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Outstanding Stories of the Week

A Greener Globe, Maybe
Andrew C. Revkin
New York Times, August 29, 2004, Section 4, Page 12

This article examines the ways in which slower population growth may lead to a cleaner environment in the future and reduce many of the strains on the planet's resources. This important aspect of population growth has been almost completely absent from most economic analyses of the impact of projected demographic trends.

Homeowners Come Up Short On Insurance
Joseph B. Treaster
New York Times, August 31, 2004, Page A1

This article reports on a common practice among insurers of selling "replacement" policies for homeowners that have coverage limits that are far short of the cost of rebuilding a home. This has left many disaster victims with insufficient funds to repair or rebuild damaged houses.


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Population Aging and Living Standards

Coming Soon: The Vanishing Work Force
Eduardo Porter 
New York Times, August 29, 2004, Section 3, Page 1

Economic Strains: Old, in the Way, and Hard at Work
Eduardo Porter
New York Times, August 29, 2004, Section 4, Page 12
Published online as, "Old, in the Way and Hard at Work"

These articles discuss the impact that the aging of society will have on the economy and the labor market. Both articles imply that living standards in the future will be lower at present than they are today in the United States and throughout much of the world. There is no credible economist who supports this view.

The position of economists who have expressed a concern about the impact of aging - including those cited in these articles - is that income will rise less rapidly than would otherwise be the case due to the aging of the population. This is easy to show with simple arithmetic.

Except in very unusual circumstances such as devastating wars or natural disasters, productivity -- and therefore economic wealth -- grows through time, leading to higher living standards. In the last decade, productivity growth in the United States has averaged well over 2.0 percent annually. Most economists expect that this rate of productivity growth will persist for the indefinite future. At a 2.0 percent annual rate of growth, output per worker hour will be almost 150 percent higher in 2050 than it is today. If the tax rate would increased a full 10 percentage points (much higher than any projections imply would be necessary), it would still leave after tax wages more than twice as high in 2050 as they are today. Unless productivity growth were to fall to near zero - something that has never happened and no economist is predicting - after-tax wages and incomes will be far higher in 2050 than today, in spite of any tax increases that may be needed to pay for benefits for retirees.

The discussion of prospective labor shortages seriously misrepresents the way markets work. There are always labor shortages, in the sense that employers would always like workers to work for them at below the market rate. When the United States and other countries industrialized, tens of millions of farmers experienced labor shortages, as farm workers left for better paying jobs in cities. If the aging of the population does result in a reduced supply of labor, this will create a situation in which workers no longer take low-paying, low productivity jobs, like check-out clerks at convenient stores.

This might be bad news for convenience store owners, but it is not bad for the economy. It simply means that there will be far fewer convenience stores. If people really value convenience stores, then they will be willing to pay higher prices to buy their food at them, and then these stores will be willing to offer workers higher salaries. The same logic applies to all the other jobs that supposedly are threatened with labor shortages. If the work is really valued, then the wages should rise until enough workers switch into the areas facing shortages. The article certainly presents no reasons why we would not expect normal market forces to be operating.

Both articles refer to Federal Reserve Board Chairman Alan Greenspan's recent comments warning that the government will not be able to afford to pay scheduled Social Security and Medicare benefits. It is worth noting that Mr. Greenspan has repeatedly contradicted himself on these issues. In 2001, he testified to Congress that President Bush' tax cuts were a good idea because he was worried that the government would pay off the debt too quickly. In other words, he was worried that the government would have too much money - the direct opposite of his recent concerns.

Mr. Greenspan was also the Chairman of the 1983 Social Security commission which deliberately raised Social Security taxes above the level needed to pay current benefits, in order to build up a surplus that would be used to help finance the retirement of the baby boomers. His current proposals to cut benefits for baby boomers is therefore similar to defaulting on the government debt held by the Social Security trust fund. This would be the largest default in the history of the world and would redistribute more than $1 trillion dollars from families in the bottom four quintiles to the richest 5 percent (see "Defaulting of the Social Security Trust Fund Bonds: Winners and Losers").

Mr. Greenspan has also repeatedly argued for the merits of free trade, yet he has never commented on the single most expensive form of protectionism facing the U.S. economy - restrictions that prevent foreign doctors from practicing in the United States. If doctors in the United States were paid at the same rate as doctors in other rich countries, it would save the economy $80 billion a year. Most of the projected increase in government spending associated with a growing population of retirees is actually due to projected increases in health care spending. The United States is alone among industrialized countries in facing out-of-control health care costs. If Mr. Greenspan were consistent in his support of free trade, and the U.S. proves incapable of fixing its health care system, then he would be advocate allowing foreign providers to compete for Medicare beneficiaries (see "Medicare Choice Plus: The Answer to the Long-Term Deficit Problem").


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The State of the Economy

Economic Squeeze Plaguing Middle-Class Families
Timothy Egan
New York Times, August 28, 2004, Page A11

This article examines the economic situation of middle-income families. At one point it comments that "despite low inflation, record home ownership and productivity" many middle income families are feeling squeezed.

There is no obvious reason why these three factors would be inconsistent with declining prosperity for the middle class. Inflation is simply a measure of price changes. There is not direct relationship between economic well-being and inflation rates. For example, the sixties were by far the country's most prosperous decade, even though inflation reached relatively high levels by the end of the decade. Home ownership rates and productivity typically rise through time. (The eighties were an exception, since the home ownership rate fell slightly during this period.) That means that the country will almost always be experiencing record levels of homeownership and productivity.

At one point the article refers to President Bush's "emphasis on trying to give tax money back to middle-class families." President Bush does not have an emphasis on giving tax money to middle class families. More than 40 percent of his tax cuts went to the richest 5 percent of taxpayers. If his emphasis had been on giving tax money to middle class families, the tax cut would have not have been oriented so much towards the wealthiest families.


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Social Security and the "Opportunity Society"

From His 'Great Goals' of 2000, President's Achievements Mixed
Dana Milbank
Washington Post, September 2, 2004, Page A1
Published online as, "Bush Promises 'a Safer World'"

Bush Outlines Plan for a 2^nd Term and Attacks Kerry's Record
Adam Nagourney and Richard W. Stevenson
New York Times, September 3, 2004, Page A1

These articles both discuss President's Bush's plans for a second term as well as his record in his first term. The Post article refers to Social Security's "insolvency" while the Times article comments on a "looming financial crisis." Neither article indicates the basis for these comments. The Social Security trustees' report, the standard reference point for analysts, shows that the system will be fully solvent for nearly forty years, with no changes whatsoever, and even after this date it will always be able to pay a higher benefit than what current retirees receive.

A recent analysis by the Congressional Budget Office showed that the system was even stronger -- that it could pay all scheduled benefits through 2052 with no changes whatsoever. Both analyses show the program to be much stronger than it has been through most of its existence.

At one point the Times article reports that President Bush's plans to replace a portion of Social Security with individual accounts and to have more tax sheltered individual health accounts are "intended to promote individual power and responsibility." While this is how President Bush describes his agenda, politicians stated motives are not always their real motives.

The most obvious beneficiaries of President Bush's proposals are the financial firms that manage these accounts. Many of these firms are also major financial supporters of President Bush and the Republican Party. It is possible that Mr. Bush's agenda is motivated at least in part by a desire to reward his political backers.

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Flexible Work Schedules

Domestic Questions Remain
Dan Balz
Washington Post, September 3, 2004, Page A1

This article assesses President Bush's agenda for a second term. At one point it refers to a proposal to change the Fair Labor Standards Act, so that firms are not required to pay an overtime premium when workers work more than 40 hours a week. The article described this proposal as being "aimed at improving the quality of lives for mothers, fathers and their children." It is questionable whether improving the quality of lives is the purpose of this proposal, even though that it is the Bush administration's claim.

While President Bush claims that he wants to increase flexibility for families, it is not clear that his proposal would have that effect. If the law is changed in the way the President has proposed, an employer can demand that a worker put in overtime one week, in exchange for comp time in a future week - at the convenience of the employer, not the employee. If the worker refuses, then the employer can fire him or her. This does not increase flexibility for workers in any obvious way.


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The Budget

Bush Tells Floridians He'll Seek $2 Billion to Aid State
David E. Sanger
New York Times, August 28, 2004, Page A10

This article reports on a pledge by President Bush to provide $2 billion in federal assistance to Florida to help it recover from the impact of a hurricane. It would be helpful if this figure were expressed as a share of federal spending (0.08 percent—considerably less if some of this funding takes the form of subsidized loans), since few readers will be able to assess the meaningfulness of $2 billion in spending.

South Gains the Most in a Major Redistribution of Public Housing Subsidies
David W. Chen
New York Times, August 30, 2004, Page A17

This article reports on the Bush administration's plans to change the formula through which it allocates money to public housing systems. At one point it refers to Section 8 housing subsidies, the government's largest direct housing subsidy program. (The housing interest tax deduction is considerably larger.) The article notes that the Section housing subsidy costs $14.4 billion annually. This amount is equal to approximately 0.6 percent of federal spending.

Bush Promises; Some Unfulfilled, Some Thwarted
Edmund L. Andrews and Robin Toner
New York Times, September 1, 2004, Page A1

This article examines the extent to which President Bush fulfilled the main commitments made during his 2000 election campaign. At one point, it refers to projections by outside experts, that Medicare and Social Security will "eventually fall trillions short of the money needed to meet all the entitlements guaranteed under current law."

This projected shortfall refers to the seventy-five year planning horizon; both programs currently have substantial reserves. Virtually no readers have any idea of projected income over this planning horizon, which makes it difficult to assess the importance of this shortfall. This information is readily available - the trustees of the Social Security program project its shortfall as being equal to 0.7 percent of income over this period. (The Congressional Budget Office projects the shortfall at about half this size.) In other words, it is equal to 70 cents of every hundred dollars of income. The Medicare trustees project the shortfall as being equal to 1.45 percent of income.

The article also includes references to education spending, noting that President Bush has increased spending on the poorest schools by 60 percent to $13.3 billion and set aside $1 billion to promote reading skills among young children. The article does not indicate the time frame over which this spending is taking place. If it refers to a single year's spending, then the additional funding for poor schools is equal to approximately 0.5 percent of annual spending. The reading initiative costs an amount equal to approximately 0.004 percent of annual spending.

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Olympics and GDP

Winners With Wallets
Paul Blustein
Washington Post, August 28, 2004, Page E1

This article discusses the relationship between national GDP and medals won at the Olympics. The article uses exchange rate conversions to assess each country's GDP. Economists would use purchasing power parity GDP for this sort of assessment, since it gives a much more accurate assessment of a country's wealth.

The purchasing power parity measure also makes much more sense of the medal counts. For example, China earned roughly 60 percent as many medals as the United States. While its GDP measured on an exchange rate conversion basis is only a bit more than 10 percent of the U.S. GDP, on a purchasing power parity basis, its GDP is close to 60 percent of the U.S. GDP.