Deinonychus antirrhopus

Hey Jan Egeland...

Kindly piss off, why don't ya.

If you haven't given already and would like to, click on the image above and you can make a donation via Amazon.com (100% of your donation goes to the American Red Cross and will help with disaster relief in South East Asia).

Update: Amazon.com is no over $9.2 million. Up yours Egeland.

Also, via Instapundit is this bit of information from Jeff Jarvis, U.S. government pledged $350 million in aid.

Predictions and Policy

Kevin Drum's opinion piece in the LA Times reminded me of something about policy I heard a few years ago.

When you are formulating policy about the future what do you assume about the future? Do you go with the expected outcome, or do you er on the side of caution and go with a prediciton worse than the best forecast?

For example, you have a job that on average pays $75,000/year on average, but the income in any given year is rather volatile (varying by say $25,000 either way). Do you plan your expenditures each year as if you will make $75,000 each year or do you pursue a different strategy?

So should we assume that the average economic growth rate is going to be the higher forecast of say 3% or should we plan for a more pessimistic outcome of 2%. What is the danger of the latter? You anticipate such programs as Social Security will be underfunded and reduce benefits, raise taxes, institute an alternative policy or all three. In this case you could end up with an outcome that is less desirable. But you could have that outcome even with the baseline forecast. You could forecast economic growth to be 3.5%, but it turns out to be 2.9% and your programs that depeneded on 3.5% end up going insolvent.

Further, the problem that is swept under the rug here is the temptation to try and pander to voters using some program or policy. For example, did Bush's prescription drug plan help him in Florida, a key state to his winning re-election? The problem with programs like Social Security and Medicare is that the recipients of the benefits do not bear the costs. The problem can aptly be summarized as: Politician taxes Peter, gives the money to Paul and Jane and says to them, "Here you go, some 'free' money...and remember me on election day (wink,wink)." To Paul and Jane the money looks like it is free, but from an economy wide perspective it is far from free.

Sure, the Trustees report might be overly pessimistic, but should we err on the side caution or hope for the expected outcome? And what about the ever present problem of using programs like Social Security to pander to people. Wouldn't it be better to have a program that acts as a safety net, but isn't so enticing that it reduces the incentive to save for one's retirement?

Social Security Reform: Model Two

What does President Bush's Model Two propose to do in terms of changing Social Security? First it might help to lay out what the "problem" is. According to the Social Security Administration, the trust fund is in actuarial imbalance. That means that in about 35-40 years the trust fund will run into very serious problems meeting its obligations. Now it is possible that there could be higher than expected growth, higher than expected productivity, higher than expected immigration, and so forth that keeps this from ever happening. However, counting on these factors is basically a gamble (very much like the gamble those on the Left like to decry when it comes to investing in financial markets).

So what to do about this? President Bush is proposing to help return the sytem to actuarial balance. Whether you agree with what the President is proposing the goal is to help return the system to actuarial balance.¹ The President seems to prefer his Model 2 from the Commission to Strengthen Social Security.

So how does Model 2 work? Well there are two primary changes that are designed to help solve the problem with solvency.

• Allow particpants to voluntarily invest upto 4% of their Social Security contributions (not to exceed $1,000/year) into private accounts.
• Future benefits, starting in 2009 will be indexed to the prices vs. wages.

The second change is designed to restore solvency for the 75 year period. However, it is indeed a cut in future benefits. Instead of benefits for a person retiring in say 2019 being determined by wage growth, it is determined by the change in the price level. Since the change in prices is usually lower than the change in wages it will mean lower benefits than under the current system.

To partially offset this decrease in benefits participants can invest part of their Social Security contributions into private accounts. At this point it would probably be good to discuss what these private accounts would be and wouldn't be. A popular meme on the Left side of the blogosphere right now is that Social Security privatization would throw people to the wolves of Wall Street. You'd have to learn how to be a savy investor in short order to avoid losing your shirt. This is completely false. Under Model 2, funds would be invested in diversified portfolios that satisfy certain government requirements in terms of costs, diversity and risk. In other words, particpants would not have the ability to invest in a single stock such as Enron. Let me repeat that: undern Model 2 participants would not have the ability to invest in individual stocks. Claims to the contrary by Leftys are just simply outright lies. Initally the plan would follow the Thrift Savings Plan for Federal and Military workers. After reaching some threshold amount (yet to be determined) the participant would have the option of moving into the second tier of the program which would offer a different array of diversified portfolio funds.

The Tier I portion of the plan would have allow particpants to invest in a balanced funds or index funds. A balanced fund is a combination of corporate stocks, corporate bonds, and government bonds. The various stocks and bonds and the ratios of each vary allow for conservative, medium and growth funds. The index funds are also structured in different ways that allow the participant to select between say investing in government securities, a Common Stock Index fund, a Small Capitalization Stock Index Fund, an International Stock Index Fund, etc. Each of these funds is comprised of a different individual stocks.

Now, how effective will these personal accounts be at offsetting the reductions in benefits due to the switch from wage indexing to price indexing? Well according the Urban Institute it will not make up all of the cuts. The Urban Institute's analysis of Model 2 indicates that the switch from wage indexing to price indexing will cut future benefits to about 77% of what is currently promised under current law. The same study indicates that with the baseline assumption in the President's Commission to Strengthen Social Security will increase benefits to 88% of the benefits under current law.

The Urban Institute's study is valuable for another reason: it also contains sensitivity analyses. That is, the Urban Institute varied some of the assumptions and looke at the implications for benefits. They look at different levels of participation based on preferences for risk, participation and allocation based on preferences for risk, higher administrative costs, as well as high and low scenarios for returns on private accounts. The results are in the following table.

Scenario	Annual Total Benefits
Current Law	$18,126
Current Law Adjusted	$13,902
Model 2 100% Part.	$16,623
Mod. 2 Risk Part.	$14,399
Mod. 2 Risk Part. and Alloc.	$14,591
Mod. 2 1.4% Admin. Costs	$13,491
Mod. 2 High Returns	$15,290
Mod. 2 Low Returns	$11,707

Note that each successive scenario starting for Model 2 builds on the previous scenario. Hence, the scenario with higher administrative costs also includes risk based participation and allocations. Also, current law adjusted is with adjustments to benefits alone to bring the trust fund into acturial balance.

Hopefully this helps layout some of the basics of Model 2 which President Bush seems to favor strongly. This post isn't meant to be exhaustive in that there are probably other analyses that I haven't read. Also, I would have liked to have seen the various scenarios in the Urban Institute study scenarios done with 100% participation. It seems that 100% participation improves the outcome, hence mandantory participation might be better than voluntary participation.
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¹As has been noted, Social Security while a problem, is not the big problem. Medicare is by far the worse problem.

You're Right Dean...

Dean Esmay is right when he writes,

So far the strongest answer I've heard (it's the only answer I ever seem to hear, really) is that such a statement is "not science." To which I can only reply, "a belief to the contrary is not science either. Now, is a science classroom a good place for critical inquiry, or is it not?"

Saying that something is not science is itself not science. It is more of a philosophical issue...a philosophy of science issue.

What constitutes science? At the very least I'd say that the scientist should have a model that makes some sort of prediction about the future. That is the scientist has a construct that is positive in that it actually gives us and indea of what to expect to see. Now, this is the basic requirement of science, IMO, and in this regard Intelligent Design (ID) fails utterly.

What predictions does an ID model make...for that matter name a single ID model? Having a bit of difficulty? I'm not surprised because as far as I know there is no model in ID. With no model it is quite obvious that there can be no prediction and hence nothing positive from ID. In fact, when looking at ID writings we see that virtually all of them¹ are negative in that they only attempt to punch holes in the current theory.

Further, in that last endeavor the ID movement fails. The bacterial flagellum has been shown not to be irreducibly complex.² So not only is ID not science, it is a failure in its attempts to poke holes in the current theory of evolution. This highlights another problem with ID. ID is little more than a sophisticated God of the Gaps argument which not only is logically fallacious, but has time and again been shown to be false.

So the danger is cheapening science in front of young people. People who have yet to aquire the information and experience yet to judge what is good science, what is bad science and what is not even science at all. Do we really want to bring a subject that is patently not science into the science classroom and present it to young people and call it something it is not? Normally I'd call this lying. Is that really what we want to put into introductory science classes? Do we really want to put something that is not science in front of students and call it science and discuss it if it is science?

Already people have a hard time with things like facts vs. theory. If I drop a brick on your head that is a fact. If we observe that you are unconcious for 10 minutes after the brick hits you, that is a fact. Now, if we put forward the idea that the brick caused the unconciousness due to the impact to your head, that last part is a hypothesis. A theory is like a hypothesis in that it operates on a larger scale and has quite a bit of empirical evidence behind it. The fact is lifeforms evolve. They change at a genetic level. Such a change is, simply put, evolution. Explaining these facts is where the theory part comes in. Most people haven't got a clue about this kind of stuff. The fact that they don't have a clue about these things underscores the shoddy nature of science education in this country. And yet, the solution is to debase that educational process even more?

Dean tries to skate around this issue, IMO, with the following,

Inevitably someone in these discussions asks whether we should teach witchcraft, shamanism, astrology, or voodoo in the classroom. My response is, "show me who's proposing witchcraft in the classroom and we'll discuss their ideas."

Uhhh, we do have an example of "witchcraft and shamanism". Except we call it Christianity in the case of ID. The alien explanation is simply a useful dodge that the IDists have thrown in to hide their true agenda.³ So right off the bat we know that the IDists are being disingenuous with us.

As for this question,

In the meantime, the question before us remains unchanged: is the science classroom a good place for exploring, questioning, and raising objections to a reigning scientific paradigm, or is it not?

Dean, have you stopped beating your wife? Yes, that is an unfair question, but so is Dean's. You don't jump into questions of the nature of ID vs. evolution in and introductory course. Just as the introductory classroom is not the place to discuss the latest path breaking research. Further, if it is going to be a science course, shouldn't it deal with science and not the magical beliefs of any religion, be it Christianity, Hinduism, or Sufism? You can't have a hypothesis out of: We don't understand it, therefore God did it. That is the simplified version of ID, and if we can't use that as a valid hypothesis how do we even get to experiments to test it let alone building an entire theory?

Is there a danger to teaching ID in introductory science courses? Yes, it runs the very real risk of degrading the already low quality of U.S. scientific education. It presents as science something which is, when all the fancy jargon is boiled away, is an appeal to magic. Now perhaps Dean is right and teaching magic in a science class presents no problems/dangers at all, but I have yet to see him make such a case.

Update: Oh yeah, regarding that claim of published peer reveiw literature, yes it is true. However, it is one article, a review article (i.e., it contains no research at all) and has subsequently been disowned by the entire editorial staff of the journal as not meeting the scientific standards fo the journal. Not exactly what I'd say is a sign of scholarly research.
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¹I confess I haven't read all writings by ID "theorists".
²The following quote helps show why the flagellum is not irreducibly complex,

At first glance, the existence of the TTSS (type III secretory system), a nasty little device that allows bacteria to inject these toxins through the cell membranes of its unsuspecting hosts, would seem to have little to do with the flagellum. However, molecular studies of proteins in the TTSS have revealed a surprising fact – the proteins of the TTSS are directly homologous to the proteins in the basal portion of the bacterial flagellum. As figure 2 (Heuck 1998) shows, these homologies extend to a cluster of closely-associated proteins found in both of these molecular "machines." On the basis of these homologies, McNab (McNab 1999) has argued that the flagellum itself should be regarded as a type III secretory system. Extending such studies with a detailed comparison of the proteins associated with both systems, Aizawa has seconded this suggestion, noting that the two systems "consist of homologous component proteins with common physico-chemical properties" (Aizawa 2001, 163). It is now clear, therefore, that a smaller subset of the full complement of proteins in the flagellum makes up the functional transmembrane portion of the TTSS.--link

³It is also my contention that the alien explanation is no explanation at all in that it leads to infinite regress. Who designed the aliens? Who designed those who designed the aliens who designed us, and so on and on and on and on. The only way out is to posit the existent of some supernatural entity that breaks the infinite regress.

Fluff -- Aviator

I saw this movie on Sunday, and it was very good. I've always considered Leonardo DiCaprio to be a fantastic actor, and this movie is no exception. Twenty minutes into the film you've forgetten that he's a pretty boy actor, and see him as Howard Hughes. He played Hughes', umm, instabilities perfectly, without over doing it. His lunacy only became tedious (and a bit disturbing with the milk bottles) towards the end of the film.

I found parts of it confusing though. In his battle with Pan Am, Hughes fought the idea that the US needed a national flagged carrier with a monopoly on international flights, and used British Airways and Lufthansa as examples. However, this conversation took place in the film in 1944. Was Lufthansa really a competitor at this time? They had no international flights during the war, and ceased operation after the German defeat.

Maybe this was supposed to be another subtle hint that he was loopy.

Social Security, Productivity, Immigration and Insolvency

Victor over at Dead Parrots has a great post that looks at the issue of Social Security and productivity. This post, provides a nice counter point to the latest meme spreading in the Left side of the blogosphere: There is no Social Security Crisis (link, link, link, link, link).

Much of this "there is no crisis" chanting is based on fact that over the last ten years the date for Social Security insolvency has been moving and is now somewhat further away than it was 10 years ago. However, as Victor's post points out there are reasons for this, and those who are claiming there is no crisis are gambling that these reasons will persist.

The first is that productivity growth may not be what it has been. To help demonstrate this, Victor posts the following graphic.

As Victor notes, the first part of the graph would seem to have a higher average level of productivity than the latter half. Still, the last part of the graph is encouraging. Further, this is why there have been increases in future estimates of productivity. Here are past productivity assumptions,

1. 1.3% in in 1999,
2. 1.5% in 2000-2001,
3. 1.6% in 2002.

And Victor does discuss how there is a pretty good case for productivity to be increased on a short term basis to 1.7%.

However, the problem isn't history. What is the problem is estimating what productivity will be like for the next 75 years. Will it continue to rise or fall?

Victor provides reasons why we should expect the answer to be "no". First, education levels have risen rapidly. Will this continue indefinitely? Unlikely. We can't all be a nation of PhDs. Another thing is that the baby boomers have been gaining in experience. If that work experience makes them more productive then we can expect those gains to slow down and reverse themselves as the boomers move out of the work force and into retirement.

Besides the productivity issue, there is also the issue of immigration. The Social Security Trustees Report has been fairly consistent in underestimating the amount of immigration. In other words, increased immigration and allowing in those with high skill levels would help with Social Security as well. However, the idea of admitting as many as 2,000,000 skilled immigrants a year is unlikely to sit well with the public.

So for these reasons the Social Security date has been moving and staying pretty much 35-40 years away. However, the reasons for this have been unexpected good productivity numbers, larger than expected immigration and a few other factors. Are these unexpected outcomes what we want to base policy on. Do we really want a fiscal policy which can be summarized by: Plan for the best, ignore the worst?

And I'll close this post with a couple of thoughts. First, what if there is a big drop in productivity? Right now productivity is up quite a bit. However, that does not mean it has to stay high. Look at the graph, and in particular that section on both sides of 1979. What would happen if productivity tanked in a similar manner? Second, what if immigration is reduced dramatically? Many now point to immigration not only as an economic problem for states, but also as a national security issue. What happens if immigration is reduced by 20-30%? Suddenly the date of insolvency might stop moving. Do we really want to assume these things wont happen? Seems to me that there is just as much pie-in-the-sky assumption making on the Left as on the Right.

Merry Christmas Everyone

That's it, I'm going home now. Don't know if I'll blog over the next 3 days or not. Hope everyone has a good Holiday and weekend.

Global Warming Causes Record Snow Fall

...no really. You see it warms up and thus there is more snow...because...because...because...oh who gives a fuck we're all gonna die!

Kevin Drum Slays some Hobgoblins

Two posts caught my attention today. First was this one on Social Security. The other was this one that notes that bush is cutting Pell Grants.

What gets me is how easily Kevin can shift gears simply because two similar things fit his world view, but in different ways. For example, Kevin really dislikes President Bush. So naturally a news article about Bush cutting Pell Grants is given full weight even though at least one of the studies was by a special interest group that benefits from Pell Grants. Not like they'd try to put as bad a face on the results as possible to try and scuttle the new policy. Nooooo.

The Social Security one, without any supporting documentation at all, notes that the forecasts that go into the Trustees report are selected not by actuaries, but by political appointees, the Trustees themselves. Naturally Kevin hints strongly that the Trustees have a strong incentive to paint as bleak a picture as possible.

Social Security Indexing Update

As usual Victor has given us the answer to this one. He provides an example of how the reducing the factors by the real wage growth rate would hold the benefits constant in terms of the CPI¹. Victor suggests using a simplified benefits formula to see how it would work--i.e., a benefits formula without bend points.²

With the bend points the forumla isn't that much different.

Notice that in both cases there is a multiplier for real wage growth given by the term,

By reducing the bend point factors--i.e., the 90%, 32% and the 15%--by the real wage growth rate we are left with just "real" growth. Now the real growth rate depends on how wages are linked to something like the CPI. As I noted earlier the CPI is biased upwards. Thus, a straight linking of wages to the CPI would mean a growth rate slightly above real terms. If the wage is indexed to a CPI-X where X is some factor to correct for the upward bias then the growth rate would fall into one of the following catagories,

1. The growth rate above real growth (i.e., X does not fully account for the upward bias).
2. The growth rate is equivalent to the real growth rate (i.e., X accounts for the upward bias accurately).
3. The growth rate is below the real growth rate (i.e., X over estimates the upwards bias in the CPI).

So overall the effect of this on average will depend on how well or badly employers account for the upwards bias in the CPI.
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¹Not necessarily, and see this post as to why.
²The terms PIA is the Primary Insurance Amount, AIME is the Average Monthly Indexed Earnings,, is the real wage growth rate, and is the inflation rate.

Liberal Professor Fired

I got an e-mail to link to this story from David Tufte (Voluntary Exchange). From the sounds of it the professor in question was in all likelihood fired with good reason. However, it seems this has set of the wingers on the Left side of the blogosphere.

Over at the Daily Kos this is apparently a tragedy. Over at Critical Mass it is a conspiracy to get rid of the liberal, of course. There are more links over at David's blog, but the gist is all the same: this is a bad thing.

However, David has several cogent observations. For example,

Roberds did not have tenure. Therefore, the last several years were his best behavior, and if awarded tenure there is every reason to believe his behavior would get worse.

Also, as David notes one should be trying to read between the lines here. Academics rarely come out and state things in a simple straight forward manner. I recall that with the Bellesiles case where Beelesiles was pretty much caught making shit up, the report was pretty tame by most people's standards (but for academics it was pretty harsh).

Update: Well it seems this issue is still going. You can check out all the latest at VoluntaryXchange.

Of special note is are these two posts. The first is over at SCSUScholars, the main gist of that post is that there is more to this story than we are seeing in the paper. Which makes some sense in that the University has a strict policy not to release such information.

The other is actually a comment over at Newmark's Door.

Having a close friend who does personnel work for an university, I have learned quite a bit about how colleges react to problems with the faculty.

It is apparent that the administration is hiding the real reason the professor was fired. When an administration starts acting like this one is, you can bet that sex is involved.

That was my first thought as well. The placing of a professor on administrative leave simply due to using the work, "fuck" in class sounds completely ridiculous and could lead to a lawsuit. No university wants that, so is there something else going on? This also fits well with David Tufte's comments in his first post about "rumors" he has been hearing.

Given the university's privacy policy and that revealing whatever else might be part of this story would likely lead to a lawsuit, I doubt we'll hear the details.

Mandantory College Degrees

Matthew Yglesias, agrees with David Adesnik, that it would be good if everybody had a college degree. However, it might very well be the case that this is not such a great idea as it sounds.

Social Security and Risk

I know I've been blogging about this alot, but it does seem to be the current topic in the blogosphere. The latest is from Matthew Yglesias who apparently hasn't read many of the plans to privatize Social Security.

One of the Left's favorite ways of demonizing the idea of privatizing Social Security is to fall back on the risk/stupidity factor. Allowing people to invest their Social Security dollars is risky and people are generally too stupid to do it knowledgeably. The problem with this "attack" on the idea of privatization is that it relies on a complete (and knowing?) misrepresentation of the plans to privatize Social Security. Most plans I have read suggest insuring the principle (or even the real principle). That is at best you'll earn a real rate or return on the Social Security money invested in some sort of broadly defined index fund. The idea that people will be picking individual stocks and trying to time the market and so forth is just not true.

Social Security and Indexing

Since the main post on this topic is getting more than a bit long I thought I'd start a new post. I'm still not sure how the adjustments to the PIA formula factors (the 90%, 32% and 15%) would work. I've looked for something in the President's Commission to Strengthen Social Security and haven't found anything yet. However, if the idea is to reduce the formula factors by a non-zero amount every year (or couple of years) then eventually it would reduce all the formula factors to zero in the infinite horizion case.

The idea is like this, suppose we have a number z_n and that 0 < z_n < 1, for all n. Further suppose we have the following

P = z₁*z₂*...*z_n*.....

Since z is less than one and greater than zero limit as n gets infinitely large will tend towards zero. Thus, I'm not sure (yet) how this adjustment is supposed to provide a constant benefits level in real terms. It seems to me it would lead to a decreasing benefits level over time. So either I don't understand how this adjustment is going to work (the most likely case) or there is some serious lying going on here on the part of those supporting the President's plan.

Maybe Victor has had more luck with this. I admit I haven't looked terribly hard the last couple of days as I've had more important things to do.
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¹See this post as to why that is quite the case due to upward bias in the CPI.

Social Security, The CPI and Wage Indexing: A Followup

Important: See the second update at the bottom of this post.

Victor over at DeadParrots has an excellent post on this topic (which I blogged about a few days ago). Victor points out that the wage index isn't used as Kevin Drum suggests it is. The wage index is used to calculated what are called "bend points" in the formula for benefits. That is the kinks in the formula that lower the benefits of those with higher incomes. There are two bend points,

1. $627, and
2. $3,779.

So suppose you made (on average) $4,200/month then your benefits are calculated as follows,

0.9 * $627 + 0.32 * $3,152 + 0.15 * $421 = $1636.09.

When your average income is that high you get 90% of the $627 (the first bend point). You get 32% of the income between $627 and $3,779 (this is the $3,152) and lastly you get 15% of the income over $3,779 (that is the $421).

So what happens to the COLA for benefits if the calcuation of bend points is based on the CPI vs. a wage index? Nothing. Nada. Zip. Zilch. Not a thing. The reason is that the COLA for Social Security benefits has always been based on the CPI.

Does this mean a cut in the growth rate of benefits? Yes, but not the kind that people like Kevin Drum are arguing. Since the bend points wont be increasing as fast benefits wont increase as fast. However, since benefits are calculated based on the bend points and one's average monthly income, and that said average monthly income tends to increase at a rate faster than the CPI benefits will still increase at a rate above real terms.

Now maybe you don't believe me (or Victor). Well Victor does point to a memo from the Social Security Administration. Here is the relevant graph,

1) CPI-Indexed Benefits: Modify the primary insurance amount (PIA) formula factors (90, 32, and 15) starting in 2009, reducing them successively by the measured real wage growth in the second prior year. Modified PIA factors would be applicable for OASDI beneficiaries becoming eligible for benefits in 2009 and later. This provision would result in increasing benefit levels for individuals with equivalent lifetime earnings across generations (relative to the average wage level) at the rate of price growth (increase in the CPI), rather than at the rate of growth in the average wage level as in current law. Calculation of the average indexed monthly earnings (AIME) used in computing the PIA would be unaffected by this provision. This provision alone would increase the size of the long-range OASDI actuarial balance (reduce the actuarial deficit) by an estimated 2.07 percent of taxable payroll.

Note that what is being indexed to the CPI is the PIA (primary insurance amount) which is what we just calculated above. That is clearly not a COLA. In fact, here is a list of Social Security COLAs from 1975 to 2004.

Year	COLA	Year	COLA	Year	COLA
1975	8.00%	1985	3.10%	1995	2.60%
1976	6.40%	1986	1.30%	1996	2.90%
1977	5.90%	1987	4.20%	1997	2.10%
1978	6.50%	1988	4.00%	1998	1.30%
1979	9.90%	1989	4.70%	1999	a 2.5%
1980	14.30%	1990	5.40%	2000	3.50%
1981	11.20%	1991	3.70%	2001	2.60%
1982	7.40%	1992	3.00%	2002	1.40%
1983	3.50%	1993	2.60%	2003	2.10%
1984	3.50%	1994	2.80%	2004	2.70%
a The COLA for December 1999 was originally determined as 2.4 percent based on CPIs published by the Bureau of Labor Statistics. Pursuant to Public Law 106-554, however, this COLA is effectively now 2.5 percent.

Notice something? The Social Security Administration first started using COLAs in 1975. So Kevin's claim about 1954 is...probelmatic. Further, all of these COLAs are based on the...wait for it...CPI and not some wage index.

It is at moments like this that I wonder exactly where does Kevin get his information that he puts into his blog? From one of his cat's butt? After all, here he tells us how much research he has done on this topic, but it looks like he hasn't really done any at all.

Update: Well I had some free time and thought I'd see what the Primary Insurance Amounts would look like if they were calculated using the CPI as the index instead of the Average Wage Index. You can check my calculations here (warning that is an Excel file so right click, and choose save as). So what happens to the benefits? Well that depends in part on what your Average Indexed Monthly Earnings (AIME) are. But here is a chart for AIME values between $2,500 to $4,000.

AIME	AWI Benefits	CPI Benefits	Difference
$2,500	$1,164	$1,115	$49
$2,750	$1,244	$1,195	$49
$3,000	$1,324	$1,275	$49
$3,250	$1,404	$1,355	$49
$3,500	$1,484	$1,435	$49
$4,000	$1,606	$1,470	$136

Notice that huge difference. If you were going to retire in 2005 and we could go back and magically change the bend points in the PIA to be indexed to the CPI and your AIME value was $3,000 the difference would be a whopping $49 (assuming I did the calculation correctly). Where guys like Kevin get the $900 to $450 in benefits is beyond me.

Now of course the results above could be dependent on how I did the calculation. For example, to figure out the CPI numbers to use I used the current CPI-W (all urban wage earners and clerical workers). Further I took the months of July, August and September and calculated an average. This is similar to how the COLA adjustment is calculated. However, I don't think that variations in the calculation (say using the average over the entire years of 1977 and 2004) would produce a 50% drop in the benefits. On that part Kevin is utterly and completely wrong.

So what has got every Lefty's underwear in a bundle? $49. Well okay, that is $49 every month, but sheesh that still isn't the end of the world. We could argue that the COLA adjustments sometimes produce offsetting amounts due to the slight upwards bias in the CPI.

Update II: Victor strongly suspects he interpretation of what was going to happen with the switch from the wage indexing to using the CPI was wrong. And it looks like what is going to be reduced are the PIA Factors (90%, 32%, and 15%).

The idea would be to reduce the PIA factors by measured real wage growth. This would supposedly result in increasing benefits in accord with the CPI. I'm not sure how that works (at least not without resorting to pencil and paper at this point).

The Battle of Ideas

Arnold Kling comments on Milton Friedman's decleration of victory in the battle of ideas. Friedman notes that for the most part the attitudes seem to be in favor of markets whereas in practice the Welfare State/Socialism is still dominant.

Hardly anyone today, from the far Left to the far Right, regards socialism in the traditional sense of government ownership and operation of the means of production as either feasible or desirable. Those who profess socialism today mean by it a welfare state.

Over the same period, the actual role of government in the US also changed drastically -- but in precisely the opposite direction. In the first post-war decade, 1945 to 1955, government non-defence spending, federal, state and local, equalled 11.5 per cent of national income, varying from a high of 16 per cent in 1949 to a low of 8.5 per cent in 1952. From then on, spending rose rapidly. By 1983, government non-defence spending reached 30 per cent of national income, nearly triple the average amount in the first postwar decade.

...To summarise: After World War II, opinion was socialist while practice was free market; currently, opinion is free market while practice is heavily socialist. We have largely won the battle of ideas; we have succeeded in stalling the progress of socialism, but we have not succeeded in reversing its course.

I agree with Arnold's assessment that we have yet to win the battle of ideas here. I offer my own views as evidence on this. I see much of my arguments and posts here are "rear guard actions". Or more bluntly as capitulating the the view that people simply want a certain degree of Socialism in their lives. There are a number of examples such as health care, Medicare, and Social Security.

With regards to health care, my feeling is that with each passing year more and more people want health care to be run by the government in some form. Arguments that health care is a private good not a public good and hence shouldn't be provided by the government either fall on deaf ears or even worse, people claim that health care is a right. Nobody seems to want to consider that if the government takes over that the government can and in all likelihood with severly ration who gets what kind of health care. There is also a great deal of fantasizing about government run health care as well. One favorite example is that with the government running it bureaucratic overhead will plunge to some miniscule level which in turn will mean cheaper health care for everyone. Nevermind that the primary business of government is bureaucracy.

Now with Social Security we see that many on the Left are marshalling their forces to support the position that: Social Security is fine, lets do nothing. Nevermind, that Social Security is almost always is in actuarial imbalance. Nevermind that one primary reasons why bankruptcy isn't closer is the massive amounts of immigration (i.e., stop that and the insolvency date will become stationary--see this post for details).

So, no the battle has not been won. At best it is a stalemate at the moment, but certainly not a victory. In practical terms the Welfare State/Socialism side is still very much in the dominant position.

As for Arnold's question at the end of his post,

What are the most compelling arguments for scaling back the welfare state? What are the most compelling arguments for maintaining or expanding it?

I'd say the biggest problem is the incentive compatibility problem. The problem with the Welfare State is that it tends to distort incentives, and often times results in perverse incentives. In fact, one could think of the time inconsistency problem as an incentive problem as well. In the case of the government, there is a strong incentive to deviate from the stated (optimal) plan for an increase in ovearll welfare. This deviation will result in people not believing the initial plan and ultimately a sub-optimal outcome. With the government crafting a good incentive scheme is hard. Voting might be one possibility to inducing "good behavior" from the government, but with things like term limits that renders voting less effective (if it is effective at all as it would require a fairly sophisticated electorate). Markets on the other hand tend to come up with solutions to incentive problems. They don't result in the optimal outcome, but overall markets are better at overcoming the incentive problem.

Comparing Social Security Rescue Plans

I noted that comparing the benefits from a privatized Social Security system to the benefits from the current Social Security system is a bit misleading. There is another, more subtle problem at work with such comparisions.

Typically many on the Left advocate saving the current system by increasing taxes and using the increased revenue to cover the shorfall. This they argue will allow benefits to remain as they are which are superior to the benefits under various privatization schemes. While it might be true the error is in that it focuses solely on the pecuniary aspects of the benefits. What is missed is inidividual welfare.

Perhaps and example might help. Suppose you have two job offers. The first one will pay you $25/hour, you'll get to work on a subject you are quite interested in and will work in a very pleasant environment. The other one pays $25/hour, but you'll have to deal with stangers on the phone, stress and work in a rather sterile and noisy environment. Clearly one job is superior to the other for non-pecuniary reasons.

How does this relate to Social Security. Well, what should really be of interest is not the dollar amount of the benefits, but the welfare level of the participants. Sure, increasing taxes could save the sytem, but it would also lower the welfare of everybody participating in the system. How do we know this? Simply: increasing current taxes will reduce current incomes and smaller incomes today will mean less welfare today. Granted the income due to Social Security will be the same as it is currently promised, but that does not represent an improvement in welfare, but merely the status quo.

Now, it might very well be the case that simply raising taxes and going with the current system would result in higher welfare levels than undre privatization. However, it is not at all clear this has to be the case. Also, to be fair it is quite difficult to determine which policy will result in higher welfare for the participants as it is pretty much impossible to measure an individuals welfare. Still, this is something that should be at least mentioned, IMO. Because focusing simply on the pecuniary aspects could be misleading.

Perhaps Kinsley Should Read the Proposals

b) The only change in decision-making about capital investment is that the decisions about some fraction of the capital stock will be made by people with little or no financial experience. Maybe this will not be the disaster that some critics predict. But there is no reason to think that it will actually increase the overall return on capital.

This was part of Michael Kinsley's "irrefutable" criticism against Social Security privatization (found on the Liberal Blog the Daily Dish).

The problem with the above reasoning is that it completely disregards what various proposals call for. You wont have 100% control over your "private account". Instead there will be limited number of choices as to what type of investment can be made.

4. If the economy doesn't produce more than it otherwise would, the Social Security privatization bonus must come from other investors, in the form of a lower return.

a) This is in fact the implicit assumption behind the notion of putting Social Security money into stocks, instead of government bonds, because stocks have a better long-term return. The bonus will come from those saps who sell the stocks and buy the bonds.

Uhhhmm, I don't think this is quite the case. The actual case is that on a forward going basis, 2% of the revenue raised will be invested in low cost diversified portfolios. So, unless I'm mistaken, there wont be any selling of bonds. Not sure if this undermines Kinsley's point in 4 above, but starting with a faulty premise doesn't really help.

Does this mean that privatized Social Security will result in higher benefits for its participants? I don't know. Arnold Kling says it is quite right to be suspicious of this cliam, and I think Kling is right. The problem though is that doing nothing also results in less than the current system promises. What everybody seems to ignore is that the current system is in imbalance. So long as immigration stays high (say another 15 million people over the next 10 years) the insolvency date will likely stay about 40 years down the road. However, could that change? There is lots of noise being made about immigration and curtailing it for security reasons. What if those policies are successful?

So sure, privatization might not beat the current system, but the current system is broken. Using that as a benchmark is a bit misleading.

To see more responses to Kinsley check out Technorati.

The Toxic Effects of Income Inequality

Several months ago I was critical of Kevin Drum's claims that income inequality is toxic for society. Kevin never really gave an adequate answer to the question of why is income inequality toxic. However, this article might give us some insight into the problem.

JOHANNESBURG, South Africa — A dispute between South African President Thabo Mbeki and Nobel laureate Desmond M. Tutu has opened up divisions over a key government policy meant to redistribute wealth to blacks.

Under the Black Economic Empowerment strategy, aimed at redressing apartheid-era inequities, companies with substantial black ownership and management get preference in government contracts.

But retired Archbishop Tutu and others have criticized the policy for enriching what they call a "recycled" black elite that repeatedly benefits from the big deals while the majority of blacks have become poorer during the last decade. A recent study by the Human Sciences Research Council of South Africa showed that 57% of the population lives below the poverty line.--italics added

What we are seeing is the nexus of politics and econmics/business. The problem isn't just income inequality, but alos the presence of rent-seeking. When the rent-seeking becomes so prevelant that it takes on the appearance of corruption and there is extreme income inequality seems to be when the problems start. The article even notes something similar.

"What will happen in South Africa if this carries on is that you will create a class of wealthy blacks who are not entrepreneurs, so they are not creating jobs, they are not adding value to the economy or to the society," he said. "So rent-seeking becomes the core culture amongst the black elite and rent-seeking is not a productive process — it's a destructive process in the end."

Now rent-seeking doesn't always have to be unproductive, but by and large it is. For example, if a law is passed that requires the periodic testing to gain entrance into a certain profession then this creates a barrier to entry. This raises the prices those in that profession can charge and results in economic profits for those in the profession. However, if there is an increase in the quality of the work then this might offset the loss due to the barrier to entry. Note that in this example the test is periodic to ensure that those in the profession stay up-to-date. A one shot test on the other hand does not do this and is far less likely to result in an increase in quality. Thus, the one-shot tests are more likely non-beneficial to society.

The overall problem is that with both rent seeking and extreme income inequality, the perception by many is that it is virtually impossible to get ahead unless you have the right connections. Now, hard work and persistence is far less likely to lead to economic improvement. Further, those who are experiencing economic improvement are accomplishing this without hard work and persistence.

It is the combination that is "toxic". Income inequality by itself probably is not sufficient to lead to problems. So do we have to worry about income inequality here in the U.S.? Right now I'd say, "no." While there is indeed rent seeking in the U.S. it is not of a sort that means that one still cannot get ahead if one puts forth the effort. I think that last part is crucial, and why Kevin's claims about the toxicity of income inequality are nothing more than scare tactics (and bad ones at that).

Economic News

The Economic Cycle Research Institute's Weekly Leading index is higher again. The index has been rising for the past several weeks, but this doesn't indicate strong economic growth (yet) in the coming months.

Also, the CPI rose 0.1% last month.

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.1 percent in November, before seasonal adjustment, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. The November level of 191.0 (1982-84=100) was 3.5 percent higher than in November 2003. The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) increased 0.2 percent in November, prior to seasonal adjustment. The November level of 186.8 was 3.7 percent higher than in November 2003.

When In Doubt Mislead, Mislead, Mislead

Kevin is still blogging about what he percieves as a non-problem, Social Security. And as is typical Kevin is badly misleading his readers.

First up is a technical issue.

The inflation rate that most of us are familiar with is the Consumer Price Index, or CPI, which measures the increase in prices over time. But that's not the only way to measure inflation, and the method used by Social Security is to index benefits according to wage inflation, the average increase in wages over time.--italics added

Wrong, wrong, wrong. The CPI is not an inflation rate, but a measure of inflation. Further it is a flawed measure of inflation. There are numerous sources of bias in the CPI. Going in to the technical aspects would take more than a single post, but many of the known biases result in an upward bias. Is it a large bias? Hard to say, but many guesses put it between 0.5 and 1.5 percentage points.

The difference is simple but profound. Think about it this way: what if there were no price inflation at all. Would wages go up anyway?

Answer: sure they would. This is because the economy grows in real terms, and as the economy grows we all get paid more and our standard of living goes up. The whole point of having a growing economy is that it allows everyone to earn more money in real terms and live better lives.

These paragraphs exhibit a fundamental misunderstanding of what inflation, price changes, and what things like the CPI measure. The CPI measures the change in prices of a basket of goods overtime. Inflation on the other hand is viewed as a decline in the purchasing power of a given currency. While the two definitions might look similar they aren't. Suppose for example, the price of a given good goes up due to an increase in demand. Now, with the same income prior to the price change as after, an individual can buy less of the good. In this sense, the individual's purchasing power has declined. This however is not inflation as it is not an overall decline in the purchasing power of the currency used in the economy. While things like the CPI capture the effects of price changes due to inflation, they capture price changes also due to other factors such as changes in demand, supply, and so forth. The CPI is and upper-bound on the cost-of-living. The cost-of-living indexes measure the amount consumers need to spend over time to maintain the same standard of living (i.e., utility/welfare). The cost-of-living index is broader than the CPI in that the former would take into account all goods and services not just a limited basket of goods.

So does this mean absent inflation that wages would still go up? Maybe, but if Kevin's logic is valid for wages, which are the prices for various types of labor, then it is also true for other prices as well. In short, Kevin has provided no justification to think that wages are more special than other prices. Do they tend to rise faster than prices in general, yes historically they have. Will that always be the case? I don't know, maybe. But if indexing to wages is better because they grow faster than the CPI, then why not index to another sub-series such as health care commodities, fuel commodities, etc.? These traditionally have out performed the standard CPI, so why not them?

The CPI doesn't take this into account. If your benefits go up only as fast as the CPI, your standard of living is frozen forever no matter how strong the economy is.

Uhhh, no. Given that the CPI is usually considered to be an upper bound for any cost-of-living index this means your standard of living is rising in real terms, just not as fast as before. Is it a benefits cut? You bet. Frankly I don't see the problem as this is part of the policy prescription that Kevin suggested we follow just several months ago. What has happened is that Kevin has implicityly endorsed the idea of opening the borders to about 2,000,000 immigrants/year to keep the current system afloat.¹ That is one of the reasons why we have had the continually moving bankruptcy date for the past 10 or so years.

This next quote is simply astonishing in its ignorance,

Bernard Wasow of The Century Foundation, looking back to the birth year of Social Security, puts this into more concrete terms:

What we consider necessities today — indoor plumbing, a car, television, air conditioning — were unattainable luxuries for a large proportion of the population in 1935. All but the poorest Americans have these "luxuries" today. As late as 1950, more than a third of households lacked complete plumbing and even in 1970, 60 percent of families lacked air conditioning (today that number has been halved).

....It's as if an official in 1935 had said:

"Why does every retiree deserve a flush toilet and a telephone? Half of Americans make do without complete plumbing and less than half have telephones. We do not need to coddle our old people, just ensure them enough income to live adequately. You do not need a flush toilet or a telephone to live adequately in America today."

Switching to a price-indexed model would freeze the living standards of senior citizens forever. Count me out.

As already noted, the CPI is an upper bound on the cost-of-living, hence it would still mean increases in the standard of living in real terms. Further, the idea that the CPI doesn't take into account new items is simply false. The CPI goes back to 1935, and guess what? The current CPI has things like telephones in it. Here is the list of the CPI's item codes. A quick perusal fo the list of items show telephones, wireless telephone services, internet services, computers, land-line telephone services, televisions, and video equipment. I'm just guessing here, but I don't think any of these items were around in 1935. Incidentally, the periodic appearance of new and life-improving technologies and the problems they cause for the CPI is considered by some one of the sources of bias.

The bottom line is that what I predicted long ago about the difficulties of reforming Social Security are coming true. One political party decides that Social Security reform must be undertaken. The other party immediately attacks noting the evils of cutting benefits growth rates, claims that there is no crisis, etc. In this case it directly contradicts what Kevin has written on this before. Before this was a hot topic and barely on the radar screen the reasonable thing was increase taxes and the tax base with modest benefit cuts. Now it is do nothing, because cutting benefits is a cruel heartless thing to do.

Update: Bernard Wasow has commented on this post and has grossly misunderstood the point of the post. The point of the post is that even with a CPI only adjustment to benefits, the claim that this freezes benefits at some real level is false. The reason this is false has to do with the nature of the CPI and cost-of-living indexes (COLI). That Wasow's (and Drum's) claim is false is easily demonstrated. Suppose we have an initial basket of goods comprised of two goods, x*₁ and y*₂. The initial prices are, p_x,1 and p_y,1 and the price of good one changes so that it is more expensive. Now it must be the case that that M₂ > M₁ where,

p_x,1x*₁ + p_y,1y*₁ = M₁, and

p_x,1x*₁ + p_y,2y*₁ = M₂.

With p_y,2 being the new price for good y which is higher than the initial price. Now, using the indirect utility function we have

V(M₂,p_y,2,p_x,1) > V(M₃,p_y,2,p_x,1).

Where M₃ is the income necessary to get the individual back to utility level

V(M₁,p_y,1,p_x,1),

which is the initial level of utility.

I know the above is...well boring crap for most people, but it is pretty much a given that the CPI is more than just a COLI.

Update II: Tim Worstall has two post on this as well. One takes on Krugman, the other responds to Michael Kinsley.
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¹See this post here for the details. Ironically, this also seems to contradict Kevin's views on Bush's guest worker program. The guest worker program is just the ticket in that we need more workers (i.e., we don't want more welfare cases) and the more skilled the better. Maybe Kevin wants open borders...who knows.

Data That is Too Perfect?

Sounds weird, but that is indeed what it looks like. In the Global Warming (GW) debate, one of the holy scriptures is the Mann, et. al. hockey stick. The hockey stick is a recreation of temperature anomalies for the past 1,000 years for the northern Hemisphere. The shape of the reconstructed data series is like a hockey stick, mostly flat except in modern years where the series climbs steeply like a hockey stick.

Now it looks like the hockey stick result is due to flawed mathematical algorithms used to generate the data.

But now a shock: Canadian scientists Stephen McIntyre and Ross McKitrick have uncovered a fundamental mathematical flaw in the computer program that was used to produce the hockey stick. In his original publications of the stick, Mann purported to use a standard method known as principal component analysis, or PCA, to find the dominant features in a set of more than 70 different climate records.

But it wasn’t so. McIntyre and McKitrick obtained part of the program that Mann used, and they found serious problems. Not only does the program not do conventional PCA, but it handles data normalization in a way that can only be described as mistaken.

Now comes the real shocker. This improper normalization procedure tends to emphasize any data that do have the hockey stick shape, and to suppress all data that do not. To demonstrate this effect, McIntyre and McKitrick created some meaningless test data that had, on average, no trends. This method of generating random data is called “Monte Carlo” analysis, after the famous casino, and it is widely used in statistical analysis to test procedures. When McIntyre and McKitrick fed these random data into the Mann procedure, out popped a hockey stick shape!

That discovery hit me like a bombshell, and I suspect it is having the same effect on many others. Suddenly the hockey stick, the poster-child of the global warming community, turns out to be an artifact of poor mathematics. How could it happen? What is going on? Let me digress into a short technical discussion of how this incredible error took place.

Without Mann et. al., the argument in favor of GW is tremendously weakened. Although, it does not scuttle the GW hypothesis, it does re-open the debate.

Social Security Fantasy

If you visit the Lefty sites that are discussing Social Security you'll see that many of them point out that the claim that the market will consistently perform so well is a fantasy. Here is Dean Baker from MaxSpeak. Kevin Drum quotes Dean approvingly. Kevin goes on to write,

The fact is that there's nothing necessarily wrong with private accounts being part of a Social Security package, but only if they're based on reasonable assumptions about how much money they'll raise. If they're properly accounted for, tightly regulated, and honestly funded, they might be worth taking a chance on.

Not too much to disagree with there. Where one can disagree is with this notion that there is no crisis is these same blogs have been strongly hinting at. If the economy is going to grow at a rate that will not support the 7% real returns for stocks, then it also follows that the economy wont grow by sufficient amounts to allow for the current system to remain solvent. These guys are stuck with the same declining economic growth as the privatizers.

To put it more simply, suppose x% economic growht is necessary to ensure at least y% real return on stocks. If x% is a fantasy and pointing to it is bad policy then so is it also bad policy to point to x% or greater than x% as an argument for doing nothing.

Are such arguments being made by those on the Left? Yes. Max Sawicky here and here. Kevin Drum here (interestingly Kevin also derides the idea of predicting future economic growth...so much for internal consistency) and here.

The funny thing is that this is precisely the same sort of gamble that these Lefties are complaining about with privatization. Lets use Kevin Drum's post as an example,

The key assumptions in the intermediate projection from 2015 forward are the following:

• Labor force growth: 0.2% per year.
• Productivity growth: 1.6% per year.
• Average hours worked: no change.

Which leads to the following overall estimate:

• GDP growth: 1.8% per year.

This growth is lower than we're used to, but that's because GDP growth = population growth + productivity growth. Since population growth is slowing down, so will GDP growth.

Still, what if you assume that things will be a little more robust than this? If you project GDP growth of around 2.6% per year, you end up with Estimate I, and in that scenario Social Security never runs out of money. In fact, if you project GDP growth just a few tenths higher than 1.8%, Social Security stays solvent for the next century.--italics and bold in the original

In other words, lets hope growth is high enough so that we don't have to worry about this problem. Several posts later and this hope is transmogrified into "there is no Social Security crisis."

And these people accuse those on the Right and who favor privatization as being liars, knaves and incompetents.

Social Security vs. Medicare

Kevin has a sort, kinda decent post on the problems of Social Security and the undiscussed problem of Medicare. He is right in that Medicare is much, much bigger problem. Right now, if you believe the research of Gokhale and Smetters, the U.S. faces deficits of about $44 trillion dollars over the next 75 or so years. About $7 trillion is Social Security and the remaining $37 trillion is Medicare. Or Medicare is about 5 times the size of the Social Security problem.

The solution is that we need to bring more market incentives to bear on the problem. Right now Medicare recipients basically have a gigantic subsidy for consuming health care resources. This subsidy basically means that they will consume alot. This in turn drives up the price for everybody else. Throw in the fact that purchasing insurance when you are young, health and have few or no assets is a sucker's game and you have a recipe for spiralling out of control health care costs.

One solution suggested by Arnold Kling are vouchers for mandatory catastrophic health care. You must buy catastrophic health care or else you are severely punished.¹ Then they are given a voucher and have to shop around and find the best catastrophic insurance deal they can.

Also, there has to be policies put into place that will help people save for future health care consumption. As you get old the probability you will have certain medical problems will increase dramatically. As these probabilities increase the premium for insurance for these events will also increase approaching the actual cost of those events. Hence insurance for prostate cancer when you are 65 will have an extremely high premium. Hence, people are going to have to rely more on savings than on insurance.

Furthermore, these changes will have to be pretty hard to change. The reason for this is the problem of time inconsistency. If a certain plan is optimal, then it is also time inconsistent and the end result is a sub-optimal outcome.² Hence the new policies will have to be quite difficult to change. One option would be to amend the Constitution, another would be requiring some sort of super-majority. Both of these courses would send a signal of commitment to the voters/consumers telling them they can be pretty sure the government isn't going to deviate to obtain welfare gains at a later date.³ Also, the policy does not have to be simplistic. When time inconsistency was first pointed out by Finn Kydland and Edward Prescott the response was typically simple rules. Kydland and Prescott responded in a second paper pointing out that the rules don't have to be simple, merely that there are rules that signal a level of commitment not to deviate at a later date.

The other problems with all of this is that since we are basically in a Second Best world⁴ this policy will undoubtedly create winners and losers.⁵ As soon as that happens the other side will immediately see it as an opening and attack. Thus, I'm fairly pessimistic about something being done about Medicare.
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¹For this to work you must have everybody playing the game--i.e., no free riders.
²The most simple example is a college class with a final. The professor announces there will be a final at the end of the semester that will determine the grade. The students believe this and hence study. Given that the students have studied there are welfare gains to be had if the professor announces there is no final exam. This way the professor doesn't have to grade papers and students don't have to sweat through a test. Forward looking students see this and will not study, thus leading to a sub-optimal outcome. If the professor administers the test once the students have studied, it is still sub-optimal in that the optimal course is not to take the test given the students have studied.
³The professor in our earlier example can also try similar approaches such as a no regrets final (i.e., the final can only improve your grade based on homeworks, and quizes). Thus, the student might opt not to take the final and thereby improve both the welfare for himself and the professor.
⁴The fact that the government doesn't have perfect information and usually can't resort to lump sum taxes, as well as time inconsistency ensure that we are in a Second Best world.
⁵If you follow the link on the Second Best, item number 3 indicate that policies will generally create winners and losers.

This post is part of the Outside the Beltway Traffic Jam Link Fest.

The Social Security Canary

John Henke has a good post on Social Security reform (and yes I basically stole his title...why not I think it is a good title and after all imitation is the sincerest form of flattery). I would point out that some of Kevin Drum's posts are...scant on research and may imply things that many people might not like (like say throwing the borders open to 2 million immigrants a year).

Update: While John has a link to this article by Arnold Kling, I'm including it as well since it pretty much gives a good reason for privatizing Social Security and why the Left should embrace it.

Ouch!

Juan Cole gets spanked Right and Left.

Heading South?

Well somebody needs a new definition for that phrase.

Instead of gambling in the market -- risking real poverty if the market heads south, as it did from 1929-1946 and again from 1966-1980, or if they try to pick stocks and do badly at it -- they could instead accept the certainly of a significantly reduced retirement standard of living.

You know, not liking the President's plan for privatization is one thing, but outright lying is another. During the 1929-1946 time period stocks did not simply head south. Sure the market took a huge dive during the period of 1929-1932, but it climbed from about 1933 to 1937, then headed south again (but nothing like the dive of 1929-1932). Then it was rather tepid until 1943 when it started heading up again. The 1966-1980 period was pretty much flat through out that entire period.

Further, the President's plan does not, AFAIK, allow for individuals to pick individual stocks. Also, the real value of an account is gauranteed. Now, this might mean that over all the plan is still bad, but these reasons are just pure fantasy.

Social Security: The Moving Bankruptcy Date

In the post below I indicated that perhaps Kevin Drum was onto something with regards to the moving date for Social Security bankruptcy. However, Victor from Dead Parrots, quite politely indicated I was being a bit naive.

First Victor suggests that one explanation for the move in the bankruptcy date has to do with immigration.

Now, with that said, I've been waiting for someone to say something like this about the last 10 years of Actuarial reports. But all Drum is doing is illustrating how Social Security can be FIXED (unlike Medicare). If you change immigration policy, which we did in the 1990s, you can affect the demographic.

Now according to the Census Bureau the number of immigrants to the U.S. went from 19.8 million to 31.1 million from 1990 to 2000. Further, that most of these immigrants are 55 years old and younger indicates that a great many of them would be of working age.

As for the net benefit to Social Security I'm not sure what the impact would be. For example, the abstract of this NBER paper suggests that while immigrants fare better in terms of Social Security, in the end immigrants are a net plus for Social Security.

For each year of work under the Social Security System, immigrants realize higher benefits than U.S. born, even when their earnings are identical in all years the immigrant has been in the U.S.. Two features of the social security benefit calculation are responsible: the social security benefit formula transfers benefits toward those with low lifetime covered earnings, and all years an immigrant spends outside the US are treated as years of zero income. Immigrants with high earnings who have worked in the U.S. for only a 10-20 years benefit most from these procedures. If instead earnings were averaged only over the years an immigrant resides in the U.S., and benefits prorated immigrants would receive the same return on their social security taxes as US born who have the same earnings in each year. It is difficult to justify the current procedures determining benefits for immigrants on the basis of income or wealth differences between US and foreign born. Among HHRS respondents, mean total wealth of immigrants is 92% of the mean total wealth of US born, while the mean income of immigrants exceeds the mean income of US born by 3%. But income and wealth are less evenly distributed among foreign born than US born. Depending on whether the appropriate period for calculating benefits is taken to be 35 or 40 years, prorating would reduce the present value of benefit payments to the cohort of immigrants born from 1932-1941 (91% of the HRS cohort) by $7.5 billion or $15 billion respectively. The 1932-1941 cohort represents 1/7 of all foreign born who are now 25-64. We also ask whether, from a selfish financial viewpoint, US born participants would have preferred to have immigrants from the HRS cohort included in social security. The answer is yes. Despite their better deal, most immigrants in the HRS cohort will pay more in taxes than they will receive in benefits, although just barely.

This paper indicates that admitting 1.6 million highly skilled immigrants per year would solve the Social Security problem as well. That number is sensitive to the skill level of the immigrants. So it is quite possible that a big part of the reason for the shift in the insolvency date for Social Security is the influx of immigrants.

As suggested by Victor I went and dug through the trustees reports and found a section that does discuss the differences from the previous year. And here is one of the findings.

Several demographic assumptions were modified: (1) the starting population was updated to reflect revised intercensal estimates (1980 through 1990) and new postcensal estimates (1990 through 1993) by the Bureau of the Census, which showed fewer people at high ages than did earlier estimates; (2) projected mortality rates were increased, reflecting the latest data, which were higher than expected for 1992 and 1993; and (3) net other-than-legal immigration was increased by 50,000 per year based on recent analysis by the Immigration and Naturalization Service. These modifications result in increases in the long-range actuarial balance of approximately equal size.

Ultimate economic assumptions were not changed for this report. However, revised short-range economic assumptions, including substantially better growth in the labor force, real GDP, and average real earnings, plus slower growth in prices, since last year's report, resulted in a small improvement in the long-range actuarial balance.--source, italics added

So from the 1995 Trustees Report we see that over the past ten years the economic assumptions were unchanged, but that changes in the demographics did play a role in changing the long run actuarial balance of the trust fund.

From the 1997 Trustees Report's section on net immigration we have this,

Table II.G3 shows the estimated OASDI income rates, cost rates, and actuarial balances, under alternative II with various assumptions about the magnitude of net immigration. These assumptions are that the annual net immigration will be 750,000 persons (as assumed for alternative III), 900,000 persons (as assumed for alternative II), and 1,150,000 persons (as assumed for alternative I).

Now based on the Census numbers we see that the number of immigrants is closer to the low cost estimate (alternative I) with 1.15 million people per year. Clearly what is going on is the large immigration numbers are helping to forestall the day of reckoning.

Another point that Victor raises is that Kevin is also basically arguing that economic growth would solve the problem. Which is fine, but it is basically a gamble. Also, if we look at economic growth we see something interesting.

Notice that the peaks are a decreasing in magnitude over time. And is Kevin really making the case that Bush is laying the foundation for strong future economic growth? Do think Kevin believes that? Neither do I.

Update: From the 2004 Trustee's Report we get the following table (which I modified a bit to fit here):

Valuation Period	672,500 Immigrants	900,000 Immigrants	1,350,000 Immigrants
Actuarial Balance:
25-year: 2004-28	+1.00	+1.10	+1.22
50-year: 2004-53	-1.20	-1.03	-0.80
75-year: 2004-78	-2.08	-1.89	-1.63
Year of Combined Trust Fund Exhaustion	2040	2042	2044

In other words, the baseline scenario is going to be off by two years. So next year we can expect the insolvency date to be somewhere between 38 and 39 years away.

Flip Flopping

No, not in the John Kerry sense, but...well let me just dive right into it.

First, we have this post by Kevin Drum which raises an interesting point. Ten years ago in 1994 the clarion call was that Social Security was going to go bankrupt in 35 years (2029). Now, the number is 38 years (2042). The date when Social Security goes bankrupt seems to be a moving target...and one that seems to be moving further away. So Kevin's conclusion: Lets wait and see what happens.

Now, what is a big thing for environmentalists? Global climate change? Well, there is alot of uncertainty for this as well. Granted it pretty much looks like there has been some warming, but part of it appears to be related to the rebound from the Little Ice Age. Part of it might be due to the sun and solar irradiance. Plus there is that annoying satellite data that shows no warming in the lower troposphere. Throw in the spotty coverage of the surface data, and there are enough reasons to wonder if climate change is the big monster many (most of them on the Left) are claiming it is. A typical response from the naysayers is: Lets wait and see what happens.

So...maybe Kevin is onto something. Maybe we wait for 10 years, reduce the gorwth rate of benefits for future beneficiaries, maybe a little means testing and see what happens. Maybe we don't even need to raise the tax rate. Maybe this bankruptcy thing isn't all it is made out to be.

Still there are some good reasons for reforming Social Security and getting people to take a more active role in saving for their own retirement. Living to 65, 67 and even 70 is not a rare event these days. Hence the idea of insuring people who live to that age just isn't feasible since the premium, as one gets older, will basically grow and move closer and closer to the actual cost. Or in short, because growing old is so common we can't insure against it. So we need to get people to save for that time when they don't want to keep working. If we want to insure against living to be 90 that might be more reasonable, but when the bulk of the population will live to be 68.7 (or whatever the retirement age for Social Security is) you just can't do it. If you want to quit working at that age, you'd better have savings.

Similarly for climate change. The apocalyptic predictions are, I'm guessing, part of what Stephen Schneider calls "being effective", or what most people call lying. To hear the pro-climate change people you'd think every calamity will befall man kind short of meteor hitting the earth (of course, now that I have suggested it I'm sure they'll gin up some kooky theory on how climate change is going to attract meteors). We are going to be hit with plauges, tornados, hurricanes, tidal waves, soaring temperatures, plunging temperatures, and probably two dozen other natural disasters I'm forgetting. Further, maybe the best strategy isn't to cripple economies by trying to cut back on green house gases, but to prepare for some of these events. Maybe we need to, like with Social Security, wait 10 years.

Social Safety Net

It's important to note that there is a market failure here -- insurance markets don't and can't exist which would allow people to insurance themselves against the range of bad hits that can happen to them. While social insurance systems are not without their problems (bad incentives), this market failure is one reason we have them. As the social safety net slips away, and more and more uninsurable risk gets transferred to individuals, life at any particular level of average income gets unambiguously worse. -Atrios 1:54 PM December 12, 2004

So the Social Safety net is slipping away? I wonder what is exactly slipping away? Federal spending on education is up. Bush put in place a huge spending plan for prescription drugs. Are Social Security payments going to be cut? No. Granted the current plan will result in increased government borrowing, but that is mainly to account for the decrease in the current surplus. Will Medicare be cut? No. Were unemployment benefits cut? No.

The last time I can recall part of the social safety net being cut it was Clinton. Now, don't get me wrong, I'm not complaining about welfare reform, but sheesh. There was indeed a cut in the social safety net, but what cuts do we have today? If anything Bush is all to eager to spend, spend, spend.

I sure wish an example had been given.

Update: Via the track back over at Eschaton there is a post at the All Spin Zone on this that notes the following,

I'll take this one step further. We all are. Well, most of us, anyway, because the days of the personal economic safety net are rapidly vanishing. There was a time when being a member of the middle class meant having the financial wherewithal to stash away a little bit extra cash out of every paycheck. The ability of average, two-wage earner families to save that "little bit extra" has been constantly eroded, to the point of almost impossibility. Costs keep rising. The average paycheck is stagnant. It doesn't require an economics degree to figure this one out.

The old joke, "too much week left at the end of the paycheck" isn't so far removed from the truth anymore.

Many families straddle the fine line between making it week to week, and financial ruin. An unexpected medical bill, or even a major car repair, can quickly mushroom into personal economic disaster. When you're livin' on the edge, and you fall behind, it's awfully difficult to catch back up. When you're livin' on the edge with no net beneath you, it's a hard landing at the bottom.

Some points here. First, while the wage part of a workers wage-benefits pay are not going up all that fast, the benefits portion is rising quite rapidly. Granted, you can't spend your benefits, but try telling a Lefty that the pay portion would rise just as fast if benefits weren't an employer's responsibility and he'd likely have a complete bowl prolapse.

Why are benefits (mostly the health benefits) rising so quickly? Probably because we are moving more and more towards more and more subsidization of health care. Everybody wants somebody else to pick up the tab.

Further, this idea that a medical bill could cause financial problems is somewhat misleading. You will still get medical care even if you can't pay the bill. The hospital will get the money from other people. It is as simple as that. The price of goods and services for those who can pay will go up. Further, they might apply to various government programs which means taxpayers will foot the bill.

This might also be one reason why people are not saving as much. If more and more of the increases in wages/benefits is in the benefits portion there is less and less that can be saved.

The other thing is that while it is nice not to have to face risk at times, the unspoken corollary that goes with that is that there are also less rewards. Think of it this way. You have a family where the incomes have become more volatile, but on average are higher. Does it make sense when the income is in an upswing to spend all of it? I read the story Kevin Drum links to and he calls it petty to focus on just such an issue, but is it? I think it starts to get right to the heart of the matter.

Should I be responsible for somebody else's bad mistake?

The 36-year-old Salvadoran-born dishwasher and her partner, warehouse worker Jose Maldanado, make barely enough to stay above the official poverty line — $18,810 last year for a family of four. But by working two, sometimes three, jobs between them, they are grabbing at middle-class dreams.

Rojas and Maldanado live in a two-room apartment in Hawthorne but have china settings for 16 tucked in a wooden hutch. Their two young daughters receive health coverage through Medi-Cal but get many of their clothes at Robinsons-May.

I make more than these people do by myself, and so does my wife. However, we don't have a china set with settings for sixteen. Neither do we have a big screen television (in fact we have an ancient television that I inherited).

So exactly why should I and my family have to go with less so these people can have more when they spend it in this manner? Sure it is heartbreaking to see that they have to struggle and that it causes problems for the household, but having me bail them out causes problems for my household. By bailing them out I have less to spend on my family. And if people are bailed out, what donwside is there to making bad decisions? What does removing the negative consequences of bad decisions have on incentives?

In the story we also see some of the problems with trying to address these problem via the government.

In the years that followed, a booming private sector largely solved the food and clothing problems. And a combination of financial market innovations and federal power applied through a battery of agencies — the Veterans Administration, the Federal Housing Administration, Fannie Mae and Freddie Mac — greatly expanded home ownership, especially among the middle class. But that still left what to do for poor families, most of whom could afford only to rent.

Washington's first answer was to have the government build and run housing projects. Some worked. But many degenerated into vertical ghettos, victimized by disastrous design, racial and economic segregation, drugs and crime.

In 1974, President Nixon and Congress turned to another solution: the Section 8 program. Instead of putting up buildings itself, the government would subsidize private developers to construct housing and give poor families vouchers to rent apartments in the open market. But developer subsidies produced cost overruns and political scandals in the 1980s and were largely phased out.

That left only the vouchers, which recently have been cut back. In all, the amount of money that Congress and the president have authorized to be spent on housing assistance has plunged by nearly two-thirds in the last 25 years, from an inflation-adjusted $82 billion in 1978 to $29 billion last year.

In other words, many of the govenrment responses were failures. These failures cost those who work hard money, deprive them of resources for their families. Is that good?

Now, the voucher program is actually something that could help with the situation. With a voucher program there are still market incentives. One of the problems with this though is that we are talking about Southern California where housing prices are always high (relative to most other parts of the country). Even a voucher for several hundred dollars might not help very much, and the program is being cut.

But note that initially there were several failed government responses. Failures that problably resulted in billions being lost. So what is the solution? More government? My guess is less government, but better structured.

For example, the earned income tax credit is a type of welfare program, but one that does not negatively impact work incentives. Vouchers for health care, housing and other important needs would also work better than most government programs in that they would work with the market and not against it. You'd think that after all these failures and fuck-ups that people would figure this out. I mean look at this part of the article,

But Grimes, in the meantime, has been staggered by another, lesser-known element of the 1996 act — a significant toughening of child-support enforcement rules. This part of the law built on other efforts undertaken since the 1970s to go after absentee parents and compel them to help finance their kids' upbringings.

Grimes and Harvey's son, Albert Jr., was born in 1988. Nine years later, when the elder Grimes applied for custody of a nephew, the Los Angeles County district attorney's office sued him for child support for Albert Jr. The D.A. took action even though Grimes, Harvey and their son had always lived together and, they and several relatives say, Grimes always helped raise the boy....

Whether a mix-up or not, the effect on Grimes' finances has been devastating. California courts not only have imposed high monthly support payments — often unrelated to a parent's ability to comply — but also have added interest at a 10% annual clip to past-due amounts.

So the very source that people like Duncan Black, Kevin Drum, et. al. look to to provide the solution are very, very much part of the problem. As Arnold Kling says, "...the Welfare State redistributes poverty and reduces income."

Jude Wanniski

You know, I can't understand the attention this guy gets. He is one of the early proponents of "Supply-side economics" and now writes some pretty kooky things about the U.N. Oil-for-Food scandal.

With regards to supply side economics I hate it. I really do. Many people think it is some sort of "school of thought" in economics much like Neo-Keynesians, New Classicals, or Real Business Cycle theory. It isn't. It is basically the idea after a certain point higher taxe rates results in decreasing tax revenue and below that point higher taxe rates result in increasing tax revenue. One could present the idea in this idealized graph.

Now, that graph is really a hypothetical in that nobody really knows the shape of this curve. This curve is known as the Laffer curve, and is often referred to jokingly as, "The Laffer curve, what a laugher that is."

While the theoretical validity of the Laffer curve is pretty much indisputable, it is not something special that justifies the rise of its own school of though. The reason is pretty simple. Just about any decent economist is going to acknowledge that there is quite a bit to the Laffer curve.

The problem is over where the laffer curve attains is maximum. Is it at say, 18% or 68%? If it is at 18% then having taxes at 68% would reduce tax revenues and result in a very sub-optimal outcome. Samething if the maximum is at 68% and taxes are set at 18%.

As for the article about the U.N. Oil-for-Food scandal, it is almost beyond belief that somebody can think there is no problem here. One has to be a certifiable whack-job to conclude that the U.N. Oil-for-Food program is nothing more than a clever ruse by the Neo-Cons to discredit Kofi Anan and the U.N.

To put all this in perspective, remember that Saddam was the duly constituted head of state in Iraq, his government not only officially recognised by the US during the Iran/Iraq war, but also was given palpable support in the war.

Why he invaded Kuwait in 1990 is another story, but it is now absolutely clear his dispute was only with the emir of Kuwait and not any other country in the Middle East.

Well except for that Iran/Iraq war thingy and the paying suicide-bombers in Isreal. Other than these destabilizing actions (and lets not mention that while Saddam likely didn't have large stockpiles of WMDs prior to the invasion his pursuit of them in previous years was also destabilizing as other nations would want similar weapons as a deterrent). Other than those two itsy-bitsy things, Saddam was a decent neighbor.

It was because of the UN economic sanctions that persisted because of US/British insistence that the oil-for-food programme came into existence in 1996.

See it really is our fault that Saddam and the U.N. started up the corrupt Oil-for-Food program. Kind of like how it is the fault of the cops that rapists and muggers get arrested. After reading that, my only conclusion is that Wanniski is a crank.

Fire at Iraq Generating Plant

I suppose this is somehow the fault of the Bush Administration.

While events such as this are not good, the idea that they are avoidable is just ridiculous. And yes, a fire could cause a widespread blackout. Remember what happened in the Northeast U.S. and parts of Canada.

Could It Be...Oh I Don't Know...Seasonality?

Matthew Yglesias and Kevin Drum, have decided to try their hands at energy economics. They looked at this picture of the generating capacity in Iraq (source),

and decide things are "bad". But are things as bad as Matthew and Kevin think?

Here is the deal, here in southern California (with pretty mild climate) we have these things called seasons. You know, warm in one part of the year, cold in others. When it is warm the load (i.e. gigawatts to you electric industry neophytes) on the system is pretty high. In fact, this is the annual peak. Then the load declines and then rises again to reach a secondary peak (Christmas lights) in December/January (the increase in usage depends on your billing cycle).

The flat line that represents the pre-war levels in the above picture is almost surely an average of generating capacity prior to the war. There were undoubtedly fluctuations in the generating capacity...either that or Iraq was one of the most efficient consumers of electricity with a completely flat load profile (not fucking likely).

Now, does Iraq have seasons? According to