Charles Krauthammer is not impressed with President Obama’s proposal to cut the cost of living adjustment for Social Security. He complains:
“First, the proposal — “chained CPI,” a change in the way inflation is measured — is very small. It reduces Social Security by a quarter of a penny on the dollar — a $2,000 check reduced by a five-dollar bill.”
This is a correct statement (or almost correct statement, the Social Security Administration estimates the impact 0.3 percent annually) on the first year impact of the cut. However the impact accumulates over time. After ten years it would be between 2.5-3.0 cents on a dollar or $50-$60 on a $2,000 check. This is a considerably larger hit to the typical beneficiary than the typical high income taxpayer would see as a result of the increase in tax rates last year.
It is also worth noting that a $2,000 monthly check would put this person near the top of the distribution of beneficiaries. The average check is a bit over $1,200.
Charles Krauthammer is not impressed with President Obama’s proposal to cut the cost of living adjustment for Social Security. He complains:
“First, the proposal — “chained CPI,” a change in the way inflation is measured — is very small. It reduces Social Security by a quarter of a penny on the dollar — a $2,000 check reduced by a five-dollar bill.”
This is a correct statement (or almost correct statement, the Social Security Administration estimates the impact 0.3 percent annually) on the first year impact of the cut. However the impact accumulates over time. After ten years it would be between 2.5-3.0 cents on a dollar or $50-$60 on a $2,000 check. This is a considerably larger hit to the typical beneficiary than the typical high income taxpayer would see as a result of the increase in tax rates last year.
It is also worth noting that a $2,000 monthly check would put this person near the top of the distribution of beneficiaries. The average check is a bit over $1,200.
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Retail sales fell in March and economists were surprised.
Retail sales fell in March and economists were surprised.
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Fareed Zakaria failed to recognize the true fruits of Thatcherism in his column today. After telling readers that Thatcherism was the right remedy for the problems of the 1970s such as oil shocks, slow productivity growth and rising wages, he says that it is not the answer for economy now:
“Today, American and European workers struggle to keep up their wages as technology and globalization push them down. Western economies face global competition, with other countries building impressive infrastructure and expanding education and worker training. They face a two-track economy where capital does well but labor does not, where college graduates thrive but those without strong skills fall behind and where inequality is rising not just in outcomes but also in opportunities.”
Actually, the problems that Zakaria identifies are largely the result of Thatcherism. A main reason that workers have to struggle to keep their wages up is that central banks have deliberately raised unemployment in order to keep inflation low. This weakens the bargaining power of workers, especially those in the bottom half of the wage distribution.
The high unemployment of recent years can be attributed to a policy of financial regulation that allowed for banks to grow large with the implicit subsidy of a government granted too big to fail guarantee. It also required central banks to conduct monetary and regulatory policy without regard to asset bubbles.
Thatcher and her kindred spirits in the United States and elsewhere worked to weaken labor unions. This has also reduced the ability of workers to secure their share of gains from productivity growth.
The split between winners and losers in the current economy does not fit Zakaria’s description. The median wage for college graduates has been virtually flat since the 1990s. This group includes many people who have very high skills.
The comment about globalization is bizarre. The fact that other countries have become wealthier should help the rich countries, not hurt them. It only poses a problem in a context of bad macroeconomic policy, like having an over-valued currency. It also can be a problem with selective protectionism of the sort used in the United States. Trade policy has deliberately put less-educated workers in direct competition with low-paid workers in the developing world. By contrast, highly educated professionals like doctors and lawyers, are largely protected from such competition.
It is remarkable that Zakaria somehow fails to recognize the extent to which the factors that he identifies as problems were the direct result of Thatcherism. In many cases, such as the weakening of workers bargaining power, this was an explicitly stated goal of many of her supporters.
Fareed Zakaria failed to recognize the true fruits of Thatcherism in his column today. After telling readers that Thatcherism was the right remedy for the problems of the 1970s such as oil shocks, slow productivity growth and rising wages, he says that it is not the answer for economy now:
“Today, American and European workers struggle to keep up their wages as technology and globalization push them down. Western economies face global competition, with other countries building impressive infrastructure and expanding education and worker training. They face a two-track economy where capital does well but labor does not, where college graduates thrive but those without strong skills fall behind and where inequality is rising not just in outcomes but also in opportunities.”
Actually, the problems that Zakaria identifies are largely the result of Thatcherism. A main reason that workers have to struggle to keep their wages up is that central banks have deliberately raised unemployment in order to keep inflation low. This weakens the bargaining power of workers, especially those in the bottom half of the wage distribution.
The high unemployment of recent years can be attributed to a policy of financial regulation that allowed for banks to grow large with the implicit subsidy of a government granted too big to fail guarantee. It also required central banks to conduct monetary and regulatory policy without regard to asset bubbles.
Thatcher and her kindred spirits in the United States and elsewhere worked to weaken labor unions. This has also reduced the ability of workers to secure their share of gains from productivity growth.
The split between winners and losers in the current economy does not fit Zakaria’s description. The median wage for college graduates has been virtually flat since the 1990s. This group includes many people who have very high skills.
The comment about globalization is bizarre. The fact that other countries have become wealthier should help the rich countries, not hurt them. It only poses a problem in a context of bad macroeconomic policy, like having an over-valued currency. It also can be a problem with selective protectionism of the sort used in the United States. Trade policy has deliberately put less-educated workers in direct competition with low-paid workers in the developing world. By contrast, highly educated professionals like doctors and lawyers, are largely protected from such competition.
It is remarkable that Zakaria somehow fails to recognize the extent to which the factors that he identifies as problems were the direct result of Thatcherism. In many cases, such as the weakening of workers bargaining power, this was an explicitly stated goal of many of her supporters.
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The Washington Post showed yet again why it is known as “Fox on 15th Street,” running a lead front page story headlined, “Obama eyes end to debt deadlock.” (The on-line version is slightly different.) The piece begins by telling readers in the first sentence:
“In the first budget of his second term, President Obama set aside the grand ambitions that marked his early days in office and sent Congress a blueprint aimed at achieving a simple goal: ending the long partisan standoff over the national debt.”
The “long partisan standoff over the national debt” is of course the Post’s invention. There are major debates over budget issues, with Republicans demanding cuts in many programs that Democrats support. (Interestingly, Social Security and Medicare are not on that list except in Washington. Both programs enjoy overwhelming support across the political spectrum elsewhere in the country.) There are also major issues on economic policy, with Democrats generally more willing to use stimulus to try to support the economy and get out of the downturn more quickly.
However there is no long partisan standoff on the national debt. Most people have little comprehension of the debt and do not view it as a major concern. Neither do financial markets, which is why the interest on 10-year Treasury bonds remains near a 60 year low. The interest burden the government faces is also near a post-World War II low. (It is at a post World-War II low if we subtract off the interest payments from the Fed to the Treasury.)
In short, the Post’s headline and the structure of the article should be understood as part of its effort to hype the debt as the country’s major problem. It is in fact not recognized as such by people across the country, nor is there any evidence suggested that it should be.
The Washington Post showed yet again why it is known as “Fox on 15th Street,” running a lead front page story headlined, “Obama eyes end to debt deadlock.” (The on-line version is slightly different.) The piece begins by telling readers in the first sentence:
“In the first budget of his second term, President Obama set aside the grand ambitions that marked his early days in office and sent Congress a blueprint aimed at achieving a simple goal: ending the long partisan standoff over the national debt.”
The “long partisan standoff over the national debt” is of course the Post’s invention. There are major debates over budget issues, with Republicans demanding cuts in many programs that Democrats support. (Interestingly, Social Security and Medicare are not on that list except in Washington. Both programs enjoy overwhelming support across the political spectrum elsewhere in the country.) There are also major issues on economic policy, with Democrats generally more willing to use stimulus to try to support the economy and get out of the downturn more quickly.
However there is no long partisan standoff on the national debt. Most people have little comprehension of the debt and do not view it as a major concern. Neither do financial markets, which is why the interest on 10-year Treasury bonds remains near a 60 year low. The interest burden the government faces is also near a post-World War II low. (It is at a post World-War II low if we subtract off the interest payments from the Fed to the Treasury.)
In short, the Post’s headline and the structure of the article should be understood as part of its effort to hype the debt as the country’s major problem. It is in fact not recognized as such by people across the country, nor is there any evidence suggested that it should be.
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The NYT had a major article on the budget today which told readers:
“While many economists say the new formula is more accurate, opponents say it does not adequately reflect the out-of-pocket health care expenses that burden older Americans.”
This comment is misleading since the issue with Social Security benefits is whether the chained CPI better reflects the cost of living of the population drawing Social Security checks. That is actually distinct from the rate of growth of out of pocket health care expenses, which would show that the cost of living for seniors as they age rises much more rapidly than the CPI.
There is good reason to believe that it does not. The Bureau of Labor Statistics (BLS) has an experimental elderly index that has consistently shown that the elderly experience a rate of inflation that is somewhat higher than the CPI that currently provides the basis for the annual cost of living adjustment. The main reason is that seniors spend a larger share of their income on health care and housing than the population as whole. Since these items tend to rise more rapidly in price, their cost of living rises somewhat more rapidly than what is shown by the current CPI.
It is also not clear that seniors substitute to the same extent as is assumed by the chained CPI. This would mean that a switch to a chained CPI would overstate the extent to which seniors benefit by substituting to goods that are rising less rapidly in price.
For this reason, many economists have advocated having the BLS construct a full elderly index which would track the rate of inflation in the specific items purchased by seniors at the stores at which they shop. This would provide a more accurate measure of the rate inflation seen by seniors.
It would have been useful if the NYT had made this point in its budget article. The comment about the views of economists on the accuracy of the chained CPI for the general population is at best misleading. It is not an issue that is relevant for the current debate.
The NYT had a major article on the budget today which told readers:
“While many economists say the new formula is more accurate, opponents say it does not adequately reflect the out-of-pocket health care expenses that burden older Americans.”
This comment is misleading since the issue with Social Security benefits is whether the chained CPI better reflects the cost of living of the population drawing Social Security checks. That is actually distinct from the rate of growth of out of pocket health care expenses, which would show that the cost of living for seniors as they age rises much more rapidly than the CPI.
There is good reason to believe that it does not. The Bureau of Labor Statistics (BLS) has an experimental elderly index that has consistently shown that the elderly experience a rate of inflation that is somewhat higher than the CPI that currently provides the basis for the annual cost of living adjustment. The main reason is that seniors spend a larger share of their income on health care and housing than the population as whole. Since these items tend to rise more rapidly in price, their cost of living rises somewhat more rapidly than what is shown by the current CPI.
It is also not clear that seniors substitute to the same extent as is assumed by the chained CPI. This would mean that a switch to a chained CPI would overstate the extent to which seniors benefit by substituting to goods that are rising less rapidly in price.
For this reason, many economists have advocated having the BLS construct a full elderly index which would track the rate of inflation in the specific items purchased by seniors at the stores at which they shop. This would provide a more accurate measure of the rate inflation seen by seniors.
It would have been useful if the NYT had made this point in its budget article. The comment about the views of economists on the accuracy of the chained CPI for the general population is at best misleading. It is not an issue that is relevant for the current debate.
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The European Central Bank (ECB) was a bit late with their April Fools’ joke, but they did come up a whopper. It produced a study of household wealth in the euro zone in 2009 and 2010 that came up with the startling news that:
“German households are among the poorest—on paper, at least—in the euro zone.”
The WSJ piece goes on to tell readers:
“Nevertheless, the report offers a reminder that citizens in some of the countries hardest-hit by Europe’s debt crisis aren’t as bad off as many believe…
“The median, or midpoint, of German households had just over €50,000 in wealth, the lowest in the euro zone. The median in Greece, was twice that, at €102,000, and five times as high as in Cyprus at nearly €270,000.”
Figured out the problem yet? Well 2009 and 2010 are the key part of the story. Most middle income people in most euro zone countries have most of their wealth in housing. The years 2009 and 2010 just pick up part of the decline in house prices. In Spain house prices declined by more than 15 percent in the last year.
This is huge in terms of people’s wealth. Imagine you had a home with 30 percent equity and the price just fell by 15 percent. Half of your equity just disappeared. If the price fell by 30 percent, as it has in many areas over this period, you would have lost all your wealth. Reporting on household wealth near the peak of the bubble is just silly. Presumably the folks at the ECB know this even if the reporters and editors at the WSJ don’t.
The European Central Bank (ECB) was a bit late with their April Fools’ joke, but they did come up a whopper. It produced a study of household wealth in the euro zone in 2009 and 2010 that came up with the startling news that:
“German households are among the poorest—on paper, at least—in the euro zone.”
The WSJ piece goes on to tell readers:
“Nevertheless, the report offers a reminder that citizens in some of the countries hardest-hit by Europe’s debt crisis aren’t as bad off as many believe…
“The median, or midpoint, of German households had just over €50,000 in wealth, the lowest in the euro zone. The median in Greece, was twice that, at €102,000, and five times as high as in Cyprus at nearly €270,000.”
Figured out the problem yet? Well 2009 and 2010 are the key part of the story. Most middle income people in most euro zone countries have most of their wealth in housing. The years 2009 and 2010 just pick up part of the decline in house prices. In Spain house prices declined by more than 15 percent in the last year.
This is huge in terms of people’s wealth. Imagine you had a home with 30 percent equity and the price just fell by 15 percent. Half of your equity just disappeared. If the price fell by 30 percent, as it has in many areas over this period, you would have lost all your wealth. Reporting on household wealth near the peak of the bubble is just silly. Presumably the folks at the ECB know this even if the reporters and editors at the WSJ don’t.
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With the economy mired in its longest period of high unemployment since the Great Depression, the richest one percent getting near all of the gains from economic growth, and a thoroughly corrupt financial sector surviving the crisis largely intact, the thoughts of folks like Washington Post columnist Charles Lane naturally turn to the Social Security disability program. Lane is upset because the cost of the program has been rising rapidly.
The most immediate reason for this increase is the economic downturn brought about by the collapse of the housing bubble. However, there has been a longer term rise, which is mostly due to the aging of the workforce and an increase in the percentage of women who have worked long enough to qualify for benefits. But there also have been an increase due to other factors, which has Lane especially angry.
He wrote on the topic last summer, but decided to give it another stab today in the context of telling us that we should emulate Germany to get back to low unemployment. (Lane touts the Hartz Reforms, which were intended to weaken workers’ bargaining power, as the main explanation for Germany’s current 5.4 percent unemployment rate. However, the more obvious factor is its system of short-work, which encourages employers to keep workers on the payroll working fewer hours rather than laying them off. The German government began to promote this system at the start of the downturn. As a result, its unemployment rate fell from 7.8 percent in 2008 to its current 5.4 percent even though its growth over the last five years has been virtually identical to growth in the United States.)
Lane’s big club in his attack on the disability system is a new study from the University of Michigan. He quotes from the study:
“the employment rate of new beneficiaries would have been 28?percentage points higher in the absence of benefit receipt.”
He then adds:
“SSDI is one reason, in addition to recession and aging, that the U.S. ratio of employment to population declined from 62.5?percent to 58.5?percent in the past 10 years.”
This sure sounds like an interesting study. If we go to the study itself, we find in the abstract:
“We find that among the estimated 23% of applicants on the margin of program entry, employment would have been 28 percentage points higher had they not received benefits.”
This means that we would see an increase in employment rates of 28 percentage points among the 23 percent who are considered marginal applicants if they had not received benefiits. That translates into an increase in employment among all applicants of 6.4 percentage points. If we applied this to the entire population of 9 million workers getting disability, it would mean that employment would rise by about 580,000, or just over 0.25 percentage points of the civilian population.
It is worth noting that these estimates were based mostly on the pre-recession period when it would have been easier for people with disabilities to find jobs. It is also worth noting that the 28 percentage point figure refers to change in employment status after two years. The study found that the difference fell to 16 percentage points after 4 years (p 22).
It is also worth noting that the study found that the difference in employment of those exceeding the Social Security Administration’s $1,040 a month “substantial gainful activity” threshold was just 19 percentage points in year two. The study also found that earnings for the marginal applicants who were denied benefits averaged between 25-50 percent of their pre-application earnings.
These findings would suggest that cracking down on “abusers” may not go far towards Lane’s goal of saving money on Medicare. (Disability beneficiaries are eligible for Medicare after 2 years.) A substantial portion of the people who are turned down for DI are likely to have incomes low enough to qualify for Medicaid. That would still leave the government stuck with the tab.
In addition, the actual earnings path of the people denied disability indicates that the vast majority are not earning much money even when we show them tough love and deny them disability benefits. This might suggest that many of the people denied benefits really do suffer from disabilities that make it difficult for them to work.
In short, the paper cited by Lane implies that the bonanza for the government from cracking the whip is much smaller than he claims. It also suggests that any efforts to further tighten eligibility (only 40 percent of claims are approved) is likely to lead to many more people with real disabilities being denied benefits.
This doesn’t mean that the system cannot be usefully reformed. Certainly a faster application process would be beneficial. If applicants are not going to get benefits, it is helpful for them to know this as soon as possible, since most do not work while waiting. In addition, it would be a positive step if more people on disability could return to work if their health improves. (There are some experimental programs in place to test different mechanisms.) However the story of massive abuse bankrupting the government and leading to plunging employment simply does not fit the data.
Addendum: Michael Cushman points out that Germany may not be the model that Lane is looking for on this issue. According to Eurostat it spends roughly 1.7 percent of its GDP on its disability insurance program. By comparison, the United States spends less than 0.9 percent of GDP.
With the economy mired in its longest period of high unemployment since the Great Depression, the richest one percent getting near all of the gains from economic growth, and a thoroughly corrupt financial sector surviving the crisis largely intact, the thoughts of folks like Washington Post columnist Charles Lane naturally turn to the Social Security disability program. Lane is upset because the cost of the program has been rising rapidly.
The most immediate reason for this increase is the economic downturn brought about by the collapse of the housing bubble. However, there has been a longer term rise, which is mostly due to the aging of the workforce and an increase in the percentage of women who have worked long enough to qualify for benefits. But there also have been an increase due to other factors, which has Lane especially angry.
He wrote on the topic last summer, but decided to give it another stab today in the context of telling us that we should emulate Germany to get back to low unemployment. (Lane touts the Hartz Reforms, which were intended to weaken workers’ bargaining power, as the main explanation for Germany’s current 5.4 percent unemployment rate. However, the more obvious factor is its system of short-work, which encourages employers to keep workers on the payroll working fewer hours rather than laying them off. The German government began to promote this system at the start of the downturn. As a result, its unemployment rate fell from 7.8 percent in 2008 to its current 5.4 percent even though its growth over the last five years has been virtually identical to growth in the United States.)
Lane’s big club in his attack on the disability system is a new study from the University of Michigan. He quotes from the study:
“the employment rate of new beneficiaries would have been 28?percentage points higher in the absence of benefit receipt.”
He then adds:
“SSDI is one reason, in addition to recession and aging, that the U.S. ratio of employment to population declined from 62.5?percent to 58.5?percent in the past 10 years.”
This sure sounds like an interesting study. If we go to the study itself, we find in the abstract:
“We find that among the estimated 23% of applicants on the margin of program entry, employment would have been 28 percentage points higher had they not received benefits.”
This means that we would see an increase in employment rates of 28 percentage points among the 23 percent who are considered marginal applicants if they had not received benefiits. That translates into an increase in employment among all applicants of 6.4 percentage points. If we applied this to the entire population of 9 million workers getting disability, it would mean that employment would rise by about 580,000, or just over 0.25 percentage points of the civilian population.
It is worth noting that these estimates were based mostly on the pre-recession period when it would have been easier for people with disabilities to find jobs. It is also worth noting that the 28 percentage point figure refers to change in employment status after two years. The study found that the difference fell to 16 percentage points after 4 years (p 22).
It is also worth noting that the study found that the difference in employment of those exceeding the Social Security Administration’s $1,040 a month “substantial gainful activity” threshold was just 19 percentage points in year two. The study also found that earnings for the marginal applicants who were denied benefits averaged between 25-50 percent of their pre-application earnings.
These findings would suggest that cracking down on “abusers” may not go far towards Lane’s goal of saving money on Medicare. (Disability beneficiaries are eligible for Medicare after 2 years.) A substantial portion of the people who are turned down for DI are likely to have incomes low enough to qualify for Medicaid. That would still leave the government stuck with the tab.
In addition, the actual earnings path of the people denied disability indicates that the vast majority are not earning much money even when we show them tough love and deny them disability benefits. This might suggest that many of the people denied benefits really do suffer from disabilities that make it difficult for them to work.
In short, the paper cited by Lane implies that the bonanza for the government from cracking the whip is much smaller than he claims. It also suggests that any efforts to further tighten eligibility (only 40 percent of claims are approved) is likely to lead to many more people with real disabilities being denied benefits.
This doesn’t mean that the system cannot be usefully reformed. Certainly a faster application process would be beneficial. If applicants are not going to get benefits, it is helpful for them to know this as soon as possible, since most do not work while waiting. In addition, it would be a positive step if more people on disability could return to work if their health improves. (There are some experimental programs in place to test different mechanisms.) However the story of massive abuse bankrupting the government and leading to plunging employment simply does not fit the data.
Addendum: Michael Cushman points out that Germany may not be the model that Lane is looking for on this issue. According to Eurostat it spends roughly 1.7 percent of its GDP on its disability insurance program. By comparison, the United States spends less than 0.9 percent of GDP.
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Why do they let Cokie Roberts get on NPR and say such things? (Sorry, it’s not posted yet.) Yes, the numbers may have been worse than what the experts whom NPR relies upon expected, but it was not a big surprise to people who follow the economy closely. (My forecast was 150k. The March jobs number, plus upward revisions for the 2 prior months, was 149k.)
Roberts also claimed that President Obama’s budget proposal, with its big cut to Social Security, is an effort to appeal to centrist voters. There is no polling data that show cuts to Social Security are popular among centrist voters. In fact, polls have consistently shown that cuts to Social Security are hugely unpopular across the political spectrum.
Why do they let Cokie Roberts get on NPR and say such things? (Sorry, it’s not posted yet.) Yes, the numbers may have been worse than what the experts whom NPR relies upon expected, but it was not a big surprise to people who follow the economy closely. (My forecast was 150k. The March jobs number, plus upward revisions for the 2 prior months, was 149k.)
Roberts also claimed that President Obama’s budget proposal, with its big cut to Social Security, is an effort to appeal to centrist voters. There is no polling data that show cuts to Social Security are popular among centrist voters. In fact, polls have consistently shown that cuts to Social Security are hugely unpopular across the political spectrum.
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