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In our attempt to bring some historical context to the economic situation, on Wednesday we remembered the bouncing federal funds rate of the early aughts and the massive tax cuts of George W. Bush's first term and the results that were not pretty. We wondered why this so recent history has been lost to sober assessment.
Today we want to look at risk versus uncertainty, with comment from John Maynard Keynes. We will also look at the supposed bankruptcy of social security and take issue with Robert Reich on the subject and return to the Sarkozy report on economic metrics.
At Demand Side we previously pointed out that Social Security retirement is a long way from bankruptcy by any measure, even considering the current economic doldrums. Even twenty or thirty years from now, when the trust fund is not sufficient to pay promised obligations in full -- imagining no changes in that period -- that trust fund will be far from empty, and the program could float along paying 95 percent of obligations.
The crisis of Social Security arises not because of its internal financial structure or any blindness to the actuarial facts. The crisis arises because the fund is full of U.S. government bonds. You and I would be happy to have such bonds, but ...
Well, let's take a listen to a left of center commentator -- Robert Reich -- courtesy of Marketplace.
Stop, stop, stop.
Tipping points, paying out more than collecting, changing the benefit formulas. It is not as if the aging of the population sneaked up on us. There are some things even government cannot ignore.
As a historical exercise, let's remember the Greenspan Commission of the early 1980s. Yes. Before he was Fed chair and after he was Gerald Ford's chief economist (remember WIN buttons?), Alan Greenspan chaired the first social security commission. That group convinced congress to raise payroll taxes, extend retirement ages and put social security int he black for the next fifty years.
The social security trust funds are solvent. When we say paying out more than we are taking in, we ignore the fact that we collected huge excesses, saved for the obvious demographics and made sure the system was secure. The reason there is a problem is we financed big tax cuts under Reagan and Bush II by borrowing from social security. We invented the unified budget, which allowed us to declare deficits net of this borrowing. Now we don't want to honor those bonds.
Reich's answer is immigration. Import younger workers to pay payroll taxes so we don't have to raise real taxes. Demand Side's answer is to recognize the shell game, the Reagan era shift of taxes down the income scale, and put an end to it. Abolish the cap on payroll taxes, currently around a hundred thousand dollars. That would produce an immediate 15 percent increase in the marginal tax rate of those most able to pay and those most benefited by the previous cuts and recognize that social security is being run responsibly. It is the rest of the budget that is not.
Now to risk. Here is the opening of a recent podcast from the Economist magazine, or newspaper as it is called in Britain. This is Matthew Valencia interviewed by Ryan Avent.
The Economist has always been a little late to the table and a little light on the salt.
Hyman Minsky, who died in 1996 had a good idea of the leverage in the system. he predicted just the sort of thing that would happen, ever larger and unstable overhangs of leverage.
The Economist's interview goes on in much the same manner. Risk was misunderstood. Others call them fat tails in the distribution. Naseem Taleb made a name from the so-called black swan events. We admit we did not read him very closely.
John Maynard Keynes, who wrote authoritatively on the subject of probability, had a different view. There is risk, but there is also uncertainty. In a famous note to Jacob Viner in 1937, he wrote:
"By 'uncertain knowledge,' let me explain, I do not mean merely to distinguish what is known for certain from what is only probable. The game of roulette is not subject, in this sense, to uncertainty; nor is the prospect of a Victory bond being drawn. Or again, the expectation of life is only slightly uncertain. Even the weather is only moderately uncertain. The sense in which I am using the term is that in which the prospect of a European war is uncertain, or the price of copper and the rate of interest twenty years hence, or the obsolescence of a new invention, or the position of private wealth owners in the social system in 1970. About these matters there is no scientific basis on which to form any calculable probability whatever. We simply do not know."
And Minsky viewed uncertainty as the key driver in the pricing of assets.
It is our view that all the hoopla around managing risk and the risk models that so famously blew up on the Nobel laureates and the rest of us, is a game to pretend that uncertainty can be managed and so allow leverage into dimensions that otherwise would not be contemplated or allowed.
The managers of the banks famously did not understand the models their mathematical employees developed, nor the stupid assumptions built into them, but they didn't need to. These models were allowing the amassing of leverage, which is what they needed.
Is our view.
I guess we made short work of that.
Let's do a similar job on the Sarkozy Report. You'll remember we are presenting in a series some of the key findings of the Commission on the Measurement of Economic Performance and Social Progress, as initiated by Nikolas Sarkozy and chaired by Joseph Stiglitz and Amartya Sen.
We promised their comment on the subject of leisure. Here it is, from the issues paper published last fall.
"What about the value of leisure?
Once one starts thinking about non-market income, one has to think about leisure. With time spent on generating income (market or non-market) we buy goods and services to meet our needs or for simple enjoyment. Time spent on leisure is another input necessary to well-being. Changes in the amount of leisure over time and differences between countries represent one of the more important aspects of well-being. Focusing only on goods and services can therefore bias comparative measures of well-being. It is, however, difficult to put a monetary value on leisure. What is the value of an hour's walk in the park? Such evaluations are difficult to put in place, let alone integrate systematically into a system of national accounts.
A different way of considering both the effects of the consumption of goods and services and leisure is by using a different metric -- time. Krueger, Kahneman and other researchers have developed a system of national time accounting where information on how people use time is combined with information on the emotional experience during these activities. Certain activities concern household production, and others concern leisure."
It is the Demand Side perspective that leisure is often considered a passive consumption of pleasure, when in many cases it is family time, community time, personal development time, volunteer time, and so the society and its development are poorer in conditions of low leisure time.
This podcast, for example, is a leisure activity. Civic involvement, helping neighbors, and so on, are leisure time activities. Which is not to say a lot of intense activity does not happen on game day. Just saying.
And a note. Sorry to be slack on the blog. We hope to be back to providing a coherent relay of a useful piece from the demand side perspective early next week.