From the article:
China is heading for a confrontation next week when finance ministers and central bankers of the Group of Seven industrialized nations press Chinese leaders to loosen the connection of about 8.3 yuan to the dollar.
Stay tuned.
January 2005 Archives
Alan has been testing the new site for a couple weeks, and today is the official rollout to coincide with the anniversary of Kansas's entry into the union.
For those of you who don't know Alan or his blog, let me fill you in. Alan and I went to college together in the early '90s. He edited the school newspaper; I worked in the college TV studio and was executive producer for our newsmagazine show. He was a DJ at the college radio station; I was a guest DJ once in a while. Our interest in media and politics was matched only by our appetite for $4.25 pizza (the best value in town at the time).
He's a Minnesota native who transplanted to Kansas and now covers Kansas issues out in Washington DC for Knight-Ridder. The "Oz" in Ozblog is appropriate--he's not in Kansas anymore! The content of his blog is mostly political, through the eyes of a beltway reporter. But don't be surprised to see some discussion of pop culture. Now that he's getting the blog going again, I expect to be linking to it frequently.
We started blogging at roughly the same time. He was doing it for his employer at first--for the Democratic and Republican conventions. I had been thinking about starting a blog for a while. When I saw him doing it, I decided to take the plunge too.
Today's post is on the Boeing deal with China.
Congrats on the new site, Alan!
Real GDP grew at an annual rate of 3.1% in the 4th quarther of 2004 according to the Bureau of Economic Analysis. Press release here. This is lower than than was expected and down about a point from the 4% rate in the 3rd quarter.
The street was expecting about 3.5%, and forecasts were for even lower in 2005Q1. Here's a link to a St. Louis Fed article that explains why. Business economists and forecasters have been concerned about investment for months now. In November, the forecasters were looking at 3.7% for the 4th quarter with about a 3 point drop in the growth of business investment (from 13 to 10%). By this week, the expectations had diminished further.
From the same St. Louis publication comes this chart which I look for every quarter and find extremely useful for visualizing the components of GDP and whether they are contributing to growth or acting as a drag on growth. (Click to enlarge.)
It is clear that the slowdown in investment (10.3% growth for nonresidential fixed investment, down from 13%) is partly to blame, but look at exports. Exports suffered their biggest decline in 2 years and represented a negative contribution to GDP growth. This Reuters article mentions the trade deficit, but not exports specifically. (Note: Macroblog links to another article that does.) Imports increased significantly, but the growth rate was well within its normal range, especially this early in an expansion. As Dave at macroblog points out, the export news isn't much of a surprise, but the chart shows that it makes a difference. PGL, commenting at macroblog, mentions that government spending grew little, and again the chart bears out the tiny contribution to overall growth.
The Reuters piece also tells us that Treasuries rose on the news, bringing the yield down to 4.14% from 4.22%. Will this have any impact on the FOMC meeting next week? The IEM seems to think not. The current price of the "up" contract is still over 98 cents. The price of the "up" contract for March is close to 93 cents.
Also, from macroblog, a good thing to keep in mind:
Furthermore, there is this reminder from the Commerce department report:The Bureau emphasized that the fourth-quarter "advance" estimates are based on source data that are incomplete or subject to further revision by the source agency ... The fourth-quarter "preliminary" estimates, based on more comprehensive data, will be released on February 25, 2005.
From the same St. Louis Fed publication referenced above (National Economic Trends), we have this:
It's true that lately, the final and annual revisions have added a few tenths to the preliminary estimate. (Update: That should be advance and preliminary estimates.)
Angry Bear reaches back into the archives for an idea he had about a year ago.
The idea:
Here's a proposal I'd like to see analyzed: means-tested matches, on a sliding scale, to Roth and Traditional IRA contributions, with EITC recipients getting some amount match-free.
And his comment today:
Amidst all of the talk over privatization, I've yet to hear much along these lines. But this is a form of "ownership society" I could support -- as long as (1) it is in addition to Social Security, (2) it is funded out of the general fund and not Social Security taxes, and (3) it is funded in a revenue-neutral fashion by, e.g., partially reinstating the estate tax.
I'm inclined to think that this sort of thing could turn out to be a little expensive, and if it were implemented I think there would eventually be a discussion about reducing Social Security benefits as people increasingly rely on these accounts.
But I'll agree with him on one thing. I would like to see it analyzed.
...I checked Yoni Cohen's blog and found this:
All the games, all live, all March.
With apologies to Howard Dean... YEEAAAHHH!!!
Paul Krugman says what many of us are thinking.
The last name one often hears is Ben Bernanke, currently a member of the Fed's Board of Governors. (Before going to the Fed, Mr. Bernanke was chairman of the Princeton economics department, where I'm on the faculty.) If Mr. Bernanke were appointed directly from his current Fed position to the chairmanship, there would be general acclaim. But he may soon move to the Council of Economic Advisers. Why?
Surely it's not because this administration, with its disdain for technical expertise in all fields, wants his advice. I hope I'm wrong, but my guess is that what's intended for Mr. Bernanke is a form of hazing: he will be expected to prove his loyalty by defending the indefensible and saying things he knows aren't true.
That might seem a tolerable price to pay for the Fed chairmanship - but a year of it might well make Mr. Bernanke damaged goods from the point of view of the markets.
It's a dilemma. I don't have any sympathy for the administration's perplexity. But I do wish Mr. Bernanke the best of luck, and hope he knows what he's doing.
I wish him the best of luck too. It is a dilemma. "Defending the indefensible" is a little strong for me, but like I said recently, jumping directly from the CEA to the Fed would make me nervous.
Back in 1998, Timothy Cogley at the San Francisco Fed described a transition to a fully funded system. When I have time, I might compare and contrast this with the President's plan or with my ideal plan. In this short "weekly letter" format, Cogley leaves out some of the details, but he does indicate that equities would be part of the system. Something along these lines could be workable, even though there are still a lot of blanks to fill in. More on this later. In the meantime, study your (recent) history.
One of America's foremost architects is dead at the age of 98. He designed the Crystal Cathedral and so many other buildings too numerous to mention. What most people will not know is that he designed the Civic Center in Peoria, IL. His amazing use of glass is evident in many of his buildings throughout the world.
Found via Marginal Revolution
Phil at Market Power tells it like it is.
PGL, whose posts I frequently read at Angry Bear, was kind enough to read my blog and comment on my last Social Security post. This weekend, I was preoccupied with a combination of work and college basketball, but I have been meaning take this up again. You can read the original post, with the comment here.
Basically, my point is that if bonds (like TIPS) were available for people to put into their private accounts, they probably would. Private accounts would become diversified. Then, Krugman's argument that there would have to be some fool out there willing to sell stocks to those private accounts loses some of its bite.
PGL writes that if people already have balanced portfolios, including the bonds implicit in the Trust Fund and their 401(k)s and they suddenly receive the Trust Fund, they will not buy stocks. The implication is that they would buy bonds, effectively replacing the bonds in the Trust Fund and keeping their risk/return ratio the same.
Our logic is pretty much the same. If Social Security was fully funded, I would absolutely 100% agree. But it's not. So I don't. Not 100% anyway. I have to ask myself this question. Suppose the government gave me a $1000 refund on my FICA tax for this year and offered me two options. 1) Give it back to Social Security and forget the whole thing ever happened or 2) buy a $1000 government bond (TIPS, so I don't have to worry about inflation) and keep rolling it over until I retire.
I choose door number 2. In a heartbeat. In other words, I don't think that the bonds implicit in the Trust Fund are the same as a bond in my hand (or my private account). If I did think that they were the same, I wouldn't care--option 1 and option 2 would be equivalent. (UPDATE/CLARIFICATION: It's not by a wide margin that I choose door number 2, but I would choose it. The implication that has for PGL's comment is that while I don't agree 100%, I think he's close. Close enough that there should be more discussion on this point.)
All of this makes me think that perhaps the best fix for Social Security would be a very gradual transition to a fully funded system restricted to holding government bonds. The outcome of a pay-as-you-go system like we have is determined by demographics and Congress. The former we have a fairly good handle on; the latter is unpredictable. After all, Congress switched from price indexing to wage indexing in 1977. Bush wants to switch us back. Both represent efforts to curb the growth of benefits (first in a high inflation environment, second in a low inflation environment). Nothing says they couldn't change it again, or do something else. Pay-as-you-go encourages both political gamesmanship and sloppy government accounting.
Ok. That said, the debate is heating up. I'm generally pretty open to well thought out ideas for privatization (though I do not endorse any specific proposals yet). And I think the wage/price indexing debate should be kept separate and thought out very carefully before we do anything. I realize that separating the two issues might make it harder to enact the reform that the Bush administration seems to want. (And I accept that.)
And because I think a good debate is important, I am grateful for PGL's comment, and for his recent posts at Angry Bear here and here. Also deserving mention are posts by Angry Bear and The Lowest Deep. The last of these is worth a careful look if you are really into this debate.
Brad Setser has some insights.
Personally, I began thinking Bernanke had an inside track shortly after he was appointed to the Board. Lately, however, this has been a much harder race to handicap.
R. Glenn Hubbard has been the latest name thought by some to be a frontrunner. Martin Feldstein could face a tough fight. John Taylor appear to be out of the running according to the New York Times. (Pity.)
Setser is decidedly cool on Hubbard. I understand. I would be concerned about the appearance of this being a political appointment. (I'm a realist, I know that there's a political element, but I'd like a little effort to put some distance between the White House and the Eccles Building.) If any president appointed such a recent CEA chair, it would raise questions.
In the end, I think Hubbard would be confirmed if he were to be appointed. (Though I think the hearings would be exciting... scratch that, the hearings will be exciting no matter who gets appointed. They should sell tickets for this one.) Actually, I think any of the frontrunners would be confirmed, but Bush needs to think this one through very carefully. Like it or not, Bush's fiscal policy will be on trial at those hearings. The appointee must be able to (1) articulate that he (or she) would maintain the current level of independence at the Fed and be (2) credible when saying it.
Anyone can do the first part. It's the second part that will make all the difference.
We haven't heard the last about this.
The WSU Shockers, who are quickly becoming the big story of the Missouri Valley Conference, won again. 65-57 over Northern Iowa. There is presently a log-jam in the middle of the conference, making the upcoming Creighton/Bradley game fairly important.
Could the Valley place three teams in the NCAA and three in the NIT? Commissioner Doug Elgin thinks its possible,
"I think we have a legitimate shot at three (in the NCAA) and possibly six teams in the postseason," said Elgin, referring to the NIT.
Hat tip: yoco
Surprisingly, I could see a scenario where SIU and WSU both make it. Then, if a team like Illinois State, Bradley, Creighton, or UNI could nearly run the table from this point, they would have a chance... but those four will have to sort themselves out to see who has what it takes.
But getting the three in the NIT (presumably three of the four mentioned above, plus maybe Evansville)... that is harder to see.
You have to admit though, it has been a good year so far, no matter whether we get two or three teams into the tournament (and at this point, it's hard to imagine only getting one).
The Shockers are for real. Believe it.
Yoni Cohen dug up the reason the battle for the top of the MVC was not on TV.
He also posts a 40 point college basketball week in review. Look at points 4 and 13 for the MVC. Illinois is mentioned several times, including number 1 on his list.
I am too young to remember the best of Carson's career, but I've seen many of the highlights on various specials over the years. Love the animal bits. One of my favorite bits of all time was the Copper Clapper Caper with Jack Webb.
Concerning the coverage on the cable channels tonight: I find it sad that the younger hosts on all of the channels (not singling anyone out in particular) have no skill at interviewing the truly great icons of showbusiness (Merv Griffin, Rich Little, Mickey Rooney, etc.) Today's anchors are most at home interviewing politicians with no personality or entertainers promoting their movie. I know what their problem is: they don't listen to the person they are interviewing. They've never had to listen before.
Ironic, since that's one of the things that set Carson apart from the talk show crowd.
Ozblog has been retooling his site. The new site with a new address should be unveiled next Saturday.
Looking forward to it!
Oh, and by the way, the paper he writes for is in Wichita. Did I mention that they won tonight?
Via 56572:
10 great places to revel in cinematic grandeur
On their list is the Fargo Theatre. I toured this magnificent gem shortly after it was restored to the way it looked in the '30s. It is a beauty in every sense of the word.
Here's what the USA Today said:
"The snow outside is white, but the delightful Art Deco/Moderne interior of this theater, featuring multicolored Deco mirrors and mahogany wood accents, shines in the blue-neon splendor of the 1937 remodeling. The region's leading art-house cinema has highlights that include silent-movie nights with the Mighty Wurlitzer organ." 701-239-8385; fargotheatre.org.
And here is one that I did not know of, but would like to visit. I've been through the town, but don't recall the theatre--the Watts Theatre in Osage, Iowa.
" 'Your key to Watts of entertainment, Watts of comfort ...' the opening program promised. After 28 years in the good care of Jim and Millie Watts, it is run today by Robert Williams and his family, who maintain this 1950s showcase. Recently, the son of the man who installed the original neon marquee restored it." 800-509-2887; wattstheatre.com.
Also in 56572's stack of links today is this one for lovers of Fargo (the city, not the movie).
Scroll down further and he has pictures of "sun dogs" or parhelia. We don't see those much in Illinois. I miss them.
Here are the scores of the games I mentioned in last night's post:
ISU 82
Creighton 77 (OT)
UNI 65
Bradley 71
And...
SIU 56
WSU 58
Unfortunately, this was the one game of the three that was NOT televised in Peoria.
In college hoops this weekend, Southern Illinois travels to Wichita. The two schools have one loss between them. WSU has really improved in the last few years. Sadly, I don't think the game is on TV.
Practically the rest of the conference is on TV though. UNI travels to Bradley for what might be a decent game. UNI is right behind SIU and WSU in 3rd place. The home team is further back, but always tough at home. Creighton and Illinois State are in 4th and 5th place, respectively.
All of this makes Saturday perhaps the hottest competition that the MVC will see in a single day all season. Any of these could be conference tournament matchups.
Yoni Cohen asked his readers what team could be first round spoiler this March. UNI was a popular choice. If they make the tournament (which would require winning the conference tourney), I would agree. SIU has a good chance of making it even if they don't win the conference tournament, but I don't think it would be an upset if they won in the first round either. WSU has a tough week ahead. They travel to UNI in a few days in what by then could be a battle for 2nd place. A good showing both days and I'd say that WSU could be the spoiler. We'll see.
Krugman in today's New York Times. Here's the core of his argument.
The whole scheme ignores the most basic principle of economics: there is no free lunch.
There are several ways to explain why this particular lunch isn't free, but the clearest comes from Michael Kinsley, editorial and opinion editor of The Los Angeles Times. He points out that the math of Bush-style privatization works only if you assume both that stocks are a much better investment than government bonds and that somebody out there in the private sector will nonetheless sell those private accounts lots of stocks while buying lots of government bonds.
So privatizers are in effect asserting that politicians are smart - they know that stocks are a much better investment than bonds - while private investors are stupid, and will swap their valuable stocks for much less valuable government bonds. Isn't such an assertion very peculiar coming from people who claim to trust markets?
There's a pattern emerging here. Like Roger Lowenstein, Krugman is appealing to the argument that Bush-style privatization involves giving up government bonds to pick up stocks. Krugman is simply looking at the other side of the transaction, wondering if there is anyone out there stupid enough to give up the stocks and buy the less valuable bonds.
Remember, the Social Security "trust fund" owns the bonds, individuals don't. So don't be fooled by the wording. Krugman, of course, knows this. What he's really worried about is the impact on government finance when the trust fund's demand for bonds gets smaller. (You can say this a number of ways--the "cost of the transition to privatization" for example.) This has been a common theme of Krugman's recent columns, and this is just another way of putting it. But at the heart of the matter, this is as much a political problem as an economic one.
The whole discussion ignores the fact that prices will adjust.
Consider this thought experiment. There is a private investor (call him a market maker or a broker, if you want) who holds a stock and bond portfolio he thinks is optimal. He is just indifferent between buying stocks and bonds at current prices.
Then, privatization happens. Workers want to buy stocks to put into their individual accounts. Simultaneously, the trust fund reduces its demand for bonds. Our private investor (or broker) helps the market to clear, selling the stocks for a higher price to be compensated for mopping up the excess supply of bonds (whose price has fallen).
Does the story end here? Not necessarily. If the price of stocks goes up too high the workers might not want to buy as many. Those workers might even want to buy some bonds (at lower prices the bond yields have gone up). The worker's portfolio might even start to resemble that of a well diversified investor.
Am I oversimplifying? Maybe a little. But I maintain that a lot of the concerns that people have about privatization would be less of a problem if workers could hold stocks and bonds in their individual accounts.
We definitely have to get away from this stock vs. bond comparison. Currently, you don't hold the bonds, the governement sells them to itself. How the government will deal with a little less demand from itself is a question that will have to be answered someday even without privatization. Wouldn't it be better to try to figure that out gradually over time when there is plenty of time and we're not at a crisis point?
UPDATE: Brad DeLong also thinks Krugman is too harsh, for somewhat different reasons. And he's with me on diversified portfolios. DeLong concludes:
The problem is that bad portfolio choice and administrative costs can easily eat up all of those gains. Private accounts should be placed in well-diversified portfolios, should not be altered in response to fads, and should be administered at extremely low management fees. Thus it is with a sinking feeling that I learn that Fidelity Investments thinks it has a dog in the private accounts fight. The kind of private accounts that raise Fidelity's stock price--and thus the private accounts that the Bush political machine has told inside supporters will be coming--are not the kind of private accounts we need.
This brings up an important question that has received scant attention (so far we've just been attacking or defending the very idea of privatization). Who will run the accounts? I hope it's more than Fidelity. I hope there is some independent oversight. I hope, I hope...
Point taken.
Via Tyler Cowen at Marginal Revolution:
One proposal for social security reform involves heavy government investment in equity markets. In a previous post, I questioned how much this would capture in the way of superior returns. My second worry is whether such a scheme would avoid politicization. After all, can we trust government as a large shareholder? Will government start controlling corporations for short-term political gain? Should our government have owned Enron and Philip Morris?
Brad DeLong has suggested government equity ownership along the lines of the Federal Reserve. An impartial panel of experts would make decisions concerning ownership, voting rights, and portfolio investments.
He then goes on to list his concerns.
So... Does anyone remember how Social Security reform movement fizzled out last time?
Brief synopsis: Republicans and some Democrats (most notably Daniel Patrick Moynihan and Bob Kerrey) began looking for a way to shore up Social Security. Partial privatization and individual accounts were gaining popularity. Being more worried about the deficit, Clinton was against this at first. But, as the late 90s arrived and the deficit became a memory, Clinton (and Gore) reversed course somewhat. Towards the end of his presidency, Clinton was actually in favor of a proposal to invest the Social Security "trust fund" in the stock market. No private accounts, just let the government invest in the stock market.
The concerns voiced by many Republicans and assorted other free marketers then were much like those that Tyler Cowen voices in his post today.
Was Clinton's embrace of that type of reform a clever attempt to muddy the waters and derail the whole thing? You decide. It happened pretty late in his term. And if Gore had won in 2000, he never would have gone through with it. Anyway, if that was the idea, it worked. Gore had a little explaining to do when he ran for president and advocated a "lock box" but let go of the idea of investing in the stock market. But in the end, I don't think that's what hurt him.
If there is a serious proposal on the table to let the government hold equities as a part of Social Security reform, there is a very real possibility of history repeating itself. This bears careful watching.
Links to individual posts were cutting off the titles. I have fixed the problem. Link to individual posts to your heart's content!
Once more for the record, I don't think that Social Security is in "crisis." I've said so before. However, the system will need some kind of adjustment in the next few decades. Almost no one disputes that.
So wouldn't it be nice to take prudent steps now that might have a long run payoff? (One doesn't have to think that the system is in crisis to agree to that.) I'm not sure that the plan that is being discussed is exactly what I want. My ideal plan would probably be more cautious in some ways and more daring in others. I would just like to preserve the insurance aspect of Social Security while improving the rate of return to younger workers and leaving the return to retired (and nearly retired) people unharmed.
But for now, chew on this NY Times Magazine article by Roger Lowenstein.
Even though I disagree with much of it, and it has some problems (see below). I did learn a thing or two. Read it, but read it critically.
Here's an amusing part, even though it hurt a bit:
Politicians and other commentators tend to speak about these long-range trends, or at least about Social Security's finances, with an air of precision. This is almost amusing, since few economists can predict the swings in the federal budget even a year in advance.
I pointed out in an op-ed a few years ago that the cumulative forecast error in the federal budget from about 1997 to 2001 (based on a 1997 forecast) was almost half as large as the annual budget itself. The difference between the Social Security Administration's optimistic and pessimistic forecasts can be almost as bad. Forecasting is hard. We all know that. That shouldn't stop us from trying, though.
Then there's this:
Conservative economists say the figure [how many people would be below the poverty line if they didn't have Social Security] is irrelevant: if Social Security didn't exist, people would save more. This may be true of economists, but what about the rest of us? The argument illustrates the ideological agenda of those who favor privatization: they want to change people's behavior.
That paragraph is confused. Start at the end. Those who favor privatization want to change people's behavior. (Imagine! I mean, certainly no other policy advocate ever wanted to (gulp!) change behavior!) But... the only people who would save more if Social Security didn't exist would be the economists. And yet that doesn't stop policymakers from trying to coerce the non-economists to conform to their desired behavior.
That just doesn't make sense.
Mr. Lowenstein has a low opinion of our (the economists') ability to forecast, but apparently he thinks we would be the only ones smart enough to save more for retirement if Social Security were not there.
The Lucas Critique is like the Law of Gravity--you don't have to know how and why it works for it to affect you. (I should put that on a bumper sticker!)
One rationale for privatization is that workers would get a better return on their money in Wall Street securities than with Social Security's dowdy old Treasuries.
I don't think I'm taking this out of context. (It's on page 8 if you want to see for yourself how it fits into the whole article.) He seems to be doing one of two things, either he's totally missing the boat concerning how Social Security works or he's comparing "privatization" with "fully funded Social Security." Lowenstein seems quite knowledgeable about Social Security, so I don't think it's the former. Yet, the article certainly doesn't hold up a fully funded system where workers actually have claim to government bonds as an option. Truthfully, I'd take the return on "dowdy old Treasuries" in a fully funded system over pay-as-you-go Social Security any day. I even made a post a few days ago that said I would like to see TIPS as a safe choice for private accounts.
Picture sharing, apparently.
Just heard on NBC Nightly News that demand for limos in Washington is so great that they had to bring some down from New York.
They didn't say anything about the prices. How much compensation do you think would be necessary to induce limo services to drive down to DC for the week?
Not that there is any lack of money flowing in the nation's capital this week. The NBC story was on all the lunches and dinners for members of Congress and the administration that are paid for by lobbyists and corporations. Is there too much money in politics? Yes, but I don't like the alternatives either.
Macroblog quotes from another article on the early release of the minutes. The quote reminded me of a link I've been meaning to post. The article quotes William Poole, St. Louis Fed President, on the issue of transparency which reminds me of a couple of good speeches he has made on the subject. Both were reprinted in the St. Louis Fed Review. You can read them here and here.
Macroblog has also had a series of posts on forecasts for 2005 that are worth checking out.
In other Fed news, the Beige Book was released today. I immediately skipped down to read about prices:
Inflationary pressures remained largely in check in December and early January. While many manufacturers and builders continued to report small increases in input costs, price increases for final goods and services were generally modest.
In manufacturing, input prices rose modestly in most districts, but Boston and Minneapolis reported that some input prices rose sharply. Manufacturers of nondurable goods in the Cleveland district noted that prices for raw materials continued to rise, while prices for durable goods inputs were steady. Prices charged by manufacturers increased modestly in Kansas City, New York, and Richmond, and remained in check in Atlanta and Chicago. Increases in the costs of building materials were mixed by district. Modest to sharp price hikes were widely reported in Atlanta, Kansas City, and Minneapolis, but material prices were flat in Cleveland and New York, and eased somewhat in San Francisco.
Overall, price inflation remained relatively steady in recent weeks. Reports from Atlanta, Boston, Chicago, Kansas City, New York, Richmond, and San Francisco reported that price increases remained largely in check. Contacts in Dallas noted that many firms were unable to pass rising costs along to the customer due to stiff competition, and Chicago noted that competition in the retail sector is expected to limit price increases.
Much is being made about the Bush administration's proposal to shift from wage indexing of social security benefits to price indexing. See, for example, here.
And there is the now famous Peter Wehner memo that has been posted on many blogs, including Brad DeLong. One paragraph reads:
It's worth noting that wage indexation was not part of the original design of Social Security. The current method of wage indexation was created in 1977, under (you guessed it) the Carter Administration. Wage indexation makes it impossible to "grow our way" out of the Social Security problem. If the economy grows faster and wages rise, this produces more tax revenue. But the faster wage growth also means that we owe more in Social Security benefits. This has produced a never-ending cycle of higher tax burdens, even during periods of robust economic growth. It is the classic case of the dog chasing his tail around the tree; he can run faster and faster, and never make any progress.
Given all the discussion of the shift to price indexing, I thought I would look at how wage indexing came about. The memo is correct. It did happen in 1977. The following is from the New York Times, May 10, 1977 (page 55):
Inadvertently, as it turned out, Congress in 1972 created what virtually all analysts regard as an overly generous inflation-adjustment formula for calculating the initial benefits of newly retired persons. It takes account of both wage inflation and price inflation.
Breaking that link is called "decoupling." Mr. Carter proposed that Congress do this by eliminating price rises from the calculation of initial benefits and by using a wage-ratio formula that would maintain the ratio of benefits to final pre-retirement earnings at the present 45 percent. Thereafter, benefits would escalate with the Consumer Price Index, as they do now.
Without decoupling, the Administration said, by the year 2020 some retired persons might be drawing benefits at a 60 percent ratio. Some might draw more than 100 percent of their earnings in their last working year.
And then there is the September 10, 1977 New York Times (page 8):
In addition the Republicans also proposed a new formula for calculating initial benefits of retired persons that would undo the over-compensation for inflation that Congress adopted in 1972. All sides agree that this formula must be changed.
...
Joseph A. Califano Jr., the Secretary of Health, Education and Welfare, criticized the Republican decoupling formula on the ground that it would lead to initial retirement benefits in the future 6 percent below what the present formula would produce.
The Republicans have said as much. They maintain that such an adjustment is fair because the 1972 formula led to an increase in benefits that was 6 percent greater than the increase in the cost of living.
However, the Republicans contend that no one who retired before the formula was changed would suffer a reduction in benefits, nor would any future beneficiary have to accept less than he would have been entitled to under the pre-1972 formula.
So, yes it was during the Carter administration, but it was bi-partisan. And truthfully, in looking at the news accounts of the time, people were much more concerned about the changes in the payroll tax rates than the change in the indexing method. The bottom line is that between 1972 and 1977 inflation caught Social Security between a rock and a hard place. Wage indexing was a way to reduce the burden on the system caused by inflation. It worked. Then the pendulum swung back in the other direction. Today, we find ourselves in an equal, but opposite situation.
In any case, wage indexing was not a plan to expand benefits. Quite the contrary, it was a plan to slow the growth of benefits in a time of high inflation.
Tyler Cowen at Marginal Revolution has a defense of the Bush proposal to freeze benefits in real terms. I'm not sure I'm ready to, as he puts it, "push the 'yes' button" on this just yet. That said, a compromise might be in order here. The formula does not have to be all or nothing in either direction. Honest folks on both sides should take a look at how to moderate the increases in benefits without reverting to what some might see as Draconian cuts. As Tyler suggests, the big problem is medical care, and there are probably better ways to solve that problem than by growing Social Security. I'll give it a cautious "yes" with a heartfelt plea for compromise.
My only problem with the change is the extent to which it may affect workers not yet at retirement, but who have read their annual statement from Social Security and used it in their retirement planning. I would be much more comfortable with an indexing change that affects new workers or very young workers so that accurate expectations may be formed. Ideally, if the private accounts are only phased in for the younger workers, I would start the indexing change there as well. Expectations matter. Start reform with the young, and if it works, expand it over decades.
I saw the movie version of "Phantom of the Opera" Saturday night. It's worth the price of admission, and then some. The Phantom of the Opera is my favorite musical--I've seen it on Broadway as well as the touring version. Of course, nothing can compare to seeing it on Broadway (except maybe London--which I have yet to see), but the movie is excellent in its own right.
The movie stays very true to the musical, but there are some differences which will be noticed by fans. There is some new music. Real fans will notice where it is. There is a little more background on the characters. Camera angles take you were the musical cannot, and overall I thought the cinematography was excellent. I was a little disappointed by the costumes for the "Masquerade" number (not as colorful as in the musical), and the Phantom's face is not as gory as it is in the musical.
And maybe it's just me, but the movie version of the Phantom is not as sympathetic as the one in the musical. It's subtle. Maybe it's just the casting. Gerard Butler is good, but if you've listened to Michael Crawford in the soundtrack a few hundred times, it can be hard to hear someone different in the role. Even so, Butler does a convincing job as the Phantom. Emmy Rossum is absolutely amazing as Christine. She is clearly a rising star.
It's not a substitute for seeing the musical, but it's the next best thing. Can't wait for the DVD.
Argentine representatives are on the road trying to sell their debt swap to international investors. I don't know what to say, other than that there are no winners in a situation like this.
Governor Kohn elaborates on the costs and benefits of greater communication from the Fed.
The minutes are not an attempt to articulate a single consensus explanation of our actions or outlook, but rather, reflecting a strength of the FOMC, they summarize the give and take in Committee discussion arising from differing perspectives on difficult issues.
Early release of the minutes could have costs if Committee members became more guarded in their discussion out of concern about the effects of their remarks when reported or if, over time, the minutes themselves became less comprehensive. In my view, neither of these developments is an inevitable consequence of the new schedule, and I am sure the Committee will resist any temptation to allow them to occur.
I love the last sentence.
Over time, I anticipate further steps toward explaining our views, but at a pace that is likely to be measured.
Read the whole thing.
Dave at macroblog posts an excellent response to my question on voluntary private accounts for Social Security. He concludes his post with the following:
The rub, of course, was that the results from this type of exercise depend -- sometimes critically -- on the assumptions that are made. Modesty (or self-defense) requires me to conclude that making a definitive judgment about the true return to the typical private account, for example, is just a bit beyond the rank of your standard well-meaning policymaker. The solution, so it seems to me still, is to make participation voluntary, and let people sort themselves into the plan that they deem best. If our guess is right, we will see a systematic sorting of younger people into the privatized system, and the pay-as-you-go world will slowly fade away. If they don't, well maybe the critics of privatization are right.
There will, of course, be an element of trial-and-error in all of this. Those in the privatized system still have to help pay the freight for the existing pay-as-you-go liabilities, and it will not be immediately apparent what tax rates settings will do the trick. That will be revealed in time, and adjustments will have to be made. But being a good conservative commentator, I live by a simple creed. Give the market a chance. It will probably give you the right answer.
Well said. The part about those in the privatized system paying the freight for the existing pay-as-you-go liabilities (including those young workers joining the system who choose pay-as-you-go over private accounts) is exactly what I'm concerned about. The more people who opt out of private accounts, the more freight there is to pay. I have confidence in the ability of the government's actuaries to work this out through a combination of the Law of Large Numbers and trial and error, but I think a split system would add significantly to the cost of administering the system as well as lowering the overall returns to the participants.
If the idea of voluntary accounts is to give people a choice over where to put their contributions (with the existing system being the safe choice), I would take a different approach. Give people the option of putting their contribution into TIPS (Treasury inflation protected securities). Risk would be extremely low, and the return would almost certainly dominate that of the pay-as-you-go system. If the government could guarantee that the return from TIPS would dominate what they would have received in the old system, we could dispense with the old system right away at least for brand new workers contributing for the first time.
I think this is the right kind of debate to have. I am looking forward to seeing more specifics from the administration and more discussion of the finer points.
UPDATE/CLARIFICATION: When I say "dispense with," I don't mean the whole system, of course, since the administration is only suggesting that part of the payroll tax would be allowed to go into the private accounts. In effect, what I want is for that portion of the payroll tax to be permanently and totally detached from the pay-as-you-go system.
UPDATE/CLARIFICATION: I'm assuming about a 1.8% real return on pay-as-you-go Social Security as suggested by Gokhale and Lansing. Real yields on TIPS less than that over a long period would be pretty unlikely--if it ever happened, we'd have more problems than just Social Security.
I see that the Bush administration's Social Security proposal makes the personal accounts voluntary.
The President favors voluntary personal accounts as part of a comprehensive solution to give younger workers the option to save some of these payroll taxes. Personal accounts give younger workers the opportunity to receive higher benefits than the current system can afford to pay, and provide ownership, choice, and the opportunity for workers to build a nest egg for their retirement and to pass it on to their spouse or their children.
Those who do not choose to have a personal account would continue to draw benefits as Americans have long done from the Social Security program.
Personal accounts will provide Americans who choose to participate with an opportunity to share in the benefits of economic growth by participating in markets through sound investments.
See... This is what happens when economic policy goes through the political sausage maker. "Voluntary" sounds so nice and politically correct. It's less threatening, perhaps.
But having voluntary private accounts makes it sound like you're comingling a fully funded and a pay-as-you-go system, doesn't it?
Will someone please explain to me how today's young people who choose to stay in the existing pay-as-you-go system can expect to someday receive the same level of benefits that are paid today if some in the generation after them are in a fully funded system?
Higher taxes, I suppose. How does this fix anything?
And doesn't this make the actuarial accounting of the system more nightmarish than it already is?
I'm generally not opposed to doing something to improve the system. (see previous post) However, the voluntary aspect of the proposal on the table sounds like trouble to me. I have to this point seen no evidence that my concerns have been thought through by the administration.
Any thoughts?
Yes and no. Consider these two claims:
Could the right sort of adjustment/modification/reform of Social Security in the next few years make future retired persons better off? Almost without question, yes.
Is Social Security on the verge of becoming the nation's biggest fiscal problem if it's not fixed in this presidential term of office? Definitely no.
Even the AARP might agree with my first claim, although the latest out of the White House sounds like they might take issue with my second claim. In any case, these two claims are fairly well accepted by economists, policymakers, and pundits on both sides of the debate. So what should be done?
Let's get one thing straight. I would not be in favor of any reform that would mean a reduction of benefits for today's retirees. I don't think anyone would favor that. Hence, it won't happen. Today's retirees need not fear. Whatever reform takes place, it will (possibly) help future retirees (today's kids and those not yet born--I fear that I may even be too old to benefit, more on that later).
I also would leave the disabilty and SSI benefits pretty much the way they are. What we are talking about here is the basic retirement aspect of Social Security.
I tend to agree with macroblog on this one:
I fully concede that you cannot take any old private-account scheme off the shelf and claim that it dominates the current system. But I think it should also be conceded that it is conceivable that a privatized system might dominate, if properly constructed.
And then he recalls some research that he and Jagadeesh Gokhale did on the issue.
If we allowed people below some critical age the opportunity to shift to private accounts, while at the same time taxing them to pay promised liabilities to those who remain in the system, would it be in their interest to do so? Our answer: yeah, maybe.
I've been a supporter of their (Altig and Gokhale's) idea since before there was a macroblog. I read their research from the Cleveland Fed when it first appeared in the mid 1990s. Read here for one of their articles much like the Cato piece referenced above. Read here for one by Gokhale and Lansing from about the same time. The latter has nice historical graphs, but it is getting a little dated.
Articles like these convinced me about 9 years ago that Social Security could be fixed if we really wanted to. We just haven't wanted to. In 1996, Altig and Gokhale reckoned that transitioning everyone under the age of 43 to a privatized system could potentially be Pareto improving. In the 1997 Cato piece, they put the cutoff at age 32. At the end of the summary of that piece, they say if we wait until 2011, only those under the age of 20 could move to the new system. We're halfway there. As I suggested above, I think it's too late for me.
The reason why the window is closing on this type of reform is that in the next few years the Social Security surplus will begin to shrink. Because Social Security contributions have been added to the government's general fund for some time, the disappearance of these funds will be noticed. In order to support the benefits of retirees and those near retirement (all those baby boomers), we will need to draw on more of the current contributions (from younger and younger workers). Once the Social Security surplus is gone (2018, by their own estimate), the transition becomes more difficult and costly. I don't see how anyone can look at the figures and the charts and fail to see that the time do something that would be Pareto improving is sooner rather than later.
Good solid economic growth with some fiscal responsibility will extend the life of the system for decades even if we do nothing. We don't have to do anything (except maybe raise the retirement age by one year every decade or something similar if life expectancies keep rising). But if it is possible to do something Pareto improving, I think we should do something.
But I also concede that you can't just take any old privatization scheme off the shelf and say that it will be a Pareto improvement.
Two new reciprocal links in my list today from folks who linked to me over the weekend.
macroblog (If you're interested in macroeconomics, this blog is excellent, a must read.)
Stumbling and Mumbling (A variety of topics, including economics, from across the pond.)
Many thanks!
Via Marginal Revolution:
Robert Heilbroner, author of Worldly Philosophers: The Lives, Times and Ideas of the Great Economic Thinkers and among the most influential economic historians of the 20th century, has died in New York. He was 85.
Dr Heilbroner, who had suffered for the past three years with Lewy Body disease, a rare Alzheimer's-like illness, died of a stroke last Wednesday, according to his son, David.