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Author: Andrew Samwick

Published on Leave a comment on Democrats, Unity, and Social Security

Matthew Yglesias has two posts on whether the Democrats should participate in the legislative process on Social Security or remain united in opposition to any action by the Republicans. From the first of these posts:

It's not so much a question of conservatives versus moderates, as it is a question of people who happen to have a bug in their pants about Social Security versus those who are nervous about the political risks here and who have other agendas they'd like to advance. The only really feasible way to put a stop to this is to make sure that the nervous nellies stay very nervous. Key to that is making sure that unlike with, say, the Medicare bill, they can't drape their vote in even the merest veneer of bipartisanship.

In the second post, he endorses the following:

"Message No. 1 to Americans: When it comes to Social Security, the sky is not falling," said the Senate's new assistant Democratic leader, Richard Durbin (D-Ill.). "There are people in this administration who have an agenda that is not friendly to Social Security."

And then he adds:

Exactly. Message number one is that Social Security is healthy and successful. There is no crisis.

I'll look to address (again) the substance of the "there is no crisis" refrain in another post. In this post, I'll focus on why I think this is not a winning strategy for Democrats. I'll be very frank about my bias here. I have no partisan interest in the Democratic party per se, but it would be nice if someday it fielded a candidate for President who inspired me to vote for him or her.

First, the focus group results that I have seen show that very few approaches to Social Security cause as negative a reaction as denying that Social Security has a problem that needs to be fixed. If you don't like the idea of adding personal accounts to Social Security, then argue against it. But to go beyond that and suggest that there is no need to reform the system (leaving aside for now whether the current predicament merits the label of a "crisis") is unwise. I think that most people understand that the aging of the Baby Boom will reshape our fiscal landscape. They don't have much tolerance for people who seem to doubt that widely held view. On the other side of the issue, I have sequenced my arguments on this on the blog very precisely to make sure that every reader knows that I think the key issue is solvency and not personal accounts.

Second, there's an old saying in Washington, "You can't beat something with nothing." I hated having this quoted to me by policy folks in the White House last year--it caused otherwise sensible small-government people to propose all sorts of expansions of the federal government. Not very Republican of them. But there is a big danger to the Democrats who suggest that unity in opposition is a sensible policy for a (shrinking?) minority party in the Congress. If Democrats elected to the legislature refuse to engage in the legislative enterprise, then the rationale for re-electing them disappears. We saw some of that in 2004: the Democrats lost ground in Congress and Senator Daschle was defeated even though he held the leadership position. Had he used that position to be something other than the President's chief obstructionist, he may have stood a better chance.

There are plenty of ways the Democrats could constructively engage. For example, they could insist that, in exchange for going along with personal accounts of the size suggested by the President's Commission (e.g., 4% of payroll up to $1000), solvency be restored not through reducing benefits across the board but by raising the ages of full and early retirement (a much better policy). To cover themselves politically, they could even insist that this change be proposed on a bipartisan basis. If they did that, they would have dramatically improved the system compared to its present status. And they would also come a step closer to getting the "Grownup Republican" vote that they needed in November. As an alternative example, they could shore up the support of their base if they proposed something like this.

I don't want a replay of the Medicare bill any more than Matt does.

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Published on Leave a comment on Congestion and Anonymity

At Dartmouth, as at many other institutions, incoming first-year students are assigned an optional reading assignment over the summer. In the spring of 2002, the Dean of First-Year Students asked me if I would assign the book and give a public lecture on it during Orientation Week in September. I was happy to oblige, and, being an economist, I naturally thought of Capitalism and Freedom by Milton Friedman as the one book from my field that I would have all college students read. But I figured that Free to Choose, which was co-authored with his wife, Rose, and covers many of the same insights, would be a more inviting title. So that's what I assigned to the Class of 2006--a primer on how to use basic economic insights to study all manner of social interactions. The slides from the presentation are here.

Of the many topics in the book, the Friedmans' discussion of educational reform in general, and vouchers for primary and secondary school in particular, generated the most interest from the students. I'll share my views on that topic in a later post. To end the lecture, which took place a little over a year after 9/11, I tried to think of how to use the insights from the book to think about the War on Terror.

The core of economics is optimization under scarcity--it is the science of tradeoffs and how markets dictate the relative prices at which those tradeoffs can occur. An economist's analysis of the world after 9/11 would begin by asking, "What aspects of the way our society exists have seen their relative prices increase?" I offered two:

  1. Congestion: Economies of scale often dictate that congestion is efficient. Examples include densely populated cities, tall office and residential buildings, busy highways, and transportation and communication hubs with near universal access. That same efficiency now makes them vulnerable as targets. A strategically placed assault can cripple many systems or kill many people all at once.

  2. Anonymity: This has historically been one of the best protections afforded by large, competitive markets. I can purchase the goods and services that I need and sell my services without having to introduce myself personally to the other parties in the transaction. Very few of these counter-parties collect anything more than rudimentary information about me. In other contexts, I routinely drive on roads near cars whose drivers I do not know and travel on planes with people I've never met. I agree that some of the best transactions are the ones that are not anonymous, but the option to transact anonymously makes a lot of interactions more efficient. It also allows terrorists to strike with a greatly reduced risk of apprehension or reprisal.

After 9/11, we would have to find ways to go about our business with less congestion and less anonymity. Not zero--but definitely less. To become less congested, we would need to spread out our people and assets more evenly in the country and add some redundancies in our networks. Managing this process would be a job primarily for planners and engineers. I don't follow the relevant sectors well enough to know whether there have been changes in residential and commercial planning since 9/11, nor do we yet have good information on whether there has been a change in migration from more to less densely settled parts of the country.

To become less anonymous, we would need to increase our collection of real-time data and develop stringent privacy standards for how it is handled. Managing this process would be a job primarily for those who manage the access points to networks--whether for electronics, communications, transportation, or finance. And, appropriately, many of the most contentious issues would be adjudicated in courts. The Patriot Act, the creation of the Department of Homeland Security, and the recently passed Intelligence Reform are all attempts, at least in part, to redefine the concept of anonymity.

Some of what we are discovering in this ongoing process is that people differ in how price sensitive they are to changes in the relative prices of congestion and anonymity. Some people are very price sensitive--they would do with quite a bit less of each in response to small increases in their costs. Others are hardly price sensitive at all--they wouldn't change their behavior at all even in the face of large increases in their costs. For ordinary things we consume, a market would accommodate our different preferences. This is possible to some extent with congestion and anonymity, but because we are all interconnected in at least some of the things we do, a large amount of it must be negotiated in the political environment.

Thanks to Roland Patrick for suggesting that the lecture might make for a good post to the blog.

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Published on Leave a comment on In Praise of Rafael Peralta

Via Powerline, I learn about the death in combat of Marine Sargeant Rafael Peralta in the Battle for Fallujah last month. The Seattle Times was quick to carry the report. The critical sequence of events:

Peralta, 25, as platoon scout, wasn't even assigned to the assault team that entered the insurgent safe house in northern Fallujah, Marines said. Despite an assignment that would have allowed him to avoid such dangerous duty, he regularly asked squad leaders if he could join their assault teams, they said.

One of the first Marines to enter the house, Peralta was wounded in the face by rifle fire from a room near the entry door, said Lance Cpl. Adam Morrison, 20, of Tacoma, who was in the house when Peralta was first wounded.

Moments later, an insurgent rolled a fragmentation grenade into the area where a wounded Peralta and the other Marines were seeking cover.

As Morrison and another Marine scrambled to escape the blast, pounding against a locked door, Peralta grabbed the grenade and cradled it into his body, Morrison said. While one Marine was badly wounded by shrapnel from the blast, the Marines said they believe more lives would have been lost if not for Peralta's selfless act.

Blogging has been light these past couple of days because I've been turning the pages on Flags of Our Fathers. Written by James Bradley, it chronicles the stories of the 6 men in the famous flag-raising picture on Mount Suribachi on Iwo Jima, one of whom was John Bradley, the author's father. If you are like me, then you don't know enough American history to know the brutality of the War in the Pacific and the many ways that this famous image is widely misunderstood. Read the book.

John Bradley shunned the limelight that followed his inclusion in that photo, saying little to his son about the battle in the nearly fifty years he lived thereafter. He refused to allow people to glorify him as a hero, saying "The real heroes of Iwo Jima were the guys who didn't come back." He was talking about the 26,000 Marines who perished in the battle for that island. He could just as well have been talking about Rafael Peralta nearly sixty years later.

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Published on Leave a comment on Maybe His Daddy Moved to Queens

This week, my fellow Red Sox fans and I learned that Pedro Martinez opted for a $53 million contract over four years with the Mets rather than the best offer the Red Sox could muster ($40.5 million over three years). Best of luck to a heck of a pitcher. And the Boston sportswriters should stop whining about it. It's a business, and if you can trade Nomar for your own reasons, then you can't complain when Pedro leaves for a bigger paycheck. Meanwhile the Mets continue their efforts to become the best team in baseball--in January rather than October.

I'll still be cheering for the Red Sox next year, now with Edgar Renteria playing shortstop, though I don't hold out any hope that they can get back to the World Series without filling this hole in their pitching rotation. I guess there will be plenty of time to watch Faith Rewarded next October.

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Published on Leave a comment on Greg Ip Earns a Voxy

Brad DeLong often titles his posts "Why Oh Why Can't We Have a Better Press Corps?", and Andrew Sullivan often names his posts after and gives awards in (dis)honor of journalists who make outlandish statements. I would like to introduce my own award--the Voxy--to be bestowed occasionally on journalists in the mainstream media who make exceptionally lucid and thoughtful contributions to the public discussion. Feel free to e-mail me with nominations.

The inaugural award goes to Greg Ip, for his article in yesterday's Wall Street Journal, Medicare Ills Make Social Security Look Fit. Read the whole thing. I'm just going to focus on some excerpts that show why the article is noteworthy. Greg begins with an observation:

Reforming Social Security occupies countless scholars, commissions and legislators. Reforming Medicare, the program that could really wreck the budget, gets almost no attention at all.

He's right. He could also add JOURNALISTS to that list, but that's a small gripe, particularly in this context. He continues:

The mismatch between the programs' problems and the energy devoted to them is striking. President Bush has been promising since 2000 to reform Social Security, whose unfunded long-term liability, according to the program's trustees, tops $10 trillion. Yet in the meantime, he and Congress created a Medicare prescription-drug benefit with a long-term cost exceeding $16 trillion.

Yes, that's basically right, too. According to the 2004 Medicare Trustees Report (see Table II.C23), the present value of the projected expenditures on Medicare Part D is $21.9 trillion, or 2.4% of GDP. (I would have called this the long-term cost.) Beneficiariy premiums and state transfers are projected to offset $3.6 and $1.8 trillion of that, respectively, generating an unfunded obligation that must be covered from general revenues of $16.6 trillion (after rounding), or 1.8% of GDP.

There are two caveats to comparing this $16.6 trillion directly with the $10.4 trillion in unfunded obligations for Social Security. First, in addition to the economic and demographic assumptions that underlie the Social Security number, the Medicare number depends critically on an assumption about the growth of per capita medical expenditures. The disparity could be higher or lower than $6.2 trillion even if the $10.4 trillion projection is completely accurate. Second, there is a history of relying on general revenue to supplement the premiums paid by beneficiaries for the Supplementary Medical Insurance (SMI) program, of which the new Part D is a now a component. Some general revenue financing appears to be part of the design.

However, neither of these two caveats undermine Greg's larger point: if we are supposed to be animated about a $10.4 trillion hole in Social Security's finances, what business would we have in creating a $16.6 trillion hole in Medicare's finances? And for pointing out that inconsistency, Greg earns a Voxy. Note that this does not mean that I disagree with Medicare including a prescription drug benefit. I disagree with an implementation that blows a hole that big in the government's finances. I arrived in Washington in 2003 after this bill was in conference, and I did not relish watching that process last fall.

In fact, Greg retains the Voxy despite including a quote from me in his article that will render yours truly unconfirmable for future positions in government:

So how to fix Medicare? One way is to raise the age at which retirees qualify for benefits, as is often proposed by Federal Reserve Chairman Alan Greenspan and others for Social Security. "Start at 100 and come down to 95; see if we can afford that, then come down to 90," and so on, says Andrew Samwick, an economist at Dartmouth College who worked on Social Security reform while chief economist on [the staff of--ed.] President Bush's Council of Economic Advisers. "There is some age at which the system is in balance."

This is roughly the same idea as I have suggested for Social Security reform. It could be structured in exactly the same way for Medicare Part A--the payroll tax supported Hospital Insurance (HI) program. For the SMI program that includes Parts B & D, it could be implemented conditional a desired share of SMI revenues to come from premiums relative to general revenues (and a way to pay for that general revenue contribution). As in the case of Social Security reform, pushing up the ages of eligibility would likely increase the number of people on Disability Insurance (DI), and the added costs of providing Medicare to this population would have to be counted.

He keeps the Voxy because he shows where a "raise the eligibility age" strategy may come up short:

But it's not a cure-all. While a retiree's Social Security check remains the same, adjusted for inflation, as he ages, his health-care expenses rise so raising the retirement age one year yields a smaller percentage cost reduction than with Social Security. And it's politically unpalatable.

Greg's right again. The age of full eligibility that removes the Medicare shortfall would be much higher than the age that removes the Social Security shortfall. Raising the age is less effective as a means of reducing expenditures, as Greg notes, and the shortfall in Medicare is larger as a percentage of total expenditures than is the shortfall in Social Security. Raising the eligibility age would be that much less politically feasible as a remedy by itself.

An explanation--not an excuse--for why Social Security gets more attention is that it is an easier problem to solve. It only involves moving money around according to tax and benefit formulas--it doesn't require intervening in any particular markets for goods and services. This doesn't mean that it has gotten no attention. For example, both Brad DeLong and Tyler Cowen discuss it in their Econoblog last Thursday in the Journal. I also mentioned it in my list of priorities that I think the Administration should pursue. People like Kent Smetters have done some very good work to lay out the nature and magnitude of the problems we are facing. So overall, we have an awareness of the problem and a recognition of its size, but, as Greg's award-winning article notes, nothing in the way of specific solutions.

Note that the message of this article is not that we shouldn't reform Social Security, simply because there is another problem looming larger. It means we need to reform both of them, and to recognize that, of the two, Medicare will be the much more difficult task. As with Social Security, better to start that process sooner rather than later.

Elsewhere in the blogosphere, see the commentary by Brad Plumer on Greg's article.

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Published on Leave a comment on More from Stratfor

I finished reading America's Secret War. In an earlier post, I took some issue with the author's claim that:

We went into Iraq to isolate and frighten the Saudi government into cracking down on the flow of money to Al Qaeda.

I don't think that the book "proves" that this was the purpose of the war. In that earlier post, I conjectured that the strategic benefit of Iraq would have to be evaluated based on how it hastened the arrival of democracy in Iran. I read the book with this alternative in mind. On pages 250-1, the book suggests that we were in a deal with Iran--to obtain access to Iran's intelligence on Al Qaeda, we toppled Saddam in favor of a government that would have a Shiite majority. Here are the relevant two paragraphs:

Iran wanted the United States to invade Iraq. It did everything to induce the United States to do so. Its strategy was to provide the United States with intelligence that would persuade the United States that invasion was both practical and necessary. There were many intelligence channels operating between Teheran and the United States, but the single most important was Ahmad Chalabi, the Defense Department's candidate for President of Iraq. Chalabi, a Shiite who traveled extensively to Iran before the war, was the head of the Iraqi National Council, which provided key intelligence to the United States on Iraq, including on WMD. But what it did not provide the U.S. was most important: intelligence on Iranian operations in Iraq or on Iraqi preparations for a guerrilla war. Chalabi made it look easy. That's what the Iranians wanted.

The primary vector for Chalabi's information was not the CIA, but OSP under Abe Shulsky. OSP could not have missed Chalabi's Iranian ties, nor could they have believed the positive intelligence he was giving them. Bus OSP and Shulsky were playing a deeper game. These were old Cold Warriors. For them, the key to the collapse of the Soviet Union was the American alliance with China. Splitting the enemy was the way to go, and the fault line in the Islamic world was the Sunni-Shiite split. The United States, from their point of view, was not playing the fool by accommodating Iran's wishes on Iraq. Apart from all of its other virtues, they felt that the invasion would create a confluence of interests between the U.S. and Iran,

which would have enormously more value in the long run than any problems posed by the Iraqi invasion. From the standpoint of OSP--and therefore Wolfowitz and Rumsfeld--Chalabi's intelligence or lack of it was immaterial. The key was the alignment with Iran as another lever against Saudi Arabia. And there were more immediate threats as well.

Again, not proof, but an attempt to tell a coherent story in hindsight with still limited information on the government's internal decision-making. The excerpt also reflects the author's writing style, and the book makes for an interesting perspective on the War on Terror from its start through a few months ago.

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Published on Leave a comment on 2004 Weblog Awards Results

The voting for the 2004 Weblog Awards has finished. Thanks to everyone who voted for VoxBaby and congratulations to all of the blogs that won their categories. I could tell via the blog's sitemeter that I got many referrals from the contest, and so I am glad that I participated.

A special thanks to the folks at Wizbang for hosting the contest.

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Published on Leave a comment on Sam Bodman for Energy Secretary

This announcement was a pleasant surprise on Friday. I had the opportunity to be in a few meetings with Sam while he was the Deputy Secretary at Commerce, mainly about pension issues. I would characterize him as very smart. How would I define "smart" in this context?

Many of the meetings that senior officials (like Sam) have with junior officials (like I was) involve the junior officials presenting complicated issues that are in their areas of expertise. There is no presumption that the senior official is an expert in every single area on which s/he might be briefed. I measure smart as how quickly the senior official is able to figure out the issue from the briefing. Sam is very smart.

I wasn't the only one who was surprised on Friday. Via Outside the Beltway, I find this Reuters story with a great quote:

"Sam who? I've never heard of this guy," said one energy industry lobbyist, who added Bodman was virtually unknown to Washington energy policy insiders.

Even better--unconnected to the energy industry lobby in addition to being very smart. In his nomination speech, the President made the following remarks (with my highlights):

During the next four years, we will continue to enhance our economic security and our national security through sound energy policy. We will pursue more energy close to home, in our own country and in our own hemisphere, so that we're less dependent on energy from unstable parts of the world. We will continue improving pipelines and gas terminals and power lines, so that energy flow is reliable. We will develop and deploy the latest technology to provide a new generation of cleaner and more efficient energy sources. We will promote strong conservation measures.

There are two things I like about the highlighted sentence. First, he did not say that we should pursue energy independence. There is no reason to insist that energy imports are zero--only that we do not continue our excessive reliance on fuel from unstable parts of the world (which corrupts our broader policy and theirs). Second, he said "in our own hemisphere" in addition to "in our own country." Okay, I could do without the reference to drilling in ANWR. But I like the idea of other sources of energy in our hemisphere--particularly ethanol made from Brazilian sugar. Let's hope that this is what they have in mind.

In addition to the post at Outside the Beltway, see this comprehensive post at Trolling in Shallow Water.

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Published on Leave a comment on Progressivity in Social Security Reform

In a recent post (and an article at TechCentralStation), Arnold Kling wonders whether the Left and the Right should switch their positions on Social Security reform financed by debt. Quoting from the article:

However, there is one important difference between keeping Social Security as it is and switching to privatization. Under the current system, Social Security's liabilities will continue to be funded by payroll taxes. However, under privatization, the transitional debt would be repaid using -- guess what? General revenues! In other words, privatization is a vehicle for changing Social Security's medium-term funding mechanism from payroll taxes to income taxes. It is exactly what the Left presumably wants, and what the Right presumably opposes.

Following up in his post, he notes:

The Left complains about "diverting" payroll taxes into private accounts. But that means that other taxes, mostly income taxes, would be needed to cover current benefits. From the standpoint of the supporters of progressive taxation, that would seem to be an improvement. I honestly do not believe that either side has really thought this through.

Actually, this need not be the case. For example, suppose the reform turned out to be exactly Commission Model 2 with all near-term cash flow deficits covered by borrowing. As I noted in an earlier post, all of the debt issued to cover these deficits is repaid out of reduced future expenditures of the pay-as-you-go system. (As interest accrues on the debt, more debt is issued to cover that expense, and all of it is eventually paid back.) At no point in this decades-long transition do income taxes have to rise to retire this debt.

So I don't think that people on the Left would believe that any reform on the horizon necessarily would have this "salutary" benefit that Arnold is ascribing to it.

In his question for discussion, Arnold asks:

Has there been an analysis undertaken of the distributional effects of a shift toward privatization?

Yes. A very good collection of analyses are presented in The Distributional Aspects of Investment Based Social Security Reform, edited by Martin Feldstein and Jeffrey Liebman. The editors served in the Reagan and Clinton administrations, respectively, and the contributors reflect a wide range of opinions.

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Published on Leave a comment on Brilliant Deduction?

A comment on my last post on the tax treatment of health insurance pointed to a December 8 editorial by John Cogan, Glenn Hubbard, and Dan Kessler in the Wall Street Journal, "Brilliant Deduction." According to the editorial:

We propose a simple change to tax law that would cut unproductive health spending, reduce the number of uninsured and promote greater tax fairness. For anyone with at least catastrophic insurance coverage, all health-care expenses--employee contributions to employer-provided insurance, individually purchased insurance and out-of-pocket spending--would be tax-deductible. The deduction would be available to those who claim the standard deduction and to those who itemize.

Is this a good idea? Maybe. Is it a better idea than eliminating the excludability of health insurance purchases from income and using the higher tax revenues to provide refundable tax credits to lower income households who purchase insurance, as I suggested in my first post on this topic? I don't think so. Here are my reasons:

  1. Both proposals eliminate the tax distortion between insurance premiums and out-of-pocket expenses. Both would serve to encourage plans with lower premiums and higher co-pays and deductibles, providing better incentives for consumers to economize on their health care purchases.

  2. Administratively, the CHK plan seems much more difficult to implement. The proposal to eliminate excludability requires only one piece of information on the W-2 form--an indication of whether the person has purchased insurance through the employer plan--or an analogous document from an insurance company in the case of non-group purchases. With the CHK plan, every purchase of health care now needs to be documented and submitted to some entity, whether the government or a benefits management company, and then reimbursed. These companies need to be periodically audited to make sure they are allowing all valid expenses (and only valid expenses). This entails a large amount of paperwork, particularly in the sort of high-deductible plans that CHK envision. My own experience with my employer's flexible spending account does not make me optimistic.

  3. In terms of equity, the CHK plan suffers from the same problems as the current system. If we believe that the income tax is supposed to tax income, regardless of how it is spent, then we judge the equity of the proposal by how much of the tax deductions for health care go to different income groups. Even under CHK, high-income households will derive the largest benefits because they have higher tax rates and greater rates of coverage. CHK argue that this is an improvement over the current system, but it is clear that it is still less progressive than the alternative--eliminate the excludability and redistribute the incremental revenues back to low-income households for refundable tax credits.

  4. In terms of efficiency, the biggest issue is that the CHK plan lowers the overall cost of health care by expanding tax deductibility. Thus, we expect more health care to be purchased (before making allowances for the improved incentives). Eliminating excludability in favor of tax credits can have the same incentive effects without lowering the overall price of a good that is already overconsumed. In a comment on the original post, Tom Miller points out (in his point #4):

    On another front, expanding tax deductibility to all out-of-pocket health expenses would indeed add new misincentives to spend more on health care than it’s worth. By making OOP spending appear to be “cheaper” with a pre-tax discount, it would dilute the cost constraining effects of the recent shift already underway toward higher levels of cost sharing (deductibles and coinsurance) in today’s employer-sponsored health plans. Unlike tax-advantaged Health Savings Accounts, it would only reward taxpayers for spending health care dollars today, instead of saving them for tomorrow. Replacing one set of third-party payers (insurers and employers) with another one (the Treasury, on behalf of invisible taxpayers) won’t make individual consumers much more sensitive to the real costs of the health care decisions they make. A better way to level the playing field is to level down, instead of leveling up, by reducing the tax rate differential imposed on everything else we earn, save and spend. Eliminating the current tax exclusion for health insurance could be swapped for an equivalent across-the board reduction of about three and a half percent in all marginal rates for personal income taxes.

    This is a reasonable point, with an alternative suggestion about what to do with the tax revenues generated by removing excludability. Tom also has some useful suggestions about how exactly to generate better incentives through the tax code.

Overall, I don't think the CHK plan is better than my alternative, but it does have one advantage politically. It lowers the individual tax burden, whereas mine leaves it about the same (by intent). In the current political climate, tax cuts can pass, but large redistributions--even ones that increase both equity and efficiency--are probably dead politically.

UPDATE: Follow the discussion elsewhere in the blogosphere, including Arnold Kling, The Lowest Deep, and Marginal Revolution.

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