Dean Baker:. The 2016 Social Security Trustees Report [feedly]

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The 2016 Social Security Trustees Report
// Economist's View

Dean Baker:

Statement on the 2016 Social Security Trustees Report: The 2016 Social Security Trustees Report is little changed from the 2015 Report. It shows a small decrease in the projected 75-year shortfall of 0.02 percentage points. Changes in the disability program, along with small changes in projections more than offset the increase of 0.6 percentage points due to shifting the projection period by a year. (The new projection adds 2093, a year with a large projected deficit, and loses 2015, a year with a surplus.) While reporters and politicians routinely focus on the projected shortfall, what will matter far more to the people covered by Social Security is the projected growth in real wages and their distribution. As has been pointed out, almost 40 percent of the projected shortfall in the program is attributable to the upward redistribution of income over the last four decades. This has pushed a larger share of wage income over the taxable maximum. For this reason, the finances of the program are directly affected by the distribution of income. ...

This means that workers have vastly more at stake in whether they will receive their share of wage growth over this period, than whether it is necessary to raise the Social Security tax rate at some point. ... (Of course any shortfall in Social Security could be covered through other mechanisms than increases in the payroll tax.)

This is the last Trustees report of the Obama administration. For this reason, it is worth comparing the changes with the last report of the Bush administration. The 2008 Trustees Report showed a considerably smaller projected shortfall for Social Security. It projected a shortfall of 1.70 percentage points for the years 2008–2082. This figure has increased to 2.66 percentage points in the 2016 report. Roughly half of this increase is attributable to the change in the projection period. Moving the period out eight years added approximately 0.48 percentage points to the projected shortfall. The other half of the increase in the gap was due to the Great Recession. This reduced employment and wage growth, leaving both far below the projections in the 2008 report. This is a clear warning as to the importance of the strength of the overall economy for the health of Social Security.

The positive side of the picture is that the projected shortfall in the Medicare program is now much smaller than had been projected in 2008. At that time, the Trustees projected a shortfall in the program equal to 3.54 percent of payroll. This brought the combined projected shortfall for the two programs to 5.24 percent. In the most recent report, the projected shortfall for Medicare is just 0.73 percent of payroll, bringing the combined projected shortfall to 3.39 percent of payroll.

This means that the longer term shortfall projected for these programs together is now considerably smaller than when President Obama took office. The reason for the decline in the projected Medicare shortfall is a slower projected rate of health care cost growth. This is undoubtedly attributable in part to changes implemented as a result of the Affordable Care Act (ACA). While the size of the impact of the ACA on health care cost growth can be debated, it is clear that the combined finances of these programs looks better in 2016 than when President Obama took office.

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Econ Links on Brexit [feedly]

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Links on Brexit
// Economist's View

Why Brexit is worse for Europe than Britain - Larry Summers The triumph of the tabloids - mainly macro Britain's Democratic Failure - Kenneth RogoffBrexit will reconfigure the UK economy - Martin WolfScattered thoughts on Brexit - Jared Bernstein Here's what happens next. - Henry Farrell Brexit: the Biggest Global Monetary Shock Since 2008 - David Beckworth Britain's Exit Could Put Climate Commitment in Doubt - Scientific American Brexit Vote Throws Britain and Europe Into Turmoil - John Cassidy My Grain of Salt on Brexit and the Risk of XXxit - Gloomy European Economist Brexit: The Morning After, by Paul Krugman, NYTimes
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Summers after.....Why Brexit is worse for Europe than Britain [feedly]

Why Brexit is worse for Europe than Britain

Larry Summers

http://larrysummers.com/2016/06/24/why-brexit-is-worse-for-europe-than-britain/

Brexit is in train. If journalism is the rough draft of history, instant blog responses are even cruder responses to events.  Nonetheless, here are some thoughts prior to market opening in the United States.

Markets

So far given the shock value of what has happened the market response has been on the calm side.  The British pound is only a bit weaker than it was 10 days ago when the outcome looked highly uncertain.  I would not have been surprised to see the pound below 1.30, the yen below 100 and more dramatic moves in credit spreads in the European periphery.  Notably the pound which is a kind of bellwether and many other asset prices have rallied considerably from their lows during the night.

Relatively resilient markets so far probably reflect a combination of confidence that central banks will do whatever is necessary to maintain order as well as some opportunistic buying in response to opportunities created by the falling asset prices.  Notably cool heads seem to be in control for now in London and Brussels.  Fortunately authorities do not seem overly fussed with moral hazard at a time when the preoccupation needs to be maintaining liquidity and orderly markets.  Critically, the market has expressed confidence that the Fed understands the gravity of the situation by taking the probability of a Fed hike by the end of the year down to the 10 percent range.

All of this could easily change when U.S. markets open, when investors ponder the new and more volatile environment they live in, when traders decide they do not want to bear risk over the weekend, or when a weekend of pondering leads to a wave of liquidations on Monday morning.  In 1987 volatile markets with international uncertainties at the end of the preceding week presaged the Monday crash.  It is far too early for any kind of complacency.

The situation of European banks should and will receive extensive policy attention.  Even before the last 24 hours, several were selling at price-book value ratios suggesting alarmabout their prospects.  And some, not only British banks are now down more than 20 percent.  Large flight to quality flows into the dollar and yen also risk bringing on alarm about emerging markets and a return to concern about currency wars.

Economics

For Britain, the economic effects are two sided.  On the one hand, a major jolt has been delivered to confidence, to future unity and down the road to trade.  On the other, the currency has become more competitive, and liquidity will be in very ample supply.  I would expect that a significant deterioration in growth and a recession beginning in the next 12 months has to be a substantial risk though short of an odds on bet.

As suggested by the fact that stock markets in Italy and Spain are down almost twice as much as in the UK, the prospects for Europe may in some ways be worse than for the UK.  There is the real risk of "populist exit contagion" in a number of countries.  A credit crunch is a serious risk.  Unlike in Britain, the trade weighted exchange rate is unlikely to decline very much.  The central bank has less room for incremental policy measures.

The effects on the rest of the world will depend heavily on psychology.  I continue to be alarmed as I wrote in this space a few days ago that this unexpected outcome in the UK will raise the spectre of "Trump risk".  If the UK can vote for Brexit perhaps the U.S. can vote for Donald Trump.  I fear this possibility will lead to a freezing up of spending decisions particularly on the part of internationally oriented businesses.  The odds of U.S. recession beginning within the next 12 months are I think now in the 30 percent range.  Also noteworthy is that an environment of increased risk aversion and flight to quality will complicate Japan's problem of generating inflation, and China's challenge of attaining currency stability.

To an extent that is underestimated in some quarters and understated in others, the world economy is far more brittle than usual because of the inability almost everywhere to lower interest rates substantially.  Normally in response to incipient downturns central banks lower rates by 400 basis points or more.  Nowhere do they have that kind of room.  Nor is there large scope for reducing term and credit spreads given their very low levels.  This is no time for austerity.  Greater use of fiscal policy should be on the agenda almost everywhere and certainly with the change of government in the UK.

Brexit will rightly be taken as a signal that the political support for global integration is at best waning and at worst collapsing.  Dramatic exchange rate fluctuations tend to portend upswings in protectionist pressure.  And problems in European banks could as in 2009 lead to a drying up of trade finance.  Already global trade has lagged global growth in recent years.  A clear sense of commitment to avoid backsliding towards protection from the G20 will be essential going forward.  Specific efforts with respect to trade finance may be appropriate.

Broader Observations

After Brexit, Trump, Sanders and the misforecast British and Canadian general elections, it should be clear that the term political science is an oxymoron.  Political events cannot be reliably predicted by pollsters, pundits or punters.  All three groups should have humility going forward.  In particular no one should be confident about the outcome of the U.S. presidential election.

The political challenge in many countries going forward is to develop a "responsible nationalism".  It is clear that there is a hunger on the part of electorates, if not the Davos set within countries, for approaches to policy that privilege local interests and local people over more cosmopolitan concerns.  Channeling this hunger constructively rather than destructively is the challenge for the next decade.  We now know that neither denying the hunger, or explaining that it is based on fallacy is a viable strategy.

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Smmers before......Why Brexit would be a history-defining, irreversible mistake [feedly]

Why Brexit would be a history-defining, irreversible mistake
http://larrysummers.com/2016/06/21/6895/

U.K. voters will decide on Thursday whether or not the U.K will withdraw from the European Union.  At one level it is a fundamental political choice.  Does the U.K. want to face the world alone as a limited scale island nation or to remain an influential part of the European Union—the world's largest economy? Does the U.K. want to stand apart from Europe or try to shape it at this complex hour in global affairs?  These are not questions which an American should presume to answer.

But Thursday's choices will have immediate financial and economic consequences.  And they can be assessed by outside economists.  My judgements are I believe widely, though not universally, shared by both progressive and conservative global financial and economic analysts.

Put simply, Brexit could well be the worst self-inflicted policy wound by a G7 country since the formation of the G7 forty years ago.  It is a risk no prudent policymaker would take.  And the risk is not confined to the UK.  In the current context, Brexit would unsettle the global economy and possibly tip it into recession.  Four points are crucial.

First, unlike almost all other economic policy choices, Brexit is irreversible. Francois Mitterrand's lurch towards socialism, Ronald Reagan's excessive tax cuts, and Japan's encouragement of bubbles were all egregious errors but all were reversed, albeit not before substantial damage had been done.  Divorce can be reversed by remarriage if regretted.  There is no reversing Brexit if it proves unwise.  Indeed given the EU's very strong incentive to discourage further dissolution, it is far from clear that there would even be concerted efforts to minimize its cost.

Second, markets are likely to suffer extraordinary volatility in the wake of Brexit. A Black Friday could follow referendum Thursday.  It is likely that foreign investors in British stocks would lose 15 percent off the bat, adding together market declines and currency losses.  This is a judgement supported by the gyrations in markets induced by relatively small fluctuations in the perceived chance of Brexit and by the very high prices commanded by out of the money options.  The truth is that even with all the regulatory changes that have been put in place we do not know for sure how the financial system will respond.  A return of systemic risk as large losses lead to cascading liquidations cannot be ruled out.  At a time when central banks have far less ammunition than they did in 2008, the consequences could be grave.

Third, Brexit will undermine confidence and increase uncertainty.  No one knows what the new structure will be or how soon it will emerge.  Quite likely Brexit would lead to changes not only in Britain's relationship with Europe but within Europe itself.  While businesses wait to see what happens, they will hold off on new investment.  Some will decide that it is much safer to base European operations outside the U.K.  Others will simply avoid hiring until matters are clear.  There exist contingency plans to move hundreds of thousands offinancial sector and other workers out of the UK.  If matters play out slowly, they may be acted on.  Given adverse markets, huge uncertainty, the likely absence of either expansionary fiscal policy (because of government policy commitments) or incrementally expansionary monetary policy (because of lack of room to cut rates), I believe Brexit would likely be followed by a recession in the UK.

Fourth, Brexit would quite likely have large contagion effects.  So irrational and dangerous an act in a traditional bastion of mature democracy would prompt a global reassessment of the likelihood of dangerous populist policy. The result could be large and destabilizing asset price declines and capital flows towards assets like gold and the Swiss franc.  A vicious cycle of falling asset prices, reduced confidence and further declines could ensue.  I am reminded of the Smoot-Hawley tariff and the Depression.  No direct calculation of its impact can explain more than a tiny part of the Depression.  But it may have been a psychological tipping point. Brexit too could have global effects that dwarf its direct impacts.

None of this certain.  But prudence dictates the avoidance of needless risk. Remain is the only rational economic choice.

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U.S. markets drop sharply after 'Brexit' vote increases global recession risk [feedly]

U.S. markets drop sharply after 'Brexit' vote increases global recession risk
http://www.latimes.com/business/la-fi-brexit-economic-impact-20160624-snap-story.html

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Bernstein: UK to EU: We Out. Scattered thoughts on Brexit [feedly]

UK to EU: We Out. Scattered thoughts on Brexit
http://jaredbernsteinblog.com/uk-to-eu-we-out-scattered-thoughts-on-brexit/

No time to organize thoughts so here's a few synaptic firings.

–I was disappointed by the outcome but not surprised. As I've written, this was a in no small part a referendum on immigration and the timing of the vote interacted with rising anger about this and other impacts of globalization.

–The structure of the EU–a common market with free flow of people and goods–has a great deal to recommend it, especially given Europe's bellicose history. But both the incomplete architecture–the absence of a fiscal and banking union–along with gross mismanagement–fiscal austerity, punitive actions by Brussels and Germany, non-management of immigrant flows–surely led "Leave" voters to discount the benefits of EU membership.

–I highly discount all the economic predictions in terms of the cost of the Brexit in terms of GDP, jobs, etc., except the following:
–volatile financial markets over the next few days and large losses to the value of the pound, euro, yen relative to the dollar;
–the Fed may further flatten its "normalization" path.

–What about growth effects? The reason I discount the predictions is that such predictions must be based on the past and we've got no record to forecast off of. Moreover:

–The political economy of the Brexit impact is really tricky. At one level, I'd like the EU to avoid negative growth impacts by smoothing renegotiating the UK's reentry into the common European market. But, as many pundits have argued, that would be firmly against Brussels' interests, as it would signal other potential leavers that leaving is costless.

–However, there's a deeper problem than that. The UK can't possibly get back in without accepting at least some, and likely most, of the conditions 52 percent of the voting electorate just rejected. EG, how could EU authorities possibly say, "we'll give you back full, no-tarriff trading privileges with no requirements on freedom of movement for EU citizens." That's not a matter of disciplining other potential leavers; it's part of the fundamental structure of the EU.

–I predict Scotland with be anxious to leave the UK as they will want to rejoin the EU. Look for another referendum before too long.

–Finally, I saw this WaPo headline: "Stop underestimating Trump. 'Brexit' vote shows why he can win." I get–and bemoan–the Trumpian dimensions of the outcome, but here's the thing. I believe that to the median Leave voter who might share some Trump sentiments–anti-immigration, anti-globalization, turn back the clock, insulate–the down of leaving the EU looks a lot less scary than a Trump presidency. To be clear, I'm obviously not talking about die-hard Trump supporters. I'm talking about a US voter who's unhappy with her choices from either party, yet she sympathizes with some of the anti-establishment sentiments fueling the Trump phenomenon. I would not assume that she views the consequences of leaving the EU as seriously potentially damaging as a Trump presidency.

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Rodrik: Brexit and the Globalization Trilemma [feedly]

Rodrik himself on Brexit....and "structural shifts" of global dimensions...

Brexit and the Globalization Trilemma

Dani Rodrik

http://rodrik.typepad.com/dani_rodriks_weblog/2016/06/brexit-and-the-globalization-trilemma.html

I have not written much on Brexit because I do not have a strong or particularly well-informed view of it. My personal hope is that Britain will choose to remain in the EU – but that is as much because of a belief that without Britain the EU will likely become less democratic and more wrong-headed as it is because of the likely economic costs of Brexit.

Yes, I do think exit poses significant economic risk to Britain (and possibly to the world economy), though I believe there are very large margins of uncertainty around the quantitative prognostications presented by the U.K. Treasury and many British economists. But there are also serious questions posed about the nature of democracy and self-government in the EU as presently constituted.

Ambrose Evans-Pritchard (AEP) has now written a remarkable piece that makes the political case for Brexit. AEP makes clear that he has little in common with the jingoistic and nativist tone of the Brexit campaign. The distortions and lies promoted by the Brexiteers aside, the referendum does raise a serious question about how Britain will be governed:

"Stripped of distractions, it comes down to an elemental choice: whether to restore the full self-government of this nation, or to continue living under a higher supranational regime, ruled by a European Council that we do not elect in any meaningful sense, and that the British people can never remove, even when it persists in error.

…

We are deciding whether to be guided by a Commission with quasi-executive powers that operates more like the priesthood of the 13th Century papacy than a modern civil service; and whether to submit to a European Court (ECJ) that claims sweeping supremacy, with no right of appeal.

It is whether you think the nation states of Europe are the only authentic fora of democracy, be it in this country, or Sweden, or the Netherlands, or France …."

The trouble is that the EU is more of a technocracy than a democracy (AEP calls it a nomenklatura). An obvious alternative to Brexit would be to construct a full-fledged European democracy. AEP mentions Yanis Varoufakis, a Brexit opponent, who has argued for something like "a United States of Europe with a genuine parliament holding an elected president to account." But as AEP says,

"I do not think this is remotely possible, or would be desirable if it were, but it is not on offer anyway. Six years into the eurozone crisis there is no a flicker of fiscal union: no eurobonds, no Hamiltonian redemption fund, no pooling of debt, and no budget transfers. The banking union belies its name. Germany and the creditor states have dug in their heels."

All of this is of course what I tried to highlight with my "political trilemma of the global economy," reproduced below.

The trilemma suggests democracy is compatible with deep economic integration only if democracy is appropriately transnationalized as well – the solution that Varoufakis favors. AEP, by contrast, believes a democratic and accountable European super-state is neither feasible, nor even desirable.

Note that the tension that arises between democracy and globalization is not straightforwardly a consequence of the fact that the latter constrains national sovereignty. There are ways in which external constraints – as with democratic delegation – can enhance rather than limit democracy. But there are also many circumstances under which external rules do not satisfy the conditions of democratic delegation. See the discussionhere.  

AEP believes that European rules clearly lie within the latter category. In addition to the European bureaucracy (and its treatment of the euro crisis), he is especially bothered by the broad authority the European Court of Justice (ECJ) has over national policies, without right to appeal. As for Britain's opt-out: "Need I add too that Britain's opt-out from the Charter under Protocol 30  - described as "absolutely clear" by Tony Blair on the floor of the Commons - has since been swept aside by the ECJ."

I do not have a clear view on the substance of AEP's argument – as to whether Britain's self-government is sufficiently impaired by the EU, or its opt-out has been nullified by the ECJ. But it is clear that the EU rules needed to underpin a single European market have extended significantly beyond what can be supported by democratic legitimacy. Whether Britain's opt out remains effective or not, the political trilemma is at work. In AEP's evocative language,

"The [European] Project bleeds the lifeblood of the national institutions, but fails to replace them with anything lovable or legitimate at a European level. It draws away charisma, and destroys it. This is how democracies die."

I first thought of the globalization trilemma when I was asked to contribute to a special millennial issue of the Journal of Economic Perspectives (in 2000), where I was asked to speculate about the nature of the world economy in 100 years' time. I presented it as the political analogue of the macroeconomic trilemma of the open-economy well known to economists (we can have at most two among monetary independence, free capital flows, currency pegs). I thought then, and still do, that it will increasingly shape the evolution of world's political economy.

At the time, I viewed the EU as the only part of the world economy that could successfully combine hyperglobalization ("the single market") with democracy through the creation of a European demos and polity. I expressed the same view, somewhat more cautiously, in my 2011 book The Globalization Paradox.

But I now have to admit that I was wrong in this view (or hope, perhaps). The manner in which Germany and Angela Merkel, in particular, reacted to the crisis in Greece and other indebted countries buried any chance of a democratic Europe. She might have presented the crisis as one of interdependence ("we all contributed to it, and we are all in it together"), using it as an opportunity to make a leap towards greater political union. Instead, she treated it as a morality play, pitting responsible northerners against lazy, profligate southerners, and to be dealt with by European technocrats accountable to no one serving up disastrous economic remedies.   

As Brexit opponents keep reminding us, the economic costs of Britain's departure could be indeed sizable. Reasonable people have to make up their own mind as to how those costs stack up against the damage to democratic self-government. EAP is fully aware that his choice entails taking a "calculated risk."

My generation of Turks looked at the European Union as an example to emulate and a beacon of democracy. It saddens me greatly that it has now come to stand for a style of rule-making and governance so antithetical to democracy that even informed and reasonable observers like AEP view departure from it as the only option for repairing democracy.  

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