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February 09, 2005

Opinions on Shape of Earth Differ (Why Oh Why Can't We Have a Better Press Corps? Department)

Paul Krugman likes to say that if the White House were to announce tomorrow that the world is flat, our press is so disfunctional that the leads the following day would read "opinions on shape of earth differ."

Here's our latest example of this phenomenon: the Washington Post'sJonathan Weisman sees a "heated debate" among economists between those who (like me) believe that administration forecasts of 6.5% stock returns and 1.9% economic growth rates are inconsistent, and those who see no trouble:

washingtonpost.com: Bush's Social Security Plan Assumes Much From Stocks: President Bush is relying on projections that an aging society will drag down economic growth. Yet his proposal to establish personal accounts is counting on strong investment gains in financial markets that would be coping with the same demographic head wind. That seeming contradiction has become fodder for a heated debate among economists, who divide sharply between those who believe the stock market cannot meet the president's expectations and those who say investor demand from a faster-growing developing world will keep stock prices rising...

On my side, Weisman quotes "Douglas Fore, director of investment analytics for TIAA-CREF," "Richard Jackson, director of the Center for Strategic and International Studies' global aging initiative," "Germany's Mannheim Research Institute," "Richard Berner, senior U.S. economist at Morgan Stanley," "Prudential Equity Group strategist Edward Keon," Dean Baker (who owns this issue), and me.

On the other side, Weisman cites... well, it sounds like he's citing Jeremy Siegel from Wharton:

"The only way to save the financial markets is very rapid growth in the developing world."... Growth in China, India and other parts Asia will help, Siegel said, because the growing middle class in those countries will want to invest in the West, creating demand for the stocks and bonds that retirees will sell. But if the economic laggards in Africa, the Middle East and Latin America don't speed up fast, the pool of capital from the developing world will not be large enough to make up for the West's decline. He gives future workers an 84 percent chance of beating the White House's 3 percent threshold. That might seem like good odds, he said, but, "if you're going to miss it, that's going to hurt a lot more than if you exceed it."

But Weisman has a problem: Siegel isn't on the other side, he's on my side. He's not saying that stock market returns will average 6.5%, he's saying that there's an 84% chance that they'll average more than 3%. That's a wide gap. (IIRC, at current dividend yields Jeremy's forecast of long-run stock returns is roughly 5% per year.)

So who is he citing on the other side? "Bush's Council of Economic Advisers... predicted that gains from the stock market, over the long term, will continue to be healthy," and unnamed "White House economists [who] say such calculations are absurd because they ignore global economic growth and investment in countries unaffected by the demographic slowdown."

If there really were a "furious debate," shouldn't Weisman have been able to find at least one White House economist who would agree to be quoted by name to say that my (well, actually Dean Baker's and Paul Krugman's) calculations are "absurd"? Shouldn't Weisman have been able to find one reputable economist not on the White House payroll willing to say that 1.9% per year future real GDP growth is not inconsistent with 6.5% real stock returns starting from our current price-dividend ratio of more than 60?

The fact is that there is no furious debate among economists. Among reputable economists, there are those who expect stocks to fall significantly in the short run from their current heights, there are those who expect U.S. economic growth in the long run to be a lot faster than 1.9% per year, there are those who expect stock returns to be less than 6.5% real in the long run, there are those who bounce around between those positions, and there are those who haven't thought the issues through.

Whatever it is when one side consists of unnamed White House functionaries who hide their identities, it's certainly not a "furious debate" among economists. Weisman does those of his readers who don't read beyond the fold no good service when he tells them that it is.


UPDATE: Jonathan Weisman responds (to another correspondent):

Alas, I fear you have been reading Brad DeLong's website. I suppose he is very persuasive to his readers, but I think the story is more complicated than he makes it out to be. There is a fierce debate, but it is not neat and simple and it is not necessarily left vesus right. Richard Jackson at CSIS and the Mannheim Research Institute for the Economics of Aging believe that global aging will impact financial markets, but not terribly, certainly not as terribly as Prof. DeLong and Dean Baker maintain. A recent Mannheim paper by Axel Börsch-Supan, Alexander Ludwig and Mathias Sommer concluded that the hit to the return on capital would be 100 basis points, 1 percent -- a finding they presented as "comforting." Jeremy Siegel also would not put himself into the DeLong-Baker-Krugman camp. He is concerned, but he believes investors in the developing world could indeed soak up much if not all of the selling in the developed world. Indeed, he specifically told me he would counsel younger workers to take their chances on private accounts if given the chance. The McKinsey Global Institute, which has also studied the matter, concluded we just can't know what will happen to the stock market in the future because we can't know how investment in and investors from the developing world will impact western markets. This is a recurring theme, and not just from a few crackpots.

On DeLong's side is Richard Berner at Morgan Stanley, Edward Keon at Prudential and Douglas Fore at TIAA-CREF. Against him are Steve Goss, Social Security's chief actuary, who made the disputed projections, the White House Council of Economic Advisers and a bunch of conservatives whom I didn't quote by maybe should have, including Kevin Hassett at the American Enterprise Institute and Donald Luskin, whom Prof. DeLong knows full well disagrees fiercely with him. Just because Prof. DeLong says Mr. Luskin is the stupidest man in the world doesn't mean I as a reporter have to ignore Luskin's writings on the subject. Indeed, when various economic bloggers start calling each other idiots over the subject, I think it qualifies as a fierce debate.

As always when encountering Weisman, it's terribly depressing because it's hard to know where to start. For example, Weisman writes that "Jeremy Siegel also would not put himself into the DeLong-Baker-Krugman camp.... Indeed, he specifically told me he would counsel younger workers to take their chances on private accounts if given the chance." Well, I would tell younger workers who have succeeded in college to take their chances on private accounts (for those who haven't gone to or been successful in college the risks are much more serious). It's not that I--or Dean Baker, or Paul Krugman--thinks that properly-diversified, unchurned, low-fee private accounts are a bad investment vehicle for those with a sufficient retirement income floor to afford the risks. It's that the Bush administration's assumptions about stock returns require rapid projected future economic growth in the background, while the claims that Social Security is in dire crisis require slow projected future economic growth. We're saying that the Bush administration should not be allowed to have it both ways: starting from current dividend yields, you can forecast a 1.9% long-run economic growth rate or a 6.5% long-run real stock return, but not both.

Weisman seems--genuinely--to not know this. Which leads me to the natural question: why is he writing on a subject about which he knows so little?

Let me bring up one more point--one more tree of misconception out of Weisman's forest. Weisman claims that Kevin Hassett is happy forecasting future real GDP growth rates of 1.9% per year and future equity returns of 6.5% per year. I very much doubt it. The point of Hassett's _Dow 36,000_ after all, was that (a) the market would jump in the 3-5 years after its publication to a point where (b) expected stock returns would be 3.5% per year: no higher than bond returns, and remain equal to bond returns thereafter.

The claim that equity returns will average 3.5% per year is one of Hassett's core intellectual commitments. If Hassett is indeed throwing that over the side because it is inconvenient to the White House this week, that is a remarkable thing indeed.

But I see no sign that Weisman asked Hassett about the consistency of what he was saying yesterday with _Dow 36,000_, or indeed knows that Kevin Hassett has a longstanding commitment to the position that equity returns will be relatively low in the future.

Why, as one senior press hand was telling me only this morning, "Jonathan's big problem is that he's not that deep into the issues, and he has no backup. There's nobody that he can go to in that building to tell him 'this was how X was trying to mislead you' or 'this is Y's history' or 'be very careful here: if you get this detail Z wrong, they'll come down on you extremely hard.' (As indeed, the White House did to him last week, when Weisman wrote "If a worker sets aside $1,000 a year for 40 years, and earns 4 percent annually on investments, the account would grow to $99,800 in today's dollars, but the government would keep $78,700" instead of "If a worker sets aside $1,000 a year for 40 years, and earns 4 percent annually on investments, the account would grow to $99,800 in today's dollars, but the effect on the worker's retirement income would be the same as if the government kept $78,700".)

Posted by DeLong at February 9, 2005 03:52 PM

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Comments

The social security shortfall is predicated on a 1.9% GDP growth rate. Does anyone know at what GDP growth rate is it predicted that social security will not experience a shortfall over 75 years. In other words, what is the social security breakeven point in terms of GDP? Thanks.

Posted by: Dan at February 9, 2005 10:02 AM


Weisman is a whore. You hear that Weisman? I hope you read this because you have proven over and over what a stinking little whore you are. Get some integrity, loser.

Posted by: The Fool at February 9, 2005 10:07 AM


Dan, the 1.9% GDP growth rate is the intermediate estimate. For the "low cost" estimate, the Trustees Report used 2.2% GDP growth, but that is NOT the only variable they changed (you can see the report here):
http://www.ssa.gov/OACT/TR/TR04/trTOC.html

The "low cost" estimate shows no problem with SS - ever. I am not aware of anyone modeling just changing the GDP growth rate.

Posted by: CalculatedRisk at February 9, 2005 10:26 AM


And how exactly is there to be robust growth in the developing world, if the U.S. current account deficit is soaking up all the surplus capital in the world, all the more so with Social Security privatization debt, and developing economies are left only with the option to cater to U.S. import consumption demand, through de facto price deflation?

Posted by: john c. halasz at February 9, 2005 10:44 AM


"Growth in China, India and other parts Asia will help, Siegel said, because the growing middle class in those countries will want to invest in the West, creating demand for the stocks and bonds that retirees will sell."

?????

Why would they want to invest in the US?

A very large percentage of US companies cannot make the products that they sell. They are purely marketing and distribution entities, and not only do not own the factories, but don't even own the designs, patents, or any of the intellectual property underlying the products. Basically, they can't make anything that anyone in Asia would want to buy.

And as marketing and distribution entities those companies are selling into a market whose buying power is heavily dependent on loans from Asia.

This system is sustainable only as long as trading continues to be based on greater-fool-theory price appreciation, with no one demanding that their investments actually yield meaningful cash flow. Perhaps that can go on forever. But perhaps not; the Japanese real estate market operated on a greater-fool-theory basis for decades, but they ran out of fools, and now the watchword is "Kane wo umanai fudosan wo kau na!" {"Don't buy real estate that doesn't yield cash!"]

Posted by: jm at February 9, 2005 11:00 AM


Ah, but this type of "reporting" is ubiquitous. You can see it reflected in any newspaper article or TV report on just about any topic. Global warming is a great case in point--there are no (as in none, zero, not a single one) credentialed scientists or researchers who dispute global warming as being caused or at least aggravated by human activities. Yet, when reporters write or tape pieces on this subject, we're invariably treated to the "dispute," "debate," and so forth in the scientific community about global warming. In fact, the only other side in this "debate" consists of either industry flacks or administration political appointees--people with no scientific training, no data, and no studies to back their contention.

Why is it that reporters simply cannot look at the balance of information, detect that one side is obviously full of shit, and let the readers know that that side is trying to hoodwink the people?

Posted by: Derelict at February 9, 2005 11:05 AM


As Ambassador Wilson put it succinctly in an interview on Daily Kos today,

"No longer is there a quest for the truth so much as there is this apparent need to present both sides of an issue even if one is nothing but lies and distortions. Giving the same value to fiction as to fact in the interest of so-called fairness is to mislead the American people and the press has become party to that."

http://www.dailykos.com/story/2005/2/9/94615/61143

The fact that mention of this dynamic has become utterly commonplace in no way detracts from the dynamic's status as an advanced-stage, malignant cancer on American democracy.

Posted by: Steady Eddie at February 9, 2005 11:07 AM


It's well known - I pointed it out on my blog - that journalists count like the rabbits in Watership Down: one, two, three, many.

Posted by: Alex at February 9, 2005 11:08 AM


One irony is that developing country capital does flow to the US, to buy Treasuries, for now. But to pitch this as a long-term support for the stock market -- crazy. Has Greg Mankiw just trashed all his writings on convergence?

Posted by: P O'Neill at February 9, 2005 11:27 AM


While I have a lot of respect for Prof. Siegel, I'm just curious about one presumption that underlies his reasoning. Is it possible that equity markets in (currently) developing countries will evolve to the point where their transparency and access rivals that of U.S. equity markets, leading foreign investors to exhibit the home-country bias that seems of affect investors in general? And if those equity markets do evolve in this manner, and those investors do stay at home, who will buy all those U.S. equities and generate those fantabulous returns?

Posted by: Uncle Jeffy at February 9, 2005 11:43 AM


The main quote from the other side of the "fierce" debate is this from the CEA:

"Although short-run movements in growth can affect stock market returns, there is no necessary connection between stock returns and economic growth in the long run," the White House said.

This follows a drum-beat of comment favoring the Dean/Krugman/DeLong side of the debate. So the structure of the article is something like this --

There is a debate about whether the low-ball estimate of GDP growth necessary to justify wrecking Social Security also implies stock market performance so bad that private accounts won't be worth the trouble. On the side arguing that slow growth means rotten stock market performance are all these impressive and sincere sounding financial market experts. The other side offers nothing more than this absurd quote, without any effort at justification. We are forced to report that the debate is between economists because the CEA is staffed by a bunch of economists and the CEA released the quote, even though none of the economists was stupid enough to sign the stupid quote. We report, you decide.

If the structure that I think I see is the intended structure (intentionalist fallacy alert), then if we are dealing with journalistic whores, they are in this case whores with hearts of gold. Yes, they followed the opinions-on-the-shape-of-the-earth-differ model of journalism, but I think I detect a tongue in a cheek.

Posted by: kharris at February 9, 2005 11:57 AM


kharris-

Nice reading. What worries me is not only that

1) most people don't read newspapers

but

2) of those who do, most wouldn't be reading carefully enough (or be sharp enough) to catch the irony (if it was intended--you've almost convinced me).

Inside jokes won't do it. The press should forget about objectivity through selective quotation, refuse to print anything said by any politician, "official" or "expert" and go ad fontem.

The innumerable immemorious shills have built such a vast and byzantine allegorical structure of misrepresentations atop this country that deconstruction, however pointed, won't hack it any more. We need to scrap everything and start over.

Perhaps a good first step would be to replace the press corps with academia--gradual students and profs are smart enough and mad enough to do a much better job. The ex-reporters could then go from town to town preaching the word of Saint Francis, and the universities would be left to the porcupines. That would be interesting.

-NM

Posted by: Nicholas Mycroft at February 9, 2005 12:31 PM


KHarris

Nice reading, again....

"If economic growth is slow enough that we've got a problem with Social Security, then we are also going to have problems with the stock market. It's as simple as that," said Douglas Fore, director of investment analytics for TIAA-CREF Investment Management Group. A spokeswoman said the company has not taken a position on the Social Security debate.

In the next two decades, as elderly populations swell throughout the developed world, retirees will begin withdrawing their savings, selling their financial holdings to raise cash and potentially glutting the world with stocks and bonds. Richard Jackson, director of the Center for Strategic and International Studies' global aging initiative, called it "the great depreciation scenario." Germany's Mannheim Research Institute for the Economics of Aging dubs it the "asset meltdown hypothesis."

That would not be an auspicious environment for young investors opening personal accounts to replace a portion of their traditional Social Security benefits.

"If there isn't an alternative source of demand for those assets, you're going to have a tremendous slowing of growth," said Jeremy J. Siegel, a University of Pennsylvania finance professor who just completed a book on the subject. "The only way to save the financial markets is very rapid growth in the developing world."

Compounding the problem of oversupply, economic growth -- predicted by the Social Security Administration to slow from a historical annual rate of 3.5 percent to a sluggish 1.9 percent -- would hit corporate profits and lower stock prices further, the theory goes. That would cause stock prices to drop, because they are priced as a multiple of a company's earnings.

The debate over future stock values has become so fierce that Bush's Council of Economic Advisers issued a statement to rebut its critics. It predicted that gains from the stock market, over the long term, will continue to be healthy.

"Although short-run movements in growth can affect stock market returns, there is no necessary connection between stock returns and economic growth in the long run," the White House said.

Posted by: anne at February 9, 2005 12:43 PM


What the Council of Economic Advisors holds is that there is no limit to price earning ratio of stocks. As Paul Krugman and Dean Baker point out, for the CEA a p/e of 70 to 100 makes fine sense.

Paul Krugman:

The price-earnings ratio - the value of a company's stock, divided by its profits - is widely used to assess whether a stock is overvalued or undervalued. Historically, that ratio averaged about 14. Today it's about 20. Where would it have to go to yield a 6.5 percent rate of return?

I asked Dean Baker, of the Center for Economic and Policy Research, to help me out with that calculation (there are some technical details I won't get into). Here's what we found: by 2050, the price-earnings ratio would have to rise to about 70. By 2060, it would have to be more than 100.

In other words, to believe in a privatization-friendly rate of return, you have to believe that half a century from now, the average stock will be priced like technology stocks at the height of the Internet bubble - and that stock prices will nonetheless keep on rising.

Posted by: anne at February 9, 2005 12:48 PM


"Although short-run movements in growth can affect stock market returns, there is no necessary connection between stock returns and economic growth in the long run," the White House said."

Gawd. I hadn't seen that quote. Well, I guess from a certain perspective there is no necessary connection between anything and anything.

Paging Jacques Derrida....

-NM

ps or David Hume, come to think of it.

Posted by: Nicholas Mycroft at February 9, 2005 02:19 PM


. . . you have to believe that half a century from now

Again, this is the wrong argument about Social Security. No one has any idea where we will be in 90 days, let alone 5 years.

The first point that should be made, constantly, is that the very regressive social security tax will have a surplus of +/-$115 billion, this year. Because that is a regressive tax, first dollar tax, it is being paid by younger, lower income workers.

The position of the Democratic Party should be that we eliminate the tax and replace such with a consumption tax that exempts savings. For example, at VAT property and casualty insurance premiums would really hit the wealthy and business.

The second point that should be made is that economic growth should be tried, first. There are a whole string of pro growth policies, starting with reducing the deficit, again by the right kinds of taxes.

Posted by: Moe Levine at February 9, 2005 02:37 PM


jm's argument has merit if viewed in the long term:

"Why would they want to invest in the US?"

"A very large percentage of US companies cannot make the products that they sell. They are purely marketing and distribution entities, and not only do not own the factories, but don't even own the designs, patents, or any of the intellectual property underlying the products. Basically, they can't make anything that anyone in Asia would want to buy."

We act as though only the U.S. can create Wal-Mart style corporations or their technical equivalents in various industries.

As we move into the more limiting role of being merchants as opposed to creators and producers of many goods, it's unlikely that we will continue to dominate the world. Yes, we're still creating a few classes of goods, but the list is shrinking.

It appears that, in large measure, we've bet the farm on only becoming merchants of services and goods. We sell boxes, and we don't particularly care what is inside them. Hardly the group one would chose to rule the world.

It is difficult to watch us give away and eliminate our skill base in so many industries. The exceptions are fine, but the rest of the picture is alarming.



Posted by: Movie Guy at February 9, 2005 02:52 PM


Now I had thought that Andrew Samwick and I could be "on the other side" but there was one little problem. Your post that payout ratios must allow at least enough retained earnings for investment in new assets to support growth was interesting and I HAD thought I could model the following two things out: (a) a scenario consistent with your sensible observation; and (b) one where lower growth did not lower the P/E ratio. But this model had P/E = the inverse of the discount rate and if the discount rate were 7, P/E would be in the low teens. But to get P/E to be 20 and the rate of return to be around 7%, the revised model had to concede that a fall in growth rates lead to a fall in the P/E ratio. So as I read the CEA analysis, I had to go "no, no, no, no, no" (ala Tim Russert). Yep - my attempt to be on the other side utterly failed.

{Sorry. Better luck next time :-) ]

Posted by: pgl at February 9, 2005 03:43 PM


I actually thought you were being a wee bit hard on Weisman until I saw what he wrote about Luskin. If he doesn't understand enough economics, investments and just plain math to understand that Luskin is to be discounted to the realm of a John Lott and perhaps even beneath, then he really is not fit to write for a paper of record on any subject related to economics, investments or just plain math.

Ugh.

And PGL, congrats. I have no idea why you tried in the first place, since increasing payout does not make a fellow sanguine about growth, but I'm pleased to see you worked it out. How otherwise -smart people like Samwick haven't seen by now is beyond me.

Posted by: wcw at February 9, 2005 04:19 PM


reporters are just not that smart.
There's no structural basis for having reporters with extra qualifications being being fast, competent writers, so hardly any such exist.

Posted by: marky at February 9, 2005 04:51 PM


I watched CBS calculate SS private account returns and they used an 8% return rate. This was presented as the average over X years. Yikes. How reasonable is that?

Posted by: bakho at February 9, 2005 05:00 PM


marky wrote, "There's no structural basis for having reporters with extra qualifications being being fast, competent writers, so hardly any such exist."

Exactly. A friend of mine was in print journalism for a couple years once. It's quite clear that the number one skill required is writing ability, NOT analytical ability. A filter effect occurs wherein the vast majority of journalists are good at writing (or speaking, in the case of broadcasting), but not necessarily reasoning.

Posted by: liberal at February 9, 2005 05:09 PM


Liberal,
Thanks so much for reading through my typo.. obviously I could not be a reporter:)

Posted by: marky at February 9, 2005 05:11 PM


Anne has pointed out that if economic growth approaches the 3.4% to 3.5% average of the last 60 to 75 years, then a nominal return above 8% for the S&P Stock Index is reasonable. The question is whether we assume economic growth can continue at historical levels. Though with growth above 2.2%, there will be no problem for Social Security.

Posted by: lise at February 9, 2005 05:15 PM


We could do a partial rescue of Hassett by positing that the return on bonds will have to rise to compensate for the increased default risk on US Treasuries. Therefore he gets bailed out of his 36,000/3.5% prediction because it's bond returns rising to the level of stock returns, due partly to the influence of his own fiscal policy prescriptions. He, like the administration he loves, has made his own reality when the existing one didn't look so good.

Posted by: P O'Neill at February 9, 2005 05:26 PM


The point that Paul Krugman has been making is that the intent is not to reform Social Security but to finish with it. There is no problem with Social Security that needs attention now. There is a government deficit problem, but the government deficit which will be used as a reason to slash away social benefit programs is not a result of too much spending but of too little revenue.

Federal spending as a proportion of GDP is below the average of the last 20 years, while revenue as a proportion of GDP is at 50 years lows. There is a severe deficit that has been purposely created in the general government account. Social Security is of course in surplus and helping to limit the deficit, but the intent is to finish off the program.

Posted by: anne at February 9, 2005 05:32 PM


http://www.nytimes.com/2005/02/08/opinion/08krugman.html?ex=1108098000&en=b77e6f02f561ae6f&ei=5070

February 8, 2005

Spearing the Beast
By PAUL KRUGMAN

The attempt to "jab a spear" through Social Security complements the strategy of "starve the beast," long advocated by right-wing intellectuals: cut taxes, then use the resulting deficits as an excuse for cuts in social spending. The spearing doesn't seem to be going too well at the moment, but the starving was on full display in the budget released yesterday.

To put that budget into perspective, let's look at the causes of the federal budget deficit. In spite of the expense of the Iraq war, federal spending as a share of G.D.P. isn't high by historical standards - in fact, it's slightly below its average over the past 20 years. But federal revenue as a share of G.D.P. has plunged to levels not seen since the 1950's.

Almost all of this plunge came from a sharp decline in receipts from the personal income tax and the corporate profits tax. These are the taxes that fall primarily on people with high incomes - and in 2003 and 2004, their combined take as a share of G.D.P. was at its lowest level since 1942. On the other hand, the payroll tax, which is the main federal tax paid by middle-class and working-class Americans, remains at near-record levels.

You might think, given these facts, that a plan to reduce the deficit would include major efforts to increase revenue, starting with a rollback of recent huge tax cuts for the wealthy. In fact, the budget contains new upper-income tax breaks.

Any deficit reduction will come from spending cuts. Many of those cuts won't make it through Congress, but Mr. Bush may well succeed in imposing cuts in child care assistance and food stamps for low-income workers. He may also succeed in severely squeezing Medicaid - the only one of the three great social insurance programs specifically intended for the poor and near-poor, and therefore the most politically vulnerable.

All of this explains why it's foolish to imagine some sort of widely acceptable compromise with Mr. Bush about Social Security. Moderates and liberals want to preserve the America F.D.R. built. Mr. Bush and the ideological movement he leads, although they may use F.D.R.'s image in ads, want to destroy it.

Posted by: anne at February 9, 2005 05:37 PM


um, opinions on spelling of 'dysfunctional' differ.

Posted by: Randolph Fritz at February 9, 2005 06:12 PM


My, my. Arrogance. Y'all are as bad as Juan Cole.

I'm not good on the petty facts or the abstruse theories, but I have **good judgement** and that's what's important.

Posted by: John Emerson at February 9, 2005 07:09 PM


http://www.whitehouse.gov/news/releases/2005/02/20050209-15.html

{It is a funding problem. In the year 2027, the federal government is somehow going to have to come up with $200 billion more than the payroll tax to make sure we fulfill the promise. And the problem gets worse and worse. Starting in 2018, which isn't all that far away, 13 years away from now, the system goes into the red. That means more money coming out of Social Security than going in.

Some in our country think that Social Security is a trust fund -- in other words, there's a pile of money being accumulated. That's just simply not true. The money -- payroll taxes going into the Social Security are spent. They're spent on benefits and they're spent on government programs. There is no trust. We're on the ultimate pay-as-you-go system -- what goes in comes out. And so, starting in 2018, what's going in -- what's coming out is greater than what's going in. It says we've got a problem. And we'd better start dealing with it now. The longer we wait, the harder it is to fix the problem.}

The gauntlet is thrown. Bush has publicly said he does not intend to repay the Trust Fund Treasury Bonds.

Posted by: Mark Jones at February 9, 2005 07:10 PM


Sometimes, in my more cynical moments, I hope George W Bush succeeds in destroying social security. The white working class who have handed the GOP the country will be the ones to suffer, not so much white collar liberals, and they will finally perhaps find out what their hatred of abortion and gays and immigrants and others has cost them.

Posted by: Robin the Hood at February 9, 2005 08:25 PM


In 2027, the interest due on the bonds held for the Social Security trust fund will be about $420 Billion, if the interest rate on the bonds is six percent as it is now.

What's the problem paying part of the interest on the bonds that will be due?

Posted by: ChasHeath at February 9, 2005 08:46 PM


Mark Jones -

Thank you for the remarkable quote. I thought that the scaremongers would have noted the brouhaha that ensued after the Senator made this claim earlier this year. Clearly, the lesson has not been learned at the White House.

So, now that the President has violated the oath of office he took only three weeks ago...

Amendment XIV
4. The validity of the public debt of the United States, authorized by law,
including debts incurred for payment of pensions and bounties for services in
suppressing insurrection or rebellion, shall not be questioned.

...can we ask Congress to impeach him for high crimes and misdemeanors? Now? Please?

Posted by: MTC at February 9, 2005 10:02 PM


Furthermore, what are we to make of this bit of business:

"Alas, I fear you have been reading Brad DeLong's website."

My guess is in the midst of cutting and pasting, he lost the middle part of his sentence.

The original introductory sentence, based on deep textual analysis too complex to describe briefly within a parenthetical statement, reads:

"Alas, I am but a warty, anxious little toad. I dare not show my face at the office because I fear you have been reading Brad DeLong's website."

Posted by: MTC at February 9, 2005 10:27 PM


"Growth in China, India and other parts Asia will help, Siegel said, because the growing middle class in those countries will want to invest in the West, creating demand for the stocks and bonds that retirees will sell."

Following up on Jam's comment, help me out here. What is there in the Bush policy that leads to the assumption that the investments will be in the "West" including the US? If the most rapid growth is going to be in the "East" (and there are certainly arguments supporting the notion), then are Bush's plans based on the assumptions that private accounts will be investing in the East, reversing the money flows suggested above?

And what are the political implications if Bush's policies assume that the most likely way to get the necessary growth is to invest outside rather than inside the US?

Posted by: John at February 9, 2005 10:44 PM


I'm still waiting for somebody to factor in higher taxes when they do the cost-benefit comparisons of the status quo and the Bush plan.

Somewhere there has to be an accounting for the added burden of transition costs to the federal budget. And that burden will be felt by all taxpayers, of course, not just those who 'elect' to divert FICA taxes into the stock market.

Posted by: Jon Koppenhoefer at February 9, 2005 11:49 PM


Imagine the absurity of thinking what will save us all is tossing our retirement saving to emerging markets or relying on investors from emerging markets to in turn support our retirements by buying up our assets. Huh?

Posted by: anne at February 10, 2005 02:44 AM


Since we have been wondering about economic appointments by the Administration, notice that Karl Rove is now formally handling domestic affairs.

Posted by: lise at February 10, 2005 04:15 AM


NM,

Agreed. The "opinions differ" style of journalism is always bad, for the reasons you note. I just thought I detected an effort to undermine the "opinions differ" theme in the article itself.

Having read Wiesman's response, I now must retract my earlier view. He is slicing the baloney way too thin when he drags Jackson and Mannheim in as not in the Krugman/DeLong camp. If this is a two-sided debate, then they are in the Krugman/DeLong camp. If it's "more complicated than that", the right place to have said so would have been the original article, not an after-the-fact response to one person. Worst of all, if Wiesman is unaware that partisan analysis is marketing, not analysis, he isn't up to the job. If Luskin and CEA are the only sources he could find, there is not a debate between economists. If that's all he's got, he has not made the case that there is a debate between economists. There is a political sales job going on. Serious economists have commented on the sales job, but the debate that Weisman described is not the debate he said he described.

Posted by: kharris at February 10, 2005 04:50 AM


The statement that in the short run growth drives stocks but not in the long run is 100% wrong, wrong, wrong.

In the short run the correlation between the change in the stock market and change in earnings is zero, zero zero. In other words it is perfectly random. Even if you have perfect knowledge of what earnings growth will be it is of no help in telling you what the market will do.

On the other hand the correlation between the change in the market and the change in the market pe is 0.9. If you can forecast the change in the market pe you have a 90% chance on being right on the direction of the market.

But if you use a 10 year moving average of stock prices and earnings the correlation between the change in the market and the change in earnings is around 0.9.

The person at the white house making the statement had no idea what he was talking about. I challenge him to show one data series that supports his statement.

Posted by: spencer at February 10, 2005 05:18 AM


Foolish questions: Can the Federal reserve counter any rise in interest rates caused by a decline in international demand for our long term debt? Besides, why is it the long term Treasury interest rates are 3.98%? Is it absense of supply of long term debt that is driving the market? I am astonished. The Vanguard Long Term Investment Grade Bond Fund is up 5% for the year. Bond funds have been splendid investments these 5 years, but I no longer have a sense why this is so.

[Not a foolish question at all. A deep and complicated one. The answer is "Yes--but it may not like the inflation that results"]

Posted by: anne at February 10, 2005 05:31 AM


Could someone help out a layman? Historically, what is the correlation between stock market growth and the growth of the US economy?

Posted by: Jon K at February 10, 2005 06:52 AM


anne-

Liquidity. Central banks, led by our much-feted Fed, have been pouring cash into the global financial system since 2001. Private and public financial institutions thus have the option of borrowing "short" at negative real interest rates and buying "long" to pick up yield. Free money. Salad days for trading desks at Citigroup, the finance units of carmakers, hedge funds, etc. etc.

So today you have the 30-year U.S. Treasury Bond (which does not exist, btw--finance requires a healthy imagination) yielding 4.4%. A back-of-the-envelope assessment of bond value is that yield should roughly equal nominal economic growth over the horizon of the bond--or, looked at slightly differently, a real return component, an inflation expectation component, and a risk premium to compensate the investor for the chance that inflation will rise more than expected.

Do that math for the 30-year Treasury right now, and it just makes no sense. The 30-year Treasury is priced as if we are headed into a depression.

Whether the profits earned by the carry trade are of any real economic value to anyone is another question. Kevin Phillips would probably argue that it is another sign that the U.S. is a decadent, declining economic power which depends far too much on finance and too little on innovation and excellence.

And when foreign central banks, big buyers of U.S. bonds, decide (most likely gradually, fortunately) that these yields are too low to compensate them for the risks inherent in U.S. indebtedness and a falling U.S. dollar...?

I'd look at VFSTX.

-NM

Posted by: Nicholas Mycroft at February 10, 2005 07:23 AM


Pardon--I should add that another component of bond valuation is assessing the risk that a bond issuer will default on the payments. I would feel terribly guilty if anyone read my last post and loaded up on "cheap" Venezuelan bonds....

-NM

Posted by: Nicholas Mycroft at February 10, 2005 07:36 AM


"Could someone help out a layman? Historically, what is the correlation between stock market growth and the growth of the US economy?"

Stock market returns at a given price earning ratio consist of dividends and share buybacks and growth in earnings. As earning grow investors there is an implication of more of a return to investors in dividends and buybacks and so there can be share price increases or capital gains. But, earnings change over time along with economic growth patterns. A 1.9% economic growth rate will limit earnings growth since we have had a 3.4% rate of economic growth the last 75 years.

So, stock prices can move speculatively simply because the price earning ratio moves. Otherwise changes in stock prices reflect economic or earnings growth.

....

The "carry trade" explanation is important and apt, and in mind.

Posted by: lise at February 10, 2005 07:45 AM


Robin the Hood,

I know what you mean. In my view, anyone who voted for Bush or did not bother to vote in the last election deserves Bush, and they should be punished. In fact, the economic hardship will be hardly enough punishment for their sin of supporting a unnecessary war that has claimed, and continues to claim, thousands of lives. The problem, of course, is the "collateral damage" come with the punishment ...

Posted by: pat at February 10, 2005 09:08 AM


Talking about media-whores...

Maybe 2 years ago, PK wrote to the point that Bush was ruining the trust fund and thus producing a _social security crisis_. Now that crisis is manufactured for political reasons by the GWB spin machine. Crisis? No crisis? PK will oppose _anything_ the current administration proposes, for any convenient reason. That puts him in the same camp as the people stating WMDs in Iraq.

Possibility 1: dividends will rise substantially. No totally convincing law says that only x percent of GNP will go to corporate profits, so a yield of over 6% is not impossible at all.

Possibility 2: people will start worrying about their retirement income and save like hell - a global savings glut will ensue, making Japanese interest rates pervasive over the globe

Possibility 3: Stocks will become ponzi-schemes. They can rise indefinitely, as long as future generations will buy them at their galactical prices. No-one would consider bonds then? Imagine a hyper-Japan...

Possibility 4: The fantasies of continental sociologists will materialize and capital will produce more capital... labour will be obsolete... Everyone will have infinite wealth... Only appartments with beach access will get curiously short...

Posted by: Huffy at February 10, 2005 09:26 AM


What kind of question was Weisman responding to? His answer seems wholly tangential to anything pertinent- dealing not with the tension (to be kind) between privatization promises based on historical data and the operating assumptions (from SocSec) about the future but rather with a 'who thinks that future growth will be strong and who disagrees' framework.

Also, his citation of Luskin- in the spirit of anything published is notable and attacks on published material must reflect disagreement and debate rather than accurate vs. inaccurate. There is no attempt to recognize that arguments can (let alone should) be evaluated.

A backup for Weisman seems like it would be useless. He is a collector of data points- here a remark, there a position- seemingly without the skepticism and curiousity necessary to be a vigilant reporter. What good is knowledge at the fingertips of such a reporter?

Posted by: tegwar at February 10, 2005 09:27 AM


This may be naive, but if the problem is related to the aging of the US population,and the consequent expected modest returns from stocks, surely the answer is to invest in the high-growth economies in, let us say, East Asia. If that were to be forbidden, or too scary to be popular, then it would detract from the financial attractions of the scheme.

Posted by: dearieme at February 10, 2005 09:32 AM


"...the Bush administration's assumptions about stock returns require rapid projected future economic growth in the background..."

This the fallacy of circular reasoning.

So far, no one has bet against Tom Maguire.

Posted by: Patrick R. Sullivan at February 10, 2005 09:46 AM



"We're saying that the Bush administration should not be allowed to have it both ways: starting from current dividend yields, you can forecast a 1.9% long-run economic growth rate or a 6.5% long-run real stock return, but not both."

GDP growth reflects both equity and debt. if 30% of capitalization is debt at 3% interest, (stock at 6.5%) the total return on capitalization is 5.45%. A 1.9% growth is consistent with a dividend payout of 3.5%. Isn't this a little close to say that the assumptions given current dividend payout are inconsistent?

Posted by: nat at February 10, 2005 09:53 AM


Huffy: And Krugman was correct those two years ago--as now. The "ruining" of the SSTF discussed then (and now) is the insistence that that money should be considered as part of spendable (USG) income now, not the "savings for a rainy day against future demographics" that it was so as in 1983.

So let's consider the possibilities:

Possibility one: Dividends will rise substantially. A P/E of 20 implies earnings at 5%. You could, therefore, pay out 4.6% in dividends (getting the other 1.9% in growth)--if your company can survive on 8% of its earnings.

Possibility 2: Actual savings. If you really mean savings, then the US consumer spending drops by at least 5%, and probably closer to 10%. Since consumer spending produces 2/3 of GDP, I fail to see how this profits the market. (If you mean, "puts money into the stock market and pulls the lever," you're assuming an increase in liquidity to drive P/E higher--reducing the possibility of increasing dividends and requiring taking on additional risk for minimal reward. At that point, the remaining smart money gets out of the US Stock Market and into something that provides a reasonable return, such as JGBs, where fiscal austerity is the rule, not the exception.)

Possibility 3: Looks like a repeat of Possibility 2, but this time explicitly. The great thing about Ponzi schemes is that someone will be left holding the bag. The bad thing about them is that they are not really good for long-term investment accounts. Those of you who plan to live more than another 30 years would be better advised playing the numbers, or--if you have to--state lotteries (which present more risk and pay worse).

Possibility 4 is a variation of the Tom Maguire theory, where productivity increases and labor does not have to be compensated--that is, where people do not insist on being paid their fair market value and no major firm is willing to pay FMV. Of course, not compensating labour reduces savings, consumer spending, or both, which causes reduction in GDP and company earnings.

To no one's great surprise, I'm not seeing any value being created for the U.S. economy in any of those scenarios. Excuse me while I see if Everbank has accounts in yuan.

Posted by: Ken Houghton at February 10, 2005 10:15 AM


dearieme-

Very far from naive. I don't yet have my ducks in a row well enough to make a satisfactory argument, but I am pretty sure that the best way for individual and institutional investors (and particularly defined-benefit plan trustees) to hedge the demographic risks posed by an aging U.S. population is to invest in emerging markets securities and international small-cap value stocks. A stomach-churning investment strategy--but no guts, no glory.

Kevin Phillips (him again) would remind us that capital flight is another sign of a deteriorating economic great power.

-NM

Posted by: Nicholas Mycroft at February 10, 2005 10:31 AM


" was correct those two years ago--as now. The "ruining" of the SSTF discussed then (and now) is the insistence that that money should be considered as part of spendable (USG) income now"

No no no. I was referring to that fact that Krugman said then that diverting money from the trust fund would ruin the system or some such. Now the crisis is "manufactured".

Poss 2 was a hint towards the possibility of oversaving. If you save so much, interest rates go off. This point was made by "whatever" PK.

Poss 3 was a thought on what would actually happen if market cap was in the stratosphere. If people would buy the stuff at that price, there would be no problem. Companies would become "infinitely valuable"; their market cap would be a theoretical number ever increasing, and their earnings potential would be of no interest.

What would happen to the bond market all the while? It would perish, since no-one would pay real $$ for something that could be get by issuing stock, especially the fantastic type.

All in all: 3 is good only for illustrative purpose.

@4: Some people in Europe have thought that progress would make capital produce capital at a rate of 1-1. Progress would continue ad-infinitum, while people could follow their whims. However, the environment (business, ecology, policy etc, etc) changes, so this is fantastic. Not so, if you have automatic production on Mars. "Call you psychiatrist" for that.

Posted by: Huffy at February 10, 2005 10:50 AM


Alas, I am reading Brad DeLong.

I am also reading Nouriel Roubini and Brad Setser - woe is me.

Posted by: pebird at February 10, 2005 10:51 AM


This is really depressing-- as well as personally embarrassing. I get the Post, saw the article in question, and was so relieved that SOME of the arguments against turning Social Security into another government benefit program for the rich were being reported AT ALL that I didn't even notice that he had entirely miscast the argument: it is not one group of economists saying that growth will be high and another saying it will be low, but Bush SIMULTANEOUSLY saying that it will be high (when arguing for private accounts) and low (when arguing that Social Security is in trouble).

That American reporters apparently cannot follow a logical train of thought, much less point out a clear contradiction, is extremely disheartening.
I watched the Czech press make the transition from Communist propaganda organ to really top-flight investigative reporting in a few short years. Is it really too much to expect American reporters, raised in a free country, to be able to do as well?

Maybe so-- for a free press to fulfill its role there has to be widespread acceptance of certain principles: that you do not make manifestly false assertions in order to support your point of view, that if a logical or mathematical flaw in your argument is pointed out, you do not continue to assert the fallacy and that if a policy change you have supported turns out to have the opposite effect of what you claim to have intended that you consider the possibility of reviewing the change. In addition, a society needs a collective memory going back more than a few weeks-- where, oh where is the mainstream press analysis of all the previous 'fixes' of the Social Security program which, we were told, was supposed to guarantee my generations' retirement? Not to mention all that Al Gore had to say about using the surplus to make sure Social Security was secured!

Moan-- but, (to borrow a phrase from the younger set) my bad for being such an uncritical reader, too...

(Is it something in the water...??)

Posted by: ForgedCzech at February 10, 2005 11:12 AM


FC

Go to Billmon - he has the history cronicled

Posted by: ed_finnerty at February 10, 2005 12:25 PM


BC: "Bush SIMULTANEOUSLY saying that it will be high (when arguing for private accounts) and low (when arguing that Social Security is in trouble). "

This reminds me of the Chinese Communist Party which simultaneously say that the water level at the upstream of the 3 gorge dam will be 200 meters high (when arguing that silt is not a problem since water flow will be fast) and 175 meters high (when arguing that only 1.1 million people need to be moved, instead of a number somewhere doubles it). For some reason, Bush reminds me of the CCP all the time.

Posted by: pat at February 10, 2005 12:44 PM


Since WW II after tax profits have been about 6% of gdp.

To get a 6.5% real return on stocks assume
1. constant pe
2. dividend yield of 2%.
3. real profits growth of 4.5%.

Ok, that give you a 6.5% real retun.

If profits are now 6% of gdp and gdp grows
at a 1.9% rate and profits grow at a 4.5% rate:

In about 50 years profits would increase from 6% of gdp to about 50% of gdp.
In about 66 years profits would be 100% of gdp.
in 75 years profits would be about 160% of gdp.

Can someone show me what is wrong with these calculations.

Posted by: spencer at February 10, 2005 02:37 PM


Spencer

Agreed completely.

Posted by: anne at February 10, 2005 02:55 PM


Paul Krugman's first analysis suggests earnings growth at 1.9% and stock dividends and buybacks at 3%. So, we can project real returns to be 4.9%.

The 1.9% economic growth or earnings growth estimate is taken from the actuaries for Social Security.

Paul Krugman's second analysis suggests earnings growth at 3.4% and stock dividends and buybacks at 3%. So, we can project real returns to be 6.4%.

The 3.4% economic growth or earnings growth estimate is the rate for the last 75 years.

....

Spencer explains if long term economic growth is 1.9%, the only way to increase stock market returns to 6.5% is to increase the share of GDP in earnings to impossible levels. Krugman adds the price earning ratio could also increase to impossible levels. Slow growth, will mean we will not find stock returns matching the historical pattern.

Posted by: anne at February 10, 2005 03:06 PM


The demographic doom and gloom scenarios upthread ignore one important variable -- immigration. With an uptick in immigration, and with those workers well enough off to invest some of their own earnings, things may not get to be too bad.

Of course, under this scenario Social Security would be in good shape, too. Which is Profs Krugman and DeLong's point.

Posted by: Jay at February 10, 2005 05:46 PM


"if long term economic growth is 1.9%, the only way to increase stock market returns to 6.5% is to increase the share of GDP in earnings to impossible levels."
"the price earning ratio could also increase to impossible levels. Slow growth, will mean we will not find stock returns matching the historical pattern."

See my last post. GDP growth reflects both stock and debt payout. The above statement using the dividends plus growth model assert that that dividends growth of 1.9% and dividend payout of less than 4.6% isless than the 6.5% stock yield. But for the economy it is total capitalization that matters, not stocks. If you payout earnings in dividends and interest and the total payout is 4.6%, than 1.9% earnings growth and 6.5% stock yield are not inconsistent.

Posted by: nat at February 11, 2005 05:49 AM


nat wrote, "GDP growth reflects both stock and debt payout."

From "The Heisenberg Equity Principle" (http://www.efficientfrontier.com/ef/900/heisenbg.htm):

"In short, ***the aggregate national investment return will be approximately the same no matter what the overall stock/bond mix of the capital markets***. To the extent that debt tends to decrease agency conflicts, a small nod may go to an increase in the overall debt/equity ratio. If everybody issues/invests in stocks, then stock returns must fall to the aggregate return rate. Which may actually already have happened. If all of the nation’s pension funds and newly-privatized social security accounts shifted to stocks, they most decidedly would not obtain the historical 7%-8% real return." [Emphasis in original.]

Posted by: liberal at February 11, 2005 08:33 AM


Liberal
The yield on stock reflects its risk premium over debt. Debtholders have no upside claim on earnings over the interest payout. If debt to total market value of capitalization is high, the expected return (risk premium) on equity will be very high since there will be little expectation of dividend payout. A firm that cannot cover its interest is bankrupt and maybe after equity is wiped out debtholders become the owners and have the same expected returns as equity.

Posted by: nat at February 11, 2005 12:07 PM


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