More later, but I thought I'd archive this piece from the FT discussing a financial transaction tax. The overall issue is what regulatory changes should be made to the way the financial sector (this includes banks, financial services, insurance and real estate) operates to reduce the possibility of another financial crisis ( I'm not a politician so I'm not going to be so naive as say "so it NEVER happens again", as our Trsy secretary said back in March or April).
So far any significant changes have been dismissed. For example an attempt by the senate to put a 36% cap (might have been 32) on credit card interest rates. OH NO!!! That would restrict the FREEDOM of consumers to obtain credit. OK, starving them would also restrict their freedom. What's the difference? As Senator Durbin said, "Wall Street owns this place."
It's not just the predatory practices. But along with our expensive health care industry, something like 1/3rd of our economy (meaning our money) is used to pay these jokers. We can't afford it, and neither can our country.
Thursday, August 27, 2009
Monday, August 24, 2009
Roubini and Krugman support Joe K's ideas!!
Wow, I no more than write my first blog post in more than 2 years, and two of the economists I follow most closely, Professors Nouriel Roubini of NYU and Paul Krugman of Princeton, write opinion pieces supporting my views!! Just kidding, but their articles are worth reading. Roubini discussing the recovery and possibility of a double-dip recession in the FT (Financial Times), and Krugman reviewing the inadequacies of Reaganomics including growth in inequality over the past 3 decades in the NYT (New York Times).
Beyond the fact that both are brilliant (in their own ways), they were also two of the few economists who were warning years ago that our economic path was unsustainable (excessive household debt, housing price bubble, flat real (inflation adjusted) wages for the majority of people, etc.). Even though they based their arguments on clear facts, the mainstream (Washington, Wall Street, the media and most academic economists) simply dismissed their arguments without ever addressing the facts. "Out in left field", "kookie", etc. What's worse (as Krugman mentions), is that the same failed thinking that got us into the mess in the first place, "the market knows best, so don't rock the boat", is pretty much back on the front burner.
Man o man, what's an aging pragmatic liberal to do? Get my thesis done would be a good start!!!
BTW, Krugman mentions Emmanuel Saez's (a professor at UC Berkely) work on inequality. Here a link to his research. Quite interesting and the guy was just named the best economist under 40.
Beyond the fact that both are brilliant (in their own ways), they were also two of the few economists who were warning years ago that our economic path was unsustainable (excessive household debt, housing price bubble, flat real (inflation adjusted) wages for the majority of people, etc.). Even though they based their arguments on clear facts, the mainstream (Washington, Wall Street, the media and most academic economists) simply dismissed their arguments without ever addressing the facts. "Out in left field", "kookie", etc. What's worse (as Krugman mentions), is that the same failed thinking that got us into the mess in the first place, "the market knows best, so don't rock the boat", is pretty much back on the front burner.
Man o man, what's an aging pragmatic liberal to do? Get my thesis done would be a good start!!!
BTW, Krugman mentions Emmanuel Saez's (a professor at UC Berkely) work on inequality. Here a link to his research. Quite interesting and the guy was just named the best economist under 40.
Sunday, August 23, 2009
Back blogging! Recovery? Even Krugman?
Well I'm back. No real progress on the thesis but i did spend a lot of time following the election and the economic crisis, learning a lot in both areas. I also reread my initial posts. A fair amount of needless commentary (some of it just junk!) in them. I'll clean it up over time and try to make it more useful from a lay perspective. I was a little exuberant (OMG giddy?) to say the least when I first started the blog.
Well since my last post in August of 2007, we've had a heck of a recession, pretty much world-wide. According to NBER (the National Bureau of Economic Research one of whose functions is to define when recessions begin and end in the US) the recession began in December of 2007, but really gathered steam (ice) in the last quarter of 2008 and the 1st quarter of 2009, with the US economy shrinking by about 1.5% (close to 6% annualized) in each quarter (versus the respective prior quarter). However, the economy was down by only 0.3% (1% annualized) in the 2nd qtr. of 2009, as it appears the Federal stimulus (among other factors) has started to help slow the slide. In the meantime unemployment went from about 5% in December 2007 to 9.5% in June 2009, and is expected by many economists to pass 10% by the end of this year, even with the stimulus.
But beginning this Spring there has been an increasing chorus of pundits predicting that the economy will start growing this Summer. This (recently) included Paul Krugman. Nothing wrong with that, and Prof. Krugman is much more realistic about the long-term prospects (slow) than most. In fact we might very well show some positive economic growth this (3rd) quarter. Consumer spending (70% of the economy) is not robust, but the cash for clunkers program has spurred some increase in automotive sales. Further, residential housing sales are up, aided by dropping prices and the housing purchase rebate (scheduled to expire in November). And the $ amount of stimulus will continue more or less at a similar level (about 2.5%) of GDP as the 2nd Qtr. So all told (and including additional production to build inventory of goods back up), this might be enough to show positive economic growth this Qtr. AND THEN?
The problem is that consumer spending after adjusting for inflation (personal consumption-see the bureau of economic analysis June personal consumption) , has been essentially flat since the initial and significant drop in the 2nd half of 2008. IN SPITE OF or better said, INCLUDING the government stimulus. My concern is that as businesses realize that consumption (Sales) in fact will continue slow (not growing) for several years, layoffs will (re)accelerate, causing a further dip in consumption (and perhaps a further decrease in business investment) and therefore a second leg down in the economy (the so-called double dip recession) later this year and into 2010. This would clearly call for a more robust (and job-directed) stimulus, but no way in H the current political environment will allow it. A little (a lot?) like the situation in 1930-32 or 1936 during the great depression.
Regarding the American consumer much has been made of the fact that the savings rate (% of net income saved) went from around zero a couple of years ago to 5-6% at the end of 2008 and in the first half of this year. Presumably because consumers lack confidence and are preparing for the worst by spending less and saving more. So, based on this the key question is, as they regain confidence will they start spending more in the near future to support an economic recovery?
In my view they won't spend more, not because of a lack of confidence, but because of a lack of MONEY to spend. Between 1999 and 2007 the debt of American consumers (mortgage, home equity loans, installment loans such as cars and furniture and credit cards) more than DOUBLED!!, to about 100% of GDP. In other words many (but many did not) consumers spent their earnings and then borrowed money to spend even more, which produced negative savings for this group. But then the housing bubble burst and banks began to decrease lending, so these same consumers had to cut their spending to match their incomes, less some more to reduce their debts.
So let's assume that 2-4 years ago, on average 50% of consumers (group A) spent what they earned plus 10% more, borrowed from banks (which means a negative savings rate of 10%). And the other 50% of consumers (group B) saved 10% of what they earned (spending the rest every year). If you average the two groups together, the savings rate is 0. So let's say today group B keeps saving 10% of their earnings. And group A keeps spending all they earn, but CAN'T borrow from the bank, so their savings rate is 0, but not negative as in the past. Now if we average the two together we get an overall savings rate of 5%.
So where will increased spending come from? Group A can't spend more, unless the banks lend them more, and the banks want to get paid back, not lend more. And group B has been sensibly saving for retirement in the past, so why would they change now? This is what economists call the BALANCE SHEET problem, meaning too many consumers have too much debt and too few assets. Until the debt gets significantly reduced there is unlikely to be any significant increase in consumer spending.
Well since my last post in August of 2007, we've had a heck of a recession, pretty much world-wide. According to NBER (the National Bureau of Economic Research one of whose functions is to define when recessions begin and end in the US) the recession began in December of 2007, but really gathered steam (ice) in the last quarter of 2008 and the 1st quarter of 2009, with the US economy shrinking by about 1.5% (close to 6% annualized) in each quarter (versus the respective prior quarter). However, the economy was down by only 0.3% (1% annualized) in the 2nd qtr. of 2009, as it appears the Federal stimulus (among other factors) has started to help slow the slide. In the meantime unemployment went from about 5% in December 2007 to 9.5% in June 2009, and is expected by many economists to pass 10% by the end of this year, even with the stimulus.
But beginning this Spring there has been an increasing chorus of pundits predicting that the economy will start growing this Summer. This (recently) included Paul Krugman. Nothing wrong with that, and Prof. Krugman is much more realistic about the long-term prospects (slow) than most. In fact we might very well show some positive economic growth this (3rd) quarter. Consumer spending (70% of the economy) is not robust, but the cash for clunkers program has spurred some increase in automotive sales. Further, residential housing sales are up, aided by dropping prices and the housing purchase rebate (scheduled to expire in November). And the $ amount of stimulus will continue more or less at a similar level (about 2.5%) of GDP as the 2nd Qtr. So all told (and including additional production to build inventory of goods back up), this might be enough to show positive economic growth this Qtr. AND THEN?
The problem is that consumer spending after adjusting for inflation (personal consumption-see the bureau of economic analysis June personal consumption) , has been essentially flat since the initial and significant drop in the 2nd half of 2008. IN SPITE OF or better said, INCLUDING the government stimulus. My concern is that as businesses realize that consumption (Sales) in fact will continue slow (not growing) for several years, layoffs will (re)accelerate, causing a further dip in consumption (and perhaps a further decrease in business investment) and therefore a second leg down in the economy (the so-called double dip recession) later this year and into 2010. This would clearly call for a more robust (and job-directed) stimulus, but no way in H the current political environment will allow it. A little (a lot?) like the situation in 1930-32 or 1936 during the great depression.
Regarding the American consumer much has been made of the fact that the savings rate (% of net income saved) went from around zero a couple of years ago to 5-6% at the end of 2008 and in the first half of this year. Presumably because consumers lack confidence and are preparing for the worst by spending less and saving more. So, based on this the key question is, as they regain confidence will they start spending more in the near future to support an economic recovery?
In my view they won't spend more, not because of a lack of confidence, but because of a lack of MONEY to spend. Between 1999 and 2007 the debt of American consumers (mortgage, home equity loans, installment loans such as cars and furniture and credit cards) more than DOUBLED!!, to about 100% of GDP. In other words many (but many did not) consumers spent their earnings and then borrowed money to spend even more, which produced negative savings for this group. But then the housing bubble burst and banks began to decrease lending, so these same consumers had to cut their spending to match their incomes, less some more to reduce their debts.
So let's assume that 2-4 years ago, on average 50% of consumers (group A) spent what they earned plus 10% more, borrowed from banks (which means a negative savings rate of 10%). And the other 50% of consumers (group B) saved 10% of what they earned (spending the rest every year). If you average the two groups together, the savings rate is 0. So let's say today group B keeps saving 10% of their earnings. And group A keeps spending all they earn, but CAN'T borrow from the bank, so their savings rate is 0, but not negative as in the past. Now if we average the two together we get an overall savings rate of 5%.
So where will increased spending come from? Group A can't spend more, unless the banks lend them more, and the banks want to get paid back, not lend more. And group B has been sensibly saving for retirement in the past, so why would they change now? This is what economists call the BALANCE SHEET problem, meaning too many consumers have too much debt and too few assets. Until the debt gets significantly reduced there is unlikely to be any significant increase in consumer spending.
Thursday, August 2, 2007
3. Thesis Free Trade Zones Part 1
This will serve as the introduction to my thesis, the topic of which is tentatively "The Benefits of Free Trade Zones in Costa Rica and Honduras".
As I discussed in my first post, I want to focus my second career on sustainable economic development, reducing poverty and reducing economic inequality between and within countries, focusing on the Americas. Part of this naturally entails looking at the efficacy of existing development policies. One of the more prevalent of existing policies in developing countries is the use of Free Trade Zones (FTZ's) which are also referred to as Export Processing Zones (EPZ's) or Maquilas depending on the country, with little difference in the rules governing them. So it is a good place to start for a thesis.
I've already done a fair amount of research, both in preparing the thesis proposal last fall, and since then in searching for relevant data, although I suspect I'm still missing some data I would prefer to have. The problem is that I ran into a mental stalemate in actually wriitng down what I have (which should also help to clarify what, if anything, I'm missing). So one use for this blog is to help get over that writer's CRAMP. (Please spare the advice. i've had enough already and don't want to be an ingrate).
To begin some observations on: the state of economic affairs between developed and developing countries, prevalent development policies, major causes for relative economic weakness in the developing countries (in effect some of my current premises to be either refined or modified as knowledge progresses) and the nature of economic development, inequality and poverty.
1. THE STATE OF AFFAIRS. Economic disparity. In 2003 Gross National Income (GNI) per capita in the US was about $38,000 per year ranking #4 of over 200 countires measured. In Costa Rica (often referred to as the "Switzerland" of Latin America) this was about $9,000 (rank #79) and in Honduras about $2,600 (rank # 149). See the World Bank's 2005 World Development Indicators Report -WDI. (http://devdata.worldbank.org/wdi2005/Indexofindicators.htm). Note that these figures are restated (referred to as PPP or Purchasing Power Parity) to make them (more) comparable in US $ terms between the countries.
Further, income distribution within these countries is highly unequal. According to the WDI report for the year 2000, as a per cent of total income, the top 20% of the population received 46% of the income in the US, 53% in Costa Rica and 59% in Honduras. This compares to less than 40% in France and Germany. To put this in perspective consider the US. If the top 20 per cent of the population received 46% of the income in 2003 (their share has been growing, so this contrast is somewhat understated) their per capita income would have been $87,400 on average. Whereas per capita income of the other 80% of the population would have been $20,500. Comparable figures in Honduras, would be $7,700 per capita for the top 20% and only $1,300 for the other 80% of the population. Remember this is $1,300 stated in terms of costs (purchasing power) in the US and other major industrialized countries. Of course the major industrialized contries have social programs to offset at least some of the misery in their countries. Many poor countries don't or have very little.
Finally, the Millenium Development Goals (MDG) program (see http://www.un.org/millenniumgoals/index.asp), tracks levels of poverty in the world using standardized measurements of extreme poverty (< 1 Dollar per day) and poverty (< 2 dollars per day). In 2005, there were about 2.5 billion people living in poverty, of which about 1 billion in extreme poverty. Obviously, there are many factors to consider, but no doubt if measured by the average industrialized countries standards (in the US a working individual-no dependants- earning less than $10,000 per year is considered living in poverty), the number living in poverty would likely be closer to 4 or 5 billion of the roughly 6.4 billion people in the world.
To summarize, there is substantial disparity in levels of economic well-being between the 50 or so "developed countries" and the rest of the world; and to make matters worse for the bulk of the world's population, high levels of income inequality within most of the "underdeveloped" countries. Of course a fundamental question is whether the rich nations should concern themselves with the plight of the poor. There are numerous moral and political reasons for doing so, although many would not agree. But on a purely and coldly economic basis, is there a reason? If we are rich becasue we work hard and are very productive why do we owe anything to the poor. They should just follow our example, and if they can't or don't want to, isn't that their problem? But what if our wealth, or at least a portion of it, was due to taking unfair advantage of resources from the poor countries. If this were the case the (neo) classical economist would state that this results in an inefficent allocation of resources (due to distortions - anomalies- in pricing of the resources), resulting in LOWER economic growth. No different then the effect of subsidies (monetary or protection such as patents) given to the agro and pharmaceutical industries in this (and other countires).
Part of my future research will be devoted to this issue (unequal exchange), and I will at least touch on it in my thesis. In the next post I will give an overview of economic development policies, and also discuss some of my premises as to the reasons for the economic disparity between rich and poor countries using FTZ's as the framework (including the "unfair" or unequal exchange of resources between rich and poor countries discussed above).
As I discussed in my first post, I want to focus my second career on sustainable economic development, reducing poverty and reducing economic inequality between and within countries, focusing on the Americas. Part of this naturally entails looking at the efficacy of existing development policies. One of the more prevalent of existing policies in developing countries is the use of Free Trade Zones (FTZ's) which are also referred to as Export Processing Zones (EPZ's) or Maquilas depending on the country, with little difference in the rules governing them. So it is a good place to start for a thesis.
I've already done a fair amount of research, both in preparing the thesis proposal last fall, and since then in searching for relevant data, although I suspect I'm still missing some data I would prefer to have. The problem is that I ran into a mental stalemate in actually wriitng down what I have (which should also help to clarify what, if anything, I'm missing). So one use for this blog is to help get over that writer's CRAMP. (Please spare the advice. i've had enough already and don't want to be an ingrate).
To begin some observations on: the state of economic affairs between developed and developing countries, prevalent development policies, major causes for relative economic weakness in the developing countries (in effect some of my current premises to be either refined or modified as knowledge progresses) and the nature of economic development, inequality and poverty.
1. THE STATE OF AFFAIRS. Economic disparity. In 2003 Gross National Income (GNI) per capita in the US was about $38,000 per year ranking #4 of over 200 countires measured. In Costa Rica (often referred to as the "Switzerland" of Latin America) this was about $9,000 (rank #79) and in Honduras about $2,600 (rank # 149). See the World Bank's 2005 World Development Indicators Report -WDI. (http://devdata.worldbank.org/wdi2005/Indexofindicators.htm). Note that these figures are restated (referred to as PPP or Purchasing Power Parity) to make them (more) comparable in US $ terms between the countries.
Further, income distribution within these countries is highly unequal. According to the WDI report for the year 2000, as a per cent of total income, the top 20% of the population received 46% of the income in the US, 53% in Costa Rica and 59% in Honduras. This compares to less than 40% in France and Germany. To put this in perspective consider the US. If the top 20 per cent of the population received 46% of the income in 2003 (their share has been growing, so this contrast is somewhat understated) their per capita income would have been $87,400 on average. Whereas per capita income of the other 80% of the population would have been $20,500. Comparable figures in Honduras, would be $7,700 per capita for the top 20% and only $1,300 for the other 80% of the population. Remember this is $1,300 stated in terms of costs (purchasing power) in the US and other major industrialized countries. Of course the major industrialized contries have social programs to offset at least some of the misery in their countries. Many poor countries don't or have very little.
Finally, the Millenium Development Goals (MDG) program (see http://www.un.org/millenniumgoals/index.asp), tracks levels of poverty in the world using standardized measurements of extreme poverty (< 1 Dollar per day) and poverty (< 2 dollars per day). In 2005, there were about 2.5 billion people living in poverty, of which about 1 billion in extreme poverty. Obviously, there are many factors to consider, but no doubt if measured by the average industrialized countries standards (in the US a working individual-no dependants- earning less than $10,000 per year is considered living in poverty), the number living in poverty would likely be closer to 4 or 5 billion of the roughly 6.4 billion people in the world.
To summarize, there is substantial disparity in levels of economic well-being between the 50 or so "developed countries" and the rest of the world; and to make matters worse for the bulk of the world's population, high levels of income inequality within most of the "underdeveloped" countries. Of course a fundamental question is whether the rich nations should concern themselves with the plight of the poor. There are numerous moral and political reasons for doing so, although many would not agree. But on a purely and coldly economic basis, is there a reason? If we are rich becasue we work hard and are very productive why do we owe anything to the poor. They should just follow our example, and if they can't or don't want to, isn't that their problem? But what if our wealth, or at least a portion of it, was due to taking unfair advantage of resources from the poor countries. If this were the case the (neo) classical economist would state that this results in an inefficent allocation of resources (due to distortions - anomalies- in pricing of the resources), resulting in LOWER economic growth. No different then the effect of subsidies (monetary or protection such as patents) given to the agro and pharmaceutical industries in this (and other countires).
Part of my future research will be devoted to this issue (unequal exchange), and I will at least touch on it in my thesis. In the next post I will give an overview of economic development policies, and also discuss some of my premises as to the reasons for the economic disparity between rich and poor countries using FTZ's as the framework (including the "unfair" or unequal exchange of resources between rich and poor countries discussed above).
Tuesday, July 24, 2007
Sicko, Free Trade, Inequality & the new gilded age
Some great stuff on PBS last night (Fri 6/29 in case it takes me a week or a month to finish this post). A brief summary before I cover some more basic issues. I'll be returning to these topics many times in the future.
1. First, on NOW, an interview with Michael Moore talking about his movie "Sicko" and the health care industry, in particular health care insurance. While the US system can provide excellent care, on a per capita basis it is roughly 50% to 100% more expensive than other major industrialized countries, with poorer health results; namely, life expectancy lower, infant mortality higher. We do lead in obesity!! (Check the OECD web site for the data).
2. Washington Week as usual covered several issues, but in particular they mentioned the demise of the immigration bill and in so doing referred to another major defeat for the Bush administration, social security reform in 2005. My own view on the immigration bill is that it was far from perfect but it was better than what we have. (Perfect would be open migration between countries on a world basis, no different than migration between states in the US. Of course that would require substantial changes in how the world operates, including an effective world govt., with nation state interests secondary, just as state interests in the US are secondary to the federal govt. Not highly likely to occur but just IMAGINE!!).
The debate on immigration was full of hubris and jingoism, but the debate over Social Security reform took the cake for irrelevant excess, on both sides of the fence. Fortunately the right result, dropping of Social Security changes, was obtained. More on Social Security later in this post.
3. Then on Bill Moyer's journal two items: An interview with Lori Wallach on Free Trade (she's awesome and a significant thorn in the side of the medical industry, dogmatic free trade advocates and in general neo-liberal econ types). Check her views at http://www.citizen.org/trade/. A lot more on "Free" trade in the future. A facet of it (Free Trade Zones) is my thesis topic.
Then there was Gretchen Morgenstern an NYT reporter, who talked about: the housing boom (now housing bust) and how it was driven in part by inappropriate mortgage schemes; the level of income inequality in the US recently matching our all-time worst level in the late 1920's, and how execs in the finance industry are the most egregious of the lot. Making money off of money, versus actually in an industry which produces something of tangible benefit (not to excuse the excesses of the Rockerfellers, Vanderbilts and other "Robber Barons" of the gilded age).
So a number of interesting and important issues which I'll be returning to at various times in the future. For excellent commentary on these and similar issues see Dean Baker's blog (of the Center for Economic Policy Research http://www.cepr.net/ ). His blog is at http://prospect.org/csnc/blogs/beat_the_press. For alternate views the Cato Institue web site usually has some interesting stuff, for a bunch of sniveling elitists (just kidding!!).
Analytical techniques:
But for now I want to use these issues, in particular Social Security, to introduce a couple of analytical techniques I tend to use (and have used for many years) when I evaluate what can be very complicated or complex issues. I often find that these techniques help me to strip away the irrelevant, focus on understanding the core problems and therefore provide a better opportunity for effective solutions.
1. The self-contained (self-reliant for the conservative reader) farm or small village. As self-contained communities, everything the farm family or village residents have, in terms of material goods and services, is what they produce or provide. Further no need for money (yep you can live without it) on the family farm since Mom and Dad, maybe even the entire family, decide how the goods (food, clothes etc.) are divvied up in some acceptable manner. Sort of a mini-commune. The village might or might not have money, depending on what level of complexity I want to introduce. But in any event, I find these simplifications useful since they allow a more direct focus on what people ACTUALLY do or NEED to do to provide for their economic existence. And no they do not for example NEED to shop until they drop at the malls.
One might think that a self-contained farm or small village is not a useful way of looking at the economic issues of the world. But realize that the world itself is a self-contained entity. I.e. everything the world has, in terms of material goods and services, is what it produces or provides. So size is the only real (albeit important) difference.
2. The Three Circles of people, goods and services, and money. One way of looking at the economic world is to divide it up into circles of:
a) People in their functions as consumers of goods and services as well as producers and providers of goods and services. Note that of the roughly (I'll keep it simple) 300 million people/consumers in the US (I am unclear whether this includes some estimate for "illegal" immigrants of perhaps 12 to 15 million) only about half or 150 million are actually in the US labor force, (and this includes 7 or 8 milion unemployed). See the US Bureau of Labor Statistics (BLS) monthly employment reports to get actual figures. Of the rest about 25% or 75 million are retired or under working age and another roughly 25% or 75 million are not in the work force (essentially working age but not seeking formal employment).
b) Goods & services produced or provided by the active work force, the sum total of which is the GDP (Gross Domestic Product) in a given year.
c) Money supply. That intangible symbol of value which in its most basic sense is used to divvy up goods and services produced to the people as consumers. Check the Federal Reserve web site for definition(s) of money supply.
So let's consider the Social Security reform debate. (As I go through the background you might try to consider the issue in terms of the Three Circles, which I will do at the end of this post). There are two main elements to SSO, medicare (including the recently added prescription drug benefit) and a pension for retirees (full pension beginning at age 65-67 depending on year of birth, partial at age 62-?) and disabled people. Given the rapid increase in the costs of health care over the past couple of decades, medicare is actually a much greater financial problem for the government than is the pension piece. But I will consider medicare later in a post on health care. For now I want to focus on the pension aspect (officially referred to as Old Age, Survivors and Disability Insurance - OASDI).
1. FUNDING. Simply stated while we are working the Govt deducts money (FICA) from our wages and puts it into a govt. Social Security trust fund. Currently the deduction rate is 15.3% in total, split equally between the worker and the employer. Further 12.4% is designated for pension and 2.9% for medicare. And finally the pension piece is taxed on a certain annual wage limit (over $90 thousand at present, increases annually with inflation). From the individual's point of view one is "saving" money for retirement through this "Govt" program. Many people (if they have enough income and are prudent) also save additional funds "privately" through various types of savings plans.
2. PAYMENT. As people retire at qualifying age limits (or become disabled) they begin to receive their Govt pension. The amount is based on a combination of the number of years worked and the amounts "saved/deducted" from wages during those years. This is then factored into the Govt determined "base" pension which is increased each year for inflation. So a person who earned at minimum wage during his working life and for whatever reason only worked 25 full years, will receive a lower Soc. Scrty. pension than someone who always earned at the maximum wage limit and worked for 40 years. But here the system has a progressive bent since the person at the low end of the wage/savings scale receives a higher pension as a % of his accumulated savings, than the person at the high end.
The payment of the pension is made out of the Soc Scrty trust fund. So every year money (the savings/deductions of people who are working) comes into the trust fund, and every year money comes out of the trust fund to pay the pensions of those who are retired. In effect the savings (wage taxes) of those who are working are used to pay for the pensions of those who are retired. This is referred to as a PAY AS YOU GO plan. It works fine as long as the working generation agrees to "pay" the pensions of the retired generation.
A key point here is that many individuals might think that the FICA or wage taxes they pay go into a personal Soc Scrty account to pay for their pesnion when they retire. This is not the case. These wage taxes are used to pay the pensions of those who are already retired. If an individual also has his/her own "private" savings plan such as an IRA or company 401-k, these funds accumulate, and at time of retirement can be used to provide an additional pension, solely for that individual. This is what is referred to as a "FUNDED" plan, in the sense that the amount of money which (with future interest on the funds) will be used to "fund" the payment of the private pension, is already accumulated in the individual's savings account when payments commence.
Regardless, as a result of changes enacted in the 1980's, including higher tax rates on wages, the amount paid into the Soc Scrty trust fund has for many years been exceeding the amount paid out for pensions, allowing a "surplus" to build. The surplus in 2006 was about $ 2 trillion (see the Social Security Administration trustees report. This surplus is invested in US govt. bonds until it is needed.
A side issue, but an interesting point, is that when the Govt announces the Federal budget deficit, it usually includes the current year surplus collected in Social Security (referred to as the "unified" budget deficit). For example, this year the "unified" deficit is expected to be around $220 billion. But this includes (I'm guessing but the magnitude is correct) about $150 billion of Social Security surplus. I.e. the "real" deficit (sorry I started as a bean counter) is around $370 billion. Yes this is partly semantics since it is all within the Fed Govt., but we can be sure that in the future when & if there is a Social Security deficit, the Govt will exclude this deficit from briefings on the "Federal" budget deficit.
SO WHAT'S THE PROBLEM WITH SOCIAL SCRTY.?
Well the main issue is that people are living even longer than envisioned in the 1983 reforms. Therefore, if current trends continue there will be more retirees than planned, with the amounts paid out in pensions exceeding the amounts (assuming no change in wage tax rates) paid in by those working. For example today there are about 3 workers for every retiree. But in 20 years or so, as the baby boomers fully retire there will be about 2 workers for every retiree. These issues are covered in the annual Social Security Trustees report (with the Congressional Budget office also doing an estimate). Presently the expectation is that in about 10 years, the annual pension payments will about equal the amounts of wage taxes paid in to the trust fund. After that the deficit (current year pensions paid vs. current year wage taxes received) will grow, until sometime in the 2040's the surplus in the trust fund will be eliminated. Subsequently there will be enough money coming in each year to pay only about 70-75% of the current year pensions. (Again this assumes no changes to current law governing the program and also assumes that all of the long-term estimates used to make the calculations are accurate).
The solution (to allow payment of full promised pensions beyond 2040) clearly would be some combination of retiring later (say 70 instead of 65-67), higher wage tax rates, higher wage bases or lower benefits. But as I said earlier, I agreed with not making any changes at present. This is because I don't see this as a pressing issue, rather something we will need to deal with in 5-10 years when the estimates are more current. For now the issues of Health care (which includes medicare), the environment, growing income inequality and our Foreign policy snafus are clearly more pressing.
But the President's proposal (never clearly delineated as I recall) centered around establishing "private or individual" savings accounts within the Social Security system. This would eventually turn the system into a "Funded" system, similar to private savings accounts described above, with individuals allowed to invest their funds in the stock market, and with their pension based on the balance in their "individual" Social Security account when they retire. This concept was coupled with a number of "talking points" to set the stage, briefly as follows:
1. This is your money for your retirement so you should be able to invest it as you want, and when you retire it should be there for you, or if you die early for your spouse or children. Do you really want 'big brother" to take care of your money?
2. The govt is using your money to help pay for their big spending ways and cover the deficit. All you have in Social Security is a piece of paper, an IOU, in some Govt beancounters ("ouch") account. Do you really think this will be worth something in 30 years?
3. If you had a personal account and could invest in America's growth, in the stock market, on average earnings have been 8-10% over many years. Or do you want to keep it in Social Security where on average the earnings on YOUR money is more like 2% per year?
All interesting issues, enlightening, aggravating and confusing at the same time (the essence of good talking points!). But time to wrap this post up, so on to the Three Circles, to consider the problem of Social Security from a somewhat different perspective.
THE CIRCLE OF PEOPLE. Recall that there are (were but don't quibble) about 300 million people in the US of which about half or 150 million actually work (according to the BLS definition). Also recall there are about 3 workers for every 1 retiree, meaning there are about 50 million retirees (evidently counting those receiving social security pensions). In 20 years this will presumably go to 2 workers for every retiree. Meaning if we freeze workers at 150 million, there would then be about 75 million retirees, or 50 PER CENT more for those workers to support with their wage taxes, in the pay as you go system.
A significant increase in the burden for workers, yes. But also consider that the workers TODAY actually support the total population, a total of 150 million non-workers (retirees, plus children, housepartners?, and others) or a ratio of 1 worker for each non-worker. Even if we add 25 million additional retirees in 20 years (all else frozen), this means an increase from 150 million non-workers to 175 million non-workers. Percentage wise this would be 16 2/3 % , still significant, but a heck of a lot less daunting than the 50% increase referred to above. Frankly Northern Europe and Japan already live with this type of demographic, and while whiners abound throughout the world, they seem to get along just fine.
THE THREE CIRCLES. One last angle. So the essence of the Social Security "crisis" was (is) given the changing demographics, how best to SAVE for the future so there will be enough "money" to go around. But remember that the number of workers will remain (in the above example) at 150 million and therefore the amount of goods & services they produce in that circle, is all that will be available for the total # of consumers in the people circle (325 million), REGARDLESS of how we save or how much we save. So how we save and who saves more only affects the money circle (with one big "if"), it does not mean there will be more goods and services to go around. To me its more of a big shell game, with the only obvious winners, if we go to private accounts, you guessed it WALL STREET! Why, becasue every year they would exact their 1% or so tribute from the bulk of us peons, further exacerbating the growing level of inequality in this country.
So the big "if" refers to investment. Way too much for this post, but briefly if people "save" it also means they are consuming less of the goods and services (because they are spending less). Logically this should mean that some of the workers could shift from producing "consumable" goods and services to producing new and more efficient plant and equipment, allowing future workers (the 150 million) to produce more (for the goods and services circle) in the future and thereby satisfy the growing needs of the population, without the workers sacrificing their own needs.
But that is enough for now. Suffice it to say that, even in the classical sense, there is enough money sloshing around these days for investment purposes. So changing the method of investing Social Security "savings" is highly unlikely to have any appreciable effect on the level of investment (in productive goods and services) in this country.
Hasta la proxima!
1. First, on NOW, an interview with Michael Moore talking about his movie "Sicko" and the health care industry, in particular health care insurance. While the US system can provide excellent care, on a per capita basis it is roughly 50% to 100% more expensive than other major industrialized countries, with poorer health results; namely, life expectancy lower, infant mortality higher. We do lead in obesity!! (Check the OECD web site for the data).
2. Washington Week as usual covered several issues, but in particular they mentioned the demise of the immigration bill and in so doing referred to another major defeat for the Bush administration, social security reform in 2005. My own view on the immigration bill is that it was far from perfect but it was better than what we have. (Perfect would be open migration between countries on a world basis, no different than migration between states in the US. Of course that would require substantial changes in how the world operates, including an effective world govt., with nation state interests secondary, just as state interests in the US are secondary to the federal govt. Not highly likely to occur but just IMAGINE!!).
The debate on immigration was full of hubris and jingoism, but the debate over Social Security reform took the cake for irrelevant excess, on both sides of the fence. Fortunately the right result, dropping of Social Security changes, was obtained. More on Social Security later in this post.
3. Then on Bill Moyer's journal two items: An interview with Lori Wallach on Free Trade (she's awesome and a significant thorn in the side of the medical industry, dogmatic free trade advocates and in general neo-liberal econ types). Check her views at http://www.citizen.org/trade/. A lot more on "Free" trade in the future. A facet of it (Free Trade Zones) is my thesis topic.
Then there was Gretchen Morgenstern an NYT reporter, who talked about: the housing boom (now housing bust) and how it was driven in part by inappropriate mortgage schemes; the level of income inequality in the US recently matching our all-time worst level in the late 1920's, and how execs in the finance industry are the most egregious of the lot. Making money off of money, versus actually in an industry which produces something of tangible benefit (not to excuse the excesses of the Rockerfellers, Vanderbilts and other "Robber Barons" of the gilded age).
So a number of interesting and important issues which I'll be returning to at various times in the future. For excellent commentary on these and similar issues see Dean Baker's blog (of the Center for Economic Policy Research http://www.cepr.net/ ). His blog is at http://prospect.org/csnc/blogs/beat_the_press. For alternate views the Cato Institue web site usually has some interesting stuff, for a bunch of sniveling elitists (just kidding!!).
Analytical techniques:
But for now I want to use these issues, in particular Social Security, to introduce a couple of analytical techniques I tend to use (and have used for many years) when I evaluate what can be very complicated or complex issues. I often find that these techniques help me to strip away the irrelevant, focus on understanding the core problems and therefore provide a better opportunity for effective solutions.
1. The self-contained (self-reliant for the conservative reader) farm or small village. As self-contained communities, everything the farm family or village residents have, in terms of material goods and services, is what they produce or provide. Further no need for money (yep you can live without it) on the family farm since Mom and Dad, maybe even the entire family, decide how the goods (food, clothes etc.) are divvied up in some acceptable manner. Sort of a mini-commune. The village might or might not have money, depending on what level of complexity I want to introduce. But in any event, I find these simplifications useful since they allow a more direct focus on what people ACTUALLY do or NEED to do to provide for their economic existence. And no they do not for example NEED to shop until they drop at the malls.
One might think that a self-contained farm or small village is not a useful way of looking at the economic issues of the world. But realize that the world itself is a self-contained entity. I.e. everything the world has, in terms of material goods and services, is what it produces or provides. So size is the only real (albeit important) difference.
2. The Three Circles of people, goods and services, and money. One way of looking at the economic world is to divide it up into circles of:
a) People in their functions as consumers of goods and services as well as producers and providers of goods and services. Note that of the roughly (I'll keep it simple) 300 million people/consumers in the US (I am unclear whether this includes some estimate for "illegal" immigrants of perhaps 12 to 15 million) only about half or 150 million are actually in the US labor force, (and this includes 7 or 8 milion unemployed). See the US Bureau of Labor Statistics (BLS) monthly employment reports to get actual figures. Of the rest about 25% or 75 million are retired or under working age and another roughly 25% or 75 million are not in the work force (essentially working age but not seeking formal employment).
b) Goods & services produced or provided by the active work force, the sum total of which is the GDP (Gross Domestic Product) in a given year.
c) Money supply. That intangible symbol of value which in its most basic sense is used to divvy up goods and services produced to the people as consumers. Check the Federal Reserve web site for definition(s) of money supply.
So let's consider the Social Security reform debate. (As I go through the background you might try to consider the issue in terms of the Three Circles, which I will do at the end of this post). There are two main elements to SSO, medicare (including the recently added prescription drug benefit) and a pension for retirees (full pension beginning at age 65-67 depending on year of birth, partial at age 62-?) and disabled people. Given the rapid increase in the costs of health care over the past couple of decades, medicare is actually a much greater financial problem for the government than is the pension piece. But I will consider medicare later in a post on health care. For now I want to focus on the pension aspect (officially referred to as Old Age, Survivors and Disability Insurance - OASDI).
1. FUNDING. Simply stated while we are working the Govt deducts money (FICA) from our wages and puts it into a govt. Social Security trust fund. Currently the deduction rate is 15.3% in total, split equally between the worker and the employer. Further 12.4% is designated for pension and 2.9% for medicare. And finally the pension piece is taxed on a certain annual wage limit (over $90 thousand at present, increases annually with inflation). From the individual's point of view one is "saving" money for retirement through this "Govt" program. Many people (if they have enough income and are prudent) also save additional funds "privately" through various types of savings plans.
2. PAYMENT. As people retire at qualifying age limits (or become disabled) they begin to receive their Govt pension. The amount is based on a combination of the number of years worked and the amounts "saved/deducted" from wages during those years. This is then factored into the Govt determined "base" pension which is increased each year for inflation. So a person who earned at minimum wage during his working life and for whatever reason only worked 25 full years, will receive a lower Soc. Scrty. pension than someone who always earned at the maximum wage limit and worked for 40 years. But here the system has a progressive bent since the person at the low end of the wage/savings scale receives a higher pension as a % of his accumulated savings, than the person at the high end.
The payment of the pension is made out of the Soc Scrty trust fund. So every year money (the savings/deductions of people who are working) comes into the trust fund, and every year money comes out of the trust fund to pay the pensions of those who are retired. In effect the savings (wage taxes) of those who are working are used to pay for the pensions of those who are retired. This is referred to as a PAY AS YOU GO plan. It works fine as long as the working generation agrees to "pay" the pensions of the retired generation.
A key point here is that many individuals might think that the FICA or wage taxes they pay go into a personal Soc Scrty account to pay for their pesnion when they retire. This is not the case. These wage taxes are used to pay the pensions of those who are already retired. If an individual also has his/her own "private" savings plan such as an IRA or company 401-k, these funds accumulate, and at time of retirement can be used to provide an additional pension, solely for that individual. This is what is referred to as a "FUNDED" plan, in the sense that the amount of money which (with future interest on the funds) will be used to "fund" the payment of the private pension, is already accumulated in the individual's savings account when payments commence.
Regardless, as a result of changes enacted in the 1980's, including higher tax rates on wages, the amount paid into the Soc Scrty trust fund has for many years been exceeding the amount paid out for pensions, allowing a "surplus" to build. The surplus in 2006 was about $ 2 trillion (see the Social Security Administration trustees report
A side issue, but an interesting point, is that when the Govt announces the Federal budget deficit, it usually includes the current year surplus collected in Social Security (referred to as the "unified" budget deficit). For example, this year the "unified" deficit is expected to be around $220 billion. But this includes (I'm guessing but the magnitude is correct) about $150 billion of Social Security surplus. I.e. the "real" deficit (sorry I started as a bean counter) is around $370 billion. Yes this is partly semantics since it is all within the Fed Govt., but we can be sure that in the future when & if there is a Social Security deficit, the Govt will exclude this deficit from briefings on the "Federal" budget deficit.
SO WHAT'S THE PROBLEM WITH SOCIAL SCRTY.?
Well the main issue is that people are living even longer than envisioned in the 1983 reforms. Therefore, if current trends continue there will be more retirees than planned, with the amounts paid out in pensions exceeding the amounts (assuming no change in wage tax rates) paid in by those working. For example today there are about 3 workers for every retiree. But in 20 years or so, as the baby boomers fully retire there will be about 2 workers for every retiree. These issues are covered in the annual Social Security Trustees report (with the Congressional Budget office also doing an estimate). Presently the expectation is that in about 10 years, the annual pension payments will about equal the amounts of wage taxes paid in to the trust fund. After that the deficit (current year pensions paid vs. current year wage taxes received) will grow, until sometime in the 2040's the surplus in the trust fund will be eliminated. Subsequently there will be enough money coming in each year to pay only about 70-75% of the current year pensions. (Again this assumes no changes to current law governing the program and also assumes that all of the long-term estimates used to make the calculations are accurate).
The solution (to allow payment of full promised pensions beyond 2040) clearly would be some combination of retiring later (say 70 instead of 65-67), higher wage tax rates, higher wage bases or lower benefits. But as I said earlier, I agreed with not making any changes at present. This is because I don't see this as a pressing issue, rather something we will need to deal with in 5-10 years when the estimates are more current. For now the issues of Health care (which includes medicare), the environment, growing income inequality and our Foreign policy snafus are clearly more pressing.
But the President's proposal (never clearly delineated as I recall) centered around establishing "private or individual" savings accounts within the Social Security system. This would eventually turn the system into a "Funded" system, similar to private savings accounts described above, with individuals allowed to invest their funds in the stock market, and with their pension based on the balance in their "individual" Social Security account when they retire. This concept was coupled with a number of "talking points" to set the stage, briefly as follows:
1. This is your money for your retirement so you should be able to invest it as you want, and when you retire it should be there for you, or if you die early for your spouse or children. Do you really want 'big brother" to take care of your money?
2. The govt is using your money to help pay for their big spending ways and cover the deficit. All you have in Social Security is a piece of paper, an IOU, in some Govt beancounters ("ouch") account. Do you really think this will be worth something in 30 years?
3. If you had a personal account and could invest in America's growth, in the stock market, on average earnings have been 8-10% over many years. Or do you want to keep it in Social Security where on average the earnings on YOUR money is more like 2% per year?
All interesting issues, enlightening, aggravating and confusing at the same time (the essence of good talking points!). But time to wrap this post up, so on to the Three Circles, to consider the problem of Social Security from a somewhat different perspective.
THE CIRCLE OF PEOPLE. Recall that there are (were but don't quibble) about 300 million people in the US of which about half or 150 million actually work (according to the BLS definition). Also recall there are about 3 workers for every 1 retiree, meaning there are about 50 million retirees (evidently counting those receiving social security pensions). In 20 years this will presumably go to 2 workers for every retiree. Meaning if we freeze workers at 150 million, there would then be about 75 million retirees, or 50 PER CENT more for those workers to support with their wage taxes, in the pay as you go system.
A significant increase in the burden for workers, yes. But also consider that the workers TODAY actually support the total population, a total of 150 million non-workers (retirees, plus children, housepartners?, and others) or a ratio of 1 worker for each non-worker. Even if we add 25 million additional retirees in 20 years (all else frozen), this means an increase from 150 million non-workers to 175 million non-workers. Percentage wise this would be 16 2/3 % , still significant, but a heck of a lot less daunting than the 50% increase referred to above. Frankly Northern Europe and Japan already live with this type of demographic, and while whiners abound throughout the world, they seem to get along just fine.
THE THREE CIRCLES. One last angle. So the essence of the Social Security "crisis" was (is) given the changing demographics, how best to SAVE for the future so there will be enough "money" to go around. But remember that the number of workers will remain (in the above example) at 150 million and therefore the amount of goods & services they produce in that circle, is all that will be available for the total # of consumers in the people circle (325 million), REGARDLESS of how we save or how much we save. So how we save and who saves more only affects the money circle (with one big "if"), it does not mean there will be more goods and services to go around. To me its more of a big shell game, with the only obvious winners, if we go to private accounts, you guessed it WALL STREET! Why, becasue every year they would exact their 1% or so tribute from the bulk of us peons, further exacerbating the growing level of inequality in this country.
So the big "if" refers to investment. Way too much for this post, but briefly if people "save" it also means they are consuming less of the goods and services (because they are spending less). Logically this should mean that some of the workers could shift from producing "consumable" goods and services to producing new and more efficient plant and equipment, allowing future workers (the 150 million) to produce more (for the goods and services circle) in the future and thereby satisfy the growing needs of the population, without the workers sacrificing their own needs.
But that is enough for now. Suffice it to say that, even in the classical sense, there is enough money sloshing around these days for investment purposes. So changing the method of investing Social Security "savings" is highly unlikely to have any appreciable effect on the level of investment (in productive goods and services) in this country.
Hasta la proxima!
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