Merry Christmas

The Size of the Problem

According to MSNBC:

"The (Social Security) trustees do say that the problem over the next 75 years could be remedied by:

Increasing the combined payroll tax rate in a manner equivalent to an immediate and permanent increase of 1.89 percentage points, from the current 12.4 percent to 14.29 percent. For a worker making $60,000 a year, that would amount to a tax increase of $567 a year on the portion of Social Security tax that he pays.

Reducing benefits in a manner equivalent to an immediate and permanent reduction of 12.6 percent.

Shifting $3.7 trillion in general tax revenues into the Social Security system.

Some combination of all of the above."

The problem with these number are that the Trustees assume that the Social Security Administration will be able to redeem the trillions of dollars of US Government debt the SSA has accumulated over the past three decades. These bonds were issued to the Social Security system to compensate for the Social Security surpluses that the Congress has irresponsibly spent over the past few decades.

The trustees claim that if Social Security can redeem these bonds, the system will remain solvent until 2042. However, that requires that the Federal Government finds billions and billions of dollars each year to redeem those bonds, starting in 2013 when the Social Security System begins bringing in less money than it pays out. For the past 30 years or so it has been the exact opposite, Social Security has brought in huge surpluses, which the Congress has quickly spent on everything except Social Security. In short, the SSA holds trillions of dollars of worthless debt that it is planning on from 2013 to 2042, it is debt that the government owes the government, so the problem is much larger than the Trustees are willing to admit.

Some people (like John Sweeny of the AFL-CIO) propose a tax increase dedicated to Social Security, a nice idea. The only problem is that we already have taxes specifically dedicated to Social Security, and they are being spent on other things. Congress wastes the Social Security Surplus every year, so why not start by securing the Social Security Surpluss? Well that requires solving another big problem first, balancing the budget. In fact that requires "balancing the budget" plus reducing spending to the point that we no longer "need" to spend the Social Security surplus on general spending, and that requires something else, telling "needy" constituents no, that is the first thing to do, and for Congress, that will be the hardest.

Timothy Burger

What You Know, What You Own

For a nation there are very few things more important that what their citizens know and what they own. Things like how free they are, how innovative, how much they love their nation and each other tend to result in smarter, wealthier people. Things like health and happiness (on a national scale) tend to flow from knowledge and wealth.

There is no question that at this point in history the United States is the greatest, wealthiest, most productive nation on Earth. Fortunately, there are a number of nations who would like to become the greatest, wealthiest, most productive nation on Earth. I say fortunately because most of the nations that are serious threats to U.S. dominance are trying to get to the top by educating their citizens, reducing regulation, and building a better world rather than by attacking the U.S. With that being said, recently there were two stories that should be cause for alarm in the U.S.. Both of these continue long established trends, unfortunately trends that could lead to the U.S. slouching out of the #1 slot.

First, The OECD released a study showing that 15 year olds in the US are near the bottom of all students in industrialized nations in math, reading, problem solving and science. US students scored below most of their peers in all skill sets. While studies have shown US weakness in math and science for decades, weakness in problem solving and reading are especially alarming. The US faces stiff competition from all over the globe, notably from Asia in all types of jobs, increasingly in the type of high paying jobs our economy depends on. These jobs require a high level of knowledge and growing weakness in these areas may have serious negative consequences in the near future.

Second, the US current account deficit grew to $164.7 Billion in the third quarter, in the third quarter! That is equal to 5.7% of US GDP. This is an important number because the current account includes all inflows and outflows, it is a comprehensive measure of how much capital our nation sends to other nations in relation to how much they send to us. This means that from July to September we sent out $164.7 billion more than we took in. That is scary, that is the total of the trade deficit, the budget deficit, and direct investment. The highlight of the report was that direct investment into the US actually rose in the third quarter. The big picture is that this deficit results in a weaker dollar, more foreign ownership, more interest payments going to other nations, and a weaker US. This has been going on for a long time, and is a complicated issue, but long story short: it is generally not good for a nation to borrow and buy more than it earns and makes.


Timothy Burger

Update, and More on the Way

I want to apologize to everyone, for the past couple of weeks I have been studying for and taking final exams. However, now I am on break from school and should have plenty of time to post on a regular basis. With that said, let me give you a quick quote to think about, I promise more coming soon.

Stephen Roach: A $40 trillion world economy is woefully out of balance. This shows up in many forms, but the most glaring sign is an unprecedented disparity between the world's current account deficits (America) and surpluses (mainly Asia and, to a lesser extent, Europe). The key to a successful global rebalancing hinges critically on tempering the risks of the world's most serious excesses. For me, that speaks of a shift in the world's relative price structure -- namely, currencies -- in order to re- establish a more sustainable equilibrium. That's where the dollar comes into play. But currency adjustments can't do it alone. A weaker dollar could also be key in forcing the interest rate adjustments that address the asset-driven excesses of the American consumer -- quite possibly the biggest risk factor in today's US and global economy. If the depreciation of the dollar implies tough adjustments elsewhere in the world -- like forcing export-led Asian and European economies to stimulate domestic demand -- then that's not such a bad thing either. Global rebalancing is a shared responsibility.

From
Debating the Dollar December 10, 2004 Morgan Stanley Global Economics Team

Timothy Burger