by Bruce Webb

Yes. Both. But first a recap. The semi-final version of the basic NW Plan was introduced in this post: NW Plan for a Real Social Security Fix. The spreadsheets linked to that post show that under current projections you can fix Social Security by implementing a 0.20% FICA increase in 2010, another of 0.10% in 2011, followed by a series of 0.20% increases in 2026-2036. The NW Plan doesn't set those future increases in stone, instead they are tied to a specific trigger, the date that either fund that comprise Social Security falls out of the Trustees primary official test, that of Short Term Actuarial Balance. As it happens DI already failed that test last year which explains the immediate increases for 2010 and 2011. But OAS retains a significant degree of uncertainty. For example even though CBO starts from the same set of demographic assumptions as SSA, their different treatments of the economic numbers result in wide variations between their median outcomes. The CBO projections from Aug 2008 can be seen at the following post Probability and Social Security. The most current SSA projections can be seen in the following figure:

(Update: the above figure is from the 2009 Report, the original post included the version from the 2008 (below). Sorry about that.)

The differences between CBO and SSA are explained in large part by different assumptions and methodology but are also effected by being different snapshots in time, SSA building in data for Q3 and Q4 of calender 2008 and Q1 2009 not available to CBO last summer.

So the Northwest Plan is being worked up as a Policy Plan to be presented to policy analysts and policy makers. But like all batttle plans it is unlikely to escape all effects of contact with the enemy, which in this case is the uncertainty of the projections. What the Northwest Plan does is to close both the Short Term and Long Term actuarial gap under the Trustees most current set of assumptions and definitions and provides a mechanism for adjusting the tax schedule each year in anticipation of events as yet fifteen to twenty years down the road. Rather than revisiting the issue every decade or two it provides for a permanent yet flexible fix that in turn allows us to focus if we wish on other measures that might move that future trigger point farther out in time.

For example if we examine the above graph we see that DI (light gray) has vastly more variation than OAS. Under the NW Plan the light gray line that current intersects with zero in 2025 instead would exit the 75 year window right at 180. But if we examine outcome I we see that line exiting the window at above 2000. Oddly it is politically hazardess for Social Security if its Trust Fund balances remain permanently north of a ratio of 300 or so. If over the next few years it looks like DI is on a course approaching outcome I we would want to divert a portion of the 2010 and 2011 increases, which are under the NW Plan devoted to DI, over to OAS. This in turn would serve to move the trigger point for OAS, perhaps imperceptably, perhaps noticeably. But we don't have to rely on chance events, lowering future costs for DI is a matter of lowering the incidence of disability or of tightening eligibility. I'll let Nancy Ortiz speak to the latter, from what I hear if anything the rules are too tight and the administration too disfunctional already. On the other hand it would be useful to focus on the differences between Intermediate Cost (II) assumptions on incidence and Low Cost (I) and then work on ways to achieve improved outcomes. For example it is possible that better enforcement of existing workplace safety law might directly serve to drive down disability generally and hence need for DI and in turn reducing DIs impact on OAS.

In this way the OAS trigger set by the NW Plan for 2026 can be an explicit target for economic policy. Once you change your model from the deterministic one typical of today, "Social Security will go to depletion in year X", instead we should be thinking "What can we do in 2010 to push that trigger point back, or use it to increase benefits". In that way the NW Plan frees us to approach Social Security pro-actively rather than passively.

The NW Plan provides a Social Security fix that is at the same time permanent, flexible in the face of events, and modifiable by direct action by policy. It is certainly worth a try.

But the title of the post also says it is a benchmark. How so? Answer below the fold.

On the merits 'Nothing' has been shown to be a perfectly sound plan. That is instead of rasing taxes by $1/week as the NW Plan does we could reallocate current FICA between DI and OAS in a way that made their future shortfall and depletion dates congruent and then start trying to move the joint trigger point outwards via economic policy. This would mirror past practice. But 'Nothing' is a tough sell, it implies that the people pushing it are in some sort of denial rather than what is the case, that examination of the data shows 'Nothing' to be on net a historical proven plan since 1997. But rather than continually rebattling that war we propose the implementation of the NW Plan to at least serve as a benchmark.

Because the NW Plan is scorable, it has numbers that can be checked and against which conclusions can be drawn such as "Yes under Intermediate Cost assumptions the NW Plan would put Social Security into Short and Long Term Actuarial balance at a cost of X dollars in 2010, Y dollars in 2011 and Zetc dollars in years 2026 and following." Which then allows us to challenge any other plan to match up dollar for dollar. What does their plan cost in the form of foregone benefits or increased taxes in any future year? If it doesn't actually provide better retirement benefits at a lower cost what are its offsetting advantages that would induce workers to take the deal? Put your numbers on the table and lets compare.

It is one of the striking features of the overall Social Security debate that future impacts for any given year are rarely if ever spelled out. Yes under Intermediate Cost assumptions cash income from taxation falls behind cost in 2017. What does that mean for 2017? or 2023? Yes if we do nothing on Social Security the system will only have projected resources to pay out 75% of benefits in 2037? What does that mean in real terms? Well you never know because the argument always moves form 'Crisis' to 'Benefit cuts' without anyone pausing to quantify the effects or reflect on alternatives.

Well the Northwest Plan is such an alternative. It provides 100% of the scheduled benefit while maintaining the Trust Funds in actuarial balance through the current 75 year window. Plus it offers a mechanism that allows Social Security to maintain that state over the Infinite Future if you like. Want to wipe $15.3 trillion dollars in unfunded liability off the U.S.'s books tomorrow? Enact the NW Plan.

Of course it will cost you a $1.50 a week by year two. Maybe that is a deal breaker, but at least people need to explain why that shoud be. Over to you all.

rdan

A thought for a Sunday's musing:

If you have USD $50,000 in cash, what do you actually do with the money now? It is probably different by age group, but does one buy Ford at $2/share, swiss francs, some gold?

As writers in newspapers and blogs analyze the state of the economy, what do they really think concerning their own welfare?

rdan

The Washington Post reports that:

Sen. Edward M. Kennedy (D-Mass.) is circulating the outlines of sweeping health-care legislation that would require every American to have insurance and would mandate that employers contribute to workers' coverage.

The plan in the summary document, provided by two Democrats who do not work for Kennedy, closely resembles extensive changes enacted in the senator's home state three years ago.

In many respects it adopts the most liberal approaches to health reform being discussed in Washington. Kennedy, for example, embraces a proposal to create a government-sponsored insurance program to compete directly with existing private insurance plans, according to one senior adviser who was not authorized to talk to reporters.

The draft summary also calls for opening Medicaid to those whose incomes are 500 percent of the federal poverty level, or $110,250 a year for a family of four.

President Obama, meanwhile, is urging his most loyal supporters to reactivate the grass-roots machine that helped elect him and direct it toward health-care reform.

"If we don't get it done this year, we're not going to get it done," he said yesterday in a call to members of Organizing for America, the political group formed to advance his agenda. "And to do that we're going to need all of you to mobilize."

Robert Waldmann

It may turn out that the value of the Geithner put given to banks in the PPIP will not be huge. Many people including me worried that the legacy loan program was a huge scam, because loans were to be bought with up to 85% of the money a no recourse loan from the FDIC.

When I finally read the Geithner plan fact sheet, I discovered that there are 3 parts of the Geithner plan and that the FDIC was given the tools to protect itself.

The program which involves the FDIC, provides a large no recourse loan to buy pools of loans. The FDIC must approve the pool. The the pool is auctioned, then the FDIC decides how big a loan to make (if any).

The FDIC can (try to) protect its trust fund by not allowing pools with (predictably) huge variance. FDIC bosses do not want to have to go to congress to beg for a top up of the fund (I think that's putting it mildly).

Now I read that the FDIC is, indeed protecting itself and has no intention of giving its trust fund to banks. Masaccio writes "it turns out the FDIC’s Sheila Bair has a spine and isn’t going to let that happen. "We’ll show you," say the banks, "we won’t participate."" OK so Masaccio is a great painter but I don't know if he is right about the final outcome of the legacy loan portion of the Geithner plan. If he is I will write a post entitled "I Told You So."

by Tom aka Rusty Rustbelt

Paying for Health Care Reform

President Obama’s ambitious health care reform plans may have run into an immovable object – money.

In order to move forward on his plan the President has to find and/or reallocate something on the order of a trillion dollars.

One means of expanding health care coverage while containing health care costs is “efficiency” a fuzzy and hard to predict concept at best, especially while expanding insurance coverage.

Other potential means are been discussed by various constituencies, including:


1)Taxing the rich (also discussed to solve the deficit and other problems)

2)Tax some or all employer-paid health care benefits

3)Tax soda

4)Tax all sorts of “sin” products

5)Broaden the Medicare tax base

6)Cut payer reimbursements, possibly offset by insuring most Americans

7)Create new reimbursement systems for providers, perhaps “outcomes based”

8)Reduce or eliminate the tax sheltering benefits of Flex Savings Arrangements (FSAs)

9)Alter Health Savings Accounts (HSAs)

10)A national value added tax (VAT) or sales tax

Accomplishing this in the midst of a nasty and deep national recession may prove to be difficult if not impossible, but it appears Congress is going to move ahead and give it a try (sources - a couple fo dozen varied news reports).

And then there is another approach - increase the deficit, probably difficult.
____________________________________

Tom aka Rusty Rustbelt

Robert Waldmann

Kevin Drum argues that it is a very bad thing that financial firms can pick their regulator

For what it's worth, I'd say that having a single bank regulator is long overdue. The current structure not only doesn't make sense, but allows banks to shop around for the most lenient regulator they can find, prompting a race to the regulatory bottom.

In the post immediately below, Drum agrees with Bill Clinton that the Gramm Leach Bliley act was no big deal.

In an interview with Peter Baker, Bill Clinton says that although he regrets not regulating derivatives more strictly, he doesn't think that repealing the Glass-Steagall Act and allowing commercial banks to merge with investment banks was a big cause of our financial meltdown:

[snip Bill]

I think this is roughly right

huh ? I amplify after the jump.




There is a certain tension, almost cognitive dissonance, between this post and the post below. In the post below, you agree with Bill Clinton that the repeal of Glass-Steagal was no biggie. Here you argue that it is terrible to have competing regulators who are financed by fees paid by regulated firms inevitably causing a race to the bottom.

How did we ever get such an absurd regulatory system which seems to have been conciously designed to prevent actual regulation ? That would be by the repeal of Glass Steagal. The problem isn't that the barriers between say financial services companies and insurance companies were removed. The problem is that the barriers between the regulators weren't removed.

Firms could switch from sector to sector and their regulator couldn't follow them. Back under Glass Steagal a firm couldn't choose its regulator because it wasn't allowed into the business of the desired regulator.

To put it another way, the problem with the bill was not that it allowed AIG to set up AIG-Financial products, but that it allowed AIG-FP to find a way to be regulated by the office of thrift supervision.

Oh and I don't doubt that the regulatory system left by the repeal of Glass Steagal wasn't deliberately designed to allow a race to the bottom and prevent regulation insofar as that was possible. The chief architect was Phil Gramm who has made it very very clear that he thinks the main problem with regulation is that it exists.

Robert Waldmann

This post is an act of solidarity with DeLong's heroic civil disobedience of absurd intellectual property restrictions. Brad writes (in full Brad. All's fair with those who ignore "fair use" restrictions).

Jacob Viner (1933), "Balanced Deflation, Inflation, or More Depression"

Perhaps the most important single document with respect to how much the Chicago School of Economics has forgotten over the past seventy-five years--how much less they know now than Irving Fisher or Knut Wicksell did.

As I understand things, Jacob Viner's estate has rights to this document until 2040, and there is at present no way for me to get permission to legally distribute it. So I think it is time to hoist the jolly roger...

I hoist it too.

By Spencer:

The yield curve is strongly positive, and this is getting all kinds of blog comments.

They range from Arnold Kling saying "in my view, this is perfectly rational, and it shows that the short-run effect of the fiscal stimulus is negative"

To Greg Mankiw saying "that it signals future economic growth. In many ways, however, this is an unusual downturn, so it is not entirely clear to what extent historical relationships are a useful guide going forward'


It looks to me like a very normal cyclical development. For example according to this traditional indicator of what drives the yield curve the surprise ought to be that the yield curve is so flat.

I'm inclined to go along with Mankiw on this one and can not understand how this support Kling's conclusion that this demonstrates that the impact of fiscal stimulous is negative.

After responding in the comments section I thought I would add this chart to demonstrate my point. At the bottom in December the bond market was discounting a deflationary, depression.
Now it is discounting an economic recovery. It is a normal cyclical development.

He decides to consider current income the only determinant of savings.

He writes of Sonia Sottomayer "My grandmother would have been shocked and appalled to see someone who makes so much save so little."

True and one can understand his grandmother's total lack of appreciation for the work of Milton Friedman. Professor Mankiw, however, knows better, as is explained in the blog post with the best title ever and by Brad deLong.

Mankiw mentions his theory and I discuss after the jump.


Prof Mankiw

I once wrote a short paper called The Savers-Spenders Theory of Fiscal Policy based on the premise that there are two types of people: Some save and intertemporally optimize their consumption plans, while others live paycheck to paycheck, spending their entire income as soon as it's received.[...]

Apparently, the new Supreme Court nominee Sonia Sotomayor is an example of the latter. The Washington Post reports that the 54-year-old Sotomayer has a $179,500 yearly salary but

On her financial disclosure report for 2007, she said her only financial holdings were a Citibank checking and savings account, worth $50,000 to $115,000 combined. During the previous four years, the money in the accounts at some points was listed as low as $30,000.

So evidently 50,000= 0. I mean most people not as expert on economics as prof. Mankiw would not consider someone with 50,000 in the bank to beliving from paycheck to paycheck. The fact that her wealth was much lower at some point in the last 4 years means that her consumption does not track her income. The evidence for significan consumption by "spenders" is mostly that income and consumption are more highly correlated than they would be if all people were intertemporal maximizers without budget constraints (excess sensitivity). This is observed in aggregate data in spite of the case of judge Sottomayer whose wealth is not only positive (wouldn't show up) but variable (uh oh for the we're all spenders hypothesis of Prof Mankiw's colleague prof strawman).

In contrast, as explained by Brad DeLong and Nate Silver in the linked posts, it is relatively easy to reconcile the Sottomayer data with the intertemporal utility maximizing hypothesis.

The idea that one can expect a simple relationship between financial wealth and income would not be shockingly inconsistent with modern economic theory if stated by Prof Mankiw's grandmother, but it is authentically shocking coming from prof. Mankiw.

Now I actually think quite highly of Prof. Mankiw's work on consumption. I can remember the day I first saw it presented -- October 19, 1987. OK click the link and see that I can look up the date not because the brilliance of the talk seered the date into my memory but because the stock market was crashing.

The first I heard of the crash was that Mankiw was describing instruments used to forecast future aggregate income and mentioned the advantage that stock market indices are available every day (then in an aside sometimes every minute) but that they are not good predictors of future income (then in an aside "I guess we should be glad about that today"). Only when the seminar was over did I find out what he was talking about, so I was reassured in advance that the expected income decline conditional on the crash was, according to him, modest. And so it turned out to be, supporting Mankiw's work on excess volatility of stock markets (both papers with co-author John Campbell).

The Sottomayer episode shows something almost serious I think. Economists don't take economic theory seriously. We switch from optimizing models to our grandmother's model to get a blog post out. We certainly switch back and forth from the model in which everyone is rational, markets are complete and competition is perfect depending on the arugment we want to make. Mankiw takes economics very seriously (compared to say Waldmann) yet even he is willing to embrace pre Friedman thinking at the slightest provocation.

By divorced one like Bush

Hello everyone. Things have been hectic, so no time to blog. But, I thought these two videos would be of interest. They are Hans Rosling presenting his data via his program that animates the changing statistics.

Even the most worldly and well-traveled among us will have their perspectives shifted by Hans Rosling. A professor of global health at Sweden’s Karolinska Institute, his current work focuses on dispelling common myths about the so-called developing world, which (he points out) is no longer worlds away from the west. In fact, most of the third world is on the same trajectory toward health and prosperity, and many countries are moving twice as fast as the west did.

The first is his introduction of his program while discussing the relationship of wealth and health. His take is that health has to come before wealth to make real wealth progress. This second presentation makes it clearer as you see the change over time as a race between US, Japan and Sweden. He also relates it to climate change in that no nation has made progress without effecting climate.

His goal is to make data more readily available in a form that makes it easier to interpret. He works with the UN.

The videos are about 20 minutes each.
The first video is: Hans Rosling shows the best stats you've ever seen

The second video is: Hans Rosling's new insights on poverty

These come to you via: TED

by Bruce Webb


The above two figures are from CBO's Aug 2008 study on long-term Social Security solvency. I am not going to discuss them in depth but just point out that we trap ourselves when we say Oh-mi-God Social Security depletion moved back from 2041 to 2037!!" when the reality is that it is just the center point of the probability distribution that so moved. There is still a 50% chance that the result will be better than that and of course 50% that it will be worse. But we are free to act in such a way that moves that probability ban the other way. The Northwest Plan just being the simplest.

Of course there is also a 10% chance that Social Security if left alone actually ends up over-funded even if we do nothing at all. Meaning we should not freak out every time the mid-point of the distribution moves.

an animation by Lee A. Arnold

Higly Highly recommended (in Webb talk 'higly' is way above 'highly' but in deference to Lee we'll go English this time)


Direct link: http://www.youtube.com/watch?v=Tts2uTWt6e8

by Tom Bozzo

Mike at Rortybomb tries to make some sense of the apparently negative option value of revolving credit card debt and is left scratching his head:

Now interfluidity points out that people are willing to pay a yearly fee for a transaction card – let’s say $100. Now if you are a business and get a revolving line of debt, you are going to have to pay significant fees to keep it. And since the “revolving debt” option of a credit card is an option you choose to exercise, a credit card should cost more to have than a transaction card. Checking my mailbox, there are a lot of credit card offers with no yearly fees. In fact, they are incredibly rare. So:

Transaction Card + Option to Revolving Transactional Debt = Credit Card
($100) + ($?) <= 0 So the option to revolve the debt, counter-intuitive to classical economic and financial theory, has a negative expected value. So being given the option to revolve debt is actually a losing prospective for the consumer. At least in the aggregate. What does that say for financial theory at the consumer level, and behavioral economics more generally? For the finance geeks, isn't that twisted?

There's actually an old but pretty good paper bearing on this very subject: "The Failure of Competition in the Credit Card Market" by Larry Ausubel (American Economic Review, March 1991; pdf kindly provided by the author here). From the abstract:

The failure of the competitive model appears to be partly attributable to consumers making credit card choices without taking account of the very high probability that they will pay interest on their outstanding balances.

In short, the option value of revolving may be negative because banks correctly regard "freeloaders" who pay their bills as likely to reveal their inner revolver.

More below the jump.

Ausubel was writing before a lot of industry consolidation — and before the industry got around to sending billions of pieces of mail a year dangling low switching costs before consumers (temporarily juicing the finances of the U.S. Postal Service; another story). He conducted a survey of credit card issuers that strongly suggested that individuals lie when asked by other surveys whether they revolve their balances. Shocking, I know. The wrinkle of credit-card users underestimating the probability that they'll pay significant finance charges after low-transaction-cost balance transfers with low teaser rates is not at all a major leap.

Ausubel in fact anticipated many of the credit card features that the recently-passed legislation seeks to rein in:

Banks only face adverse selection [i.e. having customers who are bad credit risks select into their products] when they compete on the credit-sensitive portions of prices; they do not... when they unilaterally improve the terms facing customers [who do not revolve]. This would seem to be a powerful explanation why essentially all large issuers offer a... grace period... hardly ever impose transaction charges... small... annual fees... At the same time, issuers may install punitive prices for bad credit risks.

So non-revolvers are more-or-less rationally insensitive to pricing terms because they don't anticipate being subject to the array of interest rates and/or punitive fees. The information asymmetry for everyone else suggests a couple of outcomes: the old-style world where almost every revolver pays 19.8 percent interest — the "sticky rate" world that was Ausubel's main focus — or the present one where there is (or was) more interest rate competition but banks defend their profits from bad credit risks through stiff fees and penalty rates. (A more recent working paper [pdf] also implicates competition to collect from borrowers with increased default risk as an additional motivator for universal default and other repricing terms.)

This does suggest that a possible outcome is that responsible revolvers will pay somewhat higher average interest rates, which is not obviously a bad thing if they get a lower variance of rates and fees in return. Poor risks could be denied credit at the margin, though a feature of the old-style market was that plenty of cards were issued (maybe to people with thin credit histories more than poor ones) with relatively low credit lines.

Meanwhile transactional users are unlikely to get screwed. As Rortybomb's Mike observes in another post, fee waivers and rewards are not really subsidized, at least for that group on average. Looking back to the original model for the credit card industry's excess profits, encouraging transactional users to give up credit cards for debit cards or transactional-credit cards would additionally reduce the probability of converting those users to occasional revolvers and kill off a nontrivial source of profit.

Mike also makes the excellent point that in an apparent failure of competition, interchange fees have been at best nondecreasing even as interchange costs surely have decreased from the days — as recent as the late-eighties (at which point small merchants had dial-up charge terminals pushed on them with the carrot of non-trivial breaks in interchange fees) — when interchange involved pushing handwritten paper charge slips, so the stream of net fees from transactional users is not obviously diminished by more generous rewards than prevailed in the eighties and early nineties. He also ties in the related collective action problem (or is it a behavioral economics problem?), which is that society would be better off in a world where interchange fees were driven down to costs but rewards-maximizers gave up their "perks."

by reader ilsm

More reason to worry about the USA's AAA bond rating.

The Navy, Air Force, Marine Corps, United Kingdom Joint Strike Fighter, F-35 Lightning II (see P-47 from WW II Army Air Force fame) is the latest capability dream whittling away US resources, and stopping any war machine corporate welfare worries about Obama making any change in Washington. As the F-22 might go out of production at 183 useless money pits, Defense Secretary Robert Gates has given Lockheed a tit for tat. He is pushing the mostly untested F-35’s be paid for early.

May 20, 2009 the annual GAO report on the sham of the F 35 program, GAO 09-711T was issued titled: JOINT STRIKE FIGHTER; Strong Risk Management Essential as Program Enters Most Challenging Phase.

GAO found: development is slipping by 1 to 3 years and development costs are increasing by $2.4 to 7.4B, according to whether you compare early program office baselines to rosy revisions or less optimistic independent assessments. The department is not funding an alternate engine to the Pratt & Whitney F135 (they ignore the’ great engine war’ over the P&W F100 which made the F-16 a lawn dart). Manufacturing processes are not proven and there is doubt that 9 more test aircraft will be delivered by 2010. Test flying remains in its infancy and is far behind the F-22 at the same point in its development process.

Worse, the taxpayer is doing all this early buying using cost reimbursement contracts. These contracts mean that Lockheed gets paid whether anything happens or not. You and I are holding the bill for all the scrap and rework, and no one will terminate it because there are too many jobs at stake.

Back to Secretary Gates: With all the contrary indications the Defense is supporting raising production to 130 aircraft per year by 2015, that is almost tomorrow given the slow and faulty progress of the F-35 development to date.

To order these quantities under statute existing for years, the F-35 would have to go through operational test and evaluation and tell congress it is effective and suitable. That will not happen unless the definitions of effective and suitable are highly compromised (as the MV 22 and other systems).

It will be another build them all and try to make the thing fly. Good thing there is no need for the capability 'promised' to get the taxpayer to waste this money.

No risk management here, might as well whittle $240B worth of beaks.
__________________________________
by reader ilsm

by cactus

I had a few posts in which I noted that it appeared to me that corn ethanol (as opposed to the sugar cane variety) is a hoax being perpetrated on the American public. That conclusion came about as a result of my failure to see how the numbers could work out to make the use of corn ethanol viable as a fuel without being subsidized forever.


This story in Business Week makes a point I hadn't even considered:

Pushed into it by the corn growers' and ethanol refiners' lobbying organizations, today the EPA is starting to go through the public comment phase on increasing the level of ethanol in our gasoline from 10% to 15%. Time and time again we have heard from these groups, who now claim that there is zero scientific evidence that a 15% blend of ethanol would do any damage whatsoever if the mandate for ethanol were raised. As with all statements made by vested interests, few outsiders have actually taken the time to look and find out whether this statement was true.
In fact, it's false.

Not one mechanic I've spoken with said they would be comfortable with a 15% blend of ethanol in their personal car. However, most suggest that if the government moves the ethanol mandate to 15%, it will be the dawn of a new golden age for auto mechanics' income.

One last thought: Most individuals who have had to repair their fuel systems in recent years never had the gasoline tested to see if the ethanol percentage might be the problem. Today most repair shops and new-car dealers are still not testing for ethanol blends. They're simply repairing the vehicles and sending their unhappy and less wealthy customers on their way. But, where dealer and repair shops are testing the gasoline, ethanol is becoming one of the leading culprits for the damage.

Sadly, when a truly bad idea is exposed today, Washington's answer is to double-down on the bet, mandate more of the same, and make the problem worse. Only this time around motorists will be able to gauge the real cost of ethanol when it comes time to fix their personal cars.

Sadly, like subsidies for tobacco, another product that just isn't good for us, I don't think this is gonna die.
________________________________
by cactus

rdan

Bolinas goes from 400 gal./day household to 100 gal./day household use.

Fresno has no meters.

These are two anecdotal stories about water use that are interesting, revealing the variety of problems localities face. The stories reflect residential use only, which is about 12% of total water use in the US according to USGS.

Cassander, writing at Steve Keen's Debtwatch,* puts the hammer to those arguing that the death of the patient had nothing to do with the doctor:

What a load of bollocks.

The "principles of economics" that [N. Gregory] Mankiw champions, and the "More economic research (and teaching)" that [Doug] McTaggart et al are calling for, are the major reason why economists in general were oblivious to this crisis until well after it had broken out.

If they meant "Principles of Hyman Minsky’s Financial Instability Hypothesis", or "More Post Keynesian and Evolutionary economic research", there might be some validity to their claims. But what they really mean is "principles of neoclassical economics" and "More neoclassical economic research (and teaching)"—precisely the stuff that led to this crisis in the first place. [emphases in original]

Go Read the Whole Thing: a worthy spew of bile from one of the blogs that I've been reading a lot recently, in part so I don't feel guilty not having written the same thing.

*Cassander is, I believe, Keen's nom-de-blog for non-personal posts. But I could be wrong.

by Bruce Webb

The following piece is so bad that I won't even put any of it above the fold, nor will I waste my time critiquing it. But people should know that the battle over Social Security is not over, crap like this is routinely delivered via our major media voices.

Robert Samuelson in Newsweek: Let Them Go Bankrupt, Soon
Solving Social Security and Medicare

Have at it, I just don't have the heart to take this stale argument on yet again. And if any of you Angry Bears has better plans for the weekend certainly don't drop them for this. I just wanted to have him on record.

When the trustees of Social Security and Medicare recently reported on the economic outlook for these programs, the news coverage was universally glum. The recession had made everything worse. Social Security, Medicare face insolvency sooner, headlined The Wall Street Journal. Actually, these reports were good news. Better would have been Social Security, Medicare risk bankruptcy in 2010.

It's increasingly obvious that Congress and the president (regardless of which party is in power) will deal with the political stink bomb of an aging society only if forced. And the most plausible means of compulsion would be for Social Security and Medicare to go bankrupt: trust funds run dry; promised benefits exceed dedicated payroll taxes. The sooner this happens, the better. (cont)

It only gets worse from there. One final note, if this sounds vaguely Leninist that is because it is.

Robert Waldmann

In the post below, I totally humiliate myself by arguing that they way to appreciate "The General Theory of Employment, Interest, and Money" is to totally reject the idea that economists should aim for general theories.

So which is it ? Do I reject "The General Theory ..." or do I accept general theories ?



I think "The General Theory ..." is a wonderful contribution to human understanding. However, I disagree with the title. Keynes doesn't use the word "Theory" the way it is used by today's economists (so what ?). More importantly he doesn't use the word the way natural scientists and philosophers of science use it.

The word is now generally used to refer to a hypothesis which has survived many confrontations with the data -- that is a statement which is falsifiable but not yet falsified. "The General Theory ..." does not purport to present a model which can fit all macroeconomic data and which could be falsified by, say, post WWII US time series. Keynes specifically says that he can't make predictions on a key variable, that he thinks it is a mistake to aim for a simple equation with that variable on the left hand side. The variable is nominal wages.

For most of the book, he divides all other variables by the nominal wage level. This book ends with a conclusory chapter 18 "The general Theory of Employment Re-Stated." Then he goes on to discuss the things he left out -- nominal quantities not quantities expressed as multiples of the wage level. When discussing this in Chapter 19 "Changes in Money Wages," he notes that, in his incomplete model, a decline in nominal wages is just like an expansion of the money supply.

In 2 other chapters (including chapter 14 Appendix on the Rate of Interest in Marshall's Principles ...) he notes that, in a liquidity trap, neither increases in the money supply nor reductions in money wages cause increased real GNP. Now this is a special case, and it is very irritating for economics to depend on something silly like the real return to money hidden under a mattress, but here we are. A nice general model should not have "regimes" that is cases which are very different depending on the exact value of a variable (here is the safe short term nominal interest rate zero or not). Yuck. Even Keynes can barely stand the fact that the theory for a liquidity trap is not at all like the theory for normal times. But here we are in a liquidity trap. The problem is that two models with quite different properties are needed for trapped and untrapped liquidity. Keynes himself almost seems eager to hide the discussion of the liquidity trap in the most obscure possible part of his book.

Sorry for the digression. Back to Keynes on the determination of nominal wages. We get to chapter 20 "The employment function" which includes the best footnote in the economics literature "Those who (rightly) dislike algebra will lose little by omitting the first section of this chapter." Keynes never wrote truer words (well maybe "nothing" would be better than "little." The algebra consists of the definition of elasticity, defining elasticities, and deriving equations from those definitions. There are equations but there is no content. The only point is to set up a warning about what not to do -- assume an elasticity is approximately constant because you have defined it. The second and valuable half of the chapter is devoted to arguing that the pointless equations are not useful at all, because the painfully defined elasticities are not constant.

One of those pointless equations is better known as the Phillips curve. Keynes specifically notes that it is vertical in the case of "flight from the currency" by which he clearly means hyperinflation. He argues here and elsewhere that it is unwise to hope for a simple relationship between anything else and the wage level. Basically he specifically and repeatedly warns against treating the Phillips curve as a causal law or a menu of options open to policy makers.

Thus the failure of the Phillips curve in the 70s is just one more triumph of Keynes. He warned that there was no simple theory of the wage level and that adding it to the General Theory (implicitly the IS-LM model) would lead to false predictions.

Then when things happened exactly as predicted by Keynes -- or rather the thing which he said was unpredictable turned out to be unpredictable -- the economics profession decided that Keynes's general theory had been refuted by the data and it was necessary to throw away "The General Theory ..." and start over.

Sargent, for example, looked at the case of hyperinflations and noted that that the claim in "The General Theory ..." was exactly right and concluded that this showed that Keynes was wrong. Sargent is rather honest and I assume that he didn't remember The General Theory of Employment Interest and Money or that he never got to chapter 20 (entirely possible I don't think Sargent could stand to read the book).

Keynes managed to avoid being wrong by not presuming to explain everything always. He was modest enough to admit that some topics were not, or not yet, amenable to theory.

So you see the condemnation of general theories is consistent with praise of "The General Theory ..." if you admit that Keynes' rare virtue was his unusual humility.

Huh ?!? What ?!?!?! That's crazy too, but I've already argued one oxymoron in this post. The humility of Keynes will have to be the topic of another post.

Robert Waldmann

Oddly I imagine debating Niall Ferguson and manage to make a fool of myself.
This requires genius in reverse, so I will post my thoughts as an example of what not to say.

Brad DeLong quotes a "friend" who notes that Ferguson, lacking any valid arguments, attempted unsuccessfully to bait Krugman into losing his cool with comments like

"I rather fear that, at the risk of provoking the man sitting on the other side of me, that it says 1936 on the bottle of Dr. Keynes’ medicine..."

Krugman didn't take the bait, but I do, after the hump.


My reaction to this is to note that it says 1930 on the patient chart of recent economic data, so maybe the 1936 prescription is what we need.

At length.

It is a tad odd to recommend a 73 year old prescription.

Certainly MDs don't do that often unless they are dealing with malaria or hypochondria. First, I'd note that the world economy has malaria -- a disease which was almost eliminated and has returned due to extreme carelessness and which requires old remedies, the newer remedy of fiscal policy based on long term considerations and steady monetary policy being as ineffective against a recession and liquidity trap as penicillin is against malaria.

But first, I'd object to the implicit analogy. Prof. Ferguson is suggesting that economic science has progressed as much as medical science in the past 73 years. If only. If it were true that saying that Keynes is our best physician is to say that economists have accomplished nothing of value in my lifetime (Krugman's that is not mine) I wouldn't hesitate to do so. Clearly Keynes' remedy is the only hope for a cure for what ails us. The utter idiocy of counterarguments supports the overwhelming evidence from the historical record. If that means that all my efforts (Krugman's great efforts not my occasional dabbling in actual research) and those of all my economist contemporaries have been wasted, then so be it. It is better to face a painful truth than to reject reality.

However, I think economics has only failed to the extent that it has set to high a standard for itself -- Physics (this is Krugman speaking I am more inclined to just say it has failed). Indeed if we followed Ferguson and make the analogy with physic not physics, we see how it is possible that Keynes' prescription is the right one and that later economists have made constributions of value.

Physics is unique among the sciences because it aims for theories which are both simple and universally valid -- that is, pretty much, the definition of physics. Chemists don't claim that their research is relevant to understanding what is going on in the center of the sun, Biologists don't imagine that their results have any relevance to living things on other planets if any. Except in physics, and again by definition, natural scientists aim to develop theories which are valid for a limited range of conditions. To be a natural scientist is to attempt to find explanations which are consistent with the laws of physics but not, necessarily, to be a physicist.

The problem with economic theorists and the reason many have abandoned the valid insights of Keynes is that they have aimed for a general theory, when they should

Oh shit. I just said Keynes' work good "General Theory" very bad. Major blush.

I do think that. I think that economists have something useful to say when they stick close to the evidence which can, along with common sense identifying assumptions which people have trouble doubting, give useful answers to specific practical questions. However when they attempt to find universally valid theories they immediately abandon the idea that theories have to fit all the available facts and present universally invalid theories.

But I am defending dr Keynes who wrote a book entitled The General Theory of Employment Interest and Money and I have totally humiliated myself by saying that the one thing economists shouldn't do is attempt a general theory. Amusing no ?
However, this post is too long, so I will reflect on why my rejection of the aim for a general theory is consistent with my admiration for "The General Theory ..." in another post.

Via Dr. Black, those RBC models may be missing a variable or two:

In April, the rate in the United States rose to 8.9 percent. When the European figures are compiled, it seems likely that the American rate will be higher for the first time since Eurostat began compiling the numbers in 1993....

First, it appears that the safety nets in many Western European economies made it easier for people to keep their jobs as the economy declined. In Germany, programs allow companies to get government help in paying workers, for example, keeping them employed. If the recession becomes severe enough and long enough, of course, it could turn out those programs do not so much avoid the pain as defer it.

Because the alternatives are either direct government unemployment benefits on top of a decrease in GDP or a decline in social welfare with generational implications.

Another factor may be the lack of an economic boom in many European countries, which has left them less vulnerable to recession-related cutbacks.

Ah, pure RBC theory: the seeds of the next recession are sown in the economic growth that preceded it, even if that growth was somewhat enhanced by long-term liabilities:

Interesting, not unrelated, notes:

Then, the United States had an unemployment rate of 4.7 percent, lower than all but three of the 15 European Union countries — Denmark, the Netherlands and Ireland — and equal to that of a fourth, Luxembourg.

As the graphic shows, the March rate for the United States was higher than the rates of 11 of the 15. The exceptions were Portugal, which has the same rate, and Spain, Ireland and France.

The Irish story was truly a country-wide "miracle," now featuring both higher highs and lower lows than even the U.S.

Spain and Ireland, two of the highest unemployment countries in Western Europe, suffered housing booms and busts that were comparable to the cycle in the United States.

Spanish banks hit the news earlier this week. U.S. banks are evermore heavily subsidized by the U.S. taxpayer (or that taxpayer's debt; see above). Or, as Robert Lucas told Arjo Klamer in May of 1982:

But I don't think unemployment is at the center of the story [of the Great Depression]. For those who do think it is the center, I can see why they don't look to me for enlightment.

What a difference 27 years makes.

(Update: input numbers by Coberly the Office of the Actuary of SSA; calculations and output numbers by Coberly)




Click to enlarge. This is what the result of implementing DI and OAS Triggers immediately would look like. 100% of scheduled benefits, no increase in retirement age, ending Trust Fund ratio of 123. This should be considered a baseline for policy, it may be that we would want to target policy in ways that would reduce ultimate tax rates, and it may be that the economy just does that for us. But this is what a tax based fix looks like: a couple of years of adjustments initially, a decade of small adjustments after 2026, followed by long stretches when no changes need be made at all.

rdan

Bloomberg reports on

Timothy Geithner committed to cutting the budget deficit as concern about deteriorating U.S. creditworthiness deepened, and ascribed a sell-off in Treasuries to prospects for an economic recovery.

“It’s very important that this Congress and this president put in place policies that will bring those deficits down to a sustainable level over the medium term,” Geithner said in an interview with Bloomberg Television yesterday. He added that the target is reducing the gap to about 3 percent of gross domestic product, from a projected 12.9 percent this year.

The dollar extended declines today after Treasuries and American stocks slumped on concern the U.S. government’s debt rating may at some point be lowered. Bill Gross, the co-chief investment officer of Pacific Investment Management Co., said the U.S. “eventually” will lose its AAA grade.

Geithner, 47, also said that the rise in yields on Treasury securities this year “is a sign that things are improving” and that “there is a little less acute concern about the depth of the recession.”

The benchmark 10-year Treasury yield jumped 17 basis points to 3.36 percent yesterday and was unchanged as of 12:18 p.m. in London. The Standard & Poor’s 500 Stock Index fell 1.7 percent to 888.33 yesterday. The dollar tumbled 0.5 percent today to $1.3957 per euro after a 0.8 percent drop yesterday.

by cactus

It Rarely Happens But What Goes Around Can, Potentially, Come Around


Dear Mr. Obama,


Incriminating information about a certain individual has come to my attention. In the 1980s, this individual praised and defended a small cabal that worked its way into the highest levels of government and then sold modern American military equipment to Iran in violation of any number of laws. In the 1990s, that individual would himself head an international organization that had dealings with Iran and Libya. He would also work to make it easier for others to deal with those rogue nations. In recent years, he was instrumental - by emphasizing false and misleading information from disreputable sources - at creating the conditions which led to the deaths of thousands of American lives, the loss of American prestige, and not incidentally, tremendous strategic benefits for Iran. More recently, he has come across a lot of classified information whose disclosure would put the country at risk. Much of that information is extremely up-to-date. With his history - especially where it pertains to a very hostile state (Iran) - this cannot lead to a happy outcome for the United States.


Fortunately, he has in the past shown a willingness to do what it takes to keep himself out of harm's way, regardless of the damage to others. Thus, it is likely that he would cough up anything he knows quickly and with little fuss if physically threatened. Still, I would recommend waterboarding him. A lot. By about the 190th time, he'll have confessed to so many things - true and false - that you'll be able to use his statements to justify anything at all, from invading Canada to imprisoning his family members forever. I wouldn't put it past him to accuse his own child of behavior so heinous that decorated war heroes who engage in it are chucked out of the US military with no recourse.


I think I've provided enough clues as to this man's identity for the FBI to locate him. Good luck.


cactus

rdan


Executive summary of EBRI stats on:

Income of the Elderly Population Age 65 and Over, 2005

• Latest data: This article reviews the latest available data on the older population's income (age 65 and older), how it has changed over time, and the elderly's reliance on these sources.

• Social Security still dominant: In 2005, Social Security was the largest source of income for those currently age 65 and older, accounting for 40.1 percent of their income on average. Pension and annuities income was 19.3 percent, income from assets 13.6 percent, and income from earnings 24.8 percent.

• Income levels: The median (mid-point) income level of the elderly population increased from $12,074 (in constant 2005 dollars) in 1974 to $15,422 in 2005. The average income of the elderly increased from $17,037 in 1974 to $24,418 in 2005.

• Gender differences: Elderly women get more of their income from Social Security (50 percent of income) than elderly men (33.3 percent). Elderly men derive a larger share of their income from employment-based sources, such as earnings (30.5 percent) than elderly women (16.4 percent).
Elderly women are deriving more income from employment-based sources over time, reflecting the growing presence of women in the work force.

I did not find data that included the current situation of pensions and such in this format.

by Bruce Webb, data by Coberly

Coberly has now produced new spreadsheets updated in light of the new numbers of the 2009 Report. Copies of past and current spreadsheets are available at our Google Group RealSocialSecurityFix's Northwest Plan page. (It should be viewable by anyone). The new Trigger ones linked below.
(UPDATE: Hot off the press, the combined OASDI Trigger Plan. Coberly has simplified and improved the labeling and data presentation).

The newest version treats the DI (Disability Insurance) and OAS (Old Age/Survivors Insurance) individually instead as just part of a combined OASDI. This has a few advantages including the big one that it allows a smoothing and phasing of the tax increases in a way that the impact will be barely perceptible in any given year. Moreover it allows those increases to occur or not in relation to specific Triggers.

The Trustees of Social Security measure the health of two insurance programs by two tests: Short Term Actuarial Balance which is measured over a 10 year period and Long Term Actuarial Balance which is measured over a 75 year period. In 2003 they introduced a new measure which calculates that balance over the Infinite Future Horizon. Our view is that Infinite Future was purely a gimmick introduced to allow new huge scary numbers to be introduced, others including some big name economists who are out there defending Social Security disagree. In any event Coberly and I are not going to bother with it, as the numbers run if you fix the 75 year problem you mostly fix the 100 year problem and there is no real gap between year 100 and Infinity anyway. (If you take the actuarial balance for 'Future Participants', i.e. everyone under the age of 15 and people yet unborn, the ystem is in long term surplus of $1.2 trillion Table IV.B7.—Present Values of OASDI Cost Less Tax Revenue and Unfunded Obligations for Program Participants)

The NW Plan is designed to kick in right as either DI or OAS fail the test of Short Term Actuarial Balance and phase in tax increases in a way that allows the Trust Fund to meet both the Short Term and Long Term tests. The plans are flexible in that the Trigger points and the size and phasing of the increases can be changed as new Report Years roll in. And rather than quarrell that SSA is too pessimistic or CBO too optimistic we propose to just run with SSA, if CBO turns out to more correct then all the better, you just tinker with the formula giving everyone years and years to plan. That is the NW Plan takes much of the drama out of Social Security.

As it turns out the Trigger point for DI already happened, it failed the Short Term test a year ago. Meaning that changes have to kick in right away. DI Trigger: 2009 Report. This means an increase in the DI portion of the FICA tax by 0.02% 0.20% in 2010, another 0.01% 0.10% in 2011, and another 0.01% 0.10% in 2039 (updating to 2009 numbers caused a small change in the later two dates). For a median income household and assuming the employer/employee spllit this works out around $1 per week in year one.

OAS is a different story, although it too took a hit in 2009 the result was not to move the Trigger much. If the NW Plan had been in effect over the last couple of years none of the attempted hysteria around 'Vanishing Surplus' would have happened, in reality events over the last year have only marginally effected the larger picture. OASI Trigger: 2009 Report. Now it looks like restoring Social Security to Short and Long Term Actuarial Balance requires tax boosts of 0.02% 0.20% per year (once again about a $1 a week for the median income household) for the ten years starting in 2026. Starting in 2036 those increases slow to only needing to change every four to ten years.

These numbers are subject to change with every Report Year, in fact that is one of the points. We don't really now what 2012 is going to bring, CBO and OMB numbers start diverging broadly after that, if we were using CBO numbers for the Northwest Plan the cost of the fix would be roughly half of that shown in the spreadsheets. The NW Plan is designed to be a flexible planning tool that can respond to new data in real time. Or we could lock ourselves into policy based on assumptions about economic performance after the dawn of the 22nd century and on to the Infinite Future. A better choice for those people would be to relax and watch Star Trek. BTW if you want some Social Security Sci-Fi, follow me below the fold.


Because Low Cost is out there. Relatively few people pay attention to Low Cost and this even in the face of a series of years from 1997 to 2003 or so where the economy consistently returned better numbers than even Low Cost projected and so rapidily moved the date of Trust Fund Depletion back and shrank the payroll gap. The years since then have not been as kind to Low Cost but similarly show that Intermediate Cost remains too pessimistic over the long run. Which means that in addition to monitoring Short Term Actuarial Balance we also need to keep an eye on Long Term, simply to avoid over-funding Social Security.

Why is over-funding Social Security a problem? Well I outlined it in one of my first posts at AB, in fact I actually lifted that from a previous post at the Bruce Web prior to my having AB posting privileges. The Danger of Low Cost
This figure is from the original post and so is from the 2008 Report, it is not much changed with the 2009 (see figure II.D6). In this figure a flat line represents a constant TF ratio, meaning that all income equals all costs with enough left over to maintain a constant reserve. But it not healthy for the country or for Social Security for that line to go flat at too high a level. Because that means that Social Security would be relying to a greater degree on interest earned on the Trust Fund. And while there is nothing phony about the excess FICA tax that has been paid since 1983, that was real money borrowed from workers that was put to use in the real economy hopefully in a way that increased productivity down the road. But whatever utility that spending had it is ultimately discounted by the interest being extracted from the future economy and this is particularly so if that interest is just left to compound endlessly. From 2006 Interest on Interest: a Threat If the Trust Fund settles out with a TF ratio of 500 this implies that 25% of Cost is being covered by General Fund transfers in the form of Interest. Well that still leaves Social Security 75% pay-go from current workers. But as the decades go on the people who originally paid in those extra taxes prior to shortfall in 2017 gradually die off leaving this unproductive albatross behind and ultimately retirees are to some degree getting a free ride based on sacrifices made by earlier generations. Indeed if the Trust Fund goes to 1000 then fully half of Cost could be met from Interest, making it into somewhat of a welfare plan.

So how do we escape this possible long term trap? Well I suggested a variety of approaches on my blog in 2005-2006 but they all boil down to targetting Long Term as well as Short Term. I called this the 100/100 Plan in the days before Coberly supplied numbers. Under DI Trigger the TF ratio drops as low as 107 in the mid 2030's which triggers the third and final increase in 2039 which gradually increases the TF ratio to the 180s. This isn't a bad spot, it leaves DI as a little over 90% pay-go, but you don't want to see it go much higher. Meaning that at some point we might want to reverse the 2039 increase and then maybe roll back the 2011 and 2010 increases as well. Because the following is NOT a good outcome.

The pale grey line is DI and alternative II is Intermediate Cost. We want the II line to flatten, but we have no reason for it to continue to rise. Under Low Cost outcomes or anything approaching it we would by 2019 or so seriously considering cancelling the 2039 increase and then potentially rolling back earlier increases to target a 100-200 range for TF ratio. The black line is OASI. Under Intermediate Cost the Trigger point is set around the 2026-2028 date range. Under Low Cost the Trigger point is never reached and in fact we might even to decide to schedule some gradual tax decreases after 2017 to bring total income in line with cost and put the TF on a glide bath to 100/100.

So the Northwest Plan offers both a carrot and a stick. To the extent that Social Security projects not to diliver a 100% benefit it proposes some mild and phased in increases in tax. If workers are able to boost productivity and more importantly in a way that garners them a fairer share in that productivity than they got over the last eight years we can sweeten that with a possible payroll tax rate cut. Don't want even a small increase in FICA rates in 2026? Demand better Real Wages in the meantime. There is more than one way to skin the cat of retirement security, the Northwest Plan is just a mechanism to keep the opposition from simply slashing future benefits just because they don't want to pay back the money they borrowed.

Cross posted by Linda Beale, ataxingmatter

Linda Beale has a take on tax competition and real costs hidden by gaming the system. Who does pay for the US Naval protection of commerce in the world?

Tax Competition: why it is not a good thingThe Tax Foundation is one of those purported think tanks that preaches (I use the word calculatedly) a strong "free marketarian" ideology. Most of the materials produced come out very anti-tax, anti-government, and pro-big business. Most of the material makes one want more information about who is really paying the Tax Foundation's bills.

Not surprisingly, the Tax Foundation has now issued a "special report" challenging the Obama administration proposals on international taxation as "a step in the wrong direction" because they "would put U.S.-based companies at a competitive disadvantage in their competition with multinational firms based in other major trading nations." See Carroll, Bank Secrecy, Tax havens and international Tax Competition, Special Report No. 167, May 13, 2009.

Let's be clear. When the Tax Foundation argues for tax competition among countries (i.e., lowering of tax rates and losses of revenues in order to attract MNEs from other countries to establish some kind of token presence, usually, in the low-tax country), as it does here, it is not arguing for a policy that benefits ordinary Americans. It is arguing for a policy that would benefit major multinational enterprises located in the United States, ones that want the protection of the U.S. flag (and its flagships) but not the corresponding burden of helping to pay the price for the stability at home and the armed and diplomatic forces abroad that are so important to US MNEs when they do business offshore.


Similarly, when the Tax Foundation argues, as it does in the email message sending out the report, that the U.S. tax system is "out-of-line internationally" because it "has made no major change in its corporate tax in over 20 years", it is just plain wrong. When I began practice at Cleary Gottlieb in late 1995, there was a good bit of discussion in the Clinton administration and among congressional representatives about corporate tax shelters and the need to crack down. Doggett began proposing his economic codification bill, but the corporate lobbyists were able to defeat it, time after time. There was at the same time quite a long "wish list" of items that corporate lobbyists wanted to see passed in the tax code. Many in that corporate wish list were passed by the Bush Administration working with a Republican congress in the 2004 tax bills. One heard there'd even been an explicit tradeoff--the Republicans planned to pass their huge individual tax cuts in the 2003 bills (the one that gave the wealthiest Americans tens or hundreds of thousands in annual reductions of tax bills), and then the corporations will get what they want in the 2004 bill. What kinds of things were passed to favor corporations? How about the 2004 erroneously named "Jobs Act" provision permitting repatriation of long-held overseas profits at a pittance of the tax rate that should apply? That was a meritless giveaway for no purpose other than lowering (even further) the already low tax liabilities of U.S. MNEs. The US MNEs that had been "good" citizens, repatriating their profits regularly and paying at least some share of the appropriate burden, were stiffed by the competitive disadvantage created by this provision for the "bad" citizens. Companies that had held out and lobbied for the repatriation provision were able to bring back billions with extraordinarily low taxation, and then plan to hold out on any further repatriation until they could get a similar bill passed again in the future. The bill claimed it would create jobs. But there was no job creation requirement for getting the low tax rate! In fact, many of the companies that made a killing out of repatriating large sums at very low tax also laid off workers. Similarly, the enormous expansion of the expensing provisions under section 179 and section 168 have provided a gigantic tax writeoff for U.S. MNEs--upfront expensing does not comport with the economic decline in value of property and operates as a huge tax cut. The same is true of the R&D credit and the "manufacturing" deduction. There have, in fact, been a series of provisions that are "tax expenditures" favoring corporations amounting to billions of dollars. All of these things the Tax Foundation glibly disregards.

The Tax Foundation argues too that the OECD harmful tax practices initiative is itself problematic, suggesting that the paltry amendments by various nations to their information exchange problems have addressed the issues. Not so. If it were true, we would not be in a battle with Swizterland to force disclosure of names, where the Swiss banks says they can't provide information unless the request is made for specific accounts, but there can't be requests for specific accounts if the swiss banks have served to hide the information from the U.S. The information exchange provisions that the Tax Foundation suggests are sufficient, in other words, are merely window dressing. They do not do the job that is needed to prevent wealthy taxpayers from hiding their assets offshore to avoid taxation.

Similarly, the Tax Foundation insists that low tax rates should not be considered a harmful tax practice because it "is a legitimate way to expand a nation's tax base and increase the living standards of all residents." The latter, of course, is highly questionable in the case of tax havens like Bermuda or the Cayman Islands--those whose living standards are increased are generally the owners and managers of the MNEs taking advantage of the low tax rates to stiff their home country on the taxes due or the various parasitic law firms and others that make millions off of facilitating that stiffing. Competition between countries for the business of MNEs who treat countries as fungible entities so that they can pay labor the least and owners the most possible is not a public good.

The Tax Foundation also continues to compound the misrepresentation of the US comparative tax burden by emphasizing the statutory corporate tax rate rather than the average effective tax rate or the overall tax burden in the US and other countries. This is problematic for several reasons. The US statutory rate provides a very misleading picture of the relative tax burden of the US compared to other countries, because of the large amount of subsidy provided to US corporations through tax expenditures. Moreover, overly aggressive tax planning by large MNEs significantly reduces the corporate tax burden, since these sheltering transactions may not be found on audit or may not be adequately reviewed to find the aggressive position taken, resulting in companies paying taxes on a lesser amount of income than would be the case if the standards for reporting were stiffer and enforcement harsher. In fact, the average effective tax rate on large US corproations that do pay tax is substantially lower than the 39.25% combined national and subnational statutory rate that is cited in the Tax Foundation report. Additionally, other countries typically have a significant VAT tax as well as the corporate income tax (and often many additional excise-type taxes). Accordingly, the overall tax burden is very different from that portrayed solely by looking at corporate income tax rates. The Tax Foundation claims that the same "trends" apply to overall tax systems, relying on its own study that looked at the effective marginal tax rates, and asserts that average tax rates is not adequate, since it disregards the non-corporate sector. But this argument surely is a strawman--entities have a choice of form in the US. There are advantages to operating in the corporate form, and a corporation that chooses those advantages should bear a fair share of the costs of providing them (from regulatory apparatus to general law enforcement to defense apparatus).

The Tax Foundation implies that US MNEs pay the high US corporate tax rate on their foreign source income. However, that disregards the fact that US MNEs actually game the system to use foreign tax credits to reduce their US source income taxation--a reason for some of the rules proposed by the Obama administration.

Tax competition is merely one more tool in the corporatist agenda toolbox. It is not a public good, but a harmful result of globalization and the fungibility of money and, increasingly, labor. Capital owners benefit, but everybody else loses when countries' ability to raise appropriate revenues from the business sector is undermined by tax competition.

GoogleLookup, for the datasheet that gets dumped into a database and updates the model regularly.

Or just for fun.

Consider this a PSA.

rdan

Mark Thoma at Economist's View offers a look at Jeff Sachs (in Scientific American) notions of the correctness of a 'global' basket of currencies to be used as a substitute for the US dollar.

China has now proposed that ... nations peg their currencies to a representative basket of others rather than to the dollar alone. ... U.S. monetary policy would accordingly lose its excessive global influence...

The U.S. response to the Chinese proposal was revealing. Treasury Secretary Timothy Geithner initially described himself as open to exploring the idea; his candor quickly caused the dollar to weaken in value—which it needs to do for the good of the U.S. economy. That weakening, however, led Geithner to reverse himself...

Geithner’s first reaction was right. The Chinese proposal requires study but seems consistent with the long-term shift to a more balanced world economy in which the U.S. plays a monetary role more coequal with Europe and Asia. No change of global monetary system will happen abruptly... We will probably move over time to a world of greater monetary cooperation within Asia, a rising role for the Chinese yuan, and greater symmetry in overall world monetary and financial relations.

Given how the WTO rules were developed, allowing freer flow of capital but not much else, how are we to view this sort of thing....good or bad? And will the new order happen with the little guy in mind?

Because a world without Leonard Cohen songs readily available to all in Frisian is not a world we want to live in:



plagiarism confession: This post is entirely copied from Brad DeLong who quoted Justin FoxJustin Fox.

See Maureen Dowd -- that wasn't so hard was it ?

Susan of Texas has an immortal post on the housing crisis, McMegan's ratiocination, and the persistence of ignorant memes. The money quote:

McArdle doesn't refute facts, she hen-pecks at the methods used to gather information. That way she doesn't actually have to prove anything, she just casts enough aspersions on the data to confuse the issue. When source after source after source after source brings up a problem, dismissing it out of hand begins to look like bigotry and callous indifference instead of honest disagreement. [links from original]

Go Read the Whole Thing.*

(Cross-posted and expanded from Marginal Utility)

*Yes, rdan, this is another blog we've been keeping from you.

by Bruce Webb

Michael Lind wrote an interesting article for Salon that was picked up by the New America Foundation under the snappy title Let's Cut Social Security to Pay for Banker Bailouts!. In it he outlines arguments that will be familiar to followers of Angry Bear's Social Security coverage, notably pointing out the 'message' campaign outlined by Stuart Butler and Peter Germanis in 1983 with the publication of 'Social Security Reform: Achieving a 'Leninist' Strategy', something discussed here last May.What does Lenin have to do with it? Well this caused Andrew Biggs to strike back at what Biggs calls "lefty claptrap" in his own article The Strawmen of Social Security. In the course of this he refers us to this SSA Actuarial Note with its own snappy title INTERNAL REAL RATES OF RETURN UNDER THE OASDI PROGRAM FOR HYPOTHETICAL WORKERS He summarizes it as follows:

First, fairness: Social Security’s treatment of different generations of Americans is declining, such that those who retire in the near future will receive much higher benefits relative to their taxes than those who retire later. For instance, this study from the Social Security Administration shows that a typical couple retiring today will receive around a 2.3 percent rate of return from Social Security, while a typical couple retiring in 2050 will receive around a 1.7 percent return. Compounded over a full career of paying taxes, these differences amount to a lot. By acting today, we can lower returns a little for near-retirees so we do not need to hit future retirees as hard.

Is that a fair summary of the Note? Well no, that is in fact a strawman so flimsy that you don't know if it will burn up or simply blow away. For example what the hell does 'typical' mean in context?

To answer that we need to look at the data tables. Reproduced below the fold.



So where is our typical couple? Well you won't find them, in fact the whole point of the study was to see how Social Security performs for all couples across generations. And it turns out that depends a lot on where that couple is situated. For example for our hypothetical couple retiring today if either husband or wife have incomes classified as 'low' or 'very' low their Internal Real Rate of return ranges from 3.0 to 4.6%. In order to get a return at Biggs' level you would have to have a combination of 'medium' and 'medium'. Now while it is possible that medium + medium = median = mean and so 'typical' is how Biggs read the situation. But aan examination of Table A shows that 'medium' is defined as $38,651 meaning a household wage income of $77 thousand which is significantly above median household income. For Biggs it seems that 'typical' means comfortably middle class (and yes, yes, yes I know people say you can't live in LA or NY on less than $300,000, that doesn't make them 'typical').

So when I look at these tables I take away a very different lesson. Social Security has been a really good deal for those making under the median and a great deal for those nearer the bottom. On the other hand if you or your spouse or both have 'high' incomes defined as $62 thousand a year it is a only kinda good deal. If you restrict yourself to this narrow measure. But as the authors of the actual note tell us (bolding mine):

Because the Social Security program has operated on a largely pay-as-you-go (PAYGO) basis, the level of contributions of each generation of workers is not directly related to the benefits they will receive. Under a PAYGO plan, benefits are not based on the accumulation of individual contributions, as in a defined contribution plan, nor are annual contributions determined based on scheduled future benefits of current workers and beneficiaries, as in an advance-funded defined benefit plan.
Rather, the combined amount of contributions from workers and employers needed to fund the system is largely determined by the total amount of benefits to be paid for any year. Thus, internal rates of return for a PAYGO-financed benefit program are only theoretical indicators of the apparent value for contributions on an individual or cohort basis. On this
basis, with administrative expenses of less than 1 percent of total program cost, the real value of OASDI benefits is extraordinarily high.
Internal rate of return does not reflect the full value of insurance in reducing the risk for extreme outcomes, such as death or disability at very young ages or survival to very old ages. In addition, calculations of the internal rate of return from Social Security benefits are not fully adequate for making comparisons with private-sector plans, since many features of Social Security benefits are not typically available in private-sector plans. Examples include guaranteed cost-of-living adjustments
based on the Consumer Price Index, and benefits for life in the event of disability. However, internal rates of return are of value for exploring the relative value of benefits provided across generations and types of workers.

Oh and that future 'typical' couple retiring in 2050 who are only getting 1.7% per Biggs? Turns out that includes only those couples whose incomes BOTH score as 'high'. If you both score 'very low'? The new retired couple of today? 4.61%. The trampled on retirees of 2050? 4.54%. Man the intergenerational inequity just screams out here. Not.

So that funny smell is some combination of freshly picked cherries and straw burning up.

Did no one in Georgia pay attention in the 1980s?

It’s not just reputations that are on the line. Board members, also known as directors, could be held personally liable for a bank’s demise.

Experts are expecting a wave of lawsuits against directors to be filed in Georgia over the next year or two as regulators and shareholders seek someone to blame — and someone to pay — for the state’s bank failures.

Eleven Georgia banks have failed in the past eight months, the most in the country, and experts say many more troubled institutions are in danger of being shut down.

But recovery, of course, is just around the corner.

rdan

Check 0:25 for information on Bob Graham's briefing
Check 2:50 for information on WMD briefing at about the same time
Check 3:50 for information on Bob Graham's now notable notebook system and inaccuracies in briefing dates (3 of 4 mentioned to him never occurred on those dates).



A better question to pursue is not to discuss "the CIA", but which individuals filtered the information and the timing of the information, as well as what was discussed. If the "CIA" gets briefing dates wrong, is that significant? Would individuals in the CIA filter information to Congress?: of course. Is the RNC frame actually important?: Only if there were crimes determined to have happened...let us start with Yoo and company, and work steadily from there.

rdan

No friends in high places for these small to medium sized banks. (hat tip Calculated Risk)

rdan

Middle aged men and pensions in the industries. Much wealth has vanished...I notice a lot of apathy among employees such as teachers whose state plans have not declared losses yet except generally. The MA plan declared a 29% "loss" in value, but I have yet to see a clear statement about what the "loss" implies, how much is perhaps permanent as in owning worthless paper, and how current revenue can handle the next few years of retirements of boomers. Can anyone help out in this evaluation?

All over the country, pensions guaranteed by union-negotiated contracts are vanishing into thin air, casualties of bankruptcy, economic upheaval, and flawed legislation. Pensions have turned to dust at airlines (United, Delta), steel companies (Bethlehem), textile makers, and even electronics companies like Polaroid. The Big Three and their suppliers may roll back pension plans that support hundreds of thousands of retirees and their families. Entire towns have seen their economic base disappear; in Kannapolis, North Carolina, home to the textile maker Pillowtex Corporation, 23,000 private pensions were wiped out overnight when the company went bankrupt in 2003.

For workers whose pensions vanish, the only safety net is the federal Pension Benefit Guaranty Corporation, an insurance fund financed by employer premiums. Today, 1.3 million workers rely on the federal government to pay pensions that their employers no longer can or will pay; the number has more than doubled in the past eight years, and it keeps rising. The pbgc, its investments battered by the stock market crash, is now deep in the red, with a deficit of more than $11 billion instead of the $9.7 billion surplus it had in 2000.

But there is a growing population of workers whom the pbgc can't fully compensate: those in heavy-labor industries, where bodies wear out long before the traditional retirement age, and where retirement typically starts in a worker's mid-50s. When these companies bail on their pensions, the pbgc often offers significantly less. It also doesn't cover health insurance, an essential benefit to workers who don't qualify for Medicare and who often have children still at home.

"It's a frightful societal development," says Bill Brandt, a Chicago-based financial consultant who has served as a trustee during numerous bankruptcy proceedings. Between the disappearing pensions, slim prospects for new jobs, and vanished medical benefits, middle-aged workers like Hazel "will discover it's the beginning of a very sordid story for the rest of their lives."

In Longview, retirement promises were only the last to be broken. In 2000, the world's largest aluminum producer, Alcoa, Inc. (then run by Paul O'Neill, whom George W. Bush would soon appoint as treasury secretary), had bought out the foundry's owner, Reynolds Metals. But Alcoa quickly found itself embroiled in an antitrust battle, which required it to sell part of its stake in Reynolds; it also realized that the Longview plant used obsolete, polluting technology—"we were dinosaurs in the mud," says one ex-worker bitterly—and that the plant was full of men whose pension and health ious were coming due.

(Bolding is mine.)