For some reason the NYT wants to scare its readers about Japan’s economic situation, warning that the country faces a “demographic squeeze” because its population is declining. Simple arithmetic shows that this is nonsense.
The article tells readers that the share of the population over 65 is projected to rise from 25 percent in 2010 to 40 percent in 2050. Given that roughly 20 percent of the population is under age 20, this implies that the current ratio of people ages 20-65 to people over age 65 is approximately 2.2 to 1. Assuming the under 20 portion falls to 15 percent of the population by 2050, in that year the ratio will be 1.4 to 1.
If productivity growth averages just 1.5 percent annually (it has been averaging more than 2.0 percent in the U.S. over the last 15 years), then output per worker will be more than 80 percent higher in 2050 than it is today. If the average retiree currently consumes 70 percent as much as a prime age worker, then this increase in productivity would allow retirees in 2050 to enjoy a 50 percent rise in living standards above current levels, while still leaving workers almost 30 percent better off.
The situation will be even better insofar as more workers are pulled into the labor force. As this article notes, because of weak demand, many younger workers cannot find jobs. If Japan were facing a “demographic squeeze” then young workers will have no problem finding jobs since there will be a shortage of workers. Also, because of the longevity and relative good health of many older Japanese, it is likely that many people will opt to continue working past age 65.
The decline in population is in fact a benefit in many respects for Japan. It is a very crowded island with expensive land prices. A falling population will reduce the pressure on land making housing more affordable. It will also reduce congestion in cities. In addition, the decline in population will make it easier for Japan to meet commitments for reducing greenhouse gas emissions, if countries are ever held responsible for the contributions to global warming.
For some reason the NYT wants to scare its readers about Japan’s economic situation, warning that the country faces a “demographic squeeze” because its population is declining. Simple arithmetic shows that this is nonsense.
The article tells readers that the share of the population over 65 is projected to rise from 25 percent in 2010 to 40 percent in 2050. Given that roughly 20 percent of the population is under age 20, this implies that the current ratio of people ages 20-65 to people over age 65 is approximately 2.2 to 1. Assuming the under 20 portion falls to 15 percent of the population by 2050, in that year the ratio will be 1.4 to 1.
If productivity growth averages just 1.5 percent annually (it has been averaging more than 2.0 percent in the U.S. over the last 15 years), then output per worker will be more than 80 percent higher in 2050 than it is today. If the average retiree currently consumes 70 percent as much as a prime age worker, then this increase in productivity would allow retirees in 2050 to enjoy a 50 percent rise in living standards above current levels, while still leaving workers almost 30 percent better off.
The situation will be even better insofar as more workers are pulled into the labor force. As this article notes, because of weak demand, many younger workers cannot find jobs. If Japan were facing a “demographic squeeze” then young workers will have no problem finding jobs since there will be a shortage of workers. Also, because of the longevity and relative good health of many older Japanese, it is likely that many people will opt to continue working past age 65.
The decline in population is in fact a benefit in many respects for Japan. It is a very crowded island with expensive land prices. A falling population will reduce the pressure on land making housing more affordable. It will also reduce congestion in cities. In addition, the decline in population will make it easier for Japan to meet commitments for reducing greenhouse gas emissions, if countries are ever held responsible for the contributions to global warming.
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It would be such a great thing if the people who made and wrote about economic policy learned third grade arithmetic. Then they would be able to recognize little things like $8 trillion housing bubbles before they reach such enormous sizes where their collapse can wreck the economy.
The latest person flaunting his ignorance in this area is the usually sensible Ryan Avent who tells us that, “I find the arguments for another big drop in national prices to be rather implausible.”
Avent gets many things wrong in making his case. Among the biggest is his assertion that price to rent ratios are about normal. In fact rents are roughly at the same level they were at in the mid-90s in real terms, while real house prices are still close to 30 percent above their mid-90s level. This basic measure suggests that prices still have considerable room to fall.
Avent’s effort to explain the price decline reported in recent months’ data on short-term economic fluctuations makes no sense. House prices have never responded in any significant way to short-term economic conditions. House prices have never fallen in the past because of 3-4 months of weak job growth or soared because of a similar run of strong job reports. In other words there is zero reason to believe that house prices would be moved in any noticeable way by 1-2 good or bad quarters.
If you look at the Case-Shiller data there is a very simple story. The first time buyers credit supported the market first and foremost by pushing up prices in the bottom tier. This support disappeared when the credit disappeared. Prices in the bottom tier have been plummeting in the few months of post-credit data that we have available. In the four available months since June, prices in the bottom tier fell by 6.4 percent in Seattle, 8.0 percent in Portland, 12.5 percent in Minneapolis, and 23.0 percent in Atlanta.
The logic is that the credit most immediately affects the bottom tier. (This is where first time buyers mostly buy.) It will soon feed over into the higher end homes, since the people buying these homes are selling homes in the bottom tier.
In terms of the fundamentals, the basic story is that we continue to have a record supply of vacant units. It was an astounding failure of the economics profession that almost no one in a prominent position was able to see an enormous and dangerous development like the housing bubble. It shows the incredible lack of controls within the profession that no one seems to have paid any career consequence for this failure.
As economic theory would predict, when there are no negative consequences for poor performance, we see more of it. That appears to be the case as the people who write and talk about the economy still don’t seem to have a clue about the housing bubble and its impact on the economy.
It would be such a great thing if the people who made and wrote about economic policy learned third grade arithmetic. Then they would be able to recognize little things like $8 trillion housing bubbles before they reach such enormous sizes where their collapse can wreck the economy.
The latest person flaunting his ignorance in this area is the usually sensible Ryan Avent who tells us that, “I find the arguments for another big drop in national prices to be rather implausible.”
Avent gets many things wrong in making his case. Among the biggest is his assertion that price to rent ratios are about normal. In fact rents are roughly at the same level they were at in the mid-90s in real terms, while real house prices are still close to 30 percent above their mid-90s level. This basic measure suggests that prices still have considerable room to fall.
Avent’s effort to explain the price decline reported in recent months’ data on short-term economic fluctuations makes no sense. House prices have never responded in any significant way to short-term economic conditions. House prices have never fallen in the past because of 3-4 months of weak job growth or soared because of a similar run of strong job reports. In other words there is zero reason to believe that house prices would be moved in any noticeable way by 1-2 good or bad quarters.
If you look at the Case-Shiller data there is a very simple story. The first time buyers credit supported the market first and foremost by pushing up prices in the bottom tier. This support disappeared when the credit disappeared. Prices in the bottom tier have been plummeting in the few months of post-credit data that we have available. In the four available months since June, prices in the bottom tier fell by 6.4 percent in Seattle, 8.0 percent in Portland, 12.5 percent in Minneapolis, and 23.0 percent in Atlanta.
The logic is that the credit most immediately affects the bottom tier. (This is where first time buyers mostly buy.) It will soon feed over into the higher end homes, since the people buying these homes are selling homes in the bottom tier.
In terms of the fundamentals, the basic story is that we continue to have a record supply of vacant units. It was an astounding failure of the economics profession that almost no one in a prominent position was able to see an enormous and dangerous development like the housing bubble. It shows the incredible lack of controls within the profession that no one seems to have paid any career consequence for this failure.
As economic theory would predict, when there are no negative consequences for poor performance, we see more of it. That appears to be the case as the people who write and talk about the economy still don’t seem to have a clue about the housing bubble and its impact on the economy.
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USA Today ran a piece warning of the projected rise in Medicare costs associated with the baby boom cohorts turning 65, the age of eligibility. While the article told readers that the projected increase in Medicare costs will eventually exceed the program’s revenues, it would have been worth mentioning that Medicare would be easily affordable if the U.S. did not pay more than twice as much per person for health care as other countries.
There are simple ways in which the United States could benefit from the lower cost of health care in other countries but the protectionists in Congress refuse to consider such options. Unfortunately this article relied exclusively on protectionists as sources.
USA Today ran a piece warning of the projected rise in Medicare costs associated with the baby boom cohorts turning 65, the age of eligibility. While the article told readers that the projected increase in Medicare costs will eventually exceed the program’s revenues, it would have been worth mentioning that Medicare would be easily affordable if the U.S. did not pay more than twice as much per person for health care as other countries.
There are simple ways in which the United States could benefit from the lower cost of health care in other countries but the protectionists in Congress refuse to consider such options. Unfortunately this article relied exclusively on protectionists as sources.
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The NYT told readers that the November 2010 index for pending home sales was:
“5 percent lower than November 2009 when buyers were scrambling to close purchases to qualify for the first federal tax credit.”
Actually, the credit that expired in November of 2009 was based on completed sales. It typically takes 6-8 weeks from when a home is put under contract until the sale is completed. As a result, no one who signed a contract in November of 2009 could have reasonably expected to complete the sale in time to qualify for the tax credit. The actual surge in contracts was in September and October. Pending homes sales in November of 2009 were 18 percent below the October level.
The NYT told readers that the November 2010 index for pending home sales was:
“5 percent lower than November 2009 when buyers were scrambling to close purchases to qualify for the first federal tax credit.”
Actually, the credit that expired in November of 2009 was based on completed sales. It typically takes 6-8 weeks from when a home is put under contract until the sale is completed. As a result, no one who signed a contract in November of 2009 could have reasonably expected to complete the sale in time to qualify for the tax credit. The actual surge in contracts was in September and October. Pending homes sales in November of 2009 were 18 percent below the October level.
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Robert Samuelson is once again calling for cuts to Social Security and Medicare, ostensibly in the name of generational fairness. Samuelson makes the now common argument that a hugely disproportionate share of government spending goes to these programs that primarily serve the elderly. Of course, using Samuelson logic we should also complain that a hugely disproportionate share of government expenditures go the very wealthy.
The reason that the wealthy get a disproportionate share of government expenditures is that they bought government bonds which pay interest. The reason that the elderly get a disproportionate share of government benefits is that they paid Social Security taxes and Medicare taxes that were intended to support these programs.
Samuelson goes on to complain that Social Security has become a “middle-age retirement system,” citing Eugene Steuerle of the Urban Institute. Samuelson apparently is not familiar with data on life expectancy that shows that workers in the bottom half of the wage distribution have seen relatively small gains in longevity over the last three decades. He is apparently also unfamiliar with Steurele’s calculations on the rate of return that retirees get on their Social Security benefits. For many middle income retirees in the baby boom cohorts it will be less than 1.0 percent and in some cases less than zero, according to Steuerle.
What is remarkable about Samuelson’s piece is that there is absolutely zero effort to consider any real issues of generational equity in a piece that is ostensibly devoted to the topic. For example, there is no discussion of the fact that the current generation of near retirees experienced an unprecedented period of wage stagnation over their working lifetime. The median hourly wage in 2010 is less than 10 percent higher than it was in 1973.
By contrast, the Social Security trustees project that average hourly wages will rise by more than 40 percent over the next three decades. While it is possible that income inequality will continue to increase so that these gains again go overwhelmingly to the top, there is no precedent in U.S. history for the level of inequality that this would imply.
It is also striking that Samuelson never mentions health care costs in discussing the enormous burden created by Social Security and Medicare. If per person health care costs were the same in the United States as in any of the countries that enjoy longer life expectancies, we would be facing huge long-run budget surpluses, not deficits. In other words, the problem is not that our benefits are too generous but rather that we pay too much for them.
There are simple mechanisms that would help to restrain health care costs in the United States. For example, supporters of the free market would suggest allowing retirees to buy into the more efficient health care systems elsewhere, with the U.S. government, the host government, and the beneficiaries dividing the savings.
We could also develop more efficient mechanisms for financing prescription drug research. This could save hundreds of billions of dollars a year on prescription drug costs, in addition to eliminating the incentive for drug companies to lie about the safety and effectiveness of their drugs.
However, raising these issues involves confronting powerful interest groups like insurance companies, drug companies, and the doctors lobbies. Robert Samuelson and the rest of the crew at the Washington Post (a.k.a. Fox on 15th) doesn’t like to get these folks angry, they would rather just beat up the elderly.
Robert Samuelson is once again calling for cuts to Social Security and Medicare, ostensibly in the name of generational fairness. Samuelson makes the now common argument that a hugely disproportionate share of government spending goes to these programs that primarily serve the elderly. Of course, using Samuelson logic we should also complain that a hugely disproportionate share of government expenditures go the very wealthy.
The reason that the wealthy get a disproportionate share of government expenditures is that they bought government bonds which pay interest. The reason that the elderly get a disproportionate share of government benefits is that they paid Social Security taxes and Medicare taxes that were intended to support these programs.
Samuelson goes on to complain that Social Security has become a “middle-age retirement system,” citing Eugene Steuerle of the Urban Institute. Samuelson apparently is not familiar with data on life expectancy that shows that workers in the bottom half of the wage distribution have seen relatively small gains in longevity over the last three decades. He is apparently also unfamiliar with Steurele’s calculations on the rate of return that retirees get on their Social Security benefits. For many middle income retirees in the baby boom cohorts it will be less than 1.0 percent and in some cases less than zero, according to Steuerle.
What is remarkable about Samuelson’s piece is that there is absolutely zero effort to consider any real issues of generational equity in a piece that is ostensibly devoted to the topic. For example, there is no discussion of the fact that the current generation of near retirees experienced an unprecedented period of wage stagnation over their working lifetime. The median hourly wage in 2010 is less than 10 percent higher than it was in 1973.
By contrast, the Social Security trustees project that average hourly wages will rise by more than 40 percent over the next three decades. While it is possible that income inequality will continue to increase so that these gains again go overwhelmingly to the top, there is no precedent in U.S. history for the level of inequality that this would imply.
It is also striking that Samuelson never mentions health care costs in discussing the enormous burden created by Social Security and Medicare. If per person health care costs were the same in the United States as in any of the countries that enjoy longer life expectancies, we would be facing huge long-run budget surpluses, not deficits. In other words, the problem is not that our benefits are too generous but rather that we pay too much for them.
There are simple mechanisms that would help to restrain health care costs in the United States. For example, supporters of the free market would suggest allowing retirees to buy into the more efficient health care systems elsewhere, with the U.S. government, the host government, and the beneficiaries dividing the savings.
We could also develop more efficient mechanisms for financing prescription drug research. This could save hundreds of billions of dollars a year on prescription drug costs, in addition to eliminating the incentive for drug companies to lie about the safety and effectiveness of their drugs.
However, raising these issues involves confronting powerful interest groups like insurance companies, drug companies, and the doctors lobbies. Robert Samuelson and the rest of the crew at the Washington Post (a.k.a. Fox on 15th) doesn’t like to get these folks angry, they would rather just beat up the elderly.
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The NYT has a lengthy piece that notes the sharp rise in inequality in the last three decades due to the “superstar effect.” This is attributed in part to the fact that technology allows a top athlete or entertainer to be seen by far more people in 2010 than in 1960.
It is important to recognize that it was not technology alone that allowed superstars to profit from this change. The U.S. government has gone to great lengths to strengthen the reach and enforcement of copyright law, in many cases leading to serious restrictions on individual behavior. For example, it was briefly illegal to sell digital recorders because they were not encoded to protect copyrighted material.
This fact it is important because it means that policy decisions, not just technology, was central to the rise in inequality. This is also the case with the soaring pay of top corporate executives. This is attributed to their growing responsibilities as the size of the largest corporations increases. However, companies in Europe and Japan expanded as well without a corresponding increase in CEO pay. This suggests that the difference in compensation is more likely attributable to differences in laws and norms surrounding corporate governance than any increase in the value of effective leadership to corporate profitability.
The NYT has a lengthy piece that notes the sharp rise in inequality in the last three decades due to the “superstar effect.” This is attributed in part to the fact that technology allows a top athlete or entertainer to be seen by far more people in 2010 than in 1960.
It is important to recognize that it was not technology alone that allowed superstars to profit from this change. The U.S. government has gone to great lengths to strengthen the reach and enforcement of copyright law, in many cases leading to serious restrictions on individual behavior. For example, it was briefly illegal to sell digital recorders because they were not encoded to protect copyrighted material.
This fact it is important because it means that policy decisions, not just technology, was central to the rise in inequality. This is also the case with the soaring pay of top corporate executives. This is attributed to their growing responsibilities as the size of the largest corporations increases. However, companies in Europe and Japan expanded as well without a corresponding increase in CEO pay. This suggests that the difference in compensation is more likely attributable to differences in laws and norms surrounding corporate governance than any increase in the value of effective leadership to corporate profitability.
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That was the topic of its lead editorial which complained that China did not respect U.S. style intellectual property. Patents and copyrights are government granted monopolies that allow items like prescription drugs to sell at prices that can be several thousand percent above their free market price. This leads to the same sorts of economic distortions that would be predicted from tariffs of this size. As a result of this protection, software and recorded music and movies, which would otherwise be available at no cost over the Internet, can instead command high prices.
Given the enormous costs associated with patent and copyright protection it is not surprising that China would not be anxious to impose these costs on its economy. There are more efficient mechanisms for financing research in prescription drugs and creative and artistic work. It is understandable that China will only agree to accept these costs that it will demand something important in exchange, for example the option to maintain a seriously over-valued exchange rate that gives its goods a huge advantage in international trade. In effect, a policy that imposes U.S. style intellectual property rules on China is redistributing income from manufacturing workers and non-college educated workers (who disproportionately work in manufacturing) to companies like Pfizer and Microsoft and their highly educated workers.
That was the topic of its lead editorial which complained that China did not respect U.S. style intellectual property. Patents and copyrights are government granted monopolies that allow items like prescription drugs to sell at prices that can be several thousand percent above their free market price. This leads to the same sorts of economic distortions that would be predicted from tariffs of this size. As a result of this protection, software and recorded music and movies, which would otherwise be available at no cost over the Internet, can instead command high prices.
Given the enormous costs associated with patent and copyright protection it is not surprising that China would not be anxious to impose these costs on its economy. There are more efficient mechanisms for financing research in prescription drugs and creative and artistic work. It is understandable that China will only agree to accept these costs that it will demand something important in exchange, for example the option to maintain a seriously over-valued exchange rate that gives its goods a huge advantage in international trade. In effect, a policy that imposes U.S. style intellectual property rules on China is redistributing income from manufacturing workers and non-college educated workers (who disproportionately work in manufacturing) to companies like Pfizer and Microsoft and their highly educated workers.
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The Wall Street Journal told readers today that “pensions push property taxes higher,” in a headline of a news article. The article notes that large pension shortfalls, together with a loss of other tax revenue, are causing many local and county governments to raise property taxes.
Of course the reason that pensions face large shortfalls is that economists like Alan Greenspan and Ben Bernanke were not able to see the $8 trillion housing bubble, the collapse of which wrecked the economy. These pension funds also suffered because they listened to highly paid investment advisers who had no idea what they were doing. It is worth noting that almost all of these highly paid investment advisers still hold their high paying jobs.
The Wall Street Journal told readers today that “pensions push property taxes higher,” in a headline of a news article. The article notes that large pension shortfalls, together with a loss of other tax revenue, are causing many local and county governments to raise property taxes.
Of course the reason that pensions face large shortfalls is that economists like Alan Greenspan and Ben Bernanke were not able to see the $8 trillion housing bubble, the collapse of which wrecked the economy. These pension funds also suffered because they listened to highly paid investment advisers who had no idea what they were doing. It is worth noting that almost all of these highly paid investment advisers still hold their high paying jobs.
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How many state or local jurisdictions have lost 40 percent of their population in the last four decades and have their top elected officials convicted of corruption? While this may fit the bill in some places, it is not typical for the country as a whole. Populations are continuing to rise in most areas and the number of elected officials who are convicted for corruption is still a relatively small minority.
This might lead one to wonder why both the New York Times and Wall Street Journal were so anxious to tell readers that the city of Prichard, Alabama foretells the future for their public employee pension plans. The city has stopped making pension payments to 40 retired workers who have earned them.
According to the articles, it appears that the pension funds have long been drained, at least partly through corruption. Due to its depressed economy the city is now finding it difficult to make ends meet.
It is worth noting that the pension obligations do not appear to be quite the crushing burdens implied in these articles. The NYT reports that the average pension is $12,000 a year. This means that if the full payment were made out of current tax revenue it would imply a tax of approximately $18 per capita on the town’s 27,000 residents. This is less than 0.14 of the city’s per capita income.
How many state or local jurisdictions have lost 40 percent of their population in the last four decades and have their top elected officials convicted of corruption? While this may fit the bill in some places, it is not typical for the country as a whole. Populations are continuing to rise in most areas and the number of elected officials who are convicted for corruption is still a relatively small minority.
This might lead one to wonder why both the New York Times and Wall Street Journal were so anxious to tell readers that the city of Prichard, Alabama foretells the future for their public employee pension plans. The city has stopped making pension payments to 40 retired workers who have earned them.
According to the articles, it appears that the pension funds have long been drained, at least partly through corruption. Due to its depressed economy the city is now finding it difficult to make ends meet.
It is worth noting that the pension obligations do not appear to be quite the crushing burdens implied in these articles. The NYT reports that the average pension is $12,000 a year. This means that if the full payment were made out of current tax revenue it would imply a tax of approximately $18 per capita on the town’s 27,000 residents. This is less than 0.14 of the city’s per capita income.
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The anchor introduced a Morning Edition segment on ethanol subsidies by referring to the “crushing deficit.” Is this bit of editorializing now official NPR policy? If NPR needs an adjective for deficits right now, a more accurate one would be “essential,” since demand and therefore GDP would plummet if the country were to balance its budget.
The anchor introduced a Morning Edition segment on ethanol subsidies by referring to the “crushing deficit.” Is this bit of editorializing now official NPR policy? If NPR needs an adjective for deficits right now, a more accurate one would be “essential,” since demand and therefore GDP would plummet if the country were to balance its budget.
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