"Saving Social Security: Comparing Three Plans"
David E. Rosenbaum
New York Times, March 24, 1999, page A18
This article describes three proposals that would extend the solvency of the Social Security program beyond 2032, the date when the trust fund is currently projected to be depleted.
Several aspects of this description are misleading, including the title of the article. No one disputes that the program can pay all scheduled benefits for the next 33 years, and even after that date it continue to provide a larger real benefit than what retirees currently get. It seems to dubious to assert that such a program is in need of "saving."
At several points the article provides misleading information about the prospects for gains from investing Social Security money in the stock market. For example, in its description of the "Republican plan," it discusses how the proposed individual accounts would interact with the existing system of Social Security benefits. It gives an example of a worker who accumulates an enough in his or her individual account to have a monthly annuity of $800.
Using the Trustees projections of wage growth, and projections of stock returns that are consistent with the other projections in the Trustees Report, even a worker that earned the maximum taxable income every year for 40 years would not accumulate enough to get an $800 monthly annuity (in today's dollars). A more typical worker, who currently earns $20,000 a year and has his or her wage rise with the average wage each year, would not accumulate enough to get even a $200 monthly annuity after 40 years.
In the same vein, the article at one point asserts that "Social Security might remain a good deal for low-income Americans, but over a lifetime, most people would be better off if they invested their retirement savings." This claims is contradicted by every credible analysis of Social Security privatization. For example, the Employee Benefits Research Institute (EBRI) recently did a study which showed that the vast majority of workers would fare better under the current system than a privatized system, when the costs of transition are factored in.
Since this study, the model was changed to significantly reduce the projections of returns on stocks. (See "How Do Individual Social Security Accounts Stack Up? An Evaluation Using the EBRI-SSASIM2 Policy Simulation Model," EBRI Issue Brief #195, 3/98.) This would make individual accounts appear even less attractive relative to Social Security.
The article also misrepresents the economic impact of higher national savings. At one point it asserts that Clinton's proposal to pay down the national debt would "theoretically…create jobs, generating more tax revenue." In fact, virtually all of the theoretical impact from debt reduction is in increasing the amount of output per worker by adding to the capital stock. Plausible projections of this effect from the Clinton plan are small, adding a cumulative total of less than 0.7 percentage points to GDP by 2015, an amount too trivial even to affect the Social Security projections, except by rounding.
According to economic theory, the increase in productivity should also lead to some increase in jobs, but the number of additional jobs, and any resulting tax revenue, would be so trivial there is no point in even trying to factor them into the Social Security projections.
In its comparison, at several points the article also focuses on the cost of paying for the retirement of the baby boomers. In fact, the vast majority of the projected shortfall in the Social Security funds occurs in years long after the baby boom will have passed into history. The bulk of the projected shortfall is attributable to the fact that the generations that follow the baby boomers are projected to live far longer than people do at present.
The article also uses the term "IOU" to refer to the government bonds held by the trust fund. All bonds are, by definition, IOUs. However, this term is never used in discussing the bonds (corporate or government) held by private individuals or corporations. This characterization of the bonds held by the Social Security trust fund seems intended to question the value of these bonds. The article never provides any rationale for the belief that the federal government is likely to default on this portion of its debt.
"Russian With Many Faces May Get Lift in U.S. Visit"
Michael R. Gordon
New York Times, March 21, 1999, Section 1 page 1
"Russian IMF Loans Routed Through Offshore Company"
David Hoffman
Washington Post, March 23, 1999, page A11
These articles discuss aspects of the current situation in Russia just before a scheduled visit by Russian Prime Minister Yevgeny Primakov to the United States. At one point, the Times article asserts that Primakov has "established a political equilibrium largely by avoiding the tough decisions needed to yank Russia out of its economic mire."
This statement implies that the economic measures needed to restore economic growth in Russia are both "tough" and known. Russia governments had been following International Monetary Fund advice for seven years prior to Primakov taking power. During this period, its economy contracted by approximately 50 percent and its health care and education systems collapsed. While the IMF's policies have certainly been tough on the Russian population, leading to large declines in life expectancy, they have completely failed as tools to foster economic growth. There is no reason to believe that any additional recommendations coming from the IMF would necessarily be more effective in promoting economic growth.
The Times article also refers to the period when Leonid Brezhnev ruled the Soviet Union as "18 years of social and economic stagnation." During the period when Brezhnev was in power, the Soviet Union enjoyed relatively healthy economic growth. Living standards improved significantly in many areas; according to World Bank data, for example, the ratio of doctors to patients nearly doubled, as did the percentage of children enrolled in secondary school. The period since the demise of the Soviet Union has been one of sharp deterioration in such measures of well-being.
The Post article discusses evidence that past loans from the IMF were funneled into foreign bank accounts, and may have been used for private purposes. The article does not point out that any possible misappropriations took place when the government was controlled by U.S. backed "reformers," not under the Primakov government.
Later the article notes that Russia has $17.2 billion in debt coming due this year, and that it has already missed some payments on debt dating from the Soviet era. It is worth noting that Russia has been able to negotiate significant reductions in its debt burden. It recently persuaded Deutsche Bank and Chase Manhattan to accept a debt settlement involving repayment of just 5 cents on the dollar. (See "Banker Split Over Russian Debt Payment," by Alan Cowell, New York Times, 3/2/99, page C4; ERR, 3/8/99.) If the I.M.F. and the U.S. government do not intervene to obstruct such negotiations, it is possible that Russia could negotiate significant concessions from its creditors on the rest of its debt, as well.
"German Reds and Greens Get the Blues"
Roger Cohen
New York Times, March 22, 1999, page A3
"Crucial Hour Nears for German Economy"
William Drozdiak
Washington Post, March 23, 1999, page A1
These articles discuss the prospects of the German government in the wake of the resignation of Oskar Lafontaine as finance minister. Both articles describe efforts by German business leaders to pressure the government to reduce taxes and regulation on business. In the Times article, these demands are presented as the pleadings of a special interest group. For example, the Times article notes that in Germany "the business lobby is extremely strong" and then goes on to note institutional factors restricting progressive change.
The Post article presents the lobbying of business leaders as objective evidence about the state of Germany's economy. For example, the article asserts that the dire economic warnings and the threat of a capital strike by "a delegation of leading business executives…underscores just how rapidly Germany…is becoming the sick man of Europe." The article then lists a variety of comments from business executives in which they explain that they "could not remain in Germany" or that they would "have to trim investments." The article then certifies these comments as "hard facts."
Clearly Germany's top business executives possess the ability to inflict considerable harm on Germany's economy if they choose to do so. Germany's labor unions also possess the ability to inflict considerable economic damage if they were to engage in a long strike to obtain their demands. If Germany's business leaders have resolved to engage in capital strike, where they refuse to invest unless their demands are met, this is no more a "hard fact" than if Germany's labor unions had resolved to strike until their demands are met, regardless of the cost to the nation's economy. In principle, the position of Germany's business leaders can be reversed, if there is sufficient political power to oppose them.
It is also worth noting that profit rates in Germany at present are far higher than they were 15 or 20 years ago. According to data from the OECD, the return to capital in Germany in 1997 was 15.3 percent. By contrast, at the peak of the '70s business cycle it was just 10.6 percent.
The Post article also argues that one reason that the Germany economy is facing trouble is competition with low-wage labor abroad. It notes that in Poland and Hungary wages are "as little as one-fifth of those in Germany," and that therefore wages in Germany will have to decline. The argument that competition with low-wage foreign labor reduces workers' living standards is usually ridiculed as "protectionist" in the context of U.S. economic debates. Here it is asserted as a fact.
"Productivity Gains Help Keep Economy on a Roll"
Louis Uchitelle
New York Times, March 22, 1999, page A1
This article discusses way in which firms have introduced new technologies to increase their productivity, so that they can maintain output levels with fewer workers. It also notes the increased frequency with which firms are relying on temporary and contingent workers to keep their labor costs down.
"Developers Fail to Meet Mandate on Housing Access"
Steven A. Holmes
New York Times, March 22, 1999, page A1
This article discusses evidence collected by the Justice Department and advocates for the disabled that many developers are still constructing structures that do not comply with the requirements of the Americans With Disabilities Act.
"Killing the Forest for the Trees"
Anthony Faiola
Washington Post, March 23, 1999, page A11
This article reports on evidence that Brazil's environment is likely to be seriously damaged as a result of its economic downturn and the cuts in the federal budget being demanded by the IMF. In many cases, environmental protection programs are among those being targeted for large cuts.
"Fearful Seniors Watch a Housing Subsidy Drama Play Out"
Michael Grunwald
Washington Post, March 24, 1999, page A3
This article reports on the impact that cuts in federal housing subsidies have had on some of the senior citizens who had been benefiting from them. Housing is one of the areas of social spending that has been subject to large cuts under the Clinton administration. The article explains that the loss of the subsidy has forced many seniors to move from apartments they have lived in for decades, and many more now fear losing the subsidy in the future.
While the number of people living in subsidized units has declined over the last four years, the article quotes President Clinton telling the president of New Hampshire's senate, "God, Junie, this is the first I've heard of it."
Dean Baker is a senior research fellow at the Preamble Center.
Recent articles can be found on the websites of the New York Times and Washington Post.
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