The views expressed by me on this blog are mine alone at the time of posting and do not necessarily reflect the views of any organization with which I am associated.

Monday, August 21, 2023

Social Security Reform, Back in the Spotlight

A recent op-ed by Mark Duggan, an economist who directs the Stanford Institute for Economic Policy Research (SIEPR), and a podcast by Charles Blahous, a former public trustee of Social Security, highlight the programs projected shortfalls on the occasion of its 88th birthday. Both give appropriate updates on the financial condition of the program.

Social Security was one of the topics featured regularly on my original blog, VoxBaby, from 2004 - 2008. A guide to those posts is available here. Social Security, and its possible reform to include personal accounts that would build up assets outside of the trust fund, has been a topic of interest and research since the mid-1990s. At the time, we had the Baby Boom generation in the workforce in some of its most productive years. Had we started reform then, we might have tapped the resources of this generation to help close the projected fiscal gap. With all Baby Boomers now "at or near retirement," the phrase that seems to trigger political immunity from having to contribute via benefit reductions or tax increases to provide more financing, that window has closed. There is now no longer an opportunity to meaningfully prefund future liabilities. Those future liabilities will soon be current liabilities. Failure to act sooner has increased the burden on all subsequent generations.

I would call your attention to this post, What Social Security Reform Should Democrats Propose?, written on the eve of the 2004 Presidential election in which President Bush's plans for reform were relevant. It refers to the book written originally in 2003, Saving Social Security: A Balanced Approach, by Peter Diamond and Peter Orszag. My expectation is that as the date of trust fund insolvency approaches, policy makers will eventually implement most of the changes described in their approach. Those immediate tax increases and phased-in benefit reductions will have to be updated to the present -- larger in all cases -- since we wasted two decades not acting to solve a crisis whose arrival was completely predictable.

Monday, March 22, 2021

Economic Policy Conservatives

In yesterday's Dallas Morning News, my former DC colleague Charles Blahous concludes his thoughtful op-ed on, Who will stop America's plunge into debt?, with the following:

One thing is for certain: Unless and until economic policy conservatives finally put the Trump years behind them, there will be no serious challenge to the left’s economic agenda, and the only debate will be over how rapidly to expand government. The contest over America’s economic future can only truly be joined if moderates and conservatives reunite to advocate for fiscal prudence and free economic activity, wielding the same energy and commitment that the left uses to pursue government’s expansion.

The first statement is true but it does not go far enough. It is a necessary but not sufficient condition.

Economic policy conservatives were on this road to ruin when Chuck and I both served on the Bush economic policy team. Not at our suggestion, the Bush administration passed a new Medicare Part D benefit that, at the time of its passing, had a larger projected unfunded liability than Social Security's projected unfunded liability, which was the fiscal threat that I went to Washington to help solve. My very first week on the job, I wrote a memo to try to get more means-testing onto that new entitlement. (Some of those ideas were later published here, alongside a similar analysis of the marketplace subsidies in Obamacare.) Prior to my arrival in DC, the Bush administration passed a series of so-called temporary tax cuts, almost all of which were eventually made permanent by the Bush and Obama administrations. When the latter did so in the face of the so-called "fiscal cliff" in early 2013, I referred to it as creating a fiscal grand canyon.

All of this happened before the Trump administration.What economic policy conservatives need to do to challenge the left's economic agenda is to acknowledge that:

  1. Republicans have expanded our fiscal imbalances through entitlement spending when it suited their political interests.
  2. Republicans have squandered resources in ill-conceived military operations in Iraq during the early part of this century.
  3. Republicans have ignored fiscal balance over the last 20 years when passing tax cuts for the sake of passing tax cuts.
  4. There are some valid reasons for the federal government to engage in deficit spending if needed, primarily when it benefits children who are born into challenging social and economic circumstances. (See this paper for an introduction.)

Economic policy conservatives, when they can acknowledge these things that implicate much more of the Republican Party's recent history than the Trump administration, might then be able to play a constructive role in countering the left's economic agenda. They are not credible elements of the economic policy process if they don't.


Monday, October 12, 2020

Looking Ahead to 2024

David Brooks pins our current social and political problems on Collapsing Levels of Trust in his recent column in The Atlantic. I think he gets most of his arguments right. Without evidence that people are in general trustworthy, individuals will tend to congregate with others in their tribes. The way this is playing out today is polarization toward the far left and the far right.

As Rabbi Jonathan Sacks puts it in his recent book, Morality: Restoring the Common Good in Divided Times:

The far right dreams of a Golden Age that never was, and the far left dreams of a utopia that will never be.
It is not an unreasonable reading of 20th century history to say that when the extremes are emboldened in pursuit of these dreams, the result is violent and horrific. What are reasonable people supposed to do?

In brief, form a new tribe in the center. I am politically to the right of the center, but probably no more so than most of the people whom I call friends are to the left of center. If we chose to, we could waste a lot of time on Facebook, Twitter, or other anti-social media arguing about whether the lunatics well to their left are worse than the lunatics well to my right. We would be making the problem worse, by acting like partisans and letting the extremists set the agenda for public discussion and civic life. And yet this is the pattern into which we have fallen. Instead, we could disavow them both. 
I would wager that a coalition that included them on its left flank and me on the right flank would constitute a majority and would enact sensible policies. Centrist parties are thought not to be possible in our Presidential system in part because the parties that start on the far left or far right will find it easy to encroach on the center without losing the support of their flanks. I understand this as an equilibrium result. Are we in or moving toward such an equilibrium? I see no evidence that the two major political parties are courting the political center by moving toward the center. So perhaps there is a window of opportunity during which this coalition could govern. In other countries, they would call this a unity government, and such governments typically get formed when the alternatives are pretty awful. I am surprised that 2019 was not awful enough to spark such an insurgency of the rational. I suspect 2020 is that awful but the timing relative the Presidential election is unfavorable.
The last link and the phrase it highlights are to a TEDx talk by my colleague Charlie Wheelan, who put forth a sensible platform in the Centrist Manifesto in 2013 and founded Unite America to try to get a pivotal centrist bloc in the Senate. The Achilles heel in that strategy turned out to be that it presumes a Congress that seeks to perform even its most basic Constitutional responsibilities. So, looking ahead to 2024, we should be thinking about a centrist ticket for the Presidency, composed initially of a bipartisan duo with a prudent and responsible platform that begins to address the many crises we have built for ourselves. If the ticket wins, then the party can immediately recruit Senators and Representatives from the political center for a majority in each House, leaving the two existing parties in the extremes. Addressing those crises, even if incrementally, is what will help rebuild trust in our public life.

Saturday, September 12, 2020

9/11 for Our New Arrivals

This fall marks the arrival of the Class of 2024 on college campuses. This is the first cohort in which most members were born after the attacks of 9/11. A strange milestone. To honor the memory of those who died, and to help inform young adults of the events of that day, Keith Hennessey has crafted a study guide, available here. Keith was working on the Hill at that time and acknowledges that the passengers of Flight 93 may have saved his life. I had the good fortune of meeting Keith a few years later when my time at the Council of Economic Advisers overlapped with his time at the National Economic Council.

Tuesday, June 30, 2020

DC Statehood

Last week, the House passed a bill to allow for statehood for Washington, DC. I am in favor of representation in national legislature for the residents of the District, but I am not in favor of statehood. The Founders intended for the District to not be a part of any state. Here is a proposal formed from ideas I've picked up over the years from various sources, so I don't claim originality here.

We could think of the District as part of Maryland, which gave the land for it. Allow the District to be its own Congressional district. This is only fair, as the House allocates representation based on population. The District gets a minimum of 1 Representative (and is protected from gerrymandering that might occur if it were formally part of Maryland). For the Senate, allow residents of the District to vote for the Senators that represent Maryland. Then its residents have two Senators to represent them. 

This solves the problem that there are no voting members of the national legislature who are responsive to the residents of the District. It does so with minimal disruption. I acknowledge that Maryland has to take one for the team and needs to consent. But this is where I would start the conversation.

Friday, March 20, 2020

Corona Blogging

There are debates about what the policy response should be to the COVID-19 threat to the United States. I think there are three important steps that need to be taken, beyond what the Federal Reserve is already doing to support the banking system.

One, rather than spraying $1000 checks around like confetti, the Federal government needs to re-insure and augment state unemployment insurance programs. Yesterday's report showed that we had a jump in initial UI claims, from 211,000 in the week ending March 7 to 281,000 in the week ending March 14. Expect that to go much higher for this week (released next Thursday) and next. In my view, Federal support for state unemployment insurance programs is the best way to inject cash into the economy. Top off replacement rates at higher levels, since these claims are due to factors beyond the control of workers and their employers, and extend them for longer than the current claiming period. Make the funds available to states in proportion to their working-age population, to avoid explicitly bailing out states that were not properly funding their systems. What's important here is the Federal government's announcement. It is the announcement that sets people's expectations about their resources and these expectations that drive consumer behavior.

Two, we need to recognize the manpower cost of successfully addressing the COVID-19 threat and mobilize accordingly. I encountered two useful accounts that shaped my thinking about this. The first was a Ted Talk by Bill Gates from 2015 that resurfaced recently. We should have taken his advice then (in the wake of the Ebola outbreak). We should start the mobilization now. If the government is going to spend, it should use this occasion to buy what it needs. In bulk. (Sound familiar?) The second was a first-person account from an economics colleague who flew from London to Beijing, posted to Twitter. What struck me about his account was how labor-intensive the testing and quarantining process is in the places where that process is being applied rigorously enough to actually contain the virus. And now we have a whole bunch of service-sector employees looking for temporary work. State and particularly local governments should be hiring and training, with funding provided by the Federal government, legions of people to facilitate this process. When the immediate threat has been contained, that corps of people can be shifted to address long-term preparedness along the lines that Gates was describing.

Three, for any publicly traded company that needs short-term funding to remain liquid and solvent, like airlines and hotels, the Federal government can provide it. However, it needs to take warrants as part of the deal, similar to the arrangements for banks in TARP, so that it more fully shares in the eventual recovery (and signals its belief that there will be a recovery). This is not an appropriate time to advance clearly partisan objectives when the business disruption is due to an external factor like the virus.

Saturday, December 14, 2019

The Management Consulting Business

Christopher Ingraham, writing in The Washington Post, links to an old working paper of mine in his article, How consulting companies like McKinsey optimized American inequality. The paper began as my co-author, Ajay Prakash's senior thesis, which I advised and then helped revise. This topic is in the news of late due to Pete Buttigieg's experience working at McKinsey and the perceived need by the chattering class to demonize just about everything on everyone's resume. I currently have no intention of casting a vote for Mayor Pete in 2020, but I don't hold his McKinsey experience against him.

The subtitle of the article is, "Two things tend to happen when businesses hire a management consultant: Stock performance rises and payroll falls." To be clear, the announcement effect is negative but the long-term effect is positive risk-adjusted returns on a scale that more than offsets the bad news at the announcement. That shows that whatever happens after the consultants are brought on board, it tends to turn the company around. The article should suspend its focus on distributional issues between shareholders and workers long enough to acknowledge that this is consistent with the consultants adding value to the economy.

What I found frustrating about the article is that it doesn't seriously engage with the counterfactual. Our paper also found that "announcing companies earn negative risk adjusted returns prior to their announcements." This means that the company was underperforming, and that underperformance was going to have be addressed, whether through the consultant's advice and actions or some other way. Imagine the firm failed instead. The workers who lost their jobs would be in the same position, but every other worker is better off due to the consultants. To give some sense of the scale of the two groups, we found that the median employment growth (relative to the industry) was -5% for firms that announce they've hired a management consultant. Is it really unacceptable to lower employment by 5% if it means shoring up the other 95%?

I would say 'no.' What I would say as well is that I would like to know that the workers who are displaced are treated fairly, whether through unemployment insurance or some other mechanism. For example, publicly traded companies that lay off workers under such circumstances might be required to offer severance in the form of warrants (stock options issued by the company to those workers). If the company does well as a result of the layoffs, then those who were laid off share in that improvement.