Friday, May 13, 2011

Thoughts on Entitlement Programs for the Elderly

Here are some thoughts about entitlement programs, prompted by reading this piece in the WSJ by John Cogan. (Brought to my attention by RecessionCone.)
  1. Social Security and Medicare are really separate issues.
    • SS needs some changes, but it could be tweaked into solvency fairly easily (given the political will.) The shortfall is not projected grow explosively. (See here:
    • Medicare, on the other hand, is projected to grow grow and grow, like The Blob, until it eats the entire economy.
  2. So always remember that it is the growth of Medicare that is the big problem. We could absolutely "afford" to continue to pay for the care that Seniors receive now; it's the extra care they are supposed to get in the future that is the problem. We could even "afford" to have expenditures grow along with GDP.
  3. The fact that Medicare is projected to grow and grow, and we are simply cursed to accept this, seems strange. There is much disagreement (as well as much misinformation) about what is causing this and what can be done about it. Unfortunately doing anything about it at all can be politically unpopular, as both Obama and Paul Ryan have found out. This is a really tricky problem, both as a policy problem and a political problem.
  4. Social security is and has always been a transfer program, where the young transfer income to the elderly. It's not, and has never been, a funded savings program, like a private pension. People often seem confused about this.
  5. Don't forget that in any system at all where there are retired people, it is the young who produce what the old consume. When you remember that, transfers from the young to old don't seem that outrageous. It's all a question of how we set things up to make those transfers, how big those transfers will be, and how those things affect overall efficiency and growth.
  6. Some of Cogan's points seem off:
    • Talking about what we "cannot afford" can be misleading. Taxes could be a lot higher. That may or may not be a good thing, but it is not impossible.
    • Cogan seems to imply that it is somehow unfair that the people who put in $500K are getting $1M in benefits. But that is a pretty low rate of return. These people would have done much better buying long term treasury bonds, let alone investing in stocks.
    • Cogan goes on to say:
      But regardless of how much they have contributed, the hard reality is that the federal government has already spent it. No matter how deserving they are, it is younger generations of workers who have to come up with the money.
      But that is equally true of someone who is redeeming government bonds! I doubt Cogan would use this as a reason for the US to default on our debts.
    • Cogan seems to call for a system of private accounts, invested in stocks and bonds. I have grave reservations about such a system, which I will leave for another time.
  7. Cogan is also right about some things
    • Cogan says the current system is "not the result of elected officials carefully weighing the needs of senior citizens against the financial ability of younger workers to meet these needs." That's right: it is the result of a political process. Like everything the governement does. Always a good thing to keep in mind.
    • He's right that reform is needed. His proposals for reform are not all what I would choose, but at least they are serious proposals.
The most important thing to me is that we need to get the long term fiscal picture in order, as soon as possible. This will require reductions in the growth of spending (sometimes misleadingly called "cuts") as well as tax increases.

Sunday, April 24, 2011

Book Reviews - Stuart England

Mark Kishlansky, A Monarchy Transformed, Britain 1603-1714

Last month I resolved that I should consume less news and read more books. About this time I also got an android phone with Kindle software. So now that I'm reading more books, I thought I'd jot down some reviews, for myself and the 2 or 3 other people who might read this blog. Lately I've been reading mostly history.

Stuart England is a time and place that should be pretty interesting. You've got one King losing his head and another being driven out by his own daughter and son in law! Roundheads vs. Cavaliers! Oliver Cromwell and the New Model Army! Austere, moralizing puritans and other religious dissenters! Dissolute libertinism in the Restoration period! Pepys' London, the fire, and the plague! The beginnings of the enlightenment, with Newton, Bacon, Hooke, Hobbes, and Locke! Colonization of North America! The first Whigs and Tories, and the main foundations of constitutional monarchy!

Unfortunately, Kishlansky's book focuses almost exclusively on political history, so it just skips over a lot of the stuff I listed in the last paragraph. In hindsight, I would have liked more liked more social, cultural, and economic history (like I found in the much-more-enjoyable volume of European history I read last fall, The Pursuit of Glory.) I suppose it is difficult to cover such a long time period without making the reading sort of dry. Still, I found it dry even by these standards. It didn't even include the word "Roundhead!" Plus, the Kindle version didn't have the maps! Can't recommend.

Not satisfied that I'd gotten all I could get from this period of English history, I started reading Macaulay's famous history, downloaded for free from project Gutenberg. I read volume I and much of volume II (there are five volumes altogether). This is also mostly political history (except the justly famous Vol I chapter 3 which gives an overview of the state of technology in 1685), but the prose is much more lively, and everything and everyone seems much more interesting. Macaulay is criticized today for his "whiggish" approach to history, but his biases are easy to detect, and anyway probably aren't too different from my own. I liked it a lot. (I stopped after volume II, because I don't think I want to read three entire volumes about the exploits of William III.)

The most exciting parts were probably the account of the "Glorious Revolution" in the last two chapters of volume II. Even though it wasn't really a revolution, and the main principle at stake was the King James' refusal to sufficiently persecute Roman Catholics.

Favorite newly-learned historical fact: The secret treaty of Dover, in which Charles the second agrees to put himself and his armies at the service of Louis XIV, and even convert to catholicism (!!), all for a couple hundred thousand £'s.

Historical character I'd like to learn more about: Cromwell, Marlborough (tie)

Favorite obscure historical character: Praise-God Barebone (pictured)

Favorite historical hijinks: James II trying to flee England in disguise, getting captured by fisherman and treated rudely, but eventually recognized and returned to London. Nobody knew what to do with him, so they kind of let him escape again.

Favorite passage: taken from Macaulay's description of the character of Charles II, from Vol I, Chapter 2:
According to him [Charles], every person was to be bought: but some people haggled more about their price than others; and when this haggling was very obstinate and very skilful it was called by some fine name. The chief trick by which clever men kept up the price of their abilities was called integrity. The chief trick by which handsome women kept up the price of their beauty was called modesty. The love of God, the love of country, the love of family, the love of friends, were phrases of the same sort, delicate and convenient synonymes for the love of self. Thinking thus of mankind, Charles naturally cared very little what they thought of him. Honour and shame were scarcely more to him than light and darkness to the blind.

Friday, April 22, 2011

In Defense of Oil Speculators

Whenever oil and gasoline prices go up, people start vaguely casting blame on "manipulation" and "speculation." Now I see that even Obama has gotten into the game, vowing to"root out any cases of fraud or manipulation" in gasoline prices, "and that includes the role of traders and speculators [big applause line]."

It's true: speculation in oil futures can drive today's price up (or down). And that's just what we should want it to do.

Because we shouldn't care just about today's price, but about tomorrow's price too. If we knew that demand would likely be higher in the future (for example because of seasonal effects), or that supply would be lower in the future (for example because of unrest in oil producing countries), then what we would want to do is take some oil off the market today and save it for later. This would of course drive up the price we pay today, but it would lower the price we'd pay later when the oil would be even more scarce.

This is exactly what "speculators" try to do. People who believe they are well informed about future oil market conditions bid up futures prices, which causes people to store oil, or just leave it in the ground, in anticipation of higher prices later on. If these people are right, then they make money (at the expense of the people who took the other side of the bet), and consumers are better off in the long run. Of course the speculation could prove wrong (that's why it's called "speculation"), but still it represents the aggregated best guess of the people who have studied the issue enough that they are willing to place large bets on the outcome. If they are wrong, they lose money.

Now let's look at some quotes from the story about Obama's announcement as reported in McClatchy Newspapers:
Despite turmoil in the Middle East, there has been no significant interruption of oil production, and supplies remain abundant.
Well, not yet. Futures prices are about preparing for the future. Or would you prefer we just forget about the future and just burn whatever oil we can get our hands on with no concern about what might happen later?
Obama is under political pressure to address gasoline prices that are nearing an average of $4 a gallon.
Of course, political pressure. Ignorant voters forget that oil is traded in a world market and the president has basically no power to affect the price. Perhaps they would prefer that the government take over the entire gasoline market; maybe we could even have gasoline riots, like they do in Iran.
Commodities markets rely on speculation. It's excessive speculation that regulators are trying to curb.
Great! I'm sure government bureaucrats will just gaze into their federally issued crystal balls and determine when speculation is "excessive," outguessing the investors who make their living by making these predictions.
Bart Chilton, a member of the Commodity Futures Trading Commission, has argued that speculation is excessive.
Then maybe he should use his special insight sell some oil futures and get rich. Good luck with that, Bart!
But he said that determining how much of the oil-price increase stems from speculators, rather than a "fear premium" rising from Middle East instability, isn't a simple calculation.
Um, aren't these the same thing? The "fear premium" is due to a reasonable "fear" that supply will be lower in the future. (Of course if the fears turn out to be unfounded, then all those "speculators" will lose money. But predictions are hard, especially about the future.)
Proving market manipulation isn't easy.
Right, so this will probably come to nothing. (In fact, I don't think there are any commodity traders remotely big enough to "manipulate" this giant world market.) Maybe that's what Obama thinks too...I like to think he's smarter than this.

Monday, April 18, 2011

How I know Climate Science isn't "Unequivocal"

First, I believe that CO2 (among other gases) is increasing in the atmosphere due to human activity, and that this will have a first order effect of warming the planet. I also believe that we have seen moderate warming over the last century or so (indeed the warming started even before the CO2 really took off). But I don't believe that the evidence for predictions of large, catastrophic global warming is, as we are often told, "unequivocal." Here's how I know.

In 2009 I saw global warming alarmists on the internet gleefully pointing out this new study from MIT scientists, showing that "climate change could be double previous estimates. " Here's a quiz: should this make you more or less confident in global warming models? I'd say that if you just found that your previously unequivocal models might be off by a factor of 100%, you might want to rethink whether they are really so unequivocal or not. If they can be 3 degrees too low, maybe they can also be 3 degrees too high. (This isn't unique: here's something from 2005 predicting warming twice as bad as previously thought.) Instead, findings like this seem to only make climate alarmists more sure of themselves. And people were already saying these predictions were unequivocal back in 1996 when they didn't even know about something so important as the Pacific decadal oscillation yet.

I mean, these models are really, really complicated. They have lots of degrees of freedom. And I don't believe they have produced any very impressive out-of-sample predictions yet. Furthermore, I'm confident that all the funding and publication biases would run in the direction of people wanting to predict more warming. Scientists are unfortunately not immune to overconfidence and confirmation bias.

And when I read criticism of "deniers" and "skeptics," all the focus seems to be on the least informed straw man arguments that come from people like Rush Limbaugh. I never see anyone respond to skeptics like this guy.

So I don't discount the possibility that CO2 emissions might have large impact on climate. I think it is definitely something to worry about and study. Climate science is not a "scam," as many crazies on the right will tell you. But being told it is unequivocal really gets my BS detector going. Apparently expressing any skepticism about even the magnitude of effects is enough to get you kicked out of polite society. This is not healthy.

Wednesday, March 9, 2011

Waiting for Superman?

I missed a big twitterfight yesterday about the film Waiting for Superman. So I thought I'd put up a few of my many thoughts about school reform issues.

1. I haven't seen WFS. I agree that most popular documentaries are manipulative and should be taken with a large grain of salt.

2. As I tweeted before "good school" mostly means "good students."

2a. US schools aren't as bad as you think, it's the students that are bad. I believe outcomes for Chinese students here are much more similar to Chinese students in Singapore than they are to Chinese students in China.

2b. There is probably no magic bullet in school reform, and even things that are most worth doing will probably show small effects.

3. Disappointingly, research shows that charters overall haven't appeared to perform very well.

4. Nevertheless, there is a subset of charters that does appear to perform better. It would be nice to allow those charter models to expand. But there are many political obstacles to opening new charters.

5. Personally, I would like to see less power for unions of all kinds, and public sector unions especially. I think teachers are great, and I admit that unions help them get higher compensation and less mistreatment by employers, things which I fully support. But this is outweighed by the negative effects of unions: they block all chances for positive reform other than tinkering around the edges, they often protect the jobs of even very incompetent teachers, and they lobby for compensation structures (e.g. DB pensions, extra pay for master's degrees) that are bad for the system.