A Side Note on the Insanity of Right Wing Politics...

Reflecting the seriousness and sober reflection undertaken by the right wing on Social Security, a coalition of conservative groups known collectively as the Arlington Group, is telling Karl Rove that they won't go along with the administration's Social Security destruction plans unless the Bush administration puts just as much emphasis on banning gay marriages.

Huh?

Never mind the total cognitive disconnect and non-relationship between state civil marriage laws and the Social Security program. Look at what our conservative guardians of family values are really saying here:

"Let's make a deal. We'll help push for the Federal Government to take away trillions of future retirement benefits for us and our families in return for you pushing to let the Federal Government dictate who we can and can't marry."

These people don't need a voice in government. They need a soft room and the kindly attention of a very large and compassionate medical staff.

It's a Social Program, Not a 401(k)!!

Number three in a continuing series.

Myth #4: Social Security is a pension or an insurance plan. (Reality: Social Security is a social program, the only social program that is so well funded and secure that it will not need a dime of additional Federal taxes for decades.)

We often hear of Social Security as a pension plan or an insurance plan. Comparing Social Security to private employer pension plans gives rise to a number of misleading and alarming observations about Social Security’s desirability. First and foremost is the charge that the individual worker gets a bad investment deal out of the system. My favorite barking mad Libertarian P.J. O’Rourke offers the typical argument:

"And if we're age twenty-four to sixty-two, we can expect a return of between -0.34 percent and -1.7 percent, and might be better off leaving the money in our old jeans and going through the closet when we retire."

Then there’s the "Ponzi Scheme" charge, named after the famous swindler who offered big dividends to investors, paid for by the investment of newer investors. Here’s O’Rourke again in the same article:

"Charles Ponzi made a profit on this, and so does the U.S. government. Social Security payroll-tax receipts have always been greater than Social Security benefit payments and will continue to be until about 2013, when the baby-boom sucker pool retires. The federal government has taken this surplus revenue, spent it and given the Social Security trust-fund IOUs in return."

(SIDE NOTE: I urge people to read O’Rourke’s article. See how many logical fallacies and statements of objective falsehood you can find. I’ve found 37 so far.)

These arguments would be more persuasive if Social Security was in fact a pension or insurance plan or a 401(k). But it's not any of those. It’s not a personal investment. It’s a government social program that happens to be funded largely through a special levy of payroll tax. Don’t believe me? I don’t blame%2

More Social Security Myth Busting

Today we debunk a couple more myths surrounding Social Security. We can tackle Myth #2 and Myth #3 at the same time, as they are two different facets of the same misconception. (Myth #1 and the introduction to this topic is here.) First though here’s a tip of the hat to a wonderful resource on the myths of the Social Security debate at the Center for Economic and Policy Research. These guys have it nailed.

Now for today’s myth busting. Here they are:

Myth #2: The Social Security Trust Funds don't really exist except as an accounting fiction. (Reality: The Trust Funds are definitely real, with real assets far above the credit quality and safety of any bank or insurance company in the world.)

Myth #3: Politicians often "raid" the Trust Funds to pay for other Federal budget needs. (Reality: The Trust Funds pay for no other programs except what they are charged to do. Not a penny has been spent from their operating budgets for any other program ...ever.)

To understand what’s really happening, you have to look at the basic structure of the Trust Funds. There are four of them, two related to Social Security and two related to Medicare. Here are the definitions of each from the 2004 SSA Trustees Report:

Trust Fund:
Separate accounts in the United States Treasury in which are deposited the taxes received under the Federal Insurance Contributions Act, the Self-Employment Contributions Act, contributions resulting from coverage of State and local government employees; any sums received under the financial interchange with the railroad retirement account; voluntary hospital and medical insurance premiums; and transfers of Federal general revenues. Funds not withdrawn for current monthly or service benefits, the financial interchange, and administrative expenses are invested in interest-bearing Federal securities, as required by law; the interest earned is also deposited in the trust funds.

• Old-Age and Survivors Insurance (OASI). The trust fund used for paying monthly benefits to retired-worker (old-age) beneficiaries and their spouses and children and to survivors of deceased insured workers.
• Disability Insurance (DI). The trust fund used for paying monthly benefits to disabled-worker beneficiaries and their spouses and children and for providing rehabilitation services to the disabled.
• Hospital Insurance (HI). The trust fund used for paying part of the costs of inpatient hospital services and related care for aged and disabled individuals who meet the eligibility requirements. Also known as Medicare Part A.
• Supplementary Medical Insurance (SMI). The Medicare trust fund composed of the Part B Account, the Part D Account, and the Transitional Assistance Account. The Part B Account pays for a portion of the costs of physicians' services, outpatient hospital services, and other related medical and health services for voluntarily enrolled aged and disabled individuals. The Part D Account pays private plans to provide prescription drug coverage, beginning in 2006. The Transitional Assistance Account pays for transitional assistance under the prescription drug card program in 2004 and 2005.

So the OASI and DI Trust Funds are what we know as Social Security. Now look at the definition above, which says:

"Funds not withdrawn for current monthly or service benefits, the financial interchange, and administrative expenses are invested in interest-bearing Federal securities, as required by law; the interest earned is also deposited in the trust funds."

This is the source of the confusion. What happens is that a portion of the collected FICA from our paychecks gets paid out in current benefits. Another portion (about 6/10ths of a penny per dollar) pays for administration of the program. Some is left over to be saved for the time when the baby boomers retire in large numbers, meaning more benefits will be paid out than taxes collected at that time. That leftover is invested in Treasury bonds, very similar to the bonds that your bank is required to hold to back up your savings and checking, or the same type that insurance companies hold to back up their assets.

Looking at Myth #2, that the Trust Funds are an accounting fiction, this is only true if you forget everything you ever learned about accounting and banking. The Trust Funds are administered as totally separate accounts, not commingled with any other Treasury funds, in an identical fashion that your checking account is held separate from all other checking accounts at your bank. Now in actual fact your checking account is not in a separate location physically separated from all other checking accounts, but it is a really existing, separate thing that you can, well, take to the bank. The Trust Funds are held separate in the exact same way.

You can see this reflected in President Bush’s latest budget message from the Office of Management & Budget. There are historical tables that show the performance of the budget going back decades. They clearly show the Trust funds as "off budget" items separate from the "on-budget", the operating budget of the government. Beyond the PDF version, there are also Excel spreadsheets of those historical tables. Take a look, for example, at Table 1.1 Summary of Receipts, Outlays, and Surpluses or Deficits (-): 1789-2009 to see what I mean.

The other important fact here is that since the Trust Funds' surplus is 100% exclusively invested in Treasury securities, that portfolio is by definition the safest and most secure portfolio in the world. No bank, insurance company, company pension fund, 401(k), mutual fund, separate account, foundation or endowment can even come close to the creditworthiness of a 100% riskless Treasury portfolio. Nor can it be duplicated anywhere else. For even if a financial institution decided to invest only in publicly available Treasuries, said institution would either have to accept low short term interest rates or a measure of long term market risk. Only the SSA Funds qualify for the best of both worlds. The class of Treasury securities they own enjoy long term interest rates, with the ability to redeem the bonds at any time for full face value.

This is like going to your bank and demanding that they give you the interest rate of their 10 year CD while giving you complete checking account access to any or all of the CD without penalty for early withdrawal. Riskless savings does not get better than that. No wonder the Republicans want to get out from under that deal!

Turning to Myth #3, that politicians regularly dip into the Trust Funds to fund other government operations, again this is a misunderstanding of how money and markets work. The Trust Funds are required to invest their surplus in riskless securities. The only riskless securities there are in the US are Treasury Bonds. So when the operating Federal budget runs red ink, the Treasury department creates Treasury bonds for investors to buy. The proceeds of those sales fund Federal deficit spending. The SSA Trust Funds are investors in those Treasuries, no different from any bank, brokerage house, mutual fund or insurance company that might be buying those riskless securities. So indirectly, the SSA surplus DOES fund our operating deficits to a limited extent, by virtue of their investing in Treasury bonds. But since they are independent legal entities, it is no more correct to say that politicians are "raiding" the SSA Trust funds than it would be to say that politicians are "raiding" the assets of a government bond mutual fund.

The language used by politicians of "raiding" the Trust Funds, or the opposite "placing Social Security in a lockbox" are colorful phrases that convey emotional messages rather than fact. The real issue behind the language is that many economists are worried what will happen to the economy when Social Security stops being a net buyer of Treasury bonds and starts redeeming them if the Federal government is still running a huge annual deficit and a huge national debt. The solution put into place by President Clinton was to return to significant surpluses in the Federal operating budget and pay down the national debt to the point where the Treasury bonds redeemed by the SSA program were the only debt service that the Federal government had to worry about. This program was succeeding to such a degree that by 2001, Fed Chair Alan Greenspan was actually discussing how the world of finance would operate if the Trust Funds were the only holders of U.S. Treasuries.

The failure of the Bush administration to continue on this path raises anew the specter of the Federal government triggering a huge inflationary crisis paying off a huge national debt service AND SSA obligation with inflated dollars off the printing press, OR with Treasury bonds that yield very high interest rates to attract the creditors necessary to absorb all the debt.

So in typical Republican fashion, instead of opting for fiscal austerity to clean up one’s own house, the administration in Washington is looking for ways to weasel out of the SSA obligation once and for all. This is like a family approaching the need to pay for their kid’s college tuition down the road with a plan to convince the kids to go to a state school or learn a blue collar trade instead of saving up for the bills. It’s disgusting. We shouldn’t let them get away with destroying Social Security.

Dispelling Social Security Myths

Oh boy, here we go again.

The alarm bells about the long term safety of Social Security have started anew. After basically keeping mum on the subject in the campaign, the Bush Administration is emboldened by their 51% victory to try once again to "fix" Social Security.

Nowhere in political discourse is there more deliberate misinformation than in the Social Security debate. Nowhere is it more obvious that politicians on both sides have a fundamental misunderstanding on the basic facts of the issue. It's more than a little scary. So over time, I'm going to lend my small effort to dispel some of the more important myths about Social Security. After we're done, it should be plain to see what to do about the system: Leave it alone!

Here are the topics I'll be addressing:

Myth #1: Social Security is in trouble and will go bankrupt when all those baby boomers retire. Therefore we must fix it before that happens. (Reality: Social Security won't run out of funds at all -- ever -- if we simply maintain the level of economic growth we are experiencing right now.)

Myth #2: The Social Security Trust Funds don't really exist except as an accounting fiction. (Reality: The Trust Funds are definitely real, with real assets far above the credit quality and safety of any bank or insurance company in the world.)

Myth #3: Politicians often "raid" the Trust Funds to pay for other Federal budget needs. (Reality: The Trust Funds pay for no other programs except what they are charged to do. Not a penny has been spent from their operating budgets for any other program ...ever.)

Myth #4: Social Security is a pension or an insurance plan. (Reality: Social Security is a social program, the only social program that is so well funded and secure that it will not need a dime of additional Federal taxes for decades.)

Myth #5: Medicare is broken and needs to be fixed. (Reality: It is the nation's health care system that needs to be fixed, not Medicare.)

Myth #6: Social Security is a drag on the economy. (Reality: Social Security has been a mighty engine for U.S. economic growth in several different ways.)

And now to begin with #1:

Myth #1: Social Security is in trouble and will go bankrupt when all those baby boomers retire. Therefore we must fix it before that happens.

Here of course, the term "fix" is to be used in the same context as "fixing" your pet. For Social Security does not need to be saved. It is not broken. Why do I say that Social Security isn't in trouble when every talking head and pundit talks about Social Security's crisis 24/7?

You've all heard the argument. The massive number of baby boomers will all retire in a short while, leaving fewer and fewer workers to support more and more retirees in the SS system until it all goes bankrupt in a few decades. In the latest Social Security Trustees Report, the Trustees have crunched their numbers and forecasted when that day will come:

"Despite these cash-flow deficits, beginning in 2018, redemption of trust fund assets will allow continuation of full benefit payments on a timely basis until 2042, when the trust funds will become exhausted."

How do they arrive at this scenario? The Trustees use computer models simulating the U.S. economy, fertility and immigration rates, inflation, interest rates and so forth. Then they run three simulations based on pessimistic, optimistic and intermediate assumptions of average levels for all of these factors. The intermediate model is the one picked for the press releases, being the Social Security Trustees best estimate of things to come. Sounds reasonable so far.

However, the devil is in the details. Any computer simulation is only as good as the assumptions you enter. In this case however, the assumptions are too pessimistic. Here you can find the assumptions used in 2004's projections.

Now I'm no expert on fertility rates and such, but I can say for sure that the range of total productivity rates assumed by the modeling are too conservative. The best case scenario calls for 1.9% productivity growth. The worst case calls for 1.3% and the intermediate projection is 1.6% per year.

The problem is that average annual productivity growth over the last 50 years is 2.16%. That's right, not even the most optimistic scenario examined by Social Security so much as assumes the same productivity growth rate we've enjoyed for 50 years. (Caveat: I'm using output per hour for non-farm businesses, the standard measure of productivity provided by the Bureau of Labor Statistics. Here's where you can construct the table. The Social Security Trustees explain that they do not use this commonly accepted measure in their projections. Rather they use an unpublished compilation of man/hour statistics provided to them by the BLS. Therefore their work is not easily duplicated.)

This assumption has a huge impact on the health of the trust funds. Less productivity growth means lower economic growth, which means fewer jobs and/or lower salaries paying into the system over the years, meaning the Trust Funds fall short sooner rather than later. And, as noted above, the Trust Funds run out of excess cash in 2042 under their 1.6% growth scenario.

What this also means is that for each year productivity grows more than 1.6%, the Trust Funds will look healthier than they did the year before as additional growth not predicted by the models would be booked in to the new projections. And sure enough, that's exactly what's happened.

Looking at the history of these projections, we see continual readjustments forward as we continue to grow more than the Trustees are calculating.

In 2003, after a lackluster 2002, the Trustees predicted 2042 as well to be the day the Trust Funds run dry: "Despite these cash-flow deficits, trust fund interest earnings and assets will allow continuation of full benefit payments until 2042, when the trust funds will be exhausted."
In 2002's Report, the year was 2041: "...asset redemptions begin to reduce the size of the combined trust funds in 2027, and the assets of the combined OASI and DI Trust Funds are exhausted in 2041."

In 2001's Report, the deadline was set at 2038: "...asset redemptions begin to reduce the size of the combined trust funds in 2025, and the assets of the combined OASI and DI Trust Funds are exhausted in 2038."

In 2000's Report, the deadline was 2037: "The combined OASI and DI Trust Funds would become exhausted in 2037 without corrective legislation."

And in 1999's Report the day of reckoning comes in 2034: "The combined OASI and DI Trust Funds would become exhausted in 2034 without corrective legislation."

In 1998 the Trust Funds were to go broke in 2032: "The combined OASI and DI Trust Funds would become exhausted in 2032 without corrective legislation."

And in 1997 the Trust Funds were to go dry in 2029: "The combined OASI and DI Trust Funds would become exhausted in 2029 without corrective legislation."

So, the Social Security doomsayers were screaming in 1997: "It's going to go broke in 32 years unless we do something!" Today, the doomsayers are screaming "It's going to go broke in 38 years unless we do something!"

Well, we've done nothing in the intervening time. No drastic reform. No overhaul. No additional cash infusion. Simply by growing GDP and productivity at the pace we've been doing for decades grows us out of the problem. Seven years of average growth bought us an additional 13 years before the Trust Funds would go broke.

This then is the fix for Social Security: maintaining a reasonable pro-growth economy which grows productivity. The Trustees Report "optimistic" scenario shows that if we maintain productivity growth of 1.9%, the Trust Funds never run out of money for the entire 75 year period studied. (Caveat #2: Yes there are other factors besides Productivity in the optimistic model, some controllable by legislation. For example, immigration assumptions are a net inflow of 900,000 per year. Yet the INS estimates that 13.5 million immigrants came to this country in the 90's, legal and illegal. Bring them all in the Social Security system and we've expanded the total per year beyond Social Security's most optimistic estimates without changing the actual number of immigrants at all.)

Now some may argue that we should plan for the most pessimistic scenarios and assume the worst will happen - in this case that productivity growth will somehow slow by 25% or more. That's a fine argument, except that if productivity was going to slow down to that drastic a degree, the LAST thing you would want to do is invest in the stock market, which depends on ever increasing productivity. So the notion of privatizing Social Security to cash in on stock market growth makes no sense however you look at it. If we have decent enough growth to make stock market investments look attractive, the Social Security system will be secure and in no need of change. If economic conditions were to be bad enough to endanger Social Security, then stock market investments should fare even worse.

While politicians themselves may be clueless, any professional policy wonk in Washington knows these facts. The political manipulation of the Trust Funds' conservative estimates are well known inside the beltway. The people scaring you into thinking Social Security won't be there for you when you retire, UNLESS they get their way to alter the system in a FUBAR kind of way, are people who know they are lying to you. They are lying to you because they know they can't get rid of the Social Security program in honest debate due to the program's popularity. So they lie to you, saying it's a flawed system bound to fail unless they "rescue" it. Don't let them do it. Don't let them hijack Social Security and destroy the most successful social program in the history of the Republic.

A Mandate? Not So Fast!

President Bush and his supporters are unabashedly crowing over their victory on election day. That's fine. They won. They step over the line when they claim a "mandate" for their policies though. Here's why:

Bush's Narrow Victory: Bush's re-election vote was the lowest of any re-elected President since Woodrow Wilson in 1916. (Look it up at the USA Election Atlas) The power of incumbency is formidable. A President facing re-election has all the powers of the Federal purse to support his bid. Further, the electorate has had four years in which to see what actually was done during his first term, so there's a solid reality to the President's candidacy that no challenger can match. That's why every re-elected President since Nixon averaged an improvement of 10 points over their vote percentage the first time around. Both Bush I and Carter suffered defeats with major reductions of their point totals, largely attributable to the existence of third party candidates for their re-election campaigns.

Presidents Nixon and Reagan legitimately claimed mandates for their policies with improvements on their vote totals of 17.25% and 7.98% respectively. President Clinton did not claim a mandate for his policies, nor did anyone bestow such upon him, despite an improvement of his vote of 6.22%. So apparently the necessary percentage improvement necessary to claim a voters mandate is above 6.22% and below 7.98%.

President Bush achieved no such threshold. His vote total is no more than 3.2% above his 2000 total. His electoral vote total is the lowest for sitting Presidents since Woodrow Wilson in 1916. There is no basis for claiming a mandate by any honest reckoning of the numbers.

Bush's Misinformed Supporters: Looking at a revealing study by the Program on International Policy Attitudes, it found that the majority of Bush supporters actually misunderstood the basic issues positions of their candidate. Taking that study and applying it to the elections results, we find that:

**62% of the American people thought they were voting for a President that favored the Kyoto Treaty on Global Climate Change. (Bush opposes Kyoto.)

**72% believed they were voting for a candidate that wanted to ban nuclear weapons testing. (Bush wants to continue nuclear testing.)

**77% believed they were voting for a candidate that favored comprehensive labor and environmental standards in international treaties. (Bush opposes such provisions.)

**54% thought they were voting for a candidate that would stop building the missile defense system until research showed it could be done. (Bush favors immediate construction of the missile defense system.)

**56% thought they were voting for a candidate that would either reduce military spending or keep spending at today's levels. (Bush favors increased military spending.)

It's too bad that this study did not focus on domestic issues, but a clue that a similar pattern holds true for domestic issues is found in the Florida elections results. While Bush tallied some 52%, a referendum to increase the minimum wage in the state passed with over 72% of the vote. Bush opposes increasing the minimum wage. Will he claim a "mandate" when that issue comes to Washington?

Anatomy of a Right Wing Argument

We've been having an interesting discussion with our friends at "The Dead Hand" blog about my assertions that Democratic administrations have a far superior record for economic growth than Republicans. Here's the record that's facing them:



That's right. EVERY Republican administration since World War II experienced lower growth than the previous one. EVERY Democratic administration experienced higher growth than the previous one. The same pattern holds true for jobs, as referenced in a previous post.

Faced with this in-your-face evidence, the right winger can only protest that it's all a coincidence. Expect to hear things like (1) correlation is not causation, or (2) every Democrat enjoyed the fruits of the previous Republican stewardship, and when all of that fails (3) governments can't affect economies that much no how. The alternative, as I'll explain below is to be forced to acknowledge that Republicans really aren't able to or interested in economic growth and they don't have any ethical problems lying to you about it.

To his credit, Jason Williscroft massaged all of the above three points in a statistical argument so airtight, the only problems with it were the basic assumptions, which were totally bogus. So instead of anything meaningful, he's left with a fully illustrated case study of GIGO. That of course, will definitely get you published in a variety of right wing think tanks Jason, so press on dude!
Here's where our intrepid Dead Hander went wrong. In describing the differences between his numbers and mine he says:

"Then there's the choice of metric. Torgerson is talking about year-to-year delta, whereas I am talking about deviation from the mean. Why would I do that? Well, it's a basic difference in perspective. Torgerson's choice of metric suggests that the government is principally responsible for the performance of the economy. Mine suggests that the economy mostly takes care of itself, and that the government mostly affects it on the margin."

There's a couple of points here. First off, I am NOT talking about year-to-year changes. I am measuring the growth over an entire administration (four or eight years) and describing that growth in terms of average annual change so that different administrations can be compared. You see, that's a much closer measure of actual reality. For example, in his first year in office, Bill Clinton spent much of it passing his tax and budget program, which by the way was a five year plan. The fact that that first year showed a different pattern of growth than the subsequent two years after the plan was implemented is not realistically significant when measuring Clinton's economic performance, BUT, if you are merely measuring statistical patterns, then you would be measuring some 'noise' in that first year which the statistician would consider significant.

Further, the longer time period you look at, the less "noise" from the ordinary business cycle will obscure the results. Looking at each year as an isolated data point assures that any longer term effects from governmental policy will be drowned out.

Further, he admits his basic difference in perspective. He denies that the government has a principal impact on the economy, and designs a model that reflects that belief. Not surprisingly, he finds little but the statistical noise he sets himself up to find.

Thirdly, Jason goes and does it again when he says: "Torgerson has left his implicit assumption unidentified and unchallenged. Take your pick" . Just because he did not notice my "implicit assumptions" he assumes they aren't there. Let's help out Jason with a link to a recent post which specifically explains why Democratic administrations do better economically. In that post I said:

"Basically, expenditures targeting low to middle income people grow the economy short term far more than expenditures targeted to affluent people. For example, committing more funds to extending unemployment benefits adds $1.74 to GDP for every $1.00 spent. By contrast, reducing taxes on stock dividends only adds 9 cents to GDP per dollar of taxes reduced. So doing a little math here, if you repeal the dividend tax cut, and take the estimated $36 billion in revenues split evenly between increased benefits to the unemployed and to reducing the budget deficit, that action would increase GDP by $28 billion in the first year alone (about a 0.3% increase in growth.) You'd lose $3.24 billion in GDP growth from repealing the dividend tax reduction, (.09 X $36 billion) and gain $31 billion in GDP from extending unemployment benefits, (1.74 X $18 billion).Paying more money in unemployment benefits to reduce unemployment seems to be counter-intuitive. But, if you think it through, it makes sense. An unemployed person receiving unemployment benefits is the person most likely to spend those benefits quickly in ways that keep the money recycling through the domestic economy: food, rent, bus fare, utility bills etc., which are all provided courtesy of employed workers, very few of whom could possibly be outsourced to India."

The specific GDP effects of the policies cited above come from an Executive Summary of a paper produced by Economy.com, the folks behind the Dismal Scientist.

Surprise! Democrats are far more likely to favor policies, like unemployment benefits, tax cuts for the less well off etc. that happen to have a more stimulative effect on the economy than the Republican's favorite goodies for their constituencies, like capital gains tax cuts, corporate breaks etc.. Therefore, it should come as no surprise whatsoever that applying more stimulative policies to the economy, you get... more stimulus to the economy!! Just so my friends at the Dead Hand can keep up, this is what is known as "causation".

Now, if this whole line of reasoning holds up, what you would see is a significant difference between the overall economic growth patterns under Democratic government control versus Republican control. And, of course, that is exactly what you see.

You see, this is all basic policywonk-craft in Washington. It is not rocket science, governments have been priming the pump as needed for decades. It works. The implication here is when a George W. Bush pushes economic and tax policies that direct benefits towards the rich, then he darn well knows that such policies won't be very effective in growing the economy, because they have never worked very well. So when he looks into the camera and says with a straight face that his tax cuts should reinvigorate the economy, he is lying to you. And, if he is too dense to understand that he's lying to you, he's got 10,000 policy wonk clerks that work for him scurrying to implement his program who know full well they are committing a fraud.

So right wingers HAVE to hide the evidence of their very own eyes amongst as many layers of bogus assumptions and statistical massaging necessary to protect them from the hard cold reality of the dishonesty of their fearless leaders.

November 2nd: The 1.3 Trillion Dollar Question

OK what's it going to take? The few people who have yet to make up their minds between Bush and Kerry, apparently the starkest differences on every major political issue aren't enough to sort it all out and make your Presidential choice clear. So I've got an offer for you.

How about some Cold Hard Cash? How about $1.3 Trillion Bucks?

In previous blogs, I've shown how job growth is accelerated under Democratic administrations, how economic growth is accelerated under Democratic administrations, how Federal budget deficits are smaller under Democratic administrations and how Federal spending as a % of GDP actually shrinks under Democratic administrations. I've also laid down my argument as to why that is here and here. These posts used data stretching back either 50 to 100 years and shows common patterns trends regardless of which Presidential administration you look at. There is a real difference between the basic economic philosophy of the parties, and one philosophy, the Democrats, works far better in actual experience in all of these areas.

So what does it mean here? It is reasonable to assume that trends that have held up for decades will continue to hold in the next administration. If a Democratic administration and a Democratic Congress are elected next week we can expect one set of economic outcomes, while the reverse is also true.. We know that since WWII, economic growth under Democratic leadership was on average about 4.5% per year (inflation adjusted.) We know also that economic growth under Republican control stood at less than half of this, at 2.1% per year.

This means that four years under Democratic growth plans will see a Gross Domestic Product that would stand over $1.3 trillion higher than under Republican 'stewardship'. $1.3 trillion. That's a lot of jobs. That's a lot of cash. That's about $4,500 for every American citizen. (Doing the math: Latest GDP figures suggest that by inauguration day 2005 GDP will stand at about $11.8 trillion. 4.5% growth for four years brings that to over 14.1 trillion. 2.1% growth over four years brings that to 12.8 trillion.)

Note inserted 11/6/06: The above predicted figures are in constant, or inflation adjusted, dollars. The comparable inflation adjusted figure for GDP as of Nov. 2006 is $12.36 trillion, a bit higher than my forecasted 2.1% growth, which would have produced about $12.17 trillion at this point. Latest growth rate announced for GDP is an anemic 1.6% per year moving forward, meaning my prediction is basically on track.)

So for all those STILL on the fence for this election, think very carefully. Do you want $1.3 trillion MORE cash floating about the U.S. economy, or $1.3 trillion LESS? Let's break it down for you: based on the entire economic experience of the country since World War II, with a President Kerry and a Democratic Congress we are likely to have $1.3 trillion more in the American economy in four years than what we would have under a President Bush and a Republican Congress. That would be $1.3 trillion more to pay for new jobs, college tuitions, environmental cleanup, homeland security, home ownership for citizens, health care for all, decent schools for children, and have plenty left over for good old reckless spending on gidgets and goo gaws.

Is it clear now which way you have to go?

Jobs Reports Follow Up

Haven't updated this blog in a while due to heightened work responsibilities and travel, but I wanted to revisit a prior subject because of some discussions that resulted mainly taking place in other blogs.

Quite a few people criticized my earlier postings discussing how most of the jobs thought to be created in the last year and reported in the Bureau of Labor Statistics' establishment survey were imaginary. In a representative criticism that actually is somewhat valid as far as it went, Jason Williscroft said:

"No place do you demonstrate that the BLS numbers actually are wrong, nor do you show that the fundamental assumptions underlying their counting methodology are actually incorrect. The best you seem to be able to do is to cherry-pick data that seem to support your assertion, while dismissing any that don't. These guys perform such counts for a living; I would suggest that, if you are going to attack their results, the onus is on you to demonstrate how they actually are wrong, not how they might be wrong in some alternate universe." (quote found here.)

This of course is a double negative. Proving something is NOT so is virtually impossible. If I asserted that, in a good friend's frequent example, that Dover, Delaware is REALLY intended to be the capitol of the United States, others would have a hard time disproving such, because of the strange scarcity of documents directly asserting that Dover is NOT the US Capitol. All one can do in such a challenge is show indirect evidence that the capitol was really some other city. Such evidence wouldn't make a skilled internet flamethrower pause for even a second, and huge quantities of bandwidth would continue to be consumed debating the proposition.

In this case the BLS is making the assertion, not I. They are claiming that over a million jobs have been created that have not EVER been detected by their actual sample surveys month after month. They make the claim based on a statistical device that has as it's core the assumption that for every job destroyed by a company gone bust or moving out of the country, another like job in the same community and the same industry mysteriously rises from the ashes to take it's place. Blind faith is necessary to believe this, because none of these jobs by definition have actually been detected. To be fair, this was a good assumption in years past when the model's mathematics were worked out. However, there has been no research from BLS or anywhere else that tests the validity of such assumptions during an era where so many jobs are outsourced, downsized or automated out of existence, OR in an era of generally contracting job opportunities.

Just like our Dover Delaware example, the argument itself won't satisfy. One has to go further to try to measure these imaginary jobs in some other way. Williscroft gave it the good old college try with an argument based on his company's health insurance customers. Points given for effort and imagination.

A better way would be to look at what the experts were saying the implications of those rosy job creation reports would be to the economy, and see if those predictions came true. Here's a representative comment of what was expected:

"I think this is something that can be sustained," William G. Cheney, chief economist at MFC Global Investment Management, said of the pace of job creation. The figures showed that the once-halting recovery has given way to a self-sustaining expansion, analysts said, as job growth drives up incomes, which fuels more spending, which begets more hiring, he said. "You create that many jobs and people go out and spend the money and it feeds on itself," Cheney said. Washington Post (248,000 Jobs Added In May -Unemployment Rate Remains Unchanged", 6/5/04)

Yup, that's exactly what would have happened if over a million more people had jobs than was actually the case. So if it did not happen as predicted, that is clear empirical evidence that those jobs weren't really there. And of course, we know what happened since then.

June's rosy headlines gave way to July's gloom. "Job growth disappoints: Economy created just 112,000 jobs in June, less than half of forecasts; unemployment flat at 5.6%."

The day before, international business headlines screamed at US employers: "Outsource or Perish".

That expected retail spending fueled by those jobs also didn't happen: Retail sales suffered a larger than expected fall in June.

All told, there were virtually no economic indicators whatsoever that pointed to those jobs being real. Instead, we were told it was an unexpected "soft spot" in a strengthening economy. Right.

This is not just some gotcha game for political posturing. Whether or not real job creation happens is of vast importance, not only to those who need those jobs but for the general public themselves. Consider this comment assessing the 148 points the Dow piled on the Monday after the Friday jobs report in June. That frenetic stock market was fueled by

"...a continuation of the euphoria we saw on Friday with the employment numbers" CNN/Money

Billions of dollars flooded the stock market that day, convinced the economic recovery was at full tilt thanks to the rosy job numbers. By the close, the Dow Jones Average stood at 10,391. As reality slowly set in during the ensuing months, those investors who were hoodwinked into thinking happy days were here again now look at a Dow 350 points lower (as of 9/24/04). Yet those of us who nailed those job reports as imaginary were denounced as tin foil hat conspiracy theorists, while those left holding the bag with their brokerage losses were spot on the mark. Go figure...

The amazing thing about all of this is that you could see it happening in real time. In the very same press release from the BLS trumpeting 248,000 new jobs in one month, you also found out a lot more. Note the Washington Post headline I linked to above: "248,000 Jobs Added In May -Unemployment Rate Remains Unchanged". This headline unwittingly reflects what is really going on here. Every measure of employment, EXCEPT the labor department's payroll numbers, suggests a continuing jobs recession.

In the June press release from the Bureau of Labor Statistics, it was duly noted that (1) the number of unemployed persons remained about the same, (2) the unemployment rate remained the same, (3) the employment-population ratio remained the same and (4) the civilian labor force participation rate remained the same, YET there were 248,000 new jobs that month. The same type of numbers occur in the prior three month's releases. We're asked to believe, (and apparently most of us did) that all measures of unemployment stayed about the same, while a combined three month total of almost a million jobs were created since February.

What's truly amazing here is how many people fell for it.

Imaginary Jobs Reports: Following Up

Haven't updated this blog in a while due to heightened work responsibilities and travel, but I wanted to revisit a prior subject because of some discussions that resulted mainly taking place in other blogs.

Quite a few people criticized my earlier postings discussing how most of the jobs thought to be created in the last year and reported in the Bureau of Labor Statistics' establishment survey were imaginary. In a representative criticism that actually is somewhat valid as far as it went, Jason Williscroft said:

"No place do you demonstrate that the BLS numbers actually are wrong, nor do you show that the fundamental assumptions underlying their counting methodology are actually incorrect. The best you seem to be able to do is to cherry-pick data that seem to support your assertion, while dismissing any that don't. These guys perform such counts for a living; I would suggest that, if you are going to attack their results, the onus is on you to demonstrate how they actually are wrong, not how they might be wrong in some alternate universe." (quote found here.)

This of course is a double negative. Proving something is NOT so is virtually impossible. If I asserted that, in a good friend's frequent example, that Dover, Delaware is REALLY intended to be the capitol of the United States, others would have a hard time proving such, because of the strange scarcity of documents directly asserting that Dover is NOT the US Capitol. All one can do in such a challenge is show indirect evidence that the capitol was really some other city. Such evidence wouldn't make a skilled internet flamethrower pause for even a second, and huge quantities of bandwidth would continue to be consumed debating the proposition.

In this case the BLS is making the assertion, not I. They are claiming that over a million jobs have been created that have not EVER been detected by their actual sample surveys month after month. They make the claim based on

June Jobs Report: A Reality Check

When does 77,000 actually equal 112,000? Only in the attempt to spin this month's jobs report into something remotely favorable to the Bush Administration. When we tuned in last month, the estimate for total nonfarm payrolls stood at 131.224 million. This month's nonfarm payroll estimate weighed in at 131.301 million, or 77,000 higher. But the announcement was made that 112,000 jobs were created in June, simply because the BLS corrected the last couple of months downward, losing 35,000 jobs in the process. After that adjustment, the new figure is indeed 112,000 higher than the new figure for last month.

But wait, there's more.

The "birth/death model", the BLS's statistical technique for guesstimating the number of jobs they think were created by businesses they don't know exist yet, added 182,000 jobs to this month's (unseasonally adjusted) total. (See earlier post for an explanation of how the BLS imputes the existence of new jobs from new businesses by looking at the number of jobs destroyed by recently deceased businesses.) When you do all the math involved, it turns out that the BLS actually detected a job LOSS of about 68,000 jobs through it's direct sample measurements, and that only by virtue of applying the birth/death statistical fiction could any positive number be discussed at all.

But Even That's Not All.

In that recent blog entry "Most of Those New Jobs Reported Are Imaginary", I calculated that 85% of the new jobs touted as created since March 2003 are the imaginary product of statistical fiction. Updating the charts and numbers with the just-announced June numbers and the April and May downward revisions, it's even more drastic. At this point only 97,000 of the 1,380,000 jobs purported to have been created since March 2003 were actually measured by the BLS sample surveys. The other 93% were "imputed" by the birth/death model. Here's the updated graph:



So What's It Mean?

It means that job growth is far less robust than what's been advertised. That carries with it all kinds of implications for stock markets, interest rates and business decisions. So Caveat Emptor. Here's what it doesn't mean: It doesn't mean the BLS are a bunch of lying scoundrels. The birth/death model is a serious attempt to measure something real, albeit undetectable: the number of jobs created by new enterprises that haven't checked in with the unemployment insurance offices that the BLS samples to collect it's establishment job data. The BLS has been completely straightforward in it's admissions of the shortcomings of the statistical estimation techniques it uses to guess at the undetectable. The BLS has also said that birth/death modeling stinks at detecting changing trends. (I'm liberally paraphrasing.) It also doesn't necessarily mean that all the jobs imagined by the birth/death model don't exist. SOME of them do, since there has to be some new businesses out there that DID create some jobs that haven't reported in to their state bureaucracies yet.

However, when looking at other employment measures, it doesn't look too good for too many of those imputed jobs to be real. We've been stuck at 5.6% unemployment for months now. The number of unemployed is up 84,000 from April to June. There is very little evidence that we have anything more than the same "jobless recovery" we've been experiencing for months. If most of these imputed jobs have not come to pass in reality, then we should see that in ongoing lackluster jobs reports, as the unrealistic projections of the birth/death model continue to be reconciled with reality and month after month of data ends up being revised downward gradually. June's BLS release at least follows this pattern.

Footnotes

There's been an ongoing discussion about my methodology in the comments section of my previous post. Thanks to a handy and brand new FAQ posted at the BLS site, many of the issues in question are now put to rest. Some comments about all of this are posted to the comments page of this post.