Rational Action

Yes, my friends, today I finally admit that Paul Krugman does not read this blog. Still, I’m going to connect the dots and claim that he takes inspiration from this fine domain. His latest op-ed column, channeled by way of Brad DeLong, explains that the long-run rate of return from diverse stock investment cannot exceed GDP. Krugman explains that unless the aggregate Price-to-Earnings ratio of stocks continually rises, stock prices must reflect profit growth. And corporate profit growth cannot, over the long-run, be geater than GDP, since that would imply the corporate sector’s eventually becoming larger than the country’s economy itself.

This logic is, in some sense, an amplification of the now-classic Sacarny post, “Conversations with Father: Part 1.” Father was happy to hear that Krugman agrees with him.

Yet the privatizers continue their attack! Former CEA chief economist Andrew Samwick has responded to Krugman’s piece, outlining a defense to Krugman’s argument. I can’t say I understand it, which is a reflection of the complexity of this argument, and thus my understanding of it, not a reflection of Samwick.

Dean Baker, with whom Krugman claims to have worked out the math for his privatization attack, replies to Samwick via MaxSpeak. Again, I am confused.

The blogosphere seems to be advancing well-reasoned arguments along quite quickly, maybe a bit too quickly for my increasingly-economically-inclined mind. Hopefully Samwick will explain himself again, in more Krugmanesque terms. If only they all could!

Dad: Adam, if i told you you could buy either a bond that was risky but would yield more, or a bond that was more assured but would yield less, which would you choose?
Me: Well, in the aggregate, won’t the riskiness of the higher yielding bond mean that the ultimate return on it will equal that of the lower yielding bond?
Dad: Yes.
Me: So that’s why you don’t support privatization?
Dad: If what he was saying made sense, no one would buy treasury bills.
Me: Why?
Dad: Because that would mean interest rates were too low
Me: What? Oh. Because people would need to see a higher return on treasury bills in order to buy then, if other bonds weren’t risky.

Dad thinks people might see a slightly higher return, but he doesn’t buy Bush’s story. Or to quote N. Gregory Mankiw, outgoing chairman of the President’s Council on Economic Advisors, “there are no free lunches here.”

The Senate Democrats have released a few documents outlining their plans for the new session…

MaxSpeak, You Listen! DEMO WONKFEST
The Senate Dems have unveiled their agenda for this year. They have released a raft of documents on election reform, fiscal policy, veterans, economic policy, Medicare, education, reproductive rights, health care, supporting the troops, terrorism, and “Keeping America’s Promise.” (These are MS Word files. Feel free to post and circulate.)

By and large the policies are sound. I’ll start with a few that I felt really hit the nail on its head.
(more…)

Ever since I developed an unhealthy obsession with weather forecasting freshman year of high school, I’ve kept my eye out for websites that would help me play meteorologist. To date, the most useful source has been weather.gov, which offers “forecast discussions” for every region in the country. These discussions are flat text files containing a few paragraphs of weather commentary; they are written by the National Weather Service meteorologists who create the official forecasts. Weather tends to be a bit mundate, and the discussions generally reflect this tendency.

Which brings us to the latest discussion for the New York City area. I count two — that’s right, two — exclamation points!! Then again, when a forecast lists total snow accumulation of 12 to 18 inches as one of its predictions, an exclamation point or two might be warranted.

OVERALL...EXPECT THINGS TO GET RATHER WILD LATE SAT AFTERNOON AND
ESPECIALLY THE EVENING. 35 MICROBARS IN THE BEST DENDRITE GROWTH
ZONE. THIS SHOULD GENERALLY EQUATE TO AT LEAST A COUPLE HOURS OF
2-4" PER HOUR SNOWS WITH EMBEDDED THUNDER. THERE MAY BE TOO MUCH
SHEAR IN THE COLUMN TO GET SLANTWISE CONVECTION TO REMAIN ORGANIZED
AND RESULT IN NASTY DISCRETE BANDING. USUALLY WANT UNIDIRECTIONAL
PROFILE FOR THAT SORT OF STUFF. STILL...SNOWFALL RATES WILL BE HEAVY
ENOUGH BETWEEN 21Z AND 06Z! 

WANT TO GET WORD OUT NOW. 3-5 FT DEPARTUES IN
WRN SOUND LOOK LIKELY AROUND 12Z SUNDAY. WATCH OUT EATONS NECK AND
ASHAROKEN!

GOOD THING THIS STORM WILL BE HAPPENING OVER THE WEEKEND.
OTHERWISE...WE'D BE LOOKING AT MORE WIDESPREAD PROBLEMS. FOR THOSE
SNOW LOVERS OUT THERE...ENJOY...I KNOW YOU'VE BEEN WAITING A LOOOONG
TIME. 

• Most americans know soc sec has problems (~1% think it’s perfectly solvent)
• But they are ambivalent about privatization (~50-50 split)
• Bush is convincing them to accept privatization plan
• Party must adapt
• Republicans are owning the media
• Response from traditional demcrats has been weak. They didn’t get the message out
• Bright spot: the blogs! Have provided very balanced debate
• www.ThereIsNoCrisis.com - but can Dems fight privatization by coming up with something better?
• Dems are working against the current if they try to combat Bush plan with no plan
• people know the system isn’t solvent
• Dems can propose their own plan and take advantage of privatization ambivalence
• Evidence that Bush is owning the debate
• people thinking that privatization will fix the problem
• without a wide conception of “the problem” it won’t
• Congress has a whole bunch of tools to fix the problem, Dems MUST start emphasizing them
• “Indexing” - determines the benefits a generation receives, based on how much that generation pays in
• Wage indexing
• one generation supports another
• pays in benefits from its own wages, but gets benefits “up-valued” based on the wages of the next generation.
• the problem: it assumes a constant ratio of workers-to-dependents
• as people live longer, ratio drops, resulting in overpromises
• Price indexing
• one generation pays for itself, gets back the same benefits it puts in
• Not dependent on worker-to-dependent ratio
• When the current system is changed to price indexing, it generates huge surpluses.
• (One generation “pays for another”, but the payout is only what the earlier, poorer generation “put in”.)
• Bush wants this indexing, and will use the surpluses to ultimately pay for the borrowing for his private accounts.
• What Bush isn’t saying: indexing fixes the problem, NOT THE PRIVATE ACCOUNTS
• Since the Dems don’t want private accounts, they can change the indexing to somewhere between prices and wages, maximizing benefits
• Other tools…
• Raise the retirement age slightly
• 1 year every decade?
• Must act soon! People are planning their lives around this
• Can help to keep worker-to-dependent ratio stable
• Benefit phase-in / Increase progressivity
• Workers start receiving benefits at the same age, but not full benefits
• (Is this a real plan?)
• Or reduce benefits paid out to the rich, (while increasing benefits to poor?)
• Increase revenue
• Gov’t employees don’t pay social security!
• Social security tax (FICA) is highly regressive: poor people pay a greater percentage of their income to it
• 6% by both employer and worker on income up to $90k, right now. after that, nothing!
• Make FICA apply to higher levels of income, or unearned (e.g. capital gains) income
• Can help us to stave off benefit cuts
• Maybe not the best strategy for the dems? Similar to John Kerry’s tax plan

This summer I worked with Thibault, the French cousin of my boss. It seems that one of his German friends grabbed a hold of his keyboard:

(16:08:25) Thibault: Allo
(16:08:34) Thibault: Wie geht es dir
(16:08:40) Thibault: geht’s
(16:08:42) Thibault: ghbtynugvty
(16:08:49) Thibault: moi aussi
(16:08:54) Thibault: tout à fait d’accord
(16:09:13) Thibault: yes c’est de la balle bébé
(16:09:22) Thibault: Es ist doch ein riesig geil
(16:10:05) Thibault: Haribo mach kinder froh und der erwachsenen eben so
(16:10:19) Thibault: It was my stupid friend*
(16:10:21) Thibault: rtlo$)e
(16:10:22) Thibault:
(16:10:24) Thibault: “é
(16:10:36) Thibault: no it’s a joke
(16:10:48) Thibault: we’re not so stupid
(16:10:52) Thibault: just german !!
(16:15:53) The conversation has become inactive and timed out.

Brad DeLong channels Krugman on really problematic government deficits
The linked entry refers to the government without taking into account Social Security. Since Social Security is presently balanced, removing it from deficit calculations reveals a huge shortfall in the “general fund” (government minus social security). Think about this - the government only takes in 70 dollars for every 100 that it spends. To close the gap the government will need to collect about 40% more than it already does.

This is troubling, no? The U.S. government runs a deficit of around 4% of GDP (a measure of the size of an economy), which is comparable to that of some other big countries (Germany, France). But in Germany, government represents fully half of the country’s economy; in the U.S., government takes up only around a fifth. We tend to measure deficit relative to the size of the country’s economy, not relative to the size of the government. Measuring this way makes a 4% American deficit seem close to a 4% German deficit.

However, when you want to know how much taxation will have to change to cover government shortfall, it’s important to consider the current size of the government. When an entity that takes up fully half of the economy runs a 4% deficit relative to the size of the whole economy, as a single entity, it would have to raise taxes by a bit more than 8% to magically plug the shortfall. (deficit / current revenues)

The U.S. government, only taking up 1/5 of the economy, needs to close a 4% shortfall relative to 5/5 of the economy. When you end up dividing the current deficit by current revenue, the number is a ghastly 23%. (That number is smaller than the 40% from before, since we’re now including the currently balanced social security system.)

In sum: taxes on the whole would have to increase a whopping 23% (pay $1.23 for every $1 you pay right now to the federal government) to stop this year’s debt hemorrhage. For the moment, we’re getting a sweet deal. But this is all going to have to be paid back with interest. Enjoy the tax cuts while you can.

(Notes: Thank you CBO. Astute readers feel free to point out horrendous mathematical errors.)

The latest fad among those economics types is discussing the state of the American Dollar. As it stands, The U.S. is importing way more than it’s exporting — around 5% of GDP. We call that the current account balance. In order for us to have a negative current account balance, which means basically buying much more than we sell, we need to take on loans from other countries.

Much of our current account deficit is financed by Asian countries, which intervene in the currency markets to keep the American dollar artificially strong and their currencies artificially weak. From the American consumer’s standpoint, this process makes Asian goods artificially cheap. From the Asian consumer’s standpoint, American goods then become artificially expensive. The American producer likewise has a hard time selling to Asian markets, but the Asian producer has an easy time selling to American markets.

American “overconsumption” is financed by foreign countries, and at some point, they will begin to cash out. As countries shy away from American investment, the dollar will weaken against foreign currencies. As the dollar weakens, American products will cost less for foreigners, while foreign products will cost more for Americans. That’s how the current account deficit begins to correct itself. Which brings us to outsourcing.

An artificially strong dollar does not just make American goods unattractive to foreigners — it also makes American workers unattractive to foreign businesses. American workers seem more expensive when the dollar is artificially strong. The reverse is true as well: the strong dollar makes foreign workers seem more attractive to American businesses. As it stands, American companies have been moving parts of their operations to foreign countries, taking advantage of cheaper labor abroad. A weakening dollar could stem, stop, or completely reverse the flow of jobs overseas (if such a flow even exists).

Let’s pretend that foreign countries stop intervening to keep the dollar strong. We start:

US$1 = 50 Indian Rupees
American worker: $50,000/yr salary (R2,500,000)
Indian worker: R500,000/yr salary ($10,000)
American pay:Indian pay = 5:1

Panic! Panic! Massive dollar selloffs. Now the American currency depreciates by a factor of 2:

US$1 = 25 Indian Rupees
American worker: $50,000/yr salary (R1,250,000)
Indian worker: R500,000/yr salary ($20,000)
American pay:Indian pay = 2.5:1

Suddenly foreign labor becomes twice as expensive, and American labor becomes two times cheaper. Outsourcing looks like a much less attractive option to the CEO, and the jobs never leave the shores. Could a weakening dollar make outsourcing irrelevant?

I saw the New Deal at the Bowery Ballroom 2 nights ago, nearly 365 days on the dot since I last saw them, that time also at the Bowery Ballroom, also right after Thanksgiving. Aye.

Given this rather interesting yet repetitive turn of events, I considered a scenario. Take the Sacarny of yesteryear and ask him…

“Mr. Sacarny, one year from now would you expect to be…

1. About ready to declare as an Econ major
2. Painfully single
3. Doing computer grunt work for WBAR
4. Procrastinating with your blog

And I suppose this old version of me would have the following response:

“Mmmm… yeah, that sounds about right.”

My opinion piece about the movie Columbia Unbecoming was published in the Columbia Spectator on Friday. It’s titled “Shedding Light on MEALAC”.

Thankfully my fame didn’t end there. Today The Spectator ran this correction:

It has come to spectator’s attention that an Op-Ed submission by Adam Sacarny (”Shedding Light on MEALAC,” Nov. 12) was previously published on the author’s web log. it is our policy to only publish material original to Spectator.

Yes, that’s right. BlogSac is a publication!