Social Security: Reform, Refund or Opt-out? (Part 2)
Posted: May 18, 2009 Filed under: U.S. Economy | Tags: Pay as You Go, Privatization of Social Security, Public Pensions, Social Security Comments Off on Social Security: Reform, Refund or Opt-out? (Part 2)
Public Pension Concepts and Alternatives
Social Security reform combines three basic possibilities. It can raise contributions or it can cut benefits sometime in the present or future (pre-funding or pay-as-you-go (PAYG)). It can be private or public. It can be diversified or undiversified. The current system is public, has no diversification and is not pre-funded (PAYG). It features forced savings in that income cannot be spent before retirement. It pools social risk so that it can provide insurance against earnings loss, disability, inflation, and longevity. It redistributes income from high to low lifetime earners. The Social Security System is controlled and administered by the U.S. government and is a defined-benefit plan (DBP) .
“Pre-funding” is a plan to reduce the sum of the system’s implicit and explicit debt. As alluded to previously in the discussion of the vulgar error, the current system has inherited or legacy debt. This is something many politicians either willfully forget or ignorantly omit. Any analysis and reform must include provisions for the cost of inherited debt or it is a truly disingenuous and misleading discussion. Omitting taking care of this unfunded liability (which is estimated at around $10 trillion) is the vulgar error committed by the many politicians who compare returns from strictly switching to other assets. They do not mention deducting this debt from the alternate assets’ internal rates of returns (IRRs) to the IRRs of Social Security. The IRRs of the Social Security Trust fund for future generations account for the legacy debt.
The earliest cohorts received very high IRRs in real terms. An anecdotal and extreme example is that of my grandfather who worked for the Federal Reserve System which did not become part of the social security system until six months before his retirement in the mid 1960s. He actually deferred his retirement six months to buy into the social security system and qualify for benefits. He, and for awhile my grandmother, received nearly 15 years of monthly benefits for six months of his contributions. A truly amazing IRR and one for which his progeny will be paying for years to come.
Social Security: Reform, Refund or Opt-Out (Part 1)
Posted: May 17, 2009 Filed under: U.S. Economy | Tags: FDR, legacy debt, Public Pensions, Social Security, Social Security Reform, Social Security System Solvency Comments Off on Social Security: Reform, Refund or Opt-Out (Part 1)
Several years ago, I did some research on Social Security. I thought I’d share that with you now as we look to more possible reforms coming from the Obama administration. This part is just introductory. Part 2 will be on Public Pension Concepts and Alternatives.
One of the most successful and significant programs put into place by the Roosevelt administration’s “New Deal” has been the U.S. Social Security System. It has met its goal of alleviating poverty among the elderly. It has become known as the ‘third rail’ of politics because of its success and acceptance by the majority of the populace. Elderly voters—an active and vocal voting constituency—do not take kindly to any discussion concerning social security reform. While other countries around the world have been reforming and restructuring their public pension systems, the U.S. social security system remains firmly entrenched in its current form. Any discussion of reduced benefit or increased contributions is political suicide. Reform discussions are difficult at best.
Most recently, President G.W. Bush spent a large amount of time and taxpayer money being educated on third rail politics while trying to convince America that some form of privatization was the right vision for the future elderly. While the highly selected audiences at these events was convinced that opting out completely was the way to go, the rest of America hit their panic buttons then phoned their congressional delegated. These re-education forums are now part of America history. The public reform debate has gone quietly into the night while discussion continues in the offices of institutions like MIT, Harvard, and the NBER.
Fortunately, many economists are still researching the efficiency of the U.S. Social Security System. Additionally, they now have around 20+ years of experience from other countries’ public pension reforms to analyze. This—at the very least—gives the United States the benefit of not going first so it can learn from the problems of the rest of the world. Learning the lessons of others may still not be enough to bring sensible and truthful debate back to the public arena. This must happen before reform or refunding actually occurs.
Somethings You Can’t Make Up
Posted: May 15, 2009 Filed under: Human Rights, president teleprompter jesus, Team Obama, U.S. Economy, Voter Ignorance | Tags: Debt, Military Tribunals, Public Health, Single Payer Health Insurance. 5 CommentsGiven the choice between posting my final grades and my morning coffee or perusing some of the latest presidential antics and my morning coffee, I chose the latter. The latest front pager at the Confluence, Steven Mather started a great conversation on Obots and willful blindness. Since I was following a tweetathon last night between Glenn Greenwald and Jack Tapper on the latest about face, it seems appropriate to start there. This just comes under the heading of reality taking on dimensions of science fiction.
Every one is trying to figure out how Military Tribunals under Bush will be different the Military Tribunals continued by Obama. Given I’ve been following the financial bailouts under Bush and the virtual continuation of the same policy under Obama, I’m thinking the progressive blogosphere should be blowing a few gaskets now. After all, they were just told to lay off the torture photos and any hope of prosecution of what can only be labeled the Cheney Torture Policy. What we appear to have is straight forward continuation of nearly all the major Bush policies with major re-framing. It’s not going to be the old Nixon War on Drugs, it’s going to be the Obama “complete public-health model for dealing with addiction”. Somebody seems to think just morphing the lexicon makes it seem less Republican. Some one needs to tell Axelrod it’s the policies, not the labels.
So Greenwald is calling it Obama’s kinder, gentler military commissions .
It now appears definitive that the Obama administration will attempt to preserve a “modified” version of George Bush’s military commissions, rather than try suspected terrorists in our long-standing civilian court system or a court-martial proceeding under the Uniform Code of Military Justice. Obama officials have been dispatched to insist to journalists (anonymously, of course) that Obama’s embrace of “new and improved” military commissions is neither inconsistent with the criticisms that were voiced about Bush’s military commission system nor with Obama’s prior statements on this issue. It is plainly not the case that these “modifications” address the core criticisms directed to what Bush did, nor is it the case that Obama’s campaign position on this issue can be reconciled with what he is now doing. Just read the facts below and decide for yourself if that is even a plausible claim.
Oh, do go read the facts listed in the article. Don’t forget those koolaide goggles, because willful blindness is about the only way you’re going to see much difference.
Meanwhile over on Bloomberg, I read up on the latest Obama-would-rather-not-be-held hostage- by-the-oval-office town hall meeting where Obama Says U.S. Long-Term Debt Load ‘Unsustainable’. I have to join Seth and Amy in a “Oh, really?” moment here. I think you all will remember the graph on the left from earlier pieces that I’ve done on the Obama stimulus package and budget. Let’s just use the Bloomberg piece as a refresher.
President Barack Obama, calling current deficit spending “unsustainable,” warned of skyrocketing interest rates for consumers if the U.S. continues to finance government by borrowing from other countries.
“We can’t keep on just borrowing from China,” Obama said at a town-hall meeting in Rio Rancho, New Mexico, outside Albuquerque. “We have to pay interest on that debt, and that means we are mortgaging our children’s future with more and more debt.”
Holders of U.S. debt will eventually “get tired” of buying it, causing interest rates on everything from auto loans to home mortgages to increase, Obama said. “It will have a dampening effect on our economy.”
Earlier this week, the Obama administration revised its own budget estimates and raised the projected deficit for this year to a record $1.84 trillion, up 5 percent from the February estimate. The revision for the 2010 fiscal year estimated the deficit at $1.26 trillion, up 7.4 percent from the February figure. The White House Office of Management and Budget also projected next year’s budget will end up at $3.59 trillion, compared with the $3.55 trillion it estimated previously.
Two weeks ago, the president proposed $17 billion in budget cuts, with plans to eliminate or reduce 121 federal programs. Republicans ridiculed the amount, saying that it represented one-half of 1 percent of the entire budget. They noted that Obama is seeking an $81 billion increase in other spending.
Meanwhile, we’ve seen protests erupt as the Senate started discussing health care reform while leaving single payer solutions off-the-table. No single payer is another Obama missive and another Republican-like policy. On May 5th, those most radical of all elements in this country, doctors and nurses, staged a protest at a senate hearing insisting single payer should be on the table.
I still can’t believe the Republicans are calling Obama a socialist. The only thing we’ve socialized so far are those incredible losses coming out of the finance sector. Everything else is Republican-lite.
All I gotta say is ya got played folks! Maddoff is a small fry scammer by comparison.
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Heaven has Fjords
Posted: May 14, 2009 Filed under: Economic Develpment, Environmental Protection, Global Financial Crisis, Uncategorized | Tags: democratic socialism., green economy, Kristin Halvorsen, Norway, Standard of living 2 Comments
When ever I hear folks rant and rave on the evils of European Social Democracies and how horrid they are, I always ask them to name the country that comes up consistently with the highest literacy rates in the world, lowest infant mortality, and much higher the the USA GDP per capita, and at the same time has what you would probably call the world’s most complete cradle-to-grave welfare state. Of course, no one knows the answer because so many folks here have been brainwashed into thinking productivity, budget surpluses, high standards of living, and great education and health care are not possible in socialist states. Well, they are really wrong.
Without a doubt, the best country to live in the world these days going strictly by the statistics (and not the weather) is Norway. Take a look at the CIA fact book for all the good stuff on Norway then take a look at the United States. Norway has bested the USA in standard of living for quite some time. The United States keeps dropping on all lists and just in GDP per capita is now sitting at number 10. Norway is ranked first on the Human Development index of 177 countries, so essentially they are number one country for living the good life. It is second, only to Luxembourg, for GDP per capita.
Today’s New York Times covers the little country that can and its stellar economic performance in today’s global economic crisis. A lot of credit is goes to Norway’s socialist finance minister Kristin Halvorsen. She’s in charge of Norway’s $300 billion sovereign wealth fund that has been steadily buying stocks since March and is used to build a decent standard of living for every one in that country. Norway likes its government and its government works well. The Times article contrasts the economics of the U.S. and Norway and the U.S. comes up way short.
A Short Treatise on Economic Development and the Role of Culture
Posted: May 13, 2009 Filed under: Economic Develpment, Global Financial Crisis | Tags: Culture, Ecnomic and Financial development Comments Off on A Short Treatise on Economic Development and the Role of CultureAnother little essay from my bag of tricks, hopefully this one is easier to grok than the last
Recently, economic development literature has stopped presupposing the existence of formal institutions like property rights and rule of law. It now examines the norms or social values that promote exchange, savings, and investment. This new line of research argues there is a cultural dimension to economic behavior. It is difficult to precisely define culture, but this line of research identifies cultural influences as “the informal shared values, norms, meanings, and behaviors that characterize human societies” (Fukuyama, 2001).
Traditional neoclassical economics downplays the role of specific societal norms in economic choice. The first 
simplifying assumption in most models is that Homo Economus is a rational utility maximizing agent. This assumption underlies the simplest microeconomic model to the more complex macroeconomic and trade models. This means that human behavior is invariant across human societies. Culture, religion, tradition, and all other forms of societal identification are some residual factor accounted for within the white noise of random variation. Most sociologists will argue that cultural norms pervade economic choices and that an economy cannot be completely understood without understanding these cultural factors (Granovetter, 1985). Economists tend to presuppose shared norms. One of the reasons we see this is that cultural factors are methodologically very difficult to quantify, measure, and disentangle from other factors.
Economic historian Douglas North was one of the first economists to revive culturalist interpretations of economic development in the 1980s and 1990s. Institutionalists began to recognize the importance of norms in economic choices. North (1990) argued that institutions that are run by either formal or informal rules are critical in reducing transaction costs. This makes them essential to promoting economic efficiency. If a society, for example, cannot agree on property rights, there would be no incentive for innovators to take risks or make investments. Institutional economists like North, began to pay attention to more than just the rational, maximizing behaviors of agents (including households and business) and became interested in studying the importance of factors like history, culture, tradition and what is now known as ‘path dependent’ variables that have a role in shaping economic behavior and choices.
Besides a renewed interest in these things by institutionalists, it also became more apparent that traditional approaches to economic development were having mixed success depending on which continent you were studying. 
The same factors examined in countries that were part of the Asian Tigers or Asian Miracle showed differing levels of importance when compared to the transition economies of the old Soviet successor states. Many Eastern European countries had to set up formal market institutions as well as judicial and political systems. It became evident that countries like Poland, Hungary, and the Czech Republic were experiencing relatively smooth transitions from centrally-planned economies. Russia and the Ukraine were experiencing many more troubles. Their institutions were generally weak and the levels of corruption were astounding.
As a result of these and the many challenges still presenting themselves in the Middle East and Africa, the World Bank and the IMF began to more closely examine cultural variables in their traditional development models. They begin to find that some uniquely Asian cultural characteristics were at play in the Asian Tiger countries. As a result, we now have a large amount of literature that studies culture factors and economic and financial development.
There are basically four channels that have become the focus of this line of literature. The first is the impact of cultural institutions on organization and production. The second is cultural factors that influence attitudes towards work and consumption. The third factor is how culture impacts the ability to create and then manage institutions. The last is the creation of social networks. Let’s look at each of these a bit more in depth.
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