Wednesday, January 18, 2017

Inauguration Week Panels at Dartmouth

This week, we are hosting four panels on opportunities and risks facing the new Presidential administration. My contribution was to yesterday's panel on domestic issues, focusing on budget policy. Here is how I opened my remarks:
Stated plainly, our federal budget policy has been a mess since our first modern experiments with tax cuts in the 1980s. A favorable combination of factors restored some sanity to it in the late 1990s. Our second modern experiment with tax cuts in the 2000s messed it up again.

All the while, the aging of the Baby Boom generation through its peak earnings years made our old-age entitlement programs temporarily less expensive to fund. Its continued aging into retirement and thus beneficiary years will cause Social Security and Medicare to switch to large and growing annual deficits.

So there is serious work to be done, and we haven’t been close to being up for the challenge in at least 6 years. 
The video is available here:

And the other three panels, focusing on global issues, health care, and energy and the environment, can be livestreamed or viewed here.


Wednesday, January 04, 2017

A New Year, An Old Post on Pensions

One of my earliest research projects focused on the shift from defined benefit (DB) to defined contribution plans and its implications for retirement income. I started it in 1993, along with my colleague (then at the NBER, now at Dartmouth) Jonathan Skinner, and after a lot of updates and modifications in response to comments, it was eventually published in The American Economic Review in 2004.

The reason we wrote it, and the reason why I mention it today, is that many commentators on pensions, and the public policy toward pensions (the name of the conference at which we originally presented it), simply have no idea about the generosity of defined benefit pension plans as they existed before the shift to 401k plans began. What was noteworthy about our article is that it used data on defined benefit pension plans, collected through the Pension Provider Surveys of the Federal Reserve's Survey of Consumer Finances, (SCF) to simulate the distribution of future retirement benefits that would obtain under the vintage of defined benefit pension plans that existed as this trend emerged.

We had data on DB pension plans in 1983 and 1989, and we were able to compare the distribution of benefits under those plans to the analogous distributions of defined contribution or 401k plans as they emerged in 1989 through 2001, the latest year of data prior to our publication. So we had the true heterogeneity in the DB plan universe, and our simulation framework incorporated uncertainty in both future wages and asset market returns. Our universe of 401k plans, and the contribution and investment behavior of participants, was drawn from those SCF respondents who relied on the 401k as their sole pension plan, not those who had it as a supplemental plan.

The key point of the paper was that even for workers who remained with the same pension plan for an entire working career, the vintage of 401k plans that existed by 1995 was providing a comparable distribution of retirement income. Put simply, participants who relied on the 401k as their sole source of pension income were, along with their employers, contributing enough and holding enough in stocks (as opposed to bonds) to match what they would have received under the DB plans that were supplanted. In a nutshell, the DB plan formulas were not necessarily that generous in terms of their replacement rates, and their reliance in many cases on "final average pay" exposed participants to a lot of uncertainty.

The comparison is even worse when we consider workers who switch pension plans one or more times during their career. When the job changes happen before the worker reaches the DB plan's early retirement age, the worker is typically entitled only to "vested deferred" benefits, the value of which is eroded by inflation (if taken at the plan's normal retirement age) or full actuarial reductions. The balances in defined contribution plans like 401k plans are fully portable and do not suffer from this "backloading" of benefits under DB plans.

This study is what informs my view, which I expressed to Bloomberg View reporter Ramesh Ponnuru in his article that appeared today. I am quoted as saying:

Criticism of 401(k)s frequently idealizes the defined-benefit plans they have largely replaced. It’s true that 401(k) participants have more responsibility for their retirements than defined-benefit plans involved, and they are also exposed to market risk. Andrew Samwick, a professor of economics at Dartmouth College, pointed out in an interview that defined-benefit plans had their own risks. The company sponsoring those plans could skimp on pension contributions, or allocate its investments poorly, or go bankrupt and leave plan participants short.

And the shift to 401(k)s has coincided with a large increase in the number of people with retirement plans: Most workers didn’t have those defined-benefit pensions. “People have a very distorted notion of how good things were under defined-benefit plans or how good they would be today if that system of defined-benefit plans had continued,” Samwick said.

Our comparisons also did not consider the problem of DB plans that the security of the participants' retirement income depends on the solvency of, and funding decisions made by, the plan sponsor. It was not over 401k plans that Daniel Gross declared "the decade of cramdown."

Saturday, November 19, 2016

An Unfortunate Night at the Theater

By now, you have likely seen or read a report of VP-elect Mike Pence's trip to see Hamilton last evening. There were two moments that deserve comment.

The first is that Pence was booed by some noticeable portion of the crowd in attendance when he arrived. I guess when people pay exorbitant prices for theater tickets, they feel entitled to behave this way.  I don't have more attention than three lines of blogging to offer them.The second is that the cast of the show took time after the production for this impromptu monologue. Both moments are included here:

True confession. My wife picked up the soundtrack for the musical after she saw the show some months ago. (The rest of us are waiting for the ticket prices to come down.) We love the story. We love the music. I suppose we are smart enough to have understood the relevance of the story and music for the world we live in today.

Guess what. Mike Pence is, too. Is there some other reason the cast thinks he showed up last evening? Is there some reason why the cast members of Hamilton think so little of their own talents and artistry, their ability to convey this relevance on the stage, that they have to deliver a sanctimonious monologue at the end? Theater works better when we let the work speak for itself.

If the cast wanted to follow up with the VP-elect, they could do it privately in a way that encourages him to take a second step, not publicly in a way that dissolves the goodwill that should follow from his first step. And if anyone wants to protest and resist the incoming administration, the best advice comes from my MIT classmate, Luigi Zingales, in yesterday's New York Times op-ed, The Right Way to Resist Trump.

Addendum: A similar argument, made with more credibility, from Steven Van Zandt.

Thursday, November 17, 2016

What Makes a Swing State Swing?

An article by my friend and former Bush Administration colleague Chuck Blahous provides a defense of the electoral college based on the claim that it focuses the presidential candidates on swing states. Here's the essence of the argument:

In an electoral college system, however, the campaigns are induced to focus less on the sheer size of a state and more on its political moderation.  The so-called swing or battleground states are those states with roughly equal numbers of voters potentially willing to back different candidates, such that an extra successful effort by one candidate could tip the balance.  This is not a theoretical concept, but rather an observable phenomenon. For example, this year the candidates repeatedly visited swing states such as Florida, Pennsylvania, North Carolina, Ohio and New Hampshire.  Tiny New Hampshire, with its mere four electoral votes, received more candidate attention than California with its 55.  Why?  It is because New Hampshire was open to being persuaded by either candidate, whereas California was not.

As I noted to Chuck in some Facebook comments, I don't think this is true.  A state can be a "swing state" because it contains a lot of voters who are political moderates and thus swing voters. But a state can also be a "swing state" because it contains a roughly equal number of Democratic voters and Republican voters, who are no more persuadable than their counterparts in other states that have less equal numbers. In the latter case, the "political moderation" benefits of the electoral college don't materialize. From my experience, the Democrats in New Hampshire (where I work) are just as partisan and no more open to persuasion to vote for a Republican than the Democrats in Vermont (where I live). Chuck is correct that candidates respond to incentives and deluge the New Hampshire media market with advertising, but these advertisements may simply be efforts to turn out their base of partisans in larger numbers than their opponent's base of partisans.

To add some further support to my hypothesis, I would note that the political advertising done in New Hampshire during the general election was not particularly targeted to swing voters. All the negativity seemed like an effort to drive turnout by the candidate's base or to depress turnout by the opponent's base. I cannot recall an advertisement that tried to appeal to moderates who might be undecided (e.g. here's a problem we need to solve in a way that respects the valid points on both sides of the political spectrum.)

Much of Chuck's article is about what would happen in the counterfactual case where the national popular vote determined the winner. He is right that candidates would likely gravitate to their strongholds to try to drive turnout by their base. (President Bush remarked, when queried about his failure to capture the popular vote majority in 2000, that if that was the objective, he would have campaigned in Texas and "run up the score.") My simple model of what candidates are doing, now and in the counterfactual, is to devote their resources where the "price per vote" is the lowest. The price they pay is with their own time and with advertising. Population density matters for economizing on their time, but I presume that media buys are more expensive when they reach more people, so that it is not clear that media dollars would flow to the largest markets. Further, the media buys presumably depend on total population, not "total population likely to be sympathetic to your message." In this case, more politically diverse areas -- swing states -- would be further disadvantaged.

Addendum: How sad, I have finally repeated a post title without realizing it. Fortunately, the message is consistent.

Wednesday, November 09, 2016

Five Suggestions for the President-Elect

By now, if you are reading this blog, you know that Donald Trump is the President-Elect. This is not an "I told you so" post, for two reasons. First, of all the subjects for a blog, the horse race aspect of politics is among the least interesting to me, and there were plenty of more qualified experts to get things wildly wrong. Second, I haven't been blogging much over the last few years. Unlike when I started blogging 12 years ago, the blogosphere is now quite crowded. Just as importantly, around the start of 2015, in response to some life events and in anticipation of how unpleasant I thought this campaign would be, I just decided to focus on some other things and give myself the gift of not paying much attention in real time.

It didn't get nearly as unpleasant as I thought it would. We should actually consider ourselves a bit lucky.

For the record, I am a Republican, but I did not vote for Trump. I voted for John Kasich in the Vermont primary and Gary Johnson in yesterday's election. I simply refuse to vote for any candidate who gives clear signals that he or she will abuse power. For different but self-evident reasons, that disqualifies both Trump and Clinton. I would have voted the same way if I lived across the river in New Hampshire, where my vote might actually have mattered.

But I was also not part of this #NeverTrump movement among my fellow Republicans. Now that Trump is President-Elect, he needs support to govern from everybody. That includes me. I'll try to offer my best ideas and most thoughtful reflections from the blog, with greater frequency than during the long campaign. I will start with five ideas.

First, Trump should announce that he expects the Senate to vote on Merrick Garland's nomination before the session ends. He should not tell them his preference for whether Garland is confirmed or not. He should further scold the Republicans for not having acted on it sooner. Draining the swamp requires him to shine a light on political opportunism, regardless of which party exhibits the bad behavior. He owes no particular courtesy to Republicans who shied away from endorsing him, and so he should not spare them the criticism they deserve.

Second, he should acknowledge that our federal budget is on an unsustainable path. He should be clear with the new Congress that he expects a compromise like Simpson-Bowles, or something better, to be on his desk by Day 100. The problem is the baseline. Simpson-Bowles addresses that problem. Resetting the baseline so that it is sustainable does not absolve the Congress of its other fiscal duties, to modify the baseline annually to better reflect priorities as they evolve. This is an issue where we need to act sooner rather than later, and Presidential involvement is absolutely essential. Plus, his involvement gives Congress cover to do something politically unpopular but fiscally prudent. They might actually appreciate it. I make this suggestion in full recognition of the next one.

Third, he needs to recognize that his election coincides with a peak of the labor market, and things are only going to get more challenging from here. He needs to be thinking of rebuilding our decrepit infrastructure as a jobs program for the labor market dislocation that is sure to come. I have been preaching this for nearly 9 years now, most recently here, so I won't repeat all the details. Just make the process of setting priorities as transparent as possible.

Fourth, he should announce that he plans to have national or international summits on key policy issues for each of his first twelve months, led by his newly appointed cabinet officials and senior aides. Bringing the country together, and bringing it together with our fellow nations, requires a distinct forum for putting ideas into discussion. There is no shortage of topics -- race relations, immigration, international trade, education, surveillance, cooperation in the Americas, what's left of NATO, energy security, environmental degradation, homeland security, ... you name it. He should task his Vice President with organizing all of them, with the expectation that the lessons learned from each will inform his policy agenda over the coming years. (Yes, I am envisioning him in his role on The Apprentice as I write this.)

Fifth, he should get up to speed, like yesterday, on potential terrorist threats. The upheaval of this election is just what ISIS ordered. He needs to surround himself with a diversity of experts and listen to what they have to say.

More ideas and reflections to come.

Addendum:  A colleague points me to this recent book, The Politics of Resentment, claiming "Kathy Cramer got it right all along."