Monday, December 8, 2008

Adam Paul on Argentina's Pay-Go Stoppage

My smart and dedicated research assistant Adam Paul has a very nice article at Tech Central Station with the latest on what's been happening in Argentina with regard to the reform/nationalization of their private social security savings accounts. Given the parallels to what some folks are proposing for the U.S., it's worth checking out.

11 comments:

bubbleRefuge said...

Galbraith, a Post-Keynesian, criticizes the current orthodox, but fraudulent, belief that social security system has a funding problem.

http://economy.nationaljournal.com/2008/10/is-there-room-for-fiscal-stimu.php#1152033

Mr Biggs, you appear to be blogging about solutions to a problem that does not exist.

Andrew G. Biggs said...

I'm not sure I'd take Galbraith's thoughts on entitlements as exactly authoritative. The financial crisis is a short-term problem, while entitlements are long-term problem. As such, the financial crisis should take priority. But the scale of the entitlements problem far exceeds what we've spent addressing the financial crisis. A trillion dollars is a lot of money; $60 or $70 trillion is even more.

bubbleRefuge said...

I'm not sure I'd take Galbraith's thoughts on entitlements as exactly authoritative. Why not? I think a high school student can understand the problem?

A trillion dollars is a lot of money; $60 or $70 trillion is even more.

You are probably referring to the cumulative benefit. Note, current GDP is 14-Trillion a year. I think a more relevant question is what is the annual service costs as a percentage of GDP? I bet the federal government can easily assume those costs by running persistent deficits of 6% of GDP or thereabouts.

Andrew G. Biggs said...

Actually the $60 or $70 trillion figure is a present value of future Social Security and Medicare shortfalls, so it's basically comparable to trillion or so that we're currently spending on the bailout. Again, I grant that the bailout has more urgency than entitlement reform, but the scale of the problems are very different.

I very much suspect that a 6% of GDP deficit can't be run persistently.

Anonymous said...

It makes ABSOLUTELY no sense to discount future projected spending/revenues of a currency issuer. The federal government CREATES reserves when it spends, and destroys them when it taxes. There is no point whatsoever in "saving" or otherwise "setting aside" money today that the federal government will create in the future when obligations come due.

Also . . . very small changes to assumptions about SS lead to actuarial balance. The "low cost" version of the SSA projections are more consistent with historical experience.

And . . . Medicare projections are due mostly to growth in healthcare costs per capita, as CBO has repeatedly showed. Fix healthcare and that goes away.

So . . we're left with a healthcare crisis, if anything, NOT a "funding" crisis and NOT an entitlement crisis.

Anonymous said...

"I very much suspect that a 6% of GDP deficit can't be run persistently."

And the fact that Japan has done so for about 10 years now . . . with interest rates on government issued securities between 0% and 2% . . . I'd be interested in how that fits into your paradigm. Thanks.

MS said...

The problem in Argentina is of coverage. Only about a third or so of the workforce contributed to the savings accounts system. For those uncovered (or with a few years of contributions), the system offered "solidarity pensions" which are financed by general revenues (essentially a pay-as-go system for the poor).

The US doesn't have a similar problem. Most of the workforce is in the formal sector. Social Security covers nearly all of the workforce. The system is not corrupted (as the Latin American pay-as-go systems used to be). I do not see such a clear parallel.

bubbleRefuge said...

I very much suspect that a 6% of GDP deficit can't be run persistently.
Mr Biggs,
No doubt you are well informed on the operational issues and the balance sheet/accounting issues associated with SS.

What would it take for you or someone like you to re-examine your fundamental assumptions about reserve accounting , monetary operations, and sovereign debt as I have done.

Tell me why a 6% deficit can't be run persistently? What is the difference between a 2,3,4,6 or 10% deficit? Does everything blow up at 6%?

Andrew G. Biggs said...

In the long run, nominal debt can't grow faster than nominal GDP, so the size of the existing debt, deficit and interest rates matter. Japan has run significant budget deficits for the past decade and its debt/GDP ratio has tripled. Can the central bank monetize the debt? Sure, but that's not exactly a recipe for growth afterwards.

bubbleRefuge said...

In the long run, nominal debt can't grow faster than nominal GDP, so the size of the existing debt, deficit and interest rates matter.

Only in a fixed exchange rate/convertible monetary regime which we don't have here in the USA. We are off the gold standard. You are out of paradigm and promoting SS policy ideas based on an inapplicable economic model. Nominal GDP can be targeted at any level the government wants it via fiscal policy( but the government doesn't appear to want to do that because policy makers have a limited understanding of reserve accounting). US Treasury debt is a function of GDP. It exists to mop up excess reserves in the banking system in order to hit Fed Funds rate targets. It doesn't fund government.


What would it take for you to re-examine your policy-making framework?

Anonymous said...

In the US during 1953-2008, interest on govt securities has been less than the rate of GDP growth. The only period during which it was frequently larger was during 1979-2000, when the Fed usually kept interest rates high. The $70 trillion number is based on an infinite horizon calculation that assumes interest will be greater than GDP growth and is meaningless if not.

Monetization vs. "borrowing" is a gold standard dichotomy that is inapplicable to a currency issuer under flexible exchange rates. Japan's cb has simply kept interest rates very low . . . so-called quantitative easing replaced low-interest earning securities for non-interest bearing ones. Since the end of quantitative easing a few years ago, rates on these securities have not risen beyond the expectations of the BOJ's target rate.

Still eagerly anticipating a response to BubbleReguge's question.