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Outstanding Stories of the Week

Social Security Enlisted To Push Its Own Revision
Robert Pear
New York Times, January 16, 2005, Page A1

This article reports on the administration's efforts to use the resources of the Social Security Administration to help convey the idea that the program is facing a crisis and need to be changed.

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WorldCom's Audacious failure and Its Toll on An Industry
Ken Belson
New York Times, January 18, 2005, Page C1

This article examines the impact that WorldCom's misrepresentations had on other firms in the telecommunications industry and to workers in the industry.

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Social Security

A Question of Numbers
Roger Lowenstein
New York Times, January 16, 2005, Magazine, Page 40

This article examines the history and prospects of the Social Security system. At one point it notes that the trustees report is "based on the actuaries' analysis." While this is true, it is important to note that the trustees report consists of projections made by the trustees, not the actuaries. Four of the six trustees are political appointees of the president (the secretaries of Labor, Health and Human Services, Treasury, and the Social Security Commissioner). The trustees receive recommendations from the actuaries at the Social Security Administration, but there is no way of knowing the extent to which they follow these recommendations, since they are not made public.

The article also asserts that the government has run larger deficits because it has been able to borrow the Social Security surplus. This is not clear. The nation's largest peace-time deficit was 6.0 percent of GDP, a year in which Social Security was not running a surplus. There is no clear relationship between the size of the deficit on the general budget and the size of the Social Security surplus. In other words, it is not clear that the government has borrowed more than would have been the case if it did not have access to the Social Security trust fund.

The article also attributes part of Social Security's financial problems in the late seventies to inflation. Actually, inflation improves the solvency of the program, since it lowers to some extent the real value of benefits. (Benefits are adjusted to inflation, but only at the end of the year.) According to the trustees' sensitivity analysis, if the annual inflation rate is 1.0 percentage point higher than projected (and wages and interest rates adjust accordingly), then the projected shortfall will fall by 0.22 percentage points of payroll (table VI.D5).

In noting the pessimism of the trustees' projections, the article points out that the trustees assume a much lower rate of immigration in 2020, when the retirement of the baby boomers is creating a labor shortage, than in the nineties. It is worth noting that the rate of immigration is a policy variable. If the public believes that the economy is suffering from a lack of labor, it will be able to have virtually an unlimited supply of immigrants by reducing barriers to immigration.

The article notes that the 1.1 percent projected average wage growth is approximately equal to the average wage growth of the last 40 years. For a seventy-five year projection, it would be reasonable to include the whole post-war period where we have reliable data. Since wages grew by more than 2.0 percent annually from 1945 to 1965, average growth over this longer period would be approximately 1.5 percent.

It is also important to note that the employer side of the payroll tax was increased by approximately 6.0 percentage points over the last forty years. These tax increases lowered average wage growth by 0.16 percentage points. Since the trustees' baseline projections are supposed to assume no changes in future tax rates, a pure extrapolation from the past forty years should show wage growth that is 0.16 percentage points higher than the actual wage growth over the prior forty years, since the projection should assume no increase in future tax rates.

The article includes a discussion of investing Social Security funds in the stock market. It refers to projections that the stock market will provide annual returns of 7.0 percentage points above the rate of inflation, the same rate of return the market has averaged over the past 70 years. Actually, this rate of return is impossible given current price to earnings ratios and the profit growth projections of the trustees. If the trustees are correct in their relatively pessimistic projections of economic growth, then the rate of return on stocks will average approximately 4.5 percentage points above the rate of inflation (see the "No Economist/Policy Analyst Left Behind Social Security Test," http://www.cepr.net/publications/ss_economist_test.htm] ).

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Political Divisions Persist After Election
Richard Morin and Dan Balz
Washington Post,  January 18, 2005, Page A1

This article reports on the results of a Washington Post-ABC News poll examining political attitudes in the country following the election. At one point the article comments that "Democratic leaders may be out of step with their rank and file on the severity of the problems facing Social Security." It then reports "two-thirds of all Democrats worry that there is not enough money to keep Social Security funded until they retire."

This is not a case of leadership being out of step with rank and file - this is evidence that the public is poorly informed about the financial state of Social Security. The trustees' projections show that the fund can pay all scheduled benefits through the year 2042, while the Congressional Budget Office projects that the program can pay all scheduled benefits through 2052. Both years are long past the retirement date of the vast majority of current voters. Even after these dates, both sets of projections show the program can always pay a higher benefit than the price-indexed one that President Bush has suggested, and that the poll claims most voters find acceptable.

The projected depletion date of Social Security is a factual matter, like the shape of the earth. If voters believe that the program will not be able to pay benefits at any earlier date than the standard projections, then it must be due to the fact that they have been misinformed. It does not reflect a differing political view.

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Bush to Return to 'Ownership Society' Theme in Push for Social Security Changes
David E. Rosenbaum
New York Times, January 16, 2005, Page A17

This article discusses the themes that President Bush is expected to emphasize in his inaugural address. It repeatedly attributes his drive for Social Security privatization and other goals, such as reducing taxes on investment income and the promotion of health savings accounts, as a philosophical belief in promoting individual efforts rather than encouraging people to rely on the government.

It is important to note that President Bush is a politician, not a political philosopher. Politicians get elected by courting powerful interest groups. All of the proposals cited in this article provide substantial economic benefits to the constituencies that backed President Bush in his campaigns.

For example, the financial industry is likely to earn tens of billions in fees and commissions if it can gain access to the private accounts created by President Bush's Social Security plan. Higher-income taxpayers will save themselves several thousand dollars a year, if more of the tax burden is shifted away from investment income and onto wage income. And the health insurance industry may gain a bonanza by offering the high -deductible insurance policies encouraged by Bush's medical savings accounts. (These accounts would also allow wealthier and healthier people to get into a more favorable risk pool, thereby saving themselves money on insurance.)

While it is possible that President Bush is partially motivated by ideology in his proposals, it is not clear that his ideology really makes much difference in determining these policies. Politicians will almost always claim that they are motivated by their beliefs, rather than a desire to serve powerful political backers, but that does not mean that their claims are true, as this article appears to assume.

At one point the article asserts that investing $1000 annually in an individual account will lead to an accumulation of $140,000 after a 44 year working career. Actually, using stock return projections derived from the Social Security trustees' profit growth projections, the account would grow to just over $100,000 after 44 years.

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China

It’s Just Business, Nothing Geopolitical
Keith Bradsher
New York Times, January 16, 2005, Section 4, 

This article discusses China's attitude towards the United States. At one point the article comments that China's trade surplus with the United States is equal to 10 percent of its GDP. This calculation uses an exchange rate conversion measure for estimating China's GDP, where China's dollar GDP is calculated by simply converting its GDP measured in Chinese currency. By this measure, China's GDP is approximately $1.5 trillion.

Economists would generally use a purchasing parity measure of GDP to estimate the size of a country's economy. This measure prices all the goods and services at the price they would sell for in the United States. By this measure, China's GDP is close to $7 trillion. By this measure, the trade surplus with the United States is still very important to China's economy, but it would be closer to 3 percent of its output, rather then 10 percent.

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Europe 

Breaking Up Is Hard to Do
Mark Landler
New York Times,, January 16, 2005, Section 4, Page 4

This article discusses attitudes in Europe toward the United States. At one point it claims that Europe wants the United States to "curb its trade and budget deficits, which would bolster the dollar and take some pressure off the euro." Actually, Europe is concerned about the rise in the euro precisely because it will lower the U.S. trade deficit with Europe. If the euro rises relative to the dollar it means that people in Europe will buy more goods made in the United States and people in the United States will buy fewer goods produced in Europe. If the U.S. trade deficit with Europe fell for some other reason, it is difficult to see why Europe would be any happier - the effect on Europe, reduced demand, would be the same.

It is also worth noting that according to conventional economic theory, the budget deficit boosts the dollar by raising interest rates in the United States. In the 1980s it was generally thought to be necessary to reduce the U.S. budget deficit in order for the dollar to fall, thereby reducing the trade deficit.

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Japan

After 100 Years, Japanese Will Go Abroad to Sell Bonds
Todd Zaun
New York Times, January 15, 2005, Page B3

This article discusses efforts by the Japanese government to get foreign investors to buy its bonds. At one point it notes that forty percent of U.S. government bonds are foreign owned. It is important to note that close to half of these foreign-owned bonds are not held by investors, but instead by central banks. In recent years, many central banks have bought large amounts of U.S. government bonds as a way of propping up the dollar, and thereby sustaining demand for their exports to the United States.

The article also notes the relatively low yield on Japanese bonds compared to U.S. bonds, 1.4 percent on a ten-year Japanese bond, compared to 4.2 percent on a U.S. bond. It is important to note that the interest rate represents only a potion of the return. In the last year, the yen has appreciated by close to 10 percent against the dollar, which means that a holder of a Japanese bond would have received a return of 11.5 percent measured in dollars (the interest, plus the appreciation of the yen).

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