Saturday, October 3, 2015

Disability Trust Fund to Run Out

This issue wears a black hat. Bwoo-ah-hah-hah-hah.

There’s likely to be some panic about this in 2016. Don’t let it bother you.

First off, there’s no trust fund. At least not in the sense that most people think of: a pile of money in an investment somewhere that can be used at any time.

Our federal government isn’t allowed to make investments for the future like you and I do, so there isn’t a sense in which it can have a trust fund for anything.

So why do we say trust fund, and what do we mean?

We say trust fund because Congress tells us that’s the name for it. But it’s a lie, and there’s no law that says they can’t lie about that.

What they mean is that they made projections way back in the past about where the money was going to come from (mostly FICA taxes withdrawn from our paychecks), said that some percentage of that was going to go to disability payments, called what they didn’t allocate a trust fund and then spent it on something else (and not necessarily something bad, they just can’t legally save it), and now they’re going to spend it (by not spending it on something else) except they expect to spend more than they pretended to save.

This isn’t as horrible as it sounds, but it isn’t good. Let me give you an analogy from my life. The family goes on vacation. My daughter brings her own money. But since she was young we haven’t trusted her with a lot of cash. So she asks me to hold it for her. And I put it in my wallet with all my other cash, and keep a mental note of how much is hers. Then I spend the cash wherever we need it. And sometimes when she finds something she wants to buy, I have to say that I have to go the ATM first because I don’t have “her” cash in my wallet any more. (I confess: it’s a tiny little bit immoral, but parents do stuff like this all the time). Oh, and she wants all her cash back right now because she wants to buy something that costs more than all the cash she gave to me in the first place, so she needs a little loan too. In the analogy, the ATM is taxpayers, I’m Congress, my daughter is the Social Security Administration, and the retailer is disability recipients.

Second off, there’s no disability crisis either. I’ve debunked this topic many times on this blog over the last several years. Instead, what we have is this big demographic hump in the labor market called the baby boomers. The economy thrived in the 80’s because they were young and healthy. The economy isn’t thriving in the teens because they’re old … and at the age where they get disabled a lot.

Americans today are about as likely as those in the past to report that they have a work-limiting disability, according to Census Bureau data. For instance, 5.6% of Americans ages 35-44 reported having a work-limiting disability in 1984, while in 2014 that figure was 5.4%. …

Yet the percentage of the working-age population collecting disability insurance benefits has more than doubled to 5.7% in 2014 from 2.7% in 1984. These increases were not anticipated …

Demographic factors have played a major role. Older workers are more likely to become disabled, and as more women entered the labor force in the 1970s and 1980s, they began receiving benefits alongside men.

And third, Congress has made it easier for some people to collect disability. But most of this happened a generation ago. It’s just catching up to us now. And don’t forget that it’s totally natural to be good-hearted and take care of more people, but also natural to blow off figuring out how to pay for that.

Congress loosened eligibility standards in 1984, allowing multiple non-disabling ailments to be combined to qualify for disability benefits. The legislature also ordered the Social Security Administration to favor evidence provided by an applicant’s medical representatives over the judgments of SSA medical professionals.

Anyway, the coming crisis is that we haven’t allocated a big enough fraction of incoming revenue to cover this. So we’ll either have to allocate more to disability (and less to other stuff), or increase taxes.

Read all about it in the article entitled “Averting the Disability-Insurance Meltdown” in the February 23 issue of The Wall Street Journal.

Sunday, September 27, 2015

Bernie Sanders

As I write this in late September, the Democratic presidential campaign is in a state of flux. Hillary Clinton is still the favorite, but the train-wreck-in-slow-motion of her ethics problems has created a lot of doubters. Those folks are flocking to Bernie Sanders, the I’m-too-left-to-be-a-Democrat Senator from Vermont. Sanders has historically called himself a Socialist, but he really doesn’t have much choice to run for president other than as a Democrat.

What Sanders has proposed is to make the U.S. more like our urban myth of how western Europe is run: with a much bigger government, providing many more social services, all on the backs of the rich.

First a digression on the urban myth part. There are three aspects to this. First, the central governments of western European countries are a larger share of their economies than ours is … but … our regional governments (states, cities, counties, and especially school districts) are much larger. If you lump them all together, you’d find that government in America is a tad less than the middle of the pack for western Europe. Second, America gets knocked because we pay for much of our healthcare, and some of our higher education, with private funding. Except we also get more for what we pay for: that’s why foreigners come here for medical care and college educations. This spending is often used to beat up America about its priorities, but that’s probably misplaced since American’s don’t seem to think it’s a bad enough deal to go elsewhere for medical treatment or college educations. Third, there aren’t that many rich people to tax to pay for this. The dirty little secret of all these discussions is that total income of “the rich” is already smaller than what the government spends: if we took it all, we’d still end up short. Way short. In order to afford big increases in government spending, we can’t define “the rich” as the top 1%, or even the top 10%, instead it has to be more like top 50%. Some people are OK with that, but many of them are in denial that this includes themselves.

Anyway, let’s take Sanders proposals at face value, since they are gaining in popularity. What does Sanders propose: 1) expanding Medicare into a single payer healthcare system that covers everyone for everything (that’s 75% of it right there), 2) shoring up predicted shortfalls in social security, 3) infrastructure improvements and repairs, 4) making college more affordable, and 5) government funded family leave.

The Sanders program amounts to increasing total federal spending by about one-third—to a projected $68 trillion or so over 10 years.

For many years, government spending has equaled about 20% of gross domestic product annually; his proposals would increase that to about 30% in their first year. As a share of the economy, that would represent a bigger increase in government spending than the New Deal or Great Society and is surpassed in modern history only by the World War II military buildup.

So this is a huge deal. What I wonder is if you asked people, did Roosevelt expand government enough, or did Johnson further expand government enough, I wonder how many would say “yes” to one of those, but would still be in favor of Sanders’ proposal? Those people definitely have a cognitive dissonance issue that they need to resolve, particularly since any rollbacks in those programs by Republicans are mostly reductions in positive growth rates rather than reductions in size and scope. For the true believers who answered “no” to both, then Sanders is probably their guy.

How would he pay for this?

[Sanders] has so far detailed tax increases that could bring in as much as $6.5 trillion over 10 years, according to his staff.

This reality check is problematic.

Having said that, if Sanders does push through conversion of our healthcare system to Medicare, then everything we now spend on healthcare would be up for grabs to be taxed away. That would more than cover the cost, so we shouldn’t really argue that his Medicare proposal creates a funding problem. Of course, it creates a huge political problem because people are not going to want that stuff taxed away, but that’s another story.

What’s interesting to me about this has two parts.

First, he’s proposing the healthcare spending, without the healthcare financing. This is financially dishonest in the small ways that we’re used to from members of Congress. The thing we need to keep our eye on as macroeconomists is that the money will come from somewhere.

Second, if my assertion is correct that there’s enough healthcare spending already out there to cover his proposal, so that we’re just moving money between different accounts … then why does he need the other $6.5 billion in proposed taxes? That’s twice the remaining spending proposals.To the extent that we buy into the Keynesian view (and I’m sure Sanders does) that spending pushes the economy forward, and taxes pull it back … then Sanders proposal to have excess taxes is a plan to hit the brakes on the economy. Who does that make sense to?

You can read about Sanders’ proposals in this piece entitled “Price Tag of Bernie Sanders’ Proposals: $18 Billion” in the September 14 issue of The Wall Street Journal.

“A Career In Economics”, from the AEA

The American Economics Association (AEA) has a new video out entitled “A Career In Economics”. In it, four economics majors talk about how useful their major was for their career as someone who uses economics without being an economist.

A career in's much more than you think from American Economic Association on Vimeo.

Consumption Inequality

Growth numbers are OK, the U.S. has posted 5 longer than average expansions in the last 2 generations, and everyone seems to have an awful lot of stuff.

But clearly there’s a growing problem with inequality. Part of the reason for this is that the top is doing very well, while the rest are merely doing OK.

Note two things: 1) this is already adjusted for inflation, and 2) it measures households. Households have been getting smaller through time, so the 30% improvement in consumption shown here packs more punch than is shown, and would be higher if we corrected for that. Of course, it would be higher for the top 5% too.

Drawn from the article entitled “How a Two-Tier Economy Is Reshaping the U.S. Marketplace” in the January 28 issue of The Wall Street Journal.

Saturday, September 26, 2015

What Should We Call Poorer Countries?

Here’s a social problem that’s broader than economics: what do you call people who aren’t doing as well that isn’t insulting, doesn’t sound patronizing, and doesn’t open up an avenue for those less well-off to rationalize their situation?

Macroeconomists and politicians have this trouble with countries. We need a label. In the handbook for this class, I’ve primarily used “developing”, but I’ve also mentioned “third world”.

Third world is an older term, that’s seen as insulting by some.

Developing has been on the rise for a couple of decades, but it’s seen as patronizing.

Using either phrase (or others) can open up the third can of worms. This has two facets.

First, some will argue that the developed countries are richer because they’ve stolen stuff from developing countries. This is a popular notion, tied up with exploitation, for which there’s actually not much supportive data. The really scary thing is not that the U.S. has taken a lot from, say, Cuba — but rather that if Americans actually cared about Cuba as much as Mexico, Cuba would probably be better off.

Second, there are many people who will say things like “we’re doing this our way because we don’t want to be developed … we don’t want to turn out like you”. This is actually really frightening, because often the people saying this are already the ones with most of the money and power in these countries. In short, they’re big fish in a small pond, and they like it that way.

I’m posting this during Pope Francis’ first visit to the U.S. Personally, I have very strong feelings that Pope Francis may be the biggest exponent of this view at the moment. While personally, he has taken a vow of poverty, he’s been elevated to the top of institution that got rich from just about very means except economic growth, and he’s using that position to criticize societies that got rich from pretty much only economic growth. I find that irony disturbing.*

Some of these ideas, and others, are touched on in the article “The Rise and Fall of the Term ‘Third World’” from the May 1 issue of The Wall Street Journal. For the curious, they date the usage of the phrase third world to French sociologists in the early 1950’s. They came up with that term to put a positive spin on those places, even though now some people think of it as insulting.

FWIW: I’ve lived and worked in Utah for a majority of my adult life, but I am not Mormon. I grew up in a heavily Catholic area, and have a great many close Catholic friends. I do not advocate that you take my viewpoint as anti-Catholic, or even anti-Francis. I am merely very much opposed to the publicly stated economic positions of this Pope.

Sunday, September 20, 2015

China’s Real GDP Growth Rate

It’s late July and I’m writing up an article from late April. In the past 3 months, not only are we continuing to worry about how China’s economy is doing, but now their stock market has crashed too: it’s off by 1/3 since mid-June. For perspective, that’s roughly as much as the NYSE lost in 1929.

I am not a huge fan of the stock market as an indicator of macroeconomic performance. And that’s in the U.S. where investors have thick markets to choose from. In China, investors are limited in their choices, and are allowed to buy stock on margin: this is a recipe for a stock market to get unhinged from the underlying economy.

But, back to China’s growth rate, and the article I found interesting.

“Growth Likely Overstated,” said a Citibank report, concluding that actual quarterly growth could be below 6% year to year, depending on the factors weighed. Other research firms put their numbers far lower, with Capital Economics pegging the quarter at 4.9%, the Conference Board’s China Center at 4% and Lombard Street Research at 3.8%.

That’s quite the range of numbers. And that low end of 3.8%. That’s the range a developed economy can hit fairly regularly (although we’ve had trouble with that for 8 years now). But for a developing country like China, that rate is terribly low. As in, never-going-to-develop low.

Here’s the kicker:

… The figures are suspiciously smooth, with none of the sharp gyrations seen in the U.S. or other economies. The methodology often appears inconsistent or contradictory. Also, no one knows how China accounts for inflation when tabulating its gross domestic product.

Note that last sentence, and think about how we work through GDP in class. We start out by counting up nominal GDP. But there’s no way to count up real GDP. Instead, we estimate inflation, remove it from nominal GDP, and what we’re left with is real GDP.

If analysts are saying “no one knows how China accounts for inflation”, what they really mean is no one thinks their growth rates are credible or accurate.

Off the record, the leaders in China seem aware of this problem:

… Roundabout backing of Premier [Li], who in 2007 as Communist Party chief of northeastern Liaoning province criticized China’s GDP numbers as “man-made and therefore unreliable,” according to a memo by the U.S. ambassador at the time, later released by WikiLeaks.

I guess WikiLeaks was good for something.

Read the whole thing, entitled “China’s True Growth Is a Mystery; Economists Weigh the Clues” in the April 26 issue of The Wall Street Journal.

Saturday, September 19, 2015

America’s Crude Oil Export Ban

Politics often leads to economic policies that are nothing short of stupid. One of the especially stupid periods for such policies was the 1970’s. It was if the country had hit a string of bad luck so the politicians figured they’d start kicking it while it was down.

I’m done now. Winking smile 

One of the things that came out of that was a ban on the export of crude oil.

This was at the time of the two OPEC oil crises (1973-5 and 1978-9). But note the bizarreness: because oil we imported was getting more expensive we banned the export of our own oil.

An analogy may help. In the labor market, a teenager exports time/labor from the family when they work outside the home, and when the parents hire, say, a cleaner, they’re importing labor. With those ideas in mind, the oil export ban is like the parents responding to cleaners getting more expensive by telling the teenager they have to quit their job. Yeah … that might make more time available within the home so that they teenager could do more cleaning … but I think it’s fair to say it’s probably not the approach most parents would choose. But that is what the politicians chose back in the 70’s when they instituted the oil export ban.

And don’t fail to note that even if this could be justified as a slightly panicked response to a transitory problem with crude oil supplies … we still have the ban in effect 40 years later.

Yet high prices are an incentive to develop new technologies, and while it took decades, the response of Americans to higher crude oil prices was to develop horizontal drilling and its ugly stepchild fracking. Now we have cheap crude oil. But we’re not allowed to sell it to people who’d pay more for it.

There’s also a problem with path dependence. Path dependence is the idea that you get where you are by following a certain path, and that path may have had side effects. In the case of the U.S., some of the crude oil that we import comes mostly from Mexico, Venezuela, and other places. And it’s the dirtier, nastier, harder to refine kind of oil. So we have a refinery industry based around turning the nastiest crude oil into lots of nicer products, like gas, jet fuel, plastics, and so on. Except that now, not only are we producing a lot more crude through horizontal drilling with fracking, but it’s also coming out of the ground in a nicer form that we’re not well-equipped to process. Importers in other countries will pay a premium for the good stuff, but we’ve made it illegal to sell it to them.

Mind you, it’s not illegal to export all the good stuff we make out of the lousy crude we import. So, we still need to import a lot of lousy crude to keep the refineries we have doing what they’re designed to do.

You can’t make this stuff up.

Oh, and BTW, it’s been several years since the horizontal drilling boom started to hit, and D.C. still hasn’t fixed this.

Here’s an op-ed from an oil industry executive entitled “The Oil Export Ban: A Relic of the 1970s”. It’s from the April 24 issue of The Wall Street Journal and it touches on some of these issue.