. My sister kept house for me, up until she passed away six years ago She wa'n't extravagant, but she wa'n't the savin' kind either. Darned if I know where the money went. Only recreation we ever had was the movies, twice a week. That only come to a dollar.

                                                                "I don't know's you have to know what my politics, do you? What do you think they be? Yes, that's right -- Republican. Republican and proud of it That's what my father used to say, Republican and proud of it ... I never see any reason to change. I never see the Democrats get in yet, but what they didn't make a mess of everything. Now that's my opinion, you asked for it and I gave it to you ...

                                                                "Unions I do not believe in. Nossir' I hear they got one down to the shop now. Well, they got a lot of dummies down there that'll join it and expect to get a raise in pay right off the bat, and then after a year or two when they ain't gittin' any more'n they was before, they'll drop out Meantime the company's got every one or them down for troublemakers, don't you forgit it. Every time a union gits in, the company gits its back up, and in the end the ones that join ain't no better off than they was before. Worse off. Look at the money they paid out in dues."

                                                                Here's another account from a report about unemployment before the Great Depression and its effects on black and immigrant groups as well as other Americans. This account illustrates the need to insure against the risk of unemployment. Again, this was written before the Great Depression, so the conditions were much worse after the Great Depression hit:

                                                                Prosperity and Thrift: The Coolidge Era and the Consumer Economy, 1921-1929


                                                                Savings are the first cushion, cash savings first of all. Many of our families had small savings, but there is nothing in their experience to show that high wages are general enough or continuous enough to enable savings to give any general security. The economists tell us that for three-quarters of the population of the United States the margin between income and necessary outgo is so close as to allow little or no leeway for emergencies. In one out of five of our cases it is recorded that the families had used up whatever cash savings they had. When it has taken fifteen years to save $700, as it had the DiPesas of Boston, and you wipe it out in one winter of unemployment, you have lost something more than the $700. You do not start again with the same spirit. In one out of ten of the cases, especially those where the work had been seasonal or where there were a larger number of children or there had been previous sickness, the families had not been able to lay by for a "rainy day." Or, as one neighbor put it, it "rained too soon."

                                                                There is scarcely a family whose ideal is not to own their own home. A house is savings if you own it or are buying it bit by bit on instalments. This instinct for home ownership survives in spite of discouraging fluctuations in real estate values in our industrial neighborhoods. Many of our immigrant peoples come from countries where their families have lived for generations on the same little plot of ground. With them the instinct to own is deep-seated, and they are willing to put up a fierce struggle to have it satisfied. That struggle must be watched close at hand to understand its full significance. A dozen of our families had engaged in it, only to find the home they had worked for, which had stood for security to them, become a back-breaking load once their earning power was cut. They were in arrears in their payments, behind in their interest on mortgages, and some of them faced foreclosure. The LeFevres of Minneapolis had paid $2000 against $3500 on the house they lived in. The furniture had cost $1100 and was all paid for. When the LeFevres came to the attention of the settlement they had lost their house and sold their furniture and the five members of the family were all living in one room. It takes little imagination to guess what had happened to the morale of the family by the time they arrived in that single room.

                                                                Furniture is savings: and we find furniture sold or, more often, lost to the instalment collector. That was the way with the piano which the Morans in Boston had almost paid for. Then their parlor furniture went. The instalment house stripped the rooms of the De Macios of Pittsburgh and left only mattresses, broken chairs and a hot plate. It meant more than the actual loss when the young Greens had saved $1500 over five years to buy their furnishings and were forced to sell them for $200. These material things stand for steps along the line of respectability and progress. They mean not only parlor furniture, but the place you take in your community, your being able to have your friends in, your daughter's meeting her boy friend in her own home instead of on the corner.

                                                                And more intimate treasures are also lost. Dorothy Dohancy in Boston, in order to meet the rent, insurance, union dues, instalment payments, pawned her wedding ring. The Benders in Cleveland had no furniture they could sell, so it was the mother's engagement ring that was put in hock. The James family in Salt Lake City pawned both the mother's wedding ring and the father's watch. The Sapellis pawned their little girl's communion ring to pay for the mother's dental work. She was just thirty, but when they found it would cost more than the ring brought in, she had all her teeth pulled out...

                                                                  Posted by on Wednesday, March 16, 2005 at 02:25 PM in Economics, Social Security | Permalink  TrackBack (0)  Comments (0) 

                                                                  Angry Bears and Unqualified Wolfowitz's

                                                                  In support of the post by Kash at Angry Bear, this is from The World Bank Group quoting the Financial Times:

                                                                  The White House's consideration of Paul Wolfowitz, deputy defense secretary, for the presidency of the World Bank has again raised the question of what qualifications are required to head the world's leading development institution, reports The Financial Times.

                                                                  The World Bank Group goes on to note that:

                                                                  Wolfowitz has experience in international relations, including a period as ambassador to Indonesia, but is not a development expert. European officials have diplomatically focused on this shortfall, rather than over his role as an architect of the controversial war in Iraq.

                                                                  The qualifications are simple. There's only one. Toe the party line.

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                                                                    Posted by on Wednesday, March 16, 2005 at 08:46 AM in Economics, Politics | Permalink  TrackBack (0)  Comments (0) 

                                                                    Tuesday, March 15, 2005

                                                                    Shine a Light on Me

                                                                    A little snippet from USA Today:

                                                                    John Cogan: The president's professor

                                                                    Former secretary of State George Shultz invited over a few Stanford colleagues in April 1998 to meet George W. Bush. The Texas governor discussed foreign policy with provost Condoleezza Rice, who would become his secretary of State. He talked about taxes with professor John Taylor, who would take a senior post at Treasury.

                                                                    And he began a conversation about Social Security with John Cogan.

                                                                    "We spent three hours talking about domestic policy and foreign affairs over tea and cookies," Cogan recalls. Bush, then running for a second term as governor but eyeing the White House, was interested in Cogan's view that individual accounts could let workers accumulate wealth and have more control over their retirement. Bush already had been considering the concept.

                                                                    Their conversation has never stopped. After Bush was elected president in 2000, Cogan led the task of producing Bush's first budget. In 2001, Bush appointed him to a Social Security commission that drew up options to add the accounts to the system.

                                                                    Though he eschews the spotlight, Cogan, 57, remains a key adviser. "He has very close relationships over time with the president," says Leanne Abdnor, who also served on the commission.

                                                                    Cogan, an economist who worked for President Reagan and the elder President Bush, is unpretentious and pragmatic. "Success would be a combination of personal accounts plus curbs in future benefits," he says. "They go hand-in-hand." He's argued against Bush advisers who say there's no need to take some painful steps.

                                                                    "I give my advice," he says, "and sometimes it's taken and sometimes it's not."

                                                                    It may be that he "eschews the spotlight," but I think it's time for him to step forward and take full credit for "a combination of personal accounts plus curbs in future benefits."

                                                                    I've been wondering who to blame.

                                                                    List of Social Security Commission Members

                                                                    Comments from old site

                                                                      Posted by on Tuesday, March 15, 2005 at 11:07 PM in Economics, Politics, Social Security | Permalink  TrackBack (0)  Comments (0) 

                                                                      Greenspan and the Cookie Jar

                                                                      I just can't take it anymore.

                                                                      I can't say what I want to say about Greenspan's testimony today, so I will refer you to Angry Bear's site.

                                                                      Here's an interesting part of his testimony:

                                                                      Last year, Social Security tax revenues plus interest exceeded benefits by about $150 billion. If those funds had been removed from the unified budget and "locked up" and Congress had not made any adjustments in the rest of the budget, the unified budget deficit would have been $564 billion. A reasonable hypothesis is that the Congress would, in fact, have responded by taking actions to pare the deficit...

                                                                      The major attraction of personal or private accounts is that they can be constructed to be truly segregated from the unified budget and, therefore, are more likely to induce the federal government to take those actions that would reduce public dissaving and raise national saving. But it is important to recognize that many varieties of private accounts exist, with significantly different economic consequences. Some types of accounts are virtually indistinguishable from the current Social Security system, and the Congress would be unlikely to view them as truly off-budget. Other types of accounts actually do transfer funds into the private sector as unencumbered private assets. The Congress is much more likely to view the transfer of funds to these latter types of accounts as raising the deficit and would then react by taking measures to lower it.

                                                                      So he is saying is that we need private accounts, not because it raises benefits or helps workers, but rather because the government can't keep its hands out of the cookie jar lockbox. Instead of proposing that our elected representatives do the right thing and quit spending the Social Security surplus, instead of slapping the hands in the cookie jar, he proposes solving the problem by shifting economic risk to the average person through private accounts.

                                                                      Thank you Dr. Greenspan. Families all over America thank you for making them pay the price of legislative misbehavior.

                                                                        Posted by on Tuesday, March 15, 2005 at 08:01 PM in Economics, Politics, Social Security | Permalink  TrackBack (0)  Comments (0) 

                                                                        Boil the frogs slowly

                                                                        They say that if you turn the heat up slowly enough as you boil frogs, they won't jump out out the pot to avoid the danger of the rising heat.

                                                                        Short-term interest rates are slowly inching up to their highest level in recent years. Here's today's news:

                                                                        WASHINGTON - Interest rates on short-term Treasury bills rose in Monday's auction to the highest levels in 3 1/2 years.

                                                                        The Treasury Department auctioned $20 billion in three-month bills at a discount rate of 2.735 percent, up from 2.710 percent last week. An additional $18 billion in six-month bills was auctioned at a discount rate of 3.000 percent, up from 2.935 percent last week.

                                                                        The three-month rate was the highest since three-month bills averaged 3.180 percent on Sept. 10, 2001. The six-month rate was the highest since 3.120 percent on Sept. 10, 2001.

                                                                        The new discount rates understate the actual return to investors - 2.792 percent for three-month bills with a $10,000 bill selling for $9,930.87 and 3.089 percent for a six-month bill selling for $9,848.33.

                                                                        In a separate report, the Federal Reserve said Monday that the average yield for one-year Treasury bills, a popular index for making changes in adjustable rate mortgages, rose to 3.24 percent last week from 3.20 percent the previous week.

                                                                        Here's a picture of the slowly rising heat:

                                                                        6-Month T-Bill Rate (secondary market)

                                                                        I think it's time to jump.

                                                                        Comments from old site

                                                                          Posted by on Tuesday, March 15, 2005 at 01:08 PM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (0) 

                                                                          Monday, March 14, 2005

                                                                          Markets in Almost Everything: Privatization Gone Bad

                                                                          Given the current push towards privatization, it seems like a good time to begin highlighting examples of privatization failures.

                                                                          An article by Judith Greene entitled Bailing Out Private Jails (9/10/01) states the case against privatization of prisons very clearly.

                                                                          She states:

                                                                          "The private-prison industry is in trouble. For close to a decade, its business boomed and its stock prices soared because state legislators across the country thought they could look both tough on crime and fiscally conservative if they contracted with private companies to handle the growing multitudes being sent to prison under the new, more severe sentencing laws. But then reality set in: accumulating press reports about gross deficiencies and abuses at private prisons; lawsuits; million-dollar fines. By last year, not a single state was soliciting new private-prison contracts. Many existing contracts were rolled back or even rescinded. The companies' stock prices went through the floor."

                                                                          Does privatization increase the quality of prisons?

                                                                          "The problems seem to be endemic to the enterprise--a result, in great part, of the private companies' mission to hold down costs. Most important, wages and benefits substantially lower than those in government-run prisons have resulted in significantly higher employee turnover, with dramatic ill effects. But other kinds of corner cutting have also taken a toll. Spending on inmate health care and on staff training also tends to be inadequate at the private prisons--another reason why the industry has fallen behind the public-prison system both in maintaining prisoners' basic human right to a safe and humane environment and in protecting the safety of the prison staff and the public."

                                                                          Does privatization increase increase efficiency?

                                                                          "Yet for all that, it's unlikely that the states will save much, if any, money by contracting with the private companies. Private-prison cost cutting primarily serves to boost company profits. As early as 1996, a report of the U.S. General Accounting Office thoroughly reviewed a series of academic and state studies and concluded that there was no clear evidence about cost savings."

                                                                          "But with the states pulling back from the trouble-plagued facilities and Wall Street reacting even more strongly to the deaths and scandals, the companies have found themselves overleveraged and undercapitalized--CCA, in particular. It built new prisons "on spec," assuming that contracts to fill them would follow, and by my estimate the company now has more than 8,500 prison beds standing empty. The firm last year came close to a financial meltdown: Its stock lost 93 percent of its value in 2000, and its accountants reported a fourth-quarter loss of more than a third of a billion dollars."

                                                                          "Human rights advocates, public employee unions, prisoners' rights activists, and student groups have not let any of this pass unnoticed. Thus, it should be no surprise that so many states are now backing away from for-profit companies."

                                                                          On the efficiency aspect, she also has a very good account of the Mississippi experience in a section called "Mississippi Churning" in the article.

                                                                          And what did the Feds learn from all of this?

                                                                          "But while most state correctional managers are taking a hard look at the private-prison industry, the federal government has stepped up to fill the breach. Says Steven Logan, the ceo of Cornell Corrections: "On the federal side, there's an unprecedented [new market]--to the tune of approximately 20,000 beds that are expected to be set out for people to bid on over the next 24 months." If Logan is right, the feds are poised to take up a lot of the slack--and, in fact, to spur new construction--by showering the industry with contracts that will be worth $4.6 billion over the next 10 years."

                                                                          Apparently very little.

                                                                          Even with evidence such as this to look back upon, there seems to be a presumption that has been building over the last few years that the private sector always dominates the government in the provision of goods and services. This example makes it clear that this is not always the case. We ought to privatize when we can, but privatization is not always the best answer to every government problem.

                                                                          If you have good examples of market failure (not just from privatization), please pass them along.

                                                                            Posted by on Monday, March 14, 2005 at 07:47 AM in Economics, Market Failure | Permalink  TrackBack (0)  Comments (0) 

                                                                            Sunday, March 13, 2005

                                                                            AEI Says Privatization Unfairly Shifts Taxes to the Wealthy

                                                                            The article Broad Ownership Needs Broad Taxpaying at American Enterprise Institute Online by attorneys Scott Johnson and John Hinderaker argues in the section The Danger of Democratic Theft that personal accounts will represent a tax cut to the middle class. Therefore "Most Americans would no longer be making any significant contribution whatever toward the maintenance of the federal government. Thus, Federal programs will be essentially free to most Americans leaving the wealthy to finance most of government and "...nakedly expose the tax burden that our personal income tax disproportionately lays on the top 5 percent of Americans."

                                                                            The call is, of course, to increase the tax burden on lower income taxpayers and reduce the burden on the wealthy in the name of fairness.

                                                                            I can't believe this is put forth as serious analysis.

                                                                            Here are some quotes:

                                                                            Given that poorer citizens always outnumber the rich, political philosophers have long worried that government based on majority rule could lead to organized theft from the wealthy by the democratic masses. "If the majority distributes among itself the things of a minority, it is evident that it will destroy the city," warns Aristotle. The Founders of the United States were deep students of politics and history, and they shared Aristotle's worry.


                                                                            Given that one of the causes of the American Revolution was a tax, the Founders understood very well that taxation could become a way for one group to prey on another.


                                                                            So why hasn't the majority in America helped itself to more of the minority's wealth, as Aristotle and our Founders feared? Partly because the protections for individual property erected by the Founders have worked. Partly, too, because many Americans' political convictions are (thankfully) based on principle, not economic self-interest.


                                                                            Which leads to the question: What will happen if conservatives succeed, as part of their push for an Ownership Society, in redirecting much of the payroll tax from federal coffers into the personal accounts of workers? Most Americans would then be directly supporting the federal government only through the income tax and the few federal sales and excise taxes (e.g., on gasoline). The result: Most Americans would no longer be making any significant contribution whatever toward the maintenance of the federal government.

                                                                            Any new programs that Congress might adopt would cost the average American little or nothing. He already pays scant income tax, and he would be getting much of his Social Security and Medicare taxes back in the expected personal accounts. So at that point the relatively small number of citizens who make significant income tax payments would be carrying our whole federal edifice.

                                                                            And there's the rub. "Rebating" a big chunk of payroll taxes back to workers in the form of personal accounts is devoutly to be wished for in most ways. But one troubling side effect of such a transformation would be to nakedly expose the tax burden that our personal income tax disproportionately lays on the top 5 percent of Americans.

                                                                            Our Founders had no confidence that voters, unmoored from financial responsibility, would refrain from pillaging the wealth of their neighbors. If most of Washington's costs end up piled on just a few backs, the only thing preventing a sharp ratcheting up of the income tax will be the decency and political principle of ordinary Americans.

                                                                            In that event, we will find out whether Aristotle and James Madison were too pessimistic in their view of human selfishness--or unhappily accurate.

                                                                            Since the author's place so much faith in Aristotle's beliefs and economics, note that Aristotle also believed it was immoral to charge interest. The reason was that interest made money breed. If you start with $100 and charge 10% interest, the money will grow to $110. Thus, the money essentially had ten dollars in children. But inanimate objects cannot breed. By its very nature, money is barren and the birth of money from money is therefore unnatural. Therefore, charging interest is unnatural. QED.

                                                                            The authors should endorse Aristotle's economic beliefs and call for the wealthy to lend money at 0% interest. Anything else would be unnatural an immoral.

                                                                            And what was all that I heard about liberals and class warfare?      

                                                                              Posted by on Sunday, March 13, 2005 at 07:38 AM in Economics, Politics, Taxes | Permalink  TrackBack (1)  Comments (0) 

                                                                              Saturday, March 12, 2005

                                                                              Economic Risk Trickles Down

                                                                              From Rich Lowry of The National Review:

                                                                              "…Republican Sen. Jim DeMint from South Carolina — who is seeking compromise with Democrats — has offered a proposal that would allow lower-income people to invest a higher proportion of their payroll taxes in personal accounts. DeMint suggested a sliding scale that would allow lower-income workers to invest up to 8 percent of the payroll taxes they and their employers pay, while upper-income workers would only get to invest 3 percent. Remember: The diversion of payroll taxes into personal accounts is, in effect, a tax cut. So this proposal would be what Democrats always profess to favor — a tax cut for the poor."

                                                                              First, how is reducing retirement benefits and replacing them dollar for dollar with earnings from the stock market a tax cut?

                                                                              Second, if benefits are reduced identically across income groups, then this is a proposal to cut benefits for the upper income group. Or, as is more likely, this means that benefits will be reduced by less for the upper income group (since the stock market earnings will only be 3% on average rather than 8%).

                                                                              If so, then this amounts to a substantial differential in the shifting of risk between the two income groups without any increase in retirement assets at all (remember, retirement benefits are reduced dollar for dollar with earnings in the stock market). Both groups will have the same mean retirement assets as before, but the lower income group will have a much higher variance.
                                                                              Lowry goes on to say:

                                                                              "DeMint's idea would allow lower-income workers to benefit disproportionately from the higher rate of return that personal accounts offer over sending the taxes on to the federal treasury."

                                                                              What he doesn’t say is that they will also receive a disproportionate share of uncertainty.

                                                                              The trickle down of economic risk continues...

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                                                                                Posted by on Saturday, March 12, 2005 at 09:27 AM in Economics, Social Security | Permalink  TrackBack (0)  Comments (0) 

                                                                                Friday, March 11, 2005

                                                                                Poole No Longer Rules

                                                                                I had the same reaction as PGL at Angry Bear when I saw Social Security versus Private Retirement Accounts: A Historical Analysis by Thomas A. Garrett and Russell M. Rhine as I was getting data from Fred II at the St. Louis Fed site.

                                                                                Congatulations on the rediscovery of the risk premium.

                                                                                This publication by the St. Louis Fed combined with Greenspan's recent comments reminds me how reassuring it is to know the Fed is a truly independent and unbiased source of information.

                                                                                Here's are a couple of example quotes showing they are honest brokers:

                                                                                "There is overwhelming evidence that the current Social Security system will become insolvent within the next several decades" (pg. 114).

                                                                                "Forecasts for the continued solvency of the Social Security system are quite bleak" (pg. 106).

                                                                                And what does this mean?

                                                                                "As mentioned, another concern over private retirement accounts is volatility. Relative to Social Security, investment in private accounts will generate a higher return at the expense of greater volatility. The fear of many opponents of private retirement accounts is that a large drop in the stock market occurring months before an individual’s planned retirement would significantly reduce their retirement income. However, our analysis considered the most recent market downturn, as well as all other downturns occurring in the past 56 years, and revealed that investment in private retirement accounts would have yielded a monthly retirement benefit greater than that received from the current Social Security system." (pg. 115).

                                                                                So, first we are told that risk and [expected] return are positivley related. Then we are told people fear volatility, especially near retirement when it matters. Finally we are told that on average, stocks do better than CD's.

                                                                                So, summing up, risk and (expected) return are positively related, people are risk averse, and risky assets pay more on average. Thanks for that. I favor private accounts now.

                                                                                Shall we add the St. Louis Fed to the list of government agencies shilling for the administration?

                                                                                  Posted by on Friday, March 11, 2005 at 08:01 PM in Economics, Social Security | Permalink  TrackBack (0)  Comments (0) 

                                                                                  Increasing Economic Risk: Let Me Count the Ways

                                                                                  As I see it, economic risk for the typical household is rising due to the potential for

                                                                                  1. Cuts in Education and Student Loan/Grant Programs
                                                                                  2. Social Security Privatization
                                                                                  3. Changes in Bankruptcy Laws
                                                                                  4. Interest Rate Increases from Rising Federal Debt (e.g. mortgage risk)
                                                                                  5. Caps on Legal Judgments
                                                                                  6. Decreases in Workplace Protections (Health Costs)
                                                                                  7. Reductions in Environmental Protection (Health Costs)
                                                                                  8. Further Declines in Union Power (increased job loss risk, income more uncertain)
                                                                                  9. Further Reduction in the Real Minimum Wage

                                                                                  Suggested Additions:

                                                                                  10. Changes in overtime law, including “comp time” that is at the discretion of the employer, not the employee.
                                                                                  11. The dangers from non-inspected or improperly inspected food imports, especially beef from Mexico and South America. (health).

                                                                                  Additions on 3/12:

                                                                                  This morning's paper reported that:

                                                                                  12. There are proposed cuts in food stamps. Instead of reducing farm subsidies, the proposal is to cut 300,000 people from the Food Stamp program, and to also cut WIC and school lunch programs for a total saving of 300 million annually.
                                                                                  13. Proposed reductions in low income housing development grants and housing assistance.

                                                                                  Additions on 3/16:

                                                                                  14. Fewer people covered under private and government health insurance.
                                                                                  15. $55/bl oil and inaction on energy policy means more money spent at the pumps for households making it harder for them to meet other expenses.

                                                                                  Additions of 3/17:

                                                                                  16. When income taxes fall and social programs are cut back, we lose "automatic stabilizers," many of which were instituted after the Great Depression. The loss of these stabilizing influences accentuates both booms and recessions imparting additional variation and uncertainty into household income.
                                                                                  17. I should have added this up front. Because down-side risk will be covered, i.e. society will not let people starve no matter how poorly they have behaved previously, individuals will assume more risk than if they faced the down-side risk due to what is called moral hazard. This distorts the proper functioning of the social insurance market and causes individuals to assume more risk than is optimal.

                                                                                  Anything else I should add to the list?

                                                                                    Posted by on Friday, March 11, 2005 at 09:00 AM in Economics, Social Security | Permalink  TrackBack (0)  Comments (0) 

                                                                                    Thursday, March 10, 2005

                                                                                    Social Security Benefits by Gender - The High Life?

                                                                                    Table 2. Number of beneficiaries with benefits in current-payment status, for all states, by sex of beneficiaries, aged 65 or older, December 2003

                                                                                    Men 14,027,610 Women 19,405,989

                                                                                    Table 3. Amount of benefits in current-payment status, for all states, by sex of beneficiaries, aged 65 or older, December 2003 (in thousands of dollars)

                                                                                    Men $14,539,335 Women $15,232,132

                                                                                    The tables don't do this, but the average benefit can be calculated:

                                                                                    Men $1,036.48 Women $784.93

                                                                                    For some reason, I expected the average benefit to be more than this. A benefit of $785 - $1,040 isn't a lot to live on if that's a person's sole source of income. I wonder what the average is for this group, i.e. for those with no other source of income. It seems, though I don't know for sure, that this group would be on the low end of the distribution of benefits. If so, the mean for this group would be even lower (does anyone know where to get this figure?).

                                                                                    I keep hearing about reducing benefits to the poverty level. These are averages. How low would the poverty level be? Do you want grandma living on less than $785 should she outlive her other sources of retirement income, have a large unexpected health bill, or face some other unexpected contingency?

                                                                                    Update: These figures were posted on Brad DeLong's blog on 3/14/05. Quoting

                                                                                    "According to :

                                                                                    Average 2004 monthly Social Security benefits:

                                                                                    Retired worker: $922
                                                                                    Retired couple: $1,523
                                                                                    Disabled worker: $862
                                                                                    Disabled worker with a spouse and child: $1,442
                                                                                    Widow or widower: $888
                                                                                    Young widow or widower with two children: $1,904"

                                                                                    {Source of figures above update:}

                                                                                      Posted by on Thursday, March 10, 2005 at 07:02 PM in Economics, Social Security | Permalink  TrackBack (0)  Comments (0) 

                                                                                      Wednesday, March 09, 2005

                                                                                      More Than 90% of New Debt Held Outside of the U.S. Over the Last Two Years

                                                                                      These are the quarter by quarter changes in the percent of U.S. debt held by the foreign sector (the average is 95.49%). For example the 48.52% figure represents the change in the percent of the debt held by the foreign sector from Dec 02 to Mar 03, i.e. the change in foreign debt holding divided by the change in total debt (times 100 to get a percentage). The last figure is the change from Jun 04 to Sep 04, the latest data available. In some quarters it's more than 100%.


                                                                                      If you calculate the change from Dec 02 to Sep 04 rather than averaging the quarter by quarter changes, the figure is 93.77%. In any case, it's far higher (and rising faster) than I realized. I knew that 43% of the total was held outside the U.S., but I wasn't aware that nearly 100% of the new debt is being absorbed by the foreign sector.

                                                                                      Add interest rate risk to the list of ways risk is increasing for the average household. Families with variable rate mortgages are at increasing risk of a rising mortgage payment.

                                                                                      Here's the percentage of the total debt held by the foreign sector quarter by quarter from Mar 93 to Sep 04


                                                                                      [Both sets of percentages are derived from the series "Federal Debt Held by the Public" [FYGFDPUN] from The Council of Economic Advisors and "Federal Debt Held by Foreign & International Investors" [FDHBFIN] from The U.S. Department of the Treasury, Financial Management Service obtained from Fred II at the St. Louis Fed's web site at]

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                                                                                        Posted by on Wednesday, March 9, 2005 at 03:33 PM in Budget Deficit, Economics, International Finance | Permalink  TrackBack (0)  Comments (0) 

                                                                                        Tuesday, March 08, 2005

                                                                                        The Value of Credibility

                                                                                        It looks like we're going to find out what happens when the Fed Chair loses credibility, at least with respect to fiscal policy. Great.

                                                                                        Does that mean, because of the government budget constraint and adherence to interest rate rules, that inflation policy commitments may not be credible either? Presumably the Fed expected a lower trajectory for interest rates than they are going to get. I suppose we won't find out unless and until the foreign sector stops purchasing more than 90% of newly issued debt and there is upward pressure on interest rates beyond what the Fed is comfortable with.

                                                                                        "America's credibility must not be squandered, especially by its leaders" (Henry A. Kissinger).

                                                                                          Posted by on Tuesday, March 8, 2005 at 07:38 PM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (0) 

                                                                                          Distributional Equity and Progressive Taxes

                                                                                          It's been a long time since I took a public finance course, but given the current discussion of a consumption tax, it seems like a good time to review the reasons often cited to justify progressive taxation. First of all, we should note that principles of distributional equity in taxation are grounded in non-economic value judgments. So, I pulled a dusty text from my undergraduate days off the shelf and recalled some of the equity principles that have been invoked to justify particular tax schemes (the book is now thirty years old and it reminds why it's a bad idea to use the word modern in a title). Here are the principles:

                                                                                          1. Absolute Equity

                                                                                          Everyone pays an equal share, the value of expenditures divided by the number of people. Lump-sum taxes fit this principle of equity.

                                                                                          2. Ability to Pay

                                                                                          The equity principle here is grounded in the idea that everyone should make the same utility sacrifice. There are both horizontal and vertical equity considerations. Horizontal equity means that equals should be treated equally while vertical equity suggests that unequals be treated unequally. Equals and unequals are defined according to some principle such as income or wealth levels.

                                                                                          This results in three sacrifice theories:

                                                                                          a. Equal Absolute Sacrifice

                                                                                          Here high and low income individuals would be subjected to the same loss of total utility.

                                                                                          b. Equal Proportional Sacrifice

                                                                                          Here every individual gives up the same proportion (e.g. 10%) of their total utility.

                                                                                          c. Equal Marginal Sacrifice

                                                                                          According to this equity principle the marginal disutility of giving up the last dollar of taxes should be the same for all individuals.

                                                                                          Implications for progressive taxes:

                                                                                          Assuming (i) it is possible to compare "consumptive utilities," (ii) the utilities of individuals are equal within a particular income level, and (iii) marginal utility decreases at an increasing rate, then it is possible to justify a progressive tax structure with the ability to pay principle. But these assumptions are very strict and rely on a cardinal notion of utility, and utility cannot be measured in those terms. Thus, progressive taxation in practice must rely upon a collective value judgment rather than on an empirically measurable economic justification.

                                                                                          3. The Benefit Principle

                                                                                          Under the benefit principle each individual pays for the amount of government provided goods and services they consume. Because the exchange is voluntary, at least as envisioned by many promoting this principle, and payments are in accordance with benefits, it satisfies this notion of equity.

                                                                                          In practice, the voluntary approach is restricted in its application due to the free rider problem and the necessity to use compulsion to induce individuals to pay for the benefits they receive.

                                                                                          If those with higher incomes also consume more government provided resources, then this would justify a progressive tax structure. But which income groups use the most resources is an empirical question. If lower income groups consume more government goods, then this could also support a regressive structure.

                                                                                          What other notions of distributional equity are used to justify particular tax/transfer arrangements?      

                                                                                            Posted by on Tuesday, March 8, 2005 at 08:01 AM in Economics, Taxes | Permalink  TrackBack (0)  Comments (0) 

                                                                                            Monday, March 07, 2005

                                                                                            Dismantling Social Security

                                                                                            Here's a letter I wrote on the administration's selling of privatization that appeared in our local paper. When I wrote the about "Social Security Veteran's for Truth" in mid January I thought I was being sarcastic, not prescient. I wish that I had changed "Fox News" to "Faux News" before I sent it:

                                                                                            Real crisis is Medicare funding

                                                                                            The hunt is on for weapons of mass Social Security destruction. With any luck, the administration can reassemble the highly skilled team of information gatherers and analysts that has been so successful in the past.

                                                                                            George Tenet, a previous medal winner in this area, would be a good choice to lead the administration's search for the evidence that will convince us that nothing short of war on the Social Security system will prevent future suffering.

                                                                                            Once he and his highly skilled team have concocted the evidence supporting the administration's preconceived ideological position, perhaps Colin Powell can present it to the American people. I hope he uses charts and pictures like last time. Those were really convincing. Pundits can be paid to promote the agenda; Fox News and Social Security Veterans for Truth can help, too.

                                                                                            What other methods of mass deception will be used to convince us the system is in serious trouble? Even using overly pessimistic growth rates for the U.S. economy, the system is not in any danger in the foreseeable future, and the changes the administration proposes will not help the average person.

                                                                                            There is, however, an actual problem to solve. The Osama bin Laden of unfunded liabilities is Medicare. This problem is much larger than the most dismal projections for Social Security, and much more immediate. An administration that truly cared about helping the average person would work on real problems, not problems invented to support an ideological agenda.

                                                                                              Posted by on Monday, March 7, 2005 at 09:36 AM in Economics, Politics, Social Security | Permalink  TrackBack (0)  Comments (0) 

                                                                                              Sunday, March 06, 2005

                                                                                              Social Security and Saving

                                                                                              When the government issues new debt, it seems to me that there are three possibilities to consider (assuming it is not monetized):

                                                                                              1. The resulting rise in interest rates causes saving to increase and consumption to decrease. Thus, one possibility is the textbook case of saving increasing because interest rates rise.

                                                                                              2. The fall in the price of T-Bills (rise in the interest rate) causes a movement away from substitute assets into T-Bills. There is no net effect on saving.

                                                                                              3. The T-Bills are purchased by the foreign sector. [The experience of the EU may be relevant (see Krugman and Obstfeld page 306, 6th ed.). In that case, a reduction in the deficit had almost no effect on national saving as savers decreased private saving to compensate. Thus, the twin deficits prediction of an increase in the current account surplus failed to materialize. As K/O note, one explanation for this is Ricardian equivalence, but it is not likely the full explanation as the empirical evidence suggests Ricardian equivalence only holds in part. K/O point to increases in household wealth as responsible for the remainder of the fall in private saving. ]

                                                                                              4. If households are led to believe (incorrectly and therefore irrationally) that privatization will increase the expected assets available to them at retirement, saving will decrease. I will assume rationality will prevail in the end.

                                                                                              Then there is risk to consider:

                                                                                              1. Since the government's obligations are reduced under privatization and replaced by an inflow from the stock market, people may perceive a reduction in the risk of the government meeting its obligation to pay retirement benefits. Government payments are more certain since the obligation is smaller. This reduces risk and reduces saving.

                                                                                              2. Since individuals are now participating in the stock market, they face more risk. This will increase their saving.

                                                                                              Thus, the net effect depends on people's perception of the change in risk. There is more risk from being in the market, but less risk of government default. The effect on saving depends upon the individual's perception of how these risks change.

                                                                                              So, it seems like the overall effect is an empirical question - it depends upon relative magnitudes, and one of the influences is difficult to measure as it depends upon people's perception of changes in risk.

                                                                                              I've been trying to fully understand the savings debate I'm reading. With the above as a reference point, what have I left out or stated incorrectly? What other forces affect saving, or cancel the effects noted above?

                                                                                                Posted by on Sunday, March 6, 2005 at 02:25 PM in Economics, Saving, Social Security | Permalink  TrackBack (0)  Comments (0) 

                                                                                                Saturday, March 05, 2005

                                                                                                Social Security is about insurance, not savings

                                                                                                [Link to actual article: Guest Viewpoint: Social Security is about Insurance, not Savings]

                                                                                                Guest Viewpoint: Social Security is about insurance, not savings, By Mark Thoma, Register Guard, February 24, 2005

                                                                                                When the Great Depression hit the United States in October 1929, the economic and social turmoil that followed exposed the typical family's need for economic security.

                                                                                                Workers who diligently endured the daily grind to support their families could find themselves suddenly thrown into unemployment simply because a new machine was invented, people changed their buying habits, production was relocated or the economy entered a recession.

                                                                                                Prior to industrialization, the need for economic security was not as great. In an agrarian economy, economic security is provided by extended family relationships coupled with the largely self-sufficient nature of farms.

                                                                                                Industrialization led to large economic gains, but the resulting migration to cities, the breakup of extended families, reliance on wage income as the primary means of support and an increase in life expectancy substantially increased the economic risk faced by the typical family. For a worker dependent solely on wages, the loss of a job means a total lack of income, not just hard times.

                                                                                                Without the help of others, abundant savings or some type of social insurance program, starvation is a real possibility. Even a worker who has assiduously saved for retirement can suddenly become impoverished due to such events as an illness or by living longer than expected.

                                                                                                Programs such as unemployment compensation and Social Security arose out of the Great Depression as a means to mitigate economic risk using the least amount of society's valuable resources.

                                                                                                Social Security was never intended to be an individual savings account. It was intended to provide a social safety net for people in retirement and families that lose a primary wage earner, and to provide the insurance at less expense than could be done privately.

                                                                                                People saving for their own retirement must save enough to sustain themselves should they live a long time or incur large health care costs. But this is not the optimal arrangement. Precisely the same goal can be attained with a smaller amount of savings by each individual. If everyone pools their funds, then each person needs to contribute only enough to support the average life and health expectancy of the group.

                                                                                                It is no different than fire insurance. Without such insurance, people would need to save enough to replace their homes should a fire break out. All risk must be borne individually, and most people end up saving far more than needed compared to an insurance program providing identical benefits. Others are left without any protection at all. With fire insurance, each person pays a smaller amount into a fund, and those unlucky few who need the insurance collect. There is no expectation that the amount paid in and the amount collected will necessarily match. Social Security insurance is no different.

                                                                                                But why does the government need to provide such insurance? Couldn't the private sector offer it instead to those interested in participating?

                                                                                                Before 1935, there was no such private insurance system available, so that is one reason to suspect the private sector will not offer such insurance. The lack of adequate pension plans offered by employers today is another.

                                                                                                In addition, economic theory suggests this may be an instance of market failure - that is, a case in which the private market does not provide the optimal amount of a good or service, such as insurance. Government intervention is necessary to correct the market failure.

                                                                                                Even if insurance is provided by the private sector, when left to provide for themselves many people do not make good decisions on saving for their retirement years. Social Security was created to solve the problems that arose when such insurance was left to the private sector.

                                                                                                The privatization debate has not paid enough attention to the insurance aspect of Social Security. It is social insurance, not an individual savings program, and it is important to recognize why it is optimal for government to provide social insurance collectively rather than leaving it to individuals.

                                                                                                Leaving it to the private sector didn't work before 1935, and there are good reasons to believe it won't work now.

                                                                                                Whether Social Security actually needs fixing is another debate. If it is to be fixed, anything that threatens to undermine the social safety net - and privatization is a step that pushes in that direction - also threatens the social contract the government forged with its citizens to provide for their economic security.

                                                                                                Comments from old site

                                                                                                  Posted by on Saturday, March 5, 2005 at 10:44 AM in Economics, Saving, Social Security | Permalink  TrackBack (0)  Comments (0) 

                                                                                                  Is the Social Security System in need of reform?

                                                                                                  [See also The New York Times: "A Question of Numbers" by Roger Lowenstein]

                                                                                                  Though the numbers reported in the press vary, a common figure reported based upon estimates by the Social Security Trustees is that in 2042 the system will be able to pay 73% of scheduled benefits, a number that will fall to 68% in 2078. The Congressional Budget Office also provides estimates, and its figures are more optimistic predicting that 81% of benefits will be available in 2053, and 71% will be available in 2100.

                                                                                                  These figures are reported as though they were known with 100% certainty. We hear repeatedly with the appropriate fist pounding that the system either is, or is not in serious trouble depending upon who is talking the loudest at the moment. We are told that if nothing is done we will most certainly (or most certainly will not) face calamity in the future. But do we know this for sure?

                                                                                                  Here’s one way to think about it. Given enough time, two lines that are not exactly parallel will grow arbitrarily far apart. Thus, if the distance between the lines represents a surplus or a deficit in Social Security, we can make the surplus or deficit arbitrarily large by simply moving far enough into the future. All that is required is that the initial growth rates be slightly different.

                                                                                                  In the Social Security funding debate, these two lines are population and GDP. Growth in population is a key factor determining the demand for benefits in the future and the growth in GDP represents the ability to supply those benefits. All projections regarding Social Security’s ability to pay future benefits depend critically upon estimates of these two growth rates. Very slight changes in these growth rates can have very large effects on projections when you allow those differences to compound over many decades.

                                                                                                  To get a sense of the degree of uncertainty, consider the most common estimate reported regarding benefits, the estimate for 2042. That projection was made forty years into the future. Go back forty years, to the mid 1960’s, and ask yourself how well people could have predicted the economy we have today. Or how about the figure that only 68% will be available in 2078? That is a seventy five year ahead projection. If we go back seventy five years from when the forecast was made, which is prior to 1929 and the onset of the Great Depression and several years before the creation of the Social Security system, how well would we have predicted GDP in 2005?

                                                                                                  I will leave it to demographers to comment upon uncertainty regarding population projections over the next fifty to one hundred years, but it seems safe to presume that some uncertainty exists. What I can talk about is the uncertainty regarding estimates of GDP growth. The problem economists face is the same as the problem faced by scientists trying to figure out if there is global warming based upon temperature and other data. In the global warming debate, the central problem is to sort cycles of cooling and warming from underlying changes in the trend temperature. If you see temperatures rising over time, is it just another warming-cooling cycle as have occurred repeatedly in the past, or does it represent a fundamental change in the underlying trend for temperatures?

                                                                                                  To answer this question, a very long series of temperature data is needed, and the longer the better. Economists must also sort out boom and bust cycles in GDP from the underlying trend to accurately project GDP in the future, and like those studying global warming, very long data series are needed to do this accurately. Unfortunately, since reliable data regarding the economy do not exist prior to 1947, there is considerable uncertainty regarding the division of GDP growth into trend growth and cycles around that trend, and hence considerable uncertainty regarding the underlying trend rate of growth in the economy. The two growing lines, one for population and one for GDP, have very uncertain trajectories and very uncertain implications for the ability to pay benefits in the future.

                                                                                                  I do not wish to imply that Social Security will definitely be solvent fifty or one hundred years from now. Similarly, I do not wish to imply that it won’t be. We just don’t know. Forecasts that far into the future are sufficiently uncertain so as to render any firm conclusions regarding the health of Social Security difficult to make. We should keep our radar up because some estimates indicate that there may be bumps in the road ahead. But whether there is sufficient basis to radically reform the system based upon these highly uncertain estimates regarding the magnitude of the problem is a question that is worth asking.

                                                                                                    Posted by on Saturday, March 5, 2005 at 10:21 AM in Economics, Social Security | Permalink  TrackBack (0)  Comments (0) 

                                                                                                    Article from The New York Times on the need for Social Security Reform

                                                                                                    Another interesting article, this one on the need for Social Security reform:

                                                                                                    The New York Times: A Question of Numbers by Roger Lowenstein

                                                                                                      Posted by on Saturday, March 5, 2005 at 09:49 AM in Economics, Reading, Social Security | Permalink  TrackBack (0)  Comments (0)