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November 15, 2011

Latest Posts from Economist's View

Latest Posts from Economist's View

"The Myth of the Wealthy Elderly"

Posted: 15 Nov 2011 01:17 AM PST

Dean Baker:

The Myth of the Wealthy Elderly, by Dean Baker: The austerity gang seeking cuts to Social Security and Medicare has been vigorously promoting the myth that the elderly are an especially affluent and privileged group. Their argument is that because of their relative affluence, cuts to the programs upon which they depend is a simple matter of fairness. There were two reports released last week that call this view into question.
The first was a report from the Census Bureau that used a new experimental poverty index. This index differed from the official measure in several ways; most importantly it includes the value of government non-cash benefits, like food stamps. It also adjusts for differences in costs by area and takes account of differences in health spending by age.
While this new measures showed a slightly higher overall poverty rate the most striking difference between the new measure and the official measure was the rise in the poverty rate among the elderly. Using the official measure, the poverty rate for the elderly is somewhat lower than for the adult population as a whole, 9 percent for the elderly compared with 14 percent for the non-elderly adult population. However with the new measure, the poverty rate for the elderly jumps to 14 percent, compared with 13 percent for non-elderly adults.
By this higher measure, we have not been nearly as successful in reducing poverty among the elderly as we had believed. While Social Security has done much to ensure retirees an income above the poverty line, the rising cost of health care expenses not covered by Medicare has been an important force operating in the opposite direction. ...
It is also worth remembering that the Medicare premium is projected to rise considerably more than the cost of living each year. This means that as retirees age, rising Medicare premiums will be reducing the buying power of their Social Security check each year.  And this is the median; half of all seniors will have less income than this to support themselves.
This is the group that the Very Serious People in Washington want to target for their deficit reduction. While the Very Serious People debate whether people who earn $250,000 a year are actually rich when it comes to restoring the tax rates of the 1990s, they somehow think that seniors with incomes under $30,000 a year must sacrifice to balance the budget. There is a logic here, but it ain't pretty.

Raising the payroll tax limit for Social Security would provide needed revenues in a way that is skewed heavily toward the wealthy. However, it would also be a tax increase and we can't have that. But cutting benefits and putting more of the elderly in jeopardy of living in poverty? Apparently that's not a problem.

The Optimistic Case for Italy

Posted: 15 Nov 2011 01:08 AM PST

Antonio Fatás does his best to paint an optimistic picture for Italy:

Italy: not good but we have seen this before, by Antonio Fatás: It is hard to find much optimism by looking at the Italian economy today:... I will do my best to be a contrarian and argue that maybe it is not as bad as it looks. Or maybe it is, but ... there is some hope. ...
Below is the Italian government debt expressed as % of GDP. There are two lines, the gross and net values of government debt. Net debt is a more appropriate measure as it ... is equivalent to what is referred to in the US as "government debt held by the public". ...

...If we focus on net debt the current level of debt is significantly below what it was in 1994. So Italy has seen similar or higher levels of debt before.
We can then argue that those times were different, that Italy had its own currency (although it was heading towards the Euro) and that a combination of high inflation and fast growth allowed them to stabilize that high level of debt.
Certainly it was not growth that saved them. GDP growth in Italy has been low during this period of time..., clearly below the growth in other Euro countries... What about interest rates? Maybe the government of Italy did not face the high interest rates that they face today? Below is a chart of the 10-year interest rate for Italian government bonds.

As it is clear from the chart, financial conditions back in 1994-1995 were extremely difficult for the Italian government with nominal interest rates as high as 12%. Much higher than the current levels of 6-7% that look unsustainable. Of course, what matters is not nominal rates but real rates (what really matters is the difference between interest rates and growth but I do not have that chart ready in my computer). Below is a chart with real rates that confirms that interest rates today remain low compared to the ones faced by Italy in 1994-95.

Here is what I learn... To my surprise, and the surprise of many, Italy has managed to sustain a very high level of debt even when facing high interest rates by generating large enough primary surpluses. And it has done so with a political environment that has been volatile and in some cases driven by very poor choices. Does it mean that they can keep going like this forever? No... But ... it is interesting to see when we look back at history that a similar episode did not automatically lead to default even with poor economic policy choices. And if you want to be even more optimistic, there is some hope that this crisis is not wasted and the future Italian government finds an even better way to manage a very difficult situation.

Links for 2011-11-15

Posted: 15 Nov 2011 12:06 AM PST

"Congress is Indeed Subject to Insider Trading Laws"

Posted: 14 Nov 2011 03:33 PM PST

Richard Green responds to a 60 Minutes report saying that Congress is not subject to insider trading laws:

David Barker writes that Congress is indeed subject to insider trading laws, by Richard Green: He points me to a paper by Donna Nagy.  I will be curious to see if a prosecutor does anything with it.

Here's the abstract to the paper:

Insider Trading, Congressional Officials, and Duties of Entrustment, by Donna M. Nagy, Indiana University Maurer School of Law, Boston University Law Review, Vol. 91, p. 1105, 2011 Indiana Legal Studies Research Paper No. 181: Abstract: This article refutes what has become the conventional wisdom that insider trading by members of Congress and legislative staffers is "totally legal" because such congressional officials are immune from federal insider trading law. It argues that this well-worn claim is rooted in twin misconceptions based on: (1) a lack of regard for the broad and sweeping duties of entrustment which attach to public office and (2) an unduly restrictive view of Supreme Court precedents, which have interpreted Rule 10b-5 of the Securities Exchange Act to impose liability whenever a person trades securities on the basis of material nonpublic information in violation of a fiduciary-like duty owed either to the issuer's shareholders or to the source of the information. It also argues that nonpublic congressional information constitutes property which, like congressional funds and tangible property, rightfully belongs to the federal government and its citizens.

I will also be curious to see if there's any follow-up on this point. In any case, this unfair advantage that Congress has needs to be stopped.

Economists as Imagineers?

Posted: 14 Nov 2011 02:34 PM PST

The editors at Reuters asked if I'd like to respond to an essay by Roger Martin on "The limits of the scientific method in economics and the world." I said I would:

Should economists be "imagineers" of our future?

[My response will make more sense (I hope) if you read Roger Martin's essay first.]

Rising Risks of Recession

Posted: 14 Nov 2011 02:07 PM PST

The situation in Europe has increased the chances of a recession in the US (extract of extract via):

Future Recession Risks, FRBSF Economic Letter: ...odds are greater than 50% that we will experience a recession sometime early in 2012…. Prudence suggests that the fragile state of the U.S. economy would not easily withstand turbulence coming across the Atlantic. A European sovereign debt default may well sink the United States back into recession…

The Fed appears to be taking some precautions, though perhaps not enough, and a wise Congress would be talking about how to do the same, i.e. how to take action now to insure against the rising future risks. Unfortunatley, wisdom is not the strong suit of this (or any?) Congress, and we'll be lucky if it doesn't make things worse.

"The Latest from the Not-So-Super-Committee"

Posted: 14 Nov 2011 09:45 AM PST

Stan Collender:

Not-So-Super Committee Seriously Considers Becoming A Circular Firing Squad, by Stan Collender: A quick note... This story by Robert Pear in today's New York Times about the latest from the not-so-super committee tells you everything you need to know about the status of the negotiations. According to Pear, one of the main plans for reducing the deficit the committee apparently is considering is to set up a process by which tax increases would be considered by the House Ways and Means and Senate Finance Committees at some point next year.
Does anyone else see how ridiculous this is? 
The anything-but-super committee was set up because the regular committees and legislative process could not agree on what to do about the deficit. But rather than make those decisions, the super committee may decide that the best way to deal with this situation is to throw it back to the two tax-writing committees that, because they were unable to come up with a plan in the first place, gave the job to the super committee.
And the most inane, stupid, absurd, remarkable thing about this is that the definitely-not-super committee will claim that this make-someone-else-do-the-hard-work-later process complies with the legal requirement to reduce the deficit by $1.2 trillion.

The fact that they are willing to make cuts in social insurance and other programs but cannot agree on revenue increases says a lot about the relative power and influence of various groups in Washington.

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