CBPP Policy Basics: Understanding the Social Security Trust Funds [feedly]

Policy Basics: Understanding the Social Security Trust Funds

http://www.cbpp.org/research/social-security/policy-basics-understanding-the-social-security-trust-funds

Few budgetary concepts generate as much unintended confusion and deliberate misinformation as the Social Security trust funds. Political candidates of both parties accuse their opponents of "raiding" the trust funds. Some writers disparage the trust funds as "funny money," "IOUs," or a "fiction." All these claims are nonsense. In fact, the Social Security trust funds are invested in Treasury securities that are every bit as sound as the U.S. government securities held by investors around the globe; investors regard those securities as being among the world's safest investments.

How Do the Trust Funds Work?

Social Security's financial operations are handled through two federal trust funds — the Old-Age and Survivors Insurance (OASI) trust fund and the Disability Insurance (DI) trust fund.  Although legally distinct, they are often referred to collectively as "the Social Security trust fund."  All of Social Security's payroll taxes and other earmarked income are deposited in the trust funds, and all of Social Security's benefits and administrative expenses are paid from the trust funds.

In years when Social Security collects more in payroll taxes and other income than it pays in benefits and other expenses — as it has each year since 1984 — the Treasury invests the surplus in interest-bearing Treasury bonds and other Treasury securities.  Social Security can redeem these bonds whenever needed to pay benefits.  The balances in the trust funds thus provide legal authority to pay Social Security benefits when the Social Security program's current income is insufficient by itself.

What Is the Trust Funds' Financial Status?

Social Security is adequately financed in the short term but faces a modest long-term financial shortfall amounting to 1.0 percent of gross domestic product (GDP) over the next 75 years, the period that the program's actuaries use in evaluating the program's long-term finances.  Social Security has run a surplus in every year since 1984, as was anticipated when Congress enacted and President Reagan signed the legislation based on the recommendations of the Greenspan Commission in 1983.

Under current projections, the combined Social Security trust funds will continue to run annual surpluses until 2020.  The interest income that the trust funds earn on their bonds, as well as the proceeds the trust funds will receive when their bonds are redeemed, will enable Social Security to keep paying full benefits until 2034.

In 2034, the combined trust funds are projected to run out of Treasury bonds to cash in.  At that point, if nothing else is done, Social Security could still pay three-quarters of its scheduled benefits using its annual tax income.  Contrary to a common misunderstanding, benefits would not stop.  Of course, paying three quarters of promised benefits is not an acceptable way to run the program, and Congress should take action well before 2034 to restore long-term solvency to this vital program.

Most analyses of Social Security focus on the combined OASI and DI trust funds, since both are integral parts of Social Security, but the two trust funds are, in fact, separate.  The DI trust fund faces exhaustion in 2023, and the much larger OASI fund is projected to last until 2035.  Congress must therefore take action by 2023 to replenish the DI trust fund.  Increasing the share of the payroll tax that is allocated to DI (and reducing the OASI share) would assure that both the OASI and DI programs remained solvent through 2034.

How Are the Trust Funds Invested?

The Social Security trust funds are invested entirely in U.S. Treasury securities.  Like the Treasury bills, notes, and bonds purchased by private investors around the world, the Treasury securities that the trust funds hold are backed by the full faith and credit of the U.S. government.  The U.S. government has never defaulted on its obligations, and investors consider U.S. government securities to be one of the world's safest investments.

The Treasury securities held by the trust funds have some special features that make them even more attractive investments than other Treasury securities.  First, the trust funds' investments do not fluctuate in value and can always be redeemed at par.  Even if the securities must be redeemed early, Social Security is guaranteed not to lose money on its investment.  Second, all of the securities purchased by the trust funds — even short-term securities that will mature in one or two years — earn interest at the same rate as medium- and long-term Treasury securities (those not due or callable for at least four years).

By the end of 2015, the trust funds had accumulated nearly $2.8 trillion worth of Treasury securities, earning an average interest rate of 3.4 percent during that year.  The Social Security Administration provides monthly reports on the investment holdings of the trust funds, their maturities, and interest rates.  The trustees project that the trust funds will earn $89 billion in interest income in 2016.

Is the Federal Government "Raiding" the Trust Funds?

No.  Some critics have suggested that the lending of Social Security trust fund reserves to the Treasury represents a misuse of those funds.  This view reflects a misunderstanding of how the Treasury manages the federal government's finances.

When the rest of the budget is in deficit, a Social Security cash surplus allows the government to borrow less from the public to finance the deficit.  (The "public" encompasses all lenders other than federal trust funds, including U.S. individuals and institutions, the Federal Reserve System, and foreign investors.)  The Treasury always uses whatever cash is on hand — whether from Social Security contributions or other earmarked or non-earmarked sources — to meet its current obligations before engaging in additional borrowing from the public.  There is no sensible alternative to this practice.  After all, why should the Treasury borrow funds when it has cash in the till?

Back in 1938, the first Advisory Council on Social Security — a group of independent experts appointed to review the program's long-term finances — firmly endorsed the investment of Social Security surpluses in Treasury securities:

The United States Treasury uses the moneys realized from the issuance of these special securities by the old-age reserve account in the same manner as it does moneys realized from the sale of other Government securities.  As long as the budget is not balanced, the net result is to reduce the amounts which the Government has to borrow from banks, insurance companies and other private parties.  When the budget is balanced, these moneys will be available for the reduction of the national debt held by the public.  The members of the Advisory Council are in agreement that the fulfillment of the promises made to the wage earners included in the old age insurance system depends upon, more than anything else, the financial integrity of the Government.  The members of the Council, regardless of differing views on other aspects of the financing of old-age insurance, are of the opinion that the present provisions regarding the investment of the moneys in the old-age reserve account do not involve any misuse of these moneys or endanger the safety of these funds.

Other Advisory Councils have reached the same conclusion.

 Money that the federal government borrows from the public or from Social Security is used to finance the ongoing operations of the government in the same way that money deposited in a bank is used to finance spending by consumers and businesses.  In neither case does this represent a "raid" or misuse of the funds.  The bank depositor will get his or her money back when needed, and so will the Social Security trust funds.

When Social Security needs to start cashing in its holdings of Treasury securities to meet its benefit obligations, the federal government will have to increase its borrowing from the public, or raise taxes or spend less.  That will be a concern for the Treasury — but not for Social Security, as long as the solvency of the federal government itself is not called into question.  Social Security will be able to sell its bonds just as any private investor might do.

Would Investing the Trust Funds in Other Financial Assets Change the Situation?

No.  Although some people have argued that the Social Security trust funds would be more "real" if they were invested in private stocks or bonds, there is nothing to this contention.  If there were no change in the total federal budget deficit, such a policy would merely rearrange the holding of assets in the economy and would not change the net financial situation of Social Security, the federal government as a whole, or the private sector.  As the Congressional Budget Office has explained:

Clearly, investing trust funds in private investments could have no significant impact on the government's overall balance sheet.  If the Treasury were cut off from access to trust fund moneys, it would have to sell more securities (bills, notes, and bonds) in the credit markets.  At the same time, federal trust funds would accumulate more financial assets.  Net federal indebtedness — liabilities minus assets — would be little different than under the current arrangement.  Conversely, private investors would have to buy more Treasury debt than under current arrangements but would face a shrunken supply of the assets purchased by the trust funds.  The upshot would be a rearrangement of public and private portfolios, perhaps accompanied by a small change in the relative returns on various financial instruments.

For example, if the Social Security trust funds were to invest $100 billion in corporate stock, the Treasury would need to finance the non-Social Security deficit by borrowing $100 billion more in private credit markets.  As a result, the private sector would hold $100 billion less in equities and $100 billion more in government debt.  Neither the government nor the private sector would be better or worse off.  Last but not least, investing the trust funds in private stocks and bonds would subject the trust funds to a greater degree of risk.

Is Trust Fund Debt Real If It's Not Part of Debt Held by the Public?

Yes.  Budget experts generally focus on debt held by the public — which reflects what the government must borrow in private credit markets and which excludes trust fund holdings — as the most useful measure of federal debt for economic analysis.   Some have argued that it is inconsistent to adopt that focus while simultaneously viewing the debt held by Social Security as real.  This argument is incorrect:  both measures of debt are important, but they measure different things.

Debt held by the public is a measure of the federal government's overall fiscal health.  It represents money that must be borrowed and periodically refinanced in private credit markets; interest payments on that debt represent a current drain on government resources.  If the specter of excessive debt led investors to lose confidence in U.S. government securities, federal interest costs could increase substantially, with potentially troubling implications for U.S. and world economies.

 Debt held by Social Security, by contrast, provides information about the adequacy of the program'sdedicated financing.  Debt held by trust funds does not have the same broader economic significance as debt held by the public.  Since it does not need to be financed in private credit markets, it cannot lead to a refinancing crisis.  As legal authority to spend money in the future, it is essentially similar to legal authority to meet spending commitments for other entitlement programs that are not financed through trust funds and are not included in measures of federal debt.  In addition, an increase in trust fund balances that provides authority for higher Social Security expenditures in some distant year is not equivalent to issuing more publicly held debt to finance additional spending today.  If additional spending authority leads to more federal borrowing at some time in the future, that borrowing will add to debt held by the public when that spending occurs.

As the 1938 Advisory Council on Social Security wrote in the passage quoted above, "The fulfillment of the promises made to the wage earners included in the old age insurance system depends upon, more than anything else, the financial integrity of the Government."  Protecting Social Security therefore requires not only assuring that the program itself is adequately financed but also putting the overall federal budget on a sustainable long-term course.

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For more information, see this CBPP report:

Kathleen Romig, "What the 2016 Trustees' Report Shows About Social Security," July 12, 2016.

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Bernanke: Shifting Fed Policies

The Fed's shifting perspective on the economy and its implications for monetary policy

Ben S. BernankeMonday, August 8, 2016

The headline on a recent piece by Ylan Mui of the Washington Post —"Why the Fed is rethinking everything"—captured the current moment well. The Federal Reserve has indeed been revising its views on some key aspects of the economy, and that's been affecting its outlook both for the economy and for monetary policy. In this post I document and explain the ongoing shift in the Fed's economic views. I then turn to some implications, suggesting among other things that, for now at least, Fed-watchers should probably focus on incoming data and count a bit less on Fed policymakers for guidance.

Talking about the "Fed's thinking" is of course very loose. There are few official communications from the Federal Open Market Committee (FOMC) as a whole, and those that exist (such as the statements issued after each FOMC meeting) have the prose style that might be expected of a document prepared by a large committee. The usual practice therefore is to try to infer the FOMC's policy inclinations from the views expressed by individual FOMC participants in various forums. To quantify changes in the thinking of FOMC participants, I use in this post the Fed's Summary of Economic Projections, a summary of participants' forecasts that the Committee releases four times a year.

Shifting views on the economy. Each quarter, individual FOMC participants—the Washington-based members of the Fed's Board of Governors and all 12 of the regional Federal Reserve Bank presidents—submit their projections of how they expect certain key economic variables to evolve over the next 2-3 years and in the longer run. "Longer-run" projections are defined by the Fed as the values to which the variables in question are expected to converge under appropriate monetary policy and in the absence of further shocks to the economy; these projections can thus be thought of as the "steady-state" or "normal" levels of the variables, to which the economy tends over time. I'll focus here on FOMC participants' longer-run projections of three variables—output growth, the unemployment rate, and the policy interest rate (the federal funds rate)—and designate these longer-run values by y*, u*, and r*, respectively. Under the interpretation that these projections equal participants' estimates of steady-state values, each of these variables is of fundamental importance for thinking about the behavior of the economy:

• Projections of y* can be thought of as estimates of potential output growth, that is, the economy's attainable rate of growth in the long run when resources are fully utilized
• Projections of u* can be viewed as estimates of the "natural" rate of unemployment, the rate of unemployment that can be sustained in the long run without generating inflationary or deflationary pressures
• Projections of r* can be interpreted as estimates of the "terminal" or "neutral" federal funds rate, the level of the funds rate consistent with stable, noninflationary growth in the longer term

Importantly, standard macroeconomic analysis implies that the three variables above are largely out of the control of the Fed: Potential output growth depends on factors like productivity and population growth, the natural rate of unemployment is determined by various features of the labor market (such as the extent of mismatch between workers and jobs), and, given the inflation rate (which is set by the Fed), the terminal policy rate depends on factors like the rate of return on capital investment and the supply of saving. Changes in policymakers' estimates of these variables thus reflect reassessments of the economic environment in which policy must operate.

So how has the Fed's thinking changed?  The table below shows long-run projections of output (y*), the unemployment rate (u*), and the federal funds rate (r*) made by FOMC participants in June 2016 (the most recent available) and in each June of the prior four years.

Why are views shifting?  The changing views of FOMC participants (and of most outside economists) follow pretty directly from persistent errors in forecasting economic developments in recent years:As the table shows, FOMC participants have been shifting down their estimates of all three variables—y*, u*, and r*—for some years now. The declines in the past year have been particularly striking: Based on the midpoints of the central tendency ranges in the table, between June 2015 and June 2016 the typical participant marked down her estimates of both y* and u* by 0.25 percentage points, while the median estimate of r* dropped by 0.75 percentage points.  Cumulatively, over the past four years, estimated y* has fallen 0.5 percentage points, estimated u* has declined 0.75 percentage points, and estimated r* has fallen by a substantial 1.25 percentage points.  Relative to the underlying variables, these are large changes: For example, over a ten-year period, a potential growth rate of 2.4 percent (the middle of the 2012 range) cumulates to about a 27 percent total gain in output, whereas at 1.9 percent (the 2016 estimate) cumulative growth in ten years is instead about 21 percent, equivalent to a difference of about $1.1 trillion in GDP (in 2016 dollars).

1. Estimates of potential output growth (y*) have declined primarily for two reasons. [1] First, potential growth depends importantly on the pace of growth of productivity (output per hour). [2] Unfortunately, productivity growth has repeatedly disappointed expectations during this recovery. For example, in 2009, leading scholars were predictingproductivity growth in the coming years of about 2 percent per annum; in fact, growth in output per hour worked has recently been closer to half a percent per year. It's possible that productivity may recover, of course, but if it doesn't, then potential growth rates in the future will be lower than had been expected earlier.Second, although Fed forecasters have been too optimistic about output growth in recent years, they have also been, interestingly, too pessimistic about unemployment, which has fallen faster than expected despite the slow rise in GDP. Generally, the unemployment rate tends to fall when output is growing faster than its potential—a basic macroeconomic relationship known as Okun's Law. [3]The observed combination of slow output growth and rapid unemployment declines can be consistent with Okun's Law only if growth in potential output has been lower than thought.
2. The downward revisions to estimates of the natural unemployment rate (u*) largely reflect the fact that inflation has come in lower than forecast in recent years. According to the so-called Phillips curve, another basic macroeconomic relationship, inflation should rise when unemployment is persistently below u*. In 2012, as the table above shows, estimates of u* by FOMC participants centered around 5.6 percent. However, despite the facts that the unemployment rate fell below 5.6 percent in February 2015 and has been at or below 5 percent since last October, inflation has not increased, at least not to the extent expected. Although multiple factors influence inflation, one way to reconcile the recent behavior of inflation and unemployment is to revise down one's estimate of the natural unemployment rate.
3. Downward revisions in the estimates of the terminal or neutral fed funds rate (r*) also have multiple sources. Slower potential output growth implies lower returns to capital investment, and thus a lower r*; and indeed the pace of business investment has been disappointing, especially recently. A lower value of r* could also help explain the relatively sluggish pace of actual output growth, since it would imply that current policy is not as stimulative as previously thought (i.e., the current policy rate is not as far below r* as was believed). FOMC participants also pay attention to market signals: Low longer-term market interest rates imply that investors see a continuation of low real returns, low inflation, and low risk premiums on safe forms of debt, all of which point to a lower federal funds rate in the long run.

In short, over the past few years, and especially during the past 12 months, FOMC participants have significantly revised down their estimates of potential long-run U.S. economic growth, the long-run or "natural" rate of unemployment, and the long-run ("terminal") value of the federal funds rate—all of which are key determinants of economic performance.

What are the implications of these revisions for monetary policy and Fed communications?  Over the past couple of years, FOMC participants have often signaled that they expected repeated increases in the federal funds rate as the economic recovery continued. In fact, the policy rate has been increased only once, in December 2015, and market participants now appear to expect few if any additional rate rises in coming quarters.

What happened? Market commentary on FOMC decisions typically focuses on short-run factors, such as the uncertainty created by the recent vote in the United Kingdom on whether that country should leave the European Union. While such factors do affect the meeting-to-meeting timing of monetary policy decisions, they can't account for extended deviations of policy from its expected path. The more fundamental reason for the shift in policy trajectory is the ongoing change in how most FOMC participants view the key parameters of the economy.

The two changes in participants' views that have been most important in pushing the FOMC in a dovish direction are the downward revisions in the estimates of r* (the terminal funds rate) and u* (the natural unemployment rate). As mentioned, a lower value of r* implies that current policy is not as expansionary as thought. With a shorter distance to travel to get to a neutral level of the funds rate, rate hikes are seen as less urgent even by those participants inclined to be hawkish. Likewise, the decline in estimated u* implies that bringing inflation up to the Fed's target may well take a longer period of policy ease than previously believed. The downward revisions in estimated u* likely have also encouraged FOMC participants who see scope for further sustainable improvement in labor market conditions.

The downward revisions to estimates of y* have mixed implications for policy. On the one hand, lower potential output growth suggests that slow GDP growth may not be due primarily to inadequate monetary or fiscal policy support for aggregate demand, but rather reflects constraints on the supply side of the U.S. economy. If y* is truly independent of Fed policy, as the standard textbook analysis assumes, then a lower estimate of y* implies less scope for monetary policy to increase growth and greater risk of inflationary overheating if monetary ease continues for too long.

On the other hand, as mentioned earlier, the recent decline in productivity growth (and thus in potential output) has been both large and mostly unexpected. Some have hypothesized that this decline is not purely exogenous but has been influenced, to some extent, by short-term economic conditions. For example, the slow recovery from the Great Recession likely impeded capital investment, business formation, and the acquisition of skills and experience by workers, which in turn may have contributed to the disappointing pace of productivity gains. [4] The converse possibility, that stronger economic growth today might have positive and lasting effects on the economy's ability to grow, is for some an argument for erring on the side of more stimulative policies.

The bottom line is that, broadly speaking, FOMC participants' views of how the economy is likely to evolve have not changed much:  They still see monetary policy as stimulative (the current policy rate is below r*), which should lead over time to output growing faster than potential, declining unemployment, and (as reduced economic slack puts upward pressure on wages and prices) a gradual return of inflation to the Committee's 2 percent target. However, the revisions in FOMC participants' estimates of key parameters suggest that they now see this process playing out over a longer timeframe than they previously thought. In particular, relative to earlier estimates, they see current policy as less accommodative, the labor market as less tight, and inflationary pressures as more limited.  Moreover, there may be a greater possibility that running the economy a bit "hot" will lead to better productivity performance over time. The implications of these changes for policy are generally dovish, helping to explain the downward shifts in recent years in the Fed's anticipated trajectory of rates.

FOMC communications also have been affected by the recent revisions in the Fed's thinking. It has not been lost on Fed policymakers that the world looks significantly different in some ways than they thought just a few years ago, and that the degree of uncertainty about how the economy and policy will evolve may now be unusually high. Fed communications have therefore taken on a more agnostic tone recently. For example, President Bullard of the St. Louis Fed has recently proposed a framework which implies that, in most circumstances, economic forecasters can do no better than to assume that tomorrow's economy will look like today's. Other participants, noting earlier failures of forecasting, have argued that (for example) policy should not react until inflation has actually risen in a sustainable way, as opposed to being only forecast to rise. In general, with policymakers sounding more agnostic and increasingly disinclined to provide clear guidance, Fed-watchers will see less benefit in parsing statements and speeches and more from paying close attention to the incoming data. Ultimately, the data will inform us not only about the economy's near-term performance, but also about the key parameters—like y*, u*, and r*—that the FOMC sees as determining that performance over the longer term.

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[1] The two reasons are not really independent:  Both turn on the fact that when productivity growth is low, then, by definition output grows slowly relative to labor input.

[2] Potential output growth also depends on the growth rate of the labor force. However, the slower pace of labor force growth was widely anticipated and thus incorporated into forecasts of potential growth for some time.

[3] Roughly, Okun's Law says that if GDP grows one percentage point faster than potential GDP, then the unemployment rate will fall about one-half percent per year.

[4] The idea that the current level of economic activity can have persistent effects on potential output has been dubbed "hysteresis." Larry Summers is both an originator and a recent proponent of the idea.  It's also received some support from researchers at the Federal Reserve.

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Comments are welcome, but because of the volume, we only post selected comments. 

John Case
Harpers Ferry, WV

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Dean Baker: Trump agenda: more of the same

Trump agenda looks like more of the same

By Dean Baker

Dean Baker is co-director of the Center for Economic and Policy Research in Washington and the author of "Getting Back to Full Employment: A Better bargain for Working People," and "The End of Loser Liberalism: Making Markets Progressive." The views expressed are his own.

(CNN)Republican presidential nominee Donald Trump gave his first major economic address on Monday. Most of the speech was devoted to putting forward a more or less standard set of Republican policies -- Trump promised large tax cuts that would primarily benefit higher-income taxpayers, ending the Affordable Care Act and curtailing government regulation. But he also broke with Republican orthodoxy, rejecting the Trans-Pacific Partnership, proposing renegotiating NAFTA, and vowing to take a firmer stance on currency management and other issues with our trading partners.

What would some of this mean in practice?

Dean Baker

The proposal for tax cuts would put in place a system with three tax brackets of 12%, 25%, and 33%. Trump didn't indicate the cutoffs for the brackets, so it's not possible to determine how much the different groups would save. However, it is certain that the highest-income taxpayers would save under the Trump plan.

Currently, high-income taxpayers pay a 39.6% tax rate on income over $415,000 for a single individual. If a high-level executive or Wall Street trader makes $2.4 million a year (roughly the average for the richest 1%), they would save $120,000 from their tax bill just on the reduction in the top tax bracket. For the richest 0.1%, the savings would average almost $700,000 a year.

Trump also called for large cuts in the corporate tax rate. Currently, corporations pay on averagea bit more than 25% of their profits in taxes. Trump committed to a tax code in which no corporation would pay more than 15% of its profits in taxes. This implies a reduction in revenue from the corporate income tax of more than 25%, or a loss in revenue of close to $100 billion a year.

What Clinton and Trump are ignoring (Opinion)

These tax cuts are virtually certain to lead to large deficits, as occurred with previous tax cuts under President Ronald Reagan and President George W. Bush. Trump has also proposed a substantial boost to infrastructure spending (although, while more spending on infrastructure is badly needed, this will further boost the deficit).

Trump has suggested he will address the deficit by reducing waste, but presidents from both parties have promised to reduce waste for decades. Unless he is prepared to make large cuts to programs like Social Security, Medicare, or the military, it is inevitable that his tax cuts will hugely increase the budget deficit.

Some increase in the deficit would actually be a good thing, because the economy has not yet replaced the demand lost when the housing bubble burst. However, Trump's plan almost certainly goes too far and will lead to high interest rates and/or serious problems with inflation.

Trump's attack on government regulations, meanwhile, are an illusion. While some regulations surely are wasteful, the vast majority serve important purposes, like keeping lead out of the water our children drink. The Dodd-Frank financial reform bill has been a particular target of Trumpand other Republicans, yet small businesses report that credit has never been easier to get.

Meanwhile, the Affordable Care Act, which Trump promises to repeal, has given insurance to millions of people. And contrary to Trump's claims, there is no evidence it has cost jobs. In fact, job growth accelerated after the ACA took effect.

Arguably, though, Trump's position on trade is the most interesting of the policies he has outlined. We would benefit from having more balanced trade, which could create millions of jobs, mostly in manufacturing. However it is not clear that Trump knows how to get there.

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He complained about countries not honoring our copyrights and patents. However, more royalties for copyrights and patents are a tradeoff for a larger trade deficit in manufactured goods. In other words, if we make China and Brazil pay more money to Microsoft for Windows and to Pfizer for its drugs, then they will have less money to buy our manufactured goods. Trump does not seem to appreciate this trade-off and is promising that everyone will get more.

On the whole, the Trump agenda looks like the Republican agenda that we have seen many times before: It centers on large tax cuts for the wealthy and corporations, something that has not worked in the past to create either strong growth or rising living standards for working people. And while Trump does offer a qualitatively different perspective on trade, it is too contradictory to be able to determine if it will actually benefit ordinary workers.

John Case
Harpers Ferry, WV

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Robert Gordon: Can Clinton or Trump Restore Growth?

Can Clinton or Trump Recapture Robust American Growth?

By ROBERT J. GORDONAUG. 8, 2016

The party conventions were rightly characterized as either relentlessly downbeat (Republican) or fervently optimistic (Democratic). The Republican view rests in part on poll numbers that show a solid majority of Americans think that the country is headed in the wrong direction. What has caused this malaise?

Perhaps it's the country's dismal economic growth rate: From 1947 to 2007, the economy grew at 3.4 percent per year. But over the last four years, gross domestic product expanded at only a sluggish 2.0 percent. In 2016, G.D.P.has barely reached 1 percent growth.

In the 2012 election, voters credited President Obama with the recovery from a calamitous recession. But they are now right to ask, "Is this all there is?" In 2016, voters expect Hillary Clinton and Donald J. Trump to provide solutions to the economy's languid growth.

Yet the widespread unease goes beyond slow growth and the accompanying wage stagnation. Underlying deep-seated voter anxiety follows trends that are decades in the making, including fears of insecurity that plague millions of Americans.

Some of these problems can be tackled with bold presidential policies. But there are limits, and other problems may lie beyond the realm of feasible solutions.

Start with the paltry G.D.P. expansion of the past few years. As modest as it has been, it can't proceed at the same rate for much longer, because it has depended in large part on rapidly increasing hours of work as theunemployment rate dropped from 10 percent in late 2009 to 4.9 percent now. With unemployment at close to its minimum feasible, or "natural," rate, further economic growth will be limited by a shortage of skilled workers.

Photo

People waiting in line at a job fair in 2014. CreditShannon Stapleton/Reuters

Presidential candidates who promise faster growth will have to face up to the labor-force constraint. In the 1970s and 1980s, millions of women entered the labor force. Since the mid-1990s, however, female participation has leveled off, and baby boomers are retiring. This labor-force reversal by itself shaves about one percentage point from the growth that is realistic over the next decade compared with the last quarter of the 20th century.

Any economic growth beyond the limited increase in workers will depend on the expansion of output per hour, known as labor productivity. But that, too, has also slowed. From 1995 to 2004, productivity per hour grew at 3.1 percent each year, but at only 1.3 percent since 2004, and an even slower 0.5 percent over the past six years.

Why the decline in productivity?

Rapid productivity growth in the dot-com era of the late 1990s originated in computer manufacturing — information and communication technology equipment — but this manufacturing has vanished since almost all suchequipment is now imported.

This effect of that new technology was another important source of growth. Out went typewriters and calculating machines, replaced by personal computers, spreadsheet and word-processing software, web browsers and e-commerce. Productivity also boomed in retailing, as Walmart and other "big box" stores revolutionized retail selection, layout and supply chain management.

But by 2004, the digital revolution had achieved most of its transition in business methods. Not much has changed in offices and at retail stores since then.

Slow productivity growth feeds directly into voter discontent by limiting wage increases. But as slow as productivity growth has been, wages have risen even less. In fact, real inflation-adjusted median wages have risen more slowly than productivity for most of the past 40 years. There are several reasons for this: Corporate profits have increased their share of the total pie at the expense of a lower share for employee compensation; the rising cost of medical care means that health insurance coverage is taking a bigger bite out of paychecks; and most important, rising inequality has siphoned off much of the extra income produced by productivity gains into the pockets of the top 1 percent.

Voter unease reflects more than the impact of wage stagnation. Globalization and automation have hollowed out manufacturing, eliminating millions of middle-income blue-collar jobs. Roughly six million workers who want full-time jobs hold part-time positions that lack employer-paid medical insurance and force them to juggle irregular schedules. An "atomization" of the workplace has led to the increased use of temporary and on-call workers like Uber drivers and episodic forms of employment that don't offer traditional benefits. Medical insurance with high deductibles and co-payments threatens families with unpredictable financial setbacks in case of a medical emergency.

Furthermore, over the past generation, defined-benefit retirement plans paying a pension have been replaced by defined-contribution plans. These subject retirement savings to the vagaries of the stock market, and many people in their 40s and 50s have not yet recovered the level of real stock market or home equity wealth they had before the Great Recession. With the decline of marriage, there are fewer two-earner families. Young people are emerging from college with a debt burden that in many cases causes them to live with their parents delaying household formation, marriage and children.

Unfortunately for the candidates and the country's prospects, the depth and breadth of these problems go beyond the reach of policies that might nudge the economy's overall output growth rate up by a few tenths of a percentage point. The slow pace of growth has also squeezed tax revenues, restricting the scope of potential government programs.

Policy changes can help: Imposing higher taxes on the superrich and eliminating tax loopholes and deductions that primarily benefit higher-income taxpayers would make some headway both against rising inequality and flagging tax revenue. Minimum wage increases directly attack inequality, because the wage boost to those who retain their low-income jobs substantially exceeds the extent of any resulting job losses.

The tax revenues from a superrich tax surcharge and from loophole-busting tax reform would provide the funds for a huge program of investment following the example of the Interstate Highway System, which is generally regarded as a prime source of robust productivity growth in the 1960s. Mrs. Clinton's proposals thus far include substantial infrastructure spending, and this is an area, along with tax reform, where she has the potential to gain bipartisan approval.

Breaking with most Republicans, Mr. Trump has also recently signaled an openness to a robust infrastructure-spending package.

Yet there are limits to individual policies. A better direction is to follow other nations like Canada, Australia and the Nordic countries. In those countries, insecurity is less acute because government institutions are more robust. Americans look abroad and wonder why we cannot enjoy the benefits of single-payer medical care, paid parental leave, lower-cost college education and uniform income-contingent college debt repayment.

Robert J. Gordon, a professor of economics at Northwestern University, is the author of "The Rise and Fall of Economic Growth: The U.S. Standard of Living Since the Civil War."

John Case
Harpers Ferry, WV

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China's economy growing 5 times as fast as US' [feedly]

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China's economy growing 5 times as fast as US'
// Socialist Economic Bulletin

By John Ross

During the last year some international financial media, with Bloomberg playing a particularly active role, attempted to present a picture of the world economy that the U.S. is growing strongly while the rest of the world, including China, is relatively weak. Publication of new U.S. GDP data confirms the truth is the exact opposite: The U.S. economy has slowed drastically with China growing far more rapidly than the U.S. Indeed, the U.S. in the last year has grown more slowly even than the EU.

Total GDP growth

The wise Chinese dictum says "seek truth from facts." To establish the facts regarding the global economy, Figure 1 therefore shows the last year's growth, up to the latest available data, in the three largest centers of the world economy - the U.S., China and the EU. The pattern is unequivocal. In the year to the 2nd quarter of 2016 China's economy grew by 6.7 percent, the EU by 1.8 percent and the U.S. by 1.2 percent. The U.S. is therefore the most slowly growing major part of the world economy. Making a bilateral comparison, China's economy grew more than five times as fast as the U.S.' during the last year.

These three major economic centers together account for 61 percent of the world's GDP at market exchange rates. No other economies have remotely the same impact on the global economy. Therefore, there is no doubt that in the last year it is the U.S. which has been the biggest drag on the world economy.

Figure 1



Per capita GDP growth

The situation in terms of per capita GDP growth shows an even more dramatic advantage for China. Population growth in China and the U.S. is rather stable - at 0.5 percent a year in China and 0.8 percent in the U.S. China's and America's per capita GDP growth in the year to the 2nd quarter of 2016 is therefore easily calculated - 6.2 percent in China and 0.4 percent in the U.S.

An element of uncertainty, however, exists regarding the EU's population due to the refugee influx. Two estimates for the EU population are therefore used for calculation. One ("EU low population") assumes there has been an influx of 1 million refugees over and above the EU's 2015 0.3 percent population growth. The second ("EU high population") assumes a refugee influx of 2 million.

These assumptions regarding the EU population naturally affect its own per capita GDP growth rate - producing rates of increase of per capita GDP of 1.4 percent or 1.2 percent depending on which population assumption is made. But either assumption confirms the EU's superior per capita growth rate compared with the U.S. - in either case the EU's per capita GDP growth rate is much higher than the 0.4 percent in the U.S.

It is also clear that U.S. per capita GDP growth, at only 0.4 percent, was extremely stagnant. During the last year, EU per capita growth was approximately three times as fast as the U.S. But China's per capita GDP growth entirely outperformed both. China's per capita GDP growth was more than 14 times as fast as the U.S.!

Figure 2



U.S. economic deceleration

It may be argued against these factual trends that future revisions to the U.S. may raise its estimated growth rate. This is a factual question which requires watching future data releases - it is also possible future data will revise U.S. growth downwards. U.S. GDP growth is sufficiently close to the EU's, with a 0.6 percent gap, that is not impossible that U.S. GDP growth will be seen to be faster than the EU - although of course U.S. GDP growth will remain far slower than China. However, it may easily be demonstrated that huge revisions of the U.S. data would be required to alter the pattern that it is the U.S. economic slowing which has been the main cause of the downward trend in world economic growth.

To demonstrate this, Figure 3 shows year on year growth in China, the EU and U.S. for successive quarters since the beginning of 2015. The changes over that period are clear. The EU has maintained relatively consistent GDP growth of 1.8 percent. China's GDP has slowed slightly from 7.0 percent to 6.7 percent. U.S. GDP growth however fell sharply from 3.3 percent to 1.2 percent.

Compared to the beginning of 2015, EU GDP growth has not fallen at all, China's declined by a mild 0.3 percent but the U.S. decelerated by 2.1 percent. By far the most severe slowdown in the world economy has therefore been in the U.S. Only huge, and therefore highly implausible, revisions in U.S. data would be required to alter this pattern.

Figure 3



Conclusion

What therefore is the conclusion of the examination of the actual factual trends in the world economy?

· China continues to be by far the most rapidly growing of the major international economic centers. China's total GDP in the last year grew over five times as fast as the U.S., and China's per capita GDP growth was over 14 times as fast as the U.S.

· The chief cause of the slowing of the world economy in the last year is the slowdown in the U.S.

· The EU and above all China have outgrown the U.S. in terms of total GDP increase.

· U.S. per capita GDP growth, 0.4 percent on the latest data, is extremely slow.

· During the last year China and the EU have undergone either no or only mild economic slowdown while the U.S. has suffered a severe economic deceleration.

The factual situation of the world economy is therefore that not only has China been growing far more rapidly than the U.S. but even the EU has been growing more rapidly than the U.S.

Gross inaccuracy in international financial media regarding China is not unusual - they have, of course, been regularly predicting the "collapse of China" and a "China hard landing" for several decades. But the picture presented that the pattern of growth of the global economy has been strong growth in the U.S. and weak growth in China is therefore entirely false - it was the U.S. which showed to the weakest growth. Titles from Bloomberg this year such as "Fed Leaves China Only Tough Choices," "Why China's Economy Will Be So Hard to Fix," and "Soros Says China's Hard Landing Will Deepen the Rout in Stocks," coupled with claims of the strong performance of the U.S. economy, are shown by the data to be simply inaccurate.

But international and Chinese companies, as well as the Chinese authorities, require strictly objective information - not claims which are the opposite of the facts. Perhaps the wise Chinese dictum should be modified to read "seek truth from facts - not from Bloomberg."

The above article is reprinted from China.org.cn
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Jared Bernstein: Size of gov’t and growth–not what you’d expect (if you expect a negative correlation) [feedly]

Size of gov't and growth–not what you'd expect (if you expect a negative correlation)

Jared Bernstein

http://jaredbernsteinblog.com/size-of-govt-and-growth-not-what-youd-expect-if-you-expect-a-negative-correlation/

I'm willing to accept that, at least for now, I've got an illness that causes me to see everything through the lens of the presidential election. However, much in the way some bacteria protect you from getting sick, in this case my illness is arguably useful in clarifying a seriously erroneous point that conservatives constantly tout despite much evidence to the contrary.

Let me telegraph the punchline: While overall growth has slowed in the United States in recent decades, it has also slowed in most other advanced economies. And governments in these economies have very different policy footprints, including taxes, social policy, and where they draw the line between the public and private sectors. This suggests there's little in the way of correlation between the size of government and growth. So, when you hear the conservative mantras about "job-killing taxes" and "government spending that's killing growth," often with President Obama's name sprinkled in there somewhere, be aware that it's an ideological, not an empirical, claim.

We begin with a figure from Saturday in the New York Times, showing slowing real per-capita GDP growth across these advanced economies: the United States, the euro area and Japan (the figure shows annualized 10-year average growth rates).

Source: New York Times

Most people's first question upon looking at such a figure is "Why?!" That's a good question (and the subject of the article; see link above) about which I'll say a word or two later. But the point here is that it's happening in the United States, where government spending is below average; in Japan, where it's a few percentage points of GDP higher; and in the euro area, where it's considerably higher.

An important new book, "How big should our government be?," goes deep into this question of government footprint and growth. The figure on the left below plots real GDP growth (per capita, which is the right way to do this), against the change in tax revenue as a share of GDP. The "growing-tax-burden-kills-growth" mantra predicts a negative slope. The actual slope, as you see, is positive.

Source: "How big should our government be," Bakija et al.

The figure on the right, tax revenue as a share of GDP, shows how low we are relative to these other countries, some of which do better than we do on growth per capita. The authors of the book, using data on 12 advanced economies starting all the way back in 1870, conclude:

"In the century and a half since then, government expenditures as a share of GDP have risen sharply in these countries. Yet they didn't experience a slowdown in their longrun economic growth rates. The fact that economic growth has been so stable over this lengthy period, despite huge increases in the size of government, suggests that government size probably has had little or no impact on growth."

Their measured conclusion is warranted. That positive slope in the figure on the left above could easily be a function of reverse causality: As economies grow, their citizens demand more from them. So we're in the realm of correlations here, not causation. But the conclusion holds: Claims that more government crushes growth are simply not supported by the data.

Once reason that's true, and this bit is clearly causal, is that government investments in public goods such as public infrastructure, human capital and poverty prevention have long been found to be pro-growth. By definition, the private sector will underinvest in such goods because they can't easily profit from them.

Getting back to the first figure above (which shows long-term slower growth rates at times of slack in the economy), such investments can also play a key stimulative roll, replacing inadequate investment and labor demand that's not forthcoming from the private sector. While the figure above is obviously telling a long-term story, I'd suggest that the lack of such public investments, recently sacrificed at the altar of budget austerity, is one culprit.

This implies that, contrary to the claim that the size of government is the problem, smart government investment would be a solution right now (and, yes, there's also wasteful government investment; I'm not talking about "bridges to nowhere").

But my main point is that when you hear people make blatant references to "job-killing taxes and regulations," they're blowing smoke. Don't inhale, and quickly leave the area.

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