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

A representative basket of currencies

rdan

Mark Thoma at Economist’s View offers a look at Jeff Sachs (in Scientific American) notions of the correctness of a ‘global’ basket of currencies to be used as a substitute for the US dollar.

China has now proposed that … nations peg their currencies to a representative basket of others rather than to the dollar alone. … U.S. monetary policy would accordingly lose its excessive global influence…

The U.S. response to the Chinese proposal was revealing. Treasury Secretary Timothy Geithner initially described himself as open to exploring the idea; his candor quickly caused the dollar to weaken in value—which it needs to do for the good of the U.S. economy. That weakening, however, led Geithner to reverse himself…

Geithner’s first reaction was right. The Chinese proposal requires study but seems consistent with the long-term shift to a more balanced world economy in which the U.S. plays a monetary role more coequal with Europe and Asia. No change of global monetary system will happen abruptly… We will probably move over time to a world of greater monetary cooperation within Asia, a rising role for the Chinese yuan, and greater symmetry in overall world monetary and financial relations.

Given how the WTO rules were developed, allowing freer flow of capital but not much else, how are we to view this sort of thing….good or bad? And will the new order happen with the little guy in mind?

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McMegan, Discrimination, and Inappropriate Loans

Susan of Texas has an immortal post on the housing crisis, McMegan’s ratiocination, and the persistence of ignorant memes. The money quote:

McArdle doesn’t refute facts, she hen-pecks at the methods used to gather information. That way she doesn’t actually have to prove anything, she just casts enough aspersions on the data to confuse the issue. When source after source after source after source brings up a problem, dismissing it out of hand begins to look like bigotry and callous indifference instead of honest disagreement. [links from original]

Go Read the Whole Thing.*

(Cross-posted and expanded from Marginal Utility)

*Yes, rdan, this is another blog we’ve been keeping from you.

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When Strawmen Collide: Biggs v Lind

by Bruce Webb

Michael Lind wrote an interesting article for Salon that was picked up by the New America Foundation under the snappy title Let’s Cut Social Security to Pay for Banker Bailouts!. In it he outlines arguments that will be familiar to followers of Angry Bear’s Social Security coverage, notably pointing out the ‘message’ campaign outlined by Stuart Butler and Peter Germanis in 1983 with the publication of ‘Social Security Reform: Achieving a ‘Leninist’ Strategy’, something discussed here last May.What does Lenin have to do with it? Well this caused Andrew Biggs to strike back at what Biggs calls “lefty claptrap” in his own article The Strawmen of Social Security. In the course of this he refers us to this SSA Actuarial Note with its own snappy title INTERNAL REAL RATES OF RETURN UNDER THE OASDI PROGRAM FOR HYPOTHETICAL WORKERS He summarizes it as follows:

First, fairness: Social Security’s treatment of different generations of Americans is declining, such that those who retire in the near future will receive much higher benefits relative to their taxes than those who retire later. For instance, this study from the Social Security Administration shows that a typical couple retiring today will receive around a 2.3 percent rate of return from Social Security, while a typical couple retiring in 2050 will receive around a 1.7 percent return. Compounded over a full career of paying taxes, these differences amount to a lot. By acting today, we can lower returns a little for near-retirees so we do not need to hit future retirees as hard.

Is that a fair summary of the Note? Well no, that is in fact a strawman so flimsy that you don’t know if it will burn up or simply blow away. For example what the hell does ‘typical’ mean in context?

To answer that we need to look at the data tables. Reproduced below the fold.



So where is our typical couple? Well you won’t find them, in fact the whole point of the study was to see how Social Security performs for all couples across generations. And it turns out that depends a lot on where that couple is situated. For example for our hypothetical couple retiring today if either husband or wife have incomes classified as ‘low’ or ‘very’ low their Internal Real Rate of return ranges from 3.0 to 4.6%. In order to get a return at Biggs’ level you would have to have a combination of ‘medium’ and ‘medium’. Now while it is possible that medium + medium = median = mean and so ‘typical’ is how Biggs read the situation. But aan examination of Table A shows that ‘medium’ is defined as $38,651 meaning a household wage income of $77 thousand which is significantly above median household income. For Biggs it seems that ‘typical’ means comfortably middle class (and yes, yes, yes I know people say you can’t live in LA or NY on less than $300,000, that doesn’t make them ‘typical’).

So when I look at these tables I take away a very different lesson. Social Security has been a really good deal for those making under the median and a great deal for those nearer the bottom. On the other hand if you or your spouse or both have ‘high’ incomes defined as $62 thousand a year it is a only kinda good deal. If you restrict yourself to this narrow measure. But as the authors of the actual note tell us (bolding mine):

Because the Social Security program has operated on a largely pay-as-you-go (PAYGO) basis, the level of contributions of each generation of workers is not directly related to the benefits they will receive. Under a PAYGO plan, benefits are not based on the accumulation of individual contributions, as in a defined contribution plan, nor are annual contributions determined based on scheduled future benefits of current workers and beneficiaries, as in an advance-funded defined benefit plan.
Rather, the combined amount of contributions from workers and employers needed to fund the system is largely determined by the total amount of benefits to be paid for any year. Thus, internal rates of return for a PAYGO-financed benefit program are only theoretical indicators of the apparent value for contributions on an individual or cohort basis. On this
basis, with administrative expenses of less than 1 percent of total program cost, the real value of OASDI benefits is extraordinarily high.
Internal rate of return does not reflect the full value of insurance in reducing the risk for extreme outcomes, such as death or disability at very young ages or survival to very old ages. In addition, calculations of the internal rate of return from Social Security benefits are not fully adequate for making comparisons with private-sector plans, since many features of Social Security benefits are not typically available in private-sector plans. Examples include guaranteed cost-of-living adjustments
based on the Consumer Price Index, and benefits for life in the event of disability. However, internal rates of return are of value for exploring the relative value of benefits provided across generations and types of workers.

Oh and that future ‘typical’ couple retiring in 2050 who are only getting 1.7% per Biggs? Turns out that includes only those couples whose incomes BOTH score as ‘high’. If you both score ‘very low’? The new retired couple of today? 4.61%. The trampled on retirees of 2050? 4.54%. Man the intergenerational inequity just screams out here. Not.

So that funny smell is some combination of freshly picked cherries and straw burning up.

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"Banks Just Don’t Go Under"

Did no one in Georgia pay attention in the 1980s?

It’s not just reputations that are on the line. Board members, also known as directors, could be held personally liable for a bank’s demise.

Experts are expecting a wave of lawsuits against directors to be filed in Georgia over the next year or two as regulators and shareholders seek someone to blame — and someone to pay — for the state’s bank failures.

Eleven Georgia banks have failed in the past eight months, the most in the country, and experts say many more troubled institutions are in danger of being shut down.

But recovery, of course, is just around the corner.

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CIA briefings question is clever

rdan

Check 0:25 for information on Bob Graham’s briefing
Check 2:50 for information on WMD briefing at about the same time
Check 3:50 for information on Bob Graham’s now notable notebook system and inaccuracies in briefing dates (3 of 4 mentioned to him never occurred on those dates).

A better question to pursue is not to discuss “the CIA”, but which individuals filtered the information and the timing of the information, as well as what was discussed. If the “CIA” gets briefing dates wrong, is that significant? Would individuals in the CIA filter information to Congress?: of course. Is the RNC frame actually important?: Only if there were crimes determined to have happened…let us start with Yoo and company, and work steadily from there.

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More than numbers and sanctity of bonus contracts

rdan

Middle aged men and pensions in the industries. Much wealth has vanished…I notice a lot of apathy among employees such as teachers whose state plans have not declared losses yet except generally. The MA plan declared a 29% “loss” in value, but I have yet to see a clear statement about what the “loss” implies, how much is perhaps permanent as in owning worthless paper, and how current revenue can handle the next few years of retirements of boomers. Can anyone help out in this evaluation?

All over the country, pensions guaranteed by union-negotiated contracts are vanishing into thin air, casualties of bankruptcy, economic upheaval, and flawed legislation. Pensions have turned to dust at airlines (United, Delta), steel companies (Bethlehem), textile makers, and even electronics companies like Polaroid. The Big Three and their suppliers may roll back pension plans that support hundreds of thousands of retirees and their families. Entire towns have seen their economic base disappear; in Kannapolis, North Carolina, home to the textile maker Pillowtex Corporation, 23,000 private pensions were wiped out overnight when the company went bankrupt in 2003.

For workers whose pensions vanish, the only safety net is the federal Pension Benefit Guaranty Corporation, an insurance fund financed by employer premiums. Today, 1.3 million workers rely on the federal government to pay pensions that their employers no longer can or will pay; the number has more than doubled in the past eight years, and it keeps rising. The pbgc, its investments battered by the stock market crash, is now deep in the red, with a deficit of more than $11 billion instead of the $9.7 billion surplus it had in 2000.

But there is a growing population of workers whom the pbgc can’t fully compensate: those in heavy-labor industries, where bodies wear out long before the traditional retirement age, and where retirement typically starts in a worker’s mid-50s. When these companies bail on their pensions, the pbgc often offers significantly less. It also doesn’t cover health insurance, an essential benefit to workers who don’t qualify for Medicare and who often have children still at home.

“It’s a frightful societal development,” says Bill Brandt, a Chicago-based financial consultant who has served as a trustee during numerous bankruptcy proceedings. Between the disappearing pensions, slim prospects for new jobs, and vanished medical benefits, middle-aged workers like Hazel “will discover it’s the beginning of a very sordid story for the rest of their lives.”

In Longview, retirement promises were only the last to be broken. In 2000, the world’s largest aluminum producer, Alcoa, Inc. (then run by Paul O’Neill, whom George W. Bush would soon appoint as treasury secretary), had bought out the foundry’s owner, Reynolds Metals. But Alcoa quickly found itself embroiled in an antitrust battle, which required it to sell part of its stake in Reynolds; it also realized that the Longview plant used obsolete, polluting technology—”we were dinosaurs in the mud,” says one ex-worker bitterly—and that the plant was full of men whose pension and health ious were coming due.

(Bolding is mine.)

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DI Trigger: Fixing what is broken in Social Security

post by Bruce Webb data by Dale Coberly

For those following along. Recent numbers from CBO and now from Social Security show that the DI (Disability Insurance) component of Social Security is officially broken, it failed the test for Short Term Actuarial Balance last year. And when combined with the OAS component brought Trust Fund depletion forward by four years from 2041 to 2037. But on inspection only about six months of that was the direct result of a revenue dip on the OAS (Old Age/Survivors) side, if the economy recovers along the lines projected by OMB OAS may well be fine long term. So we propose fixing DI, which is broken, and leaving OAS alone until it too trips a trigger for action. If it ever does.

DI Trigger: Google Spreadsheet

0.2% increase in 2010 plus another 0.1% in 2012 plus another 0.1% in 2045 sends DI through the 75 year window with a Trust Fund Ratio of 159. Assuming the employer/employee split this means the average laborer earning $12.50/hour would have to come up with a whopping 50 cents a week to ensure that his disability benefits were no longer at risk.

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