Relevant and even prescient commentary on news, politics and the economy.

## Soc Sec XXXV: Monthly Trust Fund Reports

It is almost impossible to figure out whether Social Security is tracking better or worse than projected using productivity or Real GDP, for one thing the data lags and moreover is subject to revision. But there is one measure that can be tracked with precision: Trust Fund cash balances which are reported to the penny by the Treasury Department with a one month lag. Which means that the June and hence mid-year Report is out. So how about some numbers?

The web page for all the Trust Fund Reports (including Medicare HI, Highways etc) is http://www.treasurydirect.gov/govt/reports/tfmp/tfmp.htm For my purposes I just want to look at OAS (Old Age Survivors) and DI (Disability) the Reports themselves are found at the links below.
OAS ftp://ftp.publicdebt.treas.gov/dfi/tfmb/dfifo0608.pdf
DI ftp://ftp.publicdebt.treas.gov/dfi/tfmb/dfifd0608.pdf

Our starting point as always is the Report in this case Table IV.A1.—Operations of the OASI Trust Fund, Calendar Years 2003-171 [Amounts in billions] and Table IV.A2.—Operations of the DI Trust Fund, Calendar Years 2003-171 [Amounts in billions]
Per IV.A1 the opening balance for OAS was \$2.023 trillion, projected year end balance under Intermediate Cost \$2.216, projected year end balance under Low Cost \$2.221.
Per IV.A2 the opening balance for DI was \$214 billion, projected year end under IC \$218.7 billion, under LC \$221.3 billion

We don’t even have to do the math, that same table shows that under IC the OAS balance was projected to increase by \$192.4 billion, while under LC the number is \$197.6. For DI the equivalent figures are IC \$3.8 billion, LC \$6.4 billion.

So what does Treasury tell us for a mid-year result?: OAS \$2.140 trillion, DI \$220 billion, for a total June 30 OASDI balance of \$2.360 trillion.

Assuming for the moment that income generally comes in evenly between the first six months and the last six months (reasonable enough because it seems to divide seasonal effects pretty evenly (wage people, feel free to fill us in in comments)) how are we doing? Well OAS has gone up by \$117 billion, DI up by \$5 billion. Against a IC projection that would have OAS up by \$96.2 billion and DI up by \$1.9 billion against an LC projection that would have OAS up by \$98.8 billion and DI up by \$3.2 billion.

Well what does this mean? I am not sure, I was hoping you all could tell me. But it continues a pattern. Over the last decade DI has always lagged OAS in that its Trust Fund was projected to run out sooner, something that can be graphically in Figure IV.B3.—Long-Range OASI and DI Trust Fund Ratios [Assets as a percentage of annual expenditures], in the 2008 Report its date of Trust Fund depletion is projected at 2025 under IC. On the other hand look at the result under LC (outcome I).

Conclusion one. DI is smashing through projections just as it did in 2007. While combined OASDI came in modestly ahead of projections that year, all of that was due to DI, the weak Q4 having burned OAS quite badly (it was on track to break projections right through Sept). Conclusion two. OAS delivered 59% of its projected increase by June 30th, DI 263% against IC projections. Under LC projections the numbers work out the same for OAS at 59% and DI at 142%.

Conclusion last. Social Security seems to be weathering the current storm pretty well. If like 2007 we have a really rocky Q4 then the outlook might darken somewhat but for now things are looking good. (Please place math corrections in comments, Because I don’t doubt the possibility. Which is why I give the original links.)

Tags:

## Clap Louder? (WaPo and GDP growth)

This one’s for Brad. The Washington Post’s Neil Irwin should have his license to write about economic news revoked. His lede:

The U.S. economy grew at a healthy pace in the second quarter, the government said today, despite being buffeted by a financial crisis, a deep housing slump, high fuel prices and a weak job market.

Gross domestic product rose at a 1.9 percent inflation-adjusted annual rate in the April through June period, far above what forecasters would have expected just a few months ago.

Compare Bloomberg:

The U.S. economy shrank at the end of 2007 and grew less than forecast in this year’s second quarter, signaling that the country is in worse shape than many investors and analysts had thought…

The economy may weaken further as the temporary boost from tax rebates, which aided a pick-up in gross domestic product last quarter from the previous three months, fades.

U.S. population growth is around 0.9% p.a. So real GDP growth of -0.2%, 0.9%, and 1.9% for the last three quarters implies growth per capita of roughly -1.1%, 0%, and 1%, respectively, with hopes for Q3 not exactly running high. How on earth can a reporter with half a brain call that a “healthy pace,” and an editor let the claim into print?

Added: Here’s an optimistic but informed take from Prof. Hamilton; my concern is that lots of mischief can be made with “apart from the things that were bad, things were pretty good!” arguments.

Update: The current version of the story (12:39 P.M.) replaces “healthy” with “solid,” and adds a “but” paragraph before the “above what forecasters would have expected” bit.

Tags: , ,

## Declaring losses does hardly anything??

Hat tip to James McCarthy who notes:

Still no mark to market – Steve Hsu at Information Processing via Dealbreaker Mortgage– 28 July 08

Mortgage-backed assets with face value of \$30.6B were just sold by Merrill for \$6.7B…but, amazingly, this 80% loss on the securities only gives a kind of upper bound on their value: Merrill had to provide 75% of the financing to the buyer…..

Word on the street is that this financing arrangement isn’t atypical. Securitization warehousers are now paying to move the loans off of their books on to other balance sheets while keeping a large chunk of the risk. What this does is to chop up the write-downs into pieces spread over different entities and different accounting periods – some far enough in the future that the participants can hope the market will recover before they have to realize the loses. Of course the market may not and I doubt if the accounting reflects the contingent risk.

## Defining incentives

Hat tip to Mark Thoma link to Economistmom for this link to a WaPO column in the Human Behavior section by Shankar Vedantam.

Psychologists have long been interested in what happens when people’s internal drives are replaced by external motivations. A host of experiments have shown that when threats and rewards enter the picture, they tend to destroy the inner drives. Paychecks and pink slips might be powerful reasons to get out of bed each day, but they turn out to be surprisingly ineffective — and even counterproductive — in getting people to perform at their best.

More than three decades ago, Edward Deci, a social and personality psychologist at the University of Rochester, found the first experimental evidence of a phenomenon with wide relevance to the way most Americans conduct their personal, professional and social lives.

Deci tracked a bunch of college students who were solving puzzles for fun. He divided them into two groups. One group was allowed to keep solving puzzles as before. People in the other were offered a small financial reward for each puzzle they solved.

The psychologist later evaluated the volunteers: He found that people given a financial incentive were now less interested in solving puzzles on their own time. Although these people had earlier been just as eager as those in the other group, offering an external incentive seemed to kill their internal drive.

“They thought of it as something they really enjoy and like to do, but now they do it in order to get money, and they think of the task as an instrument to get money and not an activity that has value in its own right,” Deci said. “Human beings both want to — and, in a deeper way, need to — feel a sense of being autonomous. When someone else begins to seduce you into behaving with an offer of a reward, it takes away your sense of being autonomous. Now you are doing it for someone else.”

Rewards and punishments guide the lives of most Americans. Young children are given stars for putting away their toys, kids earn a few bucks for mowing the lawn, and teens are told they will be grounded if they get in trouble. For adults, stock options, raises, demotions and firings become different kinds of carrots and sticks.

Beliefs about the utility of rewards and punishments in motivating human behavior are deeply ingrained, and most people don’t know that more than 100 research studies have shown that motivating people in this manner can have the unintentional effect of undermining their internal drives.

The striking thing about the research, said Roland Benabou, an economist at the Woodrow Wilson School of Public and International Affairs at Princeton University, is that it is so starkly at odds with bedrock economic principles.

“A central tenet of economics is that individuals respond to incentives,” Benabou noted in one research study. “For psychologists and sociologists, in contrast, rewards and punishments are often counterproductive, because they undermine intrinsic motivation.”

Many parts of psychology as practiced have abandoned Skinerian models of incentives, so perhaps it is time for economics to do so as well. M&Ms never really worked the way they were expected to anyway.

We have also previously touched on scarcity and found it is not what many expect it to be as well, and came up with some descriptors beyond physical scarcity, to scarcity of capital/profit ratio, to building surplus as soon as stored value begins (the old school heating system image, guaranteed to make an impression on teachers), and finally a caution:

Teaching kids that what exists simply exists without asking them to consider why, or providing answers based in marginalist theory, its subjectivisms and imaginary equilibriums, is essentially no more than indoctrination meant to absolve rather than progress.

How is that handled with undergrads and voters? (Or even 12th graders).

## Tribal Economy

Tribal Economy

There has been references on AngryBear to economic structures, workforce participation and economic justice among tribal/village residents in the past. Informed readers may know that Marx and Engels repeatedly cited Lewis Henry Morgan’s Ancient Societies; another of Morgan’s publications is League of the Haudenosaunee (Iroquois). My mother has previously published an article subtitled “A Native American Looks at Economics,” in PERSPECTIVES ON BUSINESS AND GLOBAL CHANGE; World Business Academy Journal, vol. 10 no. 4, 1996. Here’s a link to her article.

I can contribute more information about this topic, based on our family’s Oneida (Iroquois) heritage. For hundreds of years prior to mass European immigration, the citizens of the Iroquois Confederacy enjoyed peace, leisure and material surplus. Extensive Western documentation of Iroquois prosperity, economic and social structure dates from the mid 17th century. [I like Dr. Barbara Mann’s Iroquoian Women for her summary and critique of these sources. She also has a feminist chapter on Iroquoian economies.]

Dr. Mann asserts the basis of the Iroquois economy can best be described as spiritual. Kinship was recognized, even across species. We all shared the same mother and all of our necessities were gifts from her. The social/political structure which also implemented our economic practices was clan based and our efforts were communal. The Oneida lived in clan-based longhouses, which were overseen by clan mothers-see for example, beginning on p. 156.

The clan mother was responsible, among many tasks, for preserving harmony within the clan. Distribution of clan bounty was guided by the principle, “To each according to need, from each according to ability.” It was well-recognized that undeveloped ability is a source of disquiet. Tribal members were observed in order to gain information about their individual strengths and interests. The pedagogical system had an initial goal of helping each individual understand *themselves as a learner* and a further goal of helping all tribal members to be as open and acquisitive of new information as possible. Intellectual bias was considered to be almost suicidal. Think about that.

The men wove the longhouses and the villages together. Their voting rights (clan affiiation) remained at their mother’s long house. During a marriage, the man moved into his wife’s longhouse. When he hunted, however, it was to feed his sister’s children. The Oneida believed that a marriage benefitted from not having that economic dependency. The sister, in turn, sewed her brother’s clothes and mocassins.

Has this 100% labor force participation, 100% safety net changed? And what has been the force of any change? Well, the longhouse as a housing model has fallen to disuse. The Dawes General Allotment Act of 1887 was specifically targeted at Native communalism. Here’s the author, Senator Henry Dawes, in 1883: “They have got as far as they can go, because they own their land in common. … There is no selfishness, which is at the bottom of civilization.” Recent history included dwindling land base and forced acculturation through adoptions and boarding schools. Currently, though, Oneida fortunes, as those of numerous tribes, are on the rise. This results, again, in shared prosperity. The Oneida Wisconsin, for example, raise beef and crops which are available to tribal members at a discount.
——————

## Oil: A New Pricing Mechanism and the Coming Crunch

Clingendael has released an interesting report regarding the coming oil crisis. (No, we are not quite there yet.) The crisis or crunch is slated for 2010, around the beginning of the next decade, five years earlier than the IEA predicted in 2007 (cf World Energy Outlook 2007).

That crunch will occur, despite some demand destruction and despite weak global economic growth. Perhaps only a severe and prolonged global recession will contain energy prices somewhat.

Compounding our difficulty is the fact that alternate energy sources are not mature enough to provide us the energy we need for continued growth. Indeed, they will not be plentiful soon enough for us to avoid real hardship.

All of the above strikes this writer as old hat, a familiar and depressing old hat at that. What is interesting is how the report deals with the recent spike–along with its subsequent fluctuations.

The writers see a struggle between two modes in establishing the price of oil.

a) The cost of the marginal barrel of supply as determined by the most expensive barrel plus a margin for supply/demand fundamentals and geopolitical risks, driven by open markets in an OECD economic framework and

b) The real User Value of oil–determined by increasingly closed markets (for new reserve exploitation; for bilateral oil trade flows; for refined products), as supported by several of the major OPEC countries and Russia.

The first is how oil has been traditionally priced. Given production, refinery, and transportation costs–each stage tacking on some reasonable profit–, we arrive at the final price, which the writers put at about \$110.

However, with a crunch in the making and with growing global demand, a new way of pricing oil is coming into play.

“Ok, oil-lovers, what is it worth to you?”

Such a question is possible when oil markets are increasingly closed. Additionally and importantly, there are more buyers for that oil–and, of course, fewer sellers.

This new pricing regime will mean that oil producers can meet their “income requirements” through price, not volume. Additionally, oil that can be stored in the ground will only gain in value as we approach crunch time.

What we are watching, then, is a transition period between the two pricing structures: first one dominates; then the other. The recent high prices were, in effect, testing User Value; after all, “weak globalization” has doubled “the consumer base to 1.5. to 2 billion people in a period of less 15 years.” Yet, if globalization were to take deep hold, i.e., China and India’s billions start owning cars, then we would see an impossible strain on present oil production. Oil producers are fully aware of this fact. Another reason a new pricing structure can be tested.

According to the writers, the next IEA report will assert that for 2030, “a new supply/demand outlook” will be “around 100-105 million b/d,” in contrast to the 2007 production of “116 million b/d.” Demand destruction in the U.S. will, of necessity, be around 50-75%.

Despite the Arctic prospect or fields off Brazil–whatever–, present discoveries are not keeping pace with oil fields in decline. The writers go so far as saying there will be “demand rationing” in the U.S.

In newly emerging markets such as China, there is the problem of oil subsidies. Relaxing their subsidies too much–or even beginning to tax oil to contain demand–will obviously bring enormous inflation, smothering the effort “to catch up” industrially with the West.

(Clearly, as U.S. prices continue their bumpy road upward, the U.S. consumer is going to holler louder and louder about the taxes on oil, pointing out that other countries unfairly subsidize prices.)

The writers spend a good deal of the report discussing Sovereign Wealth Funds and the enormous sums of monies some SWE’s are gathering as a result of oil–think Middle East. Money is power; in the case of the Middle East, enormous money is enormous power in the hands of tiny countries ruled by a few families. He who owns the spice…. interesting that Dune is a desert planet. That oil is becoming a closed market makes possible not only a different pricing modality but also a radical shift in wealth. (Poor America, it will never know what hit it.)

In short, the future of oil in the not too distant future does not make easy or pleasant reading.

As I read these kinds of informative reports, I have to wonder where the economists have been…and those who celebrated the coming wonders of globalization. Did anyone bother to check the cupboards for supplies?

## Everything Old is New Again (Space Science Edition)

An article in Wired reminds us that space science can (and should) be relevant to terrestrial issues (*):

There is a new challenge, however, that could ensure NASA remains relevant over its next 50 years: global environmental change, primarily human-induced global warming.

Jonathan Trent of the NASA Ames Green Team, a research group trying to bring NASA’s expertise to bear on energy and environmental problems on Earth, put it poetically.

“We are the crew of a spaceship we don’t understand,” Ames [sic] said. “The radical technology we need is not just for us, but the life forms on Earth with us.”

This seemed oddly familiar. To the way-back machine NYT archives!

WHEN President Bush outlined his vision of America’s future in space last week, Mars and the Moon outshone another initiative that the President said was critical to the space program: a 25-year effort using a new network of satellites to understand how the Earth’s atmosphere, seas and living creatures function as a global system.

Yes, that’s President George H. W. Bush, and the story appeared on July 25, 1989. This was called “Mission to Planet Earth” at the time, though in the Clinton era it became the très-New Democrat “Earth Science Enterprise” and what did those diabolical Clintonistas do? Let’s jump ahead to 1998:

The craft’s surveillance target is not some distant world, but rather the home planet of those who built it. AM-1 is to be the flagship of a new generation of earth satellites called the Earth Observing System, or EOS, which in turn is the centerpiece of what until recently has been called Mission to Planet Earth: a 15-year effort to subject the interlinked workings of the atmosphere, oceans and land surfaces to detailed scrutiny from space.

It should be easy to guess at the gestational difficulties for the project:

As conceived at the start of the 1990’s, EOS was to consist of an elaborate array of six 15-ton satellites, each carrying 12 sensing instruments… to be launched over a 12-year period beginning in 1998. A complementary series of smaller satellites was to be sent into orbit starting somewhat earlier. The cost of the program, including operational expenses, was projected at \$17 billion by 2000 and \$30 billion by 2020.

But the project never found solid support. When Mr. Goldin became the NASA Administrator, he set out to make the space agency’s programs ”smaller, cheaper, faster, better,” and EOS was a prime target of his intended reforms…

[T]he program came under attack from Congressional Republicans who charged that its purpose was to push a global-warming agenda.

EOS survived that challenge, but was redesigned in accordance with Mr. Goldin’s philosophy.

Then comes the other George Bush:

The two-year study by the National Academy of Sciences, released yesterday, determined that NASA’s earth science budget has declined 30 percent since 2000. It stands to fall further as funding shifts to plans for a manned mission to the moon and Mars. The National Oceanic and Atmospheric Administration, meanwhile, has experienced enormous cost overruns and schedule delays with its premier weather and climate mission.

As a result, the panel said, the United States will not have the scientific information it needs in the years ahead to analyze severe storms and changes in Earth’s climate unless programs are restored and funding made available.

“NASA’s budget has taken a major hit at the same time that NOAA’s program has fallen off the rails,” said panel co-chairman Berrien Moore III of the University of New Hampshire. “This combination is very, very disturbing, and it’s coming at the very time that we need the information most.”

After all, it isn’t as if the Bush Administration has ever sought to suppress politically inconvenient information.

(*) Not that there’s anything wrong with space science for its own sake.

Tags: , , ,

## Covered Bonds: The Latest Scam or a Real Rescue

The new game in town is “covered bonds,” Paulson’s latest attempt to rescue financial firms now mired in the toxic swamp they created. How exactly these bonds will work–and whether they will work–is a hot debate. Business Week offers the following description of these new instruments:

A covered bond is kind of bond back by mortgages.

with the following provisions: Banks must hold onto the mortgages, paying the “bondholders out of their own cash flow, not from the proceeds of the mortgages.” Additionally,

Covered bonds are considered safe investments because they must meet numerous standards. The loan-to-value ratio of the mortgages cannot exceed 80%, and borrowers must have documented income, according to the Treasury Dept.’s guidelines. In addition, no more than 20% of the underlying loans can be from one metropolitan area.

The catch is:

In lieu of a law spelling out the requirements of a covered bond, the Treasury and FDIC have issued guidelines. Banks can issue covered bonds with whatever specifications they want, but if they want the government’s stamp of approval—which they presumably will—they will stick to the guidelines.

The devil is always in the details:

• What counts as borrower documentation?
• Why not a law governing requirements?
• What kind of regulatory frame will be in place?

Somehow, guidelines do not do it for me. I wonder why? Are we supposed to trust the bank specifications. Methinks the print will be very fine. And if a bank does indeed say it is following Treasury and FDIC guidelines, just how loose will those guidelines be?

Peter Morici sees the initial problem as one of trust: Why should we trust banks when their compensation schemes encourage:

…bank executives to make risky bets that allow them to profit when things go well and to push the losses on bond and stockholders when things go sour. Upon taking over Merrill Lynch, John Thain increased executive bonuses, but established a risk management scheme. That hasn’t worked.

While I would agree with Morici that it is becoming increasingly difficult to trust the fat cats who always seem to land in the honey even as they shed employees and turn to the government for help, would it not be wise–just once–to put some regulatory teeth–not guidelines–into the whole business?

Paulson continues to admire financial innovation, but so far those who pushed us over the edge have yet to pay a real price. CEO’s hiding behind “too big to fail” should be, by law, required to cough up a goodly portion of their own assets instead of sitting on their golden thrones, requiring the tax payer to foot the entire bill.

## Final collapse of WTO Doha talks

The Center for Economic Policy and Research reports that:

Despite trade ministers’ hopes for a last-minute deal, World Trade Organization (WTO) negotiations collapsed yet again today, and observers at the talks in Geneva say that the failure is not surprising, given the reluctance of India and other developing nations to sacrifice food security measures in the wake of the recent global spike in food prices.

Given President Bush’s lame duck status, negotiators had been called to Geneva to try to push through a last-minute deal before Bush left office. Because negotiators need about six months after a deal on the major issues to complete the details of the agreement, this possibility has now evaporated.

“Given what’s been on the table, no deal is better than a bad deal. A Doha conclusion would have had major negative impacts for workers and farmers in developing countries. The tariff cuts demanded of developing countries would have caused massive job loss, and countries would have lost the ability to protect farmers from dumping, further impoverishing millions on the verge of survival,” said Deborah James, Director of International Programs for the Center for Economic and Policy Research, who has been observing the talks in Geneva.

[1] Kevin P. Gallagher and Timothy A. Wise, Back to the Drawing Board: No Basis for Concluding the Doha Round of Negotiations. Research and Information System for Developing Countries Issue Brief. No. 36, April 2008.
[2] Sandra Polaski, Winners and Losers: Impact of the Doha Round on Developing Countries. Carnegie Endowment for International Peace, March 2006.

No surprises there as the use of bi-lateral agreements increases.

Update: Dani Rodrik at Carnegie writes a nice summary and background.

## McCain Supports Employment Tax Increase

ThinkProgress seems have to Team McCain flip-flopping on whether he would consider a tax rate increase:

As Igor Volsky documents in the Wonk Room, McCain has gone back and forth a number of times on the issue of increasing the payroll tax. The truth is that lifting the current cap is the fairest way to help shore up the finances of Social Security.

Indeed it is telling that John McCain has considered only increases in the payroll tax as he also endorses reductions in tax rates on capital income. But hasn’t this always been the GOP agenda? And even if these rightwingers get their way – no explicit tax rate increases combined with slashes in Social Security benefits – isn’t that a backdoor employment tax increases? After all, we were told in 1983 that the increase in the payroll tax rate was supposed to help fund Social Security benefits for the future. Little did we know – all this Reagan reform would eventually become is just the means for paying for all those reductions in capital income taxation. Now that’s class warfare!