The Washington Post ran an article highlighting new calculations of city pension liabilities from Moody’s, the bond rating agency. Moody’s is probably best known to most people for rating hundreds of billions of dollars’ worth of subprime mortgage backed securities as investment grade during the housing bubble years. It received tens of millions of dollars in fees for these ratings from the investment banks that issued these securities.
The new pension liability figures are obtained by using a discount rate for pension liabilities that is considerably lower than the expected rate of return on pension assets. This methodology increases pension liabilities by around 50 percent compared with the traditional method.
If a pension fund was fully funded according to the new Moody’s methodology, but continued to invest in a mix of assets that gave a much higher rate of return than the discount rate used for calculating liabilities, then it would have effectively overfunded its pension. That would mean taxing current taxpayers more than necessary in order to allow future taxpayers to pay substantially less in taxes to finance public services. Usually economists believe that each generation should pay taxes that are roughly proportional to the services they receive. Moody’s methodology would not lead to this result if it became the basis for pension funding decisions.
It would have been worth highlighting this point about the Moody’s methodology. Most readers are unlikely to be aware of the strange policy implications of following the methodology and thereby assume that governments would be wrong not to accept it.
It is worth noting that public pensions did grossly exaggerate the expected returns on their assets in the stock bubble years of the late 1990s and at the market peaks hit in the last decade. Unfortunately, unlike some of us, Moody’s did not point this problem out at the time. One result was that many state and local governments raised their pensions and made additional payouts to workers which would not have been justified if they had used a discount rate that was consistent with the expected return on their assets.
The Washington Post ran an article highlighting new calculations of city pension liabilities from Moody’s, the bond rating agency. Moody’s is probably best known to most people for rating hundreds of billions of dollars’ worth of subprime mortgage backed securities as investment grade during the housing bubble years. It received tens of millions of dollars in fees for these ratings from the investment banks that issued these securities.
The new pension liability figures are obtained by using a discount rate for pension liabilities that is considerably lower than the expected rate of return on pension assets. This methodology increases pension liabilities by around 50 percent compared with the traditional method.
If a pension fund was fully funded according to the new Moody’s methodology, but continued to invest in a mix of assets that gave a much higher rate of return than the discount rate used for calculating liabilities, then it would have effectively overfunded its pension. That would mean taxing current taxpayers more than necessary in order to allow future taxpayers to pay substantially less in taxes to finance public services. Usually economists believe that each generation should pay taxes that are roughly proportional to the services they receive. Moody’s methodology would not lead to this result if it became the basis for pension funding decisions.
It would have been worth highlighting this point about the Moody’s methodology. Most readers are unlikely to be aware of the strange policy implications of following the methodology and thereby assume that governments would be wrong not to accept it.
It is worth noting that public pensions did grossly exaggerate the expected returns on their assets in the stock bubble years of the late 1990s and at the market peaks hit in the last decade. Unfortunately, unlike some of us, Moody’s did not point this problem out at the time. One result was that many state and local governments raised their pensions and made additional payouts to workers which would not have been justified if they had used a discount rate that was consistent with the expected return on their assets.
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You know times are bad when people start making a big deal about finding pennies in the street. That seems to be the case these days at the European Central Bank.
According to the New York Times, Joerg Asmussen, an Executive Board member of the European Central Bank, touted the growth potential of a trade agreement between the European Union and the United States. A study by the Centre for Economic and Policy Research in the United Kingdom (no connection to CEPR) found that in a best case scenario a deal would increase GDP in the United States by 0.39 percentage points when the impact is fully felt in 2027 (Table 16). In their more likely middle scenario, the gains to the United States would be 0.21 percent. That would translate into an increase in the annual growth rate of 0.015 percentage points.
While the gains for Europe might be slightly higher, it is worth noting that this projection does not take account of ways that a deal could slow growth, for example by increasing protections for intellectual property and putting in place investment rules that increase economic rents. It reveals a great deal about current economic prospects that a top policy official in the European Union would be touting such small potential benefits to growth.
You know times are bad when people start making a big deal about finding pennies in the street. That seems to be the case these days at the European Central Bank.
According to the New York Times, Joerg Asmussen, an Executive Board member of the European Central Bank, touted the growth potential of a trade agreement between the European Union and the United States. A study by the Centre for Economic and Policy Research in the United Kingdom (no connection to CEPR) found that in a best case scenario a deal would increase GDP in the United States by 0.39 percentage points when the impact is fully felt in 2027 (Table 16). In their more likely middle scenario, the gains to the United States would be 0.21 percent. That would translate into an increase in the annual growth rate of 0.015 percentage points.
While the gains for Europe might be slightly higher, it is worth noting that this projection does not take account of ways that a deal could slow growth, for example by increasing protections for intellectual property and putting in place investment rules that increase economic rents. It reveals a great deal about current economic prospects that a top policy official in the European Union would be touting such small potential benefits to growth.
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Obamacare may be more confusing than many people realized. Apparently even the NYT is unable to get it straight.
In an article that detailed the cost of the plans in the exchange for various types of families in each of the 50 states, the NYT told readers:
“The figures, almost by definition, provide a favorable view of costs, highlighting the least expensive coverage in each state.”
This is clearly not true. The numbers featured in the article were for the second lowest cost silver plan in the exchanges. Silver plans are supposed to cover approximately 70 percent of patients’ medical expenses. By definition they would be expected to cost more than bronze plans, which target 60 percent of patients’ health care expenses. The silver plans by definition are not the least expensive coverage in the state. (To get a bit technical, the second lowest cost plan is also more expensive than the lowest cost plan.)
The numbers featured in the article (which apparently are being highlighted by the Obama administration) are likely to be typical of the costs that patients will see. As the article notes, there are variations within states and people will have an option to find both higher and lower cost plans, but these numbers are not obviously skewed to either the high or low side.
Obamacare may be more confusing than many people realized. Apparently even the NYT is unable to get it straight.
In an article that detailed the cost of the plans in the exchange for various types of families in each of the 50 states, the NYT told readers:
“The figures, almost by definition, provide a favorable view of costs, highlighting the least expensive coverage in each state.”
This is clearly not true. The numbers featured in the article were for the second lowest cost silver plan in the exchanges. Silver plans are supposed to cover approximately 70 percent of patients’ medical expenses. By definition they would be expected to cost more than bronze plans, which target 60 percent of patients’ health care expenses. The silver plans by definition are not the least expensive coverage in the state. (To get a bit technical, the second lowest cost plan is also more expensive than the lowest cost plan.)
The numbers featured in the article (which apparently are being highlighted by the Obama administration) are likely to be typical of the costs that patients will see. As the article notes, there are variations within states and people will have an option to find both higher and lower cost plans, but these numbers are not obviously skewed to either the high or low side.
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The Washington Post had a lengthy article on Florida Representative Steve Southerland’s efforts to cut food stamp spending by $40 billion over the next decade. Since it never put this figure in any context, many readers may have mistakenly been led to believe that there is real money at stake.
While this proposed cut may make a huge difference to the affected population, it will have no noticeable impact on the federal budget.
The Washington Post had a lengthy article on Florida Representative Steve Southerland’s efforts to cut food stamp spending by $40 billion over the next decade. Since it never put this figure in any context, many readers may have mistakenly been led to believe that there is real money at stake.
While this proposed cut may make a huge difference to the affected population, it will have no noticeable impact on the federal budget.
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The hit to Europe’s economy from the collapse of its housing bubbles has been larger than the downturn it suffered in the Great Depression. So naturally the assessment of columnist Charles Lane on the Post op-ed page is:
“So far, Merkel has managed the crisis of the euro zone well.”
It’s not clear what would count as managing the crisis poorly, although Lane does tell us in the next sentence that in his view the breakup of the euro would be the ultimate disaster. If keeping the euro together is the sole criterion, regardless of how many trillions of dollars of lost output results, and however many millions of lives are ruined by prolonged unemployment, then I guess the euro crew is a winner.
Lane’s piece is deeply mired in confusion. Early on he tells readers;
“Two contradictory fears threaten these Germans’ contentment: what might happen if the government spends their hard-earned national savings on a bailout for Greece or Italy, and what might happen to Europe if someone doesn’t prop up those spendthrifts.”
Of course the most obvious route to restarting Europe’s economy would be to have the European Central Bank (ECB) act like a central bank and agree to underwrite the sort of deficits that will be needed to bring Europe’s economy back to full employment. This does not require using any of Germany’s savings. In fact, by boosting Europe’s growth it is likely to increase Germany’s “hard-earned national savings.”
Lane is also confused about the nature of budget deficits in Europe when referring to Greece and Italy as “spendthrifts.” While the former characterization has some real foundation, this description of Italy might seem a bit dubious to folks familiar with the data. Here’s a chart showing the primary deficits (this excludes interest payments) of two euro zone countries since 2000.
Source: International Monetary Fund.
If you guessed that Country B, the one that has generally had the larger primary budget surplus, is that spendthrift Italy, you got it right. In fact, Italy has had substantial primary budget surpluses for most of this century. It did have a large debt built up over prior decades which gives it a large interest burden now. The other reason that it has a large interest burden at present is the decision by the ECB to maintain a degree of ambiguity as to whether it would stand behind Italy’s debt. If it ended this ambiguity, the interest rate on Italy’s debt would be little different than the interest rate on German debt. This would make the country’s debt burden easily manageable.
Note: Country reversal corrected, thanks Joe.
The hit to Europe’s economy from the collapse of its housing bubbles has been larger than the downturn it suffered in the Great Depression. So naturally the assessment of columnist Charles Lane on the Post op-ed page is:
“So far, Merkel has managed the crisis of the euro zone well.”
It’s not clear what would count as managing the crisis poorly, although Lane does tell us in the next sentence that in his view the breakup of the euro would be the ultimate disaster. If keeping the euro together is the sole criterion, regardless of how many trillions of dollars of lost output results, and however many millions of lives are ruined by prolonged unemployment, then I guess the euro crew is a winner.
Lane’s piece is deeply mired in confusion. Early on he tells readers;
“Two contradictory fears threaten these Germans’ contentment: what might happen if the government spends their hard-earned national savings on a bailout for Greece or Italy, and what might happen to Europe if someone doesn’t prop up those spendthrifts.”
Of course the most obvious route to restarting Europe’s economy would be to have the European Central Bank (ECB) act like a central bank and agree to underwrite the sort of deficits that will be needed to bring Europe’s economy back to full employment. This does not require using any of Germany’s savings. In fact, by boosting Europe’s growth it is likely to increase Germany’s “hard-earned national savings.”
Lane is also confused about the nature of budget deficits in Europe when referring to Greece and Italy as “spendthrifts.” While the former characterization has some real foundation, this description of Italy might seem a bit dubious to folks familiar with the data. Here’s a chart showing the primary deficits (this excludes interest payments) of two euro zone countries since 2000.
Source: International Monetary Fund.
If you guessed that Country B, the one that has generally had the larger primary budget surplus, is that spendthrift Italy, you got it right. In fact, Italy has had substantial primary budget surpluses for most of this century. It did have a large debt built up over prior decades which gives it a large interest burden now. The other reason that it has a large interest burden at present is the decision by the ECB to maintain a degree of ambiguity as to whether it would stand behind Italy’s debt. If it ended this ambiguity, the interest rate on Italy’s debt would be little different than the interest rate on German debt. This would make the country’s debt burden easily manageable.
Note: Country reversal corrected, thanks Joe.
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That is undoubtedly the question that many NYT readers were asking when they read an article warning that insurance companies in the exchanges were not paying enough money to attract many doctors. At one point the piece told readers;
“Dr. Barbara L. McAneny, a cancer specialist in Albuquerque, said that insurers in the New Mexico exchange were generally paying doctors at Medicare levels, which she said were ‘often below our cost of doing business, and definitely below commercial rates.'”
The claim that Medicare payments are “below our cost of doing business” might seem rather dubious to readers since most doctors accept Medicare patients. The median earnings of physicians are well over $200,000 a year (net of malpractice insurance), which means they are heavily represented in the one percent. Given their extraordinary incomes, which they vigorously protect by excluding foreign and domestic competition, it seems implausible that many doctors are willing to lose money by treating Medicare patients.
It is more likely that doctors are getting less than their desired pay when they treat Medicare patients, but still pocketing far more money than the overwhelming majority workers for their time. It would have been useful to clarify this point for readers rather than letting Doctor McAneny’s assertion pass unchallenged.
That is undoubtedly the question that many NYT readers were asking when they read an article warning that insurance companies in the exchanges were not paying enough money to attract many doctors. At one point the piece told readers;
“Dr. Barbara L. McAneny, a cancer specialist in Albuquerque, said that insurers in the New Mexico exchange were generally paying doctors at Medicare levels, which she said were ‘often below our cost of doing business, and definitely below commercial rates.'”
The claim that Medicare payments are “below our cost of doing business” might seem rather dubious to readers since most doctors accept Medicare patients. The median earnings of physicians are well over $200,000 a year (net of malpractice insurance), which means they are heavily represented in the one percent. Given their extraordinary incomes, which they vigorously protect by excluding foreign and domestic competition, it seems implausible that many doctors are willing to lose money by treating Medicare patients.
It is more likely that doctors are getting less than their desired pay when they treat Medicare patients, but still pocketing far more money than the overwhelming majority workers for their time. It would have been useful to clarify this point for readers rather than letting Doctor McAneny’s assertion pass unchallenged.
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Robert Samuelson used his column to tell readers that people in the United States really are different than in other countries. Samuelson wrote:
“One standard question asks respondents to judge which is more important — ‘freedom to pursue life’s goals without state interference’ or ‘state guarantees [that] nobody is in need.’ By a 58?percent to 35 percent margin, Americans favored freedom over security, reported a 2011 Pew survey. In Europe, opinion was the opposite. Germans valued protections over freedom 62 percent to 36 percent. The results were similar for France, Britain and Spain.”
There are many people in the United States who do not recognize that Medicare is a government program. (Hence the frequent demand from Tea Party conservatives that the government keeps its hands off their Medicare.) It is likely they believe the same about Social Security. These people may highly value the security provided by these programs while at the same time denigrating the importance of state guarantees because they don’t recognize the connection of these programs to the state.
Insofar as this is the case, the difference in polling on this question may reflect differences in knowledge rather than differences in values.
Robert Samuelson used his column to tell readers that people in the United States really are different than in other countries. Samuelson wrote:
“One standard question asks respondents to judge which is more important — ‘freedom to pursue life’s goals without state interference’ or ‘state guarantees [that] nobody is in need.’ By a 58?percent to 35 percent margin, Americans favored freedom over security, reported a 2011 Pew survey. In Europe, opinion was the opposite. Germans valued protections over freedom 62 percent to 36 percent. The results were similar for France, Britain and Spain.”
There are many people in the United States who do not recognize that Medicare is a government program. (Hence the frequent demand from Tea Party conservatives that the government keeps its hands off their Medicare.) It is likely they believe the same about Social Security. These people may highly value the security provided by these programs while at the same time denigrating the importance of state guarantees because they don’t recognize the connection of these programs to the state.
Insofar as this is the case, the difference in polling on this question may reflect differences in knowledge rather than differences in values.
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This is an impressive accomplishment that deserves some attention.
This is an impressive accomplishment that deserves some attention.
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