You can sign up to receive ERR and other CEPR e-newsletters at the CEPR Listserve Signup Page. You can find the latest ERR at the Economic Reporting Review Main Page. All ERR prior to August 2000 can be found at Fair.org.


Outstanding Stories of the Week

Chile’s Retirees Find Shortfall In Private Pension Plan
Larry Rohter
New York Times, January 27, 2005, Page A1

This article examines the experience of Chile with a privatized Social Security system. The article reports that Chile’s system has provided inadequate retirement benefits for many workers, loses a large portion of workers’ savings in fees to the financial industry, and still costs the government far more than the U.S. system, relative to the size of its economy. Chile’s system has been held up as a model by President Bush and other proponents of Social Security privatization.

Back to Top of Page

Overstating of Assets Is Seen To Cost U.S. Billions in Taxes
David Cay Johnston
New York Times, January 24, 2005, Page C2

This article reports on a new study that finds that the government is losing close to $30 billion a year in capital gains tax revenue, because of over-reporting of the purchase price of assets such as stock and land.

Back to Top of Page


Social Security

Bush Finds a Backer in Moynihan, Who’s Not Talking
Richard W. Stevenson
New York Times, January 26, 2005, Page A12

This article reports on President Bush's efforts to claim former Senator Daniel Patrick Moynihan as a supporter of his plan to privatize Social Security. Since Moynihan died three years ago, he is not able to directly express his views himself.

It is worth noting that Senator Moynihan was the leader of the last major effort to cut Social Security benefits. In 1994 he initiated an effort to change the cost-of-living indexation formula for retirees. Arguing that the consumer price index (CPI) overstates the true increase in the cost-of-living, Senator Moynihan wanted to change the annual adjustment in Social Security benefits to 1.0 percentage point less than the inflation rate shown by the CPI (e.g. if the CPI showed a 3.0 percent inflation rate, then Social Security benefits would rise by 2.0 percent).

Had this cut gone into effect, every retiree would see their benefits reduced by approximately 1.0 percent each year, compared with the previously scheduled benefits. This means that after 10 years, a beneficiary would be getting a benefit that was approximately 10 percent lower than in the base case, and in 20 years, a retiree's benefits would be approximately 20 percent lower. (Benefits are wage indexed until retirement, so Senator Moynihan's proposal would only affect the size of benefits after workers start collecting benefits, at which point they are indexed to the CPI.)


Back to Top of Page

President Courts Blacks With Plans For 2nd Term
Michael A. Fletcher
Washington Post, January 26, 2005, Page A4

President Discusses Issues With Black Leaders
Elisabeth Bumillier
New York Times, January 26, 2005, Page A13

These articles report on President Bush's efforts to gain African American support for his plan to privatize Social Security. According to the articles, President Bush argued that his plans would provide a higher rate of return to African Americans, because they have shorter life expectancies than whites, and therefore collect retirement benefits for fewer years, on average.

It is worth noting the irony of this appeal. President Bush's plan would not be fully phased in for more than forty years. Past presidents have worked to reduce the inequities in income, living situations, and access to health care that cause the racial gap in life expectancies. Instead of addressing these inequities, President Bush is proposing to adjust the retirement system to accommodate them.

It is also worth noting, that as a matter of logic, if a retirement system ensures that workers do not outlive their savings (as Social Security does), then it must require workers to convert their individual accounts to an annuity – a lifelong stream of income. Either President Bush’s system will not provide this insurance or it will lead to the same inequities for those with shorter life expectancies as Social Security.

Back to Top of Page

Some See Risks For the G.O.P. In New Strength
Adam Nagourney and Richard W. Stevenson
New York Times, January 24, 2005, Page A1

This article discusses the potential problems the Republicans face in pursuing their major agenda items. At one point it describes President Bush's Social Security proposal as a "plan to reshape Social Security by adding private investment accounts."

It is not clear that most workers would view the private accounts as the most important part of President Bush's Social Security plan. His Social Security Commission's Plan 2, the one he identified as the likely basis for his actual proposal, provides for large cuts compared with currently scheduled benefits. For workers just entering the labor force today, the scheduled benefit under this plan would be more than 35 percent less than the currently scheduled benefit. Many workers may view these cuts as being of more consequence than the access to a private account over which they would have relatively little control.

Back to Top of Page

Schwarzenegger Aims At State Pension System
John M. Broder
New York Times, January 23, 2005, Page A14

This article reports on California governor Arnold Schwarzenegger's efforts to replace the state's defined benefit public pension system with a defined contribution system like 401(k)s. It describes this drive as being motivated by the "same ideology" behind the effort to privatize Social Security.

It is not clear that either this drive or the drive to privatize Social Security is being driven by ideology, as opposed to the special interests that stand to gain from these changes. In the case of the California pension fund, it is not even clear what ideology is being advanced by the proposed change.

The article cites a proponent of abolishing the defined benefit pension system as saying that individual accounts will give people “real ownership and a stake in how the economy and the stock market perform.” Actually the current system in California gives workers something much closer to real ownership. As noted in the article, the California pension system has established a reputation for its aggressive activism – examining the way major corporations are managed and taking action to combat corrupt and incompetent managers, and excessive compensation payments to top executives. By contrast, under the individual account system advocated by Governor Schwarzenegger, funds would be invested through intermediaries over whom workers would have no control. If the Governor has his way, workers will have no voice in the conduct of the companies that they supposedly “own.”

Workers also already have a stake in the economy under the current system. Their pensions are tied to the wage growth of state workers, which tend to track overall wage growth. (In the case of Social Security, benefits are tied directly to overall wage growth, giving workers a very direct stake in the health of the economy.) The governor's plan would give workers a more direct stake in the stock market, although they already are likely to feel the impact in their pensions of a sharp and prolonged market downturn.

At one point the article notes that Governor Schwarzenegger complained that the state had to contribute $2.6 billion to the pension fund this year, compared to just $160 million four years ago. It later cites opponents of the plan as saying that this increase is attributable to the plunge in the stock market, not any change in the plan.

This is not just a claim by opponents of the plan, it is a fact that would be acknowledged by anyone familiar with the pension system. California was allowed to pay very little into the plan in the late nineties because the sharp run-up in the stock market met its funding obligations. It now has to pay much more into the fund to meet actuarial requirements because of the subsequent crash. This fact is not in dispute.

Back to Top of Page

Can Anyone Unseat F.D.R.?
John Tierney
New York Times, January 23, 2005, Section 4, Page 1

'A Great Calamity Has Come Upon Us'
Robin Toner
New York Times, January 23, 2005, Section 4, Page 3

These articles discuss President Bush's efforts to privatize Social Security in the context of Franklin Roosevelt's New Deal legacy. Both articles refer to the reliance on defined contribution pensions, as opposed to defined benefit pensions, as a move toward embracing the market and individual responsibility.

Actually, the difference is simply whether one has insurance against bad market outcomes. The issue is very similar to buying or not buying home insurance. A person who does not buy home insurance directly assumes the risk of fire or other damage to their home. Alternatively, a person who buys home insurance has opted to pay a fee in order to pass this risk onto the insurance company. It is not clear that people who do not buy home insurance are more individualistic or market-oriented than people who do.

In the same vein, there is no obvious policy goal advanced by having workers assume more market risk with their retirement income than is currently the case, just as there is no obvious policy goal advanced by discouraging the purchase of home insurance. It simply means that their retirement will be less secure, which is the opposite of the goal for Social Security when it was established.

Back to Top of Page

Bush Plan Poses Tough 'Safety Net' Questions
David Rosenbaum
New York Times, January 27, 2005, Page A18

This article reports on several important questions about the structure of private accounts and their implications for aspects of the insurance system provided by Social Security. At one point it asserts that higher earnings from private accounts would "theoretically" allow workers to offset cuts in the guaranteed Social Security benefit.

This is not true. Projections of stock returns derived from the Social Security trustees profit growth projections show that the returns from money invested in the stock market will be on average just high enough to offset the administrative costs of these accounts. Proponents of private accounts have claimed higher returns, but none has been able to show how this is possible (see the "No Economist/Policy Analyst Left Behind Social Security Test").

Back to Top of Page

Semantics Shape Social Security Debate
Mike Allen
Washington Post, January 23, 2005, Page A4

New Strategy on Social Security
Jonathan Weisman
Washington Post, January 24, 2005, Page A3

These articles examine the strategies being pursued by President Bush in promoting his Social Security reform agenda and the Democrats opposing the plan. Both articles note that the two sides are arguing over whether the projected shortfall in the program can be described as a "crisis."

While the decision whether to refer to a problem as a “crisis” is obviously subjective, it is possible to compare the size of the Social Security shortfall with other current or projected funding gaps. The Congressional Budget Office projects that the Social Security shortfall is equal to 0.5 percent of GDP over its 75-year planning horizon. By comparison, the increase in defense spending related to the war in Iraq and the war on terrorism is exceeds 1.0 percent of GDP. President Bush’s tax cuts were equal to approximately 2 percent of GDP, and the portion that went to the richest 2 percent of families is equal to approximately 0.8 percent of GDP. Anyone who views the projected shortfall for Social Security as a crisis, must view these other costs as posing even more pressing problems, in order to be consistent.

At one point the article by Allen refers to the 2018 date when the trustees project that benefits will first exceed Social Security taxes as a posing a problem for Social Security. Under the law, this date has no meaning whatsoever for the program’s solvency, since it will hold more than $3.6 trillion (in today's dollars) in government bonds at that point which can be used to offset the annual shortfalls for nearly a quarter century, according to the trustees.

This article also reports that President Bush would allow workers to enhance their Social Security benefits by placing a portion of their payroll taxes in private accounts. The main way that his proposal allows workers to get better benefits through private accounts is by providing a government subsidy to workers who choose this route. Otherwise, on average, the administrative costs would almost fully offset any increase in returns on the money invested in these accounts.

White House Looking for Ways to Ease Opposition to Social Security Overhaul
Edmund L. Andrews and Richard W. Stevenson
New York Times, January 25, 2005, Page A17

This article reports on President Bush's efforts to overcome opposition to his plans for privatizing Social Security. At one point it refers to the $3.7 trillion shortfall that the Social Security trustees project for the 75-year planning period. It is more informative to refer to this shortfall as 0.7 percent of GDP over this period. Virtually no readers have any idea of the importance of $3.7 trillion (a discounted sum) over a 75-year horizon.

Back to Top of Page


The Dollar

Dollar's Steep Slide Adding to Tensions U.S. Faces Abroad
Reported by David E. Sanger, Mark Landler, and Keith Bradsher and written by Mr. Sanger
New York Times, January 25, 2005, Page A1

This article discusses the impact of the dollar's decline on other countries. At one point it postulates that the dollar will continue to decline if "global investors determined that Mr. Bush did not have the will to hold spending down."

Actually, this view is the exact opposite of conventional economic theory. Standard theory holds that higher budget deficits lead to higher interest rates in the United States, which will make holding dollar-denominated assets more attractive to foreigners. In the eighties, most economists argued that the large budget deficits led to large trade deficits precisely because high interest rates pushed up the value of the dollar. The article does not explain the process through which lower budget deficits would encourage foreigners to hold more dollars.

At one point the article cites an economist's assertion that the U.S. will continue to attract foreign capital because it has a higher growth rate than other wealthy countries. The bulk of foreign capital inflows go to interest bearing bonds and accounts. There is no direct relationship between the interest rates on these accounts and the growth rate in the United States. It is not clear why an investor would be willing to accept a lower interest rate, simply because the money is invested in an economy that is growing more rapidly.

The article also cites Treasury Secretary Jack Snow as saying that there is little risk that foreign investors will reassess the wisdom of investing in the United States. If someone had invested in euro-denominated assets rather than dollars in the summer of 2002, they would have approximately 50 percent more dollars today. Alternatively, they lost 30 percent of their money (expressed in euros) by holding dollar-denominated investments. Presumably such losses would give investors reason to reassess the wisdom of investing in the United States.

Back to Top of Page


Chinese Trade

China Passes U.S. In Trade With Japan
Paul Blustein
Washington Post, January 27, 2005, Page E1

This article reports on new trade data showing that China has passed the United States as Japan’s largest trading partner. At one point it discusses the debate over U.S. trade with China, and comments that “many economists” agree with the Bush administration’s contention that U.S. trade with China is beneficial to the U.S. economy. It is worth noting that virtually all economists agree with critics of current trade patterns in arguing that the current U.S. trade deficit is unsustainable and will impose long-term costs on the U.S. economy. Virtually all economists would also agree that the large trade deficit has put downward pressure on the wages of less-skilled workers in the United States, leading to an upward redistribution of wage income.

Back to Top of Page


Budget Deficits

Record '05 Deficit Forecast
Jonathan Weisman
Washington Post, January 26, 2005, Page A1

Bush Aides Say Budget Deficit Will Rise Again
Edmund L. Andrews
New York Times, January 26, 2005, Page A1

These articles discuss the new set of budget projections from the White House and the Congressional Budget Office. Both articles only refer to the deficits in nominal dollar terms, rather than as a share of GDP.

The importance of a budget deficit can only be assessed relative to the size of the economy. (A $100 billion deficit would be trivial for the U.S., but devastating for Mexico, because it has a much smaller economy.) The projected deficit of $427 billion for 2005 is equal to 3.4 percent of GDP. This is far below the record deficit in 1983, which was equal to 6.0 percent of GDP. (The deficit with Treasury borrowing from  the Social Security surplus included is equal to 4.9 percent of GDP. There was no Social Security surplus in 1983.)

Back to Top of Page


Energy Efficiency Regulations

Energy Dept. Slow to Mandate Efficiency
Justin Blum
Washington Post, January 22, 2005, Page E1

This article reports on the slow pace at which energy efficiency regulations on appliances are being put in place. At one point it refers to a claim by the White House that tighter standards would cost 272,000 jobs.

In standard economic models this loss of jobs corresponds to people opting not to work, because the real wage is projected to be lower as a result of the energy regulations. The decision of 272,000 people to opt not to work would correspond to a decline in the projected real wage of approximately 0.9 percent. In other words, if the average real wage was projected to be $20.00 an hour without the tighter standards, the White House is assuming that it will be approximately $18.82 with the standards in place. As a result, 272,000 people who would have been willing to work for $20.00 an hour opt instead to stay at home because of the lower wage.