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Saturday, April 30, 2005

WSJ: Fed Sees Inflation as Biggest Threat

Tim Duy, a colleague of mine, offers his thoughts on this WSJ column (Sub. only). Before coming to the UO, Tim was an International Economist at Treasury and a Fed Watcher for The G7 Group, a private consulting firm. First, the WSJ article:   

Fed Sees Inflation As Bigger Threat Than a Slowdown (Sub. only), More Boosts in Rates Likely Despite Signs of Cooling; Debating Use of 'Measured,' By Greg Ip , The Wall Street Journal, April 29, 2005; Page A1      

Despite signs that economic growth is slowing, the Federal Reserve sees signs of an upward creep in inflation as a bigger threat -- and is likely to keep raising interest rates in the months ahead to curb it.      

On Tuesday, the Fed likely will raise the target for its key short-term interest rate to 3% from 2.75%. … Fed increases are likely to continue at subsequent meetings unless the economy slows much more than it already has. But officials are debating the wisdom of continuing to signal their intentions for interest rates as they have been.      

… the timing of Mr. Greenspan's retirement could be a factor in Fed deliberations now … "Any central banker would rather risk a little bit weaker economy than a little bit higher inflation as part of your legacy," … Greenspan's fellow policy makers, meanwhile, "want to make sure his personal credibility as an inflation fighter stays with the institution," …

In the statement following its March 22 meeting … the Fed cited concerns about inflation for the first time in four years, suggesting it had lowered the bar for raising rates in larger, half-point increments. Since then, the economy's apparent loss of momentum has taken half-point increases off the table …  But … it would take several more months of sub-par growth before they consider a pause in rate increases. … In speeches, Fed officials have continued to emphasize their inflation focus.…      

The debate at next week's meeting likely will center on whether to continue to say rates will rise at a "measured" pace -- not over the rate change itself. … Minutes for the March meeting show some officials pressed to drop the word. … Some officials worry continued use of the word "measured," … could lead investors to think the Fed is more certain of its rate plans than it is ... However, removing the word "measured" could prompt some investors to think the Fed is about to raise rates by a half-percentage point. ... Whether officials stick with "measured" next week likely will depend in part on how they think markets will react. …         

A related issue is how much longer the Fed will describe the federal-funds rate as "accommodative," that is, below some neutral level that neither stimulates nor restrains spending. Fed officials have said a neutral funds rate is somewhere between 3% and 5%, and by next week, the rate is expected to be in that range. But no Fed official has yet suggested that rates are close to neutral, which would imply the Fed was almost finished raising them. 

Tim says:    

1. It was almost certainly placed by Greenspan. You don't go front page with a piece like that unless you are sourced from the top.   

2. On balance, FOMC members want to drop the term "measured." They do not want to step up the pace of rate increases. They want instead to have more flexibility about policy. This has always been a problem with the statement - it is often difficult to back off of a critical catch phrase.   

3. If market participants take this column well, the odds of dropping the term "measured" rise.   

4. The Fed is trying to dissuade investors from concluding that the Q1 growth slowdown is significant enough to dissuade their rate rising campaign. Critics will claim the Fed is ignoring potentially disastrous underlying economic imbalances, and that rising rates threaten to trigger a financial crisis (see DeLong's piece on hard-landings). But the Fed is always behind the curve. I would be surprised to see any shift in the course of policy prior to the Q2 GDP release in July.

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    Posted by on Saturday, April 30, 2005 at 12:33 AM in Economics, Fed Watch, Monetary Policy | Permalink  TrackBack (0)  Comments (0) 

    Friday, April 29, 2005

    Probability of a 50 Basis Point Increase in FF Target Increases Slightly

    After recent news concerning prices and output, the probability of a 50 basis point change in the FOMC's federal funds target rate, as indicated by the CBOT's 30-Day Federal Funds futures contract, rose slightly today:

    CBOT Fed Watch - April 29 Market Close             

    Summary Table:
    April 26: 95% for +25 bps versus 5% for +50 bps.
    April 27: 95% for +25 bps versus 5% for +50 bps.
    April 28: 95% for +25 bps versus 5% for +50 bps.
    April 29: 93% for +25 bps versus 7% for +50 bps.

    May 3: FOMC decision on federal funds target rate.

    Thus, according to the CBOT 30-Day Federal Funds futures contract there is a 100% chance the target rate will increase .25% to 3.00%, and a 7% chance it will increase an additional .25% to 3.25%.

      Posted by on Friday, April 29, 2005 at 02:40 PM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (0) 

      Has Fed Policy Been Less Accommodating than is Widely Believed?

      Institutional Economics discusses a paper by John H. Makin where Makin argues that the equilibrium real interest rate has fallen recently and because of this, monetary policy has not been as accommodating as is widely believed:

      It is beginning to appear as though the current rate of 2.75 percent is at or above neutral. If so, that would be about a full percentage point below what many were guessing. ... A number of exogenous events have combined to produce what probably amounts to a reduction in the neutral real fed funds rate. … the price of oil in April 2005 is 50 percent higher than it was a year earlier. … the impact of oil prices on growth and inflation suggests that higher energy prices operate on the economy with a lag of about one year.

      … the global economy has slowed sharply over the past four to six weeks … The simultaneous slowdown of the economies of the United States, Europe, and Japan virtually guarantees a global economic slowdown. …China, the perennial wild card, has moved toward a less growth-oriented stance …

      The other problem plaguing the United States… is the persistence of inflation pressures already in the pipeline. ... Such a stagflationary environment pulls the central bank in two directions. The slowing economy says to stop raising interest rates while rising inflation says to continue raising them. … interest rate increases have been more than sufficient to slow growth.

      … The Federal Reserve … faces a difficult task. Higher energy prices will probably seep through and produce higher core inflation approaching a 2.5-percent rate by fall. If ... the real economy and markets fail to recover ... the Fed will need to give serious consideration to holding the fed funds rate around 3 percent and allowing a slowing global economy to ease the upward pressure on energy prices. That said, a sharp drop in stock prices or the housing market should not result in a Fed easing, since even more inflation pressures… from energy and resurgent asset markets, would only require a disruptive resumption of rate increases in the near future.

      How has the real interest rate behaved in recent years? Let’s look at some data. Here is the federal funds rate minus the CPI less food and energy inflation rate, a measure of the ex-post real federal funds rate along with NBER dated contractions. The data are monthly and begin in 1957:

      Click on Graph for a Larger and Clearer Version

      Notice the evolution of the real rate since the beginning of the 1980’s. There is a consistent decline until around 1986 followed by a period of tightening. However, the period of tightening is brief and the real rate declines consistently until it hits zero around 1992. In 1992 the real rate begins rising and continues to rise until mid 1990’s where the increase flattens considerably. Then in the recession beginning in 2001 the real rate drops to near zero quickly and has remained at that level ever since.

      By this measure, the ex-post real rate is low by historical standards. It has only been this low once before since 1980, in 1992, and the low real rate is more persistent this time than in 1992. However, it has been this low prior to 1980 and it is interesting to note the similarity in the real rate movements in the mid 1970's to recent movements in the real rate.

      But the ex-post real rate is not what matters for policy or for economic decisions. The ex-post real rate is measured using actual rather than expected inflation and thus it fails to fully capture information about future economic conditions. For example, if the expected inflation rate is lower than the actual rate, then this measure of the ex-ante real rate, the variable we want to know about, will be too low.

      I believe that inflationary expectations are anchored. If so, then it is difficult to get much mileage out of arguments that separate actual from expected inflation in either direction in the near future. These data have made me question my past advocacy for increases in the federal funds rate. Could Makin be correct? Has the equilibrium real interest rate fallen, and if so is it enough to make policymakers think twice about an aggressive response to recent price data? Even after seeing these data I still believe that any noteworthy price pressure must be dealt with through appropriate monetary tightening.

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        Posted by on Friday, April 29, 2005 at 05:35 AM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (0) 

        GOP: Reduce Social Security Benefits and Taxes on Wealthy

        While the president was preparing his remarks outlining how Social Security benefits would be cut for wealthy individuals, congress was, in effect, proposing to give the money back by cutting their taxes:

        Budget Deal Sets Stage for Arctic Drilling And Tax Cuts, Washington Post:…The budget also makes way for $106 billion in tax cuts over five years, about what Bush had requested. Of that, $70 billion would be shielded from a Senate filibuster, enough to ensure that all expiring tax cuts can be extended, including the 2003 cuts to capital gains and dividend tax rates and last year's deduction for state and local sales taxes.

        The cost of those tax-cut extensions would more than nullify the savings from the spending cuts, allowing Democrats to charge that the budget agreement actually leaves the federal deficit worse than it would be without a deal. … Indeed, the budget instructs lawmakers to raise the federal government's statutory debt limit this fall by $781 billion, to $8.96 trillion. The government's borrowing limit will then have climbed by $3 trillion since Bush took office.

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          Posted by on Friday, April 29, 2005 at 12:24 AM in Economics, Politics, Social Security, Taxes | Permalink  TrackBack (0)  Comments (0) 

          NYT, WP, LAT, or Fox: Which Headline is Which?Bush Recasts His Message on Social Security Bush Recasts His Message on Social Security

          [I just noticed the title. It's not what I intended, but fixing it now changes the permalinks. Oh well...] Here are four headlines from tonight's press conference from the web sites of the NY Times, The Washington Post, The Los Angeles Times, and Fox News.  Can you match the headlines to the news agency?

          Bush Social Security Plan Would Cut Benefits
          Bush Recasts His Message on Social Security
          Bush Cites Plan That Would Cut Social Security
          Doing What is Right

          The last one has a different headline, Bush Clarifies Social Security, Energy Plans, when the link on the main page is followed (the headline on the main page may disappear or change, it changed from "Let's Do Our Duty" earlier, and the LA Times headline changed as well). The others have the same headline in both places. The answer is in the comments (or just use mouseover). [Update at 10:41 a.m. on 4/29: The last headline, "Doing What is Right" is no longer on the main web page - instead a smaller headline on the right-hand side of the page now reads "Staying on Course."]

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            Posted by on Friday, April 29, 2005 at 12:15 AM in Politics, Press, Social Security | Permalink  TrackBack (0)  Comments (0) 

            Thursday, April 28, 2005

            Bush to Shift Focus to Solvency

            [Update: The press conference didn't offer any new details over those described below except to name Robert Pozen as the architect of the plan they are endorsing. Here's a summary of the president's remarks from Reuters. The main change from the current system is to reduce benefits for higher income individuals as a means of achieving solvency.]

            [Update #2:  From Fox News: "I know some Americans have reservations about investing in the stock market, so I propose that one investment option consist entirely of treasury bonds, which are backed by the full faith and credit of the United States government,..." My question is if these will have a 3% clawback. The details weren't clear from the report. If so, under this safe option, returns could be negative. I assume there's no clawback on this part, but don't know. Does anyone? I'll update this if I find out. Brad DeLong addresses (and answers) this here.]

            According to a Bloomberg report, President Bush will shift the focus to solvency in his press conference tonight, but he's still insisting that personal accounts be part of the solution.  Even so, it’s looking more and more as though personal accounts won’t make it out of committee.  However, even if this does happen, that does not mean personal accounts are dead. They can be added later and put to a vote on the floor on the senate. Here’s the report from Bloomberg:

            Bush to Outline Social Security Options, Aide Says (Update1), April 28 (Bloomberg) -- President George W. Bush plans to shift the focus of Social Security overhaul to solvency solutions for the fund and away from the personal accounts he has been promoting for the past three months, a White House official involved in the issue said.

            Possibly as early as tonight's scheduled press conference, Bush will indicate he's amenable to ... greater benefit cuts for high-income individuals, raising the retirement age, and reduced incentives for early retirement, this official, speaking on condition of anonymity, said.

            The administration also favors a minimum Social Security benefit for the poor, the aide said. Bush isn't expected to go beyond what he has already said on any tax increase; he has ruled out raising the payroll tax rate but would consider raising the amount of income subject to Social Security taxes. … Opinion polls show declining support for accounts and Bush's handling of Social Security. Democrats are demanding the White House present a specific plan to make Social Security solvent before any negotiation can begin. … Bush will maintain his position that "personal accounts must be part of the solution,'' … calling for congressional passage of the plan this year.

            …"Democrats have reason to be suspicious,'' said Norm Ornstein, a congressional scholar at the American Enterprise Institute in Washington.

            Bush and Senate Republicans have "regularly'' used "bait- and-switch'' tactics on Democrats, convincing them to support policies by promising to cooperate on the final details and then they "find themselves frozen out of the conference committee,'' said Ornstein. …

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              Posted by on Thursday, April 28, 2005 at 01:42 PM in Economics, Social Security | Permalink  TrackBack (0)  Comments (0) 

              Interest Rate Spreads and Recessions

              CNN Money points to the flattening of the yield curve:

              The yields on the longer-term treasuries … have not seen much in the way of gains over the past year, even as shorter-term rates … steadily gained ground.

              The condition is known as a flattened yield curve … it is a warning sign for the economy that economists take seriously.

              History tell us that as the two types of interest rates get closer, slower economic activity is almost sure to occur. If short-term rates overtake longer-term rates, a recession is virtually always in the offing. The last time that happened was from July through November 2000.

              There is some truth to this assertion. Here is a graph of the interest rate spread between 10 year notes and 3 month T-Bills as discussed in the article along with recessions (peak to trough) as identified by the NBER. The sample period is from April 1953 through March 2005:


              (Click on graph for larger and clearer version)

              It is not inevitable that a recession follows a negative spread, but there is an association. A good counter example is the mid 1960's where the spread was negative but no recession occurred. In the other direction the spread was positive (but near zero) prior to the 1990-91 recession.

              The data in the graph are monthly and end in March 2005. The last value of the spread in the sample is 1.75. Data for 4/18/05 through 4/22/05 give spreads of 1.42, 1.36, 1.41, 1.5, 1.39. This is not yet in what appears to be the danger zone, recessions generally follow spreads that are between zero and one or negative in the graph, but the spread is certainly headed in that direction. Even though there are more sophisticated approaches to predicting the movement of output over time involving more variables than just the spread, as we wonder about the probability and timing of hard versus soft landings, this is a variable to watch.

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                Posted by on Thursday, April 28, 2005 at 01:08 PM in Economics, Inflation, Macroeconomics, Monetary Policy | Permalink  TrackBack (0)  Comments (0) 

                The Oregonian: Social Security Straw Man

                It rains once in awhile in Oregon.  The Oregonian has learned to see through the clouds:

                Social Security straw man:  The Senate panel's hearing begins on a disappointing note, Wednesday,  April  27, 2005, Editorial, The Oregonian      

                A few weeks ago, Sen. Charles Grassley made a lot of Americans cringe by asserting that the Social Security trust fund was only "a mirage." Scary words, those, from the all-powerful chairman of the Senate Finance Committee.   

                On Tuesday, the Iowa Republican said something equally as cringe-worthy, not to mention untrue, as his "mirage" remark. He blasted Democrats and other critics of President Bush's Social Security privatization plan for failing to offer ideas of their own on how to keep the system from falling apart.      

                "Doing nothing is not an option," he fumed at some who appeared before the 20-member committee Tuesday.    

                Trouble is, not a single critic of the Bush plan favors "doing nothing." Opponents of diverting Social Security payments into private investment accounts have been pointing out all sorts of responsible reforms that can put the popular social insurance program back on the path to solvency -- something that even Bush admits his proposal does not do.   

                "We've had months of sparring and skirmishing," one committee member, Sen. Ron Wyden, D-Ore., noted on the eve of the hearing. "Tuesday," he added, "is Round One of getting into the substance."

                So true. Which made it all the more disappointing to see Chairman Grassley pull out the old straw-man ploy right at the get-go. If he allows that kind of political posturing to continue in this important hearing, true Social Security reform will indeed be a mirage.

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                  Posted by on Thursday, April 28, 2005 at 12:51 PM in Oregon, Politics, Social Security | Permalink  TrackBack (0)  Comments (0) 

                  Economic News Does Not Alter Federal Funds Target Probabilities

                  Today's economic news did not change the Chicago Board of Trade’s calculation of the probabilities of changes in the FOMC's federal funds target rate, as indicated by the CBOTs 30-Day Federal Funds futures contract:

                  CBOT Fed Watch - April 28 Market Close             

                  Summary Table:
                  April 26: 95% for +25 bps versus 5% for +50 bps.
                  April 27: 95% for +25 bps versus 5% for +50 bps.
                  April 28: 95% for +25 bps versus 5% for +50 bps.

                  May 3: FOMC decision on federal funds target rate.

                  Thus, as for the previous two days, according to the CBOT 30-Day Federal Funds futures contract there is a 100% chance the target rate will increase .25% to 3.00%, and a 5% chance it will increase an additional .25% to 3.25%.

                    Posted by on Thursday, April 28, 2005 at 12:41 PM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (0) 

                    The Evolution of Central Banking in the United States

                    A very nice history of central banking in the United States from Federal Reserve Vice Chairman Roger W. Ferguson, Jr. with comparisons to the introduction of the Euro and the European Central Bank. If you are interested in monetary policy and history, this is worth reading:

                    The Evolution of Central Banking in the United States, Vice Chairman Roger W. Ferguson, Jr., The European Central Bank, Frankfurt, Germany, April 27, 2005

                    …I would like to discuss the evolution of central banking in the United States, with particular reference to currency, relations between the regions and the center, mandates, and communication. Along the way, I will compare our experience with that of the ECB…

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                      Posted by on Thursday, April 28, 2005 at 12:24 AM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (0) 

                      Wednesday, April 27, 2005

                      Samuelson's One-Sided Scissors

                      Robert Samuelson, in his Washington Post column today, excused the U.S. from any responsibility for the current account deficit. He says:    

                      Washington Post, The Global Savings Glut, By Robert J. Samuelson, April 27, 2005      

                      We are all taught that saving is good … But what if the problem of today's global economy is that people elsewhere … are saving too much and spending too little? Former Princeton Universityeconomist Ben Bernanke argues that this is precisely the case. He calls it "the global savings glut." …

                      Bernanke's global savings glut is just such a notion. It helps explain (a) the huge U.S. trade deficits; (b) the weakness of the current economic recovery (now 3 1/2 years old); and (c) the difficulty of doing anything about (a) and (b).

                      … the flow of surplus global savings to the United States has caused Americans to spend more and save less. In recent speeches, Bernanke … has shown how. In the 1990s, some of the savings surplus went into the hot U.S. stock market, boosting prices further. Feeling wealthier -- because their stock portfolios had fattened -- Americans decided they could save less and shop more.

                      …Americans' low saving and high consumption offset foreigners' high saving and low consumption. The huge U.S. trade deficits result …      

                      … Foreigners may tire of investing in the United States; the dollar may drop on foreign exchange markets, as it already has against some currencies. But if countries with savings surpluses didn't consume or invest more at home, world growth would suffer. Or the U.S.recovery could falter. Trade deficits certainly help explain its precariousness. There's a constant drag on job creation, as rising imports divert production abroad.    

                      Like others, Bernanke warns that these trade imbalances -- our huge deficits, their huge surpluses -- seem dangerous. His contribution is to show that their main causes lie outside the United States. To say a country has surplus saving is simply another way of saying that it lacks good investment opportunities at home …         

                      Whatever the problems, Americans can't fix them. The common view that our budget deficits (which Bernanke correctly thinks should be reduced) cause our trade deficits is simply wrong. The two are only loosely connected. That unconventional conclusion is also inconvenient, because it measures our powerlessness.

                      The argument is that high foreign saving caused low U.S. saving. Quoting Samuelson “… the flow of surplus global savings to the United States has caused Americans to spend more and save less.” High foreign saving caused low domestic saving? But isn’t it equally logical (which is to say it isn't logical at all) to argue the reverse, that the low saving rate, particularly public saving (the deficit) in the U.S. caused funds to flow in from abroad? Would that then mean, under Samuelson's definition, that the main cause lies within the U.S.? Does that mean, playing off Samuelson't conclusion, that whatever the problems, America can fix them?      

                      The supply of funds is not enough. There must be a demand as well. As Marshall reminded us long ago in a slightly different context, “We might as reasonably dispute whether it is the upper or the under blade of a pair of scissors that cuts a piece of paper ...”   

                      Yes, the high foreign saving rate played a role, but that is only one side of the scissors. The U.S. public and private saving rates played a role as well.

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                        Posted by on Wednesday, April 27, 2005 at 01:36 PM in China, Economics, International Finance, Press | Permalink  TrackBack (0)  Comments (0) 

                        Congressional Research Service: Texas Private Accounts a Bad Deal for Most

                        Yesterday John Tierney used the story of a single individual to characterize the entire Social Security privatization experience in Chile and as noted in this post, he leaves a very misleading impression about the success of the system.    

                        President Bush, campaigning in Galveston yesterday does the same thing. He focuses on two hypothetical workers rather than the system as a whole.  From The Los Angeles Times:   

                        …He said a Galveston County worker earning $25,000 a year who retired after 37 years would receive a monthly benefit of $1,250, compared with $669 from Social Security.      

                        A higher-wage worker earning $75,000 would do better, he said, receiving $3,600 a month from private accounts instead of what he said would be $1,300 a month from Social Security…    

                        But a study by the nonpartisan Congressional Research Service reached different conclusions for two workers similar to those that were the focus of Bush’s sales effort, conclusions supported by independent analysis of the Government Accountability Office and the Social Security Administration:    

                        The congressional study … prepared by Boxer's staff with help from the nonpartisan Congressional Research Service, cited different comparisons and reached different conclusions.   

                        It calculated that a hypothetical married worker who retired last year after earning a median annual income of $34,442 would receive a monthly payment of $1,568 under Galveston's plan, compared with an initial benefit of $1,818 under Social Security.      

                        A high-wage worker earning $87,900 a year would fare better, receiving a monthly benefit of $3,012 from his or her private account instead of a Social Security benefit of $2,841, the study found.      

                        But even that initial advantage would disappear after several years because the payment provided by the Galveston plan would be fixed, while Social Security benefits would be adjusted upward to keep pace with inflation…      

                        …Boxer's study was based on a number of assumptions, which could be challenged by advocates of personal accounts, about years of participation and rates of return on past contributions and future annuity payments.      

                        But the general conclusion that low-wage workers would fare worse than higher-paid employees is consistent with the findings of previous studies of the Galveston plan by the Government Accountability Office and the Social Security Administration…    

                        As in Chile, as in Britain, as in Ohio, and as in Texas, privatization is a bad deal for most workers.

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                          Posted by on Wednesday, April 27, 2005 at 07:26 AM in Economics, Social Security | Permalink  TrackBack (0)  Comments (0) 

                          Congress Likely to Approve Budget Adding $125 Billion to the Deficit

                          As this post notes, the headlines don’t necessarily tell the story, and as Brad DeLong notes,  the story may not tell the story either. Here are the headlines on the opening of hearings on Social Security reform:                  

                          At Social Security Hearing, Bush's Fight Looks Largely Uphill (NY Times)
                          GOP May Be Splintering on Plan (Washington Postt)
                          Clashes Growing Between Bush and GOP Moderates(LA Times)
                          Top Senator questions personal accounts(CNN)
                          Deep divide marks Social Security debate(MSNBC)

                          Dems Rebuff GOP Pleas on Social Security(AP)

                          However, while the focus is on Social Security, there are other budget issues in the news that should not escape attention. This editorial notes that some key decisions will be made in the next day or so:    

                          In Search of Budget Moderates, Editorial, April 27, 2005    

                          Unless a handful of moderate Republicans can inject some common sense and human kindness into the process, Congress is likely to approve a budget blueprint this week that manages to be profligate and mean-spirited at the same time… the budget nearing final consideration is in fact a Republican document that is expected to add at least $125 billion to the federal budget deficit in the next five years… calls for generous tax cuts for investors … and for harsh spending cuts for the needy …    

                          … the aim is to ensure that spending on Medicaid and other programs for the poor will be cut by $17 billion over five years … the House bid up the Senate's cuts for the poor, while the Senate increased the House's gifts to the rich. The result is expected to guarantee the passage of tax cuts that would cost $70 billion over the next five years … Those cuts are all but certain to include the extension of low tax rates for dividends and capital gains, which almost entirely benefit people who make more than $200,000 a year.    

                          … There is still time in the next day or so to fix this dreadful bill. Earlier this year, seven Republican senators joined forces to eliminate the Medicaid cuts that are about to be reinstated by the conference. Four of the seven - Gordon Smith, Susan Collins, Arlen Specter and Norm Coleman - are in the strongest position politically to stand firm against further cuts. The pressure is great. Fairness and fiscal sanity hang in the balance.    

                          While hearings are being conducted to consider Social Security reform due to solvency concerns, congress is considering increasing the deficit by $125 billion over the next five years (around 1 trillion over 75 years). Add that to the $290 billion estimated cost over ten years for the repeal of the estate tax and the 10-year $1.35 trillion tax cut in 2001, and that's roughly 1.765 trillion in just 10 years. Over a 75 year horizon, it would be far more than that. And this is just three items, it is not an exhaustive list of ways in which the administration and congress have increased the deficit. Think about the size of the tax cuts and who benefited from the estate tax, income tax, and other changes, think about the size of the cuts in government programs for the poor, then listen to the magnitude of the numbers being talked about in the Social Security reform hearings. After comparing the two numbers, the source of the insolvency issues in Social Security will be evident.

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                            Posted by on Wednesday, April 27, 2005 at 03:06 AM in Budget Deficit, Economics, Politics, Social Security | Permalink  TrackBack (0)  Comments (0) 

                            The CBOT's Fed Funds Rate Target Probabilities

                            Following up on David Altig’s post at macroblog yesterday, here is the Chicago Board of Trade’s calculation of the probabilities of changes in the FOMC's federal funds target rate, as indicated by the CBOT 30-Day Federal Funds futures contract:

                            CBOT Fed Watch - April 26 Market Close - Based upon the April 26 market close, the CBOT 30-Day Federal Funds futures contract for the May 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 2-3/4 percent to 3 percent at the FOMC meeting on May 3.

                            In addition, the CBOT 30-Day Federal Funds futures contract is pricing in a 5 percent probability of a further 25-basis point increase in the target rate to 3-1/4 percent (versus a 95 percent probability of just a 25-basis point rate increase).

                            April 26:  95% for +25 bps versus 5% for +50 bps.

                            May  3: FOMC decision on federal funds target rate.

                            Thus, according to the CBOT 30-Day Federal Funds futures contract, there is a 100% chance the target rate will increase .25% to 3.00%, and a 5% chance it will increase an additional .25% to 3.25%.

                              Posted by on Wednesday, April 27, 2005 at 12:42 AM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (0) 

                              Tuesday, April 26, 2005

                              Tierney on Social Security Privatization: Seeing the Tree

                              John Tierney looks at the case of a single individual and concludes that privatization in Chile is a success. Success stories are easy to find when the focus is on a single individual, in this case an economist at the University of Chile:

                              The Proof's in the Pension, NY Times, April 26, 2005, By John Tierney: … What would Pablo Serra do? … he and I were friends in second grade at a school in Chile. He remained in Chile and became the test subject; I returned to America as the control group. … Pablo, who grew up to become an economist … called up his account on his computer and studied the projected retirement options for him …"I'm very happy with my account," he said to me after comparing our pensions. He was kind enough not to gloat. When I enviously suggested that he could expect not only a much heftier pension than mine, but also enough cash to buy himself a vacation home at the shore or in the country, he reassured me that it would pay for only a modest place…

                              But what if we look at the whole forest, not just a single tree?  This is a post from earlier in April:

                              In Chile:  A Safety Net With Some Holes, By Monte Reel, Washington Post: ...Given the pace of contributions, more than half of the workers who retire in the next 30 years will not have enough money in their plans to receive the minimum payout...

                              According to this report, the forest is much less healthy than the single tree Tierney examined.

                              [Here's a link to a Washington Post story about privatization in Britain where "... 75 percent of private plans have contribution rates that fall below the level needed to provide adequate pensions." Another link on shortfalls in the Chilean system.]

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                                Posted by on Tuesday, April 26, 2005 at 02:43 PM in Economics, Press, Social Security | Permalink  TrackBack (0)  Comments (0) 

                                What Did Greenspan Say and When Did He Say It?

                                Yesterday, in this post, I discussed a Washington Times editorial attempting to absolve Alan Greenspan of responsibility for playing a role in promoting tax cuts that led to the current budget deficit. Quoting from the editorial:

                                Mr. Greenspan told Mr. Sarbanes that the charge was "frankly unfair" because it neglected the Fed chairman's unambiguous endorsement of "trigger" mechanisms during the same testimony. "I advocated tax cuts" in 2001, Mr. Greenspan acknowledged Thursday, "but I also advocated triggers in the same testimony."

                                Did he advocate triggers? While that term is not used directly in his testimony, it is used in a CBS report noted below, the only report I could find explicitly discussing spending restraint mechanisms, and Greenspan does say:

                                … In recognition of the uncertainties in the economic and budget outlook, it is important that any long-term tax plan, or spending initiative for that matter, be phased in. Conceivably, it could include provisions that, in some way, would limit surplus-reducing actions if specified targets for the budget surplus and federal debt were not satisfied. Only iaf the probability was very low that prospective tax cuts or new outlay initiatives would send the on-budget accounts into deficit, would unconditional initiatives appear prudent. … Indeed, the current economic weakness may reveal a less favorable relationship between tax receipts, income, and asset prices than has been assumed in recent projections. … But the risk of adverse movements in receipts is still real, and the probability of dropping back into deficit as a consequence of imprudent fiscal policies is not negligible.

                                But let me end on a cautionary note. With today's euphoria surrounding the surpluses, it is not difficult to imagine the hard-earned fiscal restraint developed in recent years rapidly dissipating. We need to resist those policies that could readily resurrect the deficits of the past and the fiscal imbalances that followed in their wake.

                                In my view, he does add quite a bit of caution regarding slipping back into large deficits, cautions that, as noted below, were not reported widely in the press. So, as far as it goes, the Washington Times editorial is correct.  He did talk about mechanisms to restrain spending and warned about the return of deficits.

                                However, it is also my view that this does not absolve him of responsibility. Consider the following quote:

                                …But continuing to run surpluses beyond the point at which we reach zero or near-zero federal debt brings to center stage the critical longer-term fiscal policy issue of whether the federal government should accumulate large quantities of private (more technically nonfederal) assets. … I believe, as I have noted in the past, that the federal government should eschew private asset accumulation because it would be exceptionally difficult to insulate the government's investment decisions from political pressures. Thus, over time, having the federal government hold significant amounts of private assets would risk sub-optimal performance by our capital markets, diminished economic efficiency, and lower overall standards of living than would be achieved otherwise.

                                Based upon this reasoning that the government should not accumulate large sums of private sector assets (held as loans to the public made through financial intermediaries), the Social Security Trust Fund was allowed to lapse.

                                Greenspan talks throughout his testimony of a zero debt target. He does realize that the Trust Fund assets will need to be present, but he does not believe the government should hold them. Instead, he advocates private accounts. However, if privatization is not in place, he states:

                                … Short of some privatization, it would be preferable in my judgment to allocate the required private assets to the social security trust funds, rather than to on-budget accounts. To be sure, such trust fund investments are subject to the same concerns about political pressures as on-budget investments would be. The expectation that the retirement of the baby-boom generation will eventually require a drawdown of these fund balances does, however, provide some mitigation of these concerns…

                                The question I have is why he allowed the Trust Fund to vanish without public comment. Why didn't we hear more from him as this was happening? He knew that a zero budget target without Trust Fund assets in place elsewhere would create deficit problems in the future, but he did not protest. That is hard to understand unless it was part of a broader strategy to force privatization.

                                The press bears responsibility in this as well. From the time of Greenspan’s testimony on January 25, 2001 until now, the press has missed what Greenspan was really talking about. He was afraid of a large surplus building up and the effect that would have on the private market when the government invested the large surplus in the private sector. To avoid this problem, his solution was to accumulate the Trust Fund surplus in private accounts so that individuals rather than the government would participate in the private market, and to cut taxes. At the time, Krugman stated in a column in the NY Times:

                                Some people — including, alas, Alan Greenspan — have made it seem as if any purchase of private-sector assets by the trust funds would instantly politicize the financial markets and undermine the foundations of the free-enterprise system. But that's ideology, not analysis; people who have looked seriously at the issue think that these concerns are vastly overblown. There are well-established techniques for protecting government investment accounts from political meddling, such as legal requirements that the funds buy a broad index. Are these techniques imperfect? Maybe — but who would argue that rather than running some slight risks of politicizing the markets, we should squander the money that was supposed to pay for our retirement?

                                Only a politician with an irresponsible tax cut to sell.

                                However, when the economy began slipping into deficit and the Trust Fund assets were evaporating, Greenspan did not protest, and importantly, neither did the press.

                                Here are the headlines from the time. Note that only CBS News talks about trigger mechanisms and very few of the stories mention any caution regarding deficits. None talk about the Trust Fund assets and Greenspan’s remarks in that regard. Here are the headlines:      

                                Greenspan Endorses Tax Cuts      

                                WASHINGTON, Jan 25, 2001 (AP Online via COMTEX) -- Federal Reserve Chairman Alan Greenspan gave a major boost Thursday to President Bush's plan for across-the-board cuts in taxes …      

                                GOP Raves at Greenspan's Tax Views January 26th      

                                WASHINGTON (AP) - President Bush, in office less than a week, has scored an early triumph in his campaign for a $1.6 trillion tax cut, winning Federal Reserve Chairman Alan Greenspan's support for tax relief…      

                                In Policy Change, Greenspan Backs A Broad Tax Cut    

                                RICHARD W. STEVENSON (NYT)

                                January 27, 2001      

                                … it should not be so big that it would plunge government back into deficit if federal budget surplus fails to materialize as projected …      

                                Greenspan eyes tax cuts    

                                January 25, 2001: 2:09 p.m. ET      

                                WASHINGTON (CNNfn) - Federal Reserve Chairman Alan Greenspan gave his broadest endorsement of tax cuts to date Thursday… Greenspan said that if it became clear that politicians might be tempted to use the money for major spending initiatives, it would be better to cut taxes. "It is far better, in my judgment, that the surpluses be lowered by tax reductions than by spending increases," the Fed chairman said.   

                                Greenspan supports tax cut plan      

                                By Gerard Baker in Washington FT.com site; Jan  25, 2001      

                                Alan Greenspan, chairman of the US Federal Reserve, on Thursday threw his weight behind proposals for a large tax cut, giving a powerful boost to the centerpiece of President George W. Bush's economic policy…      

                                That created the real risk that, if budget surpluses continued, the US government would begin to acquire a growing portion of the nation's private financial assets - which would create serious inefficiencies….      

                                Greenspan quick to move with times    

                                By Gerard Baker in Washington FT.com site; Jan  26, 2001      

                                …Alan Greenspan … found himself repeatedly echoing Keynes's defence …as he explained his remarkable U-turn...      

                                … At that point the government could literally buy back all the outstanding publicly held debt and still have several billion dollars left over. It is this situation Mr. Greenspan is anxious to avoid, since the government will then in effect be holding net private assets…    

                                LEX COLUMN    

                                Financial Times; Jan  26, 2001      

                                Alan Greenspan's sudden endorsement of President George W. Bush's tax cutting plans looks like smart politics rather than sound economics… Mr Greenspan worries that in six to seven years this debt will have been repaid and the government will be forced either to acquire private assets or go on a spending spree…      

                                Greenspan Gets Mixed Reviews    

                                CBS News, WASHINGTON Jan. 26, 2001            

                                … Greenspan urged caution, suggesting that Congress consider some type of trigger to trim government spending or tax cuts if the budget surpluses aren't as large as currently estimated…      

                                Greenspan on tax-cut bandwagon    

                                Chicago Tribune - US FT Abstracts; Jan 26, 2001      

                                Federal Reserve chairman Alan Greenspan told the senate budget committee yesterday that … he is ready to support reduced tax rates.   

                                Greenspan backs tax cuts as way to trim surplus    

                                Los Angeles Times - US FT Abstracts; Jan 26, 2001      

                                Federal Reserve Chairman Alan Greenspan gave his endorsement for President Bush's ambitious tax cut program yesterday, citing the expanding budget surplus as reason for lower taxes.      

                                Editorial: Interpreting Mr. Greenspan    

                                The New York Times - US FT Abstracts; Jan 26, 2001      

                                Alan Greenspan's approval of tax cuts in his Congressional testimony yesterday should not be misconstrued by Bush as an endorsement of his $1.6 trillion tax cut offer. … Congress should therefore move carefully toward tax cuts…      

                                In policy change, Greenspan backs a broad tax cut    

                                The New York Times - US FT Abstracts; Jan 26, 2001      

                                Federal Reserve Chairman Alan Greenspan has given his blessing for a substantial tax cut … but he did warn that any cut should not be so big that it plunged the government into deficit should the federal budget fail to materialize as projected…      

                                Greenspan, in about-face, backs tax cuts    

                                The Wall Street Journal - US FT Abstracts; Jan 26, 2001      

                                In a dramatic departure from a long-held view, Federal Reserve Chairman Alan Greenspan yesterday lent his support to the federal government's tax cut package…      

                                Zeal and doubt follow tax-cut blessing    

                                The Boston Globe - US FT Abstracts; Jan 26, 2001      

                                The Federal Reserve's Alan Greenspan lent his support to the Republican's plan for a tax-cutting initiative yesterday …      

                                Economic Realities Drove Greenspan    

                                The Washington Post. Washington, D.C., Jan 26, 2001. pg. A.4      

                                [FROM ABSTRACT]…Alas, said [Alan Greenspan], it's not that simple. The moment the target is reached and the government stops using its annual surpluses to pay down the national debt, it faces a problem … What to do with the extra cash piling up at the Treasury? …      

                                Bush's Hand Greatly Strengthened    

                                Glenn Kessler. The Washington Post. Washington, D.C., Jan 26, 2001      

                                [FROM ABSTRACT]… [Alan Greenspan] dispelled the notion that [Bush]'s plan to cut taxes might be reckless, dangerous or even massive, as former vice president Al Gore charged ...

                                Greenspan did warn about large deficits. But he didn’t warn about the bigger problem, congress allowing the Trust Fund assets to vanish. Because he failed to protest as the Trust Fund assets were used to fund deficit spending in other parts of government, he is not absolved of all responsibility for our current predicament.

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                                  Posted by on Tuesday, April 26, 2005 at 09:30 AM in Economics, Monetary Policy, Press | Permalink  TrackBack (0)  Comments (0) 

                                  Bloomberg: U.S. April Consumer Confidence Index Falls to Five Month Low

                                  Consumer confidence fell from 103 to a five month low of 97.7 in April:

                                  U.S. April Consumer Confidence Index Falls to 97.7 From 103 April 26 (Bloomberg) -- U.S. consumer confidence fell to a five-month low in April as record gasoline prices and doubts about job prospects threatened to slow the world's largest economy, a private survey showed…

                                  The article notes that:

                                  ...a decline in confidence doesn't always mean lower consumer spending, which accounts for more than two-thirds of gross domestic product...

                                  However, if there was no relationship between confdence and spending, the index would not tell us anything useful. It often does mean lower spending, and a fall in confidence is unlikely to increase spending, so this is not encouraging news.

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                                    Posted by on Tuesday, April 26, 2005 at 07:30 AM in Economics | Permalink  TrackBack (0)  Comments (0) 

                                    Cleveland Fed President: The Power of Price Stability and Public Pressure

                                    Sandra Pianalto, President and CEO, Federal Reserve Bank of Cleveland, explains the advantages of inflation targeting when there are budget and current account deficits. In addition, she discusses the appropriate monetary policy response in both soft and hard landing scenarios. She states a clear commitment to inflation targeting and to gradually allowing interest rates to rise to their equilibrium level in the near future. The exception is a hard landing where an immediate infusion of liquidity might be necessary to avoid systemic market failure.

                                    She also notes that the public can help the Federal Reserve with its job. She says “... it goes without saying that our job is made easier if the public expects that the fiscal authorities will address budgetary imbalances in a timely and effective fashion.” Thus, by exacting a political price for high and persistent deficits the public can help to stabilize the economy.

                                    This is an important point. If the public does not expect or demand that politicians attend to budgetary issues, then they will have no incentive to undertake the difficult task of balancing the books. Here are President Pianalto’s remarks:

                                    The Power of Price Stability,Sandra Pianalto, President and CEO, Federal Reserve Bank of Cleveland, The Levy Economics Institute of Bard College, Annandale-on-Hudson, NY, April 21, 2005

                                    The economy has been expanding for the past few years, but many people seem to think that … the economy could face some challenges from fiscal and trade deficits. Today, I would like to explain how I think central banks can best meet those challenges and promote economic prosperity - by maintaining price stability, or low and stable rates of inflation. …

                                    …Let me turn now to the issue of whether large budget deficits may undermine central banks' success in maintaining low and stable inflation rates. In the United States, current budget deficits, as well as prospective deficits over the immediate horizon, seem to be well within the boundaries of historical experience. … the United States … face[s] demographic changes where we see entitlement liabilities growing faster than the tax base available to support them…

                                    … resolving fiscal imbalances is not the job of monetary policymakers, but that does not mean that we can ignore their consequences. The stance of monetary policy - that is, whether a specific setting of the federal funds rate target is determined to be "tight," "easy," or "neutral" - depends on the level of what economists usually refer to as the "equilibrium real interest rate." …

                                    It is not unreasonable to expect that persistent government deficits will eventually yield upward pressure on the equilibrium real interest rate. … central banks … will need to respond to this pressure with corresponding movements in their policy rates. … But… large and persistent fiscal deficits introduce another risk-namely, that they could be the source of inflationary pressures.

                                    However, there is no need for deficits to be inflationary. The prospect of inflation arises only if the central bank ignores or, even worse, tries to resist any rise in real interest rates. By doing so, the central bank would keep its policy rates too low and inadvertently ease monetary policy. Of course, the real risk of an excessively stimulative monetary policy is that inflation expectations may eventually become unanchored. History shows that once inflation expectations become unstable, more stringent policy actions might be required.

                                    …I believe that the FOMC is trying very hard to preserve its credibility by being clear and unwavering in its commitment to low and stable inflation. However, it goes without saying that our job is made easier if the public expects that the fiscal authorities will address budgetary imbalances in a timely and effective fashion.

                                    Now I would like to discuss how monetary policy can best contribute to resolving the challenges brought by external account imbalances. … I think everyone agrees that these levels are unsustainable, and that a reversal is inevitable, even if the timing and pace of the adjustment are uncertain.

                                    Some people envision a soft landing. As we all know, a return to current account balance will ultimately require that U.S. households consume less and save more of their incomes. Households could become concerned about having enough money for future consumption and step up their saving, even at today's interest rates. The more commonly expected scenario, though, is that foreign savings coming into the United States could become less plentiful over time, driving up interest rates. Then, households might be induced to save more and spend less.

                                    If a substantial turnaround in U.S. current account deficits results in higher equilibrium real interest rates, the FOMC would most likely need to adjust its federal funds rate target accordingly to prevent a change in its policy stance. It is also possible that a decline in the exchange value of the dollar could result in temporary upward pressure on the price level, due to rising import prices and the prices of import-competing goods. The first responsibility of the central bank is to ensure that these price pressures do not feed into higher inflation expectations in the long run. …

                                    … of course, there are those who believe that the landing might not be so soft - and that the reversal of our large current account deficits will be sudden and disruptive. … In these circumstances, it is difficult to predict what the specific course of monetary policy ought to be, but the usual answer to financial market crises is for the central bank to provide enough liquidity to short-circuit systemic market failure.

                                    How, then, should monetary policy deal with current account imbalances today? I do not think that the FOMC should take preemptive measures to address these imbalances. However, I do think that the Committee should continue to bring the federal funds rate target to a level that is consistent with maintaining price stability in the long run. If we achieve that, then we will be in a position of strength to address whatever challenges arise.

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                                      Posted by on Tuesday, April 26, 2005 at 02:06 AM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (0) 

                                      Grassley Open to Focusing on Solvency, Dropping Private Accounts

                                      This would be encouraging, but I don't think the GOP is ready to decouple solvency and privatization:

                                      CNN Money:  Retirement debate to heat up in Senate ... Grassley, according to USA Today, said he would be open to coming up with a bill that focuses on solvency and puts aside individual accounts for now...

                                      The fact that there is an emerging recognition that solvency and privatization are separate issues is, however, a step in the right direction. [Update:  CNN has more here.]

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                                        Posted by on Tuesday, April 26, 2005 at 01:08 AM in Economics, Politics, Social Security | Permalink  TrackBack (0)  Comments (0) 

                                        Monday, April 25, 2005

                                        Greenspan Defends 2001 Comments on Tax Cuts, Says Calls for Budget Constraints Ignored

                                        From a Washington Times editorial, quotes from Alan Greenspan defending his comments on cutting taxes in January 2001. Greenspan notes that he also called for “triggers” in the same testimony to restrain spending by congress:

                                        Washington Times Editorial, Greenspan and the Democrats' spin, April 25, 2005

                                        …there is little evidence that the Bush administration and Congress have any viable plans to meet the president's commitment to slice the deficit in half over any reasonable period of time. It was in this atmosphere that Federal Reserve Chairman Alan Greenspan testified before the Senate Budget Committee Thursday, declaring, "The federal budget deficit is on an unsustainable path." Mr. Greenspan emphatically warned: "Unless that trend is reversed, at some point these deficits would cause the economy to stagnate or worse."

                                        As he has done repeatedly in past congressional testimony, Mr. Greenspan implored the senators to re-adopt budget procedures from the 1990s that provided a modicum of discipline to fiscal policy. Those procedures included discretionary spending caps and so-called PAYGO requirements... "Reinstating a structure like the one provided by the [1990] Budget Enforcement Act would signal a renewed commitment to fiscal restraint and help restore discipline to the annual budgeting process," the Fed chairman told the senators.

                                        …Mr. Greenspan was recommending the use of "triggers" -- and not for the first time… Democratic senators have pursued a revisionist strategy that attempts to place much of the blame for the burgeoning budget deficits on the Fed chairman… Mr. Greenspan told Mr. Sarbanes that the charge was "frankly unfair" because it neglected the Fed chairman's unambiguous endorsement of "trigger" mechanisms during the same testimony. "I advocated tax cuts" in 2001, Mr. Greenspan acknowledged Thursday, "but I also advocated triggers in the same testimony."

                                        …"In recognition of the uncertainties in the economic and budget outlook," Mr. Greenspan said in his prepared remarks in January 2001, "it is important that any long-term tax plan, or spending initiative for that matter, be phased in. Conceivably, it could include provisions that, in some way, would limit surplus-reducing actions if specified targets for the budget surplus and federal debt were not satisfied." … "What if," he asked more than four years ago, "the forces driving the surge in tax revenues in recent years begin to dissipate or reverse in ways that we do not now foresee?" That is precisely what happened… the triggers he advocated "never passed, never got any real interest, and as you point out, that's unfortunate, because we would have found that a number of things would have occurred differently. One of the real problems we had was allowing PAYGO to lapse in September 2002, and were we to still be under a PAYGO regime, which I thought worked very well, I think we'd have fewer problems now."

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                                          Posted by on Monday, April 25, 2005 at 09:57 AM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (0) 

                                          S&P Economist: Easter Caused Prices to Hop in 1st Quarter

                                          Now that Easter is over, pressure on prices to increase should abate according to an S&P economist:

                                          BusinessWeek, April 22, 2005, Joseph Lisanti, Inflation and the Moveable Feast

                                          The Easter bunny came early this year. Did he bring higher prices with him? … Standard & Poor's economist Beth Ann Bovino notes that some of the increase could be attributed to an early Easter in 2005. Because the holiday fell in the first quarter this year, the extra spending it generated came in March... some of the strongest price increases in the March CPI report were in transportation services, hotels, and apparel. Some could have been holiday related: As Americans bought airline tickets for holiday visits, and as they shopped the apparel stores for their spring wardrobes, prices may have been boosted by higher demand. Also, a weaker dollar may have increased foreign travel to the U.S., giving hotels and airlines more pricing power…

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                                            Posted by on Monday, April 25, 2005 at 02:34 AM in Economics, Inflation | Permalink  TrackBack (0)  Comments (0) 

                                            Hearings on Social Security Reform Legislation Begin This Week

                                            The Social Security reform battleground shifts this week. The first steps to draft Social Security legislation begin Tuesday with hearings on potential options for reform. Krugman's column "The Oblivious Right" makes it clear that the likelihood that congress will pass a bill despite public opinion to the contrary should not be underestimated. As Krugman notes:

                                            ...Mr. Bush doesn't understand their concerns. He was sold on privatization by people who have made their careers in the self-referential, corporate-sponsored world of conservative think tanks. And he himself has no personal experience with the risks that working families face. He's probably never imagined what it would be like to be destitute in his old age, with no guaranteed income...

                                            As this Washington Post story makes clear, the congress and administration are determined to pass private-accounts legislation despite polls showing seven in ten Americans say they're uneasy about his approach to the issue:

                                            Washington Post, Jonathan Weisman, April 24, 2005 - Panel to Start Writing Social Security Bill

                                            Five months after President Bush launched his drive to overhaul Social Security, the difficult, if not impossible, task of drafting legislation begins Tuesday when the Senate Finance Committee holds the first hearing on options to secure Social Security's future …, Senate Finance Committee Chairman Charles E. Grassley (R-Iowa) said last week he will move forward with Social Security legislation, hoping to push a private-accounts plan out of his committee this summer -- on a party-line vote if necessary … Supporters and opponents of the president's ideas say Grassley's determination will help the White House cause, by ramping up pressure for compromise …

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                                              Posted by on Monday, April 25, 2005 at 01:44 AM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (0) 

                                              Sunday, April 24, 2005

                                              Hundreds of Thousands of Poor to Lose Medicaid Coverage in Coming Months

                                              From the Los Angeles Times (thanks to anne for the heads-up), news that hundreds of thousands of poor will lose Medicaid coverage in coming months as state legislators try to reign in budgets. Given Krugman's recent column, the long-run cost effectiveness of this policy outcome is debatable. As Krugman notes, the uninsured will still need and receive care after losing coverage, so in the end this may just shift costs to other people and other institutions that are less efficient at providing services:

                                              States Rein In Health Costs, By Stephanie Simon, Times Staff Writer, April 24, 2005: Hundreds of thousands of poor people across the nation will lose their state-subsidized health insurance in the coming months as legislators scramble to hold down the enormous … cost of Medicaid … Lawmakers say they feel for those who will lose coverage. But they say also that they have no alternative…Prenatal checkups, care in nursing homes and other health services for the poor and disabled account for more than 25% of total spending in many states. Medicaid is often a state's single biggest budget item, more expensive even than K-12 education. And the price of services, especially prescription drugs and skilled nursing for the elderly, continues to soar.

                                              The federal government helps pay for Medicaid, but in the coming fiscal year, the federal contribution will drop by more than $1 billion because of changes in the cost-share formula. President Bush has warned of far deeper cuts to come; he aims to reduce federal spending on Medicaid by as much as $40 billion over the next decade.

                                              "It's frightening a lot of governors," said Diane Rowland, executive director of the Kaiser Commission on Medicaid and the Uninsured.

                                              ...The Republican lawmakers who have been leading the Medicaid overhaul drive say such criticism distorts their goals.

                                              The cuts are not just about balancing this year's budget, they say. They're about steering Medicaid back to its original purpose: to serve as safety net for citizens who are too young, too old, or too ill to help themselves. Turning Medicaid into a welfare program for poor but able-bodied adults risks jacking up the costs so high, they say, that the entire system could go bust...

                                              "Government is not here to do everything for everybody," said state Rep. Jodi Stefanick, a Republican representing suburban St. Louis. "We have to draw the line somewhere."

                                              Medicaid was enacted in 1965 as a joint federal-state program to provide basic care for poor children, pregnant women and people with disabilities. States administer the program and pay 20% to 50% of the total costs. The federal government funds the remainder. (The federal contribution varies from state to state, with the poorest states receiving the largest amounts.)

                                              …Medicaid now covers 53 million Americans. The program pays the bills for nearly 60% of all nursing home residents and finances 37% of all births. Because most states have added prescription drug benefits, Medicaid covers the hefty pharmacy bills for many patients with AIDS, many transplant recipients and many senior citizens on dialysis or undergoing chemotherapy.

                                              The program also covers the more mundane medical expenses of low-income working families.

                                              …For most states, Medicaid expenses are often the single largest line item on the budget, exceeding K-12 education. States spending the most on Medicaid as a percentage of fiscal 2004 budgets:

                                              Tennessee... 33.3%
                                              Missouri ...30.7
                                              Pennsylvania ...29.5
                                              Maine ...29.0
                                              New York ...28.3
                                              Illinois... 28.1
                                              Vermont ...27.5
                                              New Hampshire... 26.4
                                              Mississippi... 26.3
                                              Rhode Island ...25.5

                                              Who receives Medicaid

                                              •  25 million children
                                              •  13 million low-income adults, including pregnant women
                                              •  15 million seniors and people with disabilities

                                              Medicaid benefits

                                              By federal law, states must provide certain benefits for Medicaid recipients, including:

                                              •  Inpatient and outpatient hospital services
                                              •  Physician, psychiatrist and nurse practitioner visits
                                              •  Nursing home and home healthcare for adults
                                              •  Family-planning services and supplies
                                              •  Lab and X-ray services
                                              •  Transportation to medical appointments

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                                                Posted by on Sunday, April 24, 2005 at 03:04 PM in Economics, Health Care | Permalink  TrackBack (0)  Comments (0) 

                                                Fed Governor Kohn on the Chance of a Hard versus Soft Landing; Says Fed Should Not Hesitate to Increase Interest Rates

                                                Here are remarks by Federal Reserve Board Governor Donald L. Kohn concerning how the imbalances in the U.S. economy came about, the chance of a hard versus soft landing, and the role of monetary policy in the coming months. At the end he makes it clear that the Fed should not hesitate to increase interest rates to contain inflationary pressure:

                                                But, in the same vein, we should not hesitate to raise interest rates to contain inflation pressures just because it might set off a retrenchment in housing prices, just as we were willing to keep rates unusually low as house prices rose rapidly. Nor should we hesitate to raise rates because higher rates mean higher debt-servicing burdens for the current account, the fiscal authority, or households. In my view, our role is to anticipate as best we can the macroeconomic effects of imbalances and their correction and to respond to unexpected changes in asset prices and spending propensities as they occur. It is through such actions that we aim to achieve our objective of economic stability.

                                                This, taken together with Greenspan’s remarks that there is little sign of stagflation make it increasingly likely that the Fed will raise interest rates in coming months. If there are signs of price instability, a .50 percent increase appears possible, though new data showing accelerating inflation would likely be required, particularly since Governor Kohn describes the Fed's posture as measured. But the posture described by Governor Kohn is more aggressive towards raising interest rates than I have described recently. This emerging vigilance towards inflation has arisen as the Fed has detected underlying strength in economic growth from recent reports on the economy.

                                                Here is a longer version of Governor Kohn's remarks, and a link to a transcript of the entire speech. Calculated Risk also discusses this speech and highlights the comments regarding current account imbalances and the housing market. Dave Altig's discussion of hard and soft landings in his series of posts here, here, and here at macroblog is also worth reading:

                                                Imbalances in the U.S. Economy
                                                Remarks by Governor Donald L. Kohn
                                                At the 15th Annual Hyman P. Minsky Conference, The Levy Economics Institute of Bard College, Annandale-on-Hudson, New York
                                                April 22, 2005

                                                ... I must emphasize that these views are my own and not necessarily those of my colleagues on the Federal Open Market Committee …

                                                …The United States has been doing well over the past few years by most measures of overall economic performance ... To be sure, the rise in energy prices seems to have taken a toll on consumer confidence and spending most recently. But … most forecasters expect growth to remain solid.

                                                Excluding food and energy, the rate of inflation has fluctuated around 1-1/2 percent over the past few years... Core inflation has been running somewhat faster more recently, in part because of the increases in the prices of energy, commodities, and imports that began last year. Nevertheless … core and headline inflation rates should moderate later this year. Buttressing this view, long-run inflation expectations have been, on balance, fairly stable in the face of these price gyrations.

                                                …[S]ome aspects of the current situation might be viewed as worrisome. In particular…the ... [current account] imbalance … has risen to a record level, both in absolute terms and as a ratio to GDP. Moreover, the cumulative value of past current account deficits … is also at a record high, again both in absolute terms and as a ratio to GDP.

                                                The growing current account deficit has been associated with a pronounced decline in the saving proclivities of both the private and public sectors…

                                                … [W]ith probably limited economic slack remaining, such a pronounced imbalance between national saving and domestic investment would have placed substantial upward pressure on interest rates. One also might have expected real interest rates to be high at a time when we are experiencing rapid productivity growth. But, as you know, nominal and real yields on both short-term and long-term Treasury securities are low by historical standards…

                                                …Low interest rates have, in turn, been a major force driving the phenomenal run-up in residential real estate prices over the past few years, and the resultant boost to net worth must be one of the reasons households have felt comfortable directing so little of their current income to saving. However, whether low interest rates and other fundamental factors can fully explain the current lofty level of housing prices is the subject of substantial debate.

                                                This situation raises some difficult questions. Can the aforementioned spending imbalances and possible asset-price anomalies continue without threatening macroeconomic stability? And if they cannot be sustained, how will they unwind? Will the transition be relatively benign, or will it be a rocky adjustment with deleterious effects on economic growth, inflation, and other factors? And finally, what role will government policies play in influencing the path of adjustment?

                                                On the question of sustainability, it is worth noting that these sorts of imbalances are not new ... But, the magnitude of these imbalances is increasingly moving into unfamiliar territory…The sustainability of these large and growing imbalances has become especially suspect because it would require behavior that appears to be inconsistent with reasonable assumptions about how people spend and invest …

                                                Similar considerations apply to the current low rate of household saving... given average life expectancies and the typical number of working years, a sustained saving rate of less than 2 percent is too low for households to accumulate enough wealth to maintain their standard of living after retirement--unless, of course, those households are lucky enough to receive outsized capital gains on their homes and other assets. Although many households have received such windfalls over the past few years, such gains are not likely to be continually repeated in the future …

                                                The current imbalances will ultimately give way to more sustainable configurations of income and spending ... Ideally, the transition would be made without disturbing the relatively tranquil macroeconomic environment that we now enjoy. But the size and persistence of the current imbalances pose a risk that the transition may prove more disruptive.

                                                ...I think we can identify several factors that have played an important role in the emergence of these imbalances, and in so doing gain some insight into their likely resolution.

                                                A rise in the net supply of saving in other countries, the perception that dollar assets are a relatively favorable vehicle in which to place that saving … the increased willingness of the rest of the world to hold U.S. assets, along with the jump in our productivity growth, contributed to a sharp increase in U.S. equity valuations. And the associated capital gains, in turn, caused the net worth of U.S. households to soar relative to their income and induced a reduction in personal savings rates.

                                                Then, in 2000 and 2001, ... In the United States and elsewhere, monetary and fiscal policies turned stimulative to bolster demand and to stave off unwelcome disinflation. The size of the stimulus required to accomplish our macroeconomic objectives in the United States was further increased by the sluggish economic growth of our trading partners and by continued demand for dollar assets, which further exacerbated our trade imbalance…

                                                ...What can we say about the likely path by which these spending imbalances will resolve themselves and about the effects those resolutions will have on the broader economy? … The federal funds rate appears to be below the level … consistent with the maintenance of stable inflation and full employment over the medium run, and, if growth is sustained and inflation remains contained, we are likely to raise rates further at a measured pace. By increasing the return to saving and by damping the upward momentum in housing prices, rising interest rates should induce an increase in the personal savings rate, and thereby lessen one of the significant spending imbalances we have noted.

                                                ...We do not understand all the reasons for recent low personal saving rates, and the rise in the saving rate could exceed the increase that results from likely movements in interest rates and house prices--especially as households contemplate the adequacy of their retirement income. And fiscal policymakers do seem to be more aware of the need to change the medium-term trajectory of the federal budget.

                                                To the extent that current spending behavior is built on realistic expectations … the transition should be relatively orderly ... But if current expectations are badly distorted, then the way forward may not be so smooth... Are expectations substantially distorted? …risk premiums on private securities are low by historical standards …[and] yields reflect … low actual and expected inflation … and the market's belief that … the federal funds rate will move up only gradually as the expansion proceeds… [S]ubdued expectations may reflect a belief that underlying global demand will remain damped and that the world will continue to be willing to invest heavily in the United States.

                                                A second observation concerns the housing market … Prices have gone up far enough since then relative to interest rates, rents, and incomes to raise questions … [that] the recent trend of price increases …[can] continue. Even so, such a distortion would most likely unwind through a slow erosion of real house prices, rather than a sudden crash …

                                                … Finally, there is the exchange rate … In all likelihood, adjustments toward reduced imbalances in the United States and globally will be handled well … provided … that the Federal Reserve reacts appropriately to foster price and economic stability…

                                                … [W]e cannot rule out sudden shifts in expectations, whether or not they are unreasonable to begin with, and asset prices may change suddenly... Moreover, we cannot rule out governments engaging in unwise policies…

                                                … A permanent correction to the spending imbalances must involve the restoration of fiscal discipline and long-run solutions to the financing problems of Social Security, Medicare, and Medicaid..Adjustment of global current-account imbalances could also be aided by changes over time in the policies of our trading partners…

                                                …Finally, there is the role that monetary policy plays in reacting to these imbalances and their inevitable unwinding... [A]nything that has the potential to threaten the stability of output and prices is of concern to us... we should take into account the claim on resources implied by the federal budget, ... the effect that housing wealth has on consumer spending and the economy more broadly. We should note the implications of changes in the exchange rate or borrowing rates by U.S. corporations that result from shifts in global investor sentiment. But ... we should not hesitate to raise interest rates to contain inflation pressures just because it might set off a retrenchment in housing prices, just as we were willing to keep rates unusually low as house prices rose rapidly. Nor should we hesitate to raise rates because higher rates mean higher debt-servicing burdens for the current account, the fiscal authority, or households. In my view, our role is to anticipate as best we can the macroeconomic effects of imbalances and their correction and to respond to unexpected changes in asset prices and spending propensities as they occur. It is through such actions that we aim to achieve our objective of economic stability.

                                                [Update:  William Polley notes his approval of the Fed's recent signs of inflation fighting resolve here.]

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                                                  Posted by on Sunday, April 24, 2005 at 02:07 PM in China, Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (0) 

                                                  Bloomberg: China Will Accelerate Currency Reform, Welcomes Pressure

                                                  From Bloomberg, news that China will accelerate currency reform. It appears from this report that international pressure is part of the reason for the acceleration. A central bank governor says such pressure is welcome because it helps to bring about needed reform. However, he also says, "We have a very clear target in this regard, but we have our own sequence."

                                                  China Will Accelerate Foreign Exchange Reform (Update4)
                                                  April 24 (Bloomberg) -- China will accelerate foreign exchange reform, a regulatory official said, a day after the central bank governor said the country may speed preparations to loosen the tie between its currency and the U.S. dollar.

                                                  China should undertake “step-by-step'' reforms, Wei Benhua, deputy director of the State Administration of Foreign Exchange… “We will positively, but prudently, accelerate the process of reform of the renminbi exchange rate,'' Wei said. Yesterday, central bank Governor Zhou Xiaochuan said pressure from outside China could force the country to speed reforms …. It's “probably time,'' but first “we need to see what the impact will be on neighboring countries.''

                                                  …Zhou said China welcomes international pressure because it will force the nation to speed up needed financial reforms. Still, “we don't see that the pressure is that strong right now,'' he said.

                                                  ...The G-7's sharper rhetoric marked a shift in the group's efforts to coax the world's fastest-growing major economy into ending the peg. Some investors said the strategy might backfire, making China less likely to revalue because its leaders won't want to be seen as bowing to outside influence.       

                                                  "We have a very clear target in this regard, but we have our own sequence,'' Zhou said at the forum, a two-day gathering of regional leaders. "We are doing some preparation, for example the reform of the financial sector, to enlarge the role of the foreign-exchange market.''       

                                                  A complete liberalization of the country's foreign exchange system would take "several decades'', Wei said today, adding that China is about halfway to achieving this.      

                                                  [Update from The Financial Times: Yen and Chinese forwards leap on US pressure, By Steve Johnson in London, April 22 2005             

                                                  The yen and forward contracts based on the non-tradeable Chinese renminbi both jumped sharply on Friday amid mounting speculation that  Beijing may be ready to ease its decade-long dollar peg...]

                                                    Posted by on Sunday, April 24, 2005 at 01:46 PM in China, Economics, International Finance | Permalink  TrackBack (0)  Comments (0) 

                                                    Statistical Releases and Fed Speeches This Week

                                                    From US News and World Report, a list of speeches and statistical releases to note for the coming week. There are key reports on consecutive days throughout the week. The existing home sales release on Monday will be important given last week’s disappointing economic news and the fall in housing starts in March. Then, with consumer confidence, durable goods, GDP, and consumer sentiment reports on consecutive days starting on Tuesday, it will be an interesting week to watch. By the end of the week we should have a bit better idea about the underlying strength or weakness in the economy. The Fed speeches by Pianalto, Gramlich, Ferguson, and Hoenig are also on the watch list:   

                                                    Monday, April 25: EXISTING HOME SALES: Last week, a government report indicated that housing starts fell an unexpected 18 percent in March. Today, the National Association of Realtors is scheduled to release a separate report on existing home sales last month. If existing home sales fell significantly, it could lead to a new round of concerns about the housing market>

                                                    FEDSPEAK: Sandra Pianalto, president of the Federal Reserve Bank of  Cleveland, is scheduled to deliver a speech in Akron Ohio.

                                                    Tuesday, April 26: CONSUMER CONFIDENCE: The Conference Board is scheduled to release the latest findings of its closely followed consumer confidence index. It has declined for two consecutive months and many economists are expecting another slight drop.Wednesday,

                                                    April 27:
                                                    DURABLE GOODS: How worried are consumers about the health of the economy? One way to tell is to consider trends in durable goods—big-ticket items that consumers don't absolutely need but tend to purchase when times are flush. The government is slated to release March durable goods orders this morning.

                                                    Federal Reserve Board governor Edward Gramlich is scheduled to speak about predatory lending in an address in Philadelphia. Meanwhile, Fed Vice Chairman Roger Ferguson is expected to talk about the Federal Reserve system in a speech in Frankfurt, Germany.

                                                    Thursday, April 28:

                                                    GDP: The Commerce Department will release a preliminary assessment of first-quarter economic growth. As recently as a few weeks ago, some economists were predicting first-quarter gross domestic product growth of nearly 4 percent. But in light of recent data showing a somewhat weaker economy, many now believe GDP grew 3.5 percent at the start of the year.

                                                      Posted by on Sunday, April 24, 2005 at 01:06 PM in Economics | Permalink  TrackBack (0)  Comments (0) 

                                                      The New York Times: Private Accounts and the Priorities of Economic Advisers

                                                      This opinion piece from the New York Times speaks for itself.  It's worth reading it its entirety:

                                                      Private Accounts, and Priorities, ECONOMIC VIEW, By MATT MILLER, April 24, 2005:  WHATEVER you think of President Bush's proposal to let people divert a third of their Social Security payroll taxes into new private accounts, one thing seems a mystery.

                                                      If the White House and its allies think that private accounts are such a good idea, why don't they propose paying for the fiscal hole that the payroll tax diversion creates, rather than borrowing a fresh $200 billion or so each year for a few decades? Why isn't the idea of paying for the accounts - through spending trims elsewhere, or, more likely, through some new tax stream - even part of the debate?

                                                      As Republican economists and former presidential advisers like Michael J. Boskin, N. Gregory Mankiw and R. Glenn Hubbard take to the op-ed pages to defend the president's idea, they never mention options other than borrowing, focusing instead on a defense of why outsized borrowing is nothing to fear.

                                                      It wasn't always this way… [link to article]

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                                                        Posted by on Sunday, April 24, 2005 at 05:40 AM in Economics, Social Security | Permalink  TrackBack (0)  Comments (0) 

                                                        Saturday, April 23, 2005

                                                        Social Security as Insurance vs. Welfare vs. Saving Once Again

                                                        Deinonychus antirrhopus, in this post,  revisits the "Is Social Security saving, welfare, and/or insurance question" following up on this post on the site two days before (my response to the earlier post is here). The vehicle generating the discussion is this post from my comment on a Robert Samuelson column.  My response to the latest post at Deinonychus antirrhopus is in the comments.  Brad DeLong also commented on my Samuelson post here.  In addition, Angry Bear weighs in nicely here on social insurance.

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                                                          Posted by on Saturday, April 23, 2005 at 05:58 AM in Economics, Saving, Social Security | Permalink  TrackBack (0)  Comments (0) 

                                                          Harris Poll: Medicare and the Budget Deficit Are Not Big Problems

                                                          Here are some interesting data from the The Harris Poll on April 14. The question asked was "What do you think are the two most important issues for the government to address?" The percentage of people choosing Social Security fell between February and April from 37% to 31%. Over the same time period, the number choosing oil prices increased from 1% to 9%, worry over the deficit fell from 10% to 6% which surprises me both because it fell and because the percentage is so small, and worry over Medicare was unchanged at 3%, a smaller percentage than I would have predicted. Healthcare was a larger worry than Medicare at 14%, and it was also unchanged from February to April. These data indicate that the message that Medicare and the overall budget deficit, not Social Security, constitute the difficult problems to solve is not resonating with the public. One surprise to me was how large and often the percentages can change as attention shifts to new issues. Complete data are at the link given above.

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                                                            Posted by on Saturday, April 23, 2005 at 04:05 AM in Health Care, Politics, Social Security | Permalink  TrackBack (0)  Comments (0) 

                                                            Debunking The Daily Debunker

                                                            Today’s Daily Debunker from the Cato Institute deserves to be debunked:

                                                            …Yes, if solvency is the only issue at hand – and it does appear to be the singular focus of the Bush administration thus far – then raising the retirement age is a fine idea. But raising the retirement age under the current system is merely a benefit cut ... Of course, politicians can ensure solvency and a (sic) create a better retirement program for all Americans through a system of personal retirement accounts. Take, for example, the Individual Social Security Investment Program Act (HR 530), also known as the Johnson-Flake bill. According to the Social Security Administration, this measure would "eliminate Social Security's long rang actuarial deficit" and restore the system to "sustainable solvency." It would also allow Americans to invest 6.2% of their Social Security payroll tax into personal retirement accounts, giving them the opportunity actually to increase their net benefits...

                                                            First, the claim that the Bush administration has had a singular focus on solvency is wrong. Privatization does nothing to address solvency as the White House now admits, and no proposal from the administration addresses solvency, in no small part due to the fact that contrary to popular belief, the administration has no proposal for reform on the table. Their singular focus has been on privatization, not solvency, and the two issues are independent. To the extent there has been a focus on solvency, it has been to manufacture a crisis to sell its philosophy of privatization, but nothing has been done to try and solve the created solvency crisis.

                                                            Second, the claim that the Johnson-Flake proposal solves the solvency problem through privatization is false. The proposal replaces wage indexing with price indexing, a cut in benefits, it covers downside risk which increases the burden on the system, more so with moral hazard factored in, and there is the matter of the 6.5 trillion transition cost that is conveniently ignored in Cato’s analysis. The proposal achieves solvency by cutting benefits, not through privatization (there is another version of the proposal which also achieves solvency by cutting benefits).

                                                            Cato stoops to making false associations in its attempt to debunk. It implies privatization solves the invented solvency crisis when it is benefit cuts that are actually at work.

                                                            That Cato adopts misleading strategies sheds considerable light on the strength of its counterarguments. If it had any, it wouldn’t resort to false associations and flake analysis of the Johnson-Flake bill.

                                                            [Update #1:  PGL at Angry Bear follows up here.]
                                                            [Update #2: Dave Altig at macroblog comments here. While I believe there has been a pattern of conflating solvency and privatization, his post makes a contrary argument. I have a brief reply in the comments to his post.]

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                                                              Posted by on Saturday, April 23, 2005 at 12:24 AM in Economics, Social Security | Permalink  TrackBack (0)  Comments (0) 

                                                              Friday, April 22, 2005

                                                              Greenspan: Stagflation Not in Evidence

                                                              Greenspan said today that he does not expect stagflation, that China should allow its currency to float, he repeated his warning on deficits, and he said for the first time that he expects taxes to increase in the future.

                                                              The news here is that the Greenspan does not see signs of stagflation. Since, in his view, output growth appears robust, this reduces the chance that the Fed will back off of raising the federal funds rate at its next meeting. From The Los Angeles Times:

                                                              Fed Chief Downplays 'Stagflation' Risk but Warns of Danger in Budget Deficits

                                                              … The Fed chairman downplayed the prospect for "stagflation"— an economic malady in which inflation rises despite sluggish growth. Asked whether the economy was entering a period of stagflation, Greenspan told the Senate panel: "It certainly doesn't seem that way." …

                                                              … In addition, Greenspan urged China to stop pegging its currency to the dollar, a practice blamed for a widening U.S. trade deficit with China. …

                                                              …Citing a long-term concern, the Fed chairman repeated warnings about the danger of U.S. budget deficits, a problem that he said would require significant actions by Congress to fix. The federal budget is on "an unsustainable path," he testified. "Unless that trend is reversed, at some point these deficits would cause the economy to stagnate or worse." …

                                                              ... "The positive short-term economic outlook is playing out against a backdrop of concern about the prospects for the federal budget, especially over the longer run," ...

                                                              … "The uncertainty about future medical spending is daunting," he said.

                                                              To meet even currently projected spending, Congress would have to raise Medicare taxes, cut benefits or both, he said. "I do not see how we can avoid significant curtailment of benefits currently promised," Greenspan said. "At the end of the day, we are going to end up with many people who are going to have very large co-payments and probably should." …

                                                              Also, in a separate story from the Washington Post, Greenspan says he expects taxes to increase in the future:

                                                              Greenspan Says He Expects Tax Increases

                                                              Federal Reserve Chairman Alan Greenspan said yesterday, for the first time explicitly, that he expects tax increases to be part of any eventual agreement to reduce the federal budget deficit...

                                                              [Update:  With respect to Greenspan's comments on stagflation, there is a danger here. If the Fed misperceives the effect of negative supply shocks such as increases in the relative price of oil, then there is a danger, as I've commented elsewhere, that the Fed will aim for a target that is higher than the natural rate of output inadvertently increasing inflation and, in the worst case, lifting the anchor on inflationary expectations. However, this is not something I'm particularly worried about at this point, but it is area to watch in case correction is needed down the road as new evidence accumulates.]

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                                                                Posted by on Friday, April 22, 2005 at 12:42 AM in Economics, Inflation, Monetary Policy, Unemployment | Permalink  TrackBack (0)  Comments (0) 

                                                                Thursday, April 21, 2005

                                                                It's Insurance, and There's Market Failure

                                                                In the comments to this post at Deinonychus antirrhopus people are taken to task for using the terms "safety-net" and "insurance" when discussing Social Security. It's insurance. See here, here, and here.  That debate should have ended long ago.

                                                                In addition, there is doubt expressed in the post as to the existence of market failure in the provision of poverty insurance. If there is no market failure, then why were so many people left without any means of support after the Great Depression? If the market worked, wouldn't everyone have insured against poverty, even those past working age? How do you explain the arguments and empirical evidence put forth by Krugman on market failure in healthcare? Are similar market failure mechanisms at work in poverty insurance markets? What about the moral hazard argument from DeLong that exists independent of any selection issues? Quoting DeLong:

                                                                The first thing that struck me is that the Cato Institute does not speak of "moral hazard." If we believe--as we do--that in the long run we will not allow significant numbers of the elderly to live in dire poverty, then giving future beneficiaries "more control and ownership" of their retirement funds is a very dangerous thing to do, for it creates a situation in which future beneficiaries have powerful incentives to pursue high-risk investment strategy: if the coin comes up heads, they win big; if the coin comes up tails, the government pays. As we saw in the late 1990s with the S&L crisis, such incentives create very dangerous and very costly situations.

                                                                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...

                                                                There is market failure leading to the under provision of retirement and unemployment insurance by the private sector.

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                                                                  Posted by on Thursday, April 21, 2005 at 11:52 PM in Economics, Market Failure, Social Security | Permalink  TrackBack (0)  Comments (0) 

                                                                  Daily Show on Bush's Fake Town Hall Meetings; Social Security Metaphor of the Day

                                                                  From Dan Froomkin of the Washington Post's White House Briefing:

                                                                  ...I noted the other day that "modernization" is the new White House buzzword for its Social Security pitch. Get ready for Bush to uncork a new metaphor in that vein every few days. 

                                                                  On Monday, it was this: "Telling younger workers they have to save money in a 1930s retirement system is like telling them they have to use a cell phone with a rotary dial." 

                                                                  This morning, he said he it was "like trying to persuade them that vinyl LPs are better than iPods."

                                                                  Shall we try some of our own? Selling privatization as a solution to general fund solvency is like trying to persuade people that leeches cure cancer... Okay, so I'm not the most creative guy on the planet. Your metaphors?

                                                                  The White House Briefing also has this skit from the Daily Show on fake town hall meetings and doublespeak:

                                                                  ...Comedy Central has now posted Bee's sketch on its Web site. 

                                                                  "As he barnstorms across the country to sell his Social Security reforms, President Bush has introduced an exciting innovation: The fake town hall," Bee explains. 

                                                                  And indeed, Bee interviews Republican pollster Frank Luntz for guidance, and then casts her own fake town hall, which turns out to be eerily like Bush's, but for the relentless spewing of obscenities. 

                                                                  My favorite part, however, was Luntz serving as a White House "translator" of sorts. 

                                                                  "Drilling for oil," says Bee. "I would say, responsible exploration for energy," says Luntz. 

                                                                  "Logging," says Bee. "I would say, healthy forests," says Luntz. 

                                                                  "Manipulation," says Bee. "Explanation and education," says Luntz.

                                                                  Another chance to add some of our own! Snake oil for the solvency problem? That's Privatization. Surely someone out there can do better than that... Your translations?

                                                                  [UpdateMarginal Utility looks at Bush's metaphors in Bushisms #1 and #2: Remarks.]

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                                                                    Posted by on Thursday, April 21, 2005 at 02:25 PM in Economics, Social Security, Video | Permalink  TrackBack (0)  Comments (0) 

                                                                    Greenspan: Deficits Unsustainable, Balanced Budget Procedural Restraints Needed

                                                                    Today, in testimony before congress, Alan Greenspan reversed his 2001 position and said that deficits are unsustainable. To solve the problem, he calls for “a set of procedural restraints on the budget-making process” to limit deficit spending by congress. Such procedural restraints would undercut the need to privatize and shift risk to individuals as a means of limiting the ability of congress to spend Social Security assets, one of the key arguments for privatization from the administration:

                                                                    Greenspan Warns That Deficits Are Unsustainable, The New York Times. April 21, 2005, By JENNIFER BAYOT

                                                                    Alan Greenspan, the chairman of the Federal Reserve, warned Congress today that the federal budget is on an "unsustainable path" as a result of rising demands on Social Security and Medicare and government spending on new programs.

                                                                    Unless Congress makes major changes in how it makes the budget, he said, the country will run deficits large enough to cause the economy "to stagnate or worse." … Mr. Greenspan, in testimony before the Senate Budget Committee, described the economy as healthy but said it faced far too many uncertainties … Although Mr. Greenspan in 2001 approved the tax cuts that helped take the federal budget from a surplus to its current deficit, he called today for "a set of procedural restraints on the budget-making process.

                                                                    "These could include limits on discretionary spending and requirements that additions to the budget be balanced by cutbacks elsewhere," he said. "Such guidelines were laid out in the Budget Enforcement Act of 1990 but lapsed in 2002.

                                                                    "The brief emergence of surpluses in the late 1990's eroded the will to adhere to these rules," he added.

                                                                    Not noted in Greenspan's comments is that the lapse in 2002 he speaks of is connected to his statements at the time approving the tax cuts that led to the deficit problem.

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                                                                      Posted by on Thursday, April 21, 2005 at 10:53 AM in Budget Deficit, Economics | Permalink  TrackBack (0)  Comments (0) 

                                                                      GOP Rep Pressures Bush to Present Social Security Reform Proposal

                                                                      From Human Events Online: The National Conservative Weekly, news of pressure on the White House to present a plan for Social Security reform. The particular proposal, the Ryan-Sununu bill, increases the burdens on the system:

                                                                      GOP Rep. to Bush: Quit Dragging Feet on Social Security
                                                                      by Robert B. Bluey
                                                                      Posted Apr 20, 2005

                                                                      Conservative Republican congressmen want action from the Bush Administration on Social Security reform.

                                                                      Rep. Mike Pence (R.-Ind.) warned Tuesday that House conservatives are growing increasingly frustrated by the lack of a concrete proposal from President Bush to reform Social Security with personal retirement accounts … The White House has been coy about endorsing a specific proposal, but Pence said the lack of any Bush-backed plan is allowing Democrats to seize control of the debate … "There's talk about phase one. Phase one is there is a problem. Phase two is the solution. I'm not quarreling with the [White House's] marketing tactic, but I'm just saying I think many House conservatives want to get to phase two," Pence said. "The unknown is always more frightening than the known, and it is advantage Democrats right now."

                                                                      … "I've lost count of the number of times that I've been confronted at town-hall meetings by Americans who tell me about 'the bill,'" Pence said, recounting a typical conversation. "You know, 'What's in the bill?' What bill? I'm cosponsoring Ryan-Sununu, would you like to talk about that bill? 'No, no, the other bill, the President's bill.' The President doesn't have a bill. It goes on. It's like Abbott and Costello, 'Who's on First?'"

                                                                      Here are the details of the Ryan-Sununu bill:

                                                                      Sununu proposes personal accounts
                                                                      By ELISE CASTELLI
                                                                      Special to New Hampshire Union Leader

                                                                      WASHINGTON — Sen. John Sununu has become one of the first senators to propose a concrete plan for changing Social Security, re-filing a proposal yesterday that would allow workers under 55 years old to eventually invest more than half of their Social Security payroll taxes through personal savings accounts … Co-author Rep. Paul Ryan, R-Wis., said he also would re-file the bill in the House yesterday …

                                                                      Under the new measure, those 55 and older would be covered by the current Social Security program, while those younger than 55 would have the option of diverting a portion of the annual 12.4 percent Social Security payroll tax into their personal accounts.

                                                                      Between 2006 and 2015, workers would be allowed to invest an average of 3.4 percentage points of the tax ... Starting in 2016, an average of 6.4 percentage points of the tax could be placed into the accounts.

                                                                      These accounts would be backed with a federal guarantee that investors would be able to collect, at a minimum, a sum equal to the Social Security benefit they would be entitled to under the current law, Ryan said yesterday.

                                                                      The lower percentage of the payroll tax during the first 10 years would allow the plan to be phased in at a lower cost, Ryan said … As noted here concerning the president’s remarks on Social Security reform, the privatization proposals, this one included, do absolutely nothing to address the solvency “crisis” the administration invented to sell their philosophical position on privatization.

                                                                      Because this proposal includes a guarantee that benefits will not be lower than under the traditional system thereby limiting the downside risk, the proposal will increase the burden on the system. The burden will increase because bringing the losers in the stock market up to the level of benefits offered under the traditional system will not be counterbalanced by a reduction of benefits to the winners.

                                                                      If they are going to create an artificial solvency "crisis," they could at least act like they want to fix it, not make it worse. So far, not a single proposal has been put forth by Republicans to address their created crisis.

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                                                                        Posted by on Thursday, April 21, 2005 at 04:32 AM in Economics, Politics, Social Security | Permalink  TrackBack (0)  Comments (0) 

                                                                        Oil Futures Rise Slightly On Inventory Data

                                                                        Crude oil futures rose slightly earlier today after the release of data showing falling domestic inventories of oil and gasoline. In addition, there are mixed signals about OPEC's ability and willingness to increase supply to stabilize prices. The secretary-general of OPEC says production will be increased as necessary to stabilize prices, but Qatar's oil minister says that production is already near maximum:

                                                                        Oil prices rise on inventory data
                                                                        The Associated Press
                                                                        Updated: 3:53 p.m. ET April 20, 2005

                                                                        Crude futures rose slightly Wednesday after U.S. government data showed declining domestic inventories of oil and gasoline…Global oil reserves are in little danger of drying up for many decades, an OPEC senior official said Wednesday, and the Organization of Petroleum Exporting Countries will keep raising production as needed to stabilize prices.

                                                                        “The problem in 2004 was we did not anticipate the strength of demand ... it appears that in 2005 we are reaching a plateau,” said Adnan Shihab-Eldin, acting secretary-general of the OPEC.

                                                                        Unusually high prices cannot continue forever, “as long as you continue to put greater supply in the market,” he said.

                                                                        Meanwhile … Qatar’s oil minister … said that global oil inventories were strong, with more in the market than OPEC had expected. Although he said it was too early to predict what OPEC will do at its June meeting … the organization … was unlikely to increase production at its June meeting in Vienna.

                                                                        “I believe today the market’s very, very balanced,” he said. “The inventory today is the highest since 2002. So it means there’s more oil in the market than we expected.”

                                                                        Al Attiyah also stressed that OPEC members have little room to increase production. “OPEC is almost producing to the maximum,” he said. “In a few countries they have spare capacity, but in most member countries they have no spare capacity.”

                                                                        He also indicated that oil prices should ideally be between $40 and $50 a barrel…

                                                                          Posted by on Thursday, April 21, 2005 at 02:16 AM in Economics, Oil | Permalink  TrackBack (0)  Comments (10) 

                                                                          Wednesday, April 20, 2005

                                                                          Snow’s Latest Bumblings: U.S. Economy in a “Sweet Spot,” Deficit on Track

                                                                          It would be hard to call this reality-based.  From Reuters:

                                                                          …Earlier Wednesday, Labor Department data showed consumer prices rose more than expected last month, particularly the "core" measure excluding more volatile food and energy prices...That raised some fears of stagflation -- an environment of slowing economic growth and rising inflation -- but Snow dismissed the concern.

                                                                          "I think that's a far cry from where we are," he said.

                                                                          The U.S. economy is, for the time being, in a "sweet spot," Snow said, adding that "quite modest" bond spreads reflect generally sound economic conditions...

                                                                          And to top it off, we have this concerning budget deficits:

                                                                          …For its part, the United States will help address global imbalances by cutting its budget shortfall. Snow said the government is on track to cut the deficit to less than 2 percent of gross domestic product -- "around 1.5, 1.6 (percent), something like that" -- in a few years … He also played down fears of a national housing bubble, telling reporters that the housing market was "a different animal" from other markets…

                                                                          John Snow's Fantasy Based Semi-Daily Journal continues...

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                                                                            Posted by on Wednesday, April 20, 2005 at 02:33 PM in Budget Deficit, Economics | Permalink  TrackBack (0)  Comments (0) 

                                                                            Bush Acknowledges Personal Accounts and Solvency Are Separate Issues, But He Will Not Trade Solvency for Personal Accounts

                                                                            President Bush has finally acknowledged that personal accounts and solvency are separate issues as is evident from this portion of an interview posted on the MSNBC web site.  He also states clearly that he will not trade personal accounts for solvency:

                                                                            Insana: -- and ways to fix this problem. Would you, for instance, trade the personal savings accounts if you were promised a permanent fix for Social Security solvency problems?

                                                                            President Bush: Well, I think any plan has got to have -- give younger workers an option of investing some of their own money in, in personal savings accounts. First of all, it's not going to pass [inaudible] personal savings accounts; secondly, a plan with personal savings accounts would bring the Social Security system into the modern era ... one important ingredient is to allow younger workers to take some of their own money, set it aside in a conservative mix of bonds and stocks.

                                                                            Insana: Would you accept those personal savings accounts as add-ons, as some Democrats are suggesting, and then work through some of the solvency issues that we're also talking about?

                                                                            President Bush: Well, first of all, there needs to be a permanent fix. You keep talking about solvency issues. I agree. I mean, look, personal accounts will make the system better for younger workers. The solvency issue needs to be addressed. And, and you've heard ideas as to how to address solvency. And the Democrats have put out ideas, Republicans have put out ideas. And my job is to keep the process moving forward.

                                                                            One thing I'm not going to do on your show, in all due respect, is negotiate with myself...

                                                                            The administration created an imagined crisis in solvency (there are concerns, but they are not so large as to require fundamental changes in Social Security), then put forth personal accounts as a means of addressing solvency. Now, finally, they are admitting that solvency and personal accounts are separate issues, but they have no proposals whatsoever to deal with the insolvency. Bush claims Republicans have put forth proposals to address solvency, but what are they? Tax increases? Benefit cuts? Increasing the retirement age? What is their plan for solvency?

                                                                            They are putting up roadblocks to addressing the solvency crisis they invented. There is no need whatsoever to link personal accounts to the solvency issue, but the president has made it very clear that "...any plan has got to have -- give younger workers an option of investing some of their own money in, in personal savings accounts."

                                                                            If they truly wanted to solve their imagined solvency crisis, they would stop insisting that personal accounts be part of any solution addressing the solvency issue. It's a philosophical position, not the solvency issue, that is driving the administration's agenda.

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                                                                              Posted by on Wednesday, April 20, 2005 at 11:43 AM in Economics, Social Security | Permalink  TrackBack (0)  Comments (1) 

                                                                              Reuters: US Rate Futures See Fed Pressing on With Hikes

                                                                              From Reuters, news that markets are anticipating further increases in interest rates. Interest rate futures fell with news that the CPI core rate increased more than expected:

                                                                              ...Futures fully price rate hikes at the May and June Fed meetings. Chances of an August increase rose to 65 percent from as low as 22 percent earlier this week ... The projected year-end Federal funds rate is now about 3.72 percent against 3.61 percent late on Tuesday... Even with Wednesday's sell-off, futures suggest less aggressive Fed policy than dealers expected in early March. Since then, weak data has stirred fears that U.S. growth could be slowing, and futures prices have removed the potential for the Fed to throw in a 50 basis point rate increase at any of the next few meetings...

                                                                                Posted by on Wednesday, April 20, 2005 at 10:44 AM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (0) 

                                                                                Paul Greenberg: Economics to Blame for Summers' Remarks

                                                                                First, Paul Greenberg should learn the racist history of the phrase “dismal science” and never use it again. Second, if he's going to talk about economics, he should learn something about the discipline. His comments and quotes on economics demonstrate considerable ignorance:

                                                                                Wednesday, April 20, 2005, april fool, By Paul Greenberg, Tribune Media Services: …Mr. Suarez-Villa explained Larry Summers' problem succinctly: He's an economist. To quote Suarez-Villa's oh-so-serious diagnosis:

                                                                                "Musings that are considered 'normal' among economists tend to be regarded as insensitive or even prejudiced in many other disciplines. At the root of his remarks is the fact that Mr. Summers' thinking is grounded in a discipline that has little sense of fairness and moral obligation, where discriminatory situations are often accepted as the result of Darwinian mechanisms that should be left untouched.

                                                                                "Mr. Summers could have blamed his training in economics for his insensitive remarks, based on the discipline's inability to understand fairness and shed its pseudo-scientific ways."

                                                                                Greenberg's response, though perhaps sarcastic (it's hard to tell from the article), shows a lack of understanding of the types of issues economics addresses:

                                                                                …Not until economists come to realize that their theories about supply-and-demand and point-of-diminishing-returns need to be adjusted by race, age, gender, class and tenure will their dismal science enter the modern, politically correct age…

                                                                                "I'm a conservative-but I try not to be a damn fool," he says. Try again.

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                                                                                  Posted by on Wednesday, April 20, 2005 at 07:10 AM in Economics, Universities | Permalink  TrackBack (0)  Comments (0) 

                                                                                  Bush: The Administration Will "continue to press" Beijing to Let Yuan Float

                                                                                  Reuters reports that the Bush administration will continue to press China to let the yuan float, a strategy Nouriel Roubini has termed “playing with fire." Brad DeLong has also commented on the administration's China policy and termed it "the economic equivalent of pouring gasoline on a powder keg." Brad Setser states that "If I were part of the Bush Administration's economic high command, though, I would worry that China might take the hint. If China revalued (really revalued)..." and expresses his concerns here. Roubini, DeLong, and Setser do a good job of describing the pitfalls in the administration's policy and I share the concerns expressed in these posts. From Reuter's through ABC News:

                                                                                  Bush Eyes Interim China Step on Currency, Reuters, By Doug Palmer and Adam Entous:

                                                                                  President Bush said on Tuesday that China was considering taking an interim step toward easing its rigid currency regime and that Washington wants action as soon as possible… "Obviously we're at a competitive disadvantage to the extent that their currency won't float," Bush said in the interview, which was taped on Monday. But he added: "It's … certainly not going to be a panacea to get them to float the currency."

                                                                                  Bush said he did not know when Beijing would act. "It's hard for me to predict. It's a nontransparent society," Bush said, adding that the administration will "continue to press" Beijing on the issue…U.S. Treasury Secretary John Snow, in testimony before the U.S. House of Representatives Committee on Financial Services, reinforced the message that "now" is the time for China to loosen its exchange rate.

                                                                                  But he rejected suggestions from Sen. Charles Schumer, a New York Democrat, that administration officials had privately signaled their support for Senate legislation aimed at forcing China to revalue its currency…Although Bush administration officials have previously disavowed the bill, Schumer told reporters he had been received a different message in private. "I have gotten signals from the administration, quiet signals, that they're happy we're doing this," Schumer said.

                                                                                  Graham did not go as far as Schumer in claiming quiet administration support for the bill, but said: "I think there's understanding in the administration that … the more the House and Senate reacts to this problem (of China's currency peg), the more they're in power."…Formally declaring that China manipulates its currency would show the United States is serious about seeing a change in Beijing's policies, the senators said…

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                                                                                    Posted by on Wednesday, April 20, 2005 at 01:35 AM in China, Economics, International Finance | Permalink  TrackBack (0)  Comments (0) 

                                                                                    China's Economy Shows Strong 1st Quarter Growth

                                                                                    From Bloomberg, news that China's economy expanded more than expected in the 1st quarter led by increases in exports and investment. With growth this strong and shortages of raw materials and power supplies in evidence, there are signs that the central bank will increase interest rates and allow the currency to appreciate to damp the expansion:

                                                                                    China's Economy Grows 9.5 Percent, More Than Expected April 20 (Bloomberg) -- China's economy, which accounted for a 10th of global growth last year, expanded more than expected in the first quarter as exports and investment surged.

                                                                                    Gross domestic product rose 9.5 percent from a year earlier ... That exceeded the median 9 percent gain forecast in a Bloomberg News survey of 11 economists. Fixed- asset investment rose 23 percent...

                                                                                    "The government would not want to see GDP growth accelerate from here,'' said Lewis, the Hong Kong-based head of investment services at JF Asset Management Ltd., which holds $57 billion of mostly Asian assets. "We might see that policy is tightened a little.'' ...

                                                                                    "Investment is still very strong,'' said Andy Xie, an economist at Morgan Stanley in Hong Kong. The economist said he expects the central bank will raise its benchmark one-year lending rate to help damp industrial expansion...

                                                                                    And, importantly, according to the article, investors are betting that China will allow its currency to appreciate as part of the policy to curb expansion:

                                                                                    ...China...accounted for 26 percent of the record $617.7 billion U.S. trade deficit last year, prompting U.S. Treasury Secretary John Snow to renew calls this week for an end to the yuan's peg to the dollar. American manufacturers say the peg...gives Chinese exporters an unfair advantage...Investors are betting China will allow its currency to appreciate. The yuan would rise to 7.8445 in a year if freely traded from the pegged rate of 8.2770, according to forward contracts as of 10:55 a.m. in Hong Kong...

                                                                                      Posted by on Wednesday, April 20, 2005 at 01:26 AM in China, Economics | Permalink  TrackBack (0)  Comments (0) 

                                                                                      Brad DeLong: "Clarida Would Make a Very Good Fed Governor"

                                                                                      From Brad DeLong's Semi-Daily Journal:

                                                                                      Yes, Rich Clarida Would Make a Very Good Fed Governor

                                                                                      And he seems to be gaining ground...

                                                                                      FT.com / World / US - Clarida is leading candidate for Fed governor: By Andrew Balls in Washington Published: April 19 2005 22:32: Richard Clarida, a Columbia university professor and former official in the George W. Bush administration, is the leading candidate to replace Ben Bernanke as a Federal Reserve governor...

                                                                                      I agree and hope the momentum for his appointment continues to build.

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                                                                                        Posted by on Wednesday, April 20, 2005 at 01:08 AM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (0) 

                                                                                        Tuesday, April 19, 2005

                                                                                        Cleveland Fed President Pianalto Supports Transparency and Explicit Inflation Targeting

                                                                                        If you are interested in monetary policy, transparency, inflation targeting, and language such as “measured pace” the Fed uses to describe current and future policy, this is worth reading. It describes the direction President Pianalto sees monetary policy heading in the future with regard to transparency and explicit inflation targeting. She even states the inflation target she prefers along with the tolerance the Fed should have around the target:

                                                                                        Expectations, Communications, and Monetary Policy, Sandra Pianalto, President and CEO, Federal Reserve Bank of Cleveland, The Money Marketeers, New York, NY, April 19, 2005

                                                                                        … I would like to share with you my thinking on how the Federal Open Market Committee has "learned to talk"... My discussion will emphasize three points.

                                                                                        First, consistent behavior matters. Second, the FOMC's communications - how we talk about policy goals and actions - have played an important role in enhancing the effectiveness of monetary policy. Third, we should consider taking additional steps toward greater transparency when it seems likely that they can further enhance the effectiveness of monetary policy.

                                                                                        Please note that the views I express today are mine alone. I do not presume to speak for any of my colleagues in the Federal Reserve System…

                                                                                        Let me begin, then, with why I think consistent behavior matters … central bankers owe a great deal to the academics who led the rational expectations revolution of the 1970s and 1980s. One of their key insights is that although people are bound to make mistakes in assessing policies, policymakers themselves cannot systematically exploit these errors…Specifically, in the case of monetary policy, people will recognize when central bankers have incentives to try to trade a little inflation for extra short-run output ... Establishing a credible commitment to price stability, and conducting monetary policy consistent with that commitment, solves this problem ... As a result of this rational expectations work, and the research it prompted, academic economists began to encourage policymakers to follow predictable rules of behavior … I do think we get closer to the ideal environment by being clear about our objectives, by responding consistently and predictably to economic conditions, and by communicating promptly and clearly about our actions, especially when unusual situations present themselves.

                                                                                        At this point, I would like to talk more specifically about FOMC communications … I think about this progress in terms of two distinct types of information. One category is historical ... Another category is more forward-looking - the opinions that the Committee holds about the future state of the economy and its intentions regarding likely policy actions…

                                                                                        …A general argument for secrecy during the 1980s and early 1990s was that markets might not react appropriately to the disclosure of policy information … many FOMC members were … concerned about introducing volatility in financial markets if announcements were made as a matter of course. The initial announcement did not even refer to the funds rate directly. The language was still couched in terms of increasing "the degree of pressure on reserve positions." I think of the period since 1994 as one in which the FOMC started learning how to talk” …

                                                                                        …Let me now turn to the treatment of forward-looking information. More recently, steps toward greater transparency have been made to condition expectations about what might happen at future meetings. The "policy tilt" language first appeared in May 1999. The basic idea was to convey a major shift in the Committee's sentiments about potential changes in its federal funds rate target at some point in the future, even if no actual change in policy occurred at the meeting that produced the statement. Unfortunately, markets seemed confused by the language …This reaction caused the Committee to work out the kinks in the language, which resulted in the "balance of risks" statement that the Committee adopted in February 2000 … and the statement remains in use today … You are certainly familiar with the "considerable period" language first adopted after the August 2003 meeting. That language was designed to address a particular problem at a particular point in time. Specifically, as we all know, the language was aimed at being perfectly transparent about the Committee's desire to avoid unwelcome disinflation. As that problem passed, the language was gradually modified, evolving into the "measured pace" phrase that the FOMC has used since May of last year.

                                                                                        I think that, on balance, innovations in communications have improved the effectiveness of monetary policy and thus have enhanced economic welfare … A key implication of recent research is that the public understands what information is likely to guide the FOMC's policy actions, and that the FOMC … react to that information in a consistent way…

                                                                                        … do we need to go further? That brings me to my third point - I think that we should consider taking additional steps in the direction of greater transparency when it seems likely that they can further enhance the effectiveness of monetary policy … As you now know from the just-released minutes of the March 22 FOMC meeting, there are some on the Committee who think that the phrase "measured pace" has outlived its usefulness. In my view, this language has provided useful guidance in the limited time we have used it, but there is a risk that at some point the Committee will take an action that the public regards as contrary to what is implied by the language. To me, this risk suggests that the Committee should provide this type of guidance only when it is highly confident in the course of its near-term policy actions and when it perceives the cost of being misunderstood as exceptionally great … what to say, how to say it, and when to say it - should be designed foremost to improve the effectiveness of monetary policy.

                                                                                        So far, I have talked only about greater transparency in our operating procedures. In the final portion of my remarks, I want to talk about what some regard as the "next frontier": Increasing transparency about the FOMC's inflation objective.

                                                                                        As you know, the FOMC discussed the pros and cons of establishing an explicit numerical inflation objective at the February meeting. I think that being more explicit about our inflation objective could help us to be successful in maintaining price stability, but my expectations are modest. I do not regard an explicit numerical price objective as a panacea… My view is that the rate of inflation should average about 1½ percent, as measured by the Personal Consumption Expenditure price index, over periods of about three to five years.

                                                                                        Inflation is certain to vary in the short run, even when we achieve the objective over time ... My personal tolerance zone is a 1 percentage point spread above and below my 1½ percent inflation objective … I generally support the idea of a Committee objective and range. I say generally because I think it is not particularly useful to offer a blanket endorsement for a proposal that is not yet on the table. Furthermore, I'm sure many of you have been keeping score and know that some of my colleagues are in favor of more formal numerical objectives, but others are not. This does not trouble me, because I do not think it is necessary to jump to formal targeting in one leap. However, I think it would be useful to take a step in that direction.

                                                                                        The FOMC's semi-annual economic projections provide a mechanism for taking that step. As you know, twice a year the FOMC now provides the public with economic projections for the current year and the year ahead. The step I have in mind would have the FOMC provide an additional three- to five-year projection for inflation. This would be based on the participants' working definitions of price stability and policies that support them …Taking this step ought to be regarded as a logical extension of our current practice. In fact, I regard it as entirely consistent with the gradual approach the Committee has taken over the years to improve communications with the public…

                                                                                          Posted by on Tuesday, April 19, 2005 at 06:48 PM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (0) 

                                                                                          Poole: Don't Expect Predictable Fed Rate Rises

                                                                                          From a headline at the RGE Monitor's Daily Digest and as reported by Reuters, Federal Reserve Bank of St. Louis President William Poole told reporters that the Federal Funds rate is currently close to may deviate from its path to  a neutral level:

                                                                                          Poole said that as the Fed funds' rate gets closer to "normal" -- where borrowing costs neither help nor hinder economic growth -- future changes would depend on the central bank's assessment of incoming economic information…Spelling it out, Poole said Fed rates could either rise, fall or stay the same, adding: "I want to be quite symmetrical about that" to emphasis (sic) that he was giving no more weight to one outcome than either of the others.

                                                                                          [Update: Here is more from the article:

                                                                                          …Economists say the normal, or neutral rate of U.S. rates, lies between 3.5 percent and 4.5 percent. But it is very hard to pin down and could even be higher, if underlying U.S. productivity growth is stronger than normally assumed.

                                                                                          "As we get into that (normal) range, policy will become increasingly data dependent," Poole said.

                                                                                          "Last year is the unusual period and you should not expect that as a pattern going forward ... Last year was the exception to normal practice," he said, referring to the predictability of Fed rate hikes after the central bank vowed to remove its policy accommodation "at a pace that was likely to be measured."…

                                                                                          But the statement in the article that "...Poole said Fed rates could either rise, fall or stay the same..." appears to apply to the next FOMC meeting. Thus the message is, beginning with the next FOMC meeting, not to expect a straight line path to the target Federal Funds rate. William Polley discusses the term "measured" as used in the most recent FOMC minutes here.]

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                                                                                            Posted by on Tuesday, April 19, 2005 at 02:58 PM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (0) 

                                                                                            The Daily Standard: Bernanke Now Top Pick to Replace Greenspan

                                                                                            The Daily Standard’s Irwin M. Stelzer believes Martin Feldstein’s association with the troubled American International Group (AIG), and the likelihood that Robert Rubin will be asked to be the new CEO elevates Ben Bernanke as the top candidate to replace Greenspan as chair of the Fed, and that this will bring about “replacement of Greenspan's flexible, intuitive approach to monetary management with specific inflation targeting.”

                                                                                            The Spitzer Effect
                                                                                            A state attorney flaps his wings and there's a tempest at the Fed.
                                                                                            by Irwin M. Stelzer
                                                                                            04/19/2005 12:00:00 AM

                                                                                            Maurice "Hank" Greenberg built AIG from a small insurance operation into a $100 billion powerhouse … Greenberg was labeled "a CEO who did not tell the public the truth" and charged with "fraud" on a television broadcast by New York attorney general Eliot Spitzer; was defrocked by his board; and was forced to invoke his Fifth Amendment rights against self-incrimination when hauled before a regulatory inquisition before he had time to study the thousands of documents underlying the charges against him. …The specific issue involves a complicated transaction that may or may not have illegally shored up AIG's earnings …

                                                                                            THAT LEAVES OPEN (sic) the question of the fate of two men who might be affected by AIG's problems: Robert Rubin and Martin Feldstein…Washington and Wall Street gossip has it that Rubin … will be asked to replace Greenberg ...

                                                                                            ...Harvard professor Feldstein has been a leading candidate to succeed Alan Greenspan as chairman of the Federal Reserve Board when Greenspan retires in January. But he is an AIG director and member of the board's finance committee, and can be accused of being asleep at his post when the accounting improprieties occurred and when AIG's unusual executive compensation scheme was in use.

                                                                                            Which means that Ben Bernanke has now moved up in the candidate standings. Bernanke … has accepted the nomination to chair the president's Council of Economic Advisers … [and] has increased his chances of getting the much more important Fed chairmanship. That would mean replacement of Greenspan's flexible, intuitive approach to monetary management with specific inflation targeting, which Bernanke has long espoused…

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                                                                                              Posted by on Tuesday, April 19, 2005 at 10:08 AM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (0) 

                                                                                              Congressman Istook: Cut Welfare Programs to Solve Deficit Problem

                                                                                              Ernest Istook, a Republican congressman from Oklahoma, has a plan to solve the federal deficit problem:

                                                                                              ...Food stamps now go to 23 million Americans, at a cost of $27 billion per year ... Medicaid pays the health-care bills for 42 million people, costing federal taxpayers $174 billion annually... Federal housing subsidies ... cost of $23 billion annually...Then there's ... the mislabeled Earned Income Tax Credit ... a government income subsidy...costing taxpayers $37 billion.

                                                                                              Public-assistance payments are a huge contributor to today's massive federal deficit… Those who participate in all these programs receive cash and benefits of over $17,000 per person per year. (You can multiply this by the number of people in a household, to measure the impact.)… When tens of millions of able-bodied Americans receive public assistance year after year, we have a problem with how we define compassion. When we're told that millions of immigrants want to take jobs that Americans don't want, we should ask why they don't want those jobs. Making someone dependent on unlimited handouts is not compassion; it robs them of the dignity of work and self-sufficiency, and it gradually destroys the human spirit...

                                                                                              For a family of four, he claims the welfare benefits are potentially $68,000 per year. According to Congressman Istook, if we could just get the poor to take the jobs that immigrants are willing to take, we could eliminate "a huge contributor to today's massive federal deficit."

                                                                                              He can’t be serious.

                                                                                              [In the comments, cl says: No doubt that Congressman Istook should advocate elimination of another form of welfare --farmer subsidies -- Able bodied farmers receiving billions for doing nothing. This surely must rob those farmers of the dignity of work and self sufficiency and will gradually destroy the human spirit. We should ask why these farmers continue to accept these subsidies, bloating our federal deficit. Especially when eliminating the subsidies would go so much further in closing the deficit.]

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                                                                                                Posted by on Tuesday, April 19, 2005 at 12:24 AM in Economics, Politics | Permalink  TrackBack (0)  Comments (0) 

                                                                                                Fed Governor Bies: Young Workers Face Increasing Financial Risk

                                                                                                Fed Governor Bies remarks on the increasing financial risk faced by young workers and their failure to take advantage of voluntary private 401(k) retirement accounts even when contributions are matched by their employers:

                                                                                                Remarks by Governor Susan Schmidt Bies
                                                                                                At the Canisius College Richard J. Wehle School of Business Community Business Luncheon, Buffalo, New York
                                                                                                April 18, 2005

                                                                                                The Economy and Managing Personal Finances

                                                                                                … I am expressing my own opinions, which are not necessarily those of my colleagues on the Board of Governors or on the Federal Open Market Committee…

                                                                                                …In the household sector, some analysts have expressed concern about the rapid growth in household debt in recent years and the decline in the household saving rate. They fear that households have become overextended and will need to rein in their spending to keep their debt burdens under control… As I have already noted, in the aggregate, household debt has grown more rapidly than income in recent years. Of special relevance to this audience is that the increase in consumer debt loads in recent years is particularly apparent among younger adults… Moreover, there are indications that some of these younger households are having difficulty managing their debt successfully… Finally, surveys continue to indicate that many workers are not currently saving for retirement, and many that are saving, by their own calculations, are not saving enough…

                                                                                                …Turning to retirement savings in particular, workers entering the labor force today will bear more of the risk of financial security later in life than workers of a generation ago. Far fewer workers will be covered by defined-benefit pension plans established by their employers, which provide pre-set benefits after retirement…studies have found some troubling patterns related to individual savings in 401(k) plans that suggest that workers may not be giving adequate attention to their retirement savings. First, despite the tax advantages of 401(k) contributions, one-quarter of workers eligible for 401(k) plans do not participate at all, even if the employer would match a portion of their own contributions. These workers are effectively giving up a pay raise. And among those that contribute, many save just a little. In a survey last year, one-quarter of firms reported that their rank-and-file 401(k) participants saved an average of less than 4 percent of pay…

                                                                                                …These patterns are troubling because they raise doubts about the financial security of workers in later life…

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                                                                                                  Posted by on Tuesday, April 19, 2005 at 12:15 AM in Economics, Saving, Social Security | Permalink  TrackBack (0)  Comments (0) 

                                                                                                  Monday, April 18, 2005

                                                                                                  The White House Argues With Itself on Privatization and Social Security Solvency

                                                                                                  Following up on this post where Treasury Secretary Snow says that congress has hurt the economy by spending the Trust Fund and that privatization does not help with Social Security solvency, here are contrary statements regarding privatization and solvency from the White House web pages.

                                                                                                  In Ensuring America's Prosperity on the White House Web Site, it says personal accounts will "solve the financial problems of Social Security once and for all…”:

                                                                                                  The President wants to strengthen Social Security for the 21st century. His fiscally-responsible plan calls for reforms that … solve the financial problems of Social Security once and for all, and give younger workers a chance to save in personal accounts for their own retirement.

                                                                                                  But, as noted in this recent post, Treasury Secretary Snow in Ask The White House says:

                                                                                                  …personal accounts are an integral part of any solution in order to make the system more fair for future generations, but you’re right – other changes will be necessary to achieve solvency for the program…

                                                                                                  Snow is correct, privatization does not help with solvency. The statement on the White House web site that privatization is a "...once and for all" solution is wrong and disagrees with other statements on their web site.

                                                                                                  The Snow page on the White House web site is recent (April 15), the other page is more dated. But this is not simply a case of the White House being sloppy about updating the White House web pages as the administration changes its story to reflect the justification of the day for personal accounts.

                                                                                                  If that were the case, then Special Assistant to the President for Economic Policy Chuck Balhous would not have disagreed with Snow on his entry on the White House web page on April 5 where he says:

                                                                                                  ...The Social Security actuary’s projections, therefore, are that the net effect of the personal accounts will be to increase the benefits that workers expect from Social Security...

                                                                                                  In fact, Blahous is asked this directly and says privatizationwill not make things worse, then implies that privatization is one of the potential solutions:

                                                                                                  John, from Arizona writes:
                                                                                                  The current emphasis on setting up private accounts to help social security does nothing to address the real issue of solvency. In fact it makes the situation much worse by further reducing the amounts workers pay to the amount retiree's receive. Why not address the issue of solvency, and the tough decisions necessary to solve the issue, before any discussion of allowing private accounts?

                                                                                                  Chuck Blahous
                                                                                                  John, first, the accounts as the President has proposed them would not make the situation worse in any respect. As workers contribute money to their accounts, they would also shift some of their benefits from the traditional system to the personal account system. In that sense, the overall finances of the system would be largely unchanged. But in another sense, the situation would be improved – a portion of the system’s future liabilities would already have been met, reducing the share of the burden to be borne by our children and grandchildren...

                                                                                                  ...Personal accounts are also a very important component of the solution simply because it is virtually impossible to otherwise fix the system in a way that is fair to younger workers. Absent the personal accounts, the only measures available to fix Social Security’s finances would involve tax increases or reductions in promised benefits, each of which would worsen the treatment of younger workers. The personal accounts enable a solution to be fair to younger workers by improving their benefit expectations.

                                                                                                  The question John from Arizona asked was why the administration isn’t addressing solvency rather than wasting time pushing privatization. The answer is carefully worded, but nowhere is the solvency issue addressed directly. And when he says "Absent the personal accounts, the only measures available to fix Social Security’s finances would involve tax increases or reductions in promised benefits..." isn't he falsely implying personal accounts will help with solvency?

                                                                                                  If they are going to mislead people into thinking solvency is a major problem, then they should propose a policy that addresses the exaggerated problem.

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                                                                                                    Posted by on Monday, April 18, 2005 at 07:30 AM in Economics, Social Security | Permalink  TrackBack (0)  Comments (0) 

                                                                                                    Will the Fed Abandon Open Market Operations?

                                                                                                    If the Fed moves more and more towards explicit inflation targeting and transparency as I have discussed in several recent posts here, here, here, here, and here there is another change that might be coming as well (someday). The Fed may abandon open market operations.   

                                                                                                    Controlling the federal funds rate does not require the use of open market operations or any reference at all to a monetary aggregate. This is desirable since monetary aggregates are becoming increasingly difficult to define due to the ease of converting financial and other assets to cash. Because of this, it is difficult to know which monetary aggregate to target when attempting to control the overnight borrowing rate between banks (i.e., the federal funds rate). The procedure described below overcomes this difficulty.    

                                                                                                    Currently, policy works by using open market operations to obtain the desired federal funds rate target. Each morning, the desired change in the federal funds rate is determined by the Fed and then the open market operation needed to move as close as possible to the target is implemented.

                                                                                                    However, the discount window is all that is needed to control the overnight rate, open market operations are unnecessary. In fact, recent changes in the Fed’s operating procedure where the discount rate caps the federal fund rate have already put part of this procedure into place (currently the discount rate is equal to the target federal funds rate plus 1%. Thus, the federal funds rate caps the discount rate and allows the discount window to serve its traditional lender of last resort role without the need to explicitly limit how many times a bank may visit the window, i.e. there is no longer a need for "moral suasion").    

                                                                                                    Here’s how to control the federal funds rate without open market operations. The Fed simply sets the discount rate it charges for borrowing reserves at the target rate plus a small amount s, i.e. r + s (as it already does). Simultaneously, the Fed stands ready to pay r - s on deposits held at the Fed (it does not yet do this). Under this procedure, the federal funds rate will be bounded within the range r plus or minus s. Thus, there is no need to reference a monetary aggregate at all in order to bound movements in the overnight borrowing rate between banks.

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                                                                                                      Posted by on Monday, April 18, 2005 at 07:02 AM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (0)