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

What Obama Means when he says "the troops"

Meet the New Boss; Same as the Old Boss.

Andrew Sullivan points out the obvious link from yesterday’s appointment to today’s “reversal“:

It was a point of pride that the Red Cross would never be allowed in the door, Jeff says. This is important because it defied the Geneva Conventions, which require that the Red Cross have access to military prisons. “Once, somebody brought it up with the colonel. ‘Will they ever be allowed in here?’ And he said absolutely not. He had this directly from General McChrystal and the Pentagon that there’s no way that the Red Cross could get in — they won’t have access and they never will. This facility was completely closed off to anybody investigating, even Army investigators.”

People keep telling me that America is a better place since 20 January 2009. As with the claims of economic recovery “right around the corner,” there is precious little evidence.

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Infinite Hooey: PV and Past Participants in Social Security

by Bruce Webb

2007 Report Table IV.B7

2008 Report Table IV.B7

2009 Report Table IV.B7

There are some prominent commentators on Social Security who insist that its future Unfunded Liabilities are in large part the result of over-generosity to past participants, and particularly those who drew benefits from the program in the early years without fully contributing. And who when asked for proof point to Table IV.B7. And yes I do have Jim Glass among others in mind. To see why this is nonsense you can start by comparing the same table from three different years.

A typical retiree in 1980 would have been born in 1915 and entered working life by 1936 and so have been subject to payroll tax for his entire working life. He would also be 93 or 94 this year meaning that he and his predessors drawing benefits back from 1940 are overwhelmingly likely to be in what Social Security calls ‘past participants’ or as we say ‘dead’. Meaning that whatever benefits they drew are now fixed in stone, nothing that can happen between 2008 and 2009 can possibly change that amount. Now we know that in actual dollars all benefits paid out until 1980 totalled $999.6 billion. Now you can play around and try to express that in 2009 dollars but what you can’t do is make the consequent value vary much, it is what it is.

In 2007 the Present Value of Unfunded Obligations for Past and Current Participants was $14.5 trillion
In 2008 the Present Value of Unfunded Obligations for Past and Current Participants was $15.2 trillion
In 2009 the Present Value of Unfunded Obligations for Past and Current Participants was $16.3 trillion

Why does this value grow so much from year to year? Well it is not because the Greatest Generation is magically padding their already collected retirement by close to a $trillion per year, Past Participants share NO part in the blame here. Instead the biggest culprit is inflation, with the 2009 Report 2008 and its costs are in the past and 2083 and its costs are added to the outlook. But other factors enter in as well as can be seen in Table II.D2 from this year’s Report.

Unfunded Liability moves in response to changes in assumptions about events in the FUTURE, it has NOTHING to do with benefits collected in the PAST. You can’t change mortality assumptions for people who are already dead. When we see that of the total -0.30% deterioration that -0.05 was the result of change of valuation period (swapping 2008 for 2083) and -0.11% was for changes in mortality and fertility assumptions while -0.15% was for changes in economic data (i.e. the current recession) it is clear that none of this has to do with some mythical overpayment to the Greatest Generation. I don’t know exactly why even people are smart as Orszag have fallen into this ‘legacy debt’ concept, but certainly explanations about how this works numerically have not been convincing to date.

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Assets of the OAS Trust Fund? or just Phony IOUs?

As always, click on image to enlarge.
People who claim that ‘there is no Trust Fund’ never explain how this works in practice. In reality the two Social Security Trust Funds have portfolios of securities with stated maturities and rates. As these become due each year they are rolled over into new securities in whole or in part. If the particular program is running a cash deficit as the DI (Disability Insurance) has been since 2006 some of those securities are redeemed for cash and the amount of new securities issued to compensate for interest accrued on the Trust Fund are reduced by exactly that amount. This cash transfer did not cause the sky to fall three years ago, in fact like a tree in the woods nobody except a few people at Treasury or SSA even knew it was happening. In the case of OAS it ran a cash surplus in 2008 with the effect that more securities were issued than retired as shown here. In less than ten years OAS like DI before it will have cash needs in excess of cash receipts from taxation and a small part of its accrued interest will be paid out by Treasury in cash rather than in Special Treasuries and this too will not cause the sky to fall, instead it will be just a normal transaction between the Treasury and SSA.

In the context of total transfers in and out of Treasury the day the OAS Trust Fund moves from what CBO calls Primary Surplus to Primary Deficit will barely be a ripple on the huge wave of money going back and forth. Only morons and people trying to fool you claim this event is meaningful. Now it is true that after ten or fifteen years that ripple that started in 2016 MIGHT start getting noticeable and the column on the right starts looking notably smaller than the one on the left which would then be an argument for putting Plan NW into place for 2028. But the notion that we should be panicked because a combined event projected for 2017 now projects for 2016 is just scare-mongering. Because no part of those T-Bills look phony to me.

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a post by coberly


… reveals something rather interesting:

On page 12, it says, “Social Security’s scheduled tax revenue is projected to decline from its current level of about 5.0 percent of GDP, reaching 4.4% by 2083.”

That’s odd… Decline? That should make you wonder: The cost of Social Security is going up, but the tax revenue is declining? How can this be?

“Income from payroll taxes declines generally in relation to GDP in the future because an increasing share of employee compensation is assumed to be
provided in fringe benefits, making wages a shrinking share of GDP.”

In other words, because you and your boss are going to hide your wages from taxes, the taxes you pay will go down by about 12%.

The payroll tax is 12.4%, so if it declines by 12% of that, it will go down about 1.5% of payroll. The employees share would be 0.74% of payroll.

You may recall it was going to cost you about 2.2% of payroll to keep your full Social Security benefit for a longer life expectancy in retirement.

So it turns out a third of that was just to make up for the taxes you avoided by taking your income in “fringe benefits.”

What kind of a game are they playing here?
by coberly

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MISDIRECTION: How They Keep You From Seeing The Good News

a post by coberly

MISDIRECTION: How They Keep You From Seeing The Good News

When you go to a Magic Show, the Magician directs your attention away from what he doesn’t want you to see.

And you go oooh! and aaah! And feel good about being fooled. And happy to have paid your money.

When you read the Trustees’ Report, the magicians direct your attention away from what you need to see.

And you go oogh! and aagh! and don’t know you have been fooled , but you will pay for it when you are old.

The Big Story, according to The Media, is that “Social Security Will Run Out of Money Sooner Than Expected!”

But this is a completely insignificant fact, which we can discuss. The date the Trust Fund runs out has no practical meaning whatsoever.

The Significant Fact is that the Trustees Say (on p 13) that we can pay for Social Security forever with a 3.4% increase in the payroll tax. That means that a 1.7% extra deduction from your paycheck will pay for you to live an average of 7 years (about 30%) Ionger than the people who retired in 1985, the last time the tax rate was set (page 89). And the best news is that you don’t have to take that tax hike all at once. You can take it at half of one tenth of one percent per year. That’s about 35 cents per week per year. And the raises stop in 2030 to give the Trust Fund a chance to run out of money like it was always supposed to. By 2030 you will be making about 25% more than you are today, so you will have lots more dollars left after paying the tax than you have now.

You may need to think about this for awhile before you can understand what it means to you.
by coberly

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Someone whose list of Bad Banks Matches Mine–and Goes Further

Ken Houghton finds someone who is more pessimistic than I am.

Via News, I see that Martin D. Weiss, Ph.D., has come up with a list of Large Banks Likely to Fail:

Seven institutions — JPMorgan Chase & Co., Citigroup, Wells Fargo & Co., Goldman Sachs Group, GMAC LLC, SunTrust Banks, Inc., and Fifth Third Bancorp — are at risk of failure and may have to cut back lending dramatically to stay alive.

Rusty disagrees with me on Fifth Third, which he sees on a daily basis a lot more than I ever did.

I still expect JPMC and Goldman Sachs to survive, and am still trying to figure out why they are on this list while Bank of America and Morgan Stanley “are borderline, meaning they could be at risk of failure with worsening economic or financial conditions and will also have to cut back on lending.”

But the whole thing is worth reading, so long as you don’t have any sharp objects nearby, or are paid in Swiss Francs.

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Reverse Robin Hood applies to banks too

The next time someone tells you that “the banks need help,” just refer them to Barry Ritholtz:

Talk about burying the lead: The Times also noted — in the very last paragraphs — how the big incompetent banks and their very pricey bailouts are screwing these small healthy banks:

“Isn’t that the American way?” [Donald E. Goetz, the president of DeMotte State Bank] says, folding his arms. “Whoever is left standing, whoever was prudent, is always the one who has to pick up the pieces.”

The Geithner Put: making American banking worse, little by little and piece by piece.

Which means, Brad, that the total cost of the bailout will be higher than it would be if we just pulled some plugs now.

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Another Cost of Low Prices

In the matter of externalities, accusing political enemies of being terrorists even after they are cleared of all wrongdoing is a feature of having economic power.*

Good thing it’s not being done by a country G-Mu dislikes, or we’d hear about this at Marginal Revolution. But they’re too busy arguing that the Greenspan Commission were liars with malice aforethought.

*Not that the United States would ever do that.

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Budgets: Obama vs Reagan

By Spencer

The web is full of comments on the CBO projections of the Obama budget.

So I though a slightly different analysis might be appreciated.

Most bloggers are comparing the Obama budget to the Bush budget.

But I suspect a comparison to the Reagan budget would be more meaningful in that both Obama and Reagan began their administrations with similar sized recessions while the Bush recession was much less severe.

The main difference between the Reagan and the Obama budgets is that Obama is spending very large sums on bailing out the banks. If the bank bailouts are backed out of the Obama budget the recession deficits in the first years under Obama and Reagan are about the same.

Most importantly, after the bank bailouts end in 2010 the Reagan and Obama budgets are almost exactly the same size in relationship to the economy. Revenues in both cases are 17.9% of GDP while outlays and the deficits defer by only about a quarter of a percentage point of GDP — well within any reasonable margin of error. Maybe most importantly, according to OMB in the out years of the Obama budget the deficit falls to under 3% of GDP, a goal Reagan did not achieve.

Remember, Reagan proved that deficits do not matter.

So the key question is what is the important differences between the Obama and Reagan budget that I seem to be missing. At least according to such people as Larry Kudlow or Greg Mankiw

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My Job Application Letter

Dear Philadelphia Inquirer,

I also am a native of the City of Brotherly Love. The last two firms at which I have worked have lost billions of dollars.

While I admit that—unlike your latest columnist—I am not responsible for that happening, I believe this qualifies me to write a monthly column for you. While I understand that you must keep the amount you pay for the column secret from the workers who took $25/week pay cuts in an effort to save the paper, I believe that we can quickly agree to an amount in the neighborhood of the $1,750 you pay Rick Santorum, whose Philadelphia ties are much more suspect than mine.

I will, of course, write columns for you specifying that the current financial system is in perfect order, functioning precisely as it should. This should give my column the same truthiness that Mr. Santorum and your latest columnist bring to your august institution, and “promote further discourse.”

You can reach me via this blog. I look forward to receiving a contract.


Ken Houghton

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