That's what readers of Jim Roumell's column on wealth-testing Social Security must be asking. The column, "the rich can save Social Security by giving up their checks," gets almost all its facts wrong, and suffers from huge problems of logic.
The basic idea is that we have some very rich people who don't need Social Security, therefore there shouldn't get it. Of course these people did pay for their Social Security. While Roumell is certainly right that the very rich don't need the money, they generally wouldn't need the interest on the government bonds they own. We could also deny them the interest on these bonds, that would make as much sense as Roumell's proposal on Social Security, but let's not get bogged down in such moral considerations.
Roumell sees large savings if we deny Social Security to the rich:
"According to the Wall Street Journal, the top 1 percent of the United States’ 115 million households have a net worth of $6.8 million or greater. The top 5 percent have a net worth of $1.9 million or greater. If just the top 1 percent of wealthiest households gave up their Social Security income, assuming two-thirds of these households are of retirement age and will receive benefits averaging $30,000 a year, more than $200 billion would be saved in the first 10 years. That would contribute greatly to resolving the projected funding gap. If Social Security is gradually phased out for the wealthiest 5 percent of households, beginning with just a 10 percent benefit reduction, the savings climbs to nearly $500 billion over 10 years."
Let's see, two-thirds of the top 1.0 percent are over age 65? Where exactly did Roumell get this one? Has the Washington Post heard of fact checking?
If we eliminate Social Security for the wealthiest 5 percent, then we would be eliminating benefits for household with incomes of around $80,000 in their retirement. That's a new definition of "rich." It was $400,000 a year when we talked about small increases in tax rates.
But the best part of the story is trying to envision what Roumell's wealth test even would look like. People tend to accumulate wealth during their working lifetime and spend it down as they approach retirement. How do we monitor people's wealth? Do we do annual assessments of the value of their stock portfolios, their home and vacation properties, personal items like expensive paintings and jewelry? Then if they cross the magic $1.9 million threshold at any point in their lives we put a permanent hold on their Social Security benefits?
The long and short is that Roumell's proposal is completely unworkable as anyone who has given it a moment's thought would recognize. But hey, he wants to go after Social Security and he has a lot of money, why not give him a column in the Washington Post?
In the aftermath of the horrific factory fire in Bangladesh leading to over 1100 deaths, there have been renewed demands for serious safety standards at the clothing factories there. These demands have been met by the standard response from industry spokespeople that higher costs will simply cost jobs since firms will relocate to lower cost countries.
Adam Davidson has a piece in the NYT magazine this weekend that makes the simple point: there are no more Bangladeshes. The threat of relocation was a realistic concern when companies could move to the south of the United States, to Latin America, to China, or Vietnam, but this threat no longer exists. All of these regions/countries have seen sufficient rise in living standards and wages that they do not provide credible alternatives to companies seeking to escape higher labor costs in Bangladesh. There are no obvious locations where companies can now look to relocate to escape higher costs in Bangladesh.
This means that if companies have to pay a few pennies more per t-shirt to provide safe working conditions in Bangladesh they will just have to live with the higher cost. That means slightly lower profit for the manufacturer and an almost invisible price increase for t-shirt buyers in rich countries.
In the wake of the new CBO numbers showing projecting that the debt-to-GDP ratio is actually projected to fall over the next decade, the Washington Post decided to give us one of its classic deficit/debt fear-mongering stories. The piece could avoid noting the obvious fact that there is nothing that could remotely pass as a deficit crisis in the immediate future, but it did tell us;
"Policymakers have capped spending on agency budgets, permitted across-the-board spending cuts known as the sequester to take effect, let a temporary cut in the payroll tax expire and raised taxes on the nation’s wealthiest households. They have done nothing, however, to tackle the long-term affordability of Social Security and Medicare, which are projected to be the biggest drivers of future borrowing as the population ages."
Of course one of the highlights of this and other recent reports has been the sharply lower projected rate of growth of health care spending which was driving the projections of bloated deficits in future years. One factor in the slower projected growth is the Affordable Care Act, so this assertion from the Post is simply untrue.
However the real gem is this line:
"the improvement in the short-term forecast has removed the air of crisis that has hovered around the budget deficit since President Obama took office."
Wow, an "air of crisis." And where did this "air of crisis" come from? It surely did not come from financial markets, were investors have shown a willingness to lend the United States governments trillions of dollars at very low interest rates in the years since President Obama took office. It certainly did not come from competent economists who were able to recognize that the large deficits were a direct result of the economic collapse in 2008. It also did not come from the millions of people who lost their jobs due to the downturn and looked to government stimulus as the only possible source of demand that could re-employ them.
A more accurate statement might be that:
"the improvement in the short-term forecast has removed the air of crisis around the budget deficit that the Washington Post and its allies have sought to promote since President Obama took office."
Let's be serious here, the crisis was invented by people in Washington who have an agenda for cutting Social Security and Medicare. That is as clear as day. The deficit crisis does not actually exist in the world. In the world we have a crisis of a grossly under-performing economy that the Post and its allies have attempted to perpetuate.
We know this because they are spouting utterly absurd lines which Paul Sullivan unfortunately felt he had to repeat in his NYT column. Sullivan discusses the number of people who could be hit by President Obama's proposal to cap tax sheltered savings at $3.5 million.
The discussion is ridiculous throughout. It makes a point of saying that under optimistic assumptions we could get 10-20 million rubbing up against the proposed limits. (Yes, 10 percent of the population will have millions of dollars in financial assets.) However even more ridiculous is that there is no reason any serious person should give a damn.
If a person has $2.5 million in a tax sheltered account is there some national tragedy that the additional $50,000 they want to save will be subject to normal tax rules. If this ever rises to the point of meriting serious policy consideration then the world is way better off that I thought.
But here's the best part:
"Any discussion of retirement savings that suggests 'taking away tax-advantaged investing and capping investment amounts is detrimental to the system and society as a whole,' said Robert L. Reynolds, president and chief executive of Putnam Investments and one of the people considered responsible for popularizing the 401(k) plan.
"'Right now elderly poverty is at an all-time high,' Mr. Reynolds said. 'If that tells government anything, it’s we should do more to encourage saving for retirement.'"
Actually elderly poverty is nowhere close to being at an all-time high, but more importantly, what does Mr. Reynolds think he is talking about? The elderly who are in poverty are not worried about brushing up against the $3.5 million tax-exempt limit being proposed by President Obama. He is spouting non-sequiturs.
Apparently that is the state of the debate on this issue. And, the NYT's retirement columnist presented this nonsense as a serious argument.
Steven Pearlstein is upset that the austerity pushers, like the Post's editors, are looking rather foolish these days. After all, it seems they not only have problems with basic economic logic, they also have trouble with Excel spreadsheets. He notes the serious structural problems in Greece and some of the other crisis countries, then tells readers:
"Unfortunately, this is not how the anti-austerity crusaders talk about Greece or Italy or Portugal. They offer no reasonable alternative other than the rest of the world should line up to pour more money into a uncompetitive economies and profligate governments, under the theory that they can grow their way out of the hole they’ve dug. They can’t."
Hmmm, I wish I knew some of the "anti-austerity crusaders" that Pearlstein is talking about. Folks I know have been talking about the need for adjustments in relative wages that can best be brought about by having wages in Germany and other surplus countries rise more rapidly so that the southern countries can regain competitiveness.
There are of course other problems in the crisis countries, in Greece most importantly the problem that people don't like to pay taxes. This anti-austerity crusader has recommended a tax amnesty which would be coupled with serious penalties for people who don't comply. (How do you spell "life in prison.") My guess is that if millionaire and billionaire tax evaders got the impression that they would never get see their families or money, they might be a bit more conscientious about adhering to the tax codes.
I have also suggested a vacant property tax to lower both residential and commercial rents, thereby raising real wages and providing a boost to business. I'd be happy to see many other reforms that would eliminate corruption that has developed over the years in these countries, as I suspect is the case with most anti-austerity crusaders. My argument, and I suspect that of my fellow crusaders, is that we have to keep our eyes on the ball.
These countries are suffering today from the fallout from collapsed asset bubbles, not their internal structural problems.The fault for these bubbles sits squarely with all the wise people at the ECB and EU who are now pushing austerity. Somehow they thought everything was fine in the years of the "Great Moderation" even though all the danger signs were flashing bright red.
Making the people in these countries suffer does not in any obvious way fix their structural problems. It just ruins lives. Yeah, me and my fellow crusaders don't think that's cute. Better to ruin the lives of the elites who caused this crisis.
The NYT had a piece on changes to French labor market regulation that will make it easier for employers to cut wages. The piece implies that France has a seriously dysfunctional labor market:
"There is wide agreement that the country has to bring down its relatively high labor costs if it is to compete with lower-wage destinations overseas and even with Germany, which underwent its own painful labor-market restructuring over the last decade and currently has a jobless rate of just 5.4 percent.
"It is the kind of structural overhaul that European Union leaders are urging to increase employment and growth in France, which is being given two more years to get its budget deficit down to the European Union-mandated 3 percent of the gross domestic product. But even the government acknowledges that more must be done, including further changes to pensions.
"France is in the midst of an unemployment crisis, with nearly 11 percent of the work force unemployed in a period of near recession. Among people under 24, the problem is even worse, with more than 26 percent jobless."
France's economy is clearly depressed, but the more obvious culprit would seem to be the fallout from the collapse of housing bubbles across Europe and the austerity policies being imposed by the European Central Bank and the European Union. While France's unemployment picture does look bad, its employment to population ratio tells a different story. According to the OECD, the employment to population ratio (EPOP) in France, for people ages 16-64, was 63.9 percent in 2012, down only slightly from its 64.2 percent rate in 2007.
By comparison, the EPOP in the United States has fallen 4.8 percentage points over this period, from 71.9 percent in 2007 to 67.1 percentage points in 2012. The reason that the United States has not seen a comparable rise in its unemployment rate is that a large portion of those without jobs have given up looking for work. Most economists would probably not consider this evidence of a well-functioning labor market.
Undoubtedly everyone has seen stories in the media about how we need to expand high-skilled immigration because we have a shortage of workers with degrees in science, technology, engineering, and math (STEM). Claims of a shortage of STEM workers have been disconcerting to those of us who believe in economics since shortages are supposed to result in rising prices, or in this case, higher wages. We don't seem to be seeing rapidly rising wages in most areas, which makes the claims of shortages dubious.
It turns out that at least one major tech firm has figured out how markets work. Netflix apparently doesn't have any problem hiring STEM workers. It offers higher wages. According to Businessweek:
"Netflix can now hire just about any engineer it wants. That’s a function of the computer science the company does and its reputation as the highest payer in Silicon Valley. Managers routinely survey salary trends in Silicon Valley and pay their employees 10 percent to 20 percent more than the going rate for a given skill."
If Netflix can figure this out perhaps it would be possible for companies like Facebook, Microsoft, and other tech giants to get this down as well. It is always good for a company to get lower cost labor, just like they want to pay less for all of their inputs. But if these companies really need workers, the trick is to offer higher pay. Maybe remedial courses for top management would do the trick.
The Washington Post long ago abandoned the separation between news and editorials, routinely running pieces advocating cuts in Social Security and Medicare in its news section. It now appears as though the New York Times is following the Post's lead.
A news story on the budget made repeated assertions that Social Security and Medicare must be cut. At one point it referred to the:
"the inevitable pain that comes from curbing those huge and popular programs [Social Security and Medicare]."
Of course there is nothing inevitable about curbing spending on Social Security and Medicare and there is certainly not inevitable pain. The most obvious route for curbing costs in these programs from an economic standpoint would be cutting Medicare payments to drug companies, medical equipment companies, doctors and other providers. This would not be especially painful for anyone who does not derive income from the program.
Clearly the paper was expressing its desire to see these programs cut.
It later added:
"The longer the delay, the sharper and more immediate the changes Washington must eventually make to ease the long-term fiscal squeeze."
Again, this is an invention of the NYT. There is no evidence that the country is up against any "long-term fiscal squeeze" or that anything would be gained by making cuts now.
The NYT, unlike the Post, generally keeps these sorts of political views on the opinion page. It is unfortunate that it appears to have departed from its standard practice with this article.
In prior posts I have often referred to the run-up in the dollar engineered by the Clinton-Rubin-Summers team in the 1990s as being the root of all evils. The point is that their over-valued dollar policy led to a large trade deficit. The only way the demand lost as a result of the trade deficit (people spending their money overseas rather than here) could be offset was with asset bubbles.
To fill this demand gap, the Clinton crew gave us the stock bubble in the 1990s and the Bush team gave us the housing bubble in the last decade. In both cases the bubbles crashed with disastrous consequencees, the latter more than the former. (It took us almost 4 years to replace the jobs lost in the 2001 recession, so that downturn was not trivial either.)
Anyhow, my take away from this story is that, using the advanced economics from Econ 101, we need to get the dollar down. I have made this point in the past and readers have often commented that trade does not appear to be responding as would be predicted from a falling dollar. I would argue otherwise. The graph below shows the non-oil trade deficit measured as a share of GDP against the real value of the dollar.
Source: Bureau of Economic Analysis and the Federal Reserve Board.
This picture looks pretty much like the textbook story. The dollar has fallen nearly back to its 1995 level and the deficit as a share of GDP has fallen almost back to is 1995-1997 level as well. (There are lags, so trade does not adjust immediately to changes in the dollar's value.) Before anyone starts jumping up and down about pulling oil out of the picture, let me explain.
Oil prices have more than quadrupled over this period causing us to have a much larger deficit from oil imports. (Sorry, I have not deducted oil exports because they were not available from the same table.) Demand for oil is relatively inelastic. This means that when oil prices go up, if nothing else changed, we would expect our trade deficit to rise as the increase in the price of oil more than offsets the decline in quantity.
The textbook response to the increase in oil prices and the rise in the trade deficit would be that the additional outflow of dollars would cause a further decline in the value of the dollar. This decline in the dollar leads to reduction in imports and an increase in exports, which effectively allows the country to pay for higher priced oil.
In other words, if we followed the textbook story, we should expect to see a somewhat lower valued dollar today than in 1995 as a result of higher oil prices. This would cause us to have a reduced deficit, or even trade surplus, on non-oil products. This would mean that the dollar has to fall somewhat more than it already has in order to bring our trade deficit back to its mid-90s level.
It looks to me like the intro textbook story is still doing pretty well.
One of the key issues in the financial crisis was the fact that mortgage backed securities (MBS), filled with subprime mortgages of questionable quality, managed to get Aaa ratings from the bond-rating agencies. While ignorance and stupidity may explain much of what happens on Wall Street, there were people are the rating agencies who did raise questions about the quality of these securities. In one e-mail at S&P an analyst complained that it would rate an MBS as investment grade if it were "structured by cows." The analyst's complaint was ignored for a simple reason, S&P was making lots of money rating MBS.
Senator Al Franken proposed a simple way to eliminate this obvious conflict of interest. He proposed having the issuer use the Securities and Exchange Commission (SEC) as an intermediary in the hiring process. Essentially, this means that the issuer would have to call the SEC when they wanted to have an issue rated and the SEC would then pick the rating agency. This would eliminate the incentive for the rating agency to issue an investment grade rating to get more business. The Franken Amendment passed the senate by a huge 65-34 majority, winning bi-partisan support. (Disclosure: I had written about this sort of reform and discussed it with Franken's staff.)
While this might have seemed llike a victory for simple common sense, the amendment was largely eviscerated in a conference committee, apparently at the urging of then House Finance Committee Chair Barney Frank. Instead of implementing the amendment, the conference bill called for the SEC to study the issue and make a decision by the end of July, 2012.
The SEC is now almost a year late in this process, but apparently is prepared to ignore the rule, with an assist from the Washington Post. In an article discussing the SEC's plans, the Post dutifully repeated statements from the industry groups that were almost complete nonsense, wtihout consulting any of the many experts who could have spoken in support of the Franken proposal.
The meat of the article told readers:
"'There just doesn’t seem to be enough support in Washington to blow up the business model,' said Jaret Seiberg, an analyst with Guggenheim Partners.
"Some analysts say the appetite for creating a new bureaucracy is waning at a time when emphasis has been placed on shrinking the government. In addition, the structured finance industry and its Washington supporters are worried about having a board, instead of the ratings firms, determine rating criteria, said Tom Deutsch, executive director of the American Securitization Forum.
"'The plan would eliminate independent judgment of the rating agencies and replace it with a government-mandated, government-endorsed ratings assignment board,' Deutsch said."
If the Post was interested in running a news story rather than ad for the bond-rating agencies they would have found an expert who would have explained that the SEC would essentially be selecting from a very small number of qualified rating agencies almost at random. The "new bureaucracy" needed for this task could fit into the closet of a typical Wall Street CEO.
As far as the American Securitization Forum spokesperson's complaint that the plan would "eliminate independent judgment of the rating agencies and replace it with a government-mandated, government-endorsed ratings assignment board," this is a complete lie. The government already determines which credit rating firms provide an acceptable basis for assessing credit risk.
The SEC would presumably apply the same sort of standards in allowing credit rating agencies to rate MBS as it already does in determining that they are qualified to rate issues more generally. The Washington Post did the bond-rating agencies a great service by implying that the Franken Amendment would involve some major departure from current practices.
This process provides a great example of how a simple good government reform with wide bipartisan support could be derailed by the actions of a relatively liberal member of Congress with the complicity of the major media.
The Wall Street Journal piece was somewhat better. Unlike the Post piece, the body of the article was not filled with unchallenged assertions from the industry. It also pointed out that the SEC had missed the deadlines specified in the law.