Beat the Press

Dean Baker's commentary on economic reporting


Escaping With the Trust Fund

Folks, I am off for a weeklong vacation. I will not be back at my blogging duties until Monday, June 12th. In the meantime, my colleagues at CEPR, Heather Boushey, David Rosnick, John Schmitt, and Mark Weisbrot will be intermittently filling in.

I should also warn that there may be somewhat more delay before your comments get posted. Comments to the blog are moderated, and I can’t guarantee the pace at which items get posted in my absence.

I am sorry to leave in the middle of a lively debate on the Social Security trust fund. I am sure that there will be no difficulty reaching consensus on this issue in my absence.


Fiction on the Social Security Trust Fund

Nothing like some comments on the trust fund to get the blogging juices flowing. It is amazing how metaphysical these discussions on the trust fund get. I don’t really see anything very complicated here. I am simply referring to the law as it stands.

Under the law, Social Security can only pay benefits out of the money that it has in its trust fund. Yes, that means it has a separate account from the rest of the budget. If the budget has an enormous surplus, but the trust fund is empty, then no benefits get paid, that’s the law. On the other side, if the government has an enormous deficit, but the trust fund still holds bonds, then Social Security benefits still get paid, that’s the law. I have not commented on whether I like the law or not, I am simply describing the law. (By the way, Medicare is currently being financed in part by the bonds held in its trust fund, and I have not heard a single politician make an issue of this.)

Under the law, there is absolutely nothing that would suggest the bonds held by the trust fund are fictional. They are legal obligations, just like the bonds held by banks and private individuals. As President Bush rightly pointed out last year, they are “sheets of paper.” That is true of other bonds, stock certificates and most other claims to wealth in a modern economy. Maybe there are a lot of folks out there who carry around gold, but for my part, I don’t know of any.

Could Congress change the law? Of course, Congress passed the law and it has the legal authority to change it. My guess is that any Congress that voted to default on the bonds held by the trust fund would be massacred at the polls, but that is just speculation. I will say that I do not know of a single member of Congress who has publicly called for defaulting on the debt.

In any case, if people are trying to understand Social Security’s finances, they should understand what those finances are under the current law, not the law that some oped writer or Washington Post editor would like to exist.

Libeling Social Security

One of the disadvantages of having a public Social Security system is that people are free to make all sorts of untrue statements about it without facing any consequences. For example, an oped in the Washington Post this morning described the Social Security trust fund as “largely an accounting fiction.” This statement is of course absurd. The trust fund consists of U.S. government bonds, which the government is obligated to repay under the law. There is no sense whatsoever in which it can accurately be described as fictional.

Because Social Security is an agency of the government, the author is free to impugn the soundness of Social Security's financial situation with impunity, and the Post need not fear any consequences from printing this libel. On the other hand, if the author had made similarly untrue claims about the financial status of General Electric or Microsoft, the paper would be quickly greeted with an angry call from some honcho corporate lawyer. The correction would already be up on the website and ready to run in tomorrow’s paper. Maybe privatizing Social Security wouldn’t be a bad idea.

There's Still Good Paying Jobs for CEOs

Gretchen Morgenson had a good piece in the Times documenting some of the ways in which corporate boards manage to dish out bonuses to CEOs even when they miss performance targets. With all the scandals in CEO pay over the last decade, it is remarkable that this sort of nonsense persists unchecked. Clearly there is a structural imbalance, with top executives being able to pilfer corporate coffers to enrich themselves at the expense of shareholders.

It would be a simple matter (legally, if not politically) to change some of the rules of corporate governance to redress this imbalance. For example, how about requiring that the compensation of packages get sent out for shareholder approval at regular intervals? Suppose the rules also require that shareholder proxies that don't get returned don't count? (The standard practice now is that unreturned proxies are counted as supporting management.) How about also making corporate directors personally liable for not using proper care in setting CEO pay? (See the chapter on corporations in the Conservative Nanny State.)

Inflated CEO pay is not just a question of taking money from shareholders. These outsized salaries set standards that infect pay scales throughout the economy. It is now common to see university presidents pulling down salaries in the high six figures. Even heads of charities often draw salaries in this range. Restoring the balance in pay for corporate CEOs could reverse this recent trend.


Does Henry Paulson Advocate a Large Trade Deficit?

According to press accounts, Mr. Paulson is an ardent believer in a strong dollar. Regardless of what you think of the budget deficit, the strong dollar IS the reason for the trade deficit.

This is not really a contestable point. No one opts to buy imported goods rather than domestically produced goods because of the budget deficit. They buy imported goods because the strong dollar makes them cheaper. It really is that simple.

Of course, the United States cannot continue to run large trade deficits indefinitely. And the trade deficit is more than twice as large as unified budget deficit (it’s more than 50 percent larger than the on-budget deficit). It might be cause for concern that our new Treasury secretary is a big advocate for enlarging the country’s most unsustainable deficit, but you wouldn’t get this from any of the reporting.

The high dollar policy is also redistributive since it puts downward pressure on prices and wages in the sectors of the economy exposed to international competition (e.g. manufacturing). This hits less skilled workers to the benefit of the highly educated workers in protected sectors of the economy (e.g. doctors, lawyers, accountants and economists).

It would have been worth including comments from representatives of the industrial sector about Mr. Paulson's selection. Incredibly, none of the reporting I saw even raised this set of issues.


Should Anyone Care About Consumer Confidence?

I have always considered the consumer confidence index to be one of the least valuable releases of economic data. Consumer spending is hugely important for the state of the economy, but the index provides very little information about the direction of spending. The index includes two components, a current situation component, which does track current spending reasonably well (and therefore has little predictive value about the future), and an expectations component which is highly volatile and has very little predictive value.

The Times had a piece on the recent dip in consumer confidence this morning that backs up my view. The article includes a chart that shows the latest reading for the index is near its 2002 levels, when real consumer spending rose at a respectable 2.5 percent annual rate and the savings rate fell by more than a percentage point. In other words, a low consumer confidence index did not seem to have much impact on consumption growth.

The index probably does give useful information about public attitudes, which can make a big difference politically (at present, high gas prices are making many people feel stretched and angry), but it is not telling us much about the direction of consumer spending or the economy.

Washington Post Corrects Mexico’s Post-NAFTA Growth Rate

It took 43 days, but the Washington Post did finally correct an April 17th news story that had Mexico’s economy growing at a 17.5 percent annual rate in the period since the passage of NAFTA. This is longer than one would hope, and it required much more prodding from my colleagues at CEPR than should have been necessary, but it is still good to see that the paper felt a responsibility to correct such a blatant mistake.


Immigrant Labor and Supply and Demand

The Times had an article this morning that explained the immigration problem in very simple terms, "this many jobs; only this many visas." As the article reports, there are a huge number of less-skilled jobs waiting to be filled by immigrants, but almost no visas are available for immigrants to come across the border and work at these jobs legally.

To prove this case, the article quotes Stephen P. Gennett, president of the Carolinas chapter of the Associated General Contractors of America (a builders’ trade group), “we have a problem here, a people shortage.”

While Mr. Gennett is undoubtedly knowledgeable about the state of the labor market for construction workers, he also represents an organization that has a clear interest in this issue, they want cheap labor. Ordinarily, the claim that there is a people shortage would imply that wages are rising at an extraordinary rate. (This is the way economists ordinarily think about markets – shortages mean higher prices.) This means that there is a quick way to verify Mr. Gennett’s claims about a people shortage: see if wages in construction have been rising at an extraordinary rate.

A quick trip to the Get Detailed Statistics section of the Bureau of Labor Statistics website tells us that inflation adjusted wages for construction workers have actually fallen about 5 percent since 1980, a period in which productivity has increased by more than 70 percent. So, we have wages falling in spite of a labor shortage – not where I learned my economics.

Labor is a cost to employers, and they would all like to get their labor as cheaply as possible. The Times would like to hire reporters for $25,000 a year. While there are plenty of smart people in places like India and China who would be happy to work for the Times at this wage (and could do a very good job), reporters and other higher paid professionals are powerful enough lobbies to largely foreclose this option. But, let’s be clear. There is no more a shortage of workers for low-paid jobs than there is a shortage of workers for higher paid jobs. The difference is simply that the workers who perform less-skilled work have less political power to protect themselves against the efforts of employers to get low cost immigrant labor.