Category Archives: Beginners

The Koch Brothers, The Cato Institute, And Why Nations Fail

By Simon Johnson

A dispute has broken out between the Cato Institute, a leading libertarian think tank, and two of its longtime backers – David and Charles Koch. The institute is not the usual form of nonprofit but actually a company with shares; the Koch brothers own two of the four shares and are arguing that they have the right to acquire additional shares and thus presumably exert more control. The institute and some of its senior staff are pushing back.

According to Edward H. Crane, the president and co-founder of Cato, “This is an effort by the Kochs to turn the Cato Institute into some sort of auxiliary for the G.O.P.” Bob Levy, chairman of the Cato board, told The Washington Post: “We would take closer marching orders. That’s totally contrary to what we perceive the function of Cato be.”

Far from being just an unseemly row between prominent personalities on the right, this showdown reflects a much deeper set of concerns for American politics and society. And it raises what I regard as the central question of an important book, “Why Nations Fail: The Origins of Power, Prosperity and Poverty,” by Daron Acemoglu and James Robinson that will be published on March 20. Continue reading

Ponzi Schemes for Beginners

By James Kwak

On the theory that the best defense is a good offense, Rick Perry has been insisting to anyone who will listen that Social Security is a Ponzi scheme. Probably hundreds of people have already explained why it isn’t, but I think it’s important to be clear about why Rick Perry thinks it is—or, rather, why his political advisers think he can get away with it.

A Ponzi scheme, classically, is one where you promise high returns to investors but you have no way of actually generating those returns; instead, you plan to pay off old investors by getting new money from new investors. Social Security is obviously not a Ponzi scheme for at least two basic reasons. First, there’s no fraud involved: all of Social Security’s finances are right out in the open for anyone who cares to look, in the annual report of the trustees of the Social Security trust funds. Second, a Ponzi scheme by construction cannot go on forever; no matter how long you can keep it going, at some point you will run out of potential new investors and the whole thing will collapse. I’m sure there are other obvious differences, but that’s enough for now.

Continue reading

Social Security for Beginners

By James Kwak

In Monday’s Atlantic column, the part that upset the most people was (not surprisingly) the following paragraph on Social Security:

“The dollars are in programs like Social Security ($740 billion), which, per dollar, has a relatively small impact on the economy. Social Security doesn’t say what businesses can or can’t do, and it doesn’t say what people can do with their money: it mainly moves money from people’s working years to their retirement years, which means that in part it’s doing something that they would have done anyway.”

One commenter, for example, said that Social Security does tell you what you have to do with your money: you have to buy an annuity. Another said that if he could opt out of Social Security right now, he would, since he thinks it is a losing proposition for him.

I don’t think that any of the criticisms really addressed the main point I was trying to make: that Social Security has a smaller per-dollar economic impact than a regulatory agency like the CFPB. They are fairly typical of criticisms of Social Security, however, so I want to address them in a little more detail.

The debate is really about what Social Security is. A lot of people take the starting point that Social Security is an individual investment vehicle, and then they decide they don’t like it because it doesn’t look like the other individual investment vehicles they are familiar with (brokerage accounts, 401(k) plans, etc.). Other people think that Social Security is a welfare program, and since they don’t like welfare, they don’t like Social Security. But it isn’t either.

Continue reading

“The Elderly” for Beginners

By James Kwak

As the AARP says that it is open to modest cuts in Social Security benefits, it’s worthwhile asking a more fundamental question: are Social Security and Medicare programs that benefit the elderly?

The answer may seem obvious. After all, the bulk of Social Security Old Age and Survivors Insurance benefits go to people over 62, and almost all Medicare beneficiaries are over 65. So it’s often observed in passing that our long-range budget issues are the product of transfers to the elderly. For example, in Restoring Fiscal Sanity 2005, Alice Rivlin and Isabel Sawhill write, “These big programs, which benefit primarily the elderly, will drive increases in federal spending in the longer run” (p. 36). Other commentators have occasionally argued that the problem is that the elderly have become too powerful and therefore claim too large a share of government spending, especially compared to the very young.* When you add to that the frequent complaint that, by running budget deficits, we are imposing burdens on our grandchildren, this age-based inequity seems even greater.

But the problem with this framing is that “the elderly” change every year. There’s nothing inherently wrong or unfair with a program in which you pay insurance premiums while you work and collect benefits when you retire. Saying such a program benefits the elderly is like saying that life insurance doesn’t benefit the insured, only the beneficiaries: it’s true in a trivial sense, but people still want and buy life insurance anyway.

Continue reading

Health Care Rationing for Beginners

By James Kwak

“Obama-care kills Medicare as we know it. Obama-care raids $500 billion from Medicare to spend on Obama-care, puts in place a 15-panel board to ration Medicare by unelected bureaucrats.

“Our budget, repeals the raiding, gets rid of the rationing board, preserves this program, makes no changes for a person 55 years of age or older and saves Medicare, by reforming it for our generation, so it’s solvent. The president’s plan does not save Medicare, it allows it to go bankrupt, rations the program and raids the program. We get rid of the rationing, we stop the raiding and we save the program from bankruptcy.”

That was Paul Ryan on Fox News recently.

Ordinarily this wouldn’t be worth responding to, except to point out, as Sam Stein did, that Ryan’s proposed budget also “raids $500 billion from Medicare,” so the statement that “we stop the raiding” is, um, a lie. But it isn’t news that Paul Ryan has an issue with honesty, except perhaps for David Brooks.

But there’s a theme that is surfacing that goes something like this: OK, Ryan’s plan is extreme and has no chance. But we all know we spend too much on health care, and we have to spend less, which means that we have to ration care one way or another. Ryan does it by scrapping Medicare in favor of indexed vouchers; Obama does it by reducing Medicare payment rates and, more ominously, with “a 15-panel board to ration Medicare by unelected bureaucrats.”

Continue reading

Allocative Efficiency for Beginners

By James Kwak

I was catching up on some old Planet Money episodes and caught Allen Sanderson of the University of Chicago talking about how to allocate scarce resources. The first day of introductory economics, he says, there are always more students than seats. Say there are forty extra people, and he can only accept ten more into the class. He asks the class: how should the ten slots be allocated? You can easily guess the typical suggestions: by seniority, because seniors won’t be able to take the class later; by merit (e.g., GPA), because better students will contribute more to the class and get more out of it; to the first ten people outside his office at 8 am the next day, since that is a proxy for desire to get in; randomly, since that’s fair; and so on. Someone also invariably suggests auctioning off the slots.

This, Sanderson says, illustrates the core tradeoff of economics: fairness and efficiency. If you auction off the slots, they will go to the people to whom they are worth the most, which is best for the economy as a whole.* If we assume that taking the class will increase your lifetime productivity and therefore your lifetime earnings by some amount, then you should be willing to pay up to the present value of that increase in order to get into the class. An auction therefore ensures that the slots will go to the people whose productivity will go up the most. But of course, this isn’t necessarily fair, especially when you consider that the people who will get the most out of a marginal chunk of education are often the people who have the most already.

Continue reading

Medicare for Beginners

By James Kwak

This isn’t a post explaining how Medicare works in detail. It’s a post about why Medicare matters to you.

The basic “problem” with Medicare is that its liabilities are projected to grow faster than its revenues indefinitely because health care costs are growing faster than GDP (and Medicare’s revenues are a function of wages).* The “solution” proposed by Paul Ryan is to convert Medicare from an insurance program, which pays most of your health care expenses, to a voucher program, which gives you a certain amount of money that you can try to use to buy health insurance. I’ve described the main problems with this approach already: it transforms a large future government deficit into an even larger future household deficit, and on top of that it shifts risks from the government to individual households. Today I want to look at this from a different angle.

Continue reading