I would have you understand that I am all for recycling. Use it up, wear it out, make it do or do without--it was sound advice during World War II, and it still is today. Still, despite my committment to sustainable blogging, I was not pleased to see the Center on Budget and Policy Priorities reissue the graph I blogged about last year in virtually the same form.
I didn't think much of this graph at the time, and I still don't. The effect of the graph is to make it seem as if we could, by simply refusing to extend the Bush tax cuts on high earners, cover virtually all of the Social Security shortfall that is going to be putting immense pressure on the budget deficit over the next century. But this is not the case.
The CBPP gets its figure by taking present values of the Bush upper income tax cuts extended over 75 years, and comparing them to the present value of the Social Security shortfall. For those who haven't taken finance classes, present values are sort of like compound interest, in reverse. Instead of adding up the future gains from interest rates, you discount future cash flows by a discount rate. Why do this? Mostly because of a financial truism: a dollar today is worth more than a dollar tomorrow: it's certain, not risky, and while you can only use a dollar tomorrow, erm, tomorrow, you can use today's dollar either immediately, or at any time in the future.
Present value is a very useful tool for comparing different investment projects. Say you have one investment project that gives you an immediate return, and one that will give you a much higher return eventually, but takes ten years to pay off--a present value calculation lets you assess which project is actually going to be worth more.
But present value has some drawbacks, too. Our contractor was over last night trying to shore up some joists in our basement that were inappropriately cut to run electric wire, and I mentioned to him that I was working on this post. He thought for a minute, and then summed it up perfectly: "It seems to me that you've got two main problems here: liquidity constraint, and an inappropriate discount rate." Just so. Let me see if I can unpack that a little.
Because it discounts future dollars, often quite heavily, cash flows which happen beyond 10-20 years out virtually disappear. In this case, I assume that the CBPP used the same 5.25% discount rate that it used last year. Just to illustrate what the effect of that discount rate is, if you had a guaranteed $100 payment every year for the next 75 years, discounted at 5.25%, the present value of that cash flow would be $1864, versus the $7500 you get from just adding them all together. Over half of that present value comes from the first 14 years of the 75-year period. By twenty years out, that $100 is only worth $35 a year to you.
Now let's assume that someone comes along and offers me a deal: I can buy that guaranteed $100 cash flow, worth $1864, by taking out a loan. That loan has no interest payments for the first 30 years, and then I have to pay back $400 a year from year 30 to year 75. Should I do it?
Present value would say yes! The present value of those future $400 payments is only $1563, much less than the present value of my $100 annual payments that start now. But obviously, I am going to have trouble in year 30 covering my $400 payment with the $100 I am taking in every year.
The difference could be made up in savings; if I could save all my $100 payments at a guaranteed interest rate of 5.25%, then by year 30, the interest on my savings would be $382; using a combination of interest and slow withdrawals, I could pay off the loan and still have $4500 in the bank.
But the government does not borrow and save like normal people--its constraints are different. The closest it can come to saving is to pay off debt. And our debt is not yielding 5.25% right now; our highest-yielding debt is paying 4.375%, which the government is trying to sell more of, not pay off, in order to lengthen the average time-to-maturity of the debt held by the public, which lowers the risks to the Treasury of a sudden interest rate spike.
The average interest rate on debt held by the public is around 3% right now; it hasn't been as high as 3.75% since April 2009.
Now, you might say that this is not an ordinary time, and that when we pay off our debt in the future, we will get a better "return" on our savings. But remember that discount rate: it means that the immediate future is what gives you the most bang for your buck. And we've only got nine years of "savings" before the Social Security shortfall becomes larger than the cost of the Bush tax cuts, as this graph from the invaluable Committee for a Responsible Federal Budget points out:
We're not going to let the Bush tax cuts expire until 2012 at this point, which gives us 2013-9 to save by paying off debt. Let's say that you think that interest rates are going to bounce back to the 4.96 we paid in July of 2007, and we will use all of the money gained from repeal to pay down debt. By my extremely generous estimates (adding in my best estimate of other tax provisions that primarily benefit the rich, and which CBPP claims were not included in the Congressional Budget Office's $700 billion 10-year price tag for the repeal of the high-income tax cuts), by the end of the seven year period we might pay off as much as $600 billion dollars worth of debt. That's not nothing! Which is why we should never have extended the Bush tax cuts for anyone.
But at 5% average interest rates, we'd be saving less than $30 billion a year in interest. Add that to the $80 billion or so the high-income tax cuts will cost us in 2020 and you get $110 billion a year, or about 0.48% of GDP by my calculations. But in 2020, as you can see from the graph, the Social Security shortfall is 0.51% of GDP. By 2025 it hits around 1% of GDP.
Maybe you think interest rates will jump even further? It's certainly possible. But if you think this, then I assume you aren't among the people making fun of the invisible bond vigilantes, or demanding that we borrow more money for stimulus. Assuming that inflation is not going to suddenly zoom to 5% without Ben Bernanke noticing (or reacting), if you think that interest rates are going to hit 7% in 2013, that means you think that the bond market is going to freak out and raise our real interest rates by hundreds of basis points. Given that the average maturity of our debt is currently less than five years, that means we're going to have to roll over a bunch of debt paying less than 3% for a bunch of debt paying more than 7% . . . which to my ears is the same as shrieking "We're screwed!"
Last year I caught a lot of flak for pointing out that most of the heavy lifting was being done by the discounting, and that if you just looked at the cash flows, there wasn't any good way to pay for Social Security over the next 75 years just by repealing the Bush tax cuts for the rich. But you can see this point illustrated in the CBPP's own graph. At right, you'll see their graph from last year. Notice anything different about it from the one above? I mean, other than the fact that they included the cost of all the Bush tax cuts, not just the ones for high earners?
That's right, last year the costs were equal. This year, the Social Security shortfall is almost 15% larger--0.8% of GDP rather than 0.7%. That's the effect of just one year of poor economic growth, and one year closer to the point where the lines cross on that CFRB graph. That alone tells you how much the timing differences in the cash flows are affecting their results, and why this is not a very useful chart.
There's another problem, one which the CFRB points out in its excellent post on the dangers of this comparison. Actually, they too have recycled--they pointed out exactly the same thing last year when the CBPP debuted the graph. Which is that the CBPP's numbers are incredibly sensitive to initial assumptions about the growth rates in these two budget items.
That's not such a problem with Social Security, where the projections are among the most stable we can make. Demographic change is a slow moving disaster. To a first approximation, every single person who will be collecting benefits in 2030 is now living and working in the United States. And the benefits are tied to the taxes that are paid, which means that unless you think we're going to get a giant burst of immigration, the deficit isn't going to widen or narrow overmuch. Furthermore, the benefits are indexed to wages, which means, broadly, to productivity and GDP growth, so there aren't going to be huge upside or downside surprises.
The estimates of the cost of the Bush tax cuts, however, are extraordinarily sensitive to initial assumptions:, as they pointed out last year:
Essentially, CBPP assumes that the growth rates in revenue loss from 2017 through 2020 will continue forever. Over time, the compounding effects of these growth rates are significant -- increasing the value of the cuts to about 1.1 percent of GDP by 2080. Yet tiny changes in some of the numbers they use can drastically alter this number.
For example, they estimate that the tax cuts will cost $99 billion in 2017 and $120 billion in 2020 based off of a combination of Treasury and TPC estimates. We used some TPC tables to estimates these numbers at $102 billion in 2017 and the same $120 billion in 2020. When we tried to roughly apply their methodology using our $102 billion instead of their $99 billion (in other words, a nominal growth rate of about 5.6% instead of 6%) we found that the shortfall only reaches about 0.65 percent of GDP rather than 1.1 percent.
This is not to say that our $102 billion is right and their $99 billion is wrong - both are plausible and surely both will be wrong. The point is that tiny changes in these numbers cause wild swings in the ultimate cash flow results. (Though the magnitude of the present value cost wouldn't swing nearly as much - under the scenario we presented, the present value of the upper-income cuts would be between 0.5 and 0.6 percent of GDP rather than 0.7 percent).
We also tried projecting forward two other ways: assuming that the upper income tax cuts remained a fixed proportion of total revenue under CBO's extended baseline scenario and assuming bracket creep for the upper-income cuts in line with the total bracket creep we estimate in our CRFB baseline.
Here are the results:
The CBPP is entirely right to point out that the Bush tax cuts were extremely costly. Given our parlous fiscal condition, we cannot afford to extend them--we couldn't in 2010, either, but we did it anyway, and that's water under the bridge. Come 2012, they need to expire. But this is what the CBO says our budget looks like if the Bush tax cuts for high earners expire, but the rest of the budget is business-as-usual: "fixing" the AMT and Medicare doctor reimbursement rates, easing the cutbacks made by ObamaCare, and otherwise acting the way we've acted for the last decade:
This is obviously not sustainable. And much of it is simply driven by the growing ratio of retirees to workers, requiring ever-more Social Security and Medicare dollars to sustain them.
That's why I think it's a terrible idea to juxtapose the Bush tax cuts for the wealthy and Social Security in a graph that implies that the costs are roughly the same size. Not just because they're not really equivalent--but because we don't have that money to spend. We're already assuming that we let those tax cuts go in 2012, and the budget picture is still a disaster.
Easing the budget pressure from Social Security is going to require finding new revenue, or new cuts to existing programs--we can't solve the shortfall with revenues we've already spent, any more than you can pay the mortgage with the check you sent to the electric company last week. And those revenues and cuts will have to be large. It is not helpful to imply otherwise. The American public is already unwilling to confront the actual costs of the programs it has. They don't need any more encouragement to push their heads ever deeper into the sand.
The Trump Foundation mostly takes in other people’s money, but it appears it doesn’t have legal permission to solicit donations.
The problem with telling people to follow the money is they just might take you up on it. Donald Trump’s campaign has adopted that mantra in reference to the Clinton Foundation, but it applies to him in uncomfortable ways, too.
First, there’s the fact that he won’t release his tax returns, making it hard to follow the money and raising questions about what might be hidden there. Second, there are his forays into Cuba, apparently in violation of the embargo. Third, there’s the latest scoop from The Washington Post’s David Fahrenthold, who finds that the Donald J. Trump Foundation was operating without a required license.
As Fahrenthold previously reported, the Trump Foundation is peculiar: Unlike many other similar charities, it’s stocked with other people’s money. Trump himself has given barely any money to it since the mid-2000s, although he did direct income from places like Comedy Central to the charity, possibly without paying taxes on it. Instead, he has raised money from other donors, which he has used to, among other things, settle legal cases against him, all while basking in the glow of his apparent charity.
An etiquette update: Brevity is the highest virtue.
I recently cut the amount of time I spent on email by almost half, and I think a lot of people could do the same.
I’m sure my approach has made some people hate me, because I come off curt. But if everyone thought about email in the same way, what I’m suggesting wouldn’t be rude. Here are the basic guidelines that are working for me and, so, I propose for all of the world to adopt immediately:
Best? Cheers? Thanks?
None of the above. You can write your name if it feels too naked or abrupt not to have something down there. But it shouldn’t, and it wouldn’t if it were the norm.
Don’t waste time considering if “Dear,” or “Hey” or “[name]!” is appropriate. Just get right into it. Write the recipient’s name if you must. But most people already know their names. Like they already know your name.
Lawmakers overrode an Obama veto for the first time on Wednesday. A day later, they already had regrets.
The enactment on Wednesday of the Justice Against Sponsors of Terrorism Act should have been a triumphant moment for Republican leaders in Congress. They had succeeded, after years of trying, in overriding a presidential veto for the first time and forcing a bill into law over the strenuous objections of Barack Obama.
But the morning after brought no such celebration for HouseSpeaker Paul Ryan and Senate Majority Leader McConnell—only pangs of regret.
“It appears as if there may be some unintended ramifications,” McConnell lamented at a press conference barely 24 hours after all but one senator voted to reject the president’s veto of the legislation, which would allow victims of the September 11, 2001 terrorist attacks to sue Saudi Arabia in U.S. court. On the other side of the Capitol, Ryan said that he hoped there could be a “fix” to the very law he allowed to pass through the House—one that would protect U.S. soldiers abroad from legal retribution that the Obama administration had warned for months would follow as a result of the law.
With the death of Shimon Peres, Israel has lost its chief optimist. And the prime minister remains paralyzed by pessimism.
The Book of Proverbs teaches us that where there is no vision, the people perish. The people of Israel, now bereft of Shimon Peres, will not perish, because survival—or, at least, muddling through—is a Jewish specialty. But the death of Israel’s greatest visionary, a man who understood that it would never be morally or spiritually sufficient for the Jews to build for themselves the perfect ghetto and then wash their hands of the often-merciless world, means that Israel has lost its chief optimist.
Peres was, for so many years, a prophet without honor in his own country, but he was someone who, late in life, came to symbolize Israel’s big-hearted, free-thinking, inventive, and democratic promise. Peres came to this role in part because he had prescience, verbal acuity, a feel for poetry, and a restless curiosity, but also because, gradually but steadily, he became surrounded by small men. One of the distressing realities of Israel today is that, in so many fields—technology, medicine, agriculture, literature, music, cinema—the country is excelling. But to Israeli politics go the mediocrities.
Terry Spraitz Ciszek, a homemaker in Fayetteville, North Carolina, talks about changing perceptions of women in the traditional economy and those who choose to leave their careers to raise a family.
For many women, the decision of whether or not to go back to work after having a child remains a fraught one. After all, returning to a job after maternity leave often means facing significant workplace challenges and even a decrease in earnings. On the other hand, there is also frequently a stigma attached to women who leave the workforce temporarily to raise their children or become long-term homemakers. Oftentimes, the decision for new mothers to rejoin the workforce can be seen as a reflection of the state of the economy. The number of stay-at-home mothers fell consistently for decades—from 49 percent in 1967 to a low of 23 percent in 1999—before bouncing back to 29 percent in 2012.
The ability for one parent to stay home, for kids or otherwise, is often viewed as a luxury of upper-middle class life. But even for the households that can afford it, the financial implications can extend beyond the loss of one steady income: A hypothetical 26-year-old female worker with a salary of $44,000 a year could lose about $707,000 in lifetime income ($220,000 in income, $265,000 in lifetime wage growth, and $222,000 in retirement benefits) from taking just five years off to care for a child.
The Commission on Presidential Debates issued a cryptic statement acknowledging some audio issues Monday night.
After critics savaged his performance at Monday’s first presidential debate, Republican nominee Donald Trump alighted on several culprits: Hillary Clinton, the moderator, and especially his microphone.
The claim was met with some skepticism, but on Friday afternoon, the Commission on Presidential Debates seemed to confirm his claim, at least in part. The commission, which controls the debates, released a cryptic statement that reads in full:
Statement about first debate
Sep 30, 2016
Regarding the first debate, there were issues regarding Donald Trump's audio that affected the sound level in the debate hall.
We’ve called the commission to ask what that means, but have not heard back yet. Presumably, they are receiving dozens of such queries.
After Andrea Wulf won the Royal Society’s highest honor for her book The Invention of Nature, a writer at The Guardian attributed it to a new fondness for “female-friendly” biographies among prize juries.
Last week, the Royal Society held its ceremony to honor the best popular-science book of the year. I was there, having had the good fortune to be one of the finalists for my recent book, The Hunt for Vulcan. I didn’t expect to win—partly because of my baseline pessimism, partly because of the strength of the competition, and partly because I had set out to write a kind of miniature, a brief book on a quirky topic. Whatever the reason, I was right: I didn’t.
The event itself was good fun. Each of the authors read a passage from their work; the head judge for the prize, author Bill Bryson, led us in a brief question-and-answer session, in which we compared notes on what moved us to write about science. Then came the moment of truth. Venkatraman Ramakrishnan, the president of the Royal Society, approached the podium, opened the envelope, and announced that Andrea Wulf had won for The Invention of Nature.
Despite an array of calculating tools, comparing financial-aid packages is still an incredibly dense and circular process.
As almost any parent of a high-school senior knows, figuring out the true college price tag is confusing. While the full annual sticker price can be as much as $60,000 or $70,000 at a private college and more than $55,000 at an out-of-state public college, experts say that many students will end up paying considerably less. Sizable merit and need-based aid packages take the sting out of those big numbers.
Students, however, typically have to wait until the spring, when their acceptance letters arrive, to learn the amount of those awards, making it difficult for families to effectively plan a long-term budget and posing significant obstacles for first-generation students who may not be aware of all the financial options.
Tim Burton’s newest film, adapted from a popular young-adult novel, is a pretty but soulless adventure.
Not long after the novel Miss Peregrine’s Home for Peculiar Children was published in 2011, it starteddrawingcomparisons to Harry Potter and Lemony Snicket’s A Series of Unfortunate Events. On the one hand, many popular young-adult books get compared to one of those series at some point. But on the other, it made a lot of sense: Miss Peregrine is at its heart a dark, Gothic-tinged story about an ordinary boy discovering an extraordinary dimension to his life, one that whisks him away to a marvelous new world populated with marvelous inhabitants.
Given all the eerie fantasy elements at work, it’s little surprise then that Tim Burton was tasked with directing the film adaptation of Ransom Riggs’s first Miss Peregrine book. The director seems completely at home telling a story about a an enchanted wartime children’s orphanage, terrifying invisible monsters, and waif-like youths with giant eyes. The result is 124 minutes worth of CGI-embellished, time-traveling adventure that’s ambitious in scope and exasperating in execution. Part of that is because of the sheer amount of magical logic and backstory there is to explain, and the film’s wildly veering tone and pace. But perhaps most lacking in Miss Peregrine’s Home for Peculiar Children is something the best children’s movies always have—a genuine emotional center. Or, put more simply, heart.