Thursday, May 26, 2005

Krugman - what could the next bubble be?

Krugman in today's NYT follows the bouncing bubble. First, we had the stock market bubble. Then the FED chose to avoid an adjustment in 2001 by creating a new bubble, lowering interest rates and pumping up real estate. Krugman wonders where the FED can go from here, as there isn't any other obvious asset class to inflate to keep this rolling bubble from running out of hot air.

A few days ago, Bernanke said if we hadn't run big fiscal deficits the past few years, the imbalance in the real estate market would have just been that much bigger and it would have that much further to fall.

But I wonder. What would really have happened if the government had limited its fiscal intervention to the rebates of 2001, rather than cutting tax revenues to the lowest level post WW II?

I can't imagine all that money would just have flowed into the home mortgage market, with negative real interest rates. Some of it, perhaps, but not all of it. Something else would have to happen. Maybe, just maybe, the classical thing would have happened: we wouldn't have gotten quite so far out on a limb with our fiscal and external deficits.

Those are two more bubbles that have been inflating alongside the real estate bubble. And maybe the answer to Paul Krugman's question is, too bad we won't have the option of relaxing fiscal and trade positions as an alternative when the real estate bubble, since there's already an unsustainable level of froth in both the fiscal and external trade balance fronts.

Maybe, just maybe, a good chunk of that excess fiscal stimulus might have ended up as national savings, and a somewhat smaller trade imbalance, and somewhat less inflationary pressures on commodity goods like oil and steel. Maybe, just maybe, we could have worked though the excesses rather than pushing into new asset classes to inflate.

Monday, May 23, 2005

WSJ Leaps to Conclusions

The Wall Street Journal leaped at the opportunity to extoll the incredible increase of tax revenue for the first seven months of the fiscal year, with the predictable conclusion that the revenue was increasing because of tax cuts; to keep the revenue increasing, we have to make the tax cuts permanent; and the big problem is that the government spends too much.

To get some historical perspective on this unusual "first seven months of the fiscal year" snapshot, you can find data here .

From this, we can glean that the first seven months of FY 2005 brought in more revenue than the first seven months of FY 2000, just barely. Hallelujah! Of course, it was still 36 Billion less than the comparable seven month period in FY 2001, when the government brought in 1.25 Trillion of revenue and ran a $165 Billion surplus instead of the $237 Billion deficit run during the first seven months of FY 2005. But what the heck.

A broader historical perspective can be gleaned by comparing the change of revenue for the past five years with other five year gains. There, we find that revenues increased 48% between 1995 and 2000; 32% between 1990 and 1995; and 37% from 1985 to 1990. That's compared with the 3% gain from 2000 through 2005.

For the most part, tax revenue gains follow GDP gains over longer timeframes, historically. For example, nominal GDP grew by 37% from 1985 to 1990, exactly matching the 37% increase in tax revenues. From year to year, tax gains are more volatile, following the business cycle.

So, it isn't particularly suprising for tax revenues to increase by 11% from year to year during a rebound in the business cycle, as we've seen in the past year.

It is rather unique, though, to have a five year period when GDP increases by 26%, while tax revenue only increases by 3.7%. Now, the 26% nominal GDP increase for the past five years is pretty small, compared with other recent five year periods. But having federal tax revenue roughly flat - in nominal dollars - for a five year period - is way off the charts.

So, before we leap to a conclusion based on the new 7-months-out-of-a-fiscal-year accounting standards, perhaps we should remember that the federal government is still spending a few hundred Billion a year beyond what it brings in, and that is above and beyond the Social Security surplus, which is also being spent to cover general obligations. It's great to see federal revenue creeping up above the 17% of GDP mark, but that's still 17% short of matching spending, and that's for the easy seven month fraction of the fiscal year ending in April, and with a Social Security surplus of a couple points of GDP.

It's really time to start adjusting tax revenue so we'll bring in something closer to what we spend without having to goose general revenues with a big Social Security surplus. If the government can't come close to breaking even now, near the peak of a business cycle and with near-peak Social Security surplusses, it's time for a change of leadership.

Thursday, May 19, 2005

GOP Pans One Half of the Wexler Plan

Here's the second half of the Wexler plan to assure Social Security solvency:

The proposal also institutes a pay-as-you-go “paygo” budget measure that will help to reduce future debt and safeguard the Social Security Trust Fund by requiring future Congresses to pay dollar for dollar any new tax cuts or spending programs they enact.

We've seen the WSJ comment on the Wexler Plan, and today, Luskin . Neither mentions that the Wexler plan puts pay as you go budget rules back in place so the rest of the government can't keep spending so much more than it brings in.

Luskin even goes out of his way to say bringing in new SS payroll tax revenue now would require tax hikes later since Congress would simply spend any additional revenue that comes in to the Social Security trust fund. You'd think he'd mention that Wexler's plan would solve that particular problem by fixing the rest of the budget now, if he were seriously trying to comment on the Wexler plan, rather than simply falling into demagoguery.

Elected Democrats have distanced themselves from the Wexler plan. Not a bad idea, given that the current congress would will game anything that is put forward in order to pass a bill that would eventually phase traditional Social Security benefits out. But I do hope somebody steps up to dismantle the straw man that Luskin and the WSJ have been posturing against.

Wednesday, May 18, 2005

Conservative Crackup Continues.

John Tierney's Sunday op-ed trying to make an analogy between the highway trust fund and the Social Security trust fund was so bad I haven't even bothered to follow up on it.

Today's WSJ editorial is more interesting, though. It's one of those rare instances when the WSJ editors throw up their hands in exasperation and complain that the GOP congress can't control spending and won't bring in enough revenue to cover their spending.

A couple quotes from WSJ:

What's meaningful about the bill the Senate passed yesterday, however, is just how quickly and utterly some Republicans have abandoned all spending principle.


The highway trust fund, supported by federal gas taxes, is the main source of money for highway projects. To claim deficit "neutrality," the Senate bill mainly diverts general revenue funds into the highway trust, or shifts highway trust fund liabilities into some other fund. But either way, it constitutes deficit spending. The only proper way to "offset" something is to cut expenditures or increase revenues, and this bill by and large does neither. Moving gas guzzler tax proceeds from the general fund to the highway trust is gimmickry, plain and simple. It may bolster the highway trust, but it's a drag on the general Treasury, which by the way isn't exactly in the black right now.

The WSJ doesn't even bother to try to follow up on Tierney's "the Highway Trust Fund has been Raided, just like the Social Security Trust Fund". I sense Social Security fatigue among conservatives. The approach of summer might give them an excuse to try to let the issue fade away. What will progressives do if conservatives simply stop talking about phasing out Social Security?

Nor do they dwell on the details of pork spending. They complain about the overall spending level, but instead of the usual dwelling on the rhetorical details, they focus on the big picture - the GOP is willing to spend too much, and not willing to bring in revenue to match their spending.

Think anything will come of this? Nah.

Saturday, May 14, 2005

What She Said.

Katherine Sloan writes for the Washington Post Sunday Outlook about the tsunami in private defined benefit pensions.

It's a much better and more complete version of a short post I made a few days ago.

Thursday, May 12, 2005

Bartlett again.

Oh yes, about that VAT and Medicare reform. If you'd like to do the heavy lifting to get a VAT to pay for Bush's prescription drug benefit, I won't complain.

But I'd be a cheerleader if you'd like to go about Medicare reform with a serious health care reform that broadens access to health coverage, fixes the way health care is delivered so costs can be contained, and is paid for with a VAT. Unlike the case with the general federal budget, I think we can buy a whole lot more health care with only a little bit more pooled spending. Health care in America is just way out of control, and it's time to fix it. Why just leave the messy prescription drug plan in place and pay for it with a VAT, when we can fix the whole system for the same money?

Bartlett is honest again.

Bartlett writes in National Review today.

The topic is taxes and spending. Bartlett concludes that spending isn't going to be controlled unless the GOP tackles Medicare costs, and that tax rates are going to have to go up a lot.

Too many conservatives delude themselves that all we have to do is cut foreign aid and pork-barrel spending and the budget will be balanced. But unless Republican lawmakers are willing to seriously confront Medicare, they cannot do more than nibble around the edges. With Republicans having recently added massively to that problem, and with a Republican president who won’t veto anything, I have concluded that meaningful spending control is a hopeless cause.

Therefore, we must face the reality that taxes are going to rise a lot in coming years. I believe that a VAT is the least bad way of getting the hundreds of billions of dollars per year that will be needed. The alternative is higher tax rates that will be far more debilitating to economic growth.

Bartlett says he'd like a flat tax but getting the tax base right is more important. I agree with Bartlett that we should get the tax base right, but disagree about capital income, which Bartlett would exclude from taxation, favoring instead a VAT tax. I think capital income has to be taxed. A VAT won't get anything from someone who does most of their consumption cruising around the world, and without some taxation of capital, earnings can simply go untaxed for generations. With labor income having shrunk to the lowest fraction of GDP in history, it is unreasonable to say you can broaden the tax base while excluding capital income from taxation.

Bartlett laments Bush's marginal rate increase, saying it paved the way for Clinton's raising the marginal rate again. My recollection is that there was fairly broad support to fix the marginal rate so there wasn't - I forget what it was called, but there was a middle income bracket where the marginal rate was higher than the top marginal rate, I believe because of phasing out of preferences. That was a mistake in the 1986 reform.

Bartlett doesn't directly say so, but I believe he also laments the lobbiest gravy train that drives the annual tax cut bill today. Barlett says he doesn't believe it will be possible to get a real reform and incremental changes to the income tax code are the best likely outcome.

Well, maybe. Somehow, I doubt the current crop controlling Congress, the Senate, and the White House will engage in any sensible reforms, since the gravy train is just too powerful. Also seems unlikely that any conservative movement can push folks like Delay aside. So my sentiments lie with sweeping the bums out. But more power to ya, Bruce, if you'd like to try to reform the conservative movement incrementally.

Wednesday, May 11, 2005

Liberal Media At It Again.

We've recently learned that President Bush has failed to sell the idea of phasing out traditional Social Security benefits because of the liberal media.

And lo! The liberal media is at it again!

First, a quick primer. Social Security has promised more future benefits than it will be able to afford. To restore balance, we have to get fewer benefits than we otherwise would, pay higher taxes, or both.

Congratulations, liberal media! You've succeeded in reducing the complexity of the debate so that now, instead of a possible (some say likely) scenario in which Social Security can pay promised benefits indefinitely, we understand that "more benefits have been promised than we can afford and painful choices have to be made". Oops! I guess that's a conservative simplification. But for a liberal alternative, try Bruce Webb

Ok, onward, liberal media!

Although Pozen has become a White House favorite, his approach is far different than Bush's. Pozen is a big fan of the private accounts Bush touts as part of his "ownership society," but wants to fix Social Security's finances before dealing with the controversial accounts. "Solvency first," Pozen says. Bush wants to begin with private accounts, which do nothing to make the system solvent. The obvious solution fits on a bumper sticker: compromise.

Lo, the obvious bumper sticker solution! Phase Social Security out by alienating the middle class with big benefit cuts, but paying them their benefits while they are still working so they'll tire of supporting a welfare program when they retire! Thank goodness the "liberal media" has given us the bumper sticker solution that a "compromise" should blend the Pozen plan with Bush's private accounts on top.

Even though the polls run about two to one favoring maintaining traditional Social Security benefits, thank goodness the liberal media has reeducated us on the obvious compromise!

Pension Math

The major airlines got a get out of debt free card when a judge allowed United Airlines to shed responsibility for its employee pension plans. It seems only a matter of time until the private pension system collapses under the weight of failed plans.

One of the lessons to be learned from this is that many of the pensions that have failed did so because of overly optimistic assumptions about future returns on financial assets. This is rather remarkable given that stock and bond returns have been in a twenty-five year bull market. To be sure, companies elected overly optimistic assumptions partly to avoid putting appropriate reserves behind their responsibilities to their employees. Why pay the hired help when the alternative is higher compensation for owners and management?

But, as we watch what was thought to be a "sure thing" zap 40 million or so retirees and the taxpayers that may be called upon to bail them out, it seems a good time to remember the role of risk in projecting returns on financial assets. If the Fortune 500 was overly optimistic in projecting future returns on financial assets, why should 250 million Americans assume that George Bush would be more level headed in urging them to go for the "sure thing" of high returns on their private asset accounts?

Saturday, May 07, 2005

We'll cut your benefits, but pay them in advance

David Brooks is sermonizing against Democrats today. His complaint? Sermonizing Democrats.

Brooks thinks Bush has "called Democrat's bluff" and "stolen the Democrat's ideas" by proposing to cut middle class Social Security benefits.

I can't for the life of me recall when Democrats, during their fifty years of controlling congress, tried to turn Social Security into a welfare program, which is what progressive indexing would do.

And I sure can't remember Democrats offering folks at the top the opportunity to grab their Social Security benefits up front, while the government still has some money to offer, which is what the combination of progressive indexing and debt-financed privatization would do. Folks at the top would have practically all of their benefits paid in advance, because of the way "clawback" works. Meanwhile, the government would take on $Trillions of dollars of debt to finance paying not only current retirees but also the 18 to 62 year old's benefits.

We'd be left with a welfare program and a government reeling in debt. Is there really even any question where that would lead?

Wednesday, May 04, 2005

Treasury Blinks.

The treasury department announced it is considering issuing 30 year treasury bonds again for the first time since 2001.

Explains the undersecretary in charge of financial markets, who may be the number two at the department these days given all of the unfilled positions at treasury:

``We are doing this because times have changed, and our debt portfolio has changed,'' said Timothy Bitsberger, assistant secretary for financial markets, in a press conference. ``We believe now we have the flexibility to issue 30-year bonds and maintain liquid issuance in all of our other securities.''

"Flexibility" ? I guess the Bush administration is finally acknowledging that they've run up a lot of short term debt, enough to allow considerable "flexibility" in issuing debt of various stripes and denominations going forward. Just how much short term debt has the treasury racked up since 2001? As the undersecretary explains,

``This is a decision independent of what our deficits are,'' Bitsberger said.

In other words, plenty . We'll be rolling debt over for years, even if we somehow manage to run surplusses again any time soon. Or, put another way, Alan Greenspan's 2001 testimony is now well into the conditional fine print part about how any tax cuts enacted to assure that the treasury doesn't run out of marketable debt ought to include a clawback just in case there turns out to be more than enough marketable debt so that Social Security surplusses might be used to pay down debt.

We no longer have to worry about what the US Treasury might have to do with the Social Security surplusses. There's plenty of marketable treasury debt available to retire. Hey, doesn't that wipe out one of the biggest rationalizations for putting the "surplusses" into private hands?

Tuesday, May 03, 2005

Talking Point Memo Hits a Nerve!

Those of you who've read my blog (all three of you!) know one of my pet peeves is the WSJ editorial page.

Today, Matt Yglesias subbing for Josh Marshal issued a WSJ challenge , asking for a reader with access to WSJ archieves to find an op-ed that contradicted an assertion in a radio interview today.

And a reader found it.

You can read about the particulars at Talking Points Memo.

I think this WSJ challenge thing is a good idea for practically every political op-ed the WSJ writes, because the WSJ editors are so sloppy with their rhetorical flourish, and has such a long history, that practically everything they write contradicts something else they wrote long ago. The contradiction often takes the form of rhetorical embellishment that sounds really convincing if you just read a single op-ed and you don't have the resources to critically examine it.

I don't have the archives, so I can't be a historical reference. But, go Matt!

If only we were all millionaires!

Scrivener touts Vanguard's admiral shares as a way to cut administrative costs for privatized Social Security accounts.

A great idea. Let's see, how much money would personal accounts need to qualify for Admiral status?

Vanguard is expanding eligibility for Admiral Shares by reducing the minimum required to qualify for the shares to $100,000 per fund account, from $250,000.

Wow, cool! How long would it take to accumulate the $100,000 required to qualify for admiral status in a privatized SS account? Oh, say, 30 year, if you get a 6.5% return, or all of your working life, if you get a 3% return.

The reason account fees would be high is because the accounts start tiny by investment account standards. For an account with a thousand bucks, a $25 annual management cost zaps two and a half points right off the top.

There's also the problem that compliance cost would be high, and particularly high for small businesses or the self employed. The government run Thrift Savings program has a low overhead mainly because there is a single employer, so it costs very little to administer the accounts. With a few million employers and tens of millions of self-employed, administrative costs would be huge. The federal staff alone would be one of the biggest in the federal government, and that doesn't even include the complaince cost for businesses.

Monday, May 02, 2005

WSJ Editors dance on head of pin!

The editors repeated their assertion that interest payments from the treasury bonds held by the Social Security trust fund are real:

... what we do know with confidence is that, between now and 2017, the payroll tax will raise at least $2.2 trillion more in taxes than will be paid out in benefits.

How do we know this? Because the Social Security Trustees tell us that, of the $2.2 Trillion by which the SS trust fund will increase between now and 2014, $1.4 Trillion will be interest payments, leaving only $0.8 Trillion of payroll taxes in excess of benefit payments during that period.

Another item of interest is the editors request that Bush should STOP asserting that only proposals that will solve the Social Security solvency problem once and for all should be up for consideration:

We also wish Mr. Bush would stop promising that any reform will somehow be "permanent," or last at least for 75 years.

Perhaps the editors didn't notice that the plan Bush endorsed only cuts the 75 year acturary deficit in half. But now that the WSJ editors mention it, didn't Bush on multiple occaisions explicitly say that any proposal that he would consider would have to solve the problems once and for all time?

This page is powered by Blogger. Isn't yours?