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Figure 12-1 Two Alternative Paths of Consumption per Person
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Table 12-1 Comparison of Consequences of IBM Debt with Those of Public Debt
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International Perspective The Debt-GDP Ratio: How Does the United States Compare?
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Figure 12-2 The Ratio of U.S. Government Debt to GDP, 1790–2005
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Figure 12-3 Federal Government Revenues and Expenditures as a Percent of Natural GDP, 1960–2005
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Figure 12-4 Components of Federal Government Expenditures as a Percent of Natural GDP, 1960–2004
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Figure 12-5 The Laffer Curve
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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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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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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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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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Figure 12-6 Social Security Outlays, Revenues, and the Trust Fund, 1985–2080
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With Optimistic Assumptions there is no Exhaustion Date
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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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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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Immigration as Percentof U. S. Population, 1900-2002
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1900 1920 1940 1960 1980 2000
Legal immigration
Legal plus illegal immigrationa
Percent
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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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Population Growth per annum, 2000-2004
Population Growth
0
0.2
0.4
0.6
0.8
1
1.2
1
Pe
rce
nt
Un
ited
Sta
tes
Ca
na
da
Fra
nce
UK Japan Italy
Germany
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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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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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Figure 14-1 A Flowchart Showing the Relationship Between Policy Instruments, Policy Targets, and Economic Welfare
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Figure 14-2 The Percent Change in Real GDP Following a 1 Percentage Point Change in the Treasury Bill Rate, Three Intervals, 1961–2004
23
-4
-2
0
2
4
6
8
10
12
14
1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Perc
en
t p
er
year
Actual Real GDP Growth
Average Real GDP Growth
Reduced Volatility Reduced Volatility (4-qtr (4-qtr ΔΔ Real GDP) Real GDP)
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Rolling 20-quarter Standard Deviation of 4-qtr Δs in Real GDP, 2.8 vs. 1.3 pre/post 1988:Q1
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Perc
en
t
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Figure 14-3 The Log Output Ratio and the Moving Average of its Absolute Value, 1960–2004
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Inflation vs. Output Volatility:Sometimes the Same, butOther Times Different
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Real GDP Growth Volatility
Inflation Volatility
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Figure 14-4 The Federal Funds Interest Rate and the Log Output Ratio, 1980–2005
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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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Start Sims in 1979, Output Gap
-8
-6
-4
-2
0
2
4
6
1965:01 1970:01 1975:01 1980:01 1985:01 1990:01 1995:01 2000:01
Volcker
Greenspan
Burns
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Start Sims in 1979: Inflation
0
2
4
6
8
10
12
1965:01 1970:01 1975:01 1980:01 1985:01 1990:01 1995:01 2000:01
Greenspan
Volcker
Burns
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