Arnold Kling  

Three Quick Takes

Fragmentation of States... News Reporting and Falsehoods...

I beg to differ with PGL, Martin Feldstein, and Steve Pearlstein. First, PGL:

Gee – the [Social Security] Trust Fund will have $5 trillion in bonds earning interest.

What that means is that over the past decades, Social Security has, when accrued interest is accounted for, taken in $5 trillion more in taxes than it has accrued in liabilities. However, under the "unified Budget," enacted under Lyndon Johnson as a macroeconomic reform, Congress has managed to spend this entire $5 trillion--and more--over and above the other taxes it collected.

The economic planners want to blame consumers for not saving, and they want to "nudge" consumers to save more. But the most prodigious dis-saving has been done by the economic planners.

If Social Security consisted of personal accounts, then that $5 trillion would be sitting in what I once called the ultimate lockbox. Instead, it needs to be collected again in future taxes.

Feldstein writes,

The federal government would offer every homeowner with a mortgage the opportunity to replace 20 per cent of that mortgage with a low interest government loan – up to a loan limit of $80,000. . .that reflects the government’s lower borrowing rate. Creditors would be required to accept this partial mortgage pay-down and to reduce the monthly interest and principal by the same 20 per cent. That mortgage replacement loan would not be collateralised by the house but would be a loan that the government could enforce by lodging a claim on an individual who does not pay.

Feldstein is worried about house price declines "overshooting" their proper value. If he knows what the proper value of everyone's house is, he should set up a hedge fund to buy houses that fall below that value, while shorting the market-traded house price indexes in cities where house prices are still too high.

In fact, Feldstein doesn't know the proper value of everyone's house. And I think it's time to stop looking for ways for government to make more bets and enact more subsidies in that market.

Finally, Steven Pearlstein writes,

But over the past 35 years, the typical American household has managed to eke out only a 15 percent increase in its pretax income. During that same period, the productivity of the American worker -- the value of the goods and services produced per hour worked -- has increased by 90 percent.

In 1973, labor's share of income was roughly 74 percent (see figure five here). According to Pearlstein's narrative, the denominator (income) is up 90 percent, while the numerator (labor income) is up 15 percent. In that case, labor's share today should be 45 percent. In fact, the share is below what it was in 1973, but it is much closer to 70 percent than to 45 percent. There is quite a discrepancy between Pearlstein's reporting and reality.

What accounts for the discrepancy?

1. My guess is that the Census data do not include health benefits as income. Workers have no idea what their health benefits are worth, and so they do not report the value of those benefits to people doing the Census surveys. The fact is that worker compensation is up by far more than 15 percent, but a lot of that increased compensation consists of health benefits.

2. Pearlstein compares median worker salaries to average productivity growth. Adding low-wage immigrants will lower the median by more than the average. Increasing the wage premium for high-skilled workers will raise the average by more than the median.

I'm not denying that there has been a big increase in the dispersion of earnings. But there is no need to exaggerate it with baloneous numbers.

UPDATE: a comment points to an article by Terry Fitzgerald on reconciling the income numbers.

Comments and Sharing

CATEGORIES: Income Distribution

COMMENTS (13 to date)
KipEsquire writes:

An IOU from myself to myself is worthless, no matter how many trillions of dollars it nominally reflects or what "interest rate" it nominally pays.

An IOU from the federal government to itself is worthless, no matter how many trillions of dollars it nominally reflects or what "interest rate" it nominally pays.

This concept is so simple and so irrefutable that those -- like PGL and the New York Times editorial board -- who continue to insist otherwise simply cannot be "mistaken" or "confused." They are willfully and maliciously lying about it.

Art Woolf writes:

A partial answer to the discrepancy is given in this article form the Minneapolis Fed's Regional Review:

8 writes:

Immigration and health benefits count for a lot. Also, 43% of women were in the labor force in 1970. 59% were working in 2006.

stan writes:

Hey Arnold,

Baloneous numbers are ok to use. This is a marketplace for ideas. Whoever's numbers are right will be accepted in the end, no?

Besides, baloneous are delicious.

MattY writes:

On the SS trust fund.

The reason we have a unified budget has more to do with Supreme Court ruling which has decreed the SS system a tax and spend system like any other law.

The ruling results from a problem that Arnold points to, there are no SS contracts with private agencies, SS does not buy and sell private bonds. If SS engaged in the private security market, then the Supreme Court would rule these contracts valid beyond the current congressional session.

Hence we have a method to keep SS socialized and locked up, but it requires market exposure.

Chuck writes:


An IOU from myself to myself is worthless, no matter how many trillions of dollars it nominally reflects or what "interest rate" it nominally pays.

I don't think it is accurate to say that the SS trust fund is an IOU from myself to myself. It is an IOU from one part of the budget to another.

If we do what you seem to suggest, which is treat income from SS taxes the same as any other income stream, then we'll make the Bush tax cut that much more regressive than it already is (since the SS tax is capped).

Now it may be that a court ruled that legally we have to look at the Federal Budget this way, but since this is a representative democracy where legislators have budgetary discretion, we don't have to treat the SS tax income that way.

chuck writes:

When we talk about income distribution, why would we not use %GDP like we do for everything else?

Maybe a good reason for it, but seems fishy to me at the moment.

and back to the SS situation. Before we go and throw the SS money right into the general revenue stream (which is what you do if you deny the validity of the trust fund), lets ask taxpayers if they feel the like the tax structure of SS is a legitimate way to collect general revenues.

Past history indicates that most people think a flat or progressive tax rate is fair, not a regressive tax rate.

Chris writes:

On labor's share of income, Chuck is right. Fitzgerald's article touches on this, but the common thing that people do is compare real wages with real productivity. The thing is, they're measured using different deflators which have vastly different trends. Looking at nominal income shares, things seem a lot more sensible--a look at NIPA Table 1.14 will show that workers end up with about 70% of corporate gross value added less taxes on production and imports, regardless of the time period. Capital's share of income hasn't budged much; it's the distribution of household labor income that seems to have become much more unequal.

Kevin writes:

Arnold, while Feldstein is surely doing what you say he's doing, he's also removing the non-recourse feature of the loans for the new amounts. The interesting question for those evaluating the new product would be, "Would I rather live with the old rate and maybe get evicted, or borrow recourse from the government at its rate?" I'm not sure this is a compelling value proposition for its target customers.

mjh writes:

Chuck says:

I don't think it is accurate to say that the SS trust fund is an IOU from myself to myself. It is an IOU from one part of the budget to another.
So, if I were to have my golf budget write a $40 IOU to my personal savings budget, then I spent $40 golfing, that would enable me to say that I both spent and saved that $40? Personally, I don't think that makes a lot of sense. Nor do I think it makes much sense if the government does it.

markg writes:

Economics is the distribution of goods and services produced. Money is a man made concept. Congress decides how much "man made" money to give to retired people and how much "man made" money to take from workers. All this does is control the distribution of goods and services between those two groups. If Congress screws up and gives (creates) too much money without removing (destroying) enough money then inflation will control the distribution of the available goods and services.
The question is whether privitization of SS will result in a greater number of goods and services being produced in the future. I somehow doubt it.
I think the best course of action is similar to what happened in WWII. Government turned to patriotism to get people to buy war bonds. In this way, govt removed money it spent on the war not by taxing, but by increasing the wealth of the public in the form of Savings (war) bonds. The govt could get the working class to buy retirement bonds. In effect, the government would be making SS payments to Baby Boomers and removing the money not by taxing (which would piss off workers), but by convincing workers to buy retirement bonds. This would have the effect of increasing workers financial wealth and holding inflation in check while keeping the promise of SS benefits.

Mr. Econotarian writes:

The fact is that worker compensation is up by far more than 15 percent, but a lot of that increased compensation consists of health benefits.

It is my understading that worker pay data also does not take into account the "employer side" of payroll taxes - but those are reflected in "total compensation".

Looking over 15 years, the Social Security "employer side" tax rate has risen from 4.85% in 1973 to 6.2% in 2008, and the taxable wage max has risen from $10,800 in 1973 to $102,000 in 2008.

It would be interesting if someone could use the SS wage max rate and put it into real dollars, but my suspicion is that it is growing faster than the CPI.

The "employer side" Medicare tax rate has risen from 1% in 1973 to 1.45% in 2008.

Is this increase drowned out by the rise in non-taxed health care benefits? Unknown, but it certainly contributes to the slow growth of take-home pay.

More info here:

Mr. Econotarian writes:

Aha, I found a "real dollar" calculator.

The 1973 SS wage base was $10,800. Using the CPI, that number is now $50,377, about half of today's SS wage base of $102,000.

So in 2008 dollars, we look at 1973 with max SS employer-side taxes of 4.85% x $50,377 = $2443, versus 2008 6.2% x $102,000 = $6324.

If you were making the same $102,000 in real dollars in 1973 and 2008, your total real compensation would have risen by 3.8% of your salary because of SS wage max rises, while your real salary remained the same.

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