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Outstanding Stories of the Week

For Unemployed, Wait for New Work Grows Longer
John Leland
New York Times, January 9, 2005, Section 3, Page 1

This article examines the prevalence of long-term unemployment. It notes that the percentage of workers who have been unemployed for long periods of time (more than 26 weeks) is more typical of a recession than a period of 5.4 percent unemployment.

Cash Often Fails to Match Aid Pledges
Colum Lynch
Washington Post, January 14, 2005, Page A14

This article points out that the actual aid for Tsunami victims may prove to be considerably less than what was pledged. Much of the money reported as aid, is in fact low- or no-interest loans. Also, in many cases aid designated for Tsunami victims is simply being redirected from other projects. As a result the actual amount of cash going to assist Tsunami victims may be considerably less than what was publicly pledged.

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Social Security

Untangling the Debate on Social Security
Richard W. Stevenson
New York Times, January 9, 2005, Section 4 Page 3

This article examines some of the key issues in the Social Security debate. When assessing whether President Bush's proposal for private accounts will improve the situation, it notes that proponents of private accounts point out that the stock market has historically generated higher returns than the government bonds held by the Social Security trust fund.

The returns in the stock market in the past are irrelevant. The relevant question is what returns the stock market will give in the future. (If economic growth is the same in the future as in the past, then Social Security would be fully solvent indefinitely, with no changes whatsoever.) None of the proponents of privatization has been willing to write down the set of dividend yields and capital gains that will produce the 6.5 percent annual returns that they are projecting for the stock market. This is an extremely simple exercise in arithmetic. The fact that proponents of privatization refuse to write down projections of dividends and capital gains suggests that they do not really believe the claims they are making about stock returns (see the "No Economist/Policy Analyst Left Behind Test").

Bush Promotes Plan For Social Security
Michael A. Fletcher
Washington Post, January 12, 2005, Page A4

Bush Presses His Argument For Social Security Changes
Elisabeth Bumiller
New York Times, January 12, 2005, Page A16

These articles report on President Bush's efforts to promote his plan to partially privatize Social Security. At one point the Times article asserts that "even without changes, Mr. Bush's critics say, the system would be able to pay three-quarters of promised benefits four decades from now."

While critics of President Bush's plan do make this point, it is actually the Social Security trustees who make this projection. Four of the six Social Security trustees are political appointees of President Bush (the secretaries of Health and Human Services, Labor, Treasury, and the Social Security Commissioner).

The Post article reports that President Bush commented on the fact that African-American men have shorter life expectancies than white men. According to the article, he claimed that his plan would therefore be a boon to black men, since they would be able to pass along their private accounts to their children.

It is worth noting that it is impossible to both ensure a stable retirement income (like the inflation-indexed annuity provide by Social Security) and to pass along accounts to heirs. If retirees are not required to turn their accounts into annuities, then there is no guarantee that they will have a decent income throughout their retirement. If people do live long lives, then they may have little or no money left in their accounts to support them in their last years.

More importantly, it would have been worth noting the implication of President Bush's assessment. While African-Americans do have shorter life expectancies than whites at present, Social Security policy is designed for 30 to 40 years in the future. Effectively, President Bush has assumed that nothing will be done during this period to eliminate or reduce the racial inequalities in life expectancies. Instead, he is trying to adjust retirement policy to accommodate these inequalities, apparently accepting that these will persist for many decades into the future.

Overhauling Retirement Is Worth Risk, Cheney Says
Elisabeth Bumiller
New York Times, January 14, 2005, Page A14

This article reports on a speech by vice-president Dick Cheney in which he argued that privatizing Social Security was both desirable and necessary. At one point it notes that Mr. Cheney compared a 2 percent return that he attributed to Social Security with a 6.5 percent rate of return on investment for investing in the stock. Cheney claimed the $1000 invested at the former rate would produce $60,000 after 40 years, while $1000 invested at the latter rate would yield $160,000.

It is important to note that returns on Social Security are depressed by the need to pay for the current generation of retires. If Social Security revenue is instead diverted to private accounts, then it is necessary to pay for current beneficiaries with other taxes. The return on these other taxes is minus 100 percent, since the workers who pay them get none of this money back. It is also worth noting that Mr. Cheney's 6.5 percent return calculation assumes that all funds are invested in the stock market all the time. Virtually all analysts, including President Bush's commission assume that accounts will hold a mix of stocks or bonds, with a 50/50 or 60/40 ratio being the standard mixes. Such a mix substantially lowers the rate of return.

Also, the only reason that Social Security is projected to face a shortfall is that the trustees project that future economic growth (and profit growth) will be far lower in the future than in the past, averaging just 1.5 percent annually when measured against the consumer price index. In the past, the growth rate has averaged 3.5 percent. Stock return projections derived from this profit growth projection, and based on the current price to earnings ratio in the stock market are just 4.5 percent (see the "No Economist/Policy Analyst Left Behind Test"). When an accurate projection of stock returns is used, individual accounts provide approximately the same return as the bonds currently held by the Social Security trust fund, after netting out administrative costs.

The article also notes that Mr. Cheney referred to a shortfall of $10.4 trillion in Social Security over the infinite horizon. While it notes that the bulk of this shortfall occurs well beyond the 75-year planning period for the program, it would also be useful to put this number in context. Over an infinite horizon, the projected shortfall is equal to 1.2 percent of GDP. By comparison, President Bush's tax cuts are equal to approximately 2 percent of GDP or $17.3 trillion.

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Job Growth

Ended 2004 With Gain in Payrolls
Nell Henderson and Amy Joyce
Washington Post, January 8, 2005, Page A1

This articles report on the release of December employment data by the Labor Department. The article notes the loss of 2.6 million manufacturing jobs since the start of the recession in 2001 and comments on the impact of productivity growth in reducing the demand for manufacturing workers. While productivity growth has certainly been an important factor in reducing manufacturing employment over this period, the rise in the trade deficit has been even more important.

The trade deficit has risen from 3.9 percent of GDP in 2000 to 5.2 percent in the third quarter of 2004. Most of the deficit is attributable to a trade deficit in manufactured goods. If the trade deficit had just remained at its 2000 level, measured as a share of GDP, manufacturing employment would be approximately 1.4 million higher than it is today.

It is also worth noting that recent data indicate that productivity growth may be slowing. Productivity growth in the 3rd quarter was reported as 1.8 percent. Payroll hours expanded at a 2.0 percent annual rate in the fourth quarter, which means that if the business sector grew at a 3.5 percent annual rate in the quarter then productivity growth was just 1.5 percent. By comparison, annual productivity growth has averaged close to 4.0 percent since 2001.

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Trade

Trade Deficit Leaps Again
Paul Blustein
Washington Post, January 13, 2005, Page E1

U.S. Trade Deficit Rises to New High; More Risk to Dollar
Elizabeth Becker
New York Times, January 13, 2005, Page A1

These articles report on an unexpected jump in the size of the monthly trade deficit to a record $60.3 billion in November. Over the last three months, the trade deficit has been running at more than a $660 billion annual rate, just under 6 percent of GDP.

Both articles include comments from Treasury Secretary Jack Snow, attributing the rising deficit to slow growth in Europe and Japan. The U.S. currently exports just over $300 billion a year to these regions. If their economies had grown an additional 10 percent over the last five years (increasing their annual growth rates by 2 full percentage points - an enormous increase), then U.S. exports to these countries would be, at most, 15 to 20 percent higher at present. That would translate into an increase of $45 to $60 billion at present. In this hugely optimistic scenario for growth abroad, the trade deficit would still be in the range of $600 to $615 billion. In other words, the trade deficit cannot plausibly be attributed to slow foreign growth.

The Times article includes the assertion that economists believe that the United States will have to save more to bring down its trade deficit. The way in which more savings leads to a lower trade deficit (apart from its effect on causing the dollar to fall) is by reducing overall demand - in effect throwing the economy into a recession. The logic of this argument is that if GDP fell by 5 percent, then imports will fall by at least 5 percent (approximately $100 billion) since we will be buying 5 percent less of everything, included foreign produced goods. In effect, these economists are saying that a recession will lower the trade deficit.

The Times article reports that the net foreign debt of the United States is $2.4 trillion. Actually, this is the Commerce Department's estimate for the net foreign debt at the end of 2003. Since the current account deficit has been running at more than a $600 billion annual rate for 2004, the net foreign debt is almost certainly over $3 trillion at present.

The Times article includes an extremely useful chart that shows the trend in the trade deficit as a share of GDP over the last twenty-five years.

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The Budget

Bush’s Budget Expected to Be Aggressive
Jonathan Weisman
Washington Post, January 12, 2005, Page A12

This article reports on President Bush's plans for the 2006 budget. The article reports that President Bush wants the cost of any future changes to entitlement programs to be assessed past the normal five or ten year budget windows. It is worth noting that President Bush had earlier argued, specifically in reference to his first tax cuts, that a ten year budget window was too long because the future was so uncertain. He argued that the cost should only assessed over a five year period.

Applying Brakes to Benefits Get Wide G.O.P. Backing
Robert Pear
New York Times, January 9, 2005, Page 19

This article reports on Republican plans to cut many areas of spending in the 2006 budget. Much of the discussion is unclear, most importantly because it does not indicate whether plans to "freeze" spending allow for increases to compensate for the impact of inflation. If the freeze on domestic spending referred to in the article does not adjust for the impact of inflation, then it amounts to a cut of approximately 3.0 percent - the current rate of inflation.

At one point the article compares 2004 tax and spending levels with 2001 tax and spending levels, pointing out that revenue was 5.6 percent lower in 2004 than in 2001, but spending was 23 percent higher in 2004. This comparison is misleading. Typically, it would be expected that both revenue and spending would rise in step with GDP. GDP rose by 16.4 percent from 2001 to 2004. The share of defense spending in GDP jumped by 1.0 percentage point during this period. Otherwise government spending would have just kept pace with the growth of the economy.

It would be helpful if both the general spending levels, and the specific budget items mentioned in the article, were expressed as shares of GDP.

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Medical Malpractice

Bush Paints His Goals As "Crises"
Jim VandeHei
Washington Post, January 8, 2005, Page A1

This informative analysis examines the way in which President Bush frames issues as crises in order to advance his policy agenda. At one point it notes his characterization of malpractice insurance as a crisis and then notes that there is serious dispute over the cause of high malpractice costs. The article points out that critics of Mr. Bush's efforts to limit legal liability blame the insurance industry for high fees. It is important to note that the failure to prevent bad doctors from practicing medicine can also be an important factor driving up costs (as well as actual incidences of malpractice) as indicated by a study commissioned by the Bush administration (see " Panel Seeks Better Disciplining of Doctors," New York Times, January 5, 2005, page A19).