Massa's Confused Inheritance

Having watched much of Glen Beck's interview with former Rep. Eric Massa, I can say little actual policy was discussed. I did miss one great policy gem in Massa's babble though. Washington Post columnist Dana Milbank quotes Massa today as having said:

"You can't show up at a 'tea party' rally and claim that the entire budget deficit happened this year."

Actually you can, in fact that's the definition of a budget deficit. A deficit happens every year and goes into the budget as such. Massa was trotting out an old line about the debt, not the deficit. When President Obama came to office there was a government debt of about $12 trillion. Yet President Obama has now submitted two budgets. In those instances he could have driven the deficit to zero; doing so would not have solved the debt. Although it would have kept the debt from growing more.

Obama has actually promised to reduce the deficit in half by 2013. Doing so is a step in the right fiscal direction. Yet it would only put a small dent in the national debt. Much of which was accurred and continues to build under entitlements like Social Security and Medicare.

Massa may well have misspoken but the comment reveals just how difficult it is to separate out the debt and the deficit. When our (former) Congressmen misconstrue the two, it's even more encouraging when those showing up at tea parties often have it right.

Could Metro enter a Growth Trap?

The Washington Post today has a look at the decline in Metro’s quality. The story comes just weeks before Metro begins a temporary increase of all fares by 10 cents. The increase is scheduled to last from March until the end of June. If anyone wants to bet that those increases stay “temporary,” I’d be happy to bet against them.

The fare hike is designed to help cover a $189 shortfall in the Metro budget. Rather than looking too much at costs the WaPo story takes a keener interest in Metro’s capital. The story points out that half of Metro’s cars are at least 20 years old (a full quarter are at least 30 years old).

Without giving too much background the WaPo provides the chart below to show new purchases of Metro cars.

Sadly, the chart doesn’t explain how many of these cars are replacements of older models and how many are just additions to the system (from the factoid about old cars it looks like most of them are additions.).

Leaving aside the politics, economic theory makes this situation look rather bleak. The growth model pioneered by Robert Solow, was designed to track national growth rates but a paired down version can be helpful for Metro.

Solow’s model looks at growth in an economy, we’ll use it here to consider the quality of Metro. Solow included labor and capital productivity growth, we’ll leave those aside (a Metro car can only carry a fixed number of people—a figure that may actually have decreased as Americans have gotten bigger). Instead, we need to note the role of capital accumulation and depreciation. Solow assumes that over time our capital stock ages (cars get old, tracks need repair, etc). The risk that Solow noted and that the WaPo implies is that there are two places an economy is likely to land.

Solow predicted that economies would converge to a point where capital accumulation just equals capital deprecation and population growth. Essentially Metro shouldn’t replace everything all the time but there is a needed lower limit.

The dark side of Solow’s model and what the WaPo hints at is there is a second “growth trap” solution to the model. In this instance, capital accumulation has been below the minimum for so long that without a giant one-time boost, the system settles to a new location where no capital is ever acquired.

We often apply the “growth trap” to highly indebted, poorly managed countries.

Metro’s financial backlog has been mentioned above. It’s manager, John Catoe is retiring in April in response to the fracas over the redline accident that killed people last year and the WaPo reports that finding a new manager could take the rest of 2010. All of that makes Metro look ripe too fall into a dangerous trap.

A Picture is Worth What it Can Hide

In a recent American article, AEI scholar Andrew Biggs tackled a politicization of the FY2010 budget regarding Social Security. If Biggs’ critique reached the White House it has not yet permeated it’s visual aids. Instead, The White House’s Economic Report of the President, released last week, continued to insist that per person health care cost growth rather than simply the exploding number of seniors poses the greatest threat to the nation’s entitlement programs. The move bolsters the White House’s push for health care reform at the expense of national solvency.
The report provides this figure, which shows the impact of ageing as almost flat.

Careful readers will see that the White House wants to stress health cost growth because “over the long-term they are by far the larger contributor to the deficit.” Before getting to that claim the White House has to admit that it agrees with Biggs about the short-term impacts of aging: Over the next 20 years, demographics—the retirement of the baby boom generation—is the larger cause of rising spending.

As Biggs explained, the short-term matters the most. Entitlements will engulf the federal budget long before we reach the “long-term” health care crisis. According to a presentation by CBO Director Douglas Elmendorf, spending on Medicare, Medicaid, Social Security Defense, and debt interest will be larger than all federal revenues by 2018. Forget twenty years, we’ve barely got 10.

Generation Gap

What happens when the longest post-War recession meets rapid population aging? For starters older workers, many of whom saw their 401(k)s decline in the stock market crash, are working longer. This isn’t to say that older workers are safe in their work. Many have lost their jobs with the unemployment rates for those 65-69 almost trebling from 3.2 percent in January 2008 to 8.6 percent the same time this year.

At the same time younger workers, who experience persistently higher unemployment due to low skills and high job turnover, have also seen joblessness spike. Workers from 16 to 24 years of age began 2008 with an unemployment rate of 12.3 percent and saw the rate rise to 19.8 percent in January of this year.

If the cultural divide between generations, that composed so much of 90s sitcoms looked bad, the knowledge divide between generations will be a disaster for Americas workforce.

All of this is part of a larger shift toward an older population. In a recent presentation, CBO Director Douglas Elmendorf showed that labor force participation, the share of the adult population employed or looking for work, will decline dramatically over the next decade. This is shown in the figure below.

The dotted line indicates what could have happened without the current recession but even along that path labor force participation will decline.

This will have deleterious impact upon national finances. The figure below shows total government revenues (the dark blue line) and spending on a core set of entitlements and defense. Just take a look at this year’s defense budget and you’ll realize that entitlements are the real driver of cost growth here.

This is a well-worn entitlement story. Many retirees being supported by fewer workers become increasingly expensive. The new twist created by the recession is that many of these older workers may work longer. This could increase their benefits and keep younger workers from gaining on the job experience or earning wages at a level that can significantly contribute to current expenditures through the payroll tax.

Debt Ceiling reaches historic high

I've got a several days old post at The Enterprise blog that I have until now failed to post here.

The Economy Wins... Or Losses

A new report from the World Economic Forum says that economic risks, not geopolitical incidents, terrorism, or natural disasters, are the most likely and most damaging global risks in the coming year. The figure below is the headline image from the report. All the labels have been added for ease.

The chart color codes economic (blue), geopolitical (gray), environmental (brown), societal (purple), and technological risks (orange). {Author’s evaluations in presence of colorblindness}. The horizontal axis provides a measure of how likely an event is and the vertical axis provides the cost if it does occur. As we move to the northeast region of the chart, the expected cost, the probability of an event multiplied by its cost if it occurs, increases. So the incident with the highest expected cost is an asset price collapse (6).

To some extent, all the blue in the upper right makes sense. Coming out of a financial crisis economic risks are still high and potentially costly. Of course, one of the events in the figure has already gone from possibility to reality. The figure rates an earthquake at only a 1-5 percent chance. The quake in Haiti has removed all chance form the calculation.

So could it be that a group of economists, funded by the financial market-dependent Swiss government, is simply overstating economic risks. Haiti’s earthquake is not itself a good indicator. Massive quakes are rare. The more surprising divide is the separation of geopolitical risks. The most likely geopolitical risk is the vague global governance gaps. The most probable discrete event, Afghanistan instability rates below the probability of economic collapses and weighs in at only a quarter to a third of the cost. It may be that economists simply don’t evaluate the risks of coups or insurrections as well.

There is another gap that the WEF should worry about, the one between economists and financers on one hand and foreign policy experts and military strategists on the other.

Social Security in the Slow Lane

I've got a post over at the Enterprise blog about an new Social Security Commission proposal. The piece discusses the scare tactics being used to undermine the commission approach. There are legitimate concerns about the current commission approach. In an open letter, members of the Greenspan Commission staff raise some excellent ones, such as membership design.

Yet both open letter and the NCPSSM video in my Enterprise post, are wrong to focus two much on the speed of the commission as a negative. This speed is all in the voting process. By forcing Congress to vote, members have to take a position on each proposal. Sure that's going to be quick but drafting the proposals will take time. Plus, the range of options is limited.

If Congress feels unsettled by a proposal, they can vote no. But members would rather just not vote at all.