Daniel Gross on Social Security and Income Insecurity

A very nice piece by Daniel Gross, taking off from Gosselin, Moffitt, and Hacker. He gets bonus points by citing the extremely smart and thoughtful Raj Chetty:

The New York Times > Business > Your Money > Economic View: Social Security as Dramamine, by DANIEL GROSS:

President Bush's plan to transform Social Security from an insurance program that guarantees a minimum income into something more closely resembling a 401(k) investment program isn't going very well.... [E]conomics could help explain the public's reluctance, too.... As we learn more about income volatility in the information age, some scholars say, Social Security - an insurance program designed for the industrial age - may be even more essential.

Income volatility has long been a hallmark of the American economy.... [S]cholars have concluded that incomes are much less stable - i.e., much more volatile - today than they have been in the past. 'There has unequivocally been general upward-trend income volatility since at least 1975,' said Bruce A. Moffitt, the Krieger-Eisenhower professor of economics at Johns Hopkins University.... According to a measure of volatility constructed by Jacob S. Hacker, a Yale political scientist, which tracks the five-year moving average of family incomes, income volatility rose 88 percent between 1978 and 2000.... A series of articles last year in The Los Angeles Times, written by Peter G. Gosselin, who worked closely with Professor Moffitt and other scholars, reported that in the 1970's, income for middle-class Americans tended to fluctuate by 16 percent a year. But in the 1980's and 1990's, middle-class incomes fluctuated an average of 30 percent. For those whose earnings placed them in the bottom fifth, income volatility rose from 25 percent in the early 1970's to 50 percent in recent years....

[I]ncome volatility can wreak greater havoc now than it did in the past. 'The old view among economists was that income volatility didn't affect consumption much,' said Raj Chetty, an economist at the University of California, Berkeley. It was generally thought that when families' incomes fell sharply and unexpectedly, they would borrow, tap into savings or send a second adult (frequently a mother) into the work force rather than sharply reduce consumption. But, Professor Chetty said, 'that no longer seems to be the case today.' Why? Many families already rely on two incomes. What's more, fixed commitments have risen as a percentage of total income....

THE factors that functioned as internal shock absorbers for families have weakened. And so, too, have external buffers. Over the last three decades, the percentage of workers covered by defined-benefit pension plans and employer-provided health insurance - guarantees that provide ballast for fluctuating incomes - has declined. Add this to the trend of rising volatility - especially for people in the lower and middle income levels - and it's easy to understand the reluctance to transform a government program that guarantees seniors an income. 'Social Security provides a vital kind of insurance,' Professor Hacker said. 'The real issue lurking behind this debate is whether we should have a program that provides the bedrock protection against economic risk.'

Comments

[wishful]

Every citizen can understand this presentation of the situation. Thank you.

[anne]

When the Senate passed a Medicaid bill last week, there were a number of tax cuts included. Tax cut on capital gains and dividends. Though there was a tax cut on Social Security benefits, I did not think clearly enough about this cut. The Senate has just passed a proposal that will shorten the financial solvency of Medicare.

http://www.nytimes.com/2005/03/20/opinion/20sun1.html?ex=1111467600&en=dea1dd27904b7958&ei=5070

Washington's Fiscal Meltdown

Before leaving town for a two-week spring break, Congress indulged in its own form of March Madness. The Republican majority in the House and the Senate passed budget blueprints for 2006 that slash domestic spending by upwards of $150 billion over the next five years. Yet they still managed to increase the projected deficit by more than $125 billion over the same period (and by more than $1 trillion through 2015). How is it possible to produce that much red ink while slashing spending? Easy. Just cut revenue by giving huge tax cuts to - surprise, surprise - high earners and wealthy investors. The lawmakers will not make any final decisions until they cobble their separate proposals into one official budget later in the year, but the early signs are all bad - pointing to the least sensible tax cuts for the least needy recipients with no thought to the exploding deficit....

And then there is the 11th-hour tax cut slipped into the Senate proposal. It would repeal an income tax on Social Security benefits that applies to the wealthiest 20 percent or so of beneficiaries and whose revenue is dedicated to the Medicare hospital trust fund. The repeal would accelerate the fund's projected insolvency by four years, to 2015 from 2019. Now there's a plan! Give the best-off elderly a tax break and put all of the elderly who may have to go into the hospital at greater financial risk....

[William Palmer]

A war between the US and China:

Its such a weird thing to even imagine but it may happen.

China has orbited the earth in a manned space vehicle, so they can get a bomb to New York if they really want to - I guess the threat is enough that the US will not nuke Chinese population centers, and maybe would not use nuclear weapons in the conflict at all.

As far as I know, China cannot get troops across the strait under fire.

So I think, and I don't know what I'm talking about, that if Taiwan was to declare independence today, China would bomb some defenses and declare Taiwan's ports a war zone where trade is not allowed.

Then they would get at least one commercial vessel, enough to make it more expensive to get goods to or from Taiwan, but not enough to choke Taiwan off, since they don't have the navy they would need to choke Taiwan off with the US in the area.

Then we would see a pretty cold war - not much shooting, just more expensive shipping - and a lot of pressure would be exerted on the Taiwanese people and the world to recant and accept that Taiwan is part of China. I guess sooner or later Taiwan would hold elections and a pro-China government would come to power.

China may destroy one or more US Naval vessels that is helping to prevent the blockade. The US would retaliate with attacks on military installations near in the area along with an all-channel diplomatic effort to come up with a formula that prevents a wider war.

I can't really imagine getting from there to WWIII. If there is going to be WWIII China would rather it be in 2015 than 2005.

[Jim Harris]

It is odd that the authors seem to have analyzed the volatility of income but go on to make pronouncements about the volatility of consumption, without doing the same scrub of the data. Or maybe this is just the way the research has been quoted in the press.

Anyway, my impression is that consumption is less, not more, volatile than it used to be. I'll have to get my hands on the original research.

[anne]

Jim Harris

The guess here as well is that volatility of consumption has lessened, but guessing only. The sense I have is that assets are increasingly used in borrowing to stabilize consumption. This presents a problem as well, and we need to further explore the matter.

[kharris]

Anne and Jim,

The stinkin' Bloomberg box says it doesn't have enough data on real personal consumption to do a volatility calculation, and I am far too lazy to import the data into a spread sheet and do the actual work. However, if you were to go to economagic.com and chart real personal consumption expenditures, chained 2000 dollars, with a y/y change superimposed, you'd see a sharp drop in the volatility of the series. In particular, you'd notice that the most recent recession did not involve a decline in consumer spending. Like a lot of other US economic series, swings in consumption seem to drop off in the mid-1980s.

While aggregate income may not be what we are interested in, that's all that economagic offers. The y/y change in real disposable personal income shows a similar break in the mid-1980s, becoming less variable in recent years. I have no doubt there may be increased income volatility within and between income quintiles, but on a simple, dumb aggregate basis, it doesn't seem to be there.

[Cranky Observer]

> So I think, and I don't know what I'm talking about,
> that if Taiwan was to declare independence today, China
> would bomb some defenses and declare Taiwan's ports a
> war zone where trade is not allowed.

Then Taiwan would test one of those nuclear weapons they don't have, firing it to a test range to the east on a ballistic missile they also don't have and hitting the declared target within a few meters.

Oh, you don't think they are thinking about that?

Cranky

[anne]

KHarris

Nice. Provisionally, there does seem to be more consumption stability. Now, as we look more closely we must think what this might mean.

[mrjauk]

In fact, many right-wing pundits have argued that we should use consumption patterns as a better indicator of well-being than real incomes, precisely because over the last two decades consumption volatility has decreased, while income volatility has done the opposite.
This decrease in income volatility has, of course, come at a cost--huge mounting debts on the ocnsumer, many of whom, in the midst of a real estate bubble, are using their homes as personal ATMs.
I would suspect that once interest rates rise a little bit more, the tapped-out and debt-ridden consumer just will not be able to spend as much as s/he has been spending the last fifteen years or so.

[bhaim]

"...being able to purchase groceries 20 percent cheaper at Wal-Mart does not make up for the wage loses...You need more temporary protection for the losers."

Paul Samuelson
New York Times
September 9, 2004

[Barry Freed]

OT Sorry, but this is absurd. I think it's high time for another Crooked Timber is down post. Why not solicit jokes? Like:

Fallen Timber.

OR

Q. If a Crooked Timber fell in the forest (or blogosphere, if you prefer) will it make a sound?

A. How will we ever know without CT's erudite philosophers telling us? It is to despair.

[David]

see also Gross on Mankiw

http://slate.msn.com/id/2115122/

[Dubblblind]

If I may offer up an image of what the Bush administration is up to in general and with Social Security in particular it would be that of ushering the not-so-well-off up to the edge of a cliff and *then* pulling the rug out from under them. All done with a sense of compassion of course.

[Anna]

The NYTimes Link Generator at
http://nytimes.blogspace.com/genlink
creates a rot-free link:
(remove the space to use)
http://www.nytimes.com/2005/03/20/business/yourmoney/20view .html?ex=1268974800&en=3520d91103c4e22b&ei=5090&partner=rssuserland

[Lee A. Arnold]

Where does one get the latest numbers on household debt?

[David]

lee -- federal reserve should be a good source. see, for example, http://www.federalreserve.gov/releases/housedebt/default.htm

for household debt ratios

[bncthor]

Lee..You can find this information at...

http://mwhodges.home.att.net/debt-summary-table.htm

[Scott McArthur]

I like this part of the D Gross article in today's Slate:

It's tough to blame Mankiw for not grasping why people other than Bush-hating, paternalistic socialists may not want to rip up Social Security. For the past two years, he's been working at the White House—the one place more insulated from the reality of today's economy than Harvard.
Daniel Gross (www.danielgross.net) writes Slate's "Moneybox"

I've been saying for a while now that today's "god damn out of touch no good pointy head ivory tower intellectuals" are the conservative thinkers on campus. In the 1970s you could say that the out of touch were liberals, but the worm has turned my friends. Liberals are much more grounded today and conservatives are more frivolous. Maybe being out of favor does that to a school of thought, makes it smarten up. A natural life cycle of ideas?
Makiw's behavior is the latest indicator of conservative wooden headedness.

[Auros]

Hah, David beat me to posting the Moneybox analysis of Mankiw. Gross is, as usual, spot-on.

[kharris]

Mr Jauk,

It does make sense to watch consumption in assessing welfare, but not on a simple-minded basis. If consumers are trading away future consumption in order to consume now, we have a bit of a dilemma. On the one hand, we must give some credence to the notion that consumers know what they want. On the other, there is a clear cost to consuming more than one earns.

Watching consumption doesn't mean we shouldn't watch income, because income provides the means for savings – that is, for future consumption. Just as some may want to consume today at the expense of tomorrow, others may want to save today, spend tomorrow. Monitoring welfare only through consumption, rather than income, misses a lot that we know about time-value considerations, a lot that we know about risk avoidance.

Let's ignore the self-serving element of right-wingers pointing to consumption (which kept going up under their guy) while ignoring income (the disparity in which grew under their guy). There is something very true to character in a conservative, a real conservative, giving attention to a series that represents stability and the promise of self-correction in the economy. That is a traditional starting point for conservative economics. Just leave it alone and it'll fix itself. Those of a more interventionist mind look at the more volatile series and figure there has to be a way to make the economy work better.

Scott,

Yep. Think of Paul Wolfowitz (Yale, Johns Hopkins), Doug Feith (Washington lawyer), John Bolton (lawyer), Condi Rice (Stanford, Hoover). Folks who get it "right" on paper, but can't figure out reality to save their souls.

[jml]

kharris:
"Reality"? Wow, are you out of touch. Obviously a follower, not a leader.

[Nicholas Mycroft]

jml-

first laugh all day thank you.

[Elaine Supkis]

Consumption numbers are more like monitoring a fever that is killing the patient. We consume vast amounts of fuel per capita as well as in aggregate. Encouraging more consumption=disaster because this means we go deeper into the red vis a vis other empires like the empire of China.

This is very bad indeed. The biggest employer in America is Walmart which produces nothing.

Fixing what is broken---more money won't work. More debt is deadly. More spending is a catastrophe yet this is what the GOP is frecklessly encouraging. Exactly those things that are the worst possible forces to unleash.

[bncthor]

...."biggest employer in America is Walmart which produces nothing."

Only if you have in mind automobiles, houses, etc. (tangible items). However, Wal-Mart does produce a service, albeit a retail one. Services represent an increasing share of U. S. economic output.

[Steve in Seattle]

A big thank you to Dr. Eric Wibbels, political economist at the University of Washington, for instructing me well enough that I could figure this out on my own.

[nanute]

This may be slightly off topic. If consumption is the fuel that drives the domestic economy, and the recently passed bankruptcy bill has the effect of draining "consumption dollars" away from the rest of the domestic market, what is the net effect on the over all domestic economy. Sounds like the law of unintended consequences may be in the offing.

[elizabeth_a]

As one with microeconomic tendencies, it drives me nuts to see this massive emphasis on aggregate numbers to talk about the fate of joe blow. Even " medians" don't add a lot of clarity to what is really going on and the likely impact of poicy changes.

[anne]

Elizabeth

There is much here on the household level we do not understand.

[optional]

Since the only security on credit card loans is the borrower's ability to earn, it seems to me that an increase in income volatility would be a cause for tightening that line of credit. The bankruptcy bill does exactly the opposite: it leaves the lines of credit open, while more tightly tying the borrowers to their debt. For this reason, it strikes me as not only irrational, but contrary to the expected dictates of the market. Moreover, its possible consequences seem extremely destructive. Against the "quaint and obsolete notion" that most people are at the mercy of market forces beyond their control, a notion that frames bankruptcy and unemployment insurance as protections against the unpredictable consequences of this economic system, this bankruptcy law serves to protect lenders from the losses they should take when they fail to allow for things like income volatility when they extend unsecured credit. This protection for irresponsible and predatory lending commits a borrower's future income to settling debts, thus reducing their ability to consume and creating an incentive for them to seek additional sources of income to meet those obligations. It seems to me that this increased need, and competition, for jobs will create a downward pressure on wages, whose decrease would serve, both, to further exacerbate this situation and reduce consumption. The extent to which this will produce a form of 'free laborer's' debt peonage, akin, say, to that created by the company store, seems debatable. More than anything else, though, this special interest legislation seems to threaten to undermine this country's consumption driven economy.

[Alex]

It surprises me that none of these writers are looking at another factor driving increased income volatility, technology. As a self-taught web developer, I have seen new technology after new technology enter the field, each time causing a tremendous scramble as working developers need to ratchet up their skills to make smaller and smaller paychecks. The nail in the casket of computer work is on the horizon, code generation. In the very near future, computer programming as a field may not exist, the tasks currently handled by programmers will be done by software.. basically software writing other software. Some will hang on, by adapting - but it is inevitable that the total number of jobs in each field will dramatically decrease.

The same thing is happening everywhere. Open standards mean modular architecture, software and hardware that easily plug into other software and hardware. We are about to see a whole new generation of home and office electronic devices that automatically network to each other using technologies like Bluetooth and IP version 6, which will provide an unlimited number of Internet addresses, and enabling all sorts of new functionality by its ubiquity. The net result of this is that a LOT of people whose jobs currently involve moving information between machines will be made redundant. The machines will talk to each other and rules engines will make most decisions automatically. Jobs will become scarcer and scarcer as all but the creative and executive jobs disappear.

Nobody seems to be thinking about this, but its pretty much an unavoidable reality. There won't be many jobs created with these new technologies, and they will destroy many other jobs..

I'm not suggesting a solution, just explaining that this and many other new round of changes are coming, with the ones I mention beginning within the next one or two years.

Millions will lose their jobs, and those jobs wont ever come back..

[Alex]

Sorry, I didn't make it clear that the changes I mention will, I think, effect all jobs, not just computer ones. Even agricultural, sewing and driving jobs will eventually be done by machines.. Moores Law says that hardware to do a certain job decreases in cost by one half every 18 months. If anything, we have been going faster than that. We have still not seen the full impact of computers , then Internet and then wireless technologies. But they are progressing rapidly.
We also see a phenomenon that I would describe as the commoditization, standardization, and 'dumbing down' of all skilled jobs.. Even doctors, now, are being pressed to speed up and much of their work is being done by machines.. Quality of care does not necessarily suffer..(unless money is more important than lives, as we have in the US)

The end of wage labor means serious stress on the social contract. I don't know what we can do..but we will have to do something that preserves the world we love..

Otherwise I see rough waters ahead.. very rough waters..

Greed is killing us... American society is like an addict that can never say no to the more powerful members of itself in the interest of a better life for all..

They will do or say anything to divert us from thinking about the nonsustainability of our nations path..

But its not going away... Better to start a debate on this now than later...

Or we will end up with fascism..

[Auros]

I agree with you in principle, though I think the time scale is longer than you think. Also, you've drastically over-stated Moore's Law, which was a generalization solely about the number of components you can fit on a chip.
http://en.wikipedia.org/wiki/Moore%27s_law

It said nothing at all about cost. It didn't even talk clock-cycles, though that happens to be roughly inversely proportional.