Economics and Government

For the recent retirees, the worry there won’t be a social security check next month hasn’t crossed their mind. But in the near future if social security is not reformed today, millions of retirees will have that ugly thought come true.

The reason for the scary thought is the fact that millions of baby boomer will start to retire starting as soon as 2008. As the result, the funds will shrink and eventually become empty. The children of the baby boomers will then have to chip in. It has been predicted by many that starting 2017 Social Security will begin to pay more out than it takes in. In year 1950 there are approximately 16 workers contributing to 1 person’s retirement. But in just 50 years, that number has declined to 3.3. While it takes average of 25 years to produce a new tax payer, the number of retirees consistently increases. As a result, there will be a major gap in contribution to Social Security. While payments must still be made out while funding is low or nonexistent, other programs funds will be reduced like environmental protection, highway construction, or worse national defense. Otherwise, income, sales, or property tax will have to be increased.

All of these sounds scary as it should, but there are solutions that can and will help Social Security stay afloat. Perhaps monthly checks should only be given to individuals when their saving ran out. An age cut off has also been talked about. However the most effective is the program called 401K. Most people only think about the short term, so their decision not contributing to a 401K can haunt them dearly when they retire. Since average saving dropped from 7.1% in 1992 to barely 1% today for the average worker, some have talked about automatically enrollment to a 401K account.

An article written by Jonathan Weisman in the May 22, 2005, page A05 edition of Washington Post did just that. House Ways and Means Chairman Bill Thomas (R-Calif.) said he would give incentives to companies who convert 401(k) balances to annuities accounts that would pay out slowly over a worker's retirement. Many employers have already liked this idea because increasing enrollment in 401(k) plans will help reduce the cost of administering them. Some economists also are embracing the idea.

Today, around 10 percent of the companies that offer 401k has already enrolled its new workers automatically giving them the choice of opt out. As the result, participation has jumped from average to 37.4% to about 85.9%.

The only problem some worry is people will sue if there are investment losses. In my opinion, 401k accounts are much less risky than depending on Social Security when people retire. Social Security is full of lies and having kids pay for their parent’s retirement is plain intergenerationally unjust. This automatically enrollment to 401k definitely gets my vote. After all, more savings mean more growth and prosperity. The economy will also be more efficient.

Last week a law was signed by the president that forces the creation of a 700 mile long fence across the border between the US and Mexico. The aim is of course to lesn the number of immigrants coming to our country illegally. This particular issue hits on a couple great hot button issues, eminent domain and illegal immigration. Since I am not sure how to apply the ideas of Pareto Optimality to the illegal immigration dispute without adding in another value judgment or two lets look at the Fence itself.

Eminent Domain allows the federal government in this case to take up over 700 miles of this mostly privately owned land to use at it sees fit while only providing "just" compensation. Much of the value of the land that is to be taken is not in the land itself but in the location of the land. Since it borders the Rio Grand the land is used for irrigation that may be cut off by the fence. Should that irrigation be cut off then the rest of the land attached to these pieces becomes worth much less sine they cannot support crops without the water.

It seems that a huge scale benefit cost analysis could lend some insight into this program. Whether the proposed cost of the fence (estimated to be on the order of 2 to 9 million dollars) as well as the cost of "just" compensation to all the land owners along the proposed 700 miles, all the lighting and electronic sensing equipment, maintenance and the loss of productivity by the farms and business along the path of the fence. With the astronomical costs of this proposal I would hope that somewhere there are some damn good benefits to this to be able to offset them.

Story: http://www.mcall.com/news/opinion/all-editorial1oct31,0,1624792.story?coll=all-opiniontop-hed

Given our discussion on Social Security and the problems associated with the program, I thought it was interesting to discover Britan also has issues providing for the elderly. While the United States has the system of Social Security which has many problems, Britain has a public health system and fading away pension plans to contend with. Both of the ways the United States and Britain are trying to manage the looming problems resulting from the baby-boomer generation retiring are intergenerationally unjust- and in Britain it is already starting to spell out conflict.

There are stark defenses among the ability of the members of different generations to secure retirement in Britain. For example, many members of the baby-boomer generation in Britain are also in possession of "entitlements in defined-benefit schemes" which are linked to their final salaries. About 11 years ago there were five million private employees engaging in this plan and today there are a little less than two million. As a result it has been forecasted these schemes will disappear over time resulting from an inability to stay afloat. The companies offering these pensions have closed-up shop to new members or at least set up less generous contribution plans to new members in order to combat the deficit. "This adds up to a very dramatic shift in resources across generations."

There is also a concern about the younger generation in Britain because they will be forced to pay steeper pension contributions while being saddled with the responsibility to pay off student loans and because of policy changes many will also be impacted by the new "inheritance tax." Previously this tax was exclusively levied on wealthy estates but now it will impact the middle-class as well.

Another issue impacting the generational gap stems from political power. "Their children, on the other hand, face a far more uncertain and stressful future and risk being largely ignored by politicians." This is a result of the politically apathetic younger generation who is also outnumbered by the much more active older generation. As a result, the stark differences among the classes are also playing out in politics because in Britain there is an obvious grip on political power held by older generations. This is evident from the priority the health service by the enormous amounts of money spent on it by political parties including Labor and the Tories.

Britian and the United States both have problems with their respective plans to take care of an aging baby-boomer generation. The U.S. has a system that is generationally unjust because it will cause an increasingly difficult tax burden on members of the younger generation, while providing them little assurance the benefits will still be in place when they themselves are able to retire. Britain's problem is very similar but also looks a little worse because they seem to be heading towards intergenerational conflict as a result of not only unfair pension plans but also slowly loosing their ability to influence the government who controls the resources. "Whereas class conflict used to dominate politics and conflicts of culture and identity are today's worries, the looming danger is generational conflict." These issues not only threaten the economic livelihood of the country but also the health of their democracy.

Economic growth is at its slowest pace in more than three years. In the third qurter of 2006 the nations GDP grew at a pace of 1.6%. Down from the 2.6% growth experienced in the second quarter. GDP(Gross Domestic Product) is the governments main gauge of economic strength and performance. Analyst were expecting a growth of 2.1% over the third quarter, but actual economic growth came in much lower than forcasted. The weak third quarters performance was due in part to a rising trade gap which subtracts from GDP, as well as the slump in the nation's housing market. However an article I read on CNN.com suggests that the economy is poised to bounce back, with the help of lower energy costs. Chris Isidores states "the slower growth, and a price reading in the report that showed less inflation pressures than expected, raised hopes that the Federal Reserve could start to cut interest rates early next year, as the central bank tries to find the balance between economic growth and price stability." The fed will closely examine the supply of money and try to find the right interest rate to spur the economy, which will help growth over the fourth quarter. With elections coming up it will be interesting to see how this news will effect the races. With much of the political banter about the war in Iraq, this recent news should give the Democrats another great debate topic. With the stock market and employment rates remaining strong, it is probably easy for most American’s to believe the economy is in great shape. Many Democrats like Rep. Carolyn Maloney, D-N.Y., will argue that "Once again, the Bush economy is going in the wrong direction." What is yet to be seen is if this will have an impact on the near upcoming elections?

The recent reports that have reported that on Jan. 1st the increases will go to 3.3% which doesnt seem to be a big increase but retirees will on average get only $33 and couples $55. The big key to the increase in the cost of living is tied into the consumer price index and this will contiune to go up each year which appears to be a going in the wrong direction for future generations. For the future generations with most of the income that one will be living off comes from savings, pensions, and investment it comes very crucial that for the future generations we are going to have to make sure that we save more. When most retire and become no longer a productive member of the economy it will become imparitive that we save and invest at an early age to keep afloat after retirement. There are new programs out there that are offering a lifetime income protection, which can be described as the opposite of life insurance. With the lies of the current social security system or OASDI the future generations will not have the luxury of having government use there coersive power to get the social security problems fixed. In the report it is described as the on -your-own retirement plan, with implies that we must start looking at the investing, pensions, and saving money now. With the age in that people are tending to live to going up the amount of money that will be needed to be saved will have to increase. This may lead most people to start thinking about staying a productive member of the economy for a longer period of time and not retire. The report makes it very clear that the with the cost of living being tied into the consumer price index and the inflation rate continuing to creep up the dollar will continue to be worth less which means we will have to save more. Think about the future now or pay for it later.

An article came out October 27 stating that the economy is slowing down and will continue to do so into the fourth quarter this year. The economy grew by a real annualized pace of only 1.6% from July through September, down from 2.6% in the second quarter, and even farther down from the first quarter, 5.6%. This was the slowest quarter in more than three years.

Even more shocking was that in the GDP report there was a 17.4% drop in residential fixed investment (which includes spending on housing). That is the biggest quarterly decline since 1991.

They continue to speak of recession but I think the economy has a little room for further "deceleration" without talking of that. I’m always a little skeptical of the numbers politicians chose to announce however. So I did some more research and found that for one, inflation rate has decreased, from 2.7% to 2.3%. Also, the personal consumption expenditure rose from 2.6% to 3.1%, so obviously people are still spending plenty of money which, you would think, should help boost the economy shortly.

For starter don’t mind me, I was confused on posting…ha ha I didn’t mean to start a new blog…..well back to my post…
For the past year the Super Slab has been all over local and national news covered in many newspapers including New York Times, and the Washington Post. In an article written by Kevin Flynn in the Rocky Mountain News on September 29, 2006, the Super Slab project has been renamed the Prairie Falcon Parkway Express. This is a new 210-mile multi-transportation and utility project connecting seven Colorado eastern plains counties, including Adams, Arapahoe, Elbert, El Paso, Pueblo, Larimer, and Weld. The project includes a four-lane, median-divided toll road, rail, utilities, and associated service areas and right-of-way. Ray Wells, developer of the proposed $2.5 billion super highway, railroad bypass and utility corridor, dropped about 4,000 certified letters in the mail Monday morning August 21, 2006 to property owners within the 3-mile-wide boundaries of the project, which he has been nurturing for more than 20 years.
This is a hot topic for 2006, because everyone has stepped up working on the toll-road. So why is the Prairie Falcon Parkway Express necessary? There are approximately 4.7 million living in Colorado. Over three and a half million people live on Colorado’s Front Range and this population is expected to continue to grow. However, there is currently only one major north-south highway, Interstate 25, and only one major north-south railroad line through this growing region. To meet the increasing demands for passenger and local commuter travel, commercial transport, and rail activity, another corridor is needed now and for the future. The Prairie Falcon Parkway Express will be designed to meet those future demands.
With any project there are people for and against the proposal. With this specific project which is going to effect people that live on the eastern plains, well the people that are against the expressway. There are many meetings going on to inform people about the highway, especially the people who are in the 3 mile boundaries of the project. So how can this tie into our class? Well I think it is a great example of the benefit-cost analysis. Now that we know the goal from the developer’s point of view that is a benefit. “It is a privately funded project, and its going to be a toll-road, there is no question if it will pay for itself,” explains Ray Wells. On the flip side, it is a cost to all the residents that will be affected by this expressway (their land taken away). So the ultimate goal is to figure out if the benefits out-weigh the costs or vise versa. Having lived out in the country my whole life, I know how valuable land is to property owners, and I can’t even imagine how this is going to affect farmers, especially on the eastern plains within the 3-mile corridor. Twenty years ago when this project was purposed there wasn’t half as many people living out east. Now there are many more people, so we will have to wait to see how this turns out for the residents on the eastern plains of Colorado.

So as you might have noticed I am in general not the biggest fan of Bush's political decisions but in this one case it appears that I have no choice.

In the Washington Post: http://www.washingtonpost.com/wp-dyn/content/article/2006/10/24/AR2006102401330.html

Thats right it is Social Security. It was a big time issue earlier this year and it appears that the President has decided it would be a good time to bring it up again for some reason. The reason is a mystery but his position that Social Security should be privatized is the same. Of course the fantastic article does not go into the details as to how this is going to happen it spends more time on how the Democrats and AARP are immediately flaming the issue. Yet they have no ideas of their own that I have heard. It seems like all they are focusing on is the fact that the guaranteed benefits would go away in favor of private accounts that actually have a person's name on it.

Based on the talks we had on the subject in class it really makes me pretty disappointed that a man whom I generally do not like at all can be so bold as to forward the massively unpopular idea of Social Security Reform and all the other parties (grossly overpowered political lobbies... ahem AARP cough cough... included) can think to do is try to shoot it down without providing ides of their own.

Not knowing the details on Bush's plan I can;t really say I agree with it or not but I can say it is appalling the way the opposition is handling the situation.

According to the articles, College Tuition Increases at a Slower Rate and Spikes in College Prices Not So Sharp, printed in the Washington Post on October 24, 2006 and October 25, 2006, tuition is increasing at a slower rate than in the past. Although the rates are increasing at a slower rate, they are still increasing at a significantly higher rate than the national inflation rate. Tuition fees for two-year public, four-year private, and four-year public colleges have increased at 4.1 percent, 5.9 percent, and 6.3 percent, respectively. The national inflation rate for that same period was 3.82 percent. Moreover, financial aid has increased, but only by 3.7 percent (Washington Post).

Although few students pay full price for college, financial aid is still not what it should be. The rising costs of tuition combined with low financial aid are making it more and more difficult for people to attend college. These issues present potential problems for the future of our economy. If fewer and fewer people can afford higher education, our labor force will not be as skilled resulting in less productivity.

Currently, potential students of higher education have opportunities to receive scholarships and take out loans to pay for college. The federal government also provides the Federal Pell Grant to low-income students. This grant, however, was recently decreased by $120 per participant (Washington Post). Should the government provide more support to students to pay for higher education? Yes.

If the government provided more financial aid to students, more students would want to and be able to receive higher education. This would result in higher skilled labor. This would be beneficial to the economy overtime and it would also be beneficial to those attending higher education. This would be a feasible public policy to implement. Although it has already been implemented, the government should find ways to provide more financial aid for higher education.

Steven Mufson, in the October 18, 2006 edition of the Washington Post, wrote an article regarding the suggestion of raising the gas tax.

There are many issues of discussion in this article for sure, but one paragraph that grabbed my attention stated, in regards to curbing the US dependence on oil was:

“The report listed three approaches: raising gasoline taxes; setting tougher automobile fuel-economy standards; and imposing a nationwide ceiling on gasoline consumption, with people allowed to buy and sell rights to use more than their annual allotments.”

Economically there is nothing wrong with the suggestion of raising taxes. Graphically we can show that this will likely, in the long run, reduce the quantity demanded for gas. This in turn will reduce greenhouse gases and other pollutants and if the tax is set at the correct amount it would capture all the externalities associated with gas consumption.

Automobile efficiency in itself would certainly seem to be a good solution as well. More efficient vehicles equates to lower demand for gas. We again get the reduction in emissions. But how long will it take for a noticeable increase in more efficient vehicles to take? How old is your car?

As to the ceiling on consumption I am not sure. A ceiling seems like a bad idea – the emergence of black markets and underhanded techniques to circumvent such restrictions springs to mind. Is the market acting efficiently when a ceiling is in place! I do not see how the buying and selling of allotments would achieve anything different than the status-quo. If I sell half of my gas to you, (which implies you will use the gas), then isn’t the net consumption of gas unchanged? Now, if we are buying and selling pollution credits then that is a different argument, but that does not appear to be the suggestion.

It seems that a raise in the gas tax is the best economic solution. So why does it not occur?– Do I even have to mention the “P” word!

DAVE IVERSON doesn't like to use benefit cost analysis. He seems to present one aspect of his critique with the following series of questions:

"In 'Economic Advice' I suggest that we answer four questions when dealing with efficiency: Efficient at what? Efficient for whom? Efficient by what standard? Efficient for how long? (And then what?) "

They seem like perfectly fine questions. Do you know the answers?

Read his whole piece. I find it confusing. Do you?

Can you detect any part of his post that would accept the idea that the fundamental normative issue involving government is deciding what is a justified use of government's coercive power?

Ever since the question weather a tougher illegal immigration law should be set in place and enforced became the talk of the country, as it should, many opinions and proposals have been heard. Let’s for a moment take away the politics involved. Instead let’s ask the question does illegal immigrants, not just people from Mexico create market inefficiency and cause the economy to suffer. In this discussion, I will attempt both side of the argument, and hopefully determine what is more important, a highly efficient market or a high rolling economy.

By now we should agree that illegal immigrants takes jobs and get paid with wages MOST of us would spit on, right? I take that as a yes. The basic efficiency criterion states that efficiency is satisfied when resources are used in such a way that it’s impossible to increase the well-being of one person without hurt another. In other words, marginal social cost (MSC) must equal to marginal social benefit (MSB). However, in a society where most illegal immigrants are willing to accept any wage to have a better life, MSC will be in business owners favor and be less than MSB. Unless business owners accept normal profits, the market will become inefficient.

What about the economy? Will it suffer as a result of inefficient market? Would illegal immigrants take away jobs otherwise be available to legal citizens? Should we as a society do whatever it takes to weed out illegal immigrants? At a first glance, the answer all seem and should to be yes, but in actuality, it may not be so. Some people will answer a definite yes to question three without even any consideration. Well I say no. There is just some work some people are worse performers than others; it’s the way it is. If those people work and become unproductive, consumer will suffer and their MSB in the end will fall below MSC even if the MSC is low from the beginning.

Will the economy suffer as the result? Well, the September 15th article from AOL news by Russ Bynum titled “Immigration Raid Makes a Ghost Town” helps answer this hard question. The articles is about a small town of little bit over 1,000 residents in Stillmore, Georgia. Since September 1st after federal agents raided and rounded up illegal immigrants, the town has becoming the title of the article, a ghost town. Little bit over 120 illegal residents have been captured and sent on their way to immigration courts, while others fled. The result has left Emanuel County in the process toward bankruptcy. Stores that see average of 100 customers per day are now in the single digits. Other business is losing at much as 80% of revenue as the result. When a town loses that much business and counting, its economy will eventually crumble. Some businesses are forced to increase wages to lure new worker like Stacie Bell, whose pay increased from $5.60 at Wal-Mart to $7.75 at her new employment. Let’s say that the market value for her work is at $6.50 per hour. In this case, the increase of $1.25 will cause the MSC will be greater than MSB, causing market inefficiency. Of course if Stacie’s labor is worth exactly $7.75, then the market is at full efficiency, other things held constant.

So do illegal immigrants accepting lower wages than market value cause MSB and MSC fall other than the equilibrium and result in market inefficiency? And does enforcing immigration law help individuals like Stacie and others land a higher wage, thus forcing MSC to be equal to MSB? On one hand Emanuel County has demonstrated that weeding out illegal immigrants will force the business to pay higher wage to its legal residence if they want to stay in business. On the other hand, it has also caused its economy a great deal. When there aren’t workers to serve the few customers that remains, the MSB can laterally be zero.

With out a doubt, based on a solely normative economic and efficiency point of view, I believe illegal immigrants and their acceptance to lower than market wages causes market inefficiency. But is it a problem? Will the economy hurt from it? Emanuel County seems to benefit from an inefficient market. I doubt their illegal immigrants get paid like legal citizens. And when the illegal folks were force out, the economy suffered. But what would the economy accept and want? Would supply create its own demand and force the MSB equal to MSC? In Emanuel County’s case, it seems to be starting to work at its economy’s expense.