This was just sent in by Paul Engel. Apparently it is thus far unavailable on the web. (Since it is a public speech I presume there are no copyright issues.) As much as I hate to admit it, this raises enough practical doubts to make me start changing my mind on the issue.
TSP Expert's Analysis: Are Social Security Individual Accounts Feasible? By Francis X. Cavanaugh
Following is the complete text of remarks to the NARFE Legislative Training Conference by Francis X. Cavanaugh, a public finance consultant in Washington, DC, and the first executive director and CEO (1986-1994) of the Federal Retirement Thrift Investment Board, the agency that administers the Thrift Savings Plan for federal employees.
It is a pleasure to be here to talk about a matter of great interest to federal employees -- President Bush's plan for Social Security individual accounts (SSIA). Federal employees were brought into the Social Security system two decades ago. They also have an excellent 401(k)-type defined contribution plan. For the reasons I will give, I believe they will want to preserve the defined benefits of the present Social Security system, rather than shift a portion of their Social Security taxes into SSIAs. Federal employees have for many years viewed NARFE as the primary protector of their Civil Service retirement COLA (cost-of-living adjustment), but now they will surely be looking to NARFE to protect their Social Security benefits as well.
The exhaustive media coverage of the Bush plan in recent weeks has barely touched on the most important question. Is it doable? Can a cost-effective administrative structure be developed? Would the net earnings of SSIAs equal the net earnings of the Social Security trust fund? Could most businesses perform the employer functions now performed in 401(k) plans and the Federal Thrift Savings Plan (TSP)? The answer to these questions is no.
The Bush plan is modeled on the Thrift Savings Plan for federal employees, which was established in 1986 as a 401 (k)-type retirement savings plan for employees in all three branches of the government, including members of Congress, judges, and both career and political appointees. Many policy makers throughout the government have personal knowledge and long experience as members of the TSP, and are thus favorably disposed to the creation of a new TSP-like agency to provide similar benefits for SSIAs. Indeed, the TSP has been a huge success, with an 88 percent voluntary contribution rate by FERS (Federal Employees Retirement System) employees. It is now the largest 401(k)-type plan in the country, with more than $150 billion in assets and with an exceptionally low expense ratio of just six one-hundreths of 1 percent, that is, just 60 cents on each $1,000 invested.
So if the TSP works so well for nearly three-and-one-half million federal employees, why wouldn't it work for the 155 million Social Security taxpayers? Like the TSP, the new agency would be administered by presidentially appointed board members who would select an executive director who would be the chief executive officer of the agency. The new agency would develop TSP-like stock and bond index funds, select private investment managers, and provide for centralized record-keeping. I can personally attest to the efficacy of that structure because I was the first executive director of the Federal Retirement Thrift Investment Board, the agency that administers the TSP. Critical Administrative Problems
Yet there are many reasons why a TSP-like agency would not work for SSIAs. Let's take a look at some of the devilish details.
Too Many Small Employers. The TSP is administered by just one employer -- the U.S. government -- with well-developed personnel, payroll and systems staffs to provide the essential employee education, retirement counseling, payroll deduction, timely funds transfers, and error correction functions. The Thrift Investment Board is a wholesaler of services. It is up to the federal employing agencies to deal with the retail, that is, the individual employees participating in the plan. In fact, the TSP statute directs the Office of Personnel Management to provide for the training of TSP counselors for each federal agency. The Bush plan is intended to reach all employees, but it makes no provision for the performance of essential employer functions. They could not possibly be performed by the more than five million small business employers who are now responsible for the payroll deduction and transmission to the IRS of Social Security taxes. Most small businesses have fewer than five employees, and they do not have the experience or administrative resources to support the new plan. These are barbershops, beauty salons, garages, restaurants, laundries, lawn services, households and other very small businesses who could not be expected to meet the high fiduciary standards required of those responsible for counseling employees, for presenting a new plan in the context of the employer's existing pension or other benefits, and for the timely and accurate transfer of funds for investment. The new TSP-like agency obviously could not provide such employer-type services, either directly or on a contract basis. About 650,000 businesses go out of business each year. How would the financial interests of SSIAs be protected in bankruptcy proceedings?
Untimely Investments. The TSP is computerized, like all other large plans, with investments made for each employee's account on the same day as the contributions are deducted from the employee's paycheck. Social Security taxes are deducted on paydays, but many small businesses send them to the IRS once each quarter. More than 80 percent of businesses report to the IRS on paper. Moreover, individual taxpayers are identified only once each year with the annual income tax filings, and it would be up to 22 months under current SSA (Social Security Administration) procedures before individual SSIAs could be credited and invested. The administration's proposal is to pay SSIAs the same annual return, regardless of when contributions were actually made during the year. So a contribution in January would not earn any more than a contribution of a similar amount in December. During a year of highly volatile markets, the attempted explanation of this provision to millions of outraged participants with irregular tax payments, because of illness, seasonal, temporary or other periods of unemployment, would be a daunting challenge to the plan's telephone counselors.
Unbalanced Accounts. The TSP is balanced to the penny every day. The Social Security system is never balanced. Each year there are billions of dollars of unreconciled discrepancies between Social Security taxes paid to the IRS and reported to the SSA. These discrepancies are tolerated because they generally have little impact on the ultimate calculation of employee benefits. Such discrepancies could never be tolerated by financial institutions responsible for the timely investment of each individual's funds. Theoretically, SSIA contribution errors might be largely corrected by a rigorous examination of employer records. Yet the error correction procedures, including retroactive adjustments of investment gains or losses in volatile markets, could bring the entire system to a screeching halt.
Inevitable Account "Leakage." As I mentioned, unlike the TSP, the Bush plan would prohibit loans and emergency withdrawals and would require individuals to purchase annuities on retirement. I find it politically inconceivable, however, that Congress -- or an administration -- would long be able to resist calls for emergency access to funds before a worker's retirement, and in lump-sum amounts. Suppose, for example, that an individual has suffered a devastating personal financial loss, such as thousands experienced in the recent Florida hurricanes in the destruction of their homes. Can you imagine a politician telling these persons that they may not access "their" SSIA balances to mitigate such dire misfortunes? What about a catastrophic illness, leaving a family's breadwinner unable to work. Could such persons be denied "their" account balances to sustain spouse and children? I don't think so. There are, of course, scores more such examples, and with 155 million potential participants, you can be sure that they all would arise. Administering the politically inevitable withdrawal (or loan) program would add enormously to the cost of the Bush plan, if it did not indeed bring it to its knees.
Communication Failures. The TSP has a very effective communications system, because it can rely on the federal employing agencies to distribute plan materials and to educate and counsel their employees. Even so, the TSP found it necessary to have the central record keeper for its 3.4 million accounts maintain a staff of more than 200 telephone counselors to respond directly to questions from individual participants. Since more than 200 million Social Security taxpayers and retirees eventually would be eligible for SSIAs, the required number of telephone counselors would be more than 13,000 based on the TSP experience, and probably much higher because of the special SSIA deficiencies noted above. Also, TSP mailings consistently have reached more than 99 percent of participants, but 25 percent of SSA mailings are returned as undeliverable. Congress would undoubtedly insist that every effort be made to advise all Social Security taxpayers of the SSIA benefits Congress intended to provide them. The TSP sent summary plan documents to all three million eligible employees, which required 18 trailer trucks. On this basis, the 155 million SSIA eligibles would require more than 900 trailer trucks. The eventual costs of such efforts at this point are unknown, but they clearly would have a significant impact on SSIA expenses. It is instructive that Fidelity Investments, a major 401(k) provider, has estimated that the administration of a 401 (k)-type plan for Social Security taxpayers would require a staff of 100,000.
Even if small businesses were able to perform normal employer functions for SSIAs, would they want to? SSIAs would be voluntary for employees but, if employees elect to have SSIAs, mandatory for their employers. The TSP and 401(k) plans generally are enthusiastically sponsored and supported by the large employers who offer them as a major benefit for their employees, and as a means to move away from the old-fashioned defined benefit retirement plans that require employers to bear substantial investment risks. The major attractions of the TSP and 401(k)s generally are the matching employer contributions and the immediate tax benefit from excluding employee contributions from taxable income. The ability to borrow or withdraw funds to meet emergency needs is also a significant benefit (about which I'll say more in a moment). SSIAs would offer none of these benefits, and would be a relatively unattractive product that employers might be reluctant to support, especially small employers who do not have any pension plans. Moreover, it would be unrealistic to expect small business employers to act as large corporate employers do in assuming the costs of investment losses because of bad advice to employees or employer error in transmitting funds for timely investment of 401(k) accounts. These serious concerns of small businesses would have to be addressed during congressional hearings on SSIA proposals.
Costs of Bush Plan
About 85 percent of small businesses (defined as businesses with fewer than 100 employees) do not now offer 401(k)s or any other pension plans, in part because they have such a small number of employees that the cost per employee of administering such plans would generally exceed any investment earnings.
A survey of major 401(k) providers in 2002 showed that they do not market 401(k) services to companies with less than 10 employees. But 60 percent of small businesses have fewer than five employees. The survey showed that the annual cost to a small business for 401(k) services was more than $3,000, which would be more than $600 per employee for a company with five employees and $300 for a company with 10 employees. Since the average income of employees paying Social Security taxes (including temporary and part-time employees) is less than $30,000, the average employee could contribute no more than $1,200 annually to SSIAs under the president's plan to limit contributions to up to 4 percent of salary. (There would also be an initial limit of $1,000, and the average contribution would be much less than 4 percent.) The administrative expenses would therefore eat up more than 50 percent of contributions from employees of companies with just five employees. And that is a major reason why there is no point to offering a 401(k) or TSP-type plan to the average small business -- unless, of course, the government is willing to absorb the administrative expenses. The 2002 survey concluded that if all 155 million Social Security taxpayers participated in the SSIA program, the administrative costs would be more than $46 billion a year, that is, 155 million times more than $300, which would be a subsidy to Wall Street for performing an uneconomic function. (SSIA proponents estimate that only two-thirds of eligible Social Security taxpayers would participate, in which case the annual administrative cost would be about $30 billion.)
SSIAs were originally proposed as a solution to the long-term problem of the Social Security trust fund. Recently, leading proponents of SSIAs have moved away from that rationale and agreed that the trust fund problem must be dealt with by other measures, including tax increases and benefit cuts that had earlier been ruled out. Nearly everything is now "on the table" as proponents seem willing to trade whatever it takes to gain support for SSIAs. One of the more extreme proposals would protect low-income people from the market risks of SSIAs by guaranteeing them a return similar to what they would have received if they had left their taxes in the trust fund. Thus the market risk would be shifted from the individual to the government -- an ironic outcome, since a major inducement for corporations to substitute 401(k)s for their defined benefit plans has been to shift market risk from the employer to the employee. A well-advised SSIA holder would invest the entire account in stocks and let the government absorb any losses. It seems that conservatives are about to relearn a lesson from history -- when the government tries to cut the cost of a popular program, it winds up spending yet more on it.
The Trust Fund Alternative
Since SSIAs are not feasible, the only practical way to gain the higher returns available from equity investments is to invest part of the Social Security trust fund in equities. That way, the overwhelming administrative costs of the Bush plan would be avoided. The total administrative cost of having the Social Security trust fund invest in the private funds proposed in the Bush plan would be no more than one basis point, that is, one one-hundredth of 1 percent, based on the actual costs of market investments by the Thrift Savings Plan. The likely increase in trust fund earnings would be an effective way to maintain the solvency of the trust fund without having to resort to significant increases in Social Security taxes or reductions in benefits.
Less Government Influence Over Private Companies. The major argument against trust fund investments in private securities is that they would lead to government influence over private companies. However, as shown in the chart on p. 21, there is even less government influence over private companies under the trust fund alternative than under the TSP or Bush plan approach.
Special Benefits for Trust Fund. Unfortunately, many political leaders have convinced many people that the Social Security trust fund is not really invested because it has been "looted," and that the trust fund consists of "worthless IOUs." Nothing could be farther from the truth, and such statements betray an apparent ignorance of federal finance in our highest circles of government. The trust fund is fully invested in the best securities in the world - U.S. Treasury obligations. Private trust funds invest in Treasury securities in the open market, but the Social Security trust fund buys its Treasury securities directly from the Treasury, which is more efficient than if the Treasury were to issue the securities in the market and then buy them back for the trust fund. In the process, however, the trust fund gets a much better deal than the private funds that buy Treasuries in the market. The trust fund, by law, may redeem its securities before maturity at par value, rather than at the sometimes-deep market discounts suffered by private investors during periods of rising interest rates. Also, since the trust fund gets its securities directly from the Treasury, it avoids the market transaction costs that private investors must pay. Finally, the law requires the Treasury to pay the trust fund an interest rate on all of its investments in Treasuries equal to the average yield on long-term Treasury marketable securities. This is a significant benefit to the trust fund, since long-term rates are generally much higher than short-term rates. Thus in recent years, private investors have been earning about 2 percent on their short-term Treasuries, while the Social Security trust fund was earning about 4 percent on effectively the same maturities. Politicians seem to be totally unaware of these subsidies to the Social Security trust fund, which have been there for many decades.
Trust Fund Dedicated to Social Security. The assets of the Social Security trust fund consist of investments in Treasury securities solely for future benefit payments. Yet political leaders from both parties complain that the Treasury has spent the trust fund surplus on government programs. What on earth do they expect the Treasury to do with the money -- bury it in the Treasury's back yard? The Treasury also spends the money it raises by issuing Treasury securities in the market. Does that mean that the private investors in Treasuries are also being "looted" by the Treasury? Of course not. The scandal would be if the Treasury left the trust fund uninvested and not earning interest. Then the Secretary of the Treasury would be in effect saying, "I don't owe you," and that indeed would be a worthless IOU.
So why do politicians find fault with perfectly sound financial practices? From ignorance, as I suggested earlier? Or is it because they are trying to hide the real problem, which is the unique way this major government program is treated in the budget? Social Security expenditures are excluded from the budget and thus from the restraints on other government spending, which is proper since they are entitlements, and cannot be restrained under existing law. But the Social Security surplus is then, improperly, included in the calculation of the overall budget deficit, for the sole purpose of appearing to have achieved deficit, and thus spending, reduction. Then, having committed this accounting farce, they have the audacity to complain that the phony budget treatment of the trust fund surplus makes it available to finance other programs. The problem here is not the financing of the trust fund, but the political gimmickry of its budget treatment.
Conclusion
In conclusion, the Bush plan for universal SSIAs is not feasible, and, I predict, will not survive the discovery process of responsible congressional hearings. The only practical way for the Social Security system to capture the higher returns available from investments in stocks is to diversify Social Security trust fund investments. The trust fund alternative, compared to SSIAs, would involve less government influence over private companies, would be less disruptive of financial markets, would save tens of billions of dollars a year in administrative costs, and could be effective this year, rather than the 2009 starting date proposed for SSIAs. The multi-trillion dollar transition costs proposed by SSIA proponents would be avoided. The additional trust fund earnings would go a long way toward strengthening Social Security finances, and would thus reduce, if not eliminate, the need for significant tax increases or benefit reductions.
You will find the movie tiresomely twee, and notice that it obviously thinks it is being funny at times when you do not have the slightest clue why that should be.
I went here expecting to find tight, well reasoned talking points with many links and lots of substance. Is it me? It seems like I'm overhearing a yawning clergyman talking to a bored choir.
Investica UK has been obsessing over State-run Chinese economic publications, and has decided the yuan may be revalued next week:
The speculation over a yuan revaluation has been fuelled by comments from a state run financial newspaper. The Securities Journal stated that, following reforms of the commercial banking sector and foreign exchange market, conditions were now ripe for a policy change. The Chinese markets will also be closed next week which will increase the attractiveness from a Chinese perspective of making a policy change. The rumours were also increased by the fact that the yuan briefly traded outside its trading band. The latest comments follow a flurry of reform hints over the past two weeks. Overall, the chances of a yuan policy change over the next week are now around 50% with the most likely outcome a wider trading band.
(Note the article refers to speculation "over" rather than speculation "on.")
Somebody asked, so here it is -- an extreme example of the supply-side impact of rising international oil prices.
While waiting we ran the Yale MCU model with trade share settings adjusted so import prices could be set exogenously. I set them -- dramatically but unrealistically -- assuming international price hikes in crude oil would raise import prices initially by 25%, then by 30%. Two results are plotted below.
First, you can see the impact on growth. Doesn't look like much at first glance (especially compared with the last recession, also illustrated).
But this is a sustained growth hit. That makes all the difference, as you can see from the soaring unemployment rate:
This is not a pretty picture at all. Good thing the scenario was extreme and unrealistic. Right?
Using the official measures and the Levy Institute Measure of Economic Well-Being (LIMEW)...Blue states consistently lead the Red states in economic well-being. Although the gap between them narrowed between 1989 and 2001, it widened during Bush's first term in office...Therefore, noneconomic factors seem to have played a decisive role in the last presidential election. (Emphasis added)
What? Surely what they meant to say is that economic factors did play a decisive role (as it any chi-square statistical test of their data would clearly show) but the role played was different than the one they imagined!
Unlike many of their counterparts these models don't rely on "setting" of subjective parameters reflecting the researcher's best guesses, but they do require guesswork regarding future values of the basic exogenous variables.
This quarter, we are most interested in Ray's "PIM" (import prices) setting. You can push PIM high enough to cause a basic 70's style inflationary recession. I recently had to take back a hasty assertion Paul Krugman had published a factual error in the NYT. Soon -- perhaps later today -- we will see if he's not the only East Coast economist predicting stagflation.
UPDATE: For anyone who is interested, I've rougnly callibrated PIM with world oil price movements and used the results in the January 28th version of Fairmodel to see if I could push things to stagflation. I couldn't. Yes, it is true oil costs more now. But when everything else is taken into account (by the computer) we go nowhere near stagflation.
More from the "last thing fish would discover" department...
Why do we buy bicycles from China rather than manufacture them ourselves? Why are so many construction workers undocumented immigrants? Indeed, why are there so many jobs Americans reportedly "won't do?"
It is obvious to all but politicians that any worker...whose service is worth only $10 an hour but must be paid $20 or more cannot be employed profitably. He would inflict clear losses on anyone who would hire him, which condemns him to a life of idleness, uselessness, and emptiness. Unaware of the very cause of his affliction, he is likely to take umbrage at society that apparently sentenced him to lifelong unemployment.
American labor laws evoke such feelings every day. At this time they enforce a minimum wage of $5.15 an hour, plus 7.65% payable into a Social Security account, plus 2% to 10% into an unemployment compensation account, plus 10% to 100% for workmen's compensation which is a fund that pays an employee who is injured in the course of his work. The compensation assessments vary from state to state, but the levies together readily double the employment costs in many occupations.
The Bureau calculates total fringe costs of $5.80 an hour for service workers and $8.73 an hour for construction workers. Skilled and trained workers surely are able to cover their fringe costs by way of takehome-pay adjustment; instead of earning $18.73 an hour they receive only $10. But how can an unskilled service worker who is to earn $5.15 an hour to cover additional fringe costs of $5.80 an hour? He obviously must render services worth at least $10.95 an hour to cover his employment costs. Anyone unable to render $10.95-services cannot be employed productively.
As the New York Times continues to publish pissy, whiny emails about John Bolton's relations with uncooperative staff, important material like this gets overlooked:
Mr. Bolton not only exerted his considerable influence publicly at congressional hearings but made certain the U.S. delegation to the United Nations understood that repeal of the obnoxious U.N. resolution was our principal objective.
The point was made without any of the usual diplomatic circumlocutions that muddy human communications at the United Nations. Mr. Bolton was blunt, categorical, unequivocal. He got the point across that the U.S. would not tolerate anti-Semitism under any guise at the U.N. or anywhere else.
As a result of John Bolton's forceful and courageous efforts, the obnoxious Zionism-equals-racism document was finally repealed by the U.N. General Assembly, a milestone in an environment where half-truths and circumlocutions normally hold sway. Mr. Bolton's achievement was all the more commendable since it became a fixed norm of U.S. foreign policy no longer attributable to the personal preferences of one or another U.S. ambassador to the U.N.
The United Nations has suffered and still suffers from many contradictions and subversions of its original purpose. Everyone agrees reform is the organizations main objective at present, when so many of its blemishes have come to the surface.
One of the most successful reformers of the United Nations has been John Bolton.
Markey, who tried unsuccessfully to force changes in the bill during House debate, said the legislation will make the United States more dependent on foreign oil because it fails to require cars and sport utility vehicles to be more fuel-efficient.
Since when is it kosher to claim legislation will do one thing because it fails to do something else? By this reasoning, we can argue the legislation will increase teen pregnancy because it doesn't include funding for condom distribution, raise the rate of homelessness because it doesn't have provisions for subsdizing low income housing, and so on, and so on, and so on...
We are now one step closer to being able to send mice to Mars and the outer planets.
Seriously, though, this seems rather cool.
UPDATE: More here. The tiny bits I remember from my childhood Gilbert chemistry set suggest these experiments involve easy-to-produce gasses. One can only hope kids won't start experimenting on themselves -- as in, for example, "just wake me up when it's time for college!"
Underlying these disappointing numbers is sluggish job creation. Private-sector employment is still lower than it was before the 2001 recession. (Emphasis added)
Here are three measures of private sector employment: the BLS payroll survey, the BLS household survey, and Fairmodel's JF varable. The horizontal dotted lines show prerecession employment levels maxed out at, respectively, December 2100 for the payroll survey and January 2001 for the other two:
So how are we doing? As those pesky little EconoPundit red arrows show, all three current numbers are above the dotted line. So I guess it's like they say: Who are you gonna believe -- Paul Krugman, or your own lying eyes?
UPDATE: Reader Dave Rajangam says we're wrong and Krugman is right:
...Krugman is technically correct that "Private" sector employment is below the 2001 peak. The payroll survey includes government payrolls which were expanded post Sept 11.
Here's the payroll survey minus BLS series LNS12032188, government wage and salary employment: Yes indeed -- we retract the payroll survey contention, because if it includes government employees Paul Krugman's words were correct.
But check this out -- when we plot payroll minus government against government employment alone, and normalize the two, we can see what transpired:
However -- the editorial's opening paragraph exhibits incredible laziness:
The United States spends far more on health care than other advanced countries. Yet we don't appear to receive more medical services. And we have lower life-expectancy and higher infant-mortality rates than countries that spend less than half as much per person. How do we do it? (Emphasis added)
These urban legends have been debunked so many times it is hard to believe the author considers them worthy of passing along.
Can stagflation happen again, asks Paul Krugman? Last week, he says, "fears of a return to stagflation sent stock prices to a five-month low." And even worse, few have noticed what he calls "a mild form of stagflation" -- inflation combined with an economy "still well short of full employment."
The basic jobs number -- a 5.2% unemployment rate -- may not seem all that bad, he admits, but other indicators show "a situation much less favorable to workers than that of the 1990's." A lower fraction of population employed, for example, and an average duration of unemployment "much higher than it was in the 1990's."
This "weak" job market, he says, leaves workers struggling to get ahead, with minimal wage increases that haven't kept up with inflation -- explaining (in his mind) why respondents tell pollsters the economy is "only fair" or "poor," rather than "good" or "excellent."
Let's examine the argument as it stands so far. The Bureau of Labor Statistics has for decades contended with critics' periodic, each as-if-for-the-first-time rediscovery of the discouraged worker effect. Partly because the unemployment and the discouraged worker effect can be misused for political purposes, the BLS has for years maintained six series (identified as U-1 through U-6) called "alternative measures of labor underutilization":
U-1 Persons unemployed 15 weeks or longer, as a percent of the civilian labor force
U-2 Job losers and persons who completed temporary jobs, as a percent of the civilian labor force
U-3 Total unemployed, as a percent of the civilian labor force (official unemployment rate)
U-4 Total unemployed plus discouraged workers, as a percent of the civilian labor force plus discouraged workers
U-5 Total unemployed, plus discouraged workers, plus all other marginally attached workers, as a percent of the civilian labor force plus all marginally attached workers
U-6 Total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all marginally attached workers
Here's a plot of U-1:
The red arrow points to two facts Paul Krugman left out. Fact #1 is the last recession was the mildest in a generation. Fact #2 is, simply, that things are getting better for job seekers. Here's a plot of U-6, the broadest alternate measure of labor underutilization:
The series only begins in 1994 so we can't compare recessions, but it otherwise corresponds with what we've seen so far, and with what's seen in all the other alternative measures: the recovery is well under way. It is questionable whether "weak" is an appropriate description of the current job market.
So what in the world is Paul Krugman smelling? He's careful to avoid any close analogy to the 1970's, when oil price hikes exerted a supply-side effect, choking off economic growth. And he's quite correct to avoid the analogy, as you can see from this long-term plot of petroleum and petroleum products' import price index: Are we about to re-live the stagflationary 70's? Just compare the story told by the red arrows (then) and that told by the blue arrows (now) (bearing in mind adjusting for exchange rate fluctuations would only make the conclusions more dramatic).
So what exactly is Paul Krugman smelling? In his own words:
We shouldn't overstate the case: we're not back to the economic misery of the 1970's. But the fact that we're already experiencing mild stagflation means that there will be no good options if something else goes wrong.
How in the world can be claim we are experiencing "mild" stagflation? The answer is he's comparing the current job market and its 5.2% unemployment rate with the 1990's, when unemployment went all the way down to 4%.
The problem with this comparison is you can't simply measure the "natural" rate of unemployment -- the rate we'd see when we are enjoying what's called "full" employment -- as the last low point of the rate. It has been quantitatively demonstrated that in the absence of the artificially high stock prices of the tech stock bubble, the unemployment rate would have gone no lower than 5.5% during the 1990's. Here is the experiment, re-run with latest data:
The red and green arrows point to what's rather uncomfortable for some to admit: in the absence of the tech stock bubble, the unemployment rate would in approximate terms have gone no lower than its current value of about 5%. We are currently at full employment, in other words.
So what does Paul Krugman smell? Frankly I'm not sure, but I don't think it is good economic analysis.
These numbers will be thrown all over the place as evidence of rekindled inflation, but they are all consistent with continued (and strong) job expansion.
UPDATE II: I don't get it. I just don't get it. Where is the "weak" labor market Paul Krugman is talking about? Here's the entire recession and postrecession plot of annual percent changes in average hourly earnings of production workers:
In the aggregate, average pay was increasing for virtually all of 2004 (big fat red arrow). Is the weak job market Krugman talks about the less-than-impressive downturn of the last two months (little puny blue arrow)?
...we are entering an era in which a donor can give an unlimited amount of money to an unaccountable group without any public disclosure. Before McCain-Feingold, big donors gave fully-disclosed money to the political parties, which, because they represented the entire coalition that made up the Democratic or Republican parties, were far more accountable to the public than the new, outside, groups became. Now, new C4s like protectyourcheck.org do not even have to reveal where they get their money — a central tenet of clean campaigning. And it was all done in the name of reform.
Anti-Japanese demonstrations have broken out in Shanghai and Hong Kong, with Chinese authorities looking on with winks and nods. The Chinese want Japan to apologize for aggression in the 1930s and 1940s, although Japan has done so about forty times in recent years. The Chinese also claim not to like Japan’s newly revised history textbooks on the subject. Then there’s the ongoing squabble about oil and gas reserves on some offshore islands and the matter of Japanese membership in the U.N. Security Council.
Recycling an argument that now seems sustainable...
In the Chicago Tribune, the great Amity Shlaes discusses the death tax.
Back in June of 2003 (can EconoPundit be that old?) we wrote:
...my Democratic activist buddy just couldn't understand why his latest focus group was so cool to the Party's position on inheritance taxes. Nobody had a family rich enough to be touched by the "death tax" -- but they were all opposed anyway. Nobody owned a small business, but still they argued passionately for small businessmen and family farmers unable to pass businesses along to their kids.
My buddy just didn't get it. "Do you know any farmers?" he asked. "Are any of your parents millionaires?" How could they have been so dense, he wondered to me afterwards. "They just thought this kind of tax is unfair," he complained in disbelief.
Any economics professor knows how easily students are shocked by U.S. income distribution. It all just looks so unfair , the top 20% earning over 40% of all income and so on.
Their reaction is a proper expression of democratic traditions, even of Western civilization itself. An egalitarian prejudice is basic to our culture. When combined with historical details like Utilitarian philosophy and the Great Depression, this prejudice gave rise to the progressive income tax.
But an obscure and extremely interesting feature of progressive taxation is the following. When imposed on an unequal distribution of income, a progressive distribution of taxes must by simple arithmetic appear less fair than the distribution of income itself. If richer people constitute a top 20% earning 40% of all income, in other words, a progressive income tax means they must also constitute a top 20% paying, say, 60% of all the taxes.
Those shocked by income inequities, in other words, will most certainly be even more scandalized by the even-more-unequal distribution of taxes generated by progressivity.
This is a kind of automatic stabilizer moving redistributive taxation in a less-redistributive direction. It is a real dilemma for the Dems. It explains why the tax cut is for them a guaranteed losing issue.
UPDATE: My friend might easily argue his focus group suffered from "false class consciousness." The concepts of class and class consciousness have fallen into disrepute lately. Is this perhaps why some academic friends think it is time to bring these back?
UPDATE II: Democratic Party opposition to both inheritance tax repeal and private accounts seem linked by a far more intense hostility to intergenerational wealth transfer than that felt by the American public at large.
If these professors had done Ronald Coase-style research, they would not have wasted thousands of grant dollars finding what every small retailer knows by heart.
It is called "buyer's remorse."
Only an academic economist could think this is new, mysterious, or even interesting.
UPDATE: Pejman has some thoughts about this as well.
UPDATE II: You have to know a little bit about life on the other side of the counter to understand all this. Thaler and Iyengar -- at least as the story is told by the NYT -- assume profit maximization is consistent with maximization of choices available to consumers.
But this is of course nonsense. The number of purchase options you are faced with is always carefully chosen -- neither too large nor too small. Buyers generally have exactly the "right" amount of choice -- the number of options they feel most comfortable with.
Retailers who don't get this right lose out to the others who do.
UPDATE: And on a related (some might even say "lighter") note there's this.
UPDATE II: Jon Henke is thinking about this as well:
While much of Europe is relatively wealthy, they have essentially "securitized" their financial progress by shifting risk to the government. That's a good plan for high risk/low reward activity, if you can get a sucker to take the bet. Europeans have found their sucker, and it is them.
The result is little social risk, and reduced economic gain. Grandma and Grandpa may like the comfortable bargain they've made, but their grandchildren suffer for it in ways they cannot even conceive.
Maybe this happens all the time, but at first glance -- to me at least -- this seems like a breathtaking move. The Food and Drug Administration's rulings are supposedly based on sound science. If a judge is more qualified than is the FDA, well then heck -- why waste all those tax dollars on labs and technicians?
This seriously undercuts judical activism. It sets widespread respect for the judiciary in certain quarters against the same audience's popular demand for a zero-risk society. How can anyone demand the FDA's protection from all drug-related health risk if he or she also believes FDA scientists need judicial oversight?
UPDATE: And to add to the complexity of the situation, won't these folks' business be affected?
No! I won't come out of my room until wages stay equal to profits!
In connection with yesterday's whiny, incompetent, and misleading Riccardi LA Times "news" article "Wages Lagging Behind Prices" here's a little something I prepared for class this morning. It shows 1950-2004 quarterly changes in employment (vertical axis) as these vary with changes in employers' share of national income (horizontal axis):
Okay, what have we learned? You can stamp your feet, yell, cry, hold your breath -- anything a bratty dumb child might do -- but it won't change a cruel fact of economic life: firms hire when they think it is in their best interest to do so.
Hmmmm... The immigration issue...Could prove deceptively decisive in the next election...in England:
The Tories also now have the first practicing Jew to lead any major British party. During the pre-Labor Day days, he endured a hail of personal abuse from Labour advertisements depicting him as a Fagin, a Shylock and a flying pig. He then hit back where it has hurt Labour most, by exploiting Labour's stumbling policies on immigration and asylum. He was not the first Tory to sense the fear, outside the metropolitan elites, that Britain has become a soft touch for Balkan gypsies, benefit-seeking Turks, and Nigerians with top qualifications in credit-card fraud. But, protected by his own immigrant parentage and aided by a controversial Australian adviser from the never-mind-the-dinner-parties school of politics, he has jumped upon the tiger--and made the issue the fastest riser up the pollsters' charts.
Labour has now withdrawn its Fagins and flying pigs. The evangelical Blairite held responsible for them, campaign chief Alan Milburn, has been pushed back into his box to make space for the man who masterminded Labour's last two victories, Mr. Blair's difficult partner in eight years of power, Chancellor of the Exchequer Gordon Brown.
This is a big city. Every so often on exit or entrance of your parked car your face or demeanor will somehow be offensive to one or more young people packed in some random auto crawling along in traffic.
And one of them shoots you with his right hand and smiles. Gotcha. If it had been a gun you would have been dead.
I learned long ago to ignore packed cars with kids who might behave this way. (It's an alternate version of the big-city rule: "avoid eye contact.")
But that grin you get -- that smile -- you can't forget it. Gotcha you turd, you lump, you couldda been DEAD.
So tell me: doesn't Sandy Berger set the current standard? Or are we to understand there is now a nuanced and sophisticated postmodern reality: a class of good public officials (who deserve leniency) and an alternate class of bad ones (who don't)?
The NYT has discovered what some of us already knew: many undocumented immigrants pay into Social Security without receiving benefits:
Starting in the late 1980's, the Social Security Administration received a flood of W-2 earnings reports with incorrect -- sometimes simply fictitious -- Social Security numbers. It stashed them in what it calls the "earnings suspense file" in the hope that someday it would figure out whom they belonged to.
The file has been mushrooming ever since: $189 billion worth of wages ended up recorded in the suspense file over the 1990's, two and a half times the amount of the 1980's.
In the current decade, the file is growing, on average, by more than $50 billion a year, generating $6 billion to $7 billion in Social Security tax revenue and about $1.5 billion in Medicare taxes.
In 2002 alone, the last year with figures released by the Social Security Administration, nine million W-2's with incorrect Social Security numbers landed in the suspense file, accounting for $56 billion in earnings, or about 1.5 percent of total reported wages.
Social Security officials do not know what fraction of the suspense file corresponds to the earnings of illegal immigrants. But they suspect that the portion is significant.
But the NYT ignores certain data that might be counterposed against this "surplus." Guest workers' remittances from US to Mexico, for example, are estimated at anything from $17 to $50 billion annually.
On three things the Vast Right-Wing Conspiracy stands...
And these three things are (1) Rush, (2) Fox News, (3) the Blogs.
The think tanks and politicians -- important though they may be -- are best imagined as something like background "sources" and "uses" of information.
It seems to me Byron is missing the very important point that each of (1), (2), and (3) above arose in response to public demand. A market for each product was already there. Each pays its own way, always has, and continues to do so. Being (or not being) "well-funded" may be important for the new VLWC, but it continues to be irrelevant for the VRWC. The three foundations of the VRWC are self-funding.
UPDATE: This is not to say the book isn't worthy. Here's some new information it presents, for example:
Using previously unpublished statistical evidence, I show that in fact [in contradiction to its director's claims] Fahrenheit 9/11 did very well only in a few deep-blue areas -- and also in Canada, where ticket sales counted toward the film's North American gross. Virtually everywhere else, the movie underperformed significantly.
Tim Worstall thinks the NYT is confused in its usage of the basic open economy leakages=injections formulation.
What I can add to the discussion is this: whatever meager data that do exist say the marginal propensity to save in the Peoples Republic of China is a massive 0.6 -- meaning our treasuries and other assets have roughly the same sigificance to them as new sofas and kitchen appliances have to us.
Rather than "loaning" us money, in other words. they're buying exactly what they want.
UPDATE: For those who have always wanted to know what the Chinese consumption function looks like, here's what the best available data show us: With all due respect this is the most puny consumption function I have ever seen. Each additional dollar's worth of income generates only 45 cents of additional spending. The rest is saved. Mostly here.
Students of international trade take note: here's where postmodernism meets protectionism. Each is a really dangerous "ism" all by itself. One's imagination boggles at the idea they are starting to conspire and hatch plots.
