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Author: Andrew Samwick

Published on Leave a comment on Victor Does the Heavy Lifting

In a comment on a recent post, and in more detail on The Dead Parrot Society, Victor tries to answer this request:

Matthew Yglesias asks, "The first thing that would be nice to calculate if someone can figure out how to do it is the exact average productivity growth over the next 75 years that we need to make sure that the Trust Fund is never exhausted."

In his search for an answer, and as a critique of a rough answer at Brad DeLong's blog, he finds the sensitivity analysis in the 2004 Trustees Report (Table VI.D4):

A far superior approach would be to do what the Social Security Trustees did: let the real-wage differential vary, keep all the other assumptions constant, and see how the results changed. They found that a 0.5%-points increase in the real-wage differential, improved actuarial balance by .54%-points of taxable payroll, from a 1.89% deficit to 1.35% deficit. Assuming the SSA truly held all other factors constant, this would be equivalent to increasing productivity from their baseline of 1.6% to 2.1%. That's a whopping increase in productivity, and a pretty good improvement in the actuarial balance, but you are still far from 75-year solvency. (which, recall, is only one of the issues that many are concerned about)

Victor just stops too early in his calculation. If one were to use the linear approximation in the text of the report, (0.54 percentage point of imbalance per 0.5 percentage point improvement in the real wage differential), then we would need to boost the differential by 1.89/0.54 = 3.5 units of 0.5, or by 1.75 percentage points up to 2.85 percent to go from the intermediate projections to 75-year balance.

If we wanted to be a bit fancier, we would note that the change over the three scenarios is not quite linear. The table gives us three pairs of numbers on {real wage differential, 75-year imbalance}: {0.6, -2.42}, {1.1, -1.89}, {1.6, -1.35}. With three pairs, we can fit a quadratic to do the extrapolation. When we do, we get [omitting the gratuitous algebra] about 2.81 percent for the real wage differential. Let's call it 2.8 percent, or an increase of 1.7 percentage points.

If we maintain the Trustees' other economic assumptions in Table V.B1 (earnings as a percent of compensation, average hours worked, and the wedge between CPI and the GDP price index) and Table V.B2 (total employment growth), this translates into long-term growth rates of 3.3 percent for productivity and 3.5 percent for real GDP. That productivity growth rate strikes me as too high.

However, these rough calculations were made without regard to what happens in the years after the 75-year window. In this case, there may be surpluses in the years near the end of that projection period, and so 2.8 percent for the real wage differential is too high for a longer projection period. We would need the actuaries to run the numbers themselves to be sure.

In addition, the "If we maintain ..." is a very big "if." It is not satisfied, for example, in the Brookings Paper by Robert J. Gordon that Victor cites in an earlier post as the basis of what Kevin Drum has been blogging about. It looks like, yet again, I've got more reading to do before I can make a more definitive statement.

And most importantly, it is hardly sensible to treat the Trustees' assumptions as if they are independent of each other, particularly the ones that work together to go from GDP growth to the real wage differential. If one of them changes, it is likely to be offset by changes in the others. For example, note from the historical series of Tables V.B1 and V.B2 that we have had high productivity growth in the past couple of years, but this has been associated with negative real wage differentials largely because of the decline in average hours worked. Using the last couple of years as evidence that productivity can be much higher than the Trustees have assumed is an incomplete argument. It is not evidence that productivity can be much higher, everything else equal.

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Published on Leave a comment on Enduring Institutions

Via Newmark's Door, I see that Dartmouth College was recently named by Booz Allen Hamilton as one of the ten most enduring institutions over the past century. Read for yourself:

McLean, VA, December 16, 2004 — Why is it that some institutions endure for decades or even for centuries while others disappear into history? Booz Allen Hamilton has sponsored a novel project identifying ten of the world's most Enduring Institutions over the past century. The list celebrates those institutions that have managed to reinvent themselves time and again — and remained market leaders — as the unique circumstances of their founding have given way to changing conditions.

The ten institutions chosen within each category are:

  • Academic Institutions — Dartmouth College; Oxford University
  • Arts and Entertainment — The Modern Olympic Games; the Rolling Stones
  • Business and Commerce — General Electric; Sony
  • Government Institutions — American Constitution; International Telecommunication Union
  • Nonprofit Organizations — The Salvation Army; the Rockefeller Foundation

From the press release, here's the blurb on Dartmouth:

Dartmouth College demonstrates by its often-challenged yet ultimately triumphant existence a set of internal systems for managing risk. Dartmouth has literally had to fight for survival from its earliest days, time and again emerging a stronger, more viable institution whether facing a legal threat to the college charter, or an internal threat from misguided leadership. Its risk structure has enabled and empowered this institution to survive these crises and emerge the stronger and the better for it.

I have no idea what "risk structure" they are talking about, and the story in the whole report doesn't provide any clarification. The first part deals with Dartmouth's history in the 19th century, including the landmark 1819 Supreme Court case, Dartmouth College v. Woodward, in which the Court upheld the sanctity of the college's charter against interference by the state of New Hampshire. When it gets around to the late 20th century, it notes:

Illustrative of Dartmouth’s ability to maintain a sense of community is that in 1970 during the nationwide campus unrest associated with the student deaths at Kent State University and Jackson State University, Dartmouth asked each of its current undergraduates to write a personal letter to assigned alumni. The result was that, whatever differences of opinion within the Dartmouth family, they were in touch across generations. On another front, Dartmouth showed that its historic buildings need not be at odds with the most modern curricular innovations. Thanks to the initiative of a president who was a mathematician and a pioneer in the new field of computer science, Dartmouth became the chosen site for state of the art innovation in computer technology—and computer-based college learning in the United States. Dartmouth acknowledged its colonial roots and original royal charter with the inscription “Vox Clamantis Deserto”—“A Voice Cries Out in the Wilderness!” That historic message resonates well today.

So I infer from this discussion that "risk structure" must be consultant-speak for "John Kemeny," and the inclusion of John Kemeny in any mention of what is enduring about Dartmouth is entirely appropriate. Dartmouth is an institution that thrives on being at the interface of a major research university and a small liberal arts college. It strives to have the best of both worlds. This revitalized mission of the college is one of John Kemeny's legacies.

Dartmouth will soon have a new mathematics building to memorialize him, and that will be a great visual reminder. But the best way to understand Kemeny's contribution to Dartmouth in particular and higher education in general is to read his words for yourself.

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Published on Leave a comment on More on Life Expectancy Projections

In a recent post, I noted that leading demographers think the Social Security Trustees' assumptions about longevity understate the decline in mortality and thus program costs. This is relevant to the ongoing debate about the magnitude of the program's shortfall. It has become common for those who are against reforming the system now to point out that the economic growth rate assumed by the Trustees is low relative to the last 10 years and that higher growth will boost system finances. One should also look at the other assumptions to see if they are too optimistic or pessimistic. I did this in this earlier post. Brad DeLong provides some commentary here and gives his perspective about what aspects of long-term fiscal policy are in crisis.

In yesterday's New York Times, Robert Pear writes a pretty good article about this topic, "Social Security Underestimates Future Life Spans, Critics Say." The issue is well captured in these paragraphs:

For the American population as a whole in the last century, most of the gains in life expectancy at birth occurred from 1900 to 1950. But most of the gains in life expectancy among people who had already reached age 65 were seen after 1950.

Last year an expert panel advising the Social Security Administration found "an unprecedented reduction in certain forms of old-age mortality, especially cardiovascular disease, beginning in the late 1960's."

The panel said Social Security was wrong to assume a slower decline in mortality rates among the elderly in the next 75 years. Rather, it said, the government should assume that mortality will continue to decline as it did from 1950 to 2000.

Ronald D. Lee, a professor of demography and economics at the University of California, Berkeley, said: "I foresee death rates of the elderly in the United States continuing to decline at the same pace they have declined since 1950. In fact, there is evidence that the pace of decline in other developed countries has accelerated in recent decades."

The article then tries to include opposing points of view:

Further, some population experts foresee developments that could wind up buttressing the forecasts of the Social Security Administration. S. Jay Olshansky, a professor of epidemiology and biostatistics at the University of Illinois at Chicago, said the era of large increases in life expectancy might be nearing an end, with the spread of obesity and the possible re-emergence of deadly infectious diseases.

"There are no lifestyle changes, surgical procedures, vitamins, antioxidants, hormones or techniques of genetic engineering available today with the capacity to repeat the gains in life expectancy that were achieved in the 20th century" with antibiotics, vaccinations and improvements in sanitation, Dr. Olshansky said.

Indeed, he said, without new measures on obesity and communicable diseases, "human life expectancy could decline in the 21st century."

Two things are missing from this discussion.

First, for Social Security's financing, it matters whether the improvements in life expectancy occur early or late in life. Reducing infant mortality is a net plus for Social Security financing, because it will increase (in a couple of decades) the ratio of workers to beneficiaries. Reducing old-age mortality is a net negative for Social Security financing, for the opposite reason. Some of the issues being discussed here pertain to mortality early rather than late in a person's life.

Second, this discussion of obesity misses the important point that while higher obesity rates will lower Social Security retirement expenditures, they may increase Social Security disability expenditures and reduce tax revenues. It is not clear that the combination is a net plus for financing. It also misses the impact on Medicare, which is even more likely to be negative, since obesity is an important predictor of many chronic conditions (like musculoskeletal injuries, heart disease and diabetes).

But I thought the article was generally pretty good and worth a read.

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Published on Leave a comment on Alas, He’s Not Mainstream

Bruce Bartlett has written his third annual column pointing out the rise of the blogosphere (see also the first and the second), this time kindly including yours truly with a mention. I'd like to welcome people who have found the blog after reading Bruce's column. Please browse through the archives and feel free to comment or e-mail with questions.

Were he part of the mainstream media, his writing would merit the Voxy many times over. But how can he be part of the MSM when he's been writing about blogs for over two years? In truth, he's more like a blogger than he is a reporter, but perhaps more accuraely he is the rare columnist who is the best of both worlds rather than the worst.

Here's an example of why Bruce is part of my regular reading. In one of my first posts, I explained that I started reading Powerline about 18 months ago after a Google search led me to their accurate writeup of the press coverage of the Treasury study by Gokhale and Smetters on the unfunded obligations in Social Security and Medicare. If that's my litmus test, then he passes with flying colors based on this column. But note that he's an independent thinker--he would very likely offend people across the political spectrum with that one.

I started reading Bruce's columns when I worked at the CEA last year. He's been out in front of the MSM on so many issues--the Medicare bill, outsourcing, tax policy, and others. I wish I had been reading him earlier. His online archive stretches back to 2000. For those of you who arrived here by some way other than Bruce, bookmark the page. Skim it, read it, and enjoy it.

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Published on Leave a comment on Vox Baby at Econoblog

John Irons and I are featured in the latest Econoblog at The Wall Street Journal, "The Economic Crystal Ball: Cloudy, or Clearing?" The teaser:

When clocks around the world tick over to midnight early Saturday morning, economists will reset their mental clocks and pull out a fresh sheet of graph paper, ready to tackle new challenges, and the old ones, afresh.

But what does the year bring? Oil prices, foreign exchange rates, the jobs market and the government's budget deficit are only a few of the question marks dotting the economic calendar.

By way of answering some of these questions, WSJ.com has asked economist bloggers John Irons and Andrew Samwick to look into the crystal ball and discuss their expectations for 2005. You can add your own thoughts on the 2005 economy on our discussion board.

Here's the current link and a permanent link.

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Published on Leave a comment on Max Speaks, and He Clarifies

In response to my last post, Max has clarified his remarks in a subsequent post. No need to go through it in its entirety. On his main point, he now accurately characterizes my views as to what gets worse over time:

What he means if I understand him correctly is that from the standpoint of future generations -- retirees and taxpayers -- the problem of the unfunded ten trillion dollar liability (as of 2004) gets worse because preceding cohorts of retirees are let off the hook ("held harmless" in his words) by having the good fortune of receiving their SS benefits and meeting their Maker before the bill comes due.

I'll add two additional remarks to further clarify the discussion:

First, Max makes the following statement:

Concerning Andrew's 3.5 percent of GDP, I assume this reflects another one of those calculations out to perpetuity, since the Trustees report shows the gap to be only slighly over two percent of GDP at the end of the 75 year planning period (in 2080). The increase in the cash gap relative to GDP has to take some time to rise much beyond two percent of GDP.

Yes and no. The "3.5 percent" to which I often refer is the 3.5 percent of taxable payroll that would be required immediately and in all future years to close the projected $10.4 trillion financial shortfall. It is shown here in the 2004 Trustees Report and is equivalent to about 1.2 percent of GDP. I cite this figure to put the present value calculation in the context of the traditional revenue base for the program. It is an infinite horizon measure, but it is scaled by taxable payroll not GDP.

Second, Max concludes his post with a discussion of whether "pre-funding" this unfunded obligation is good policy. This is an interesting question. As I have noted, my first choice would be not to pre-fund the unfunded obligation but instead to reduce the growth of future benefits (via increases in the retirement ages, not the replacement rate at the age of normal retirement) so that the unfunded part of the obligations is reduced to zero. Reformers to the left of me ideologically--like Diamond and Orszag--have also designed plans that do not entail substantial pre-funding. They do it with tax increases and no reduction in projected aggregate benefits for about five decades. This is a sensible distinction between right and left--smaller versus larger public spheres. I'd like to see it become the template for Congressional debate.

Without pre-funding, there is no need to work through the thorny issues of how those funds are to be accumulated and invested--centrally (via a Trust Fund with a hands off management and a "lockbox") or in a decentralized system of personal accounts. I favor the latter and prefer it to a Diamond-Orszag approach. Earlier this week, Brad DeLong commented in two posts on why he would prefer the former. Some of the difference may be the scale of the investments that we are each envisioning. Clearly, there is some size of the system's aggregate investment in equities below which even I would concede that it would be fine for the government to control the investments. I don't have a specific threshold in mind, but I'm pretty sure that it's sufficiently small (e.g., less than a hundred billion dollars) that it would do little in the way of restoring solvency. Presumably, there is some size of the system's aggregate investment that is sufficiently large that Brad would say is appropriate for a decentralized system of personal accounts. But maybe not, and I'll be the last one to put words in someone else's blog.

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Published on Leave a comment on The Sawicky Dialogues

In a recent post, Max Sawicky casts some arguments against fixing Social Security's projected shortfalls in the form of dialogues between deluded people and readers of his blog (MR below). In the third, he auditions a Vox Baby reader for the role of deluded person. Very poor form. The whole thing:

Third Deluded Person: You're all too optimistic. The program is ten trillion in debt, and every year it gets worse. I read it on Vox, Baby.

MR: Actually, the present-value to perpetuity calculation is designed precisely to be time invariant. By construction of the concept, the "problem" cannot "get worse," unless there is some policy change (analogous to the new Medicare drug benefit). No more than $1.03 next year, at a three percent discount rate, is "worse" than $1.00 this year. The number gets larger each year, but each such number is just the future value of ten trillion in 2004.

TDP: O.K., but the gap is still there, and it's big.

MR: When the sociologist was asked, "How's your wife?" he responded, "Compared to what?" The gap does not have to be closed at any particular point in time. What does need to be financed is the gap between program costs and revenues. On an annual basis, it's roughly two percent of GDP, less than the revenue loss from the Bush tax cuts, and of the same order of magnitude as the increase in defense spending since 2000.

TDP: Well the program gap keeps growing after 2080.

MR: Tell it to Captain Kirk.

When I read this, I thought, "How can it be that Max is correcting me for confusing the word 'worse' with the word 'bigger?'" So I searched my blog for the word "worse" and I discover the following paragraphs in a previous response to Max:

Max Sawicky kindly (and constructively!) responds to my recent post about whether we need to reform Social Security today. His original statement began:

There is absolutely no reason at present to make changes in Social Security, except out of political fear of the Right.

As I noted, first in "Why is Social Security a Campaign Issue?" and then again in the post to which Max is responding, my reason is that we make the problem about $300 billion worse every year that we delay. This is roughly the interest that we accrue on the unfunded obligation of $10.4 trillion in a year when the real interest rate is 3 percent, as in the 2004 Trustees Report's long-term assumptions.

So, yes, I do use the word "worse" where the precise word is "bigger." But if Max were to follow the link in that last paragraph, he would discover the full context:

So if we have an implicit debt of $10.4 trillion, and the real interest rate is 3 percent, then next year, the implicit debt will grow by 0.03*10.4 trillion = $312 billion, up to $10.7 trillion, if the assumptions underlying the projection stay the same. Why does this matter? Primarily, it matters because both the President and Senator Kerry have repeatedly stated (see the two speeches in Pennsylvania linked above) that they will not cut benefits for those at or near retirement age. (The Senator's statement may be even more encompassing, including benefits at any time in the future. I cannot tell for sure from his public statements.) This, in turn, means that each year that elapses without reform causes the burden of financing the unfunded obligations to be shifted away from one more birth cohort that crosses the threshold of being "at or near retirement." The more we wait, the larger the burden on future

generations, and the higher that 3.5 percentage point surtax would have to climb.

So a better dialogue between readers of the two blogs would have done three things. First, it would have acknowledged that we've done the math already at Vox Baby and that we understand that it is the current value getting bigger over time (and bigger relative to projected GDP). Second, it would have accurately characterized the "problem" according to Vox Baby as the increase in the burden of fixing this shortfall on future generations of workers that results when the fix is delayed and more cohorts of retirees are held harmless. Third, it would have had MR explain exactly why shifting this burden is a desirable policy to pursue.

As a casting director, I say that TDP is no reader of Vox Baby.

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Published on Leave a comment on Farm Subsidies

Reading the New York Times this morning, I found myself immersed in this article, "Big Farms Reap Two Harvests With Subsidies a Bumper Crop." The main topic in the article is well expressed in this paragraph:

For despite the fact that farm income has doubled in two years, federal subsidies have also gone up nearly 40 percent over the same period - projected at $15.7 billion this year, and $130 billion over the last nine years. And that bounty is drawing fire from people who say that at this moment of farm prosperity, the nation's subsidy system has never made less sense.

Yes, farm subsidies. How could I have blogged this long without going crazy about farm subsidies? I don't see any economic rationale for them, and the statements above (and supporting information in the article) suggest that they fail in their main purpose of providing the most income in the years when farm income is lowest. (It seems like they focus too much on price and not enough on price x quantity, as a first pass.) Certainly the obligatory "get the farmers' point of view" quotes in the article are not very reassuring:

Farm groups say the subsidies provide for a stable food supply, and ensure that major sectors of American agriculture will be competitive on the global market.

"When people ask me what the justification for this is, I point out that in nearly every country in the world you find government involved in the food supply," said Bob Young, an economist at the American Farm Bureau Federation, the powerful trade group for major agricultural producers.

This is standard interest-group pandering. Eventually, all farm subsidies ought to go, but I don't know enough about agrarian America to know what that would do to families, livelihoods, and communities in the short run. I'm open to suggestion as to how these subsidies should be unwound and over what horizon that should happen.

The reporter (Timothy Egan) clearly has a view that the subsidy system is not adequately helping small and medium-sized farms. He even marshals bad statistics to support his case. Consider the next paragraph:

But because nearly 70 percent of the subsidies go to the top 10 percent of agricultural producers, the recent prosperity is not seen or felt among many small to medium-size growers who keep the struggling counties of the Great Plains alive.

We naturally would want to know how much of the production that top 10 percent accounts for. If it is about 70 percent, then we would figure that there is probably nothing perverse about the way the subsidies are being doled out. Several paragraphs later, we accidentally get this piece of information:

Farm production has doubled over the last 50 years, while the number of farms has fallen by two-thirds. Economists say about 150,000 of America's 2.1 million farms produce 70 percent of the major food crops. But only certain crops - wheat, corn, cotton, soybeans and sunflowers among them - qualify for subsidies.

So if we have 2.1 million farms, the top 10 percent would be 210,000. But it only takes 150,000 of them to get to the 70 percent of production (assuming these "major food crops" are analogous to the "agricultural producers" above). So this means that even though the top 10 percent produce more than 70 percent of the crops, they only get 70 percent of the subsidies. I don't believe that the article provides any evidence that the subsidies are distributed in accord with anything other than total production. It may be true--but the article hasn't shown it.

Bad NYT. Go get some fact-checkers and a professional research staff. Help your reporters to do a better job.

But the last sentence of that paragraph is the one that surprised me. I guess I should have known this all along, but only a few crops get subsidies. And, in particular, a few paragraphs earlier in the story, we find:

The subsidies have also drawn criticism from farmers who grow fruits, vegetables and nuts - nearly half of American agriculture - but have nothing like the elaborate safety net in place for corn, cattle, wheat and hog producers.

We are a nation with rising obesity rates, and we decide to keep in place extensive subsidies for wheat, corn, beef, and bacon, but not for fruits and vegetables. Now this looks like a government program. It provides little insurance, seems to reward patronage rather than need, and appears to be at odds with sensible nutritional advice.

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Published on Leave a comment on Answering Some Comments

From the comments on my last post, I see that I should not quit my day job (or this one) to work as a consultant to the Democratic party. In all fairness, I should point out that others in the blogosphere with views generally dissimilar to mine have made similar points. See this post at the American Prospect online:

The Democrats' best option here, it seems to me, begins with what Kerrey and Rudman laid out. The Dems need to come up with an alternative to Bush's plan that can be framed as change and as solving the Social Security problems that they too have been yammering about for more than a decade.

Brad DeLong also makes some useful points about how things have changed to the point where he is out of the crisis mode (i.e., his view that the uptick in productivity since 1995 looks to be here to stay and this is not reflected in the Trustees' projections). However, I think these comments are incomplete. In particular, leading demographers think the Trustees' assumptions about longevity understate the decline in mortality and thus program costs. (See this paper for a recent example.) I discussed these issues in more detail in an earlier post.

So I still think we are in crisis mode, or, more precisely, that we are in "impending crisis" mode. If we do nothing, we hand a growing stream of annual Social Security shortfalls to future generations of workers with little policy flexibility to deal with them. I am trying to avoid that outcome. In the whole set of posts that I have done on Social Security, I haven't asked the Democrats to do anything that is more difficult than what I have asked the Republicans to do. I acknowledge that the problems facing Medicare are larger than those facing Social Security. That doesn't mean that we shouldn't solve Social Security's problems.

One comment asked that I find an example of a policy that the Bush administration has implemented that it has not messed up. In the realm of economic policy:

  1. I was extremely disappointed to see the Medicare prescription drug benefit add an enormous unfunded obligation when we already face long-term shortfalls in our old-age entitlement programs.
  2. Looking forward, the persistent deficits in the budget forecast, even with above-potential economic growth and no particular fiscal challenges, are deeply worrying. The "cut the budget deficit in half in 5 years" approach is far too timid for my tastes.
  3. Looking backward, I think the tax cut packages in 2001 and 2003 were appropriately timed and of the appropriate magnitude. They averted what could have been a much deeper reduction in output. But they have clearly set us up for #2.
  4. The bright spot for me is international trade. With a few highly visible exceptions, the Administration has generally worked to lower trade barriers. This has occurred despite the stalled WTO, particularly through free-trade agreements in our hemisphere. I give the USTR's office appropriate credit.

But most of this is neither here nor there. The critical issue with Social Security reform is to restore solvency. As I watch this policy process unfolding, I get very nervous when I hear personal accounts discussed without a discussion of restoring solvency. All sugar and no medicine would equal very bad policy.

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