Category: Economics

"Anybody who thinks borrowing money for the transition to personal accounts is going to solve the problem of the long-term solvency of Social Security doesn’t understand the size of the problem," said Senator Charles E. Grassley, Republican of Iowa, the chairman of the Senate Finance Committee, which has jurisdiction over the retirement system.

Here is the full story, NYT password required but invaluable reading, or try the archive link.

Addendum: Read Brad DeLong for more.

I vow to stop calling these programs "privatizations."

The Argentine government must continue to provide benefits to workers who have retired under the old pay-as-you-go system. Meanwhile, payroll taxes are being diverted to personal retirement accounts. The government must also find some way to recognize contributions to the old system made by workers now participating in the new system. Argentina has chosen to recognize those contributions with the compensatory pension. Some analysts estimate that it will take 75 years or more to pay off the transitional obligations.

Might this soon be coming to an American screen near you?  Here is the whole Argentine story.  Here are other international examples.  Here is an essay on how social security transition problems worsened Argentina’s fiscal crisis.  Here is a summary of the lessons from international experience.  No one — even among countries with weaker "welfare state" traditions — has done away with an underlying safety net, behind the private accounts.  No one has avoided real and significant fiscal costs, no matter how the transition plan was structured.

Ah, but will the U.S. do it better?  Unlikely.

Chile, of course, had a dictatorship and instituted some radical market-oriented reforms.  How did their scheme proceed?

In Chile, that [revenue] shortfall was partly financed by fiscal tightening through a reformed tax system, including a new consumption tax, prereform cuts in spending, and the sale of some government enterprises. 

The U.S. "privatization" plans, whatever their merits or demerits in absolute terms, have no chance of going well without comparable domestic reforms up front. 

Although the nominal price has increased by almost $7, the inflation-adjusted price is over $14 cheaper (in 2004 $) than it was in 1986.

Here are the data.

"There are a few other factors that might contribute to NZ not being as successful as we should be:

1. Monetary policy. We do have low inflation but the Reserve Bank’s official cash rate is 6.5%, not exactly Greenspanesque. Borrowing money is expensive.

2. Labour markets are only free in the sense that union membership is not compulsory. Instead, pay and conditions are extremely heavily regulated and our Employment Court is weighted heavily against employers. Employers may appear to be acting voluntarily, but actually they are being coerced in all kinds of subtle ways. Our minimum wage is $9 per hour and this also makes entire areas of economic activity unviable.

3.  Welfare benefits are much too generous and little or not effort is made to ensure that the unemployed attempt to find work. Refusing to take a job that is offered is rarely penalized. Every year fruit growers watch some of their product die because they can’t get enough pickers, even though there are people just down the road collecting welfare benefits.

4. There is a serious underinvestment in infrastructure, since the consent procedures allow green and Maori groups to bring about enormous costs and delays in gaining approval. We have had power shortages on several occasions, while at the same time no new dams have been approved and burning coal (or even digging up our massive
stockpiles of it) is out of the question. We even had an extension to a state highway held up because a taniwha (a mythical river-dwelling creature) was angered and had to be appeased (i.e. paid) before contruction could continue.

5. Some of the privatization efforts have since been rolled back. In the last 5 years, the Labour government has nationalized our airline, the railways and accident compensation insurance and established a massive state superannuation fund. They are well on the way to nationalizing kindergartens and have just started on primary healthcare. Where they don’t own businesses they still regulate heavily, e.g. telecommunications.

6. Taxes are not as low as it might appear. The top rate of personal tax is 39% but there is also a 12.5% universal sales tax, property taxes and many others. Recent figures show that over the last four years, average household income has increased by $7700 while average household taxation has increased by $5200. Once you take into account price increases, our purchasing power has dropped. Since education and hospitals are fully state-funded with no voucher scheme, if you want private provision of those you have to pay twice.

7. There is a widespread and irrational dislike of foreign investment. We have always been a country that had land, labour and far too little capital. That is unlikely to change because the public, fuelled by politicians and the media, go on the attack any time an overseas business or individual tries to invest here. At the moment Shania Twain is trying to spend $14 million to buy a farm in a remote area of the South Island. You wouldn’t believe the outrage: it’s front page news and questions have been asked in Parliament.

You might wish to start reading Rodney Hide’ s blog here: http://rodneyhide.com/Diary/  Rodney is the leader of ACT, which is New Zealand’s (maybe the world’s) only classic liberal political party. He was an economics professor before being elected to Parliament."

Henry Hazlitt’s Economics in One Lesson was the second economics book I ever read; The Incredible Bread Machine was number one.  The Freeman has just published a tribute to Hazlitt, included is a short biography.

Thanks to http://www.politicaltheory.info/ for the pointer.

There is no evidence that corporations direct their investment to countries that have lower labor or environmental standards.  The bivariate relationship between foreign direct investment and labor standards is strongly positive, given that in the past decades more than 90% of FDI occurs in OECD countries, which have the highest labor standards.  Multivariate tests show no correlation between foreign direct investment and labor standards.  An International Labor Organization report reveals no evidence that countries with strong trade union presence have suffered any loss of investment in their EPZs [export processing zones].  A World Bank survey notes a strong positive correlation between higher occupational safety and health conditions and foreign investment in EPZs.  In-depth reviews of EPZs where labor standards are abused reveal that the problem is insufficient access to the global economy.  AS EPZs attract a greater number of foreign investors, labor conditions improve across the entire zone.

That’s from Daniel Drezner’s recently submitted book-in-progress, on globalization and governance, which of course I devoured immediately.  By the way, here is Dan’s first post ever, on the relationship between books and blogs.

Here is a critical review of the new Richard Posner book, Catastrophe: Risk and Response.  Money quote:

…differences in risk perception can only be resolved through political negotiation.  But democratic politics is an enterprise for which Posner has contempt. He is addicted to the rule of experts, and he proposes a series of arid and (for a self-styled pragmatist) surprisingly impractical policy solutions for applying cost benefit analysis to risk calculation: a "science court" of experts that would review dangerous government  research projects; the creation of an international environmental protection agency to enforce a modified Kyoto Protocol under the auspices of the United Nations; a federal review board that would forbid any scientific research that poses an "undue risk" to human survival. Few of these proposals have any realistic chance of being adopted in America. And even if they were adopted, public emotionalism would continue to demand irrational (or as the behavioral psychologists say, "quasi-rational") allocations of resources that would thwart the experts’ recommendations. Although Posner promises to monetize the costs of these psychological and political impediments, he fails to do so.

I’m just reading the book now, but in general I am more sympathetic to the view that we underinvest in protection against large catastrophes; read Alex on this one.

New Zealand moved from being perhaps the most socialized OECD economy to the freest.  The country now has free trade, 0-2 percent inflation, no agricultural subsidies, free labor markets, free capital markets, low marginal tax rates, a reasonable fiscal position, and it conducted substantial privatizations, mostly with success.  The reforms started about twenty years ago, but the country is not sweeping the world; here are detailed data.  Martin Wolf ($) points out some salient facts:

1. From 1982 to 2002, New Zealand grew at an average rate of about 3.6 percent.  That is not bad, but most of the other figures do not massively impress.

2. In 1970, NZ incomes were about 71 percent of the OECD average; now the figure is about 76 percent; these calculations exclude Turkey and a few other outlier countries in the OECD.  Remember, those OECD averages include the slow-growing European economies. 

3. The rate of productivity growth is now about 2 percent.  Multifactor productivity is growing at about 1.2 percent.

4. Investment remains at a relatively low 10 percent of gdp; in Australia for instance it is 16 percent.  The rate of adoption for information technology is not overwhelming.

What gives?

First, New Zealand without the reforms would have fallen apart and become insolvent; that is the relevant counterfactual.  Second, the country is small.  The population is just a bit over 4 million; for purposes of comparison the Philadelphia metropolitan area is over six million.

Michael Porter nailed it over ten years ago.  New Zealanders have few if any industries where they control market conditions or lead with innovations.  For the most part they are at the mercy of world prices and broader conditions.  The country’s earlier crisis was precipitated in the early 1970s, when the UK ended "imperial preference" for New Zealand agricultural exports.  Another shock will come if Australia passes its free trade agreement with the U.S.; New Zealand exports will face a new and tough competitor. 

Finally, the brain drain has not gone away, here are some ruminations on the topic from Nick Gillespie.

Freedom and good policy are no doubt beneficial, but there are fewer guarantees in this world than we might like to think.

Why are people more outgoing when they are young than old?  Robin Hanson attempts an answer:

As you reveal more to strangers, the distribution of their evaluations spreads out, some moving up toward friends, others down toward enemies. You want to reveal more to potential friends in the hope that some of them will rise above the friend threshold, but you do not want to reveal to potential enemies, for fear they will fall below the enemy threshold. Once people do cross these thresholds, however, your preferences about revelation switch. You want to stop revealing things to confirmed friends, for fear of losing them, and you want to reveal more to confirmed enemies, in the hope of winning them over.

So when looking for someone to marry, you’ll want to open yourself to people. And to help this process, you’ll want to learn about yourself. Once you are married with children, however, you will not want to learn or reveal more about yourself. Similarly, when searching for a new career or entry level job, you’ll want to reveal yourself, but once tied to a career or workplace, you will not want to learn or reveal more. When moving to a new neighborhood you’ll ponder what you really want, but once you live there you will not want reveal too much to neighbors, or think too carefully about how much you like them.

This may go a long way toward explaining standard life cycles in openness and conformity. The young discover and celebrate their passions and uniqueness, except not always with their old friends. The old prefer stability and conformity to community, and reveal and discover the most (in private) with their deepest adversaries. To the young the old will seem boring and conformist, while to the old the young will seem lonely and flighty. The young and the old can really be the same sort of people, but in different circumstances.

Croatia may reopen its most notorious communist-era prison for tourists willing to part with their money to re-enact the life of a political prisoner – including hard labor, stale food and nights in solitary confinement.

The plan has the support of some local officials and even former inmates, who have offered to work as tour guides, though the city council has yet to make a final decision.

"If you want to experience some of the torture that political prisoners underwent … just come along," said Josip Modric, an architect who is promoting the project.

Modric envisions tourists being issued convict uniforms, pounding large stones with a sledgehammer and hauling the pieces on their backs to quarries around the prison on Goli Otok, a barren island in the northern Adriatic Sea.

Those who sign up would be given written awards after completing their "prison sentence."

Here is the full story, which notes that real torture will not be allowed.  Thanks to Jonathan Dingel (read his blog) for the pointer.

Along related lines, The Wall Street Journal (November 19, p.A12) reports that communist-era "nostalgia brands" are sweeping Eastern Europe.

Shoot at animals over the Internet and activate a real gun to kill them.  Here is the website, and thanks to GeekPress.com for the pointer.

My question: If you add them all up, what percentage of these "Markets in Everything" installments is actually appealing?

From Jane Galt, read the whole thing.

For me the most intriguing passage (but not the central point) is:

Something that conservatives, and especially libertarians, have been slow to grapple with is that the more productive our society gets, the greater the possibility that some peoples’ labour simply isn’t productive enough to support them at a minimum level. Can we really tell former welfare mothers to go bunk ten to a room the way my Irish ancestors did? We’re a pretty rich country. Are we comfortable telling people to live as if they’re nineteenth century peasants, if their cognitive gifts, or education, won’t stretch to more?

I wonder whether increasing wealth will ever eliminate the case (sound or not) for, say, welfare payments or the public funding of education.  Won’t the U.S. at some point, however near or distant, become rich enough so that government won’t have to…fill in the rest of the sentence yourself…?  Or does growing wealth jack up land prices so much that subsistence becomes increasingly harder to achieve?  I’m not talking about a relative status effect here, or changing expectations as to what is a decent life (though those factors play a role too).  To some extent higher real wages also boost the cost of producing human beings (i.e., raising children), analogous to William Baumol’s "cost disease."  You can raise a family of seven in Mexico on one thousand dollars a year, just try that in Fairfax County.  And might further economic growth only exacerbate this contrast?

Some mid-level developing countries address this problem by allowing shantytowns to spring up in or near their major cities.  The wealthy live in the "normal" city, the poor in the shantys.  There are other ways of setting up parallel colonies on low-wage land.  Randall Parker writes of old people moving to low-cost cruise ships (no, not ice floes), and of course many of the elderly migrate to Mexico or Costa Rica.  The default of course is to keep everybody in the higher-rent, higher-value network, and not coincidentally raise general taxes over time.  We will all continue to pay lip service to the integrationist ideal, but let’s say you think the case for welfare will never go away, no matter how wealthy we become.  This view implies that the pressure for "separate colonies" will only increase over time.

The field of education is littered with reforms designed to increase student performance – everything from the "new math," to more teachers to better pay.  Yet the most obvious reform of all has hardly been tried – pay the students to learn.  That’s the simple idea of an impressive young economist, Roland Fryer (earlier I posted on Fryer’s controversial work with Steven Levitt on the causes and consequences of distinctively black names).

Fryer was here on Monday and he told me of a large scale experiment he is running in 24 of the poorest performing New York schools.  Every three weeks students are tested and if they improve they are paid on the order of $20.  Control groups are also tested.  Early results are very encouraging.  No other reform has anywhere near the bang for the buck as paying the students.

As Fryer said to me, ‘for years white parents have been giving their kids money for As, now we are trying the same system for black kids.’