Reports from the Economic Front

by Martin Hart-Landsberg

Archive for March, 2010

Social Security, Again

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Just when you thought it was safe to go back into the water—the media has once again raised the specter of a “social security crisis.”  Let’s be clear—there are powerful forces that want to see a cut in social security benefits and even more importantly the privatization of the system.  And let’s be clear about something else—the social security system is not in trouble.  For a refresher on why I say this you might want to read some past posts of mine, for example this one and this one.

The real tragedy is that those who want to slash the program never miss any opportunity to raise new fears, fears which are largely groundless but which also go largely unchallenged.  For the latest just consider the headline of a recent New York Times article: “Social Security to See Payout Exceed Pay-In This Year.”

The article notes that in 2010 “the system will pay out more in benefits than it receives in payroll taxes, an important threshold it was not expected to cross until at least 2016, according to the Congressional Budget Office.”  And it also explains that this will happen because “payments have risen more than expected during the downturn, because jobs disappeared and people applied for benefits sooner than they had planned. At the same time, the program’s revenue has fallen sharply, because there are fewer paychecks to tax.”

But what does all this mean as far as the stability of the social security system?  Those seeking to dismantle the social security system are using the fact that social security payouts will be larger than revenue from payroll taxes (this year) to suggest that the system is hurtling towards insolvency.  However, the fact of the matter is that even this year the social security system will increase its surplus.

The reason is that the social security system owns trillions of dollars of U.S. government bonds that earn interest for the system.  The social security system will use part of this year’s interest earnings to cover this year’s deficit (and might have to do the same next year as well).  But the interest payments are so great that the social security trust fund will still continue to grow this year and the next as well, perhaps by as much as $100 billion a year.

In fact, according to Congressional Budget Office projections the social security trust fund will grow from $2.5 trillion in 2009 to $3.8 trillion in 2020.

Social security trustees had previously said that social security might run into trouble paying full benefits in 2041.  Now they are saying that this might happen in 2037.  That is right, we might have trouble 27 years from now.  And then again we might not—a lot depends on the economy.  And of course on our policies.

For example, social security is funded by taxes on wage and salary income.  However, there is a limit to how much income is subject to that tax.  Right now people pay taxes on their wage and salary income up to $106,800.  Earnings above that level are not subject to the tax.  This has become a real problem because of the explosion in income inequality.  In fact, according to the Wall Street Journal, if we were to remove that income cap the social security system would be safe as far as one can see into the future.

In short, we have a manufactured crisis.  It is up to us to make sure that those who want to destroy the social security system don’t succeed with their scare tactics.

The State Of The World Economy

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The general consensus is that a new Great Depression was avoided thanks to aggressive deficit spending by core capitalist governments.  Moreover, there are also signs that the Great Recession may be ending (which is not the same thing as saying that good times lie ahead).

Two well known economists, Barry Eichengreen and Kevin H. O’Rourke, have been comparing contemporary movements in key variables with those during the depression.  Their recent work (which incorporates February 2010 data) highlights the fact that despite improvement, world industrial production, trade, and equity markets remain significantly below their previous peak levels.   More specifically:

  • World industrial production “is still 6% below its previous peak. (At the trough it was 13% below its previous peak.)”

    eo-fig-1.JPG

    • World trade “remains 8% below its previous peak.  (At the trough it was 20% below its previous peak.)”

    eo-fig-2.JPG

    • World equity markets “are now 25% below peak. (At their trough they were 50% below peak.)”

    eo-fig-3.JPG

    Written by marty

    March 26th, 2010 at 9:48 am

    A Solution To The Jobs Crisis With A Chance of Adoption

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    It is clear that without dramatic structural change in the economy unemployment is going to remain a serious problem for years to come.  Since we dont have the political power necessary to force such a change we need to start thinking of second best solutions, which means solutions that those with the power will find acceptable.

    Happily the Onion has identified a policy that can at least help younger workers: cryogenically freeze college graduates until the job market improves.

    Well, perhaps I should just let the Onion speak for itself:

    New College Graduates To Be Cryogenically Frozen Until Job Market Improves

    WASHINGTON—In a bold new measure intended to address unemployment among young professionals, lawmakers from across the political spectrum agreed on legislation Tuesday to subsidize the cryogenic freezing of recent college graduates until the job market recovers.

    Grads would be cryopreserved immediately after receiving their diplomas.

    The bill, expected to swiftly pass in both houses, would facilitate the subzero preservation of any graduate of a two- or four-year educational institution. Sponsors of the initiative said that with the national unemployment rate at just under 10 percent, it only made sense for young job-seekers to temporarily enter a state of supercooled stasis.

    “Finding employment is extremely difficult for today’s college graduate,” Sen. Kay Bailey Hutchison (R-TX) said. “Our current economy offers few options for the millions of young men and women desperate to join the workforce.”

    “Were we to freeze these graduates at the height of vigor and ambition, however, there’s a chance we could revive them during a more prosperous time,” Hutchinson continued. “When the economy finally bounces back—10, 20, even 30 years from now—we’ll have an entire generation thawed out and ready to contribute.”

    The Frozen For Their Future Act reportedly calls for the installation of thousands of cryogenic tanks at college commencement ceremonies around the country. Upon receiving their diplomas, newly minted graduates will immediately make their way to preservation stations where their hearts will be artificially stopped using electroshock or a potassium-salt solution. Once a graduate’s blood is drained and replenished with an anti-crystallizing fluid, they will be submerged in liquid nitrogen, a process that will, in effect, put them into suspended animation until key sectors of the American economy such as real estate and information technology have rebounded.

    According to Walter Reardon of the Cryonics Partnership Inc., it will be essential for the freezing procedure to be conducted as quickly as possible.

    “Graduates will never be more primed to enter the workplace than at the exuberant moment they toss their caps in the air,” said Reardon, who claimed that cryogenics was the only hope for an estimated two-thirds of the nation’s students. “Wait even two days, and a graduate’s brain will begin to show the effects of fretting about the dismal job market. Wait six months, and you might have a permanently cynical underachiever resigned to his position at a mall sunglasses kiosk.”

    “Frankly, that person might not even be worth bringing back,” Reardon added.

    Under the proposed guidelines of the legislation, frozen graduates would remain in storage at a temperature of minus 196 degrees Celsius (minus 321 degrees Fahrenheit) until the unemployment rate fell to a more manageable 4.5 percent. All graduates would also be required to sign a waiver stating that they understood the risks involved, and that there was no guarantee the economy of the future would ever grow sufficiently to warrant their revival.

    While acknowledging this danger, Sen. Charles Schumer (D-NY), who cosponsored the bill with Sen. Hutchison, said smaller subsets of graduates could be reanimated as needed if special circumstances created a demand for their skills.

    “Let’s say there’s some sort of environmental crisis,” Schumer said. “Well, we could selectively thaw students who majored in ecology or climatology and provide them with jobs. The same logic would apply if, say, 300 years from now a real-world application for people with philosophy degrees somehow arose.”

    Soon-to-be college graduates were divided about the pending legislation. While some expressed reluctance to induce their own clinical death, other students seemed content to postpone their job hunting for a while.

    “Everyone I know is either unemployed or barely getting by,” University of Illinois senior Kim Levesque said. “If they want to put me on ice until there are more jobs out there, that’s totally fine with me. Not to mention the fact that I won’t have to think about my student loans for a while.”

    When reached for comment, a spokesman for loan provider Sallie Mae said that educational loans taken out by graduates in cryogenic storage would continue to accrue interest indefinitely at 6.5 percent.

    new-colleg-grads-chart-r.jpg

    Written by marty

    March 21st, 2010 at 1:30 pm

    We Need Louder Talk About Military Spending

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    Debates over health care, education, and employment policies always seem to end in the same place—with those opposed to serious reform arguing that “we” just don’t have the money to make any meaningful changes.  In fact, most of those opposing reforms argue that given the shortage of money we actually need to be thinking about cuts in our social programs.

    Somehow these debates keep taking place without any mention of our military spending, which keeps rising as if there is no shortage of money.  As Carl Conetta notes (also see chart below):

    With his decision to boost defense spending, President Obama is continuing the process of re-inflating the Pentagon that began in late 1998 — fully three years before the 9/11 attacks on America. The FY 2011 budget marks a milestone, however: The inflation-adjusted rise in spending since 1998 will probably exceed 100 percent in real terms by the end of the fiscal year. Taking the new budget into account, the Defense Department has been granted about $7.2 trillion since 1998, when the post-Cold War decline in defense spending ended.

    The rise in spending since 1998 is unprecedented over a 48-year period. In real percentage terms, it’s as large as the Kennedy-Johnson surge (43 percent) and the Reagan increases (57 percent) combined. Whether one looks at the entire Pentagon budget or just that part not related to the wars, current spending is above the peak years of the Vietnam War era and the Reagan years. And it’s set to remain there. Looking forward, the Obama administration plans to spend more on the Pentagon over the next eight years than any administration since World War II.

    The Project on Defense Alternatives has compiled a very useful collection of studies and articles analyzing our military spending here.

    budgethistory.jpg

    I Have Seen The Future: Work Till You Drop

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    I have seen the future: no more retirement; people will work until they drop.

    The conventional wisdom is that this is the richest country in the world.  Our wonderful market mechanisms have generated great wealth and opportunities which have contributed to a steady improvement in our quality of life.

    Well, the U.S. is a rich country and the economy has generated great wealth and opportunities but as for a steady improvement in our quality of life—I guess the question is for whom?

    Increasingly it appears that working people are facing a future of never ending work, and at jobs that will provide few if any benefits (material, social, or community).

    What leads me to say that?  CNN Money offers one reason:

    The percentage of American workers with virtually no retirement savings grew for the third straight year, according to a survey released Tuesday [March 9, 2010].

    The percentage of workers who said they have less than $10,000 in savings grew to 43% in 2010, from 39% in 2009, according to the Employee Benefit Research Institute’s annual Retirement Confidence Survey. That excludes the value of primary homes and defined-benefit pension plans [which are different from the more common defined contribution plans—they are pretty rare].

    Workers who said they had less than $1,000 jumped to 27%, from 20% in 2009.

    The article suggests that workers are going to have to get smart–delay their retirement and use their extra working years to boost savings.  But—are there really going to be good, stable, well-paying jobs for people?  There sure aren’t many now and the predictions are far from rosy.

    Compounding the problem is the growing attack on Social Security—a system that remains well funded and administered, although you would never know it from the media and most of our political leaders.  The “consensus” is that the most important thing that government needs to do to save the economy is cut social spending, and social security is on or near the top of most cut lists.  Tragically the consensus is plain wrong.

    Regardless, President Obama appears to have embraced this conventional wisdom.  Last month he created a new commission and charged it with developing suggestions for reducing the national debt.  He appointed former Clinton Administration Chief of Staff Erskine Bowles and former GOP Senator Alan Simpson as the co-chairs.

    Here is what The Hill has to say about this commission:

    The goal of the commission, created through an executive order, is to come up with a fiscal reform plan, which could include tax increases, spending cuts and changes to entitlement programs, aimed at bringing down the deficit to a level equivalent to 3 percent of the country’s economy. That’s the level the White House said is sustainable over the long term.

    “Everything’s on the table,” Obama said at a ceremony after he signed the executive order creating the commission. “That’s how this thing is going to work.”

    Sadly, everything being on the table means entitlement programs and the commission’s real mission is to provide political cover for an attack on the two biggest and most popular ones: Social Security and Medicare.

    Alan Simpson, for example, has spent years trying to dismantle the social security system.  Bowles is only little better.

    Unless there is real popular resistance the outcome is easy to predict.  The Commission will recommend cutting Social Security benefits and delaying the retirement age at which people can collect their full benefits.  It is worth remembering that 65% of those over 65 rely on Social Security for over half their income.

    Such a future—work harder, work longer and for less—-it sure is a good thing that this is such a rich country.

    Written by marty

    March 10th, 2010 at 1:43 pm

    Humanizing The Boss

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    Perhaps not surprisingly given the state of the economy, the media is trying to find ways of letting workers vent while simultaneously encouraging them to believe that reform is on the way.  Said differently, that those at the top will hear our cry and come to our aid.

    One of the best examples of this is the new CBS show Undercover Boss.

    Here is what CBS says about the show (which had its first airing on February 7, right after the Super Bowl):

    Each week a different executive will leave the comfort of their corner office for an undercover mission to examine the inner workings of their company. While working alongside their employees, they will see the effects their decisions have on others, where the problems lie within their organization and get an up-close look at both the good and the bad while discovering the unsung heroes who make their company run.

    Companies whose chief executives will make the undercover journey include such corporate giants as Waste Management (Larry O’Donnell, President and C.O.O.), 7-Eleven (Joseph M. DePinto, President and C.E.O.), Hooters (Coby G. Brooks, President and C.E.O.), White Castle (Dave Rife, Owner/Executive Board Member) and Churchill Downs (William C. Carstanjen, C.O.O.).

    The premiere episode of UNDERCOVER BOSS will follow Larry O’Donnell, the President and C.O.O. of Waste Management, as he works alongside his employees, cleaning porta-potties, sorting waste at one of their recycling plants, collecting garbage from a landfill and even being fired for the first time in his life. O’Donnell’s mission is to garner an up-close look at his company and workforce to see how and where improvements can be made from both an operational and morale standpoint.

    For a critical look at the show, including a discussion of how it is filmed, check out this Working Class Perspectives blog entry.

    According to a NPR blog discussion of the premier episode, when O’Donnell (the head of Waste Management) is pressed by a reviewer at a post-premier discussion to highlight some of the changes he might make in light of the terrible working conditions he observed, about the only thing he can suggest is a renewed corporate effort to better explain corporate policies to the workers.

    That should make everyone feel better–including the female trash collector who, “under the watchful eye of the . . . supervisor surveillance truck, . . .  is reduced to urinating into a tin can rather than compromising productivity by taking a bathroom break.”

    Written by marty

    March 5th, 2010 at 10:56 am

    Life At The Very Very Top

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    Ever wonder what life is like at the top?  Well, thanks to Visualizing Economics, here is a look at the average income reported to the IRS and the average taxes paid by the 400 individuals with the highest adjusted gross incomes (based on their tax returns) over the period 1992-2005.

    irs-top-400-2005.png

    To make it into the top 400 in 2005,  you had to report income of at least $100.3 million.  The average reported income for the group was $213.9 million.

    A Wall Street Journal article discussing these figures adds the following context:

    “Those numbers are really stunning,” says Michael Graetz, a professor of law at Yale Law School and a Treasury Department official under President George H. W. Bush. “One hundred million dollars is an enormous estate to be accumulated over a lifetime, and not what we think of as one year’s income for anybody.”

    The new data actually understate the group of 400’s remarkable performance. The income yardstick used by the IRS for its study is known as “adjusted gross income,” and it doesn’t include tax-exempt interest income from state and local government bonds. (An IRS spokesman says nearly 4.5 million investors reported tax-exempt interest income for 2005 totaling $57.7 billion.) Moreover, adjusted gross income, or AGI, is arrived at after deducting various items, such as moving expenses, alimony payments and the self-employed health-insurance deduction. (For those who file Form 1040 for 2007, it’s the amount shown on line 37.)

    For its analysis, the IRS relied only on what taxpayers actually reported, without making any independent effort to estimate unreported income. The report doesn’t identify anyone by name because of taxpayer-privacy laws. It’s also important to remember these figures don’t represent wealth or even lifetime earnings — merely income for a single year.

    It is hard to get good numbers on the super rich.  They are more than happy to fund studies on the poor–but for obvious reasons don’t like to have their own lives examined.

    Written by marty

    March 1st, 2010 at 10:11 am

    Posted in Inequality,Taxes