April 07, 2011
Representative Ryan's Roadmap: Interesting Implied Macro Impacts
I've read and re-read the Heritage Foundation's analysis of how the projections for the Ryan plan were developed. I'm sure it's my own failing, but I still don't quite understand what is going on. And this is after Heritage took down their original documentation that indicated unemployment would eventually hit 2.8%.
Even ignoring the unemployment number (which seems to have moved a bit, although not reported in the document), I thought it worthwhile to mention the other oddities of the report.
First, it is important to note that the simulation forecasts relative to the CBO alternative fiscal scenario, rather than extended baseline, as would typically be the case. Obviously, this makes the Ryan plan "look better" in terms of budget deficits and (given Heritage's modeling approach incorporating substantial supply side effects) in terms of growth.
Second, it is very interesting to take a look at the forecasts. For GDP (Figure 1), the forecasts imply a noticeable increase, amounting to a 2.4% higher GDP (in log terms, relative to baseline) by 2021. Perhaps reflecting the assumptions built into the model, despite reduced effective personal tax rates (see Appendix 3 tables), personal tax receipts are higher (Figure 2).
Figure 1: GDP, bn Ch.2005 actual and CBO projected (blue line); and simulated under Ryan plan (red line). Source: CBO, Budget and Economic Outlook (January 2011), and Heritage Foundation, Appendix 3: Simulation Results.
Figure 2: Baseline personal income tax receipts baseline (blue line); and simulated under Ryan plan (red line). Source: Heritage Foundation, Appendix 3: Simulation Results.
I suspect (but do not know for certain) that this counterintuitive (to me) result can be understood if one reads this paragraph in the Heritage document (retrieved as of 4/6 8pm Pacific, version updated as of 4/6 11am):
Average Effective Personal Tax Rates. The add factor on the average effective federal personal income tax rate was changed by the percentage change from the baseline estimated in the microsimulation model. Adjusting the add factor allows for the dynamic indirect effects could continue to influence the average effective tax rate. The simulation was solved in stages. The final stage endogenously re-estimated the add factor on the average effective rate in order to target the percentage of revenue to GDP outlined in the House Budget Resolution.
Given my research interests, I found of particular interest the projections for the trade balance and foreign assets in the U.S. These are shown in Figures 3 and 4.
Figure 3: Net exports baseline (bn Ch.2005$ (blue line); and simulated under Ryan plan (red line). Source: Heritage Foundation, Appendix 3: Simulation Results.
Figure 4: Foreign assets in the U.S., bn$ at current cost, baseline (blue line); and simulated under Ryan plan (red line). Source: Heritage Foundation, Appendix 3: Simulation Results.
Figure 4 is hard to interpret; it indicates foreign holdings of US assets rise. Since the budget deficit is supposed to be smaller over most of the period of analysis, it's hard to think this is higher foreign acquisition of Treasurys. On the other hand, this makes sense (kind of) given the larger net export deficit implied by Figure 3. I say "kind of" because the nominal current account should be linked to the current cost U.S. net international investment position, and not necessarily linked to a gross liability stock. Without more information regarding the innards of the model, and other assumptions, it's difficult to determine why the foreign asset result occurs (and whether it is a consequential result).
In addition, Figure 3 is really hard for me to understand. Certainly, from a demand side perspective, the contractionary impulses arising from re-allocating health care burdens directly onto seniors and cutting government discretionary spending would be contractionary. So the source of this deteriorated trade balance must be attributable to some supply side effects. The rise in personal tax receipts (relative to baseline) despite a cut in the effective tax rate (see Appendix 3 tables) is consistent with the view that the expansionary effect emanates from the supply side. It might also come about from the increased amount of capital goods imports that arises from higher investment in plant and equipment.
This impression is buttressed by this passage, regarding how reduction in Federal debt levels work their way through the economy (page 13).
Cost of Capital. The cost of capital changes are affected directly and indirectly by the dynamic effects. (1) Lower corporate tax rates reduces the value of the interest rate deduction, which can put upward pressure on the cost of capital. (2) Lower corporate tax rates, though increase the after-tax rate of return to capital, which puts downward pressure on its cost. (3) Lower government spending decreases the demand for borrowed funds, which puts downward pressure on the cost of funds. (4) Labor and capital trade-offs as labor supply increases also plays an indirect role. These effects were all allowed to operate and then an adjustment was made to the federal funds rate, ten-year treasury rate, and corporate triple-A bond rate for the estimated percentage change in government debt. The model was then re-solved with this adjustment.25
Private Investment. Economic studies repeatedly find that government debt crowds-out private investment although the degree to which it does so can be debated.26 The structure of the model does not allow for this direct feedback between government spending and private investment variables. Therefore, the add factors on private investment variables were also adjusted to reflect percentage changes in publicly held debt. This can also put upward pressure on the cost of capital (thus helping the model balance the demand and supply effects on the cost of capital). [emphasis added -- mdc]
I believe a reduction in prospective net debt-to-GDP levels does have an impact on interest rates. . The resulting effect on investment is a subject of considerable debate.
Here is my comment on my previous interchange with a Heritage Foundation analysis, based at least in some part on the IHS Global Insight model.
Since I'm not sure what's going on in the Heritage CDA simulations (even the head economist at IHS Global Insight, which the simulations are supposed to be partly based upon, can't quite figure out what is going on ), I'm going to forego the Heritage forecasts, and fall back on assessments from the CBO. Note, the CBO does not do "dynamic scoring" -- incorporating feedback effects from budgetary measures into macro outcomes. (More on dynamic scoring:  
As shown in Table 1, the Ryan plan actually yields a larger debt-to-GDP ratio than the extended baseline by 2022 (but less than the CBO Alternative Fiscal Scenario). Clearly, as we pass the transition phase, the gap between the debt-to-GDP trajectory widens, by virtue of cutting benefits by fiat.
Table 1 from CBO.
The impact on the burden of health care costs (which actually rise faster under the Ryan plan) is shown in Figure 1 from the CBO letter.
Figure 1 from CBO.
That is, the burden is shifted onto the recipients substantially; and the burden itself will be larger.
Update, 1:40pm Pacific: Paul Krugman scooped me by a day in noting that the Heritage CDA analysis of the Ryan plan invokes supply side effects of implausibly large proportions. For my quantitative view of "fantasy scenarios" such as these, see this post.
Posted by Menzie Chinn at April 7, 2011 11:35 AMdigg this | reddit
The Heritage Report suffers from the inductive/deductive presentation issues. Their analysis is deductive, ie, the key items are farther down, and this makes it hard to follow.
What is their purpose? Are they selling or analyzing? I would presume they're selling. (If they're not prepared to criticize the proposal, they're selling.) For selling, inductive form would be better.
So, two sentences of intro ("Paul asked the Heritage Foundation's Center for...to...") then, the vision for the future (one sentence): "The Paul budget envisions an America more self-reliant, dynamic, prosperous and healthy..." Then key policy changes reflecting the vision and their impacts in four bullet points max.
After that comes methodologies, more minor initiatives, etc.
You know, I watched Mr. Smith goes to Washington last night.
Posted by: Steven Kopits at April 7, 2011 12:56 PM
"Perhaps reflecting the assumptions built into the model, despite reduced effective personal tax rates, personal tax receipts are higher."
Dynamic scoring! That, plus one part unicorn horn and two parts rainbow, means tax cuts increase revenue. Doesn't Art Laffer work occasionally at the Heritage Foundation? That would explain a lot.
Posted by: Joseph at April 7, 2011 12:58 PM
Menzie: I've read and re-read the Heritage Foundation's analysis of how the projections for the Ryan plan were developed.
Hours of your life that you'll never get back.
Posted by: 2slugbaits at April 7, 2011 01:27 PM
So, why don't we compare the two submitted budget submissions to date, Obama's request against Ryan's resolution? Maybe, if the Dems in the Senate can get a budget resolution built and passed, then we can get down to comparing apples and apples in normal progression.
Wouldn't that be novel????
But instead we are trying to compare analyses of the House's Resolution, a blue print for further budget legislative actions.
Posted by: CoRev at April 7, 2011 03:25 PM
I enjoy reading Heritage's analysis papers because they lie so bluntly and with a straight face. In an earlier analysis on the budget, they described how the non-defense discretionary budget was the problem, but you had to read through the tables to find that they'd rather bluntly done a few neat, dishonest things: they'd arbitrarily taken out a percentage of tax receipts off the top line and they simply lied about the percentage increases in the areas they pointed at (they didn't actually rise in their own projections). The entire thing was an exercise in saying that if you cut tax revenue by some percentage and leave the rest alone then you have a budget deficit, but they unartfully for anyone who actually reads made that into a case for cutting spending.
This one is even more silly. As you note, they fudge a bunch of numbers so their projections equal what the GOP asked for as revenue. In other words, they don't actually evaluate the revenue effects of the tax proposals but play with the numbers until they equal the desired total. That's a doozy. When CBO looked at the original, Ryan had them use his revenue numbers. I gather the idea now is to make it look like the numbers are real. Ha- ha.
To ramble for a moment, I'm very troubled by the way this plan "privatizes." To be brief, they take money sent directly to providers for care and route that through a middleman who has much higher admin costs - and marketing costs Medicare doesn't. Besides the obvious point that this is a net reduction in payments to providers unless we gross up the payments by a guesstimate of about $200B a year, this turns the insurance industry into a quasi-governmental bureaucracy which pushes paper. They are, bluntly, taking productive money and transforming it into unproductive paper pushers funded by the federal government. I don't understand how anyone could think that is free market enterprise; it's closer to statism. Putting aside the incredible disincentives for any person to be a doctor, how could it be good for the country to take a large percentage of our GDP - health - and convert it from actual payments for actual services into paper pushing? That is, to me, like saying we want to run in a race after blowing off a foot with a shot gun.
Posted by: jonathan at April 7, 2011 04:03 PM
Lower corporate tax rates reduces the value of the interest rate deduction, which can put upward pressure on the cost of capital. (2) Lower corporate tax rates, though increase the after-tax rate of return to capital, which puts downward pressure on its cost.
At first blush this sounds reasonable enough. And it seems to fit with intuition. But let's think about this for moment. What Heritage seems to be getting at is that a lower tax rate will increase the amount of physical capital available to workers, which would increase productivity and push out the AS curve. Let's suppose that a company wants to finance a capital expansion project through debt. And we'll ignore inflation and depreciation allowances and we'll assume a zero corporate tax rate. If the interest rate is 10%, then the firm will want a capital stock level of "Ko" that generates a marginal product of capital equal to 10%. Now suppose the tax rate goes to 35% but the firm is able to deduct the interest cost. The same capital stock level of "Ko" will yield an after-tax marginal product of capital equal to 6.5% because 3.5% will go to taxes. But if the firm is allowed to deduct interest costs, then the after-tax cost of capital will also be 6.5% as well because the firm is able to deduct 35% of the interest payments from taxes. Notice what's going on here. Absent inflation and depreciation costs and assuming debt financing with deductible interest, the corporate tax rate has zero effect on the actual level of the capital stock. So the Heritage analysis quite literally does not add up. It's ersatz economics. If lowering the corporate tax rate doesn't have any effect on the actual level of the capital stock, then where's the supply side boost?
Posted by: 2slugbaits at April 7, 2011 04:16 PM
Frankly I do not understand why serious economists pay any attention to the shill houses like Heritage. Laffer economics has been definitively disproven--but its proponents keep trotting it out. Its like denying the holocaust--just not serious.
Posted by: lee at April 7, 2011 05:26 PM
CoRev The Obama Administration did submit a FY2011 budget...over a year ago (1 Feb 2010).
What's preventing us from comparing apples to apples and oranges to oranges is the fact that Ryan's plan is neither apple nor orange...it's a turd.
But I do think the Democrats in Congress deserve a lot of the blame. They should have rammed through Obama's budget last fall.
Ryan's plan is typical of the kind of stuff you see from someone who learned just enough introductory economics at a small liberal arts school to be dangerous, but somehow never got around to taking the graduate level stuff. And the fact that Ryan relies upon Heritage Foundation studies to support his policy recommendations is just further proof that he's in way over his head. The Cato Institute is every bit as conservative as Heritage, but at least Cato (used to) do actual serious academic level studies. Heritage is just a hack house. It's only purpose is to provide conservatives who don't actually have credentials with some kind of veneer of respectability.
Posted by: 2slugbaits at April 7, 2011 06:36 PM
Your're obviously not familiar with how the Heritage Foundation does its econometric analysis. Let me explain. It goes something like this:
Phase 1: Collect Underpants
Phase 2: ?
Phase 3: Profit
Posted by: Mark A. Sadowski at April 7, 2011 07:22 PM
2slugs said: "CoRev The Obama Administration did submit a FY2011 budget...over a year ago (1 Feb 2010)." That was last year's budget. And, he submitted another for 2012. So?????
You're an insider, your supposed to know this stuff!
First step, Prez submits a budget request. Yup! Done.
2nd step, House submits a budget resolution (Ryan's plan under discussion, and definitely not a Heritage Report.) Yup! Done
3rd step, Senate submits its budget resolution. Nope! Not done.
So, I repeat my original question. Why are we not addressing those two real documents?
Posted by: CoRev at April 7, 2011 07:51 PM
Reading the empirical data K Rogoff C Reinhart "This time is different" (a repeat of the content will never hurt the financial spheres and policy makers)
Five cycles of sovereign defaults from 1800 1990, their symptoms are assumed known but consequences are unfortunately higher unemployment.Would technological innovation help? (the great crises had plenty of them automobile,fridge,radio,Tv).
An IMF study as applied to 88 banking crisis hold documented empirical evidences that over a life span of 40 years, average output in the countries where banking crisis occurred, does not go back to the former level but remains permanently below.GDP growth rate may remain unaltered and positive and rebalancing switch from public spending to private spending is a must.
Econbrowser recent posts and comments (Consumption spending slowing down) may provide for an outlook of the public accounts and private accounts among the G7 countries,( ECB statistical data warehouse for private savings,public accounts in Europe,World bank data and statistics,Fred)
The expected shift from public accounts to private accounts spending is far from granted or even to be on course,rendering extrapolation on employment growth just an exercise.
Posted by: ppcm at April 8, 2011 12:32 AM
CoRev The Ryan plan has been discussed in previous posts and found wanting. The Heritage Foundation's analysis of Ryan's plan has been out there for a few days and so far I haven't heard Rep. Ryan complain that Heritage has misrepresented or misunderstood his plan, so my conclusion is that Ryan believes it is a fair representation.
Posted by: 2slugbaits at April 8, 2011 02:38 AM
2slugs, discussing older documents, the Ryan Plan, and not the Ryan 2012 Budget Resolution, a real and formal step in developing an annual budget, shows a high degree of cognitive dissonance.
I will ask again. Why are we not addressing the real documents? For 2012 to date, they are the President's Budget Request, and the House Budget Resolution.
One day soon we should be able to add the Senate Budget Resolution, but recent history may make that assumption presumptuous. Maybe the pain associated with the Dem 2011 budget performance is behind the failure to discuss reality versus some proxies. Dunno, just asking.
Posted by: CoRev at April 8, 2011 05:59 AM
I think that Ryan has already scored a major triumph with his plan, as indicated by the effort of the left wing to poke holes in it. I haven't read it (except for some descriptions) but will try to do so in the next week or so. The fact that the nit-picking is focusing on the guts of the projection tells me that he has framed the issue properly and altered the terms of the debate.
"CoRev The Ryan plan has been discussed in previous posts and found wanting. " I love how you make your royal pronouncements - I guess after you have spoken, what else can mortal man add?
Posted by: Rich Berger at April 8, 2011 06:25 AM
Ignoring depreciation rates in any analysis of corporate income tax rate changes is a fatal flaw. Depreciation rates, depending on the extent of depreciation expense deductability, are a critical parameter in most growth models that analyze adjustments in tax rates (I'm thinking Stokey & Rebelo, [1995?] JPE).
The effect is relatively small, but nontrivial. The Heritage model is probably relying on implausible estimates, I agree. But, saying that corporate income tax rate adjustments have no effect is different from saying their effect has been wildly exaggerated.
Menzi, great analysis, as always.
Posted by: Lance at April 8, 2011 07:40 AM
Could you post a link to Ryan's plan? I have found a lot of commentary but not the actual plan.
That said why not give the Ryan plan a chance? Obviously the massive Keynesian efforts used by both the Bush and Obama administrations have failed miserably.
In the immortal words of Henry Paulson, "We have to do something." The proof of Ryan's plan would be to try it. The problem the progressives have today is they keep running into that pesky prosperity that came from both Kennedy and Reagan using Mundell's formula. So, if it doesn't work then the progressives can claim they have proven their case. If it doesn't work any better than the foolish TARP and other stimulus plans we haven't lost a thing and the progressives can gloat.
Posted by: Ricardo at April 8, 2011 07:51 AM
"That said why not give the Ryan plan a chance?"
Because it's ridiculous, disingenuous, vicious, and won't work. Need any other reasons?
I love the argument "let's give it a chance". That's what the right wing is reduced to these days. "We don't have to make any sense at all, but give us a chance anyway."
The US is toast under these clowns.
Posted by: RN at April 8, 2011 09:04 AM
Here is a link that has a PDF of the plan on the page - http://www.roadmap.republicans.budget.house.gov/Plan/
Menzie's link above goes to Heritage's analysis as requested by Rep. Ryan so it's probably a good source after you read the plan.
Posted by: Anonymous at April 8, 2011 09:19 AM
You may have missed it. I was quoting Henry Paulson. I could have also quoted Paul Krugman, the American's Havenstein.
Posted by: Ricardo at April 8, 2011 11:19 AM
Lance Ignoring depreciation rates in any analysis of corporate income tax rate changes is a fatal flaw. Depreciation rates, depending on the extent of depreciation expense deductability, are a critical parameter
I absolutely agree, but the Heritage analysis was about the relationship between the interest rate and the corporate tax rate. And the critical thing here is that if you restrict the analysis to just those two variables and allow deductibility of interest, then it is the interest rate that determines the level of capital stock because deductibility of interest ensures that after-tax returns from capital equal after-tax costs of capital when the capital stock level is set such that the MPK equals the interest rate.
But I have to confess that in my earlier post I was deliberately leading the witness and hoping that someone would bring up the issue of depreciation allowances and investment tax credits. Notice that not once, but twice I qualified my statement to exclude depreciation and inflation. So I made it a point of emphasis. Sorry about baiting, but it's the same stunt that the late Rudi Dornbusch used to pull. The point of the exercise is to show that playing with the corporate tax rate is a bad way to achieve policy goals. A better way is to manage depreciation allowances and investment tax credits. Furthermore, those two policy options have the added advantage of being most effective when only applied on a temporary and time limited basis. Pretty much any policy goal you can achieve by changing the corporate tax rate can be achieved more effectively and more robustly by adjusting the depreciation allowance and investment tax credits. And oh by the way, the Tea Party types strongly opposed provisions in Obama's stimulus plan that would increase depreciation allowances and provide for temporary investment tax credits. They argued for lower corporate tax rates. This shows that the GOP rightwing wasn't interested in economic growth, just increased profits for their campaign contributors.
Posted by: 2slugbaits at April 8, 2011 01:49 PM
Rich Berger: For your edification, you might wish to read the Heritage report, and then this new post.
Posted by: Menzie Chinn at April 8, 2011 01:50 PM
CoRev So you want to talk about Ryan's Resolution? Then explain this piece of nonsense:
any value in the balances in the Social Security trust fund is derived from dubious
government accounting. The trust fund is not a real savings account. From 1983 to 2011, the trust fund collected more in Social Security taxes than it paid out in Social Security benefits. But the government borrowed all of
these surpluses and spent them on other government programs unrelated to Social Security. The trust fund holds Treasury securities, but the ability to redeem these securities is completely dependent on the Treasury’s ability to raise money through taxes or borrowing.
But at the same time Ryan wants to allow workers to divert part of the FICA tax to a TSP style account, which would include an option to invest in government securities. So explain to me just how a Treasury bond held by the SS Trustees is inherently worthless because it is "dependent on the Treasury's ability to raise money through taxes or borrowing it," but a Treasury bond held by the TSP trustees does have value independent of the government's ability to tax or borrow. Good luck with that one.
And what about Ryan's proposal to guarantee FICA payments diverted to private retirement accounts? Can you say "moral hazard"?
There's no limit to the goofiness in Ryan's plan.
Posted by: 2slugbaits at April 8, 2011 04:30 PM
"You may have missed it. I was quoting Henry Paulson."
Um...no, you quote Paulson in the following paragraph, on something completely different.
Posted by: RN at April 8, 2011 05:21 PM
2slugs, I guess you dispute this? "The trust fund holds Treasury securities, but the ability to redeem these securities is completely dependent on the Treasury’s ability to raise money through taxes or borrowing."
Please, please don't tell us about the interest carried in the SSTF treasuries, and the "full faith and credit" from which those treasuries are based. They do not change the facts of redemption quoted above, and the facts that the SSTF is a drawer full of paper promises. That "full faith and credit" issue again
BTW, where in the Ryan Budget Resolution does he propose any specific changes to SS? AFAIK, he is hand off SS, with future proposals for change to be provided by the appropriate committees. And, as a TSP member you should intuitively know the difference between the FICA (you may/or not be paying) and your investment in TSP. Ownership, investment and personal control.
This comment was all show for those who do not play the inside baseball game with which we are familiar.
Folks, what we have just seen is 2slugs traditional approach at obfuscation through changing the subject.
BTW, I do not intend to get into one of semantics driven discussions. G'day to you.
Posted by: CoRev at April 8, 2011 05:29 PM
CoRev where in the Ryan Budget Resolution does he propose any specific changes to SS?
In the language of the Resolution he is deliberately vague, but in his Roadmap he is quite specific:
•Offers workers under 55 the option of investing over one third of their current Social Security taxes into personal retirement accounts, similar to the Thrift Savings Plan available to Federal employees. Includes a property right so they can pass on these assets to their heirs, and a guarantee that individuals will not lose a dollar they contribute to their accounts, even after inflation
And when you dig deeper you find that he is even proposing a guarantee that those private accounts would be guaranteed by the govt in the event of a stock market meltdown.
Guarantee of Contributions. Individuals who choose to invest in personal accounts will be ensured every dollar they place into an account will be guaranteed, even after inflation. With the recent market downturn, individuals must be assured their retirement is secure. By guaranteeing the dollars put into an account, individuals can be assured that a large-scale market downturn will not cost them their Social Security personal accounts.
Personal Choice in Retirement Accounts. Beginning in 2012, the proposal allows each worker younger than 55 to shift a portion of his or her Social Security payroll tax payment into a personal retirement account, chosen from a group of investment funds approved by the government (see below). When fully phased in, the personal accounts will average 5.1 percentage points of the current 12.4-percent Social Security payroll tax.
And you should know that TSP is in addition to FICA taxes, not "instead of" FICA taxes. Ryan is proposing that workers be given the choice of opting out of paying a portion of their FICA tax, which is just a rerun of what Bush tried to sell.
It sounds like you're trying to run away and hide from Ryan's crazy plan.
Posted by: 2slugbaits at April 8, 2011 08:03 PM
Ryan's plan, while not perfect (http://brucekrasting.blogspot.com/2011/04/ryan-plan-kick-it-down-road.html), is a much better starting point for budgetary discussions than the administration's road map to ruin (nanny state).
Posted by: Babinich at April 9, 2011 03:31 AM
As i said earlier, 2slugs makes a claim then can not back it up. His best defense is more shape shifting to: "In the language of the Resolution he is deliberately vague, but in his Roadmap he is quite specific:..." 2slugs, you have added even another paper as a proxy instead of discussing original source materials.
Why not discuss the actual 2012 "official" budget documents? Your interpretation of another interpretation, competing third party analyses, add what value?
Posted by: CoRev at April 9, 2011 04:05 AM
CoRev You also avoided my original challenge, so let me repeat it. If it's true that govt bonds held by the SS Trustees are dependent upon future govt taxes as their ultimate source of value, then how is this different from govt bonds held in one's TSP account? Or govt bonds held by the Chinese or Citibank? And how is this any different than corporate bonds or privately issued promissory notes? Don't those also depend on the ability of a corporation or private agent to generate an income stream? And how is it really different from private equity stocks, which derive their value from someone else's willingness to buy those stocks? Ryan's point about govt bonds being dependent upon future taxes is true but trivial because it's true for just about everything. Ryan is being fundamentally dishonest here because he is trying to suggest that there is something uniquely fraudulent about the value of govt bonds held by the SS Trustees. That's just a lie. Unfortunately there are a lot of stupid voters (mainly in the Tea Party) that buy that kind of nonsense.
Posted by: 2slugbaits at April 9, 2011 04:59 AM
In keeping with Menzie's title of the macroeconmic effects of Ryan's Roadmap, let me suggest another macroeconomic effect that hasn't gotten a lot of attention. Suppose Congress and the President approve Ryan's proposal to allow workers to divert a significant portion of their FICA taxes to private retirement accounts. Suppose voters and consumers are all good conservatives who read lots of Milton Friedman and want to intertemporally smooth consumption. If they are rational, then current consumption/saving is optimal given expectations about the value of their assets. Now if people genuinely believe Ryan's claim that govt bonds held by the SS Trustees are essentially worthless becaue they depend upon future taxes, then people would incorporate that belief into current consumption/saving decisions. In other words, they would discount the value of future SS income. But if the Ryan plan is adopted, then people would still have the same after-FICA tax disposable income, but now some of it would go towards private accounts. And under Ryan's roadmap the assumption is that those private assets would be more valuable; i.e., presumably rational actors would not apply the same discount to privately held assets that they would to bonds held by the SS Trustees. But if that's true then it also means people would increase current consumption and actually save less after-FICA tax income than then are saving today. If they didn't increase consumption, then this would violate the previous assumption that current consumption/saving allocations reflect the optimal choices of rational agents. In other words, if private accounts will yield a higher retirement income, then intertemporal consumption smoothing requires increased current consumption. So just looking at things from the perspective of good old fashioned conservative economic principles, the macroeconomic effect of Ryan's plan would be increased consumption and less saving that we have today. How is this consistent with his plan for capital deepening?
Posted by: 2slugbaits at April 9, 2011 05:34 AM
This sis the kind of analysis I was expecting from Econbrowser. http://keithhennessey.com/2011/04/06/ryan-v-obama/
Instead we get the political theater analyzing a third party review which "Chairman Ryan requested in writing that the Center for Data Analysis, The Heritage Foundation, provide an analysis of his Chairman's Mark. The Center's report titled Economic Analysis of the House Budget Resolution was released on April 5. The document is 19 pages in length".
Maybe it's just so much easier reviewing a 19 page proxy document versus a 73 page original document, I dunno.
Posted by: CoRev at April 9, 2011 06:29 AM
Ryan's point about govt bonds being dependent upon future taxes is true but trivial because it's true for just about everything. Ryan is being fundamentally dishonest here because he is trying to suggest that there is something uniquely fraudulent about the value of govt bonds held by the SS Trustees. That's just a lie. Unfortunately there are a lot of stupid voters (mainly in the Tea Party) that buy that kind of nonsense.
Bull... The bonds in the trust fund have magic yields. http://brucekrasting.blogspot.com/2010/08/on-sstf-lets-go-back-to-1956.html
If it's true that govt bonds held by the SS Trustees are dependent upon future govt taxes as their ultimate source of value, then how is this different from govt bonds held in one's TSP account?
The more one lies about the yields of the SSTF portfolio the more we have to get taxed to pay off on this Ponzi scheme. Maybe you need a refresher as to the true cost of spending? http://www.thebigquestions.com/2010/02/01/debt-and-taxes/#more-2087
Posted by: Babinich at April 9, 2011 07:12 AM
First, the Heritage Foundation analysis is part of the Resolution...it was incorporated as Appendix II of the Resolution. And Appendix II says that it used the Ryan Roadmap to make its evaluations. Ergo, Ryan's Roadmap is part of the Congressional Resolution. That's how things works in Washington. Sorry if you don't understand.
The basic Resolution without the appendices is long on words and short on substance. I've read it and throughout the document it only hints at solutions, and those hints typically take the form of referring the reader to a document sighted in a footnote. You have to be hopelessly stupid or intellectually dishonest to fail to recognize that Ryan's Resolution is a Congressional cover sheet for his more detailed Roadmap. Even the titles are similar...one is referred to as a "roadmap" and the other as a "path." The Resolution directs Congress and the President to take some vague action to "ensure the solvency" of Social Security, but makes no specific recommendations. For that you have to go to Roadmap. And the Roadmap is very specific about privatizing Social Security and Medicare.
And by the way, Keith Hennessey's piece is not analysis...it's just accepting Ryan's made-up numbers in the Resolution and putting them on a chart. That's not analysis. You need to analyze the the assumptions and numbers behind the headline numbers. For that you have to go to Ryan's Roadmap and the Heritage Foundation report. And again, I haven't heard Rep. Ryan claim that Heritage misrepresented or misunderstood his plan, so I'm assuming that there is no daylight between the Ryan and Heritage.
Posted by: 2slugbaits at April 9, 2011 07:28 AM
Babinich Ryan's plan is hardly a starting point for a rational approach to long run structural deficit problems. It's actually a nonstarter because one of its principal aims is to take tax increases off the table, and tax increases are a sine quo non for a realistic approach to bringing the long run structural deficit under control. Ryan basically just decrees that govt spending should not exceed 19% of GDP and that tax increases should require a three-fifths majority in both houses of Congress. And this magically solves the problem. This is not serious. It's just the kind of lazy public policy approach that appeals to Tea Party types that have an intense dislike for government and only a casual weekend acquaintence with economics. A lot of teabaggers that I know are angry retired geezers with a keyboard and not much formal training in economics. Those are the kind of folks who are attracted to Ryan's plan. Anyone who thinks you can cut the top tax rate to 25%, remove interest and capital gains from taxable income, and balance the budget is just living in some fantasyland. Anyone who thinks the government can divert FICA taxes without having to cover a transition cost is living in a fantasyland. Anyone who thinks that the govt can guarantee a nonzero inflation adjusted return from TSP investments in the market but somehow cannot guarantee SS Trustee bonds needs to take remedial arithmetic. And anyone who thinks future seniors are going to passively accept paying into Medicare most of their lives only to find out at age 54 that they must now give that up in exchange for a near worthless voucher 10 years in the future...well, that person needs to take a remedial class in political science and voter dynamics.
Posted by: 2slugbaits at April 9, 2011 07:54 AM
2slugs, we can always tell when we are hitting home. The stridency and arrogance of your statements always go up. "Teabaggers", "casual weekend acquaintance with economics" and "lazy public policy approach" are just examples from your latest response.
But, your "lazy public policy approach", is the funniest. You are trying to compare Ryan's attempt to cut the budget with Obama's nearly "no change/status quo" budget.
Finally, your question is really silly re: the difference between SSTF non-transferable special treasuries owned only by the SS, with nothing other than the "full faith and credit" of the US Govt to back them and the TSP, transferable, immediate call either as a loan before retirement, or after retirement an annuity, or withdrawal and backed up by "full faith and credit" of the US Govt plus the other private investment vehicles that they may have purchased. We can also compare the difference in personal wealth accrual between TSP and SS. One is owned (you guess which) and the other is not.
Otherwise there is little difference other than the worlds apart already defined.
G'day to you.
Posted by: CoRev at April 9, 2011 10:32 AM
CoRev Still trying to avoid the issue. TSP is just the govt's version of a 401k program. That's all it is. A person supplements their SS retirement benefits with a TSP plan just as they do with a 401k in the private sector. Given that a person has an SS safety net the risks one is willing to take with a TSP or 401k are very different than they would be if you didn't have SS to back you up. And Ryan knows that, which is why he has to use the "full faith and credit" of the US govt to provide a guarantee that those who opt out of SS for a private account will not lose any money. That's a recipe for moral hazard and is completely irresponsible. And it completely contradicts Ryan's other assertion that guarantees dependent upon tax revenues are somehow defective and not to be counted upon. Ryan has put himself in a box.
When you talk about "ownership" you also have to talking about owning the downside of risk, or else it's not really ownership. Ryan says he wants to remove the downside, so if the market performs above average you get to keep the winnings, but if the market performs below average, the government will back up your losses. That's what his plan says. Go read it. And nowhere does Ryan explain how he is going to pay for the transition to a partially privatized system. Afterall, the govt still needs money to pay for those already on SS. His solution is to ignore the problem. And Ryan doesn't explain what happens if you outlive your private account. There's a lot of flim flam with his proposal and it's disturbing that grown adults fall for this crap. We went through this same debate 10 years ago.
BTW, funny you should mention TSP as being immediately callable or used for a loan. Earlier this week OPM reminded govt workers that if there was a shutdown they were not permitted to withdraw or borrow from their TSP accounts.
Posted by: 2slugbaits at April 9, 2011 11:34 AM
Babinch You posted a link to a column by Bruce Kasting. Did you understand his argument? I don't think you did. Rep. Ryan is arguing that bonds held by SS Trustees have no inherent value because they depend upon a tax revenue stream. Ryan is saying they're next to worthless. Bruce Kasting is saying exactly the opposite; his argument is that bonds held by the SS Trustees are overvalued!!! Both statements cannot be true. You cannot simultaneously claim that SS provides a bad rate of return for retirees (as Ryan claims), and then turn around and claim that SS bonds are returning an above market rate of interest that you can't get in markets. But yet that's exactly what you're trying to do here. My advice is to regroup and rethink your position. As it is, it's very confused.
Posted by: 2slugbaits at April 9, 2011 11:44 AM
Both statements cannot be true. You cannot simultaneously claim that SS provides a bad rate of return for retirees (as Ryan claims), and then turn around and claim that SS bonds are returning an above market rate of interest that you can't get in markets. But yet that's exactly what you're trying to do here. My advice is to regroup and rethink your position. As it is, it's very confused.
You can keep your advice.
That rate, paid by SSTF, will kill us because when the bonds are redeemed the US treasury must deliver. Where is it the US government going to get that type of money considering the Treasury is in hock up to its neck?
Posted by: Babinich at April 9, 2011 09:02 PM
But at the same time Ryan wants to allow workers to divert part of the FICA tax to a TSP style account, which would include an option to invest in government securities. So explain to me just how a Treasury bond held by the SS Trustees is inherently worthless because it is "dependent on the Treasury's ability to raise money through taxes or borrowing it," but a Treasury bond held by the TSP trustees does have value independent of the government's ability to tax or borrow.
I understand your overwhelming faith in the totalitarian state so I understand why you do not see the difference from forcing Social Security recipients money into Treasury securities versus making it an option for the investor. Others do understand the difference between government coercion and personal preference.
Posted by: Ricardo at April 10, 2011 06:42 AM
"...What Heritage seems to be getting at is that a lower tax rate will increase the amount of physical capital available to workers, which would increase productivity and push out the AS curve. Let's suppose that a company wants to finance a capital expansion project through debt..."
But what if the tax shield was eliminated? What if a company wanted to instead use retained earnings to invest in the company? Wouldn't lowering the tax rate on companies then make more capital available? (This sounds almost rhetorical, lowering my individual tax rate puts more money in my pocket, as, e.g. was done with the reduction on the FICA rate this year). Or am I missing something or confusing the issue?
Posted by: Rob at April 10, 2011 06:49 AM
Babinich Where is it the US government going to get that type of money considering the Treasury is in hock up to its neck?
Once again, how is that different from any other bond? Answer: it isn't. So if SSTF bonds are worthless, so are US Treasury bonds to the Chinese or the Citibank.
And it sounds like you still don't understand the Bruce Kasting post, so let me repeat it. Kasting is arguing that the return on SSTF bonds is too high. Got it? He is saying they're too high. One more time. Kasting is saying that SSTF bonds are earning above market returns. He may or may not be right...that's a different issue. My only point is that he is not saying what you seem to think he is saying.
Ricardo Is your complaint with the idea of the government forcing people to contribute to retirement or are you only upset about limited investment options? In any event, the rationael behind SS is that it is a mandatory insurance program. It has to be mandatory for the same reason that health insurance has to be mandatory. If you don't make it mandatory people will be free riders during their working years and then demand income support when they can no longer work. People have a habit of brave talk about independence as long as everything is going okay, but very short memories when things don't go so well. That's human nature. And everyone here knows perfectly well that if your investments went south, you'd be first in line to get govt income support...and you know it.
Rob I was talking about debt financed investment. Financing from equity or retained earnings would likely have a different effect, the Miller-Modigliani Theorem notwithstanding.
Posted by: 2slugbaits at April 11, 2011 03:05 PM
I realize that this post is probably off its expiration date but I have a question for you: How would the effect of Social Security on the Federal budget be different if there were no "trust fund"?
Posted by: Rich Berger at April 12, 2011 11:47 AM