Results for “cohort” 215 found
The Social Security Burden
Andrew Samwick, who has written extensively on the issue, lays out some of the mathematics of social security debt at Vox Baby.
At present, the Social Security actuaries project an unfunded obligation of $10.4 trillion in the Old-Age, Survivors, and Disability Insurance (OASDI) program. This number comes directly from the 2004 Trustees Report released in March….Note that this is the unfunded part of the obligations–it is over and above all of the payroll taxes (12.4 percent of taxable payroll) and income taxes on benefits that go to support the program under current law….
Is having so much implicit debt a problem? I think so, and the reason is that, just like explicit debt, we accrue interest on implicit debt….if we have an implicit debt of $10.4 trillion, and the real interest rate is 3 percent, then next year, the implicit debt will grow by 0.03*10.4 trillion = $312 billion, up to $10.7 trillion, if the assumptions underlying the projection stay the same….[B]oth the President and Senator Kerry have repeatedly stated that they will not cut benefits for those at or near retirement age. …This, in turn, means that each year that elapses without reform causes the burden of financing the unfunded obligations to be shifted away from one more birth cohort that crosses the threshold of being “at or near retirement.” The more we wait, the larger the burden on future generations…
If I were running the show, both Social Security and Medicare (which has even larger unfunded obligations) would be reformed so that under current law and reasonable economic and demographic assumptions, they are projected to have zero unfunded obligations. This means changing current law to reduce future benefits, raise future taxes, or both.
See also my earlier post, The US Government is Bankrupt.
Proxying Human Capital
One of the most puzzling results in the literature on economic growth is that it is difficult to show that increases in human capital increase economic growth. In regressions, sometimes human capital shows up positive and significant but sometimes it’s not significant, sometimes it’s null and sometimes it’s negative depending on the precise set of countries and time periods examined. (See Tyler’s earlier post for further skepticism on the link between human capital and growth).
A team of economists at the University of Ottawa, working with Statistics Canada, has concluded that the problem may be one of measurement. They argue that literacy scores (i.e. actual skills) might be a better proxy for human capital than the typical measure, years of schooling, and furthermore, literacy scores are not subject to the usual problems related to the comparability of education systems across countries. Their human capital indicators are based on the results of the 1994 International Adult Literacy Survey, as nicely explained by The Economist:
They use the International Adult Literacy Survey, which tested 16-65-year-olds in [1994], to estimate the skills of people in 14 countries entering the workforce at different times between 1960 and 1995. This is achieved by looking at tests of different age cohorts. For example, the literacy levels of people aged [51-59 when tested in 1994] are used to estimate the competencies of 17-25-year-olds in 1960, and hence the human-capital investment that had just been made in the course of that cohort’s education.
The biggest flaw of that study is that the indicators impute levels of literacy to individuals earlier in their lives, without correcting for the adjustement in the quality of human capital that occurs during an individual’s lifetime through learning and human capital depreciation, however, as The Economist notes, “the fact that it finds such a strong correlation between skills and growth gives a significant boost to human-capital theory”. Click here to read the executive summary or click here to read the entire study.
Teenage pregnancy
Since 1991 the teenage pregnancy rate has fallen by about 22 percent, reversing a 40 year trend. In a lengthy story, the NYTimes suggests that learning from the hard experience of others is the explanation for the drop without explaining why it should take 40 years for this learning to take effect. They do note “teenage pregnancy had already begun its decline in 1991, well before welfare changes and the economic boom, and well after the first round of sex education programs.” The Times, however, does not examine the most controversial but well-supported explanation, the introduction of legalized abortion in the 1970s.
If this explanation rings familiar it should. In a very controversial paper, Steve Levitt and John Donohue provided evidence that legalized abortion in the 1970s reduced crime some 18 years later. The theory is simple. Abortion rates are higher among the poor, the unmarried, teenagers, and African Americans than among other groups and children born to mothers with several of the preceeding characteristics are at increased risk for becoming involved in crime. Legalized abortion gave these mothers an option and thus reduced the number of at-risk children who might otherwise have grown up to become criminals (note that abortion doesn’t mean fewer children per-se, it may simply delay childbearing to when the mother is not poor, a teenager or unmarried which works just as well.)
In brief, the evidence for the Levitt-Donohue theory is a) the timing is consistent, b) states that legalized earlier had earlier drops in crimes, c) there is a dose-response effect i.e. states that had more abortions had bigger drops in crime, d) the drop in crime in the 1990s occured among those cohorts who were potentially affected by abortion policy in the 1970s (and not among say 40 years olds.)
Joined by co-author Jeff Grogger, Levitt and Donohue apply the same idea to teenage pregnancy and find very similar results – thus reinforcing their earlier story. They write:
Parents who are least able or willing to begin caring for a newborn are most likely to make use of abortion. The abortion rates for teens, the unmarried, and the poor are substantially higher than for the general population. Children who are born unwanted are subjected to poorer care both during pregnancy and the early years of life. With the legalization of abortion, mothers with unwanted pregnancies suddenly had a new recourse. Consequently, the number of children raised in adverse environments dropped substantially. Donohue and Levitt [2001] showed how this change reduced crime among the subsequent generation by 15-25 percent. As teen childbearing is a closely associate social pathogen, the magnitude of the drop should be similar.
Our empirical evidence suggests that birth rates as teens are strongly negatively associated with being born in a state and time period in which abortion rates were high. Our results suggest that teen birth rates today may be 20 percent lower as a consequence of legalized abortion in the 1970’s.
Irrational gloom, or Alex cheers me up
Alex remains worried about our future, but let us look more closely at his concerns. His biggest fear is our future demographic structure:
…the Bush policies are not the major problem. The major problem is that we are about to be hit by a tidal wave of old people (contra Tyler demographics are the problem not the solution).
Hey, I hope to be part of that wave, the problem will be if I am not!
Let’s redo Alex’s doctor example. In my version, the doctor suddenly tells Alex that he will live to the ripe old age of two hundred, most of those years in reasonable health. This is reason to celebrate, even though Alex would have to restructure his retirement plans. Something like this, albeit in less extreme form, is going on in America: a large baby boom cohort can be expected to live to older ages. Bravo, I say. Count up those extra years, including the implicit value of leisure, at their full economic value, and our “intergenerational accounts” will look much better. Note also that the elderly have a higher quality of life than ever before, for reasons ranging from cheap eye surgery to bypass operations to new drugs.
Two other issues:
First, contrary to what Alex suggests, “g>r” would solve the problem. Growing debt, which is a transfer, doesn’t change the fact that the intertemporal budget constraint has melted away, provided we can shift real resources into the present (if you’re not an economics nerd, the point would take too long to explain in non-technical language, read the link if you must).
Second, I am not convinced that Alex has put his money where his mouth is. He is conspicuously silent about whether he has gone short in bonds. Plus I bet he would have taken a tenured professorship, bought a house, and bought an internationally diversified portfolio anyway, I certainly did all of these and I am an optimist.
The bottom line? A growing population, combined with a bulge of old people, requires planning wisdom and creates some costly expenditure pressures. But overall longer lives are cause for rejoicing, not our economic doom. Love and time are what we are ultimately seeking to economize, and longer lives contribute toward both ends.
Should you buy Latin American art?
A recent study by Sebastian Edwards suggests that Latin American art, in the latter quarter of the twentieth century, brought supra-normal returns with low risk relative to the market portfolio. Under one measure, the mean annual return was a solid nine percent. Here is the abstract:
In this paper I use a large data set to analyze two aspects of the Latin American arts: (1) the nature of artistic creative process, and (2) Latin American art as an investment. I use data on auctions to understand the relation between artists’ age and the value of their work. The analysis on creativity suggests that Latin American artists have followed very different patterns from that followed by U.S. artists. There is strong evidence suggesting that American artists born after 1920 did their best work at an earlier age than their older colleagues; exactly the opposite is true for the case of Latin America. Indeed, the results reported in this paper suggest that Latin American artists born after 1920 did their best work at a significantly older age than their colleagues from earlier cohorts. The analysis of art as an investment is based on the estimation of hedonic price indexes, and indicates that Latin American art has had a relatively high rate of return indeed much higher than that of other type of paintings. The results also indicate that returns on Latin American art have a very low degree of correlation that is, a very low beta relative to an international portfolio comprised of equities. This means that adding Latin American art will lower the overall risk of an international portfolio.
How can this be?: Most national art markets are driven by collectors from that country or region. The high investment returns on Latin painters suggest that the wealth of the wealthy, in Latin America, grew faster than expected for several decades. At the same time, some Latin painters, such as Frida Kahlo, attracted sudden and unexpected interest from North American buyers. So two particular idiosyncratic factors drove these superior returns. Mexican art is a great avocation of mine, but I cannot recommend it as a means of reducing your future portfolio risk. Buy what you love, and consider it consumption expenditure.