Download Figure 12-1

Figure 12-1 Two Alternative Paths of
Consumption per Person
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12-1
Table 12-1 Comparison of Consequences of
IBM Debt with Those of Public Debt
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12-2
International Perspective The Debt-GDP
Ratio: How Does the United States Compare?
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12-3
Figure 12-2
The Ratio of
U.S. Government
Debt to GDP,
1790–2005
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12-4
Figure 12-3 Federal Government Revenues
and Expenditures as a Percent of Natural GDP,
1960–2005
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12-5
Figure 12-4 Components of Federal
Government Expenditures as a Percent of
Natural GDP, 1960–2004
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12-6
Figure 12-5 The Laffer Curve
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12-7
Social Security: Is there a Crisis?
Is the Solution Difficult?
• Social Security is Simple in the U. S.
– Other Nations should envy our population
growth
– Our official projections are incredibly
pessimistic
– The required “fixes” are very minor
– The political battle: are personal accounts
worth the transition cost?
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12-8
Essentials of Current System
• Basic contrast between “defined contribution”
and “pay as you go”
• Tax rates are changed rarely, so surplus or
deficit depends on expenditures relative to
revenues
• “Dependency Ratio”, ratio of beneficiaries to
workers
• Depends on population growth and structure
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12-9
Chronology of the Baby Boom
• High birth rate 1947-64
• They become age 65 2012-2029
• After 2012 there is a steady increase in
the dependence ratio
• Steady increase in benefits, smaller
population of workers
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12-10
Why Should the U. S. Have a
Problem?
• Not quite “pay as you go”
• 1983 Reforms built up quite a head start on
the baby boom problem
– 1983 reforms together with Reagan and Bush tax
cuts => subtle exercise in class warfare
• Will peak in 2012-15, then decline until zero
in ~2045
– The “exhaustion date” depends on assumptions,
particularly
– Productivity growth
– Population growth (fertility, mortality, immigration)
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12-11
Figure 12-6
Social Security
Outlays,
Revenues, and
the Trust Fund,
1985–2080
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12-12
With Optimistic Assumptions there is no
Exhaustion Date
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12-13
Caution on what “Exhaustion” Means
• After the trust fund is gone, revenues
will still cover 81% of benefits
• Increase in tax rate from 12 to 15 or 16
percent will keep system solvent forever
• But with more optimistic assumptions,
no need for future tax increases
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12-14
How the Assumptions Matter
• Productivity:
– Current system raises benefits by real
wage through retirement, then only inflation
• Population growth
– Fertility = 2.0 (compare to Europe!)
– Mortality ignores medicare effect (explain)
– Immigration!
• Will the population in 2080 be 415m or 600m??
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12-15
Immigration as Percent
of U. S. Population, 1900-2002
Percent
1.2
1.0
0.8
0.6
Legal plus illegal immigrat ion a
0.4
0.2
Legal immigrat ion
0.0
1900
1920
1940
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1960
1980
2000
12-16
Immigration: the Shining Light
• Immigration / Population ratio grew at 3.5
percent per year 1970-2002
• Ratio currently at 1.4/300 = 0.46%
• Official projections based on constant 1.2
million forever, so ratio declines to 0.29% by
2080
• Allowing ratio to taper off to a constant 0.5%
implies 2080 population of 600 million, not
415
• Implies permanent population growth of 1.0%,
not 0.2%
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12-17
Population Growth per annum, 20002004
Population Growth
1.2
1
UK
0.2
France
0.4
Canada
0.6
United States
Percent
0.8
Japan
Italy
Germany
0
1
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12-18
Solutions are Easy
• Faster Productivity Growth puts off crisis
• Faster population growth puts off crisis
• How to solve crisis, whenever it comes
– Index retirement age to life expectancy
– Raise ceiling on taxable income (currently $90K)
• Unnecessary to cut benefits or raise tax rates
– Raising retirement age is an implicit cut in total
benefits but not in benefits paid out per year
– Raising ceiling makes financing system less
regressive
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12-19
Bush Proposal:
Personal Accounts
• Divert 2% into personal accounts from
existing tax of 12%
• This robs the system of 1/6 of its revenue
• Creates a multi-trillion $ financing hole
• The assumption of a continuing equity
premium ignores history
– Greater macroeconomic stability implies less risk
– Remaining equity premium, if any, is a reward for
risk
• Can allow SS Trust Fund to invest in stocks
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12-20
Figure 14-1 A Flowchart Showing the
Relationship Between Policy Instruments,
Policy Targets, and Economic Welfare
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12-21
Figure 14-2 The Percent Change in Real GDP
Following a 1 Percentage Point Change in the
Treasury Bill Rate, Three Intervals, 1961–2004
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12-22
Reduced Volatility (4-qtr Δ
Real GDP)
14
12
Actual Real GDP
Growth
10
Percent per year
8
6
4
2
0
-2
Average Real GDP
Growth
-4
23
1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Rolling 20-quarter Standard Deviation of
4-qtr Δs in Real GDP,
2.8 vs. 1.3 pre/post 1988:Q1
4.5
4
3.5
Percent
3
2.5
2
1.5
1
0.5
0
1950
1965
1975 1980 1985 1990 1995 2000 12-24
2005
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2006 Pearson1960
Addison-Wesley.
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reserved.
Figure 14-3
The Log Output
Ratio and the
Moving Average of
its Absolute Value,
1960–2004
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12-25
Inflation vs. Output Volatility:
Sometimes the Same, but
Other Times Different
4.5
4
Real GDP
Growth Volatility
3.5
3
2.5
2
1.5
1
0.5
Inflation Volatility
0
1950
1955 © 2006 Pearson
1960
1965
1970reserved. 1975
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Addison-Wesley.
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1980
1985
1990
1995
2000
12-262005
Figure 14-4 The Federal Funds Interest Rate
and the Log Output Ratio, 1980–2005
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12-27
Figure 14-5 The Actual Federal Funds Rate
and Interest Rates Calculated by Two Versions
of the Taylor Rule, 1980–2004
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12-28
Start Sims in 1979, Output Gap
6
Vo lcker
4
B urns
2
0
Greenspan
-2
-4
-6
-8
1965:01
1970:01
1975:01
1980:01
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1985:01
1990:01
1995:01
2000:01
12-29
Start Sims in 1979: Inflation
12
10
8
B urns
6
Greenspan
4
2
Volcker
0
1965:01
1970:01
1975:01
1980:01
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1985:01
1990:01
1995:01
2000:01
12-30