I see that Bloomberg has apparently decided to give Megan McArdle infinite space to tell its readers that she doesn’t like the Social Security trust fund. Well, they have to fill their website with something.
Just to keep things short and simple, there are two ways to think about the trust fund. First, we can follow the law as written. Under the law, designated Social Security taxes and only designated Social Security taxes can be used to pay Social Security benefits. Money from the taxes that is unspent in the year collected is put in the trust fund for further use. The law is pretty clear on this. I have not heard even Antonin Scalia attempt to argue otherwise.
The other way to think about the trust fund is that it is an irrelevancy. At some time in the past the politicians in Washington thought it would be cute for us to pay for Social Security out of its designated tax and the trust fund, but hey, who cares? There is only one government, so it really doesn’t matter which pocket the money comes out of, so the trust fund is irrelevant to anything.
While there are good reasons for choosing one or the other of these views, both have the advantage of being consistent. Both also have the advantage of telling us that there is no necessary reason to worry about Social Security’s finances just now. In the first case, the projections show the fund will be able to pay full benefits through 2033 with no changes whatsoever. We could of course worry about Social Security’s finances sooner if we want, but some folks might think that problems like unemployment and stagnant wages are more pressing.
By the second view there is no reason to worry about Social Security’s finances because the premise is that it doesn’t have its own finances. Hey, there’s just one government, who cares which pocket the money comes out of? In this view it makes no more sense to worry about Social Security’s finances than it does to worry about the finances of the defense or state departments. It’s all part of the government.
There can only be an issue if we let people just make it up as they go along, effectively saying that Social Security has to be financed by its own taxes, but the program doesn’t get to use surpluses from prior years to pay current year’s benefits. There is not any obvious logic to this position, and it has no basis in current law, but its proponents are welcome to lobby their representatives in Congress to have the law re-written as they would like it. Until then, we need not worry about the status of the trust fund or the solvency of Social Security.
Note: The spelling of Antonin Scalia has been corrected, thanks Ken.
I see that Bloomberg has apparently decided to give Megan McArdle infinite space to tell its readers that she doesn’t like the Social Security trust fund. Well, they have to fill their website with something.
Just to keep things short and simple, there are two ways to think about the trust fund. First, we can follow the law as written. Under the law, designated Social Security taxes and only designated Social Security taxes can be used to pay Social Security benefits. Money from the taxes that is unspent in the year collected is put in the trust fund for further use. The law is pretty clear on this. I have not heard even Antonin Scalia attempt to argue otherwise.
The other way to think about the trust fund is that it is an irrelevancy. At some time in the past the politicians in Washington thought it would be cute for us to pay for Social Security out of its designated tax and the trust fund, but hey, who cares? There is only one government, so it really doesn’t matter which pocket the money comes out of, so the trust fund is irrelevant to anything.
While there are good reasons for choosing one or the other of these views, both have the advantage of being consistent. Both also have the advantage of telling us that there is no necessary reason to worry about Social Security’s finances just now. In the first case, the projections show the fund will be able to pay full benefits through 2033 with no changes whatsoever. We could of course worry about Social Security’s finances sooner if we want, but some folks might think that problems like unemployment and stagnant wages are more pressing.
By the second view there is no reason to worry about Social Security’s finances because the premise is that it doesn’t have its own finances. Hey, there’s just one government, who cares which pocket the money comes out of? In this view it makes no more sense to worry about Social Security’s finances than it does to worry about the finances of the defense or state departments. It’s all part of the government.
There can only be an issue if we let people just make it up as they go along, effectively saying that Social Security has to be financed by its own taxes, but the program doesn’t get to use surpluses from prior years to pay current year’s benefits. There is not any obvious logic to this position, and it has no basis in current law, but its proponents are welcome to lobby their representatives in Congress to have the law re-written as they would like it. Until then, we need not worry about the status of the trust fund or the solvency of Social Security.
Note: The spelling of Antonin Scalia has been corrected, thanks Ken.
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That’s the question Megan McArdle raises in her Bloomberg column condemning efforts to raise Social Security benefits. McArdle tells readers:
“Now, I don’t want to get mired in the tired old arguments about whether the trust fund is “real” — whether it’s a stupid accounting abstraction or a profound moral promise on the part of the U.S. government — because this obscures the actual point we need to be concerned with: If we want to pay Social Security beneficiaries more money than we are collecting in payroll taxes, the money has to come from somewhere, and ultimately, that “somewhere” is the United States taxpayer. It is supremely irrelevant whether that money flows through the “trust fund” or Uncle Sam holds an annual ceremony in which the trustees are handed one of those giant checks they present to lottery winners; we still need to find the money to make good on that check.”
Of course we would all like those who disagree with us in major debates to simply disregard their arguments and accept what we are saying as true. But most of us just don’t possess the power to force our opponents to concede the truth of our position, even when if we use ad hominems to belittle their arguments.
In the case of the Social Security trust fund, the tired old argument stems from the legal structure of the program whereby it is financed exclusively by its designated tax, including the surpluses from taxes in prior years. McArdle tells us that bonds purchased with prior years’ surpluses don’t matter, the government still has to cough up the money in the current year. The same logic applies to the bonds held by rich people like Peter Peterson. The government has to cough up the money to pay him the interest this year on whatever bonds he holds.
If McArdle wants to declare it “supremely irrelevant” that the payments for Social Security come from bonds held by the trust fund, then with equal validity we can declare it supremely irrelevant that Peterson paid for the bonds he owns. After all, this would just get us into tired old arguments about moral obligations to bondholders.
McArdle could contend that we have to pay Peterson his interest because otherwise no one would ever buy U.S. government bonds again, but this point actually is directly in line with tired old arguments about moral obligations. The logic of this assertion is that if we don’t meet obligations to past bondholders, then no one will trust us to meet our obligations to future bondholders.
Suppose people apply the same logic to the taxes they pay for Social Security benefits. If we don’t follow the law and pay people the benefits they have earned, then they may be more likely to try to avoid paying Social Security taxes in the future. They certainly will be less likely to approve tax increases to fund the program, if they have no reason to believe that the taxes will actually be used for the program, as required under law.
But McArdle doesn’t want to have this sort of discussion. Readers are just supposed to accept her pronouncements as true.
That’s the question Megan McArdle raises in her Bloomberg column condemning efforts to raise Social Security benefits. McArdle tells readers:
“Now, I don’t want to get mired in the tired old arguments about whether the trust fund is “real” — whether it’s a stupid accounting abstraction or a profound moral promise on the part of the U.S. government — because this obscures the actual point we need to be concerned with: If we want to pay Social Security beneficiaries more money than we are collecting in payroll taxes, the money has to come from somewhere, and ultimately, that “somewhere” is the United States taxpayer. It is supremely irrelevant whether that money flows through the “trust fund” or Uncle Sam holds an annual ceremony in which the trustees are handed one of those giant checks they present to lottery winners; we still need to find the money to make good on that check.”
Of course we would all like those who disagree with us in major debates to simply disregard their arguments and accept what we are saying as true. But most of us just don’t possess the power to force our opponents to concede the truth of our position, even when if we use ad hominems to belittle their arguments.
In the case of the Social Security trust fund, the tired old argument stems from the legal structure of the program whereby it is financed exclusively by its designated tax, including the surpluses from taxes in prior years. McArdle tells us that bonds purchased with prior years’ surpluses don’t matter, the government still has to cough up the money in the current year. The same logic applies to the bonds held by rich people like Peter Peterson. The government has to cough up the money to pay him the interest this year on whatever bonds he holds.
If McArdle wants to declare it “supremely irrelevant” that the payments for Social Security come from bonds held by the trust fund, then with equal validity we can declare it supremely irrelevant that Peterson paid for the bonds he owns. After all, this would just get us into tired old arguments about moral obligations to bondholders.
McArdle could contend that we have to pay Peterson his interest because otherwise no one would ever buy U.S. government bonds again, but this point actually is directly in line with tired old arguments about moral obligations. The logic of this assertion is that if we don’t meet obligations to past bondholders, then no one will trust us to meet our obligations to future bondholders.
Suppose people apply the same logic to the taxes they pay for Social Security benefits. If we don’t follow the law and pay people the benefits they have earned, then they may be more likely to try to avoid paying Social Security taxes in the future. They certainly will be less likely to approve tax increases to fund the program, if they have no reason to believe that the taxes will actually be used for the program, as required under law.
But McArdle doesn’t want to have this sort of discussion. Readers are just supposed to accept her pronouncements as true.
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That’s what Yahoo Finance effectively told us in the headline of a piece on the Labor Department’s release of new data from its Job Opening and Labor Turnover Survey. The headline said, “U.S. jobs opening data points to skills mismatch.” The evidence was a modest rise in the overall rate of job openings from 3.4 percent to 3.5 percent. But if this is evidence of a skills mismatch then the biggest problem is in the restaurant sector where the jobs opening rate was 5.1 percent. Apparently there are just not enough people who know how to wait tables and wash dishes.
If we used the standard economist measure, we would be looking for rising wages as evidence of skills mismatch. There is not much evidence of that anywhere, as is pointed out later in the article.
That’s what Yahoo Finance effectively told us in the headline of a piece on the Labor Department’s release of new data from its Job Opening and Labor Turnover Survey. The headline said, “U.S. jobs opening data points to skills mismatch.” The evidence was a modest rise in the overall rate of job openings from 3.4 percent to 3.5 percent. But if this is evidence of a skills mismatch then the biggest problem is in the restaurant sector where the jobs opening rate was 5.1 percent. Apparently there are just not enough people who know how to wait tables and wash dishes.
If we used the standard economist measure, we would be looking for rising wages as evidence of skills mismatch. There is not much evidence of that anywhere, as is pointed out later in the article.
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The NYT article discussing Republican efforts to limit the Fed’s power to boost the economy presented an overly narrow view of the issue of the Fed’s independence. It contrasted efforts by Democrats to make the Fed more accountable to the president and the Congress, with Republican efforts to make the regional Feds stronger by giving the banks more control. The latter was described as increasing Fed independence.
In fact, the Republican path would make the Fed more dependent on the financial industry. This has been a serious problem in the past. Undoubtedly the Fed’s failure to crackdown on the housing bubble was due in part to the fact that the financial industry was making a fortune on the issuance and securitization of junk mortgages.
A Fed that is overly dependent on the financial industry is also likely to be more prone to raise unemployment in order to reduce the risk of inflation. The cost of this policy would be millions of fewer jobs and lower wages for tens of millions of workers.
If we want a Fed that can act in the interest of the general public it makes sense to try to increase its independence from the financial industry. The Fed is an unusual regulatory agency in that members of the regulated industry sit directly on the board of its regulator. By contrast, other industries have to hire lobbyists to influence their regulators.
The NYT article discussing Republican efforts to limit the Fed’s power to boost the economy presented an overly narrow view of the issue of the Fed’s independence. It contrasted efforts by Democrats to make the Fed more accountable to the president and the Congress, with Republican efforts to make the regional Feds stronger by giving the banks more control. The latter was described as increasing Fed independence.
In fact, the Republican path would make the Fed more dependent on the financial industry. This has been a serious problem in the past. Undoubtedly the Fed’s failure to crackdown on the housing bubble was due in part to the fact that the financial industry was making a fortune on the issuance and securitization of junk mortgages.
A Fed that is overly dependent on the financial industry is also likely to be more prone to raise unemployment in order to reduce the risk of inflation. The cost of this policy would be millions of fewer jobs and lower wages for tens of millions of workers.
If we want a Fed that can act in the interest of the general public it makes sense to try to increase its independence from the financial industry. The Fed is an unusual regulatory agency in that members of the regulated industry sit directly on the board of its regulator. By contrast, other industries have to hire lobbyists to influence their regulators.
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Robert Samuelson comes down largely in the right place in arguing that the Fed should err on the side of raising employment in a context where we don’t know how far the unemployment rate can fall before triggering inflationary pressures. However, his warning that bad things happen if the Fed gets too carried away pushing high employment is misplaced.
First it is worth reminding everyone that the economics profession was far more confident (with far more evidence) back in the 1990s that the unemployment rate could not get much below 6.0 percent without leading to accelerating inflation. The profession was completely wrong in that belief as Alan Greenspan was able to prove by letting the unemployment rate fall to 4.0 percent as a year-round average for 2000 (without accelerating inflation).
The stories that the quest for full employment leads to bad things needs important qualifications. The main bad things in the 1970s were the OPEC price increases that quadrupled the price of oil in 1973-1974 and again in 1978-1980. These price increases would have led to enormous economic disruption even if the Fed had not been trying to sustain a high employment economy.
The other two bad stories, the stock bubble in the late 1990s and the housing bubble in the last decade both stemmed from an incredible failure of oversight by the Fed and other regulators. Both bubbles were easily seen by anyone with open eyes, and the recessions that would be caused by their collapse was 100 percent predictable.
The issue here is simply finding competent people to serve at the Fed and the relevant regulatory agencies. There has been much written about the skills shortage in the United States, but it should be possible to train enough people with the necessary skills to fill the small number of positions in question.
Robert Samuelson comes down largely in the right place in arguing that the Fed should err on the side of raising employment in a context where we don’t know how far the unemployment rate can fall before triggering inflationary pressures. However, his warning that bad things happen if the Fed gets too carried away pushing high employment is misplaced.
First it is worth reminding everyone that the economics profession was far more confident (with far more evidence) back in the 1990s that the unemployment rate could not get much below 6.0 percent without leading to accelerating inflation. The profession was completely wrong in that belief as Alan Greenspan was able to prove by letting the unemployment rate fall to 4.0 percent as a year-round average for 2000 (without accelerating inflation).
The stories that the quest for full employment leads to bad things needs important qualifications. The main bad things in the 1970s were the OPEC price increases that quadrupled the price of oil in 1973-1974 and again in 1978-1980. These price increases would have led to enormous economic disruption even if the Fed had not been trying to sustain a high employment economy.
The other two bad stories, the stock bubble in the late 1990s and the housing bubble in the last decade both stemmed from an incredible failure of oversight by the Fed and other regulators. Both bubbles were easily seen by anyone with open eyes, and the recessions that would be caused by their collapse was 100 percent predictable.
The issue here is simply finding competent people to serve at the Fed and the relevant regulatory agencies. There has been much written about the skills shortage in the United States, but it should be possible to train enough people with the necessary skills to fill the small number of positions in question.
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That would be an implication of research by Tufts University professor Joseph DiMasi. He found that it cost an average of $2.6 billion to develop a new drug in the United States. By contrast, the Wall Street Journal reported that a company in China developed a new cancer drug for just $70 million, less than 3 percent of DiMasi’s estimate.
Given the enormous difference in costs, the United States and the world economy would be much better served if we shifted drug development to efficient countries like China. The United States should instead focus on producing goods and services in which it has a comparative advantage. Unfortunately, our trade deals have been pushing in the opposite direction, trying quite explicitly to protect the U.S. drug industry by increasing the strength of patent and related protection. Of course the best outcome would be to move away from research financed by patent monopolies and moving toward more modern and efficient mechanisms.
(The $70 million estimate may not include any discounting for money spent in the past. The proper methodology would impute interest to money spent ten years ago as opposed to yesterday. It also is only the cost for a successful drug. It doesn’t factor in the cost of failures, as does DiMasi’s estimate.)
That would be an implication of research by Tufts University professor Joseph DiMasi. He found that it cost an average of $2.6 billion to develop a new drug in the United States. By contrast, the Wall Street Journal reported that a company in China developed a new cancer drug for just $70 million, less than 3 percent of DiMasi’s estimate.
Given the enormous difference in costs, the United States and the world economy would be much better served if we shifted drug development to efficient countries like China. The United States should instead focus on producing goods and services in which it has a comparative advantage. Unfortunately, our trade deals have been pushing in the opposite direction, trying quite explicitly to protect the U.S. drug industry by increasing the strength of patent and related protection. Of course the best outcome would be to move away from research financed by patent monopolies and moving toward more modern and efficient mechanisms.
(The $70 million estimate may not include any discounting for money spent in the past. The proper methodology would impute interest to money spent ten years ago as opposed to yesterday. It also is only the cost for a successful drug. It doesn’t factor in the cost of failures, as does DiMasi’s estimate.)
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