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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Folks who follow the economy might have thought that cutbacks in government spending, the continued weakness of construction, or the large trade deficits were the causes of the slow recovery, but the WSJ has the real scoop: it’s workers going on disability. The WSJ ran a piece headlined,”Workers Stuck in Disability Stunt Economic Recovery,” that told readers:
“The unexpectedly large number of American workers who piled into the Social Security Administration’s disability program during the recession and its aftermath threatens to cost the economy tens of billions a year in lost wages and diminished tax revenues.
Signs of the problem surfaced Friday, in a dismal jobs report that showed U.S. labor force participation rates falling last month to the lowest levels since 1979, the wrong direction for an economy that instead needs new legions of working men and women to drive growth and sustain a baby boomer generation headed to retirement”
Let’s see how this one is supposed to work. According to the Bureau of Labor Statistics were 11.7 million people who were counted as unemployed last month. This means that they were actively looking for work. On the other hand, a separate survey of firms showed that there were 3.3 million job openings. This means that there were 3.2 workers looking for jobs for every opening that was listed. We also know that there are millions of other workers who would like a job, and are not on disability, but have given up looking for work because they don’t see any jobs available.
Okay, so now we put the Wall Street Journal’s news division in charge of the disability program and they throw 9 million workers off disability. How exactly does this create more jobs? Are the companies that were already seeing many applicants for each job openings going to start offering more jobs when this ratio increases further?
Keep in mind that most of the additional applicants do have serious disabilities, only 40 percent of applicants for disability are approved, as the WSJ article notes. Also, one-third of these had to go through an appeals process. So almost all of these people will have some condition that at least seriously impairs their work ability, even if it does not make it altogether impossible to work.
So the WSJ apparently wants us to believe that when these 9 million people are thrown off disability — people with bad backs, severe fatigue, terminal cancer — companies will suddenly start offering millions of additional jobs. That’s an interesting economic theory.
Folks who follow the economy might have thought that cutbacks in government spending, the continued weakness of construction, or the large trade deficits were the causes of the slow recovery, but the WSJ has the real scoop: it’s workers going on disability. The WSJ ran a piece headlined,”Workers Stuck in Disability Stunt Economic Recovery,” that told readers:
“The unexpectedly large number of American workers who piled into the Social Security Administration’s disability program during the recession and its aftermath threatens to cost the economy tens of billions a year in lost wages and diminished tax revenues.
Signs of the problem surfaced Friday, in a dismal jobs report that showed U.S. labor force participation rates falling last month to the lowest levels since 1979, the wrong direction for an economy that instead needs new legions of working men and women to drive growth and sustain a baby boomer generation headed to retirement”
Let’s see how this one is supposed to work. According to the Bureau of Labor Statistics were 11.7 million people who were counted as unemployed last month. This means that they were actively looking for work. On the other hand, a separate survey of firms showed that there were 3.3 million job openings. This means that there were 3.2 workers looking for jobs for every opening that was listed. We also know that there are millions of other workers who would like a job, and are not on disability, but have given up looking for work because they don’t see any jobs available.
Okay, so now we put the Wall Street Journal’s news division in charge of the disability program and they throw 9 million workers off disability. How exactly does this create more jobs? Are the companies that were already seeing many applicants for each job openings going to start offering more jobs when this ratio increases further?
Keep in mind that most of the additional applicants do have serious disabilities, only 40 percent of applicants for disability are approved, as the WSJ article notes. Also, one-third of these had to go through an appeals process. So almost all of these people will have some condition that at least seriously impairs their work ability, even if it does not make it altogether impossible to work.
So the WSJ apparently wants us to believe that when these 9 million people are thrown off disability — people with bad backs, severe fatigue, terminal cancer — companies will suddenly start offering millions of additional jobs. That’s an interesting economic theory.
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Dylan Matthews had a nice piece explaining why we need not worry about current deficits and the relatively high debt to GDP ratio. He left out one very important reason, probably to avoid making prominent economists look stupid.
The debt to GDP ratio is to some extent an arbitrary number. The point here is that the price of long-term debt (e.g. 10-year and 30-year bonds) fluctuates with the interest rate. Currently bond prices are very high because interest rates are very low. However if interest rates rise back to more normal levels, as the Congressional Budget Office and others project, then the price of bonds issued at today’s low rates will plummet.
This can be seen by playing with any standard bond calculator. This would mean that we could buy back the bonds we issue in today’s low interest environment at discount rates of 20 percent, 30 percent, possibly even 40 percent. This would allow us to instantly shave hundreds of billions fo dollars, maybe even trillions, off the size of the debt. (Matthews’ colleague Allan Sloan made this point in a slightly different context a few months back.)
Of course there would be no point to this sort of bond buyback since it would leave the country’s interest burden (now near a post-World War II low) unchanged. However, for those economists and politicians who worship debt-to-GDP ratios, such bond buybacks should be a godsend. So, we can promise them that we do this sort of bond back and then we can spend what is needed to get the economy going again without having these annoying people getting in the way.
Dylan Matthews had a nice piece explaining why we need not worry about current deficits and the relatively high debt to GDP ratio. He left out one very important reason, probably to avoid making prominent economists look stupid.
The debt to GDP ratio is to some extent an arbitrary number. The point here is that the price of long-term debt (e.g. 10-year and 30-year bonds) fluctuates with the interest rate. Currently bond prices are very high because interest rates are very low. However if interest rates rise back to more normal levels, as the Congressional Budget Office and others project, then the price of bonds issued at today’s low rates will plummet.
This can be seen by playing with any standard bond calculator. This would mean that we could buy back the bonds we issue in today’s low interest environment at discount rates of 20 percent, 30 percent, possibly even 40 percent. This would allow us to instantly shave hundreds of billions fo dollars, maybe even trillions, off the size of the debt. (Matthews’ colleague Allan Sloan made this point in a slightly different context a few months back.)
Of course there would be no point to this sort of bond buyback since it would leave the country’s interest burden (now near a post-World War II low) unchanged. However, for those economists and politicians who worship debt-to-GDP ratios, such bond buybacks should be a godsend. So, we can promise them that we do this sort of bond back and then we can spend what is needed to get the economy going again without having these annoying people getting in the way.
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This simple point is shown nicely in a graph in Catherine Rampell’s Economix blogpost. The point is simple. Restaurants always want to hire people at low pay and with few benefits. In a weak labor market they can. When we have periods of low unemployment, like the late 1990s and 2005-2007, workers have better options.
This simple point is shown nicely in a graph in Catherine Rampell’s Economix blogpost. The point is simple. Restaurants always want to hire people at low pay and with few benefits. In a weak labor market they can. When we have periods of low unemployment, like the late 1990s and 2005-2007, workers have better options.
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Gretchen Morgenson reports on limited progress in reining in excessive CEO pay. Here’s the promotion for Director Watch, CEPR’s entry in the area.
Gretchen Morgenson reports on limited progress in reining in excessive CEO pay. Here’s the promotion for Director Watch, CEPR’s entry in the area.
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The Washington Post has a lengthy piece discussing the new Office of Financial Research that was set up as part of Dodd-Frank. The purpose of the office is ostensibly to prevent another financial crisis. The article focuses on the supposedly brilliant people who are staffing or advising the office and sophisticated tools that they intend to use on their job.
In fact, it was only necessary to have someone familiar with basic arithmetic and economics to prevent this crisis. It was easy to see that house prices had become grossly out of line with economic fundamentals during the bubble years. It was also easy to see that this bubble was driving the economy as residential construction rose to record shares of GDP and the wealth from bubble generated housing equity pushed consumption to record shares of disposable income.
The collapse of this bubble was the basis for the crisis. If we had seen all the same crazy financial schemes without the bubble, the consequences of their implosion for the economy would have been minimal. By contrast, if the bubble had grown to the same level without crazy financing, its collapse would have still led to a severe recession.
There are many people in positions of power and authority who like to focus on the financial aspects of the crisis because it makes it appear complicated and gives them an excuse for having failed to recognize it in advance and taking steps to stop it. The reality is that it was all very simple and the people in positions of responsibility were simply too incompetent and/or corrupt to do anything to prevent this disaster.
The Washington Post has a lengthy piece discussing the new Office of Financial Research that was set up as part of Dodd-Frank. The purpose of the office is ostensibly to prevent another financial crisis. The article focuses on the supposedly brilliant people who are staffing or advising the office and sophisticated tools that they intend to use on their job.
In fact, it was only necessary to have someone familiar with basic arithmetic and economics to prevent this crisis. It was easy to see that house prices had become grossly out of line with economic fundamentals during the bubble years. It was also easy to see that this bubble was driving the economy as residential construction rose to record shares of GDP and the wealth from bubble generated housing equity pushed consumption to record shares of disposable income.
The collapse of this bubble was the basis for the crisis. If we had seen all the same crazy financial schemes without the bubble, the consequences of their implosion for the economy would have been minimal. By contrast, if the bubble had grown to the same level without crazy financing, its collapse would have still led to a severe recession.
There are many people in positions of power and authority who like to focus on the financial aspects of the crisis because it makes it appear complicated and gives them an excuse for having failed to recognize it in advance and taking steps to stop it. The reality is that it was all very simple and the people in positions of responsibility were simply too incompetent and/or corrupt to do anything to prevent this disaster.
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