Government Accounting

Jason Delisle and Jason Richwine write,

the government’s official method for estimating cost is incomplete. It fails to incorporate the cost of the market risk associated with expecting future loan repayments. So-called “fair-value accounting,” an accounting method favored by the vast majority of finance economists as well as the CBO itself, factors in the cost of market risk. The difference transforms the official student-loan “profit” into a loss, for a budgetary swing of $279 billion over ten years. That figure demonstrates why the stakes are so high in the debate about fair-value accounting.

I recommend the entire essay. I would like to make changes to government accounting a top economic priority, because I think that avoiding a debt crisis ought to be a top priority.

If you ignore risk, then the government can appear to make a profit with all sorts of loans and loan-guarantee programs. I would go beyond fair-value accounting and subject the government budget to stress-testing, to give a measure of risk exposure.

Social Security as a Public Bad

Robert Fenge and Beatrice Scheubel write that they provide,

an empirical confirmation of the negative relationship between statutory old-age insurance or more broadly statutory social insurance and fertility. The effect amounts to a total reduction of approximately 1.7 marital births per 1000 between 1895 and 1907… [the] impact of pension insurance is comparable to the impact of an increase in urbanisation by 10-20%.

Pointer from Brian Blackstone

Off hand, it would seem to me that any form of capital accumulation by the elderly could have this effect. Private pensions certainly, and perhaps even private savings for retirement. But it might be argued that there are huge negative externalities in public pensions, in that they allow you to benefit from my having children.

New York City Pensions

The NYT reports,

Next year alone, the city will set aside for pensions more than $8 billion, or 11 percent of the budget. That is an increase of more than 12 times from the city’s outlay in 2000, when the payments accounted for less than 2 percent of the budget.

I could see the same thing happening where I live, in Montgomery County, Maryland. At some point, citizens will be paying much of their taxes not for current services but instead to try to keep unsound pension systems afloat.

Megan McArdle writes,

The core problem is that returns have not tracked with the city’s optimistic projections. In 2012, the city finally lowered its projected return to 7 percent from 8 percent, but after decades of excessive optimism, that left it with a giant hole; the payments had to be stretched out over more than two decades in order to minimize the fiscal hit. Yet this still may not be enough; it’s possible that 7 percent is still too rosy.

And of course, as many people have pointed out, a private firm’s auditors would not sign off on this sort of pension accounting.

Two SNEP Goals Connected

Jed Graham writes,

The $2.8 trillion Social Security Trust Fund is on track to be totally spent by 2030, the Congressional Budget Office said Tuesday. That’s one year earlier than projected in 2013 and a decade earlier than the CBO estimated as recently as 2011.

Graham points out that lower estimates for employment are contributing to the more adverse outlook for Social Security. I would say that this links two of the three main goals for SNEP, one of which is to increase employment and another of which is to work toward a sustainable Federal budget.

In fact, the third goal, to get the FCC and the FDA out of the way of progress, also links to the other two.

Rubio Touches the Third Rail

Andrew Biggs writes,

Included in Sen. Rubio’s ideas are:

–Social Security solvency: Rubio would gradually increase the retirement age in line with life expectancies and reduce the growth of benefits for higher-earning individuals. In addition, Rubio favors strengthening the safety net for lower-income retirees.
–Delayed retirement: Rubio would eliminate the 12.4% payroll tax for retirement-age individuals to encourage them to stay in the work force. I really like this idea and wrote on it for the Wall Street Journal.
–Open the TSP: Rubio would allow workers who are not offered retirement plans by their employers to participate in the federal government’s Thrift Savings Plan, the DC pension for government employees. In a way, this builds upon the President’s myRA proposal, but allows for greater choice in investments.

I am a big fan of indexing the age of eligibility for retirement benefits to average life expectancy at age 60. I would like to see that done for Medicare as well. People can still retire when they are younger and healthier, but not on someone else’s nickel.

But Inequality is the Defining Problem of Our Time

Lawrence Kotlikoff writes,

The US fiscal gap now stands at an estimated $205 trillion, or 10.3 percent of all future US GDP. Closing this gap is imperative, and requires a fiscal adjustment of an immediate and permanent 37 percent reduction in spending (apart from servicing official debt), an immediate and permanent 57 percent increase in all federal taxes, or some combination of the two. The necessary size of this adjustment increases the longer it is put off.

Labor Force Participation Chartfight

1. John Cochrane presents a chart showing that over the last 25 years, the employment-population ratio tracks the ratio of people aged 25-54 to the total population.

Pointer from Mark Thoma. The chart is from Torsten Slok of Deutsche Bank.

2. John Taylor has a chart showing that the labor force participation rate is several percentage points that which was projected several years ago based on demographics. The chart comes from a paper by Chris Erceg and Andy Levin.

The first chart suggests that most of the decline in the employment/population ratio in recent years is due to demographic changes. The second chart suggests the opposite. How to reconcile the two?

3. And then there is Binyamin Appelbaum:

In February 2008, 87.4 percent of men in that demographic had jobs.

Six years later, only 83.2 percent of men in that bracket are working.

Pointer from Tyler Cowen.

My verdict is that Slok’s chart, referred to by Cochrane, is misleading. Here is the chart:

The way that the two lines are superimposed makes it appear that 2007 was a glorious year of over-employment, and the plunge in the employment-population ratio looks like a reversion to trend. Suppose you were to slide the blue line up vertically so that it just touches the red line at the peak in 2007. That would make the chart look much more like Appelbaum’s, shown below:


Some other issues:

–I suspect that some of the drop-off in employment has occurred among youth, who are outside of the 25-54 bracket that Slok uses.

–Another issue is what you think should have happened outside Slok’s bracket at the other end, namely 55-64 year olds. These are baby boomers, so that their share of the labor market has been soaring. The most likely reconciliation of the two charts is that the baby boomers have been retiring early at rates higher than historical norms.

As far as labor force participation goes, is 55 the new 65? If so, then somebody should trace out what that means for Social Security. Fewer people paying in and more people collecting disability cannot be a good thing for solvency.

Update: Cochrane offers another take, more nuanced.

Crowding Out

Timothy Taylor writes,

Huntley describes the central estimate about the long-run effects of more government borrowing based on the review of the evidence like this: For each additional dollar of government budget deficit, private saving rises by 43 cents, and the inflow of foreign capital rises by 24 cents. Thus, [e]ach additional dollar of deficit leads to a 33 cent decline in domestic investment.

Jonathan Huntley works for the Congressional Budget Office. Taylor links to the full report. I like the way that Taylor explains the issue.

A few remarks:

1. A Keynesian would be quick to note that crowding out varies over the business cycle. When the economy is weak, there is excess saving, and there is no crowding out.

2. Larry Summers’ hypothesis of secular stagnation says that there has not been crowding out for two decades.

3. I have never heard a conservative economist complain about crowding out during a Republican Administration.

4. I have never heard a liberal economist complain about crowding out, ever. Complaining about (3) does not count.

This report comes out at a time in which the CBO has gotten an unusual amount of negative press. See this WaPo story, for example. Some remarks about this:

1. I think it is difficult for journalists or the general public to understand that some economic estimates are more unreliable than others. For example, estimating the cost of a government program is subject to some error, but most of the time you can get in the ballpark. There is more uncertainty about revenue from tax changes, because of behavioral responses, but one can still arrive at a reasonable range of estimates. On the other hand, estimating the macroeconomic impact of fiscal policy (the so-called multiplier) poses a much higher level of difficulty. You need a macroeconomic model. You need to take a position on the theory of monetary offset. When I was invited to give a lunch talk at CBO, I tried to emphasize that the difference between the uncertainty involved in macroeconomic forecasting and analysis on the one hand and the uncertainty in forecast and estimating the cost of a government program is a matter of kind, not just of degree. And I recommended that CBO should do something to emphasize this to the public. The crowding-out analysis is one that I would put in the high-uncertainty category.

2. It disturbs me that the press takes shots at the CBO only when the analysis raises doubts about progressive policies. If you are not going to raise doubts about CBO analysis of the stimulus, which is based on models that by now are far out of the mainstream, then you should not raise doubts about legitimately mainstream analysis of minimum wages, the employment effects of Obamacare, and, yes, crowding out.

3. Progressives who attack the CBO may be seeking a short-term gain in material at a long-term positional cost. Looking ahead a few moves, I do not think it helps progressives if they convince the public to distrust nonpartisan government experts.

Austerity

Chris Edwards dissects it.

Transfers are the largest and fastest-growing activity. Since 2000, transfers have grown at an annual average rate of 6.7 percent, which compares to purchases at 6.0 percent, compensation at 5.5 percent, and aid to the states at 5.0 percent. Total federal spending grew at 5.5 percent during this period, while the consumer price index grew at just 2.4 percent.

The CBO on the Budget Outloook

Director Elmendorf warns,

CBO estimates that federal debt held by the public will equal 74 percent of GDP at the end of this year and 79 percent in 2024 s. 4 (the end of the current 10-year projection period). Such large and growing federal debt could have serious negative consequences, including restraining economic growth in the long term, giving policymakers less flexibility to respond to unexpected challenges, and eventually increasing the risk of a fiscal crisis (in which investors would demand high interest rates to buy the government’s debt).

Some possibilities:

1. The CBO are Koch-funded austerians.

2. Just like the reduction in hours worked that the CBO forecasts for Obamacare, eventually increasing the risk of a fiscal crisis is actually a good thing.

3. More government debt gives the Fed more debt to buy, which in turn makes the stock market happy.