Economy

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Can Public Pensions Be Fair to Later Generations?

From Via Media we get this nugget, “Can Public Pensions Be Fair to Later Generations?”. Since Joe The Economist has made a pretty good argument that the idea of privatizing Social Security is an idea we can no longer afford maybe a good first step in reforming pension accounting is to embrace a more Dutch-like approach.

So many U.S. states are struggling with unsustainable public pension costs that many are probably wondering: Is an honest, fiscally sound, publicly administered pension plan possible, or are all such efforts doomed to regulatory capture, union abuse, and co-optation by politicians? At least one example suggests that, given sufficient discipline and scrutiny, pension plans can be made to work in the 21st century. An article in the New York Times today praises the Dutch version:

Dutch pensions are scrupulously funded, unlike many United States plans, and are required to tally their liabilities with brutal honesty, using a method that is common in the financial-services industry but rejected by American public pension funds.

The Dutch system rests on the idea that each generation should pay its own costs — and that the costs must be measured accurately if that is to happen. After the financial collapse of 2008, workers and retirees in the Netherlands took the bitter medicine needed to rebuild their collective nest eggs quickly, with higher contributions from workers and benefit cuts for pensioners.[…]

Notably, the Dutch central bank prohibited the measurement method that virtually all American states and cities use, which is based on the hope that strong market gains on pension investments will make the benefits cheaper. A significant downside to this method is that it lets pension systems take advantage of market gains today, but pushes the risk of losses into the future, for others to cope with.

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Does Socialism Work? A Classroom Experiment

Here is a old joke Dan Mitchell posted in 2011. I thought it was worth keeping and repeating.

An economics professor at a local college made a statement that he had never failed a single student before, but had recently failed an entire class. That class had insisted that Obama’s socialism worked and that no one would be poor and no one would be rich, a great equalizer.

The professor then said, “OK, we will have an experiment in this class on Obama’s plan”. All grades will be averaged and everyone will receive the same grade so no one will fail and no one will receive an A…. (substituting grades for dollars – something closer to home and more readily understood by all).

After the first test, the grades were averaged and everyone got a B. The students who studied hard were upset and the students who studied little were happy. As the second test rolled around, the students who studied little had studied even less and the ones who studied hard decided they wanted a free ride too so they studied little.

The second test average was a D! No one was happy.

When the 3rd test rolled around, the average was an F.

As the tests proceeded, the scores never increased as bickering, blame and name-calling all resulted in hard feelings and no one would study for the benefit of anyone else.

To their great surprise, ALL FAILED and the professor told them that socialism would also ultimately fail because when the reward is great, the effort to succeed is great, but when government takes all the reward away, no one will try or want to succeed.
It could not be any simpler than that.

There are five morals to this story:

1. You cannot legislate the poor into prosperity by legislating the wealthy out of prosperity.

2. What one person receives without working for, another person must work for without receiving.

3. The government cannot give to anybody anything that the government does not first take from somebody else.

4. You cannot multiply wealth by dividing it!

5. When half of the people get the idea that they do not have to work because the other half is going to take care of them, and when the other half gets the idea that it does no good to work because somebody else is going to get what they work for, that is the beginning of the end of any nation.

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The Latest GDPNow Forecast For Second Quarter Growth is 2.7%

I have a certain fascination with forecasts so on August 1st we shall see if the GDPNow method is better than the professional forecasters. Here is what the Atlanta Federal Reserve site said in the last report.

The final GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2014 was 2.7 percent on July 25, unchanged from its July 17 reading. The first GDPNow model forecast for GDP growth in the third quarter will be released August 1.

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Different Answers For Hourly Wages vs. CPI-Food vs. CPI-All

I was looking at a debate between Mr. Davis and Mr. Perry over inflation. Mr. Davis started out the debate with this provocative article, American Families Are Right To Be Worried About Inflation, and Mr. Perry responded with his own chart showing that average hourly earnings grew faster than inflation. Since I do the grocery shopping for our family my gut feeling says we are experiencing mild inflation in excess of wage growth. So who is right? In almost all cases like this I go over to FRED and chart some data.

My first reaction to the debate was Mr. Perry’s selection of average wage earnings. The logical choice would have been real disposable income since it removes personal current taxes and inflation and is readily available at FRED. For the average person the only wage growth that matters is what they have after taxes.

If we look at a Fred graph of real disposable personal income versus the two CPI measurements, we can see that the graph confirms Mr. Davis’s statements who claims that “food inflation blows away wage growth” and “food prices have soared since 2009”. If we adjust the real disposable personal income for population growth, the difference is even more dramatic. So what is the best way to measure wage growth, average wage earnings or real disposable personal income per capita? They tell different stories.

The graph is shown below. Here is a link to the FRED graph, http://research.stlouisfed.org/fred2/graph/?g=Gix.

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GDPNow Forecast

I continue to be fascinated with forecasting that errs in only one direction. A couple of days ago I made fun of GDP forecasting in the post, Who Is The Better Forecaster, The Economist Or The Climate Scientist? The good news is that these “scientists” are not building stuff that could hurt us like cars or airplanes. For the last couple of years the initial GDP estimates are consistently too optimistic and the chart below continues that trend. Today I found out that the Atlanta Federal Reserve’s GDPNow forecast is expecting 2.6% GDP growth for the second quarter of 2014. It should not be a surprise to anyone that this estimate is at the bottom of the range for GDP forecasts and will leave us at a negative growth rate for the first six months of the year. For those of you who like to look at the details the Atlanta Federal Reserve has graciously provided the spreadsheet they use to make the GDPNow forecast. Here is the latest forecast from their site.

Latest forecast
The GDPNow model forecast for real GDP growth (SAAR) in 2014: Q2 was 2.6 percent on July 10, unchanged from its July 3 value. This morning’s wholesale trade release from the U.S. Census Bureau had no effect on the GDP nowcast after rounding.

Evolution of Atlanta Fed GDPNow Real GDP Forecast

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Who Is The Better Forecaster, The Economist Or The Climate Scientist?

I was looking at this wonderful chart from Business Insider and from Bloomberg LP Chief Economist Michael McDonough and wondered who was the better forecaster, the economist or the climate scientist. As we can see from the chart the GDP forecasts for the last couple of years are particularly bad. In four out of four years the forecasts start out 50% to 100% too high. That is impressive! Winking smile

GDP_optimism1

Here is my favorite chart from that other dismal science, climate science. Although this is not a fair comparison the climate scientists are wrong only 95% of the time! They win!

CMIP5-90-models-global-Tsfc-vs-obs-thru-2013a

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Did The Tail Wag The Dog In The First Quarter GDP Report?

I am puzzled why health spending had such a large impact on first quarter GDP report. I thought the Affordable Care Act impacted the health care expenditures for only a small part of the population. Other people are puzzled, too. The best article that I have found that partially explains the impact of health care spending on first quarter GDP is, “Health Spending and First Quarter GDP: What Happened?“, but it fails to explain why such a small component of the GDP had such a large effect.

When I get puzzled with economic data, I go over to FRED and plot some data. So if we follow Tyler Durden’s lead of plotting quarterly changes for health care expenditures and include the Real Gross Domestic Product series we get this graph. You can see that the quarterly change in GDP dwarfs the health care expenditures and it is hard to see much of a correlation between these two indices. Unless we are willing to believe that the tail can wag the dog, we have to conclude that the 2.9% decline in the economy was for economic reasons other than health care expenditures. The impact of changes in health care expenditures is still a minor factor in the GDP growth. The Affordable Care Act taxes are probably holding the economy back a little bit but if we want to grow the economy we have to do it the old fashion way by making things bigger, better, faster, or cheaper.

FRED Graph of Health Expenditure and GDP Quarterly Changres

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Who Would Have Thunk We Would Get A 2.9% Decline In GDP?

The latest report from Bureau of Economic Analysis is out and it was a shocker. I don’t think anybody except BizzyBlog saw a 2.9% decline. I was curious how fast the economy was growing on an annualized basis. Some folks expect the economy to grow at a robust 3% rate in the second half of the year. The Federal Reserve is slightly less optimistic and recently cut their estimates for 2014 to between 2.1 percent and 2.3 percent. Considering how big a hole the first quarter GDP decline put us in, it looks like we need three quarters of a 3.8% of compounded growth to get to the low end of their estimates. Based on recent history that looks difficult to achieve. Based on this same history I am in the 1.5% annual growth camp. When I look at the economy, it looks like more of the same to me. If my calculations are correct then three quarters of 3% compounded growth will overcome the first quarter and get us a positive 1.5% growth for the year and match last year’s growth rate. The nightmare scenario for the Administration and Democratic candidates is if we do not see 3% growth for the remaining three quarters of 2014. That rarely happens during an election year but you never know. This economy has been anything but predictable.

Table 1.1.3. Real Gross Domestic Product, Quantity Indexes
[Index numbers, 2009=100] Seasonally adjusted
Bureau of Economic Analysis
Last Revised on: June 25, 2014 – Next Release Date July 30, 2014
Line   2012 2013 2014 2014 vs 2013 2014 vs 2012
I I I
1 Gross domestic product 106.683 108.087 109.753 1.5% 1.4%
2 Personal consumption expenditures 106.145 108.138 110.324 2.0% 1.9%
3 Goods 109.298 112.928 115.923 2.7% 3.0%
4 Durable goods 119.195 127.379 133.093 4.5% 5.7%
5 Nondurable goods 104.988 106.762 108.661 1.8% 1.7%
6 Services 104.616 105.818 107.618 1.7% 1.4%
7 Gross private domestic investment 129.269 131.521 136.421 3.7% 2.7%
8 Fixed investment 114.569 119.467 123.408 3.3% 3.8%
9 Nonresidential 116.551 119.318 123.458 3.5% 2.9%
10 Structures 93.345 93.09 97.601 4.8% 2.3%
11 Equipment 139.204 143.175 147.134 2.8% 2.8%
12 Intellectual property products 108.83 112.648 116.698 3.6% 3.6%
13 Residential 106.359 120.123 123.35 2.7% 7.7%
14 Change in private inventories — — —
15 Net exports of goods and services — — —
16 Exports 122.576 123.781 127.308 2.8% 1.9%
17 Goods 125.88 126.126 130.47 3.4% 1.8%
18 Services 115.719 118.961 120.767 1.5% 2.2%
19 Imports 120.475 120.584 124.361 3.1% 1.6%
20 Goods 123.394 123.098 127.109 3.3% 1.5%
21 Services 108.248 110.197 112.96 2.5% 2.2%
22 Government consumption expenditures and gross investment 95.863 94.117 92.682 -1.5% -1.7%
23 Federal 100.115 96.315 92.523 -3.9% -3.9%
24 National defense 97.769 91.731 87.434 -4.7% -5.4%
25 Nondefense 104.409 104.74 101.873 -2.7% -1.2%
26 State and local 93.096 92.672 92.766 0.1% -0.2%
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Student Loans Is The ONLY Consumer Credit That Is Growing!

I was looking at the latest G.19 report from the Federal Reserve and noticed that the only major holder of consumer credit who increased their loans was the Federal Government. For people unfamiliar with this report, this is where the government reports its student loan holdings. It is probably too early to declare the consumer driven economy as dead and buried but you get the gist. It is hard to be optimistic about a growing economy in 2014 when the only folks borrowing money in February were students. Read it and weep!

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Thing That Make Me Go Hmm… Reflecting On Ohio’s Economic Turnaround

I was fascinated with the Fox News interview of Governor Kasich this morning. Chris Wallace asked Governor Kasich the following question.

You have engineered quite a turnaround at Ohio since you took office in 2011 and let’s put up part of your record. Your state has been the number five job creator in the nation over that period of time. And number one in the Midwest. Unemployment is now 6.5 percent. The lowest in your state since June of 2008. And Ohio has gone from an $8 billion deficit to a $1.5 billion surplus. Question: what is the secret to your success?

The alleged job creation performance was pretty amazing considering that the last time I looked at Ohio’s job creation performance I was not impressed. So I decided to crunch the numbers. I picked up the job creation numbers from the Job Growth Update page at Arizona State University and found that Ohio’s 2011, 2012, 2013, and 2014 job growth performance was definitely middling. They were ranked number 26,18, 25, and 33.  This was less impressive than the performance of Indiana which was ranked 5, 8, 40, and 20. So how did Fox come up with the optimistic talking point?

Since the question talked about jobs created, I put the data into a spreadsheet and calculated the actual number of jobs created. In this case Ohio ranked 7th since Ohio has a larger population than most of the states. However if we use this definition of job creation than the number one job creator in the Midwest is Illinois since it has the largest population in the Midwest. Hmm…