Read this proposal.

“…the U.S. government [is] effectively bankrupt”

“…when rational gloom sets in, the U.S. economy will likely ‘go critical.'”

“…the decline and fall of America’s undeclared empire will be due not to terrorists at our gates nor to the rogue regimes that sponsor them, but to a fiscal crisis of the welfare state.”

Who is making these wild statements? Is it a “not-to-be-trusted”, liberal economist like Paul Krugman or Brad DeLong each of whom have warned of an impending “fiscal train wreck” and “fiscal catastrophe”? No. The statements are from Laurence Kotlikoff, one of the world’s most prominent economists, and Niall Ferguson, one of the world’s most prominent historians – both are whom are considered to be conservatives (more on that shortly).

Kotlikoff and Ferguson base their gloomy forecast on a study commissioned by Paul O’Neill before he was booted out of the administration. The study says the following: we know that there will be a deficit this year and one next year and probably one after that – suppose we add up all the future deficits and surpluses for as far as we can see and discount these to present value. What do we get? The answer: 45 trillion dollars of debt.

We do not have 45 trillion dollars. What then can we do? Here is why conservatives should not ignore the warnings of Kotlikoff and Ferguson, even when they deride similar pronouncements from Krugman and DeLong, because Kotlikoff and Ferguson argue that taxing ourselves out of this mess is not a desirable option. Instead, they argue that we must a) “discipline Medicare spending” (this was written before the prescription drug plan passed!) by eliminating “entirely the traditional fee-for-service option and giv[ing] all Medicare participants a voucher to purchase private health insurance.” and b) “privatize social security.”

Kotlikoff and Ferguson are not optimistic about the political viability of these actions, hence the opening quotes.

I worry when intelligent people on both the right and left start to talk about the U.S. “going critical.”

US senators’ personal stock portfolios outperformed the market by an average of 12 per cent a year in the five years to 1998, according to a new study.

“The results clearly support the notion that members of the Senate trade with a substantial informational advantage over ordinary investors,” says the author of the report, Professor Alan Ziobrowski of the Robinson College of Business at Georgia State University.

He admits to being “very surprised” by his findings, which were based on 6,000 financial disclosure filings and are due to be published in the Journal of Financial and Quantitative Analysis.

“The results suggest that senators knew when to buy their common stocks and when to sell.”

First-time Senators did especially well, with their stocks outperforming by 20 per cent a year on average – a result that very few professional fund managers would be able to achieve.

“It could be argued that the junior senators most recently came out of private industry, so may have better connections. Seniority was definitely a factor in returns,” says Prof Ziobrowski.

There was no difference in performance between Democrats and Republicans.

A separate study in 2000, covering 66,465 US households from 1991 to 1996 showed that the average household’s portfolio underperformed the market by 1.44 per cent a year, on average. Corporate insiders (defined as senior executives) usually outperform by about 5 per cent.

The Ziobrowski study notes that the politicians’ timing of transactions is uncanny. Most stocks bought by senators had shown little movement before the purchase. But after the stock was bought, it outperformed the market by 28.6 per cent on average in the following calender year.

Returns on sell transactions are equally intriguing. Stocks sold by senators performed in line with the market the year following the sale.

When adjusted by the size of stocks, the total portfolio returns outperformed by 12 per cent a year on average. The study used a total market index as the benchmark for comparison.

Here is the full story. Here is the home page of the researcher, Alan Ziobrowski. I haven’t scrutinized or even read the original study, but right now I will bet this is true.

Thanks to Jane Galt, who is just back from Mexico, for the pointer.

Downsizing occurs when a firm lays off workers to economize on costs. So what do economists know about this phenomenon?

1. About half of all downsizing firms end up with at least as many laborers within a few years’ time. Downsizing is often a matter of restructuring a labor force, not just getting rid of dead wood. In other cases downsizing may be purely temporary, and is reversed once the firm has some extra cash.

2. Downsizing in manufacturing is nothing new and has been going on since 1967. That being said, the smaller manufacturing firms generally have been increasing employment. The notion of “regression toward a mean” describes the manufacturing sector better than the universal downsizing hypothesis.

3. Downsizing is positively correlated with the degree of foreign competition in a sector. So trade does encourage firms to cut their costs.

4. Manufacturing is fifteen percent of the U.S. labor force and thus only a small part of the downsizing story. Retailing and services have been upsizing considerably for many years.

5. Downsizing firms tend to increase their profits but not their productivity. Downsizing commonly leads to lower wages within the downsizing firm. There is evidence for the “wage squeeze” story.

From the recent Downsizing in America: Reality, Causes and Consequences, by William J. Baumol, Alan S. Blinder, and Edward N. Wolff.

The authors conclude the following:

…no special programs appear to be called for, aside from measures to ease the transition of downsized workers to other jobs…the evidence provides no support for the conjecture that the economy is undergoing widespread and protracted reductions in the size of the typical firm’s labor force.

…when I came to the 24/7 Customer call center in Bangalore to observe hundreds of Indian young people doing service jobs via long distance – answering the phones for U.S. firms, providing technical support for U.S. computer giants or selling credit cards for global banks – I was prepared to denounce the whole thing. “How can it be good for America to have all these Indians doing our white-collar jobs?” I asked 24/7’s founder, S. Nagarajan.

Well, he answered patiently, “look around this office.” All the computers are from Compaq. The basic software is from Microsoft. The phones are from Lucent. The air-conditioning is by Carrier, and even the bottled water is by Coke, because when it comes to drinking water in India, people want a trusted brand. On top of all this, says Mr. Nagarajan, 90 percent of the shares in 24/7 are owned by U.S. investors. This explains why, although the U.S. has lost some service jobs to India, total exports from U.S. companies to India have grown from $2.5 billion in 1990 to $4.1 billion in 2002. What goes around comes around, and also benefits Americans.

Read the whole column.

Addendum: Here is Virginia Postrel’s latest piece on trade.

Second addendum: How about this press release, India awarding a big contract to Hewlett-Packard, thanks to Kevin Bone for the pointer.