The Custom-House

What should we do about

What should we do about Social Security?

Let me draw your attention to a new public policy blog, Vox Baby by Andrew Samwick.

Samwick is an economics professor at Dartmouth, Director of the Rockefeller Center for Public Policy and the Social Sciences, and served as Chief Economist on the President's Council of Economic Advisors. He specializes in Social Security issues, and has been posting on them freqently.

He highlights a new book by Peter Diamond of MIT and Peter Orszag of the Brookings Institution, in "What Social Security Reform Should Democrats Propose?" . The links include summaries of the book.

If taxes are going to be increased to make up the Social Security deficit, he'd like to see the additional money used for privatization: "How to Reform Social Security, Part I".

"...most people who have proposed a specific reform have added new revenues. Once new revenues are being added to the system, then it becomes important to figure out where they should go--the Trust Fund or personal accounts.

Confronted with that choice, I opt for personal accounts. For me, an immediate and permanent contribution of 3.5 percent of taxable payroll into personal accounts for all workers, in addition to the 12.4 percent payroll tax that they and their employers already pay, is preferable to the current system. The contributions are 3.5 percent because that is the amount that the Social Security actuaries say is required to restore solvency even if invested entirely in Treasury bonds..."

His real preference is to index Social Security payments to life expectency: "How to Reform Social Security, Part II ".

"...There are two reasons why there will be about 80 percent more beneficiaries relative to workers in the future: lower fertility rates and lower mortality rates (see this table for the history and this one for the projections). There is probably no easy way to link a reform of the system to changes in fertility rates, but it seems straightforward to base reform on changes in mortality rates.

Failing to index the retirement age to life expectancy implies an increasing portion of adulthood spent collecting benefits. Policy makers could craft a sensible justification for raising these ages. Consider how much easier it is to explain why retirement ages have to increase than it is to make sense of, say, an effective switch from wage indexing to price indexing in the calculation of the benefits (the centerpiece of Commission Model 2)..."

Thanks to Alex Tabarrok of Marginal Revolution for pointing north to Dartmouth in "The Social Security Burden".

Arlington Stadium Update Greg Depkin,

Arlington Stadium Update

Greg Depkin, at Heavy Lifting has provided a helpful set of links to his posts on the Arlington stadium referendum: "Collected Stadium Posts".

Arlington, Texas, has a referendum November 2 on whether or not to borrow hundreds of millions of dollars to finance a stadium in an effort to attract the Dallas Cowboys. This is likely to be a good deal for the Cowboys, but not for Arlington. The Cowboys are working hard to promote it. Depkin reports that:

"UT-Arlington is one of the few places in Tarrant County at which early voting is taking place. Evidently during the lunch hour today, the Dallas Cowboys Cheerleaders were on campus to drum up support for the stadium initiative. Let's see. Scantily clad gorgeous women and nineteen year old males. I am sure the cheerleaders had no impact on anybody's vote.

The other day the Cheerleaders visited the UAW Local at the GM plant here in Arlington. During last nights Red Sox-Yankees game Coach Parcells was on a commercial warning the citizens of Arlington "not to fumble the ball, and vote yes." Overall, some pretty impressive spokespeople, and if that is all it takes, then the stadium initiative will pass."

Depkin, an economist at the University of Texas, Arlington, has provided continuous updates on the negotiations, news coverage, and debates, since the story began to break in July. He has been particularly good in his evaluations of the economic analyses of the proposal, and in describing the way they've been used in the political debates. There have been almost 40 posts since the end of July. Links are provided to the original versions of key economic analyses.

I'm teaching economics of public policy to public administration master's students this semester. I'm going to have them read "The Economics of Sports Facilities and Their Communities" by John Siegfried and Andrew Zimbalist (JEP 14(3): 95-114. Summer, 2000) and then follow that up with a selection of Greg's posts and of the economic studies he cites. I think it will be a good opportunity to highlight the issues involved, as well as the ways in which economic analysis is used and misused in public debate.

I learned about Depkin's link collection from Skip Sauer at Sports Economist. The Sports Economist is another useful source for information on stadium economic studies and debates. "Dueling Studies on Arlington stadium" covers addresses the Cowboy stadium debate. "Caught Stealing" links to a Cato briefing paper on proposed subsidies for a D.C. baseball stadium.

Arnold Kling and the four

Arnold Kling and the four myths of Social Security

Arnold Kling explains four myths about Social Security: "Four Myths About Social Security" .

Social security is not a pension plan. Our problems are not a short term until the baby-boomer generation passes through the system. Medicare is not a bigger problem than Social Security.

Kling also argues that the transitional costs associated with privatization are not a showstopper. Social Security is essentially run on a pay-as-you go basis. People working now make payments to support people who are retired. If you wanted to allow working people to set aside some of their contributions to fund private pensions for themselves with individual accounts (privatization), you'd have to find new money to use to continue paying the people who are already retired. As a practical matter, the government would have to borrow the money. This could be a lot of money and is a big argument against privatization.

But Kling argues that these concerns are overblown.

"One way to eliminate the "transition cost" to partial privatization would be to first undertake a transition to better accounting. If the government were to put future Social Security obligations on its balance sheet as debt, then the accounting would be accurate. To borrow a locution from Warren Buffet, if promises to make Social Security payments are not a financial obligation of the government, then what are they? And if a financial obligation of the government is not debt, than what is it?

If unfunded liabilities to make future Social Security payments were counted as debt, then partial privatization would be nothing but a debt swap. The government would increase ordinary debt and reduce unfunded-liability debt by an equal amount. The transition cost would be zero."

Privatization financed by bonds may or may not be a good idea. However, the promises to make Social Security payments don't strike me as a financial obligation of the government. They are a policy commitment. This policy commitment has been changed in the past (program modifications in 1983 increased retirement ages). A modification in the commitment will have political ramifications, but the ramifications will be different from those involved in a unilateral decision by the government to modify the repayment schedule for its bonds.

Originally, in 1935, Social Security was an almost fully funded pension program. This changed in 1939, and the program became a tool to transfer income from the current working generation to the retired generation. Roosevelt, however, insisted that the program retain many of the trappings of a pension program. Herman Leonard tells the story:

"The social security system entered 1940, the year of its first benefit payments, sheltered by a political fortress. The cornerstone was the widespread notion that the system was directly contributory - that an individual's payroll taxes flowed into his or her personal account, accumulated interest, and would be paid back. This interpretation was explicitly ruled out by the Court's [The US Supreme Court in a 1937 decision upholding the Social Security Act - Ben] statement of the constitutional basis of the program. It had been rejected as a funding philosophy by the system's staff and by Congress. Moreover, it was inconsistent with the economics of the system's actual financing. But the notion persisted - indeed, it was explicitly promoted - because it played a crucial role in the long-term political impregnability of the system. Roosevelt emphasized from the outset that the system had to be financed by payroll taxes, referred to as contributions. If it was supported by general revenues, it was a gift that could be cut. Contributions were owned by and owed to the contributor. Roosevelt patiently explained this over and over: "Those taxes were never a problem of economics. They were politics all the way through. We put those payroll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits."

The administrative structure of the program reinforced the idea that social security was contributory insurance and not a handout. Participants had accounts identified by account numbers. They could - and many did - inquire about how much they "had" in those accounts. The social security program paid staff to keep account records even though actual benefits would be determined by earnings, not by contributions [The 1939 amendments had based social security payments on a recipient's past earnings, rather than on any contributions they had made to the program - Ben]. These visible manifestations were vital, as Roosevelt clearly understood. A management expert named Luther Gulick told Roosevelt in 1939 that the clerks adding up the sums in each participant's account were wasting their time and the government's money, to the tune of $1 million per year. Roosevelt observed, "Luther, your logic is correct, your facts are correct, but your conclusion's wrong. Now, I'll tell you why. That account is not useless. That account is not to determine how much should be paid out. That account is there so those sons of bitches up on the Hill can't ever abandon this system when I'm gone..."

Governments have a hard time making commitments. How do you stop one Congress, one school board, one fishery management council, from overturning a decision made by a previous Congress, board or council? But if you can't make a commitment, how can you make a deal? Why adopt a program, if it can be easily abandoned? Roosevelt solved his commitment problem.
The Social Security anecdote is from pages 57 and 58 of Leonard's book, Checks Unbalanced. The Quiet Side of Public Spending.

Peter Gallagher on Asian Attitudes

Peter Gallagher on Asian Attitudes on Trade Issues

Our man in Manila reports on a conference on multilateral trade and the WTO Doha Round of trade negotiations: "Asian business views on WTO":

"I spent a couple of days in the last week at a conference organized by the UN International Trade Centre in Manila (Philippines) in which 45 business leaders (CEOs of export companies, industry association executives) and government officials from 16 Asian and Middle East countries discussed the state of the multilateral trading system and the Doha round of trade negotiations.

The conference ranged over almost the whole agenda of negotiations in WTO. The participants, because of their backgrounds, were well-informed and likely to influence national approaches to the negotiations. So their opinions provide a good barometer of Asian region opinion about the WTO system..."

Lots of good stuff on Asian (except for China) opinions on the agricultural negotiations, the negotiations on trade in industrial products, the upcoming lifting of developed country textile barriers, and more. Here are Asian businessmen on the vogue for bilateral, as opposed to multilateral trade agreements:

"Many business leaders are worried that the rapid growth of discriminatory bilateral and regional trade agreements in Asia�a phenomenon that has been accelerated by offers from China�is going to make it more difficult to do business. I was surprised to see how clearly they �got� the problems that discriminatory agreements pose for the global trading system. They sense, correctly, that these agreements have a lot of transaction costs associated with them in the form of additional rules of origin and complicance requirements."

How to drive down drug

How to drive down drug prices

Malcolm Gladwell writes about high drug prices in the New Yorker: "High Prices. How to think about prescription drugs" .

Marcia Angell, former editor-in-chief of the New England Journal of Medicine, thinks high prices are caused by drug company manipulation. Gladwell disagrees.

First of all, not all prices are high:

"...The �intolerable� prices that Angell writes about are confined to the brand-name sector of the American drug marketplace. As the economists Patricia Danzon and Michael Furukawa recently pointed out in the journal Health Affairs, drugs still under patent protection are anywhere from twenty-five to forty per cent more expensive in the United States than in places like England, France, and Canada. Generic drugs are another story. Because there are so many companies in the United States that step in to make drugs once their patents expire, and because the price competition among those firms is so fierce, generic drugs here are among the cheapest in the world. And, according to Danzon and Furukawa�s analysis, when prescription drugs are converted to over-the-counter status no other country even comes close to having prices as low as the United States."

It bothers Angell that many of the drugs introduced are simple knockoffs of existing drugs, bu the competition drives down drug prices:

"An entire chapter, for instance, centers on the fact that the majority of drugs produced by the pharmaceutical industry are either minor variations or duplicates of drugs already on the market. Merck pioneered the statin category with Mevacor. Now we have Pfizer�s Lipitor, Bristol-Myers Squibb�s Pravachol, Novartis�s Lescol, AstraZeneca�s Crestor, and Merck�s second entrant, Zocor�all of which do pretty much the same thing. Angell thinks that these �me-too� drugs are a waste of time and money, and that the industry should devote its resources to the development of truly innovative drugs instead. In one sense, she�s right: we need a cure for Alzheimer�s much more than we need a fourth or fifth statin. Yet me-too drugs are what drive prices down. The presence of more than one drug in a given category gives P.B.M.s [P.B.M.s are Pharmacy Benefit Managers - Ben] their leverage when it comes time to bargain with pharmaceutical companies."

Gladwell puts his hopes in these P.B.M.s:

"This is why [the cost savings P.B.M.s can bring - Ben] increasing numbers of employers have in recent years made use of... P.B.M.s. The P.B.M.s draw up drug formularies�lists of preferred medications. They analyze clinical-trials data to find out which drugs are the most cost-effective. In a category in which there are many equivalent options, they bargain with drug firms, offering to deliver all their business to one company in exchange for a discount. They build incentives into prescription-drug plans to encourage intelligent patient behavior. If someone wants to take a brand-name oral contraceptive and there is a generic equivalent available, for example, a P.B.M. might require her to pay the price difference. In the case of something like heartburn, the P.B.M. might require patients to follow what�s called step therapy�to try the cheaper H2 antagonists first, and only if that fails to move to a proton-pump inhibitor like omeprazole. Employers who used two or more of these strategies last year saw a decrease of almost five per cent in their pharmacy spending."

I learned about the Gladwell article from Arts & Letters Daily. I posted on an article of Angell's earlier this year: "Do drug companies face the correct incentives?". She now has a book out: The Truth About the Drug Companies: How They Deceive Us and What to Do About It.

NGO Incentives Sebastian Mallaby writes

NGO Incentives

Sebastian Mallaby writes about non-governmental organizations (NGOs) in Foreign Policy: "NGOs: Fighting Poverty, Hurting the Poor".

The article is built around three entertaining case studies of NGO reactions to development projects; the most important is the story of how NGOs derailed a World Bank loan for a Chinese poverty project.

Mallaby argues that some NGOs have incentives that cause their interests to diverge from those of those of the poor:

"The most common reaction to this sort of story is that the bank must communicate better with its critics and learn how to compromise with them. Unfortunately, this prescription is naive. It presumes the critics are open to compromise. But campaigning NGOs, as distinct from those with real development programs in the field, almost have to be radical. If they stop denouncing big organizations, nobody will send them cash or quote them in the newspapers. Partly for this reason, and partly out of a likeable conviction that the status quo is never good enough, most NGOs do not have an off switch. You can do everything possible to meet them halfway, but they will still demonstrate outside your building. Of course, there will be grown-up groups like Oxfam, World Vision, or the World Wildlife Fund that may accept your olive branch. But they will be the exceptions, and they may cooperate only cautiously. They don�t want to be the next target for the radicals...

...In many of the world�s rich capitals, and especially in Washington, public policy is decided by a bewildering array of interest groups campaigning single-mindedly for narrow goals. A similar army of advocates pounds upon big international institutions like the bank, demanding they bend to particular concerns: no damage to indigenous peoples, no harm to rain forests, nothing that might threaten human rights, or Tibet, or democratic values. However noble many of the activists� motives, and however flawed the big institutions� record, this constant campaigning threatens to disable not just the World Bank but regional development banks and governmental aid organizations such as the U.S. Agency for International Development. If this takes place, the world may lose the potential for good that big organizations offer: to rise above the single-issue advocacy that small groups tend to pursue and to square off against humanity�s grandest problems in all their hideous complexity.

The power of the NGOs flows from their use of the internet and their ability to move western publics:

"Time after time, feisty Internet-enabled groups make scary claims about the iniquities of development projects. Time after time, Western publics raised on stories of World Bank white elephants believe them. Lawmakers in European parliaments and the U.S. Congress accept NGO arguments at face value, and the government officials who sit on the World Bank�s board respond by blocking funding for deserving projects."

The article has an agency viewpoint; the China story has an ironic ending that I'd enjoy if my project had been derailed. NGOs aren't condemned wholesale; some NGOs are unduly focused on a single issue, some have little incentive to compromise, some have technical expertise in public relations and bureaucratic infighting that exceeds their judgment. There are useful links to additional resources at the end of the article.

Mallaby is a Washington Post columnist, and author of a new biography of World Bank president James Wolfensohn (the article is taken from the biography). I posted on the biography a few days ago: "Who will be the next President of the World Bank".

I learned about this from "Arts & Letters Daily".

P.S. Oct 27: Mallaby tells a story about efforts by the International Rivers Network (IRN) to block a dam in Uganda. The IRN responds here: "IRN Response to Sebastian Mallaby�s Attacks on NGOs". Michael Stastny at Mahalanobis thought to track this down. His post is here: "NGOs: Fighting Poverty, Hurting the Poor ".

Good advice on time management

Good advice on time management

John Quiggin explains how to get things done: "Time management tips".

Economists Lie Less (than sociologists)

Economists Lie Less (than sociologists)

But we're not as honest as political scientists, reports Eric Rasmussen: "Are Economists Selfish? The Laband-Beil Association Dues Study".

Thanks to Michael Stastny for the "heads up":"It's official: SOCIOLOGY is BAD for one's MORALS."

More outsourcing of services to

More outsourcing of services to India

Here's another example of the outsourcing of services overseas:

"Three months ago, Howard Staab learned that he suffered from a life-threatening heart condition and would have to undergo surgery at a cost of up to $200,000 -- an impossible sum for the 53-year-old carpenter from Durham, N.C., who has no health insurance.

So he outsourced the job to India.

Taking his cue from cost-cutting U.S. businesses, Staab last month flew about 7,500 miles to the Indian capital, where doctors at the Escorts Heart Institute & Research Centre -- a sleek aluminum-colored building across the street from a bicycle-rickshaw stand -- replaced his balky heart valve with one harvested from a pig. Total bill: about $10,000, including round-trip airfare and a planned side trip to the Taj Mahal..."

See the rest of John Lancaster's article in the Washington Post, here: "Surgeries, Side Trips for 'Medical Tourists' "

This sort of openness to the world economy strikes me as a good thing, in this instance, as well as in data processing and call centers. This also suggests that openness to world trade in services can play an important role in guaranteeing broad social access to increasingly costly health care.

The Interstate Wine Shipment Case

The Interstate Wine Shipment Case

Seven economists - three Nobel prize winners - have filed an amicus brief with the Supreme Court in the interstate wine shipment case. You can find it here: Economist's amicus brief.

The brief includes an analysis of the economic foundations of state rules restricting imports of wine. Does the evidence suggest that these rules are meant to advance public welfare objectives or the economic objectives of powerful interest groups? The analysis is based on a paper by Gina Riekhof and Michael Sykuta, "Politics, Economics, and the Regulation of Direct Interstate Shipping in the Wine Industry" (CORI Working Paper 03-04, April 2004). The abstract for this paper reads in part:

"In 1986, the State of California passed legislation restricting the direct importation of wine from another state by California residents unless the originating state allowed the reciprocal privilege of direct shipment from California wineries to residents in that state. This proved to be the opening salvo in a series of legislative and judicial battles across the country. State direct shipment regulations that were uniform across 47 of the 50 states prior to 1986 now constitute a patchwork of regulations. This raises unique interstate trade questions due to the special treatment of alcohol in the U.S. Constitution. While the Commerce Clause forbids states from discriminating against interstate commerce, the 21st Amendment affords states the right to regulate alcohol within their borders. Courts are divided in their opinions on direct shipment regulation; some find that prohibiting direct shipment unconstitutionally restricts interstate commerce while others find the regulations consistent with the public interest rationale of the 21st Amendment..."

The economist's brief picks up the story:

"In the decades following the enactment of the Twenty-First Amendment, virtually all states adopted a three-tier system [the three tier system refers to separation of producer, wholesaler and retailer, enforced by state regulation - Ben]. Most states enacted direct shipment prohibitions to protect that system, but those restrictions played only a small role, as the technologies of those times rendered remote transactions between producers and consumers uneconomic. In 1986, however, California limited direct shipment to imports from states that would permit, on a reciprocal basis, the direct shipment of California wines to their citizen-consumers. The economic logic is not hard to fathom: by limiting direct shipment rights to reciprocity states, California�home to the nation�s largest wine industry�sought to open other states� markets to its domestic producers.

California�s move prompted a change from a relatively homogeneous state regulatory environment to the current patchwork of state alcohol regulation. Some states responded relatively quickly in the manner hoped for by California; there are now 13 reciprocity states. Many other states loosened their restrictions and allowed direct shipments from out-of-state, often under a permit system. A few states, however, Michigan among them, tightened their direct shipment regulations...

The variegated state responses to California�s unilateral adoption of a reciprocity regime in 1986 suggest an obvious question: why did formerly homogenous state regulatory regimes generate such disparate responses? Riekhof�s and Sykuta�s sophisticated analysis directly addresses that question and finds �that economic interests play a significant role in determining a state�s adoption of direct shipment [regulations], but no evidence supporting a general public interest motivation.� Riekhof & Sykuta at 4. That finding is highly plausible even at an intuitive level: �If direct shipment prohibitions prior to 1986 were in place solely for public interest reasons, it would be difficult to explain why California�s decision to adopt reciprocity would have its intended effect of opening up access to no-shipment states.� Id. at 12. Unsurprisingly, the authors find that the size of a state�s wine industry (number of wineries relative to state wine consumption) is positively related to the adoption of reciprocity laws. Conversely, the size and concentration of the distributor industry are negatively correlated with the likelihood that reciprocity legislation will be enacted. Id. at 22. Riekhof & Sykuta found that public sector interests (such as tax collections) also affect state responses. In contrast, none of the authors� proxies for public interest considerations appeared to have a significant effect on state policy responses. Id. These results are highly consistent with well-accepted general economic theories of regulation. They directly affect the present case: �To the extent that public welfare interests are required by courts to justify states� restrictions on interstate commerce, our results cast a shadow of doubt on public interest arguments in the area of direct shipment of wine.�

I learned about the brief from Lynne Kiesling: "Economist Amicus Brief in Interstate Wine Shipment Case".

Revised Oct 20