Economic Reporting Review by Dean Baker
March 7, 2005
In This Issue:
• Outstanding
Stories of the Week
• Social
Security
•
Malpractice
Suits
• China
• Zoning
& Property Rights
• Russia
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Outstanding
Stories of the Week
Speculators
See Gold in a Boom In Home Prices
Motoko Rich
New
York Times, March 1, 2005, Page A1
This
article reports on the growth of speculation in housing following the recent
run-up in home prices.
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Proposed
Law On Bankruptcy Has Loophole
Gretchen
Morgenson
New
York Times, March 3, 2005, Page C1
This
article reports on a provision in the bankruptcy bill being considered by the
Senate, which would allow for certain types of trusts to be shielded from
creditors. This provision would allow wealthy individuals to protect much of
their wealth while using bankruptcy to eliminate debts.
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Social
Security
Partisan
Social Security Claims Questioned
Jim VandeHei
and Jonathan Weisman
Washington
Post, February 27, 2005, Page A5
This article examines the truth of some of the claims being made by proponents and opponents of the President's plan to partially privatize Social Security. At one point it discusses the significance of the existence of the trust fund. The article correctly notes that defaulting on the bonds held by the trust fund would raise serious issues about the government's creditworthiness and therefore is highly unlikely. However, it then notes that to redeem the bonds, "the government will have three choices: raise taxes, cut spending or borrow more money. These are the same choices the government would face even if there were no trust fund."
It is worth noting that this comment has absolutely nothing to do with the finances of the Social Security program; rather, it speaks to the finances of the general government. It implies that recent tax cuts and/or spending increases may prove unaffordable; it does not address the financing problems of Social Security.
It is also worth noting that the government is already feeling the burden of a declining annual surplus of Social Security tax revenue over benefits, since the surplus peaked in 2000. The point where the annual surplus crosses zero and goes into deficit (2018 by the Social Security trustees projections) has no meaning for the federal budget. It is only the change in the surplus from one year to the next that matters.
The article reports that the Social Security actuaries project that the returns on the individual accounts will average 4.6 percent above the rate of inflation. This projection depends on the assumption that the return on stocks will average 6.5 percentage points above the rate of inflation. The actuaries have refused repeated requests (including from members of Congress) to show how their assumption on stock returns can be derived from projections of dividends and capital gains that are consistent with the trustees' profit growth projections. The only projections of stock returns that have actually been derived from profit growth projections show that stock returns will average approximately 4.5 percentage points above the rate of inflation, and that the accounts as a whole will provide a return of approximately 3.5 percent, only slightly higher the 3.0 percent interest rate charged against the money in the account.
The article also criticizes opponents of privatization for saying that Wall Street firms stand to gain large fees if Social Security is privatized. It reports the estimate of President Bush's Social Security commission that the administrative costs will be approximately 0.3 percent of the money in the accounts each year. It would have been useful to note that this implies that the fees will be equal to approximately 5 percent of the money put in the accounts (the 0.3 percent fee would apply each year that a dollar is in the account), more than 10 times the cost of administering the current Social Security program.
It
is also important to note that even if the program is originally privatized with
a low cost centralized system, there is no guarantee that this system will
remain in place. In fact, the President's Commission to Strengthen Social
Security, in its final
report (2001) (see pages 44, 46) recommended a two-tier system, which would
offer more choices for account holders at much greater administrative costs .
The exact same arguments made for privatizing Social Security ("it's your
money" or "why shouldn't people be able to control their money")
could be made against forcing workers to keep their money in a single
centralized system. Since the financial industry would have an enormous
incentive to have any such restrictions removed, it is difficult to imagine that
they would not spend large amounts of money to promote such a change.
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For
Bush, a Long Embrace of Social Security Plan
Richard W.
Stevenson
New
York Times, February 27, 2005, Page A1
This article discusses President Bush's advocacy of privatizing Social Security throughout much of his political career. The article repeatedly characterizes the core issue in privatization as being "about the relationship of individuals, the government and the market."
It is not clear that any such factors are at issue in President Bush's proposal. Under his plan, the government will still force workers to put aside exactly as much money as they do under the current system. He would also require most workers to annuitize most of the money in their accounts when they reached retirement age.
Effectively, his system accepts that the government should force workers to save for their retirement, just as does Social Security. Under his system, the government would give workers 4 or 5 investment choices with this money, but it does not let workers do whatever they want with it.
Since
President Bush's system involves as much government control as the current
system, many people with the exact same philosophy as the president might opt
for the current system because it is so much more efficient. According to
President Bush's Social Security commission, the administrative costs of his
system of private accounts will be more than 10 times as large as the
administrative costs of the existing Social Security system. The cost and
mechanics of annuities under his system, which have not been fully specified,
also add another big expense. Given the additional complications and expenses of
the President's system of accounts, many people are likely to prefer the current
system simply because of its much greater efficiency.
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Many
Hurdles For Bush Plan
Richard W.
Stevenson
New
York Times, March 2, 2005, Page A1
This article reports on the prospects for President Bush's plan to overhaul Social Security. At one point the article refers to "the painful steps necessary to meet Mr. Bush's goal of ensuring its [Social Security's] permanent solvency." It is not clear that any "painful steps" will be required. The Congressional Budget Office estimates that the cost of keeping the program solvent over its 75-year planning horizon, measured as a share of GDP, is less than half the cost of the increase in annual defense spending since 2000.
It
is also not clear that enacting increases in the retirement age for the 22nd and
23rd centuries would be especially painful. While this would meet the
president's goal of permanent solvency, it is not clear what the point of this
exercise would be, since future generations will surely want to re-evaluate the
program themselves.
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Greenspan
Warns of Economic Stagnation
Nell Henderson
Washington
Post, March 3, 2005, Page A1
Greenspan
Says Budget Deficits Can't Continue
Edmund L.
Andrews
New
York Times, March 3, 2005, Page A1
White
House May Accept Benefits Shift
Richard W.
Stevenson
New
York Times, March 3, 2005, Page A20
These articles discuss Federal Reserve Board Chairman Alan Greenspan's testimony before the House Budget Committee. According to the articles, Mr. Greenspan made several statements that directly contradicted his earlier positions.
For example, he argued that it was important to reduce the federal budget deficit quickly. Four years ago, Mr. Greenspan endorsed President Bush's tax cut because he was concerned that the budget surpluses in future years would be too large without it, and that we would therefore pay off the national debt too quickly.
Mr. Greenspan also reportedly said that the Social Security system will not work in the 21st century because of the declining ratio of workers to retirees. Mr. Greenspan chaired the 1983 commission that designed the current system. At that time, the projections already showed a declining ratio of workers to retirees (this has always been the case because people are living longer), so it not clear why he thinks this is a problem today, but was not in 1983. (Productivity growth has been somewhat slower than the Greenspan commission projected in 1983.) It would have been helpful if the articles had called attention to Mr. Greenspan's shifting views.
The
articles also note Mr. Greenspan's concerns that spending on Social Security,
Medicare, and Medicaid are projected to rise rapidly as a share of GDP over the
next quarter century. The main reason for increased spending on these programs
is rising per person health care costs, not aging, as Mr. Greenspan implied. No
other rich country is experiencing comparable increases in health care costs,
which suggests that attention might be better focused on reforming the U.S.
health care system, rather than cutting back these programs.
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A
Baby Bust Empties Out Japan's Schools
Anthony Faiola
Washington
Post, March 3, 2005, Page A1
This article reports on the impact of declining birth rates. It characterizes the drop in birth rates as a serious problem, although the factors identified do not pose problems in any obvious sense.
For example, the article reports that the prospect of a "national child shortage" is "raising fears about Japan's long-term ability to maintain its status as the world's second-largest economy." Actually, Japan is not the world second-largest economy using a purchasing power parity measure of GDP. By this measure, which economists would use for this type of comparison, China's economy is at least 30 percent larger and India's economy is almost the same size.
The article then asserts that "many people are asking: will there be enough Japanese left to participate in the economy in years to come?" Market economies can and do adjust to changing demographics - a process that the article describes in some detail. Far fewer people are being employed in schools, pediatric wards in hospitals, and theme parks oriented to children. The article presents this fact as a problem, but this is exactly how society would reallocate workers as the population ages.
There
is no reason that an economy cannot function well and produce rising living
standards with a declining population. In fact, in a relatively crowded country
like Japan, a declining population may actually lead to a more rapid increase in
living standards, by reducing the price of land, as well as pollution and
congestion.
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Malpractice
Suits
Bush's
Next Target: Malpractice Lawyers
Steve Lohr
New
York Times, February 27, 2005, Section 3, page 1
This
article examines President Bush's efforts to curtail malpractice suits. In an
article of this length it would have been worth noting the peculiarity that an
administration that is ostensibly committed to the free market would be so
intent on limiting the freedom of contract, by placing restrictions on the
contingency fees that malpractice lawyers can charge. Also, it is arguably
promoting "takings" by denying plaintiffs the opportunity to collect
compensation that jurors believe they are entitled to. It would have been
appropriate to assess how these views fit in with the Bush administration's
widely perceived determination to reduce government involvement in the economy.
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China
China's
Quiet Rise Casts Wide Shadow
Edward Cody
Washington
Post, February 27, 2005, Page A1
This
article discusses the growing influence of China across East Asia. The article
hugely understates China's GDP. It reports that China's GDP is $1.4 trillion,
which is describes as much smaller than the size of Japan's economy. This figure
is a currency conversion measure of GDP. Most economists would use a purchasing
power measure of GDP to assess the size of a country's economy. By this measure,
China's GDP is over $6 trillion, making it by far the second largest economy in
the world. According to World Bank growth projections, China will pass the
United States as the largest economy in the world in a decade.
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Zoning & Property Rights
Anti-Sprawl
Laws, Property Rights Collide in Oregon
Blaine Harden
Washington
Post, February 28, 2005, Page A1
This article reports on the impact of an initiative, approved by Oregon voters in the last election that sharply curtails the state's ability to restrict development of farmland. The article portrays the issues raised by the initiative as a conflict between environmental concerns and property rights.
It
is not clear that property rights are served by a lack of development
restrictions. For example, property values in a wealthy neighborhood would be
substantially reduced if one of the neighbors were allowed to build a
slaughterhouse. For this reason, state and local governments have long imposed
development restrictions in large part as a way to protect property values. The
initiative discussed in this article is simply about a specific set of
development restrictions, not property rights in general, which are often
protected by such restrictions.
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Russia
Investors
of the World, Here's the Word on Putin Inc.
Erin E.
Arvedlund
New
York Times, March 2, 2005, Page A4
This article discusses the direction that Russian President Vladimir Putin appears to be taking the economy. It implies that Putin is pulling the country away from a well-working market system, asserting at one point that "building blocks of a free market system - the courts, the tax agencies and law enforcement - have been corrupted during Mr. Putin's second term."
Actually
these institutions had been hugely corrupted before Mr. Putin even took office.
Russia had regularly been rated as having one of the most corrupt political
systems in the world in surveys of investors. Tax evasion was the norm and many
people made huge fortunes by using political connections to buy state assets at
a fraction of their market value. This state of affairs was noted with some
regularity in the New York Times and other news outlets. While Putin may be
intervening in the economy in ways that advance his political power, it is a
change from one type of corruption to another - not from an orderly market
system to a corrupt system.
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Dean Baker is Co-Director of the Center for Economic and Policy Research in Washington, D.C.