Economic Reporting Review
May 8, 2000:
Social Security Scams; Falling Savings; Africa Trade
By Dean Baker
Social Security | Budget Surpluses | Savings Rate | Copyright | AIDS | Africa Trade Bill | Outstanding Stories
SOCIAL SECURITY
"Bush to Advocate Private Accounts in Social Security"
Richard W. Stevenson
New York Times, May 1, 2000, page A1
"Bush Hit on Social Security"
Dan Balz and Terry M. Neal
Washington Post, May 4, 2000, page A1
"Jabs Fly in Presidential Ring Over Social Security's Future"
James Dao with Frank Bruni
New York Times, May 4, 2000, page A1
These articles discuss the debate over a proposal for the partial privatization of Social Security,
which Gov. George W. Bush is expected to put forward next week.
All three articles appear to accept the assertion from Bush's aides that the stock market will
provide significant higher returns in the future than the government bonds in which the Social
Security fund currently invests its surplus. For example, the first article uncritically repeats an
assertion from Mr. Bush's aides that "private accounts would allow workers to capture some of
the historically high returns offered by Wall Street over the long-run." The Post article and the
second Times article also uncritically repeat similar assertions from the Bush campaign.
It will not be possible for Wall Street to provide returns that are significantly higher than those
available from government bonds, given current stock prices and the Social Security trustees'
projections for profit growth. (See letter to Martin Feldstein,
http://www.cepr.net/Social_Security/letter_to_feldstein2.html, or Peter Diamond's paper,
"What Stock Market Returns to Expect for the Future?"
http://www.bc.edu/bc_org/avp/csom/executive/crr/ib2.htm). Although Mr. Bush's economic
advisors have been made aware of this logical problem, they have apparently chosen to ignore
it in pushing ahead in with their privatization proposal.
The first Times article is also misleading or incomplete on other issues related to Social
security. It refers to the government bonds held by the Social Security trust fund as "IOUs." All
bonds are IOUs, but they are never referred to in this way. Referring to the bonds held by the
trust fund this way has the effect of questioning their real value.
At one point this article contrasts Al Gore's plans to pay down the debt with Bush's proposal
to establish individual accounts, and asserts that their impact on the national debt is a subject
that "is devilishly complex even for economists."
While many economists may be able to discuss the issue in ways that make it appear complex
to a non-economist, the basic points are actually quite simple. The government has obligations
to pay off its bonds, which are counted explicitly as part of the national debt. It also has
commitments to pay workers' Social Security benefits after they retire; these obligations are not
counted as part of the national debt. George W. Bush's privatization plan would reduce the size
of the Social Security benefits that the nation is committed to pay, but it would not lower the
national debt by as much as Al Gore's plans. The net effect is roughly the same on future
budget obligations.
The impact on national savings would also be very similar. If individuals placed 2 percent of
their income in a mandatory savings account, the impact would be approximately the same as if
the government used this money to pay down the debt. (There are some secondary issues on
how the accounts may affect other savings by workers, which could make for some difference
between the two plans.)
It is important to recognize that the impact of this savings on the rate of growth of GDP is
minimal. In standard economic models, at the end of 15 years, it would raise GDP by less than
1 percent. This additional output due to debt reduction is less than the economy grew in the
first quarter of 2000.
The article also notes that Bush is not likely to present the specific details of his proposal. This
is a very important omission, since a mandatory saving plan, like the one he is proposing, is
likely to be very costly to administer. If he can get through his campaign without presenting a
specific proposal that can then be analyzed by the press and the public, he will have deceived
the public about the true risks and costs associated with his plan.
"2 Democrats Propose Panel to Overhaul Social Security"
Alison Mitchell
New York Times, May 5, 2000, page A20
This article discusses a proposal by senators Daniel Patrick Moynihan, Bob Kerrey and John
McCain to establish a congressional commission to overhaul Social Security. At one point, the
article notes a concern expressed by the Senator Kerrey that Social Security is being
converted from a program funded by payroll taxes to "a program that's going to be funded
increasingly with income taxes." The article appears to corroborate this concern by pointing out
that Social Security payroll taxes will no longer exceed benefits by 2015.
This characterization of the issue misrepresents the link between the payroll tax and Social
Security. The Social Security trust fund has used its surplus revenue to buy government bonds.
It has now accumulated close to $1 trillion in government bonds and is adding to this amount at
a rate of more than $100 billion a year. In 2015, Social Security benefits are projected to
exceed payroll taxes, but the program will be able to make its payments by using the interest
from these bonds. The interest from the bonds and the bonds themselves will provide sufficient
revenue to meet all projected benefits up to 2037.
It is misleading to refer to the payments of interest and repayment of the bonds as coming from
general revenue rather than the payroll tax. These expenditures from general revenue are simply
returning past payroll taxes that workers have paid into the Social Security fund, which were in
turn lent to the federal government to finance other spending. Had the Social Security fund not
lent this money to the government, this debt would be owed to other bondholders, who would
demand the same interest rate as the Social Security trust fund, and similarly expect to be
repaid. It is no more accurate to say that Social Security is being supported by general
revenue, when the bonds are being repaid, then it would be to say that a corporation was using
general revenue from the government to build a factory if it sold its bond holdings to raise the
money.
The distinction is not merely semantic. Social Security taxes are extremely regressive, since
they come only from wages, and there is an income cap above which the tax does not apply.
By contrast, general revenue comes overwhelmingly from the personal and corporate income
tax, which is disproportionately borne by high-income households. If the government is allowed
to default on its debt to Social Security, this would be an enormous transfer of wealth from the
moderate income households that pay Social Security taxes to the high income households who
pay most of the income tax. The article misses this important implication of Kerrey's comments.
More about Social Security.
[Top]
BUDGET SURPLUSES
"Surplus a Gulf Between Candidates"
Adam Clymer
New York Times, April 30, 2000, Section 1 page22
This article discusses the probability that the federal government will actually run the surpluses
that both presidential candidates are assuming in their tax cut and spending proposals. The
article notes the uncertainty surrounding long-term budget projections, and indicates that it is
very possible that the surpluses will be considerably smaller than is currently projected.
However, the article is misleading because it implies that there would be significant
consequences if the anticipated surpluses failed to materialize.
While future deficits may be a significant political issue, virtually all economists agree that the
economic impact of modest budget deficits, equal to 1.0 percent of GDP or less (which would
be approximately $1.3 trillion over the next decade), is very small. The economic impact of
deficits of this magnitude would be too small for almost anyone to detect in their lives, or for
economists to measure accurately.
[Top]
THE SAVINGS RATE
"Personal Income Increased 0.7% in March"
Associated Press
Washington Post, April 29, 2000, page E2
This article discusses the Commerce Department's release of data on income, consumption and
savings for the month of March. It notes that the savings rate for the month was 0.4 percent,
near its record low, then adds: "But the savings rate isn't as bad as it seems because the
calculation doesn't take into account gains realized from the sale of assets such as stocks,
bonds and real estate."
This statement is extremely misleading. Savings from current income is an important concept
because it corresponds to new investment in the economy. New investment increases the
economy's capacity to produce goods and services in the future. Capital gains from higher
stock or real estate prices do not correspond to any new asset; they simply result from the fact
that people are willing to pay more for existing assets. This is why economists insist on keeping
a separate accounting for savings from current income.
It is also worth noting that asset prices move in both directions. Given the sharp fall in the
Nasdaq in April, a savings measure that included the change in asset prices would make the
savings rate appear much lower for that month.
The low personal savings rate is also noteworthy because personal savings affects the economy
in exactly the same way as a government budget surplus. The economic rationale for running
budget surpluses is that they will make more money available for investment, which will in turn
allow the economy to grow more rapidly. In fact, the huge increase in government savings
resulting from the shift from large budget deficits to large budget surpluses has been entirely
offset by the decline in personal savings over the last decade. As a result, there has been no net
increase in the money available for investment.
[Top]
COPYRIGHTS
"MP3.com Is Loser in Copyright Case"
David Segal
Washington Post, April 29, 2000, page E1
"Music Industry Wins Ruling in Court"
Amy Harmon with John Sullivan
New York Times, April 29, 2000, page B1
These articles report on a court ruling that MP3.com is violating the copyrights of several major
music labels, because it allows customers who have purchased a CD to gain access to the
music anywhere through the Internet.
The articles focus only on the legal issues in the case and the implications for the companies
involved. This sort of restriction on the use of the Internet raises prices for consumers, and also
potentially involves large enforcement costs as the government tries to restrain the development
of technology. Given these economic costs, it would be appropriate for coverage to examine
the broader issues involved.
[Top]
AIDS
"AIDS Is Declared Threat to Security"
Barton Gellman
Washington Post, April 30, 2000, page A1
This article reports on the Clinton administration's decision to declare the spread of AIDS a
threat to U.S. national security. It discusses the administration's stepped up efforts to combat
the spread of AIDS, including a doubling of the money budgeted for this task to $254 million.
The article provides little basis for assessing the seriousness of the administration's commitment.
The amount of money it is requesting is approximately 0.014 percent of federal spending, a
fairly modest amount to address a national security threat.
The United Nations has estimated that more than 30 million people in the developing world
have been infected with the AIDS virus. The administration's commitment comes to
approximately $8.50 for each infected person. By contrast, the pharmaceutical industry reports
that the best combination of AIDS drugs now costs between $10,000 and $16,000 per person
annually.
The main reason that AIDS drugs are so expensive is that patent protection provides their
manufacturers with a monopoly. If these drugs were sold without patent protection, their price
in many cases would fall by 90 percent or more. One of the main goals of the Clinton
administration's globalization agenda has been to extend patent and copyright protection
throughout the developing world. It is likely that the cost to developing nations due to the
extension of patent protection on AIDS drugs will dwarf the amount of money that the
administration is budgeting to combat AIDS in developing nations.
[Top]
AFRICA TRADE BILL
"House Trade Bill for the Caribbean and Africa Passes"
Eric Schmitt
New York Times, May 5, 2000, page A1
"House Vote for Textile Trade Ends Long Fight"
John Burgess and Matthew Vita
Washington Post, May 5, 2000, page E1
These articles discuss the House of Representatives' approval of a trade bill that would reduce
tariffs on apparel and textiles on goods produced in Africa and the Caribbean. While both of
these articles refer to the claims of the bill's proponents, that the tariff reductions will aid poor
nations in both regions, it is not clear that they will necessarily have much positive impact. As
the Post article notes, the bill requires that nations adhere to IMF designed structural
adjustments programs in order to benefit from the tariff reduction.
There was also a competing bill, the "Hope For Africa" bill introduced by Representative Jesse
Jackson Jr., which placed debt reduction as its top priority in helping these nations. This bill is
not mentioned in either article.
Both articles note the defeat of a provision that would have allowed these nations access to
AIDS drugs at a low cost. The TRIPS agreement that accompanied the last round of the
GATT imposed U.S.-style patent and copyright laws on developing nations, raising the price of
AIDS drugs in Africa by several hundred percent above their free market price. It is unlikely
that any benefits from this trade bill will come close to offsetting the negative impact of the
higher drug prices that African nations will have to pay as a result of the TRIPS agreement.
More about Africa.
[Top]
OUTSTANDING STORIES OF THE WEEK
"He Didn't Say It. But He Knew It."
Louis Uchitelle
New York Times, April 30, 2000, Section 3 page1
This article discusses a new book by Yale economic professor Robert Shiller, Irrational
Exuberance, which argues that the stock market is over-valued by approximately 50 percent.
"For Now, Microsoft Can't Save Itself"
Gretchen Morgenson
New York Times, April 30, 2000, Section 3 page1
This article points out how Microsoft's past dealings are now preventing it from acting to
support its stock price. It negotiated the purchase of a software company in January which,
while temporarily boosting profits, prevents Microsoft from buying back shares of its stock until
June.
"Altered Salmon Leading Way to Dinner Plates, but Rules Lag"
Carol Kaesuk Yoon
New York Times, May 1, 2000, page A1
This article reports on the increased use of genetically modified salmon and some of the
potential ecological problems posed by the fish.
"Protests Follow Suspension of Boston Journalist Who Reported on Bank Fees"
Neil MacFarquhar
New York Times, May 5, 2000, page A16
This article reports on a petition signed by 75 of the 300 employees of the Boston Herald
protesting the suspension of a columnist, Robin Washington, who had written about the high
fees charged by FleetBoston Financial Corporation. This corporation is a major advertiser at
the paper, and the petition raised concerns that financial considerations had motivated the
suspension. There have been numerous incidents across the country in recent years where such
financial considerations appear to have played a role in determining news content.
Dean Baker is an economist and the co-director of the Center for Economics and Policy
Research (CEPR). His latest book (co-authored with Mark Weisbrot) is Social Security: The
Phony Crisis (University of Chicago Press). ERR is a joint project of FAIR and CEPR.
ERR is edited by Jim Naureckas.
Back to CEPR's Economics Reporting Review website.