The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.

Authors for macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.

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November 30, 2004

Taking Me To Task

Max Sawicky, at maxspeak.org, begs to differ with my previous post claiming it is misguided to focus on the deficit in the debate on social security reform.  (You can also find his comment here).  He seems to be concerned about the wisdom of borrowing on speculation of future gains.

Haven't we heard in the past that some current added borrowing will pay for itself with some gain in the future?

Well, sure, but I wasn't arguing that all deficits are irrelevant.  Quite the opposite.  What I was trying to say was that a particular deficit can be judged only by the spending and tax policies that it represents.   It seems to me deficits that that do little more than translate promised future payments into explicit promissory notes -- something akin to Chilean recognition bonds, for example --  change absolutely nothing.

Time inconsistency is, of course, a serious issue.  (As  recognized in the awarding of this year's Nobel prize in economics.)  Healthy skepticism about government borrowing today, backed by the promise to take specific actions in the future, is just plain sensible.  But in the case of social security reform, those future actions will almost certainly be associated with not delivering public benefits that would otherwise require more borrowing or taxation to finance. That seems like an easy promise to keep.

(If you just can't get enough of this, surf on over to Vox Baby and Angry Bear.)

UPDATE: Andrew has a much more extensive response here.

November 30, 2004 in Social Security | Permalink


I think David and I are largely in agreement. I have posted my response to Max as well, over at Vox Baby.

Posted by: Andrew Samwick | December 01, 2004 at 12:20 AM

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3rd Quarter GDP -- Still Looking Good

The Bureau of Economic Analysis released revised GDP statistics for the third quarter today.  The news was reasonably good.

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 3.9 percent in the third quarter of 2004 according to preliminary estimates released by the Bureau of Economic Analysis.  In the second quarter real GDP increased 3.3 percent.

The advance 3rd quarter estimate of annualized GDP growth was 3.7 percent.  While output growth was robust, price level growth was modest.

The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 1.8 percent in the third quarter, the same as in the advance estimate; the index increased 3.5 percent in the second quarter.  Excluding food and energy prices, the price index for gross domestic purchases increased 1.6 percent in the third quarter, conmpared with an increase of 2.5 percent in the second.

However, it appears that markets today had their hearts set on bad news. This, from the AP (as found in the SignonSanDiego.com):

Stocks sagged Tuesday as sliding consumer confidence trumped the latest report on the nation's gross domestic product, which grew at a faster pace than expected.

On the other hand, here's the more important part of the story.

Still, the major indexes ended November with their best monthly performance for the year.

November 30, 2004 in Data Releases | Permalink


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November 28, 2004

Keeping The Eye On The Prize In The Social Security Debate

Yes, yet another Social Security post.  But, hey I don't make the news.  Today's motivation is this NYT article, which I am going to use an excuse to offer my view regarding those issues in the reform debate that are essential, and those that are red herrings.

Point 1: An increase in the deficit is not equivalent to a lack of fiscal discipline.  From the Times article:

Many Democrats say that the costs associated with setting up personal accounts just make Social Security's financial problems worse, and that the United States can scarcely afford to add to its rapidly growing national debt...

"The president does support personal accounts, which need not add over all to the cost of the program but could in the short run require additional borrowing to finance the transition," [director of the White House's Office of Management and Buddget Joshua] Bolten said. "I believe there's a strong case that this approach not only makes sense as a matter of savings policy, but is also fiscally prudent."

Either of these positions could be right, of course, depending on the details of the policy.  But a basic truth is that Social Security's financial problems relate to the flow of payments and revenues over time.  Otherwise, everything would be just perfect as it stands, since Social Security revenues currently exceed benefit payments (and will for several years to come).  Whether the deficit (on the books of the Social Security system or the government more generally) increases as a result of any particular reform program is quite beside the point of whether the system is in balance or imbalance.  What matters is what the policy implies for the present value of payments and receipts.

A corollary:  The discussion of what happens to current tax collections is beside the point.

Borrowing by the government could be necessary to establish the personal accounts because of the way Social Security pays for benefits. Under the current system, the payroll tax levied on workers goes to benefits for people who are already retired. Personal accounts would be paid for out of the same pool of money; they would allow workers to divert a portion of their payroll taxes into accounts invested in mutual funds or other investments...

But the White House has never answered fundamental questions about Mr. Bush's plan. In particular, it has not explained how it would deal with the financial quandary created by its call for personal accounts.

Fair enough, but the important quandry has virtually nothing to do with the balance of receipts and outlays in the short run.  It has everything to do with the long-run strategy for matching the present value of receipts and outlays over decades and decades into the future.

Point 2: All debt is created equal.

Opponents of Mr. Bush's approach say that Social Security's financial problems can be dealt with more easily without the addition of personal accounts, and that any large-scale borrowing would erase the presumed economic advantage of establishing the accounts: spurring more national savings, a goal that nearly all economists agree is worthy and important. Any increase in private, individual savings, they say, would be partly or wholly offset by an increase in public debt.

The idea here is that deficits by themselves encourage more spending.  Whether this is so is a longstanding matter of controversy among economists.  But if there is a circumstance in which it may not be true, this is surely it.  Take, for example, something akin to the Chilean reform program.  For purposes of this discussion, there are two essential parts.  First, workers who opt-in to a private saving account agree to forego the accumulation of any further publicly-provided pension benefits.  Does the deficit go up?  Sure.  Revenues that were previously available are no longer there.  But down the road, when previously promised benefit liabilities would have come due, there are none.  What's the problem?

The second, related, element of the Chilean reform was the creation of "recognition bonds" that gave workers a credit for accumulated benefit promises if they opted out of the state-provided pension system into private retirement accounts.  These bonds added to theexplicit public debt,  but what did they change in reality?  Did they not simply "recognize" the liability that existed under the existing social security system.  All that happened was that an explicit (in Chile's case, marketable) debt instrument was substituted for an implicit one.  As long as the value of the bonds equal promised benefit payments in present value, this sort of transfer from "off-the-books" to "on-the-books" makes absolutely no difference to the government's long-run budget balance.

Furthermore, this transaction should make little difference to workers.  The debt created by recognition bonds does not really change the private sector's wealth.  Though it might be argued that explicit bonds are more certain than promised benefits from the holders' point of view, and affects private spending decisions through that channel, I'd argue that this is not what most of the participants have in mind when obsessing on the deficit.

Point 3: Accounting is already creative.

In an effort to pressure the White House to acknowledge some of the financial trade-offs in its approach, Democratic leaders in Congress this week asked Mr. Bush to include in his next budget an accounting of the money that would be needed for his Social Security plan.

Only by including such figures in the budget, the Democrats said in a letter to Mr. Bush, "will Congress and the American people be able to weigh the difficult trade-offs between large-scale borrowing, Social Security benefit cuts, tax increases, and other spending reductions that may be required to fund your Social Security private accounts proposal. "

I'm all for that, but if we are going to do it we ought to fairly account for the true magnitude of the "debt" under the status quo as well.  A start would be to use so-called generational accounts -- which summarize the government's fiscal balance in terms of future, as well as current, reciepts and outlays -- as a benchmark.

This is, in fact, the basis of each point I am making.  The deficit is, pure and simple, a pretty poor basis on which to evaluate the pros and cons of any fiscal policy.  What matters is how much we spend and what we spend on, how we collect the revenues and who we collect them from, over the long haul.  Debate about the short-run deficit is a diversion from the important business.

November 28, 2004 in Social Security | Permalink


Isn't it radically inconsistent to say (cash-flow) deficits matter, but that a long-term in-go (e.g., lower projected Social Security benefit payments) washes out a short-term out-go (a payroll tax diversion to individual accounts, replaced by additional borrowing)? Haven't we heard in the past that some current added borrowing will pay for itself with some gain in the future? If you think that, for instance, the returns to pre-natal care are subject to dispute, what about the two-thirds of the Social Security Trust Fund shortfall derived from years beyond the next 75, lo unto eternity?

Posted by: Max Sawicky | November 30, 2004 at 09:57 AM

Love the blog, Mr. Altig. Someone exhorted me recently to turn on my trackback facility (I am also on Typepad). I did, and have been quite pleased, so I pass that advice to you. On the menus, it is Weblog/Configure/Display in order to turn on the trackback option.

As to Max's question about deficits, and much as I hate to match sources and uses, it seems to me that the Social Security privatization plan amounts to the government borrowing a trillion dollars and requiring the recipients to re-invest it in the capital markets.

My understanding is that IF deficits matter, it is because of their impact on national savings - in the privatization case, the net impact on savings is zero.

Posted by: Tom Maguire | December 03, 2004 at 04:19 PM

A short note should say it all: the real shortfall v. an Accounting shortfall is in the General Revenue Budget, not the Social Security Fund. Fund subscribers (Labor contributions)made the financial transfers to keep the SS Fund solvent. Keeping the SS Fund Accounting solvent would require a two percent increase in the FICA tax rate, or extension of the liability to somewhere into the $140k range.

The real trouble is the General Revenue Fund, which Bush refuses to finance with efficient taxation. Political decision in Washington terminated any SS Fund value by spending the funds as general revenue. Tax law equivalent to the 1986 tax rates and credits would allow the General Revenue Budget to substitute financing for the SS Fund (which it owes). lgl

Posted by: lgl | December 16, 2004 at 04:40 PM

I like the point you make on fiscal discipline. I would assert that the argument that "borrowing" in order to fund the present value deficit of social security is somehow fiscally irresponsible is flawed. For one, the borrowing has already in fact occured-the obligation (or series of millions of small obligations) has already been accepted by the Federal Government. That means what we are really talking about is a re-financing. Indeed, the fact that it exists yet is essentially not explicitly being recognized as a formal liability could be argued to be fiscally irresponsible itself, since it pushes off the inevitable problem of how that liability will be formally financed.

I only hope that we are lucky enough to have <5% long bond yields 10 years from now when there is little choice but to "borrow" to re-finance this stream of obligatiions. Otherwise we might be faced with the choice of borowing at high rates or increasing payroll taxes on-the-spot on a massive scale.

Posted by: Chris Donabedian | November 22, 2005 at 05:32 PM

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November 26, 2004

Argentina, Chile, And Other Case Studies In Social Security Reform

Tyler Cowen at Marginal Revolution offers a cautionary tale on Social  Security reform from Argentina.

In contrast, Chile, as Cowen notes, is the poster child for succesful Social Security reform.  Here's a description of how it worked, from one of the architects

This link, also provided in the Cowen post is another good source of information about the experience of other countries with  public pension reform (as of 1999).

November 26, 2004 in Latin America/South America, Social Security | Permalink


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November 24, 2004

Today's Data Releases -- Some Things To Be Thankful For?

This from MSBNC (via Reuters):

U.S. consumer sentiment brightened slightly in November, helped by cheaper gasoline and a better jobs outlook, but came in below market expectations, a survey released Wednesday showed.

The University of Michigan’s final reading for November of its consumer confidence index was 92.8, up from 91.7 in October but below November’s preliminary reading of 95.5, according to market sources who saw the subscription-only report. Analysts on average had forecast the index would rise to 96.0.

Other news (from Newsday.com):

America's factories saw orders for big-ticket goods drop in October after brisk activity in the previous month, highlighting the sometimes bumpy recovery experienced by the nation's manufacturers.

The Commerce Department reported Wednesday that orders for durable goods -- costly manufactured products expected to last at least three years -- decreased by 0.4 percent in October from September.


... there were some aspects of Wednesday's report that tempered their disappointment. Orders for durable goods in September jumped by 0.9 percent from the previous month, according to revised figures. That turned out to be considerably stronger than the government previously estimated.

And, shipments of durable goods for October -- a good barometer of current demand -- rose by a solid 0.6 percent. That compared with a 1.1 percent drop in September.

And some news a lot of us are looking for:

New claims for unemployment benefits last week fell by a seasonally adjusted 12,000 to 323,000, a three-month low, the Labor Department reported. That showing also was better than economists were expecting. They were forecasting a small rise in new applications. The report suggested that the labor market recovery is gaining traction.

Overall, a somewhat positive day on the economic news front.  But if you just insist on finding something to worry about, there is this from Bloomberg

Dollar Falls to Record Versus Euro as ECB Remains Mum on Stance

Assuming this is the sort of thing worth worrying about, of course. And that itself is far from obvious.

November 24, 2004 in Data Releases | Permalink


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Creative Accounting and Social Security Reform

The devil is always in the details, and the first devilish detail in the push toward Social Security reform appears to be the question of how to handle the probable transition costs within existing budget rules.  The first shot is a little creative accounting.  From The Washington Post:

Republican budget writers say they may have found a way to cut the federal deficit even if they borrow hundreds of billions more to overhaul the Social Security system: Don't count all that new borrowing.

As they lay the groundwork for what will probably be a controversial fight over Social Security, Republican lawmakers and the Bush administration are examining a number of accounting strategies that would allow the expensive transition to a partially privatized Social Security system without -- at least on paper -- expanding the country's record annual budget deficits. The strategies include, for example, moving the costs of Social Security reform "off-budget" so they are not counted against the government's yearly shortfall.

Although there has apparently been no firm decision on made on how to approach this issue, this statement seems like a model of understatement:

Any accounting mechanism that obscures or minimizes those costs is sure to be controversial.

Over at Vox Baby, Andrew Samwick offers a critical, but thoughtful, analysis.  We, of course, have touched on the financing issues here, here, and here.

November 24, 2004 in Social Security | Permalink


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November 23, 2004

All You Need To Know About Social Security

At least that's the title of an article by Susan Lee that appears on the editorial page of today's Wall Street Journal.  Here, according to Dr. Lee, is the crux of the problem:

All benefits are based on something called the primary insurance amount.  This amount, in turn, is based on a worker's earnings, indexed to the growth in average real wages...

So every retiring worker gets to take advantage of overall economic productivity...

Simply put, it's the real wage growth component that is at the heart of Social Security's problem.  The wage index functions like a little pituitary gland because rising productivity causes wages to grow faster than prices. 

The fix, then, seems pretty simple.

Obviously, wage indexing is not financially sustainable.  If benefits were indexed to prices, however, Social Security would, at this very minute, be in balance over the long-term...

Problem solved?  Not quite.

But solving Social Security's long-term financial crisis is not the same thing as solving its spiritual problem.  Why, at the dawn of the 21st century, are workers forced into a government retirement program that will, very soon, deliver unto them a rate of return that is very visible?

She goes on to express a preference for changes -- one of the options provided by President Bush's Commission to Strengthen Social Security, in fact -- that would combine a shift to price indexation with a partial privatization scheme.  (Specifically, workers would be allowed to allocate a part of their Social Security taxes to a private saving account, in exchange for accepting some reduction in promised benefits.)

Nice article, well worth checking out if you are interested in this issue.

November 23, 2004 in Social Security | Permalink


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The Chinese Government Respectfully Asks That People Submit Requests For A Flexible Renminbi To A Place Where There Is Little Sunshine

My colleague Emre Ergungor brought this Financial Times article to my attention.

In a mark of China's growing economic confidence, the country's central bank has offered blunt advice to Washington about its ballooning trade deficit and unemployment.

In an interview with the Financial Times, Li Ruogu, the deputy governor of the People's Bank of China, warned the US not to blame other countries for its economic difficulties...

Mr Li said China could only permit greater renminbi flexibility after creating a domestic financial infrastructure, including reformed banks and developed markets, able to cope with a more liberalised currency mechanism; considering the conditions and the wishes of neighbouring Asian economies on any move towards a more flexible system; and educating people on how to deal with a new exchange rate system, teaching them how to hedge...

“The appreciation of the RMB will not solve the problems of unemployment in the US because the cost of labour in China is only three per cent that of US labour. They should give up textiles, shoe-making and even agriculture probably.

“They should concentrate on sectors like aerospace and then sell those things to us and we would spend billions on this. We could easily balance the trade.”

So there.

November 23, 2004 in Asia, Exchange Rates and the Dollar | Permalink


I Love you girls


Posted by: LeOgAhEr | June 01, 2007 at 04:59 AM

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More Experts Weigh In On The Dollar

This, from today's online version of USA Today.

The dollar will continue to fall in value for months as large U.S. budget and trade deficits deter foreign investors from putting their money into the USA, economists predict.

More than half of economists surveyed Nov. 12-17 said they expected the dollar to continue to fall in relation to the euro for six months or longer.

Echoing the analysis of foreign government officials and others, the survey respondents point to a lack of confidence associated with fiscal and current account imbalances.

The recent weakening of the dollar stems from several factors, including foreign investors' increased nervousness about putting their money into the USA at a time when the nation is running large trade and budget deficits, considered risks to the U.S. economy.

In a related story, yesterday's print version of USA Today has more details on the paper's quarterly survey of economists (page 6b).  Here's a quick tally.

    2005 GDP growth: 3.5%
    2005 CPI Inflation: 2.5%

    2005 Year-End Federal Funds Rate: 3.25%

That expectation of higher interest rates is one reason some think that a further dollar slide may be limited.  Again from today's story:

A.G. Edwards chief economist Gary Thayer says as the Federal Reserve continues to raise interest rates, as is widely expected, foreign investors seeking to get the biggest return on their investments will want to put more money into the USA.

Of course, all good macro students realize that this depends on what is causing the increase in interest rates.

Pop quiz: What do we expect to happen to market interest rates when global savers lose confidence in the dollar?

November 23, 2004 in Exchange Rates and the Dollar | Permalink


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November 22, 2004

A Better Tomorrow?

If you are looking for cheery items to put on your economic outlook list, try the November Business Outlook Survey from the Federal Reserve Bank of Philadelphia.

The diffusion index of current activity, the survey's broadest measure of overall manufacturing conditions, decreased from 28.5 in October to 20.7 in November... The survey's other broad indicators remained positive but declined slightly. The new orders index fell almost three points, and the shipments index fell four points. Unfilled orders remained steady; about the same percentage of firms reported increases and decreases...

In a special question this month, firms were asked about their expectations for further cost increases next year (see Special Questions). More than 90 percent of the executives polled expect raw material prices (including energy) to increase next year..

Well, that doesn't sound so cheery. The survey respondents are, nonetheless, undeterred.

Overall expectations for the next six months improved markedly...Nearly 60 percent of the manufacturing executives expect increases in activity over the next six months, compared to 40 percent in the previous month. Other future indicators showed similar increases...

November 22, 2004 in Data Releases | Permalink


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