Friday, September 26, 2014

Fixing Social Security

Our Social Security system is insolvent: the present value of expected future contributions is not large enough to cover the present value of expected future benefits.

This needs to be fixed, or resources from other parts of the budget will have to be permanently diverted to make social security payments.

Macroeconomically, this is a problem that is readily fixable. This interactive webpage from The Committee for Responsible Federal Budget shows the possible policy combinations, and allows you to choose a plan to fix the problem.

Unfortunately, politically these solutions do not seem possible at this juncture. Note that because of the way the comparative dynamics work, the efficacy of each of these solutions diminishes as we move into the future.

This is ridiculous. Consider the two largest items.

The biggest is indexing payments to the CPI minus 1%. Macroeconomists know that the CPI overstates price inflation, by something in the range of 1%. So, we’ve already been giving seniors a gift every month by indexing to just the CPI.

To draw an analogy, this is like having your parents pay for your gas, and every time the price per gallon goes up by a nickel, they give you a dime to cover it. Last I checked, keeping the change as a habit, and then bitching about it if your parents threaten to ask for it back is something most of outgrew a long time ago.

The second biggest is raising the retirement age immediately (to compensate for it not being raised earlier), and then indexing it to increasing life expectancy in the future. Without doing this, with every passing month we’re offering new retirees funding for a longer expected retirement with each passing month … without them having contributed extra to the system with a longer career.

An analogy for this might be giving a football team 5 downs, or a baseball hitter 4 strikes … after the game has started. Again, excepting things like the Colorado Buffaloes 1990 co-championship, this is something that most people would find unacceptable in others.

I hope I don’t offend anyone, but many people say things like the government is broke, when in fact it’s more like grandma just stole all our sh*t.

Sunday, September 21, 2014

Is China Stalling?

Many countries grow well when poor. Some continue to grow through the middle-income ranges, and eventually become (fully) developed. Think South Korea. Others stall: think Brazil. The majority of countries hit that brick wall.

The problem in assessing how countries are going to do is to separate out two effects that are jumbled together: better marshaling of resources, and improved productivity.

Once you get those separated adequately, you come to the brick wall that most countries hit: once resources are marshaled efficiently, they cease to be an engine of growth.

So the key to whether or not a country eventually gets (fully) developed is its TFP (total factor productivity). This is a residual that isn’t easy to measure, but we really need to.

And in the case of China, TFP growth doesn’t look that good.

China’s 1% average annual growth in total factor productivity between 1978 and 2012 – a period when average per capita annual incomes rose from $2,000 to $8,000 — compares with 4% annual gains for Japan during its comparable 1950-1970 high-growth period, 3% for Taiwan from 1966-1990 and 2% for South Korea from 1966-1990, he said, when purchasing power in the relative economies is taken into account.

There really is no way to evaluate this other than to wait 20 years and check back on it. See you then.

Via Marginal Revolution.

Monday, September 8, 2014

The Long View on Labor Force Participation

The source here is definitely a conservative website interested in bashing Democrats.

But, they have a good graphic for one of the meme floating around about one symptom of the economy not working too well. Labor force participation is at a 36 year low, but compared to what exactly?

Labor Force Participation-August

So, somehow we’re on the downside of a 50 year swell in labor force participation. The time frame is the key: 50 years means that this is unlikely to be caused by some sort of policy. Instead, it’s likely to be demographics.

And that’s a point I’ve made many times for students on this blog over the last few years. The baby boomers started working in 1962 (when those born first, in 1946, turned 16), were probably all working by 1994 (when the tailenders born in 1964 hit 30), and started to edge into early retirement starting around 2001 (when the initial group turned 55). And this will continue until the tailenders are 55 to 70 (2019 to 2034) before any other demographic feature is large enough to swamp their effect.

Friday, September 5, 2014

A Culture That Won’t Deliver Growth

A problem of how macroeconomics has developed over the last 30 years is that while most fields are pushing a non-judgmental view of cultures, macro has started from scratch to pile up a bunch of support for the idea that they make a lot of difference in one area: economic growth.

As an example of a culture that is not growth oriented, take this quote:

Then there are those cultural attributes that it is considered impolite to raise. "Somali men are not lazy," protests Mr. Mohamed's No. 2. "We are descendants of Abraham, and if you descend from Abraham you don't do manual labor." When the men are caught loafing, they say they are "planning" …

This quote is from a Somali, living in Kenya, who’s employed locally in the economic development bureaucracy.

Somalis are, of course, one of the poorest ethnic groups in the world.

And … lots of people claim descent from Abraham. It’s just that most of them don’t use that to justify not being productive.

This is from “Book Review: ‘The Idealist’ by Nina Monk” in the September 6, 2013 issue of The Wall Street Journal. Her book is about Jeffrey Sachs, a famous macroeconomist who turned development maven about 15 years ago — and who appears to have evolved towards the view that lack of development is caused by the stinginess of developed countries.

Sunday, August 24, 2014

Why Is Macro So Hard? Brandolini’s Law

This comes to us from computer science:

Ordre Spontane has some similar quotes.

Anyway, think about a handful of macro issues:

  • Trade restrictions are good.
  • The minimum wage is a good way to help the poor and unskilled.
  • Predatory pricing is a successful management practice.
  • Americans don’t save enough.
  • Government needs to subsidize firms before they can thrive.

These are all BS. And yet macroeconomists spend a lot of effort, year in year out, trying to expunge these from informed public discourse.

Via Café Hayek.

The Minimum Wage Doesn’t Really Help the People We Think It Does

Raising the minimum wage nationally has been a hot political subject for a few years now, and many jurisdictions around the country have already raised it locally.

On the pro side, 1) if we take cumulative inflation seriously, then yes it’s probably time to adjust it, and 2) the “common sense” that it reduces employment doesn’t appear to be persuasively supported by the data.

But, here’s an idea familiar to economists that the public just doesn’t talk about much: a plurality of people who earn the minimum wage already live in high income households.

You see, when the minimum wage was first instituted a few generations back, most people who worked at the wage lived in low income households. So a minimum wage certainly helped them make ends meet.

That’s a good thing. I don’t know if the effect was strong enough to counterbalance the theoretical loss of jobs, but it’s close enough that reasonable people fall on both sides.

And that’s the urban myth that continues to be most people’s argument for supporting the minimum wage today.

Except it’s an urban myth because it really isn’t true any more.

These days the typical minimum wage worker is a teenager from a high income household: one with access to job openings, transportation to jobs, and immersed in a culture of employment. This is not your typical poor person in America: without ready access to job openings, often living where transportation to jobs is spotty, and distinctly not immersed in a culture of employment.

[Calculated estimates indicate that] if we were to raise the minimum wage to $10.10 per hour nationally, 18% of the benefits of the higher wages (holding employment fixed) would go to poor families, and 29% would go to families with incomes three times the poverty level or higher.

What about minimum wages as high as $15 an hour? Applying the same calculation as above for a $15 per hour minimum, the share of benefits going to poor families would decline to 12%, and the share to families more than three times the poverty line would increase to 36%. [emphasis via a quote posted at Carpe Diem].

Let me put some perspective on that. A household with income 3 times the poverty level corresponds roughly to that of a married SUU professor, with a spouse who doesn’t work, and two kids … one with a job at McDonald’s.

This is not necessarily a reason to be against a minimum wage increase, because there is still a positive effect on the poor. But, it is an argument that if your motivation for raising the minimum wage is to help the poor, then there are probably other methods you should think about first.

You can read the original here, from David Neumark, a macroeconomist at UC-Irvine.

Saturday, August 23, 2014

Putting Absolute Poverty In Perspective

One of the problems in understanding macroeconomic policy in developed countries is the distinction between absolute poverty (someone lacks something) and relative poverty (someone has less of some things than their neighbors).

And in developed countries, activists tend to prefer to talk about relative poverty … because there simply isn’t much absolute poverty.

A further concern, and one that’s a little bit deeper and thus less discussed, is what is the radius used to determine the comparison set when discussing relative poverty. Most activists want to limit that to a few miles. But if we talk about a radius of thousands of miles … there isn’t even any relative poverty in developed countries at all: it’s all in developing countries.

None of this matters though, if we focus primarily on absolute poverty. And really, even if you’re concerned about relative poverty, most would agree that it is a secondary. And, if you’re still concerned about relative poverty, then ask “relative to what?”

All of which brings me to agricultural subsidies in developed countries. You see, there’s a standard metric for the poorest of the absolute poor: those who live on $2/day or less. That covers over a billion people on the globe.

And in places like the EU, they pay cows more than that. Of course, the cows don’t get the cash themselves, to blow on smokes and forties. Instead, the farmers collect the income that (at least conceptually) is paid to the cows.

So, here’s an idea. The next time someone you know starts to grouse about poverty, suggest that we remove the agricultural supports for American farmers, and instead pay that money out to someone in absolute poverty in a developing country.