Month: January 2023

Saving Social Security

I recently received a petition for my signature to save social security from an expected Republican attack. To save it we must understand what it was meant to be and what it now is and what problems it faces.

Initially the Social Security program was meant to be a savings financed retirement fund to which employers would be required to contribute half of what was deducted from worker paycheck and put in the Social Security Trust Fund (a fully funded life insurance program). This is (or was supposed to be) like our personal IRAs but with the employer contribution (though many employers offer retirement programs for their employees to which they also contribute in addition to Social Security contributions). But from the beginning, current worker/employer contributions to the Trust Fund were used to finance current retiree benefits rather than being saved for the contributor’s future retirement, i.e., it was pay-as-you-go.

Three factors undermined this pay-as-you-go model. First, benefits were indexed to wages rather than inflation and as real wages have raise over time so have benefits. Second, the average life expectance of retirees has increased dramatically. When the Social Security scheme was launched in 1935, life expectancy in the US was a bit under 60 years (the average retiree received SS benefits for only a year or two). It is now 77.3, down a bit from 78.8 in 1919. Third, population growth has slowed and the number of workers taxes for this growing number of retirees has been and will continue to fall fast.  “Saving Social Security”

The simplest, and in my view most sensible, solution to this financing problem is to: a) increase the retirement age at which SS starts paying; b) increase the number of working age immigrates to help pay for the retired; and c) continue to encourage private pensions and IRAs. Unless you are French most of us continued working beyond normal retirement ages because we wanted to continue using our skills longer. We enjoyed what we did for more than just the money.

Adopting the above reforms would not reduce what a retiree SS beneficiary receives each month.  But it would reduce what she receives over her life time because would be retired for fewer years. Some people are calling this increase in the retirement age cutting Social Security.  What ever.

As I have argued elsewhere, I would replace Social Security with a Universal Basic Income.  “Our social safety net”

Trade once again

Everyone understands that without trade they would be dirt poor. If everyone had to be self-sufficient, they would be lucky to survive. It’s almost as obvious that the wider we can trade the more we can specialize in our comparative advantage raising the incomes of everyone. Where many stumble is at their national borders (though within national borders of large countries some regions restrict trade with other national regions to protect otherwise less efficient enterprises thus lowering incomes in general).

Why should trade be restricted across national borders? Three reasons stand out: two legitimate and one not. A potentially legitimate reason concerns national security. Requiring that products necessary for defense be domestically produced, even at greater cost, reduces the risk of supply chain disruptions. The risk is that this excuse is easily abused to the extent that such protection can turn illegitimate or corrupt.

A second legitimate reason also concerns resilience. The most efficient allocation of productive resources must take account of the risks of disruption to supply chains. We buy insurance for many assets and activities, thus incurring a certain cost, to protect our incomes from risks (large or small) of interruption and potentially larger losses. When buying goods or inputs from cheaper producers located far away, we are exposed to larger risks of supply interruptions. American manufacturers, for example, take these risks into account in deciding where to produce and purchase inputs to their products sold in the U.S.

A government bestowed financial favor on a firm or industry (trade protection, industrial policy) is always part of a quid pro quo. The firm delivers favors to the politicians who favor it.  Government protection of otherwise uncompetitive firms increases their viability and profits but at the expense of lower income for the rest of us. Countries that heavily indulge in such protection have suffered lower levels of income. “Trade protection and corruption”

Following World War II, and the establishment of what became the World Trade Organization, barriers to trade (domestic protectionism) were gradually reduced via bilateral and multilateral trade agreements. In the 62 years from 1959 to2021, real United States’ per capita personal income, when measured in constant 2012 dollars to adjust for inflation, increased 297.1%, from $13,971 in 1959 to $55,477 in 2021. This huge increase is the result of increased productivity per worker. But such productivity gains are only possible because of trade (within or across national borders).  “The case for trade”

Weaknesses in government programs to facilitate worker adjustments that are a necessary part of a dynamic, growing economy and other geopolitical factors are undermining the freest and most efficient trade (domestic and global) that our prosperity has depended on. “Geo Economic Fragmentation and the Future of Multilateralism”  “End globalization?”

The Economist magazine has argued that: “One problem [with protectionism and industrial policies] is their extra economic costs. The Economist estimates that replicating the cumulative investments of firms in the global tech-hardware, green-energy and battery industries would cost $3.1trn-4.6trn (3.2-4.8% of global gdp). Reindustrialisation will raise prices, hurting the poor most. Duplicating green supply chains will make it costlier for America and the world to wean themselves off carbon. History suggests that vast amounts of public money could go to waste…. Yet rescuing the global order will require bolder American leadership that once again rejects the false promise of zero-sum thinking. ”  “The destructive new logic that threatens globalisation”

Misinformation and corruption are undermining the basis of our incredible prosperity just when we need to pull together to deal with global warming. We must resist and fight back to restore and preserve our efficient market economies.  They would not exist without trade.

Diversity Training

America was founded on the principle that every person deserves respect and equal treatment. While our constitution incorporated an unfortunate compromise by permitting slave ownership in the South, which was fixed after our civil war, many scars remain. Each generation needs to be taught our proper principles and we should do our best to reflect them in our dealings with our fellow citizens of all races and creeds.

As Tom Palmer put it some years ago: “The recognition of individuality, of the uniqueness of each individual, is commonplace in all cultures…. Each human person is unique…. What is less commonly grasped is that we all share something morally significant and that therefore all human beings have legitimate claims to rightful treatment by each other, that is, to respect for their human rights.”  “Freedom is the birthright of all humanity”

I assume that diversity training is an attempt to provide such understanding and to endeavor to remove the remaining scars of historical prejudices. That is certainly an important and laudable goal. But perhaps the new generation would benefit more from a forward-looking, positive approach rather than stressing atonement for an unchangeable past. Diversity is a fun and enriching phenomenon.

Let’s learn more about the cultural and historical backgrounds of our fellow citizens and how and why they or their ancestors came here. Let’s sample their food and music. Let’s rejoice in the diversity around us. Most cab drivers in the DC area are immigrants or immigrants once removed. I enjoy asking them where they or their parents are from. Most of them enjoy sharing such information. Every now and then one of them will reply with sarcasm that they are from Arlington or some such place. And I reply, “Yes, yes, but where did your ancestors come from? We all came from somewhere else” (overlooking our natives).

Diversity is more than a moral duty. It is a unique blessing of the American experience.

Fair Tax Act of 2023

While I will not hold my breath, I am thrilled to see the introduction of H.R.25 – FairTax Act of 2023 in the House of Representatives by Rep. Carter Earl L. “Buddy” (R-GA-1) on January 9.

“This bill imposes a national sales tax on the use or consumption in the United States of taxable property or services in lieu of the current income taxes, payroll taxes, and estate and gift taxes. The rate of the sales tax will be 23% in 2025, with adjustments to the rate in subsequent years. There are exemptions from the tax for used and intangible property; for property or services purchased for business, export, or investment purposes; and for state government functions.

Under the bill, family members who are lawful U.S. residents receive a monthly sales tax rebate (Family Consumption Allowance) based upon criteria related to family size and poverty guidelines.” “Fair Tax Act of 2023”

I have written a great deal about taxation, a necessary feature of government spending, and how to make it fair and economically neutral (minimal distortion of the allocation of resources in our economy). Income taxation—especially corporate income taxation—fail these tests. A universal consumption tax passes them. It is especially suitable for our globalized world where companies produce and sell in many countries. “Tax reform and the press”   “The corporate income tax”

But the issue of fairness is somewhat in the eyes of the beholder. I have also supported a Universal Basic Income (UBI), in place of our many safety net transfers including Social Security. “Our social safety net”  Not only does a UBI better fit American’s strong commitment to individual liberty and choice, but when combined with a flat consumption tax it produces a progressive impact on income that satisfies my notion of fairness. “Replacing social security with a universal basic income”

As I understand the new (actually a return to the old) and improved House rules, after consideration by the House Ways and Means Committee, the bill will be debated on the floor of the full House. This is a giant step in a very good direction.  

Restoring Regular Order to Congress

In my “Hopes for the New Year” blog last week I listed among my hopes: “Restore Congressional Leadership. Enforce the War Powers Act. Restore regular order and cross aisle cooperation to address real problems. “Our dysfunctional Congress”

The promises made by Kevin McCarthy to gain the required majority support for his Speakership of the House, largely deliver my wish. They weaken the power of the overly powerful Speaker and increased the power of your and my Congressman or Congresswoman. Each appropriation will be properly and separately considered (first by the relevant committee) rather than the all in one rush package no one has time to read in the final minutes before the government must shut down. The issues and proposed remedies were presented a few days ago by Bruce Fein “Deliverance from the Republican House”

OK guys, please get on with addressing the issues and needs of the country that depend on law. The term “guys” here is a standard reference to both men and women. It reminds me of the many meetings we had in 2000 in Istanbul with the new head of the new Turkish Banking Supervision body created to manage Turkey’s exchange rate and banking crises. We (our IMF team) met with him and his team daily and often well into the night and he often referred to us as “girls” or in his better moods “ladies.”

Russian culture

Article 2 of the Constitution of the Russian Federation states: “Man, his rights and freedoms are the supreme value. The recognition, observance and protection of the rights and freedoms of man and citizen shall be the obligation of the State.”

Chapter two goes on to spell out these rights, which are those observed in most democratic country in the world. “Article 17 1. In the Russian Federation recognition and guarantees shall be provided for the rights and freedoms of man and citizen according to the universally recognized principles and norms of international law and according to the present Constitution.” These include free speech, privacy, “the right to the inviolability of private life, personal and family secrets,” etc. It seemed a bit odd, then, when the deputy from the party “New People”, the well-known Russian actor of theater and cinema, Dmitry Pevtsov, recently stated that Article 2 should be replaced a declaration of the supreme Russian values as faith, family and the fatherland.

These are very different values than in Russia’s existing constitution and those found more widely around the world. That brought to my mind an email conversation I had with a young Russian living in London almost fifteen years ago but it sounds like it was just yesterday. It was rather shocking to me then, but it is important and educational to hear how others think about their own culture and think about ours. Here it is: “Dialog with Denis-a young Russian living in Europe”