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Social Security: Cato’s “Quick Facts”

The Cato Institute has provided us with more propaganda entitled the “Quick Facts Archive”:

1. Social Security will begin running a deficit by 2017.
2. A medium income worker born after 1965 can expect a rate-of-return of less than 2% on his or her Social Security taxes.
3. The Social Security payroll tax rate has grown from just 2 percent in 1949 to 12.4 percent today.
4. Social Security faces an unfunded liability of more than $12.8 trillion.
5. “Saving” Social Security without individual accounts could require a 50% increase in Social Security taxes or a 27% cut in benefits.
6. The Supreme Court ruled in Flemming v. Nestor that there is no legal right to Social Security benefits.
7. Social Security taxes have been raised more than 40 times since the program began.
8. The maximum original Social Security tax was just $60. Today it is $11,000.
9. In 1950, there were 16 workers paying Social Security taxes for every retired person receiving benefits. Today there are 3.3. By 2030, there will be only 2.
10. 48 million Americans receive Social Security benefits, including 33 million retirees, 7 million survivors, and 8 million disabled workers.
11. Social Security pays more than $450 billion in benefits each year. If nothing is done, by 2060, the combination of Social Security and Medicare will account for more than 71 percent of the federal budget.
12. Nearly two-thirds of those under 30 years old don’t think Social Security will be able to pay them any benefit when they stop working. Fifty-seven percent of people 30 to 49 years old agree.
13. According to Gallup, reforming Social Security is a top priority for 33% of investors.
14. Nearly 80% of Americans pay more in Social Security taxes than they do in federal income tax.
15. Every two-year election cycle that we wait to reform Social Security costs an additional $320 billion.
16. The full retirement age today is 65 years and four months. It rises by two months every year, gradually increasing to age 67 for people born after 1959.
17. By 2030, there will be 70 million Americans of retirement age – twice as many as today.
18. The average monthly retirement benefit from April 2004–April 2005 was $895. That amounts to an annual benefit of $10,740.

#9, #10, and #17 only document that the U.S. has a lot of people and that we have a demographic phenomena known as the retiring of the baby boomers. Is the Cato Institute advocating we get rid of some of the elderly as their Social Security solution? #12 and #13 only show there are some foolish enough to believe the lies from the Cato crowd. #6 is just a pathetic misrepresentation of what this Court decision involved.

Cato loves to talk about increases in taxes paid but #8 is simply money illusion (nominal v. real) in part and the fact that as real income rises, real benefits rise as well. Note also that #16 and #18 represent more benefits per person now than years ago so it is not surprising that contributions have also increased (#3 and #7).

My second favorite fraud in this list is #11 as Cato had to include Medicare (see Bush’s bloated prescription drug benefit) to get to this 71% of the Federal budget claim in the first place. In the second place, most of Federal spending is already some form of transfer payment.

#1 is a very old scam and in a simple accounting sense – a lie. The cash flow surplus for the Trust Fund includes as inflows both payroll taxes and the interest income of the Trust Fund assets, which of course Cato never gets right. And while it is true that my generation can expect an average real return equal to 2%, that’s also the real return on the government bonds in my portfolio.
#5 tells us the obvious: reducing some alleged long-term shortfall requires either more revenues or future benefit cuts. That’s true regardless of which “reform” package we implement. #4 is the old present value into infinity shock figure. But I’m a little surprised at #15, which now says this shock figure rises only $160 billion per year, which translates into 1.3% of their $12 trillion number. Gee, Cato has stopped using the nominal interest rate to perpetuate this fraud, which makes #15 my personal favorite among their silly list of nonsense.

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How Would Robert Novak Pay for Military Pork?

You’d think that a tax cut jihadist like Robert Novak would be all for the work of the Base Realignment and Closure Commission. Joshua Marshall catches Robert Hypocrit whining that a small reduction in government spending might hurt a Republican politician.

So how do we pay for military pork if the massive tax cuts for the rich are made permanent? Maybe Novak can donate a portion of his $595 a person for “blithely hawking confidential sessions with Washington’s power elite”.

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America’s Healthcare Mess

An AB reader sent along The Moral Hazard Myth by Malcolm Gladwell. The opening paragraph reminded me I’m overdue to see my dentist. As Kevin Drum so ably summarizes:

Gladwell suggests that although politics has a lot to do with America’s weird and dysfunctional healthcare system, so does elite economic opinion. Read the whole thing to get his take on “moral hazard” and how it’s warped the way American economists think about healthcare. Aside from that, I think the passage above also highlights the big problem among non-elites: for some reason, Americans aren’t pissed off enough about their healthcare to demand change.

While I may be a “warped economist”, I have to concede that any article that challenges and then enhances my limited understanding of the health care market is worth the read.

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Bursting of a Housing Bubble and the Wealth Effect

A sensible conservative suggested that I read the latest from John Tamny. While this sensible conservative and I are both in utter disbelief at what Tamny has written, I’ll not say who this smart conservative is as I’m still upset that I had to read the likes of this:

To begin, Makin said the “U.S. real estate bubble is a crucial ingredient in sustaining global demand growth;” the demand growth presently sustained by an “innovative mortgage sector [that] arranges for the easy withdrawal of rising equity in homes.” What Makin seems to miss is that whether we’re talking international or domestic savings, there is someone on the other side of each mortgage origination forgoing the very consumption he claimed is presently driving economic growth. At best the wealth effect he spoke of is a wash.

If Tamny is referring to purely a wealth effect, he seems to have confused financial wealth and real wealth. It is true that my mortgage obligation (my financial liability) is someone else’s financial asset so if the present value of the lendor’s financial wealth declines, the present value of my financial liability also declines. However, the value of my house (a real asset) also declines.

Makin may be arguing that individuals in the past could not spend whatever equity they had built up in their house – that is some form of borrowing constraint. Economists have long debated whether households face such borrowing constraints – and whether financial innovations relieve such constraints thereby increasing consumption. The existence (or lack thereof) of a borrowing constraint, however, is not the same thing as the wealth effect. And my house is a real asset – not a financial asset. At least, I hope it is each night that I go to sleep.

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Keynes v. Smith – in Defense of Nixon

Mark Thoma points out to Thomas Bray that accepting a Keynesian view of macroeconomics does not mean one has to abandon Adam Smith’s view of microeconomics. Mark also points out that Bush’s adherence to fiscal stimulus in 2001 was in someway consistent with the message of the General Theory. I say “someway” because Bush’s ad nausam excuse for long-term fiscal irresponsibility by his appeal to wanting more jobs is sheer abuse of Keynesian logic.

But it is his attack on Nixon’s abandonment of the Bretton Woods system that caught my eye and apparently that of Tim Duy (see the comments section under Mark’s post):

In 1971, seeking to justify the scrapping of the gold standard and flooding the market with dollars, a Republican president, Richard Nixon, declared “we are all Keynesians now.” He was referring to British economist John Maynard Keynes, who in the 1930s called the gold standard a “barbarous relic” that got in the way of the taxing and spending needed to overcome the Great Depression. Alas for Nixon, those policies were no more successful in the 1970s than they had been in combating the long Depression. Indeed, partly because of Nixon’s misguided effort to control inflation through wage and price controls, the U.S. economy fell into a deep funk that lasted more than a decade.

Nixon did a lot of things during his term in office with some of them no doubt pleasing Milton Friedman and some of them no doubt ignoring Dr. Friedman. Perhaps Mr. Bray is not aware that the latter years of Lyndon Johnson’s Administration saw excessive aggregate demand growth (something his Keynesian CEA tried to stop) even under Bretton Woods. Friedman suggested to Nixon that a tight monetary policy should be adopted to lower inflation – and perhaps it started off too tight. While some of us may have endorsed the reversal of this tight monetary policy, I’m sure Friedman can make a compelling case that Nixon took the easy money advice too far.
But leaving Bretton Woods and going to a floating exchange rate regime was more of a Friedman idea than a Keynesian idea. Bray probably does not appreciate the concerns back then about a deterioration in the balance of payments. And he also does not appreciate the fact that U.S. policymakers since Nixon have avoided a return to Bretton Woods – even if certain Asian Central Banks have not.

Tim Duy raises the devaluation of the 1930’s. At the depth of the Great Depression (1933) real exports (in 2000$) were $18.9 billion with real imports being $29.1 billion. By 1940, real exports had risen to $34.8 billion with real imports being $36.2 billion. If we could only have the same level of success in reversing our present current account deficit woes!

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Money Illusion at the National Review

Mark Thoma reads a comment from John Tamny over at Mark’s blog and has decided Tamny will never understand basic economics. The topic Mark was trying to raise had to do with how Tamny fails to grasp either what Ben Bernanke or the long-run effects from monetary policy. Rather than concede his errors, Tamny compounds them:

Assuming Thoma could even know what “full” employment is, my point still stands. We are not constrained by Thoma’s silly belief in full employment and capacity restraints for two reasons. First off, assuming we hit “full” employment, wages will rise and in doing so will attract the marginal worker back to the workforce. More on that, I can’t think of the last time I bought gas, movie tickets or airplane tickets from a live human being. I can’t because markets have a funny way of innovating around these “shortages” that have people like Thoma so hot.

While some supply-siders have insanely high estimates of the elasticity of labor supply, few would be stupid enough to assert employment decisions are based on nominal wages rather than real wages. I say this with a little caution as Lawrence Kudlow seems to believe that the 4.81% increase in nominal wages over the past two years makes workers better off even though prices have increased by 6.25%.

In the traditional classical macroeconomic model envisioned by most supply-siders, a 10% increase in the money supply would raise nominal wages by 10% but would also raise prices by the same 10%. In other words, there would be no real effects.

Alas, Tamny continues:

Second, Thoma might agree that this is a world economy. Most companies large and small that are based here don’t limit themselves to the US workforce as my writeup very clearly stated. For Thoma to continue to act as though what I said is not true in order to impress his readers for having gotten himself some NRO hide is really pathetic, but not surprising.

Even though we covered one aspect of this earlier, which was that the extra income enjoyed by workers in India is not part of U.S. GDP, perhaps Tamny is hoping U.S. monetary expansion will lead to faster growth for our trading partners. Whether faster U.S. monetary growth leads to an increase or a decrease in foreign aggregate demand growth depends on the exchange rate regimes and the reaction of foreign central banks. For example, under floating exchange rates, faster U.S. monetary growth could lead to dollar devaluation with resulting expenditure switching effects that would increase U.S. demand but lower foreign demand. Of course, it is possible that the faster U.S. monetary growth would induce faster monetary growth abroad.

But would that lead to more employment abroad or just more foreign inflation? Tamny is assuming the Indian central bank is too stupid to manage its own economy. Last I check, the Indian central bank had not hired anyone from the National Review, which tells me that there are much smarter than Tamny thinks.

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Signs of the Times

Click on photo for larger image.
Orange County, CA. Aug 21, 2005. Open House signs are common.

Orange County, CA. Aug 20, 2005. Notice the Open House sign at the bottom and also the price of diesel. Diesel prices are a huge story in California.

For the general economy it appears gas prices are starting to bite. For some excellent commentary this week, see Dr. Roubini’s “Will the Latest Oil Price Shock Lead to a U.S. and Global Recession?” and Dr. Hamilton’s “Talk of recession“.

The 3rd photo is also from Orange County. The For Sale signs are sprouting up in my neighborhood like wildflowers in the desert in Spring.

Three in a row. For the housing market, rising inventories is the story.

In San Diego:

Inventory of all existing homes for sale in San Diego County reached a 10-year ebb of 2,916 units on March 29, 2004, said Dennis Smith, an Encinitas-based Realtor who has been tracking prices and inventory since 1995. As of Aug. 10, that inventory had risen to 13,204 homes. That rise took place in nearly 18 months.

In Palm Springs:

‘… unsold resale inventory is currently at around 3,452 properties, according to Greg Berkemer, executive vice president of the California Desert Association of Realtors. That figure is up 63 percent from a year ago and is more than twice the 1,400 seen in April 2004.’

In Sacramento:

‘Jim Eggleston, owner of Sacramento’s biggest residential “For Sale” sign installer, predicts this will be his busiest week in 21 years in business. He’s had to hire an extra worker and buy a new delivery truck since his crew planted a one-day record of 225 signs on Monday.’

In Boston:

The number of listings of single-family houses in 17 towns in Greater Boston was up 25 percent or more last week compared with one year ago. And those houses are taking longer to sell. In four towns, listings increased 50 percent or more.

This doesn’t mean the boom is over. But it might be a clue that the housing market is slowing down. Looking backwards, the OFHEO House Price Index for Q2 will be released on Sept 1st and the price gains will most likely be spectacular. This week, Existing Home Sales for July will be released on Tuesday and New Home Sales on Wednesday. The Sales numbers should be strong, but I’ll be checking out inventories as a possible leading indicator of a housing slowdown.

Best Regards, CR Calculated Risk

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Labor Market Woes: Keynesian v. Real Business Cycles?

David Altig received some heat from Brad DeLong:

Look at the what the figure tells us about the end of 1982. It tells us that at the end of 1982–in the middle of the deepest recession of the post-WWII period–after three years during which labor force participation had hardly grown at all after growing by 0.4% per year throughout the 1970s–labor force participation was not depressed below its long-term trend. If macroblog is going to say that the slowdown in growth in labor force participation between 1979 and 1982 is not a sign of a slack labor market but of “efficient changes in labor force participation” due to factors analogous to “summer vacations… winter holidays… every weekend” that cause fluctuations in labor force participation that we “would never think of calling… ‘gaps’–well, then, I wish it luck out there in the Gamma Quadrant.

He has also been receiving some heat from AB and Macroblog reader knzn (memo to Vanna White: we don’t need no stinking vowels). David replies:

My point is that I am skeptical about the position that sluggish job creation has been the result of old-fashioned deficient demand, amenable to being fixed by stimulative fiscal and monetary policies.

Even though I see this trend-cycle debate to be a bit of a distraction, I’d like to take on Brad’s comment by noting a 2001 paper by David T. Ellwood entitled The Sputtering Labor Force of the 21st Century: Can Social Policy Help? (with hat tip to Mark Thoma for emailing this to me):

In the last twenty years, the overall labor force grew by 35 percent and the so-called prime age workforce those aged 25-54 grew by a remarkable 54 percent. The number of college educated workers more than doubled, and increased as a fraction of the labor force from 22 percent of the total to over 30 percent. In the next twenty, there will be virtually no growth in the prime age workforce at all.

While Ellwood’s paper went well beyond our debate on the employment to population (EP) ratio, Ellwood documents the substantial rise in the labor force participation rate (LFP) from 1980 to 2000 – with much of this increase coming from an increase in the share of women who were in the workforce. While he predicts a fall in the growth rate of employment, his paper does not explicitly suggest a fall in the EP ratio. Ellwood noted forecasts that LFP for each subgroup (e.g., prime age workforce v. those 55 and older) would likely remain roughly the same over the 2001 to 2020 period.

Before addressing David’s suggestion of real business cycle effects, let’s tease out a couple of implications of Ellwood’s paper. I have provided three charts of LFP and EP with the first one being from 1975 to 1984, which covers the 1979 to 1982 downturn. The second one is from 1985 to 1994, which covers the Bush41 recession. During both periods, the overall trend for LFP was upwards so the cyclical efforts of the two recessionary periods showed up more in the EP ratio as well as the unemployment rate, which gave similar signals. These two signals have diverged during the latest recession and partial recovery (see the third chart covering 1995 to July 2005), which is the genesis of the current debate on LFP. But focusing only on LFP is sort of like looking at supply but not demand (more on that later).

Perhaps the best way to wrap up this discussion of trends v. cycles would be to note my own going musing with Bill Polley who noted:

Demographics will start working against us on this series very soon as well if some baby boomers start to retire early. Whether the e/p ratio can attain the level at its last peak is a serious question, just as valid today as in 1995. Like PGL, I would like e/p to get back to something more akin to full employment, but I also think there should be research into what that level is for the demographics.

If Ellwood is correct that the subgroup LFP will show no long-run trend, Bill is suggesting that as a larger share of the adult population comes from the 55 and over crowd – we will see a gradual decline in LFP. As I read Bill’s many very wise comments, I think he agrees with Brad that little of the recent decline in LFP is from demographics.

Let’s especially note that Tyler Cowen has joined David in reviving Kydland and Prescott’s real business cycle ideas. While knzn is arguing for a Keynesian explanation to the fall in the EP ratio, David is arguing for a classical demand and supply explanation. But not only do we need to think in terms of quantity variables (EP and LFP), we should also think in terms of real compensation, which have not kept pace with productivity, and real wages, which have been flat. The introduction of price as well as quantity variables is where I think Brad has David cold.

But to be fair, let’s consider four possibilities of a real business cycle starting with one that Bush supporters such as Prescott often mention:

(1) The reductions in marginal tax rates were supposed to induce higher after-tax real wages, which would encourage people to work more hours and greater entry into the labor force. But of course, we see little evidence of this effect even if the National Review keeps claiming employment has never been higher.

(2) David has mentioned the oil price shocks, which would tend to increase the cost of consumer goods relative to the price of goods domestically produced. Certainly, any such unfavorable shock would lower wages relative to consumer prices inducing a fall in LFP. Such an adverse terms of trade effect would also tend to lower profits for American companies, which is not consistent with what we have observed. Also note that the consumption price deflator has risen only 10.8% since 2000, while the GDP deflator has increased by 11.6%

(3) Kash and others have noted a third possible real business cycle effect – that being the increases in the cost of providing health care, which would explain why real compensation as traditionally measured has increased even if workers are get less in goods and services from their total compensation. In other words, the argument that has been so ably put forth by Kash and others would predict at least a modest reduction in the market clearing level of employment.

(4) I suspect these effects are minor as compared to the favorable productivity increase of the late 1990’s and its resulting investment boom. During the late 1990’s, real wages and LFP were both rising significantly. We witnessed an investment bust starting in 2001 (or even late 2000) – so might one argue we are in the flip side of the positive real business cycle shock of the late 1990’s?

I should mention one problem with my fourth and favorite real business cycle suggestion, which is the fact that productivity seems to continue to rise. Perhaps the investment bust was more along the animal spirits argument of Lord Keynes, which of course brings us back to the point knzn has been trying to make to David – as well as to me. Knzn – let me just suggest that you are preaching to the choir.

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FuzzCharts on the Black Unemployment Rate

I once tried to compliment NRO’s Jerry Bowyer by saying that he provided nice time series charts before launching into his usual nonsense. His latest alas provides no such time series chart:

Black unemployment is also lower than the average for the Clinton years. It is lower than the average of the past fifteen years. It’s also considerably lower than the thirty-year average, which is about as far back as this particular statistic goes.

As you look at the chart of the unemployment rate for blacks – as well as the overall unemployment rate – one can see why Jerry only provided averages and not the time series. It seems unemployment rates for both blacks and for whites fell during the Clinton years and rose after Bush took office. Yes, we have heard this average spin from the Blogs for Bush crowd as far as overall unemployment rates and now the NRO decides to spin the numbers in particular for African-Americans.

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The Labor Market: CKNAWWW and Time Series Analysis

James Hamilton is a proud member of CKNAWWW (Clueless Know-Nothing Analysts of the World Wide Web) and is a master of time series analysis:

It seems very hard to quarrel with the statement that any given month’s value for the labor force participation represents the confluence of different factors, some resulting from trends that are in all probability quite benign, and some representing cyclical economic swings. Whenever somebody looks at such a statistic and claims to have inferred what it is saying about purely cyclical forces, they must have used some method for distinguishing between these two kinds of forces … Any satisfactory statistical treatment of the question would regard this as a signal-extraction problem, where one would try to decompose the change in any given month’s labor participation figure into “trend” and “cycle.” There are certainly time-series methods that have been proposed for doing that sort of thing. But they rely in a very fundamental way on knowing the statistical structure of what constitutes a trend and what constitutes a cycle. I just don’t see what we could claim to base such assumptions on in this context.

David Altig reviews an interesting time series analysis from Jack Bernstein (hat tip to Max Sawicky) and writes:

There is a deep problem associated with using this sort of trend/cycle breakdown to measure “slack” or “participation gaps.” Think of labor force participation over the course of a year, and suppose that for some demographic group the participation rate is rising over the period of time. Despite a positive trend, you will find that the participation rate will still fluctuate over the course of the year. Over the seasons, for example, as summer vacations and winter holidays kick in. Or every weekend. We would never think of calling these sorts of fluctuations “gaps.” But if this is so for a weekly or seasonal frequency, why not over the span of a business cycle? To put it another way, efficient changes in labor force participation can have both temporary and permanent components. Temporary does not equal “bad” or “perverse” or “suboptimal” or “inefficient.” Yet calculating gaps as deviations from a trend treats them just that way.

OK, I’ll admit that the mere fact that the employment to population ratio now is below where it was in the late 1990’s is not definitive proof that the labor market is weak. But then those Bush supporters who keep touting the employment growth of the past couple of years as being proof that the labor market is roaring have not done the kind of careful analysis that David Altig and James Hamilton are calling for. Also, the fact that real wages have not risen even as labor productivity has seems to me to be additional evidence that the labor market is weak (even if employers have to pay a lot more for the same employee health insurance).

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