The Post had a lengthy piece about seniors being ripped off on their savings by scam artists promising high returns. While this is a serious problem, the article implies that the low interest rate policy by the Fed is a major factor pushing seniors in this direction.
Actually, very few seniors have large amounts of money in short-term accounts that would be hurt by the Fed’s low interest rate policy. According to Federal Reserve Board’s latest Survey of Consumer Finance, around 15 percent of seniors have $25,000 or more in short-term money. Most of these people are likely to also have money in stock, which has provided very good returns in the last three years. They may also hold longer term bonds, the price of which has risen sharply as interest rates fell.
Even if a senior just held their $25,000 in short-term money, the hit from the low interest rate policy would still be limited. If we consider a 3.0 percent interest rate to be normal and assume that they are now getting a near zero interest rate, the loss to a senior with $25,000 would be around $750 a year. This is approximately the same hit that a senior with a $20,000 annual Social Security benefit (roughly 30 percent above the average) would see after 13 years under President Obama’s proposal to change the base of the cost of living adjustment to the chained CPI.
Addendum:
I see from comments that folks really want to believe that this low interest rate policy is a horrible disaster because every senior you know has huge amounts of money in CDs. That’s nice, but I prefer arithmetic. My hypothetical case refers to someone with $25k in short-term money; a group that comprises around 15 percent of all seniors. I know that people want to say that seniors don’t hold any stocks or bonds, but the Fed’s data disagrees and there will be enormous overlap between the people who have substantial stock and bond wealth and those with $25k in short-term money. (Sorry, I don’t have time to analyze the micro data just now.)
This means that the number of people who are hit by the low interest rates and not seeing some offsetting benefit from higher stock or bond prices will be considerably less than 15 percent of seniors, let’s say between 5-10 percent of seniors. This group will be seeing a hit that is comparable to the hit from the chained CPI. Note, I did not say this was a small hit. My point is that it affects a relatively small share of seniors. The chained CPI will hit virtually all seniors, the vast majority of whom do not have $25,000 in financial assets of any type.
The Post had a lengthy piece about seniors being ripped off on their savings by scam artists promising high returns. While this is a serious problem, the article implies that the low interest rate policy by the Fed is a major factor pushing seniors in this direction.
Actually, very few seniors have large amounts of money in short-term accounts that would be hurt by the Fed’s low interest rate policy. According to Federal Reserve Board’s latest Survey of Consumer Finance, around 15 percent of seniors have $25,000 or more in short-term money. Most of these people are likely to also have money in stock, which has provided very good returns in the last three years. They may also hold longer term bonds, the price of which has risen sharply as interest rates fell.
Even if a senior just held their $25,000 in short-term money, the hit from the low interest rate policy would still be limited. If we consider a 3.0 percent interest rate to be normal and assume that they are now getting a near zero interest rate, the loss to a senior with $25,000 would be around $750 a year. This is approximately the same hit that a senior with a $20,000 annual Social Security benefit (roughly 30 percent above the average) would see after 13 years under President Obama’s proposal to change the base of the cost of living adjustment to the chained CPI.
Addendum:
I see from comments that folks really want to believe that this low interest rate policy is a horrible disaster because every senior you know has huge amounts of money in CDs. That’s nice, but I prefer arithmetic. My hypothetical case refers to someone with $25k in short-term money; a group that comprises around 15 percent of all seniors. I know that people want to say that seniors don’t hold any stocks or bonds, but the Fed’s data disagrees and there will be enormous overlap between the people who have substantial stock and bond wealth and those with $25k in short-term money. (Sorry, I don’t have time to analyze the micro data just now.)
This means that the number of people who are hit by the low interest rates and not seeing some offsetting benefit from higher stock or bond prices will be considerably less than 15 percent of seniors, let’s say between 5-10 percent of seniors. This group will be seeing a hit that is comparable to the hit from the chained CPI. Note, I did not say this was a small hit. My point is that it affects a relatively small share of seniors. The chained CPI will hit virtually all seniors, the vast majority of whom do not have $25,000 in financial assets of any type.
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Former students and admirers of Harvard professor Martin Feldstein, who was also the chief economist in the Reagan administration, were undoubtedly outraged to see him excluded from the NYT’s Economix blog list of top blunderers in economics. Professor Feldstein’s claim to fame in this category stems in large part from a 1974 article which purports to show that Social Security led to a reduction in private savings.
This article received considerable attention and played an important role in advancing Feldstein’s reputation as one of the top economists of his generation. However, it turned out that the result was attributable to a programming error. This error was eventually uncovered by Dean Leimer and Selig Lesnoy, two researchers at the Social Security Administration. When the error was corrected, the relationship between Social Security wealth and private saving turned out to be statistically insignificant.
Feldstein actually revisited the topic again in the 1990s and claimed that with two decades of additional data he was able to establish that he had been right all along. This one turned out not to be quite right either. My colleague David Rosnick and I tried to replicate his results without success. After repeated efforts to contact Professor Feldstein to better ascertain his methodology, he eventually gave us enough information to determine that we were running our regressions correctly.
Feldstein also added that it did not surprise him that we could not replicate his results, since saving data are subject to large revisions. This is true, but then it leads one to wonder why anyone would make major policy pronouncements based on results using the pre-revision data.
Addendum:
I am also reminded of this $12 trillion mistake back in 2003 by Michael Boskin, who had been the chief economist in the administration of the first President Bush. He was briefly convinced that money being withdrawn from tax sheltered accounts like 401(k)s would lead to huge budget surpluses. (Thanks to Charles McMillion for this one.)
There was also the time in 2007 when Boston University Professor Larry Kotlikoff, one of the country’s leading deficit scolds, was concerned that people were saving too much for retirement.
Former students and admirers of Harvard professor Martin Feldstein, who was also the chief economist in the Reagan administration, were undoubtedly outraged to see him excluded from the NYT’s Economix blog list of top blunderers in economics. Professor Feldstein’s claim to fame in this category stems in large part from a 1974 article which purports to show that Social Security led to a reduction in private savings.
This article received considerable attention and played an important role in advancing Feldstein’s reputation as one of the top economists of his generation. However, it turned out that the result was attributable to a programming error. This error was eventually uncovered by Dean Leimer and Selig Lesnoy, two researchers at the Social Security Administration. When the error was corrected, the relationship between Social Security wealth and private saving turned out to be statistically insignificant.
Feldstein actually revisited the topic again in the 1990s and claimed that with two decades of additional data he was able to establish that he had been right all along. This one turned out not to be quite right either. My colleague David Rosnick and I tried to replicate his results without success. After repeated efforts to contact Professor Feldstein to better ascertain his methodology, he eventually gave us enough information to determine that we were running our regressions correctly.
Feldstein also added that it did not surprise him that we could not replicate his results, since saving data are subject to large revisions. This is true, but then it leads one to wonder why anyone would make major policy pronouncements based on results using the pre-revision data.
Addendum:
I am also reminded of this $12 trillion mistake back in 2003 by Michael Boskin, who had been the chief economist in the administration of the first President Bush. He was briefly convinced that money being withdrawn from tax sheltered accounts like 401(k)s would lead to huge budget surpluses. (Thanks to Charles McMillion for this one.)
There was also the time in 2007 when Boston University Professor Larry Kotlikoff, one of the country’s leading deficit scolds, was concerned that people were saving too much for retirement.
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Thomas Edsall relies on some research which unfortunately in many cases is a bit dated to discuss the idea that middle wage jobs in the United States are disappearing due to technology. While there was some evidence that middle wage occupations were dwindling in the 1990s, this was reversed in the last decade. In that decade there were declines in employment shares for all but the lowest paying occupations. Since we saw the same pattern of wage polarization, with more income going to the top, in the 2000s and 1990s, this would seem to indicate that the loss of middle wage jobs was not the story in the 1990s either.
In considering the recent pattern of job growth the proliferation of low-paying jobs is most obviously explained by the weak economy. The economy also generates lots of bad jobs, however in a healthy labor market most people don’t take them. It is only when people have no other job options that take these low-paying jobs. Therefore the fact that a disproportionate share of the jobs created in the last 5 years are low-paying jobs is best explained by the fact that the economy is not creating very many jobs.
The piece also notes the shift of manufacturing jobs to China. This is not a result of inevitable globalization, but rather a policy decision to put manufacturing workers in direct competition with low-paid workers in the developing world, while maintaining or increasing protectionist barriers that allow doctors, lawyers, and other highly paid professsionals from avoid similar competition. The United States has also further disadvantaged manufacturing workers by pursuing a high dollar policy that makes it more difficult for them to compete internationally.
There is little reason to believe that there is anything inevitable about the loss of wages by middle class workers. Rather this is primarily a policy driven outcome.
Thomas Edsall relies on some research which unfortunately in many cases is a bit dated to discuss the idea that middle wage jobs in the United States are disappearing due to technology. While there was some evidence that middle wage occupations were dwindling in the 1990s, this was reversed in the last decade. In that decade there were declines in employment shares for all but the lowest paying occupations. Since we saw the same pattern of wage polarization, with more income going to the top, in the 2000s and 1990s, this would seem to indicate that the loss of middle wage jobs was not the story in the 1990s either.
In considering the recent pattern of job growth the proliferation of low-paying jobs is most obviously explained by the weak economy. The economy also generates lots of bad jobs, however in a healthy labor market most people don’t take them. It is only when people have no other job options that take these low-paying jobs. Therefore the fact that a disproportionate share of the jobs created in the last 5 years are low-paying jobs is best explained by the fact that the economy is not creating very many jobs.
The piece also notes the shift of manufacturing jobs to China. This is not a result of inevitable globalization, but rather a policy decision to put manufacturing workers in direct competition with low-paid workers in the developing world, while maintaining or increasing protectionist barriers that allow doctors, lawyers, and other highly paid professsionals from avoid similar competition. The United States has also further disadvantaged manufacturing workers by pursuing a high dollar policy that makes it more difficult for them to compete internationally.
There is little reason to believe that there is anything inevitable about the loss of wages by middle class workers. Rather this is primarily a policy driven outcome.
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It would have been helpful to note this fact in an article discussing the Obama administration’s proposal to cut Social Security benefits by adopting a chained consumer price index as the basis for Social Security cost of living adjustments (COLA). The piece notes claims that the chained CPI provides a more accurate measure of the rate of inflation, then tells readers:
“Some argue that the chained CPI would cheat seniors by understating inflation for the elderly, who spend more on health care. The nonpartisan Congressional Budget Office (CBO) has found conflicting evidence on that point.”
Actually the Congressional Budget Office did not find conflicting evidence on this point, it just noted that the evidence is not conclusive. If the White House was interested in an accurate measure of the rate of inflation seen by seniors then it could instruct the Bureau of Labor Statistics to construct a full elderly CPI that would track the actual consumption patterns of the elderly. It has steadfastly refused to consider this proposal, which could lead to a higher annual COLA.
The Post should have made this point so that readers would recognize that the goal of the Obama administration is to cut Social Security, not make the COLA more accurate. Some people may be confused on this point.
The article also misled readers when it asserted:
“Medicare, Medicaid and Social Security account for nearly 40 percent of federal spending and are growing rapidly, as they must provide benefits to all who qualify, regardless of cost.”
Actually the cost of Social Security is growing relatively slowly, having risen by roughly 1.0 percentage point of GDP over the last two decades. It is projected to rise another 1.0 percentage point over the next two decades, then stay roughly constant as a share of GDP over the rest of the century.
Medicare costs have been projected to rise more rapidly because of rapidly growing private sector health care costs. In fact, Medicare costs have risen quite slowly over the last 5 years, although CBO does not project this slower rate of growth to persist.
It would have been helpful to note this fact in an article discussing the Obama administration’s proposal to cut Social Security benefits by adopting a chained consumer price index as the basis for Social Security cost of living adjustments (COLA). The piece notes claims that the chained CPI provides a more accurate measure of the rate of inflation, then tells readers:
“Some argue that the chained CPI would cheat seniors by understating inflation for the elderly, who spend more on health care. The nonpartisan Congressional Budget Office (CBO) has found conflicting evidence on that point.”
Actually the Congressional Budget Office did not find conflicting evidence on this point, it just noted that the evidence is not conclusive. If the White House was interested in an accurate measure of the rate of inflation seen by seniors then it could instruct the Bureau of Labor Statistics to construct a full elderly CPI that would track the actual consumption patterns of the elderly. It has steadfastly refused to consider this proposal, which could lead to a higher annual COLA.
The Post should have made this point so that readers would recognize that the goal of the Obama administration is to cut Social Security, not make the COLA more accurate. Some people may be confused on this point.
The article also misled readers when it asserted:
“Medicare, Medicaid and Social Security account for nearly 40 percent of federal spending and are growing rapidly, as they must provide benefits to all who qualify, regardless of cost.”
Actually the cost of Social Security is growing relatively slowly, having risen by roughly 1.0 percentage point of GDP over the last two decades. It is projected to rise another 1.0 percentage point over the next two decades, then stay roughly constant as a share of GDP over the rest of the century.
Medicare costs have been projected to rise more rapidly because of rapidly growing private sector health care costs. In fact, Medicare costs have risen quite slowly over the last 5 years, although CBO does not project this slower rate of growth to persist.
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The Washington think tank Third Way has managed to make a lot of news lately by misrepresenting its research. It put out a paper by David Autor and Melanie Wasserman with some tentative results concerning the impact on children of growing up without a father present in the household. The paper found weak evidence that boys were less likely to graduate college under such circumstances, while girls were less affected. While the piece itself notes the tentative nature of this finding (the impact of growing up in a rural household on college graduation rates was equally strong), Third Way touted this “startling discovery.” (Fans of this finding are no doubt troubled by same sex marriage, since it implies that boys raised by lesbian couples will be less likely to graduate college.)
Anyhow, Robert Samuelson naturally picks up on this finding to warn us about our future in a piece titled “family meltdown.” Complaining about single parent families is old news, as is the growth of single parent families. (The increase in single parent households was largely a story of the 60s and the 70s. The percentage of children being raised in a household with just one parent has been relatively stable over the last quarter century.) What is new is that this complaint is coming from “a liberal think tank” rather than conservatives like Charles Murray.
It is not clear what makes Third Way liberal. It has called for cutting Social Security, focusing on deficit reduction at the expense of economic growth, and taken a variety of other positions that are not ordinarily associated with being liberal. There is nothing wrong with an organization adopting eclectic positions on issues, but it is certainly misleading for it then to be described as “liberal.” Samuelson’s description of Third Way may lead readers to believe that there is a consensus on the societal risks posed by his family meltdowns which is not at all true.
The Washington think tank Third Way has managed to make a lot of news lately by misrepresenting its research. It put out a paper by David Autor and Melanie Wasserman with some tentative results concerning the impact on children of growing up without a father present in the household. The paper found weak evidence that boys were less likely to graduate college under such circumstances, while girls were less affected. While the piece itself notes the tentative nature of this finding (the impact of growing up in a rural household on college graduation rates was equally strong), Third Way touted this “startling discovery.” (Fans of this finding are no doubt troubled by same sex marriage, since it implies that boys raised by lesbian couples will be less likely to graduate college.)
Anyhow, Robert Samuelson naturally picks up on this finding to warn us about our future in a piece titled “family meltdown.” Complaining about single parent families is old news, as is the growth of single parent families. (The increase in single parent households was largely a story of the 60s and the 70s. The percentage of children being raised in a household with just one parent has been relatively stable over the last quarter century.) What is new is that this complaint is coming from “a liberal think tank” rather than conservatives like Charles Murray.
It is not clear what makes Third Way liberal. It has called for cutting Social Security, focusing on deficit reduction at the expense of economic growth, and taken a variety of other positions that are not ordinarily associated with being liberal. There is nothing wrong with an organization adopting eclectic positions on issues, but it is certainly misleading for it then to be described as “liberal.” Samuelson’s description of Third Way may lead readers to believe that there is a consensus on the societal risks posed by his family meltdowns which is not at all true.
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Nelson Schwartz struggled to make sense of the economy in a NYT column today. After all, we see signs of economic weakness everywhere, yet the stock market is soaring. (This may be less of a mystery to folks who know that stock prices are ostensibly a measure of corporate profits, not the health of the economy.)
After going through the bad news, Schwartz gives us the case for optimism about the economy:
“‘The current slowdown will be the last for a while,’ said Ethan Harris, co-head of global economics at Bank of America Merrill Lynch. He estimates that after growing by annual rates of only 1.3 percent in the second quarter and 1.5 percent in the third quarter, the economy will expand by 2.5 percent in the final months of the year and maintain that pace in 2014.
‘We’re getting closer to the end of chronically disappointing growth,’ Mr. Harris added. ‘It’s not like we’re going to have a huge boom but something that feels sustainable.'”
The economy has a trend growth rate of between 2.2 percent and 2.4 percent. If we sustain a 2.5 percent growth rate then we will be exceeding the trend growth rate by between 0.1-0.3 percentage points. According to the Congressional Budget Office the economy is still 6.0 percentage points below its potential level of output. This means that in the optimistic scenario described here we will return to potential GDP in somewhere between 20 and 60 years.
Nelson Schwartz struggled to make sense of the economy in a NYT column today. After all, we see signs of economic weakness everywhere, yet the stock market is soaring. (This may be less of a mystery to folks who know that stock prices are ostensibly a measure of corporate profits, not the health of the economy.)
After going through the bad news, Schwartz gives us the case for optimism about the economy:
“‘The current slowdown will be the last for a while,’ said Ethan Harris, co-head of global economics at Bank of America Merrill Lynch. He estimates that after growing by annual rates of only 1.3 percent in the second quarter and 1.5 percent in the third quarter, the economy will expand by 2.5 percent in the final months of the year and maintain that pace in 2014.
‘We’re getting closer to the end of chronically disappointing growth,’ Mr. Harris added. ‘It’s not like we’re going to have a huge boom but something that feels sustainable.'”
The economy has a trend growth rate of between 2.2 percent and 2.4 percent. If we sustain a 2.5 percent growth rate then we will be exceeding the trend growth rate by between 0.1-0.3 percentage points. According to the Congressional Budget Office the economy is still 6.0 percentage points below its potential level of output. This means that in the optimistic scenario described here we will return to potential GDP in somewhere between 20 and 60 years.
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It is understandable that politicians would use euphemisms when they talk about cutting Social Security. After all, it is an incredibly popular program among all demographic groups and across the political spectrum. Therefore it is not surprising they would refer to “changes” to Social Security when they mean cuts to Social Security. But what is the Post’s excuse?
It is understandable that politicians would use euphemisms when they talk about cutting Social Security. After all, it is an incredibly popular program among all demographic groups and across the political spectrum. Therefore it is not surprising they would refer to “changes” to Social Security when they mean cuts to Social Security. But what is the Post’s excuse?
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Corporate governance structures in the United States make the old Soviet Union look like a model of democracy. As it is, the voting structure is so rigged to favor insiders that it is almost impossible for shareholders to remove even the most incompetent directors and install better management.
This is mostly done through the structure of elections to give incumbents an almost unbeatable advantage. However the NYT tells us that even in the rare cases where the incumbents are voted out they don’t always leave. Columnist James Stewart identified 41 cases where directors lost elections but still continued to hold their seats on the board.
This is why we need Director Watch (TM). The basic story in corporate America is that the CEO and other top management pay off the directors to look the other way as they pilfer the company at the shareholders’ expense. And then the CEOs run around claiming that they earned their big paychecks. Leonid Brezhnev would have been jealous.
Corporate governance structures in the United States make the old Soviet Union look like a model of democracy. As it is, the voting structure is so rigged to favor insiders that it is almost impossible for shareholders to remove even the most incompetent directors and install better management.
This is mostly done through the structure of elections to give incumbents an almost unbeatable advantage. However the NYT tells us that even in the rare cases where the incumbents are voted out they don’t always leave. Columnist James Stewart identified 41 cases where directors lost elections but still continued to hold their seats on the board.
This is why we need Director Watch (TM). The basic story in corporate America is that the CEO and other top management pay off the directors to look the other way as they pilfer the company at the shareholders’ expense. And then the CEOs run around claiming that they earned their big paychecks. Leonid Brezhnev would have been jealous.
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