The New Republic tells us what it thinks of the Republicans' latest legislative "achievement":
Posted by DeLong at November 5, 2004 10:24 AM | TrackBackThe New Republic Online: Priceless: There is a simple way to understand economic policy-making under George W. Bush: Whichever pressure group has the strongest and most direct stake in an issue gets its way. Wealthy individuals and business owners have received large tax cuts; farmers have gotten lavish assistance; and insurance and drug companies won enormous subsidies in the Medicare prescription-drug bill. When steel firms lobbied for tariffs, Bush granted them. When automakers and other manufacturers later lobbied Bush to reverse course, complaining that those tariffs had raised the cost of the steel they buy, he began to back down. If there's a single prominent case where Bush offended a powerful corporate interest--except to benefit an even more powerful corporate interest--we have not come across it.
It is therefore fitting that the final bill Bush has signed before voters have a chance to cast judgment on his term represents the apotheosis of this appalling tendency. With no public ceremony at all, Bush last week approved a grotesque and completely indefensible corporate tax bill. If anybody needs a final reminder of this administration's lack of concern for the national interest--indeed, the lack of a policy process that could even conceivably advance it--this is it.
The latest installment of this revolting saga began in March, when the European Union began imposing new tariffs as retaliation for the U.S. refusal to repeal a $5 billion per year export subsidy that the World Trade Organization said violated fair trade practices. This prompted Congress to rescind the subsidy. So far, so good. Then, predictably, Congress decided that the savings from killing the subsidy could not be used to reduce the deficit. Instead, the money had to go to tax breaks. And, rather than using the money for broad-based tax breaks, Congress decided on specific tax breaks for manufacturers. Why is this dumb? Because economists across the political spectrum have long held that, if the government rewards one kind of economic activity over another, it distorts the economy. Worse, those who don't qualify for preferential treatment will press the government to be reclassified.
That's exactly what happened. First, Congress redefined "manufacturing" to include engineering contractors (under pressure from Bechtel), companies involved in mineral extraction (for the benefit of Exxon Mobil), and virtually anybody else who hired a lobbyist. Later, the pretense of helping manufacturers was dropped entirely, and everybody from the importers of Chinese-made ceiling fans to foreign citizens who earn money gambling on American dogs and horses won special provisions. One lobbyist involved in drafting the bill confessed to The Washington Post that the whole thing represented "a new level of sleaze." In the end, the breaks given out will substantially exceed the cost of the rescinded subsidy, driving the deficit even higher.
There is plenty of blame to go around. The GOP-run Congress utterly abdicated its responsibilities by allowing the bill to degenerate into a lobbying free-for-all. Only a few Democrats bothered to put up a fight, with most deciding it was best to hop aboard the gravy train themselves. Louisiana Democratic Senator John Breaux gave voice to unprincipled capitulation when he told The New York Times, "In the end, you need to get things done." (Breaux is retiring and reportedly entertaining lucrative offers to work as a lobbyist.) And John Kerry inexplicably failed to campaign against the bill, eliminating any pressure to oppose it.
But the ultimate responsibility lies with the Bush administration. It is in Congress's nature to act like a pig at the trough. The reason this sort of spectacle is so rare is that most presidents have some sense of responsibility to the national interest. Conservatives, liberals, and moderates have all denounced this bill. (Conservatives recognize the "tax breaks" to be thinly disguised pork.) It is a naked payoff, and there's no principled reason, from any ideological perspective, to support it.
That's why it is so emblematic of Bush's presidency. Previous presidents have done things that have alienated conservatives or moderates or liberals. But is there any president in recent memory who has enacted major legislation that is universally regarded, excepting its direct beneficiaries, as bad public policy? If so, there certainly can't be one who, like Bush, has done so over and over again. (We're referring here to the farm subsidies, the Medicare bill, and other giveaways listed above.) Some endorsements of Bush have expressed hope that, in a prospective second term, he will either moderate his views or hew more firmly to conservative principles. Both possibilities would constitute an improvement. Neither, alas, would be remotely plausible.
As long as he keeps us safe from gays and the U.N., who cares?
Posted by: Alan at November 5, 2004 10:34 AMWhich kind of augurs against Bush and his Congressional cronies doing anything constructive when the fiscal crisis starts hitting. They will not respond to any pressure from the financial markets--especially if that pressure comes from overseas (think Chinese).
Instead, we'll probably see a redoubling of such pork-laden legislation combined with the purchase of newer and bigger printing presses for the U.S. Mint. Personally, I'm looking forward to the issuance of the new $1,000,000 bills. That will make it more convenient to pay for postage stamps than having to load my SUV to the roof with $10s and $20s.
Posted by: Derelict at November 5, 2004 10:51 AMThe Bill, or rather now law, is the most fantastic piece of legislation ever seen: it actually gives subsidies to Corporate Taxpayers who did not pay taxes in the first place, expecting to lay the expense on common Taxpayers, when current Tax law forestalls the collection of sufficient taxes. The next Bush brilliance will be to give Taxpyers a subsidy, because they have to pay taxes. Where does it end?
Posted by: lgl at November 5, 2004 11:06 AMAnd we wonder why the dollar is plummeting?????
Posted by: lfs at November 5, 2004 11:14 AMHuh? I'm not a subscriber, so I can only look at the URL and surmise that TNR published this critique on the 8th. That would be two days from now? OK, I understand that's not the way it really works, but it looks for all the world like this critique of Bush and his congressional party (which was perfectly obvious to any thinking individual at the time the bill was being crafted) was served up to TNR readers either after the election, or very shortly before hand, when it would have very little chance of affecting voting decisions. What friggin' good does this bold foray into real journalism do now? Next, we'll find out that the White House knew all about plans to out Plame before the fact. We'll soon be told that Cheney was overtly assigned the task of implying that Osama and Saddam were buddies, contrary to all known information on the subject. Come on! Pile on it on now, when the damage is done.
Posted by: kharris at November 5, 2004 11:22 AMGiven the present interpretation of reality, good public policy requires that the printing of new, additional U. S. currency be outsourced, rather than the purchasing of newer and bigger printing presses from a manufacturing facility located in the United States. Now lets see, where should the task be outsourced to - umm...Maybe Iraq?
Posted by: bncthor at November 5, 2004 11:32 AMYou don't suppose that three years from now the Chinese will say something to the Bush administration like "Okay, sport - you keep out of it when we invade Taiwan or your interest rates will hit the ceiling" - couldn't happen, right?
Posted by: Uncle Jeffy at November 5, 2004 11:41 AMThere has already been speculation about exactly that possibility, Uncle Jeffy. (Colin Powell's recent strong chiding of Taiwan for saying that it was actually "a separate nation" from China -- which surprised the Taiwanese -- may or may not have something to do with this.)
Posted by: Bruce Moomaw at November 5, 2004 11:48 AMToday, less than 1 week after being re-elected, US Dollar hits all-time low vs. Euro
This is due to all speculaters of currency has dumped the dollar before election and are dumping further. This is due to the deficit, and now foreign investments will steer clear due to US inability, and lack-of-direction/ signal that US wants to reduce the deficit - so irgo
the dollar falls immediately with no cushion, As do trouble for treasury notes/
Is this good for America. How long will Asia prop up the dollar when we have been a bad spoiled child.
Posted by: Dave S at November 5, 2004 11:58 AMhttp://www.dailytimes.com.pk/default.asp?page=story_23-10-2004_pg5_21
Comment: Can high oil prices be good?
By J. Bradford DeLong
World oil prices crossed $40 a barrel in mid-summer, and have since climbed to the mid-$50’s. Today’s oil prices are still only two-thirds the real peak reached during the Iranian Revolution of 1979, and future markets expect the oil price to fall back and settle at perhaps $45 a barrel. But the current high level of oil prices has led forecasters to start reining in their expectations for economic growth.
“Higher oil prices are here to stay,” says the American economic forecaster Allen Sinai. “[T]hat has to subtract growth and could cause core inflation to pick up.” Indeed, according to Sinai, higher oil prices are “the biggest risk...since the bursting of the stock-market bubble in 2000-2001.”
Sinai is hardly alone. If the oil price stays at $40 a barrel, expect it to have next to no effect on short-term world GDP growth. But if the oil price remains at or near $60 a barrel, expect everyone’s forecasts of GDP growth to be reduced by 1% per year.
Posted by: anne at November 5, 2004 12:05 PMEven the Hall-Rabushka Flat tax with a large exemption at the bottom of the income distribution would be a major improvement over where we seem to be going.
Posted by: Richard Green at November 5, 2004 12:21 PMThis is the sort of shit that really gets at me. Subsidies can be good, but a lot of times, they can be very, very bad. (Think of subsidies for alternative fuel development versus subsidies for agriculture.) Here were see a bunch of people who have no ability to given even a slight hint of fiscal responsibility. It seems to have gotten so bad that I almost feel like turning into a Libertarian.
We could aso the old question "Why aren't the grown ups in power?" But instead, let's ask, "Are there any grown ups left?"
And do you want to know the real bitch of this? It was in Sempteber or early October, I believe, when Sen. Inahofe or Sen. Nickles of Oklahoma said that they could not expand the EITC because the program was allegedly rife with fraud. Okay, let's go with that. But then, why is it okay to give tax credits to corporations? It's this sort of twisted thinking that serves as an example of one more reason why I cannot be a Republican.
Posted by: Brian at November 5, 2004 12:44 PMhttp://www.nytimes.com/2004/11/05/business/05drug.html
Study Says Drug's Dangers Were Apparent Years Ago
By GARDINER HARRIS
Merck and federal officials should have withdrawn the painkiller Vioxx from the market as early as 2000 because studies of the drug had clearly shown that it doubled the risk of heart attacks among users, according to a study released yesterday by The Lancet, a British medical journal.
Authors of the study pooled data from 25,273 patients who participated in 18 clinical trials conducted before 2001. They found that patients given Vioxx had 2.3 times the risk of heart attacks as those given placebos or other pain medications. Merck withdrew Vioxx on Sept. 30 of this year after a company-sponsored trial found a doubling of the risks for heart attack or stroke among those who took the medicine for 18 months or more.
An editorial accompanying the study criticized both Merck and the Food and Drug Administration, and described Vioxx's approval and its popularity as "public health catastrophes" that led to over 27,000 heart attacks and sudden deaths.
"For with Vioxx, Merck and the F.D.A. acted out of ruthless, short-sighted and irresponsible self-interest," wrote Richard Horton, editor of The Lancet.
In a statement, Merck said that the Lancet study was not comprehensive or new. "Merck was vigilant in monitoring and disclosing the cardiovascular safety of Vioxx, and we absolutely disagree with any implication to the contrary," the company said.
The Lancet study increases pressure on the F.D.A., which is dealing with allegations that it tried to squelch prescient warnings by its own drug-safety reviewers about the dangers of Vioxx and about the hazards of antidepressant use by children and teenagers.
The media is owned by the very corporations that benefit from this kind of largesse so they won't bother to inform the public. The New Guilded Age.
Posted by: bakho at November 5, 2004 01:26 PMDon't bother moving to Argentina. You're already there.
Posted by: Kosh at November 5, 2004 01:35 PM>"It is in Congress's nature to act like a pig at the trough."<
If THAT'S "true", we need a new Congress....
(AND/OR "a new system" for "selecting" them <]:-)
---------------------------
Safe Seats in House Keep True Races Rare
(Los Angeles Times)
Posted Monday, October 11, 2004, 6:00 am
By Eric Slater Times Staff Writer
California has 53 seats in the House of Representatives, nearly twice as many as any other state, and every one is up for grabs in November — technically.
In the increasingly predetermined reality of House races, just a single seat is really in dispute. And even that one, in the Central Valley, fails to make the cut when Democrats and Republicans list the truly competitive races in the nation.
California, often alone in its embrace of political novelty, is merely the most obvious example of a national phenomenon: congressional races that aren't races at all.
Just two of New York's 29 seats are considered competitive this year. In Florida, one out of 25 involves a race. Of the 435 seats in the House, experts from both parties say, only about 30 are in serious doubt.
" 'Coronations' is a good word when talking about congressional contests," said Rob Richie, executive director of the nonpartisan Center for Voting and Democracy. "We're getting back to the divine right of kings."
Several factors have led to the paucity of real contests, including the high cost of campaigns and the natural advantages of incumbency.
But those who study the subject say the most important driving forces are the careful, computer-aided redrawing of congressional districts and the willingness of incumbents from both major parties to embrace new political maps that help them retain their seats...
http://news.orb6.com/stories/latimests/20041011/safeseatsinhousekeeptrueracesrare.php
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worstpills.org had VIOXX pegged three years ago (they also slam Bexta and whatever the other one is).
Posted by: Brian Boru at November 5, 2004 01:58 PMhttp://www.nytimes.com/2004/10/02/opinion/02topol.html?pagewanted=print&position=
Good Riddance to a Bad Drug
By ERIC J. TOPOL
Cleveland — After three years of denying that the arthritis drug Vioxx could induce heart attacks and strokes, this week Merck bowed to reality: it withdrew Vioxx from the market.
The impact of this decision is far-reaching, and not only because tens of millions of people have tried Vioxx. It also highlights the absence of Food and Drug Administration oversight of the pharmaceutical industry as well as the lack of comprehensive long-term studies of not only Vioxx but its entire class of arthritis drugs.
In 2001, I was part of a team from the Cleveland Clinic that published a paper demonstrating the significant heart attack risk of Vioxx. Our research, published in The Journal of the American Medical Association, found that compared to naproxen, a commonly used over-the-counter anti-inflammatory drug with similar benefits, Vioxx has a five times greater heart attack risk. In response, Merck claimed that early conclusions about the risk were flawed, and attributed the comparatively high heart attack rates to an unproven protective effect of naproxen. Our study was followed by several others demonstrating Vioxx's dangers. Each time Merck had a similar reply: the study was "flawed."
Merck finally had to acknowledge the truth, but only by accident. The company undertook a large, randomized trial of 2,600 patients with colon polyps in hopes of proving that Vioxx could help their condition. In the process, though, Merck discovered that 3.5 percent of patients taking Vioxx suffered heart attacks or strokes as against 1.9 percent taking a placebo. Merck at last did the right thing by voluntarily and abruptly taking Vioxx off the market.
There are two important issues to consider here. First, the risk of heart attack or stroke found in the Merck study, at 15 cases per 1,000 patients, may be greatly underestimated. Merck's trial did not include anyone with known heart disease - patients who might be expected to have the highest risk.
And the problem may extend beyond Vioxx and its users. While it's true that when compared to the other Cox-2 inhibitors, Vioxx has repeatedly carried a far greater risk of heart attack and stroke, none of the manufacturers of Vioxx's class of drugs, called Cox-2 inhibitor agents, have studied patients who already have heart disease. The number of patients who may have sustained heart attack or stroke as a result of using these drugs could be tens of thousands. It would be premature to conclude that the other drugs still on the market, like Celebrex and Bextra, do or do not carry some risk of heart attack until sufficient testing is done.
"The media is owned by the very corporations that benefit from this kind of largesse so they won't bother to inform the public." --Bakho--
And votes are now owned by the voting machine business which is owned by Republicans. Does this not bother anyone?
Posted by: Dubblblind at November 5, 2004 03:33 PMSpeaking STRICTLY as a political-economic 'animal' now--I guess it all depends, Dubblblind at November 5, 2004 03:33 PM:
What's MY 'bother' worth to YOU?
Posted by: Mike at November 5, 2004 03:41 PMKosh,
"Don't bother moving to Argentina. You're already there."
I resent that comment!
Argentina would not invade a foreign country (except when it was a dictatorship funded and trained by the US).
And it has a press that recognizes that journalism does not mean writing "he said, she said".
"Berkshire had foreign exchange forward contracts involving eight currencies worth about $20 billion at the end of the quarter, it said in its earnings release."
anne: bextra, a faster-acting celebrex, was withdrawn a month ago
Posted by: vixen person at November 5, 2004 06:26 PManne: bextra, a faster-acting celebrex, was withdrawn a month ago
Posted by: vixen person at November 5, 2004 06:26 PMThe red states hate us left and right coasters and the gays so much they vote in the crowd that will pass me and mine another tax cut. My side is winning the culture wars. Keep it up.
Posted by: dilbert dogbert at November 5, 2004 07:28 PM> And votes are now owned by the voting machine business which is owned by Republicans. Does this not bother anyone?
yes.
www.blackboxvoting.org
mid-term elections are coming.
Lets try to stop certain people from stealing another one.
The lessen to be learned from the Merck-Vioxx tragedy, is that we need procedures for follow-up independent testing of drugs once they are approved. Drug companies have no reason to support such testing, and every reason to fight such a mandate.
Posted by: anne at November 6, 2004 04:30 AManne, per your earlier quote from the NYT, "Authors of the study pooled data from 25,273 patients who participated in 18 clinical trials conducted before 2001." A quick Google shows that at least 5 of those studies were independent of the FDA and big Pharma, so the problem isn't precisely as you state (a lack of follow-up studies). Follow-up studies on coxibs have occurred, but the FDA responded slowly and incompletely. They did issue warnings on Vioxx in 2001 against useage with patients who had obvious cases of ischemic heart disease (plus advised lowering dosage from 50Mg to 25mg), but they were mute on the thrombosis problems. There were similar warnings from Merck in Canada around the same time. I don't think the problem is an inefficient market for follow-up science. The problem appears to me to be a lax regulatory system, at least as far as I can reconstruct on the history of Vioxx.
Posted by: consigliere at November 6, 2004 06:58 AMThe Money Changers have taken over the Temple.
Posted by: Thumb at November 6, 2004 10:50 AMConsigliere,
Agreed. The problem is data is not routinely collected on patient well-being after beginning a regimin with a newly approved drug. Efficacy and safety problems can be neglected once drugs are approved for there is no routine procedure for data such collection. Had Merck not begun a trial to determine in Vioxx use might be expanded, the scattered earlier smaller trials would have been neglected longer.
Posted by: anne at November 6, 2004 11:50 AMThe term "national interest" crops up a couple of times.
First, "If anybody needs a final reminder of this administration's lack of concern for the *national interest*--indeed, the lack of a policy process that could even conceivably advance it--this is it." Second, "The reason this sort of spectacle is so rare is that most presidents have some sense of responsibility to the *national interest*."
The national interest is surely what a democratically elected government decides it is. In this case it seems to have been decided that helping US business compete successfully is in the national interest.
Haven't decisions of the Supreme Court supported the bias towards national business?
Posted by: IJ at November 7, 2004 03:24 AMhttp://www.nytimes.com/2004/11/07/business/yourmoney/07view.html
Taxes and Consequences: The Second Term Begins
By DANIEL ALTMAN
PRESIDENT BUSH began his first term with projections for $5.6 trillion in budget surpluses. Though he will start his second term facing at least $2.3 trillion in deficits, according to the Congressional Budget Office, his tax-cutting ambitions are even greater. Here are some of the initiatives that he's likely to push, and the unanswered questions that go with them.
Privatization of Social Security President Bush said he wants to give workers an opportunity to divert part of their payroll taxes to individual investment accounts, in the hope that the financial markets would pay higher returns than the existing Social Security system. That money would otherwise have gone to pay benefits for current retirees, however. How would the administration close the gap? Also, who would choose where workers could put their money? Would they have been able to invest in Enron? What about investing abroad? And finally, what would happen if financial markets crashed? In Chile, whose private pension system has been cited as a model by President Bush, some retirees saw their benefits drop by 7 percent in 2001. Could that happen here?
Simplification of the income tax It is not completely clear what the president means by this oft-heard campaign promise. Simplification could take several forms, from closing loopholes and streamlining rates (as in the 1986 restructuring), to a complete overhaul resulting in a flat tax. So, which is it?
Making the 2001, 2002 and 2003 tax cuts permanent The president has repeatedly voiced his determination to achieve this goal, but the medium-term cost could be huge. According to the Congressional Budget Office, making the tax cuts permanent would increase the projected federal debt by a third, or about $2.2 trillion, by 2014. Without any indication that the budget gap will eventually close, interest rates could rise as investors here and abroad become leery. Is this change worth the risk?
Tax-free saving accounts The Bush administration proposed an enormous expansion of saving accounts similar to Roth IRA's, where after-tax income funneled into a special portfolio would generate tax-free returns. Individuals would be able to salt away up to $15,000 a year, under the initial proposal. Most families, assuming they opened accounts for their children, would be able to shelter their entire portfolios from taxes within several years. Financial assets generated about 12 percent of individuals' taxable income in 2002. Could the government afford to forgo the resulting revenue? If there are projected benefits for the economy, how big are they?
Abolishing the tax on dividends The White House sought to eliminate this form of "double taxation" in 2003. In the end, Congress cut tax rates on dividends and capital gains, but didn't abolish the taxes. Economists have not seen a marked improvement in household saving as a result of these changes, however, so the argument to go further will not be straightforward. With big deficits already on the way, how would the administration justify revisiting this tax?
As I commented above, now we have a real beast to starve. Get on the bandwagon.
Posted by: dilbert dogbert at November 7, 2004 07:41 AMStarve the beast? Should this be the model for the global economy?
Anyway, the G8 looked into what it thinks is a serious accounting problem here. The group commissioned research into fiscal indiscipline - 'Confronting the Impediments to International Economic Cooperation: Domestic Politics and International Monetary Relations in the G8'.
The report suggests that balanced public accounts are not always possible when national voters have a say, therefore external regulation is necessary. "The implications for G8 diplomacy are compelling."
However initiatives to tackle the problem seem to be thin on the ground. And things are getting worse in the developed world (eg, in the US, and disputes in the EU over the S&G Pact)
A further opportunity to address the concerns will come when the UK chairs the G8 in 2005.
February 5, 2004
Some lessons from Sweden on the pros and cons of privatizing Social Security.
By Alan B. Krueger - New York Times
"YOUNGER workers," President Bush said in his State of the Union address, "should have the opportunity to build a nest egg by saving part of their Social Security taxes in a personal retirement account."
According to former Treasury Secretary Paul H. O'Neill, the president believes that the reason he was elected was his bold -- some would say risky -- stance on replacing part of Social Security with personal accounts. If the president holds onto office in November and his party continues to hold Congress, the creation of some sort of personal retirement accounts as part of Social Security seems likely.
Although it is impossible to know what form such accounts might take, in 2000 Sweden instituted a system of personal accounts that holds many lessons for any country seeking to reform its retirement system.
Sweden now has a blended system, an approach Mr. Bush apparently favors. Employers and employees contribute a combined 16 percent of payroll toward a "pay as you go" retirement system like Social Security, and an additional 2.5 percent toward individual retirement accounts. Those born after 1954 are fully in the new system, while older workers are phased in.
The reform process began in 1991, when a center-right coalition came to power. At the time, Sweden's generous retirement system was expected to exhaust its "buffer" funds in about 20 years, a more dire situation than what now confronts the United States; Social Security will not exhaust its trust fund until 2042, according to the latest projections.
To address its problems, Sweden set up a committee with representatives from all parties in Parliament. Because the reforms were expected to last for decades, there was pressure to devise a plan with broad support, said Annika Sunden, an expert on pensions at Stockholm University. There was agreement back in 1994 that reform would include individual accounts, so beginning in 1995 the government began tucking away 2.5 percent of payroll for employees to invest once the system was set up.
Personal investment accounts were not established until 2000, with a bewildering array of funds to choose from. Some 456 funds participated initially, and the number has since grown to around 600. Most funds invested in stocks, with a quarter primarily in Swedish stocks. Workers could choose up to five funds.
Anyone who did not choose a fund was automatically assigned to the default fund, which was set up by the government. The default fund must invest 80 to 90 percent of its assets in stocks.
A central pension agency records all the accounts and fund values. The agency also ran an ad campaign to discourage people from going into the default fund.
Nonetheless, a new study by Henrik Cronqvist and Richard Thaler of the University of Chicago finds that a third of Swedish workers did not make an active choice when the system started in 2000, and were therefore assigned to the default fund. Since 2000, fully 92 percent of new enrollees have not made a choice and have been added to the default fund.
Apparently, the large number of funds to chose from paralyzed many individuals from making a choice. This has also been the experience of many 401(k) plans that have a default option in the United States: the default option, whatever it may be, is chosen by a high proportion of investors. People are also reluctant to switch once they are in a fund, a tendency that the economists William Samuelson and Richard Zeckhauser have called status quo bias.
Another bias that Mr. Cronqvist and Mr. Thaler documented is home bias, a tendency to pick funds composed of Swedish companies, as opposed to a diversified portfolio of companies from around the world. Nearly half the money actively invested was in Swedish stocks. The default fund, by contrast, was better diversified: only 17 percent was in Swedish stocks.
They also found that people tended to pick funds in sectors that had done well recently, and to pick funds with low fees. The average fee for active choosers was 77 basis points, or 0.77 percent of the funds invested. For the default fund it was just 16 basis points. Chile's mandatory savings plan provides another point of comparison. Fund management fees were much lower in Sweden than administrative costs in Chile's plan, probably because the central pension agency orchestrated rebates and advertised the fee rates.
How did the funds do?
Sweden had bad timing. The stock market tumbled just after the program started.
It turns out, however, that the default fund lost less money than the aggregate portfolio of selected funds. The average selected fund fell by 40 percent in the first three years of the program, while the default fell 30 percent.
Although three years is a short period, there is no evidence that the active choosers made better choices than those assigned to the default fund.
For the United States, the main lesson from the Swedish experience, Ms. Sunden said, is that the default fund should be constructed very carefully, because it will attract many investors. (Ditto for 401(k) plans.) She also highlighted that more use should be made of generation funds, which move money into less risky assets as workers approach retirement, and that converting funds into annuities should be mandatory for retired workers.
The consequences of making a bad investment decision in Sweden are much less severe than they would be in the United States if Mr. Bush gets his way and allows workers to divert part of the 12.4 percent of their paycheck that goes to Social Security -- half from the employee, half from the employer -- into personal accounts.
Sweden devotes 16 percent of payroll to an earnings-linked pension system, creating a strong safety net beneath individual accounts. Sweden also established a "guaranteed pension" that provides a minimum pension amount, in excess of the poverty line, to anyone with little or no pension income.
All this leads one to wonder if it is possible to design a system that diverts some Social Security contributions into personal accounts yet still provides adequate insurance against bad luck and bad investment decisions. Moreover, the current American system is not beyond repair. In their new book, "Saving Social Security: A Balanced Approach" (Brookings Institution Press), for example, Peter A. Diamond of M.I.T. and Peter R. Orszag of the Brookings Institution outline a plan to preserve the best elements of Social Security by making politically difficult but sensible reforms, like indexing benefits to rising life expectancy and collecting some payroll taxes above the earnings cap.
Sometimes, a little status quo bias is not such a bad thing.
Posted by: anne at November 7, 2004 09:41 AMMany governments like a "pay as you go" system of accounting for retirement. It's one way of cutting charges to the public accounts.
The annual charges to the US public accounts are said to be understated by $1.5 trillion, and the UK’s by at least £57 billion. The International Federation of Accountants has been landed with this as an accounting problem, but it's officially a political problem. Nevertheless the IFAC is persisting: its Public Sector Committee has issued a consultation paper - ’Accounting for Social Policies of Government’. The consultation period is now over, and the Committee is now considering whether public sector accounts should disclose the colossal off-balance sheet liabilities. The consultation paper sets out the key problem: national Parliaments are not really obliged to pay out pensions to residents. Therefore should the national accounts be charged with the liability?
A political problem indeed. Another matter for the G8's agenda?