Thursday, February 12, 2009

Paul Weinstein Jr., former adviser to Clinton and Gore, fellow at the Progressive Policy Institute: Next, cut spending

Next, cut spending. By Paul Weinstein, Jr
Or debt will doom our future
NY Post, February 10, 2009

DESPITE the need to stimulate the economy now, the long-term health of the nation depends on a return to the fundamentals - namely, getting our fiscal house in order. So the Obama administration should lay out a plan now that would restrain spending, curb entitlement growth, eliminate tax breaks for special interests and make government more efficient.

Any effort to cut the deficit must wait until the current crisis abates and the economy gets back on its feet, but there is no reason not to enact legislation now that would put into place triggers that will kick-start a series of budget reforms later, when the time is right.

In fact, acting now would do much to allay the concerns of our economic partners, who are fearful that US borrowing will crowd them out of the credit markets. It would also help to keep down the cost of credit and capital for the private sector - and ensure the eventual recovery doesn't stall down the road.

What would such a reform plan look like?

First, it would restore pay-as-you-go budgeting and caps on discretionary spending that we had in the 1990s. These laws helped hold down the rate of spending and were a key reason that the nation experienced surpluses by the end of the decade.

Second, it would create a bipartisan commission (like the one that long handled military-base closings) that would be charged with identifying which expenditures, tax subsidies and government inefficiencies can be curbed, eliminated or streamlined. Congress would then have an up-or-down vote on the commission's recommendations, without amendment.

Third, it would give the president the authority to send pork projects and special-interest tax breaks back to Congress for reconsideration, creating a constitutional alternative to the line-item veto.

Finally, it would, as suggested by the bipartisan "Fiscal Seminar" group, put into place targets for entitlement spending and tax expenditures that would be budgeted for the long run - say, 30 years. When unexpected events pushed spending or tax expenditures above targets, automatic triggers would be used to slow spending growth, increase revenues or some combination of the two.
Such a system would force policymakers to address the greatest threat to our nation's long-term fiscal well-being: burgeoning retirement and health-care costs.

If we don't, and insist on maintaining the tax burden where it has been over the last 50 years (about 18 percent of GDP), the Fiscal Seminar group estimates public debt will most likely exceed 100 percent of GDP within 25 years.

At the end of World War II, America's debt exceeded its entire gross domestic product. Yet rather than throwing up their hands, our parents and grandparents whittled down their deficits. By the Kennedy administration, the ratio of debt to GDP was back down to prewar levels.
What lesson can we learn from the "greatest generation"? Simply this: Opportunity, not debt, is the legacy we owe to future Americans. We cannot afford to let budget basics get lost in our efforts to right the economy.

Paul Weinstein Jr., a former policy adviser to Bill Clinton and Al Gore, is a fellow at the Progressive Policy Institute and Johns Hopkins University.

Strengthening American Competitiveness: Regaining Our Competitive Edge - Four Priorities and 20 New Ideas

Strengthening American Competitiveness: Regaining Our Competitive Edge - Four Priorities and 20 New Ideas. By Jason Bordoff, Lael Brainard, Carola McGiffert & Isaac Sorkin
The Brookings Institution, February 13, 2009

The United States is in the midst of the most serious economic downturn since the Great Depression. Policymakers are understandably preoccupied with applying the right mix of fiscal and monetary policy responses to stanch and eventually reverse the decline. At the same time, policymakers need to build a foundation for sustainable, long-term prosperity that can drive our economy once we move beyond the present crisis. Going forward, the economy will no longer have the technology boom of the 1990s or the housing bubble of the 2000s to sustain its growth. And it is unlikely that debt-driven consumer spending or Wall Street will provide the same boost as in the past. If we are going to provide opportunities for all Americans going forward, we need to make the right investments today to rebuild American competitiveness by investing in our people, infrastructure, ideas, and green transformation.

This paper addresses this central challenge for the United States. We begin by discussing the economic downturn and financial turmoil facing the country and how policymakers should respond to both boost our economy in the short-run and also build the foundations for long-term competitiveness. Second, the competitiveness agenda is motivated by, and must therefore be responsive to, at least three changes in the fabric of the global economy: the increase in global integration; the attendant shift in economic power to rising powers such as Brazil, China and India; and the realization of the existential threat that climate change poses. Finally, we lay out the fundamentals of a competitiveness agenda through descriptions of specific policy proposals by leading experts on how to invest more robustly in infrastructure, people, ideas and green transformation.

The whole document is here.

State Sec remarks on the 50th Anniversary of Martin Luther King, Jr.'s Trip to India and Black History Month

The 50th Anniversary of Martin Luther King, Jr.'s Trip to India and Black History Month. Remarks by Hillary Rodham Clinton, Secretary of State
Treaty Room, Washington, DC, Thu, 12 Feb 2009 15:50:23 -0600

Remarks With Mr. Martin Luther King III, Congressman John Lewis, Congressman Spencer Bachus and Mr. Herbie Hancock

SECRETARY CLINTON: Good afternoon. Good afternoon. Well, we are so delighted to have you – please be seated – here in the Treaty Room at the State Department for what is an historic occasion, something that means a great deal to this Department and to our country. I am pleased that His Excellency, Ambassador Sen of India is with us today, and I’m also very honored to be joined by a remarkable group of Americans.

We have standing before you some of the heroes of the Civil Rights Movement and of our recent history. Certainly, Congressman Lewis needs no introduction. We have with us also Congressman Bachus. They will be leading a congressional delegation to India to retrace the steps of Dr. King and Mrs. King. And of course, the person who – for whom this is a personal journey as well as a historic one, Martin Luther King III.

Now Herbie Hancock is going along as well. (Laughter.) And I think there’ll be a lot of people who recognize him. And he just told me he’s going to be recording, including some Indian artists. And maybe he’ll say a word more about that in a minute. Also joining the CODEL will be a number of other distinguished members of Congress, as well as Ambassador Andy Young and former Senator Harris Wofford. This is the real American dream team. And I don’t think we could find better ambassadors for our country to send to help mark the 50th anniversary of Dr. Martin Luther King, Jr.’s historic trip to India.

As we celebrate Black History Month here at home, the 50th Anniversary of Dr. King’s trip to India is a reminder that the struggle for civil rights and justice has always been and continues to be a global mission; it knows no borders. As Dr. King told us, “Injustice anywhere is a threat to justice everywhere.”

Now Dr. King was just 30 years old when he traveled to India in 1959, but he had already led the Montgomery bus boycott, and understood the wisdom and power of the nonviolent protest movement pioneered by the great Mahatma Gandhi. Dr. King toured the country for a month, studying Gandhi’s philosophy, meeting with Prime Minister Nehru. He met with other Indian leaders in politics and government, in academia and the professions in business and across the society. And he talked with citizens and young people at every opportunity. He brought the lessons he learned there back to the United States, and renewed his own faith in the unmatched moral force of nonviolent resistance and its ability to achieve meaningful social change.

It’s been my great privilege to have heard Dr. King speak when I was a young girl. It was a few years after he had returned from India. It was a cold January night in Chicago, but I was deeply moved then, as I continue to be, by his timeless call to all of us, his dream for a world that is really worthy of our children. I remain inspired by his undying hope for a better tomorrow.

So I am pleased to honor Dr. King’s historic journey which really represents the journey that our country has been on. And in many ways, as we have celebrated the inauguration of President Obama, a journey that has brought great faith to people who follow the tenets of nonviolence and Dr. King’s philosophy and preaching and who have worked to make the changes here at home that continue to reverberate around the world, it’s fitting that this mission then be undertaken during Black History Month, and just weeks after our President’s historic inauguration. And on behalf of President Obama, I want to express his gratitude for you doing this and for your service as well.

You know, Dr. King’s trip to India stands as a landmark of the Civil Rights Movement and a real testament, ambassador, to the bonds of affection and shared history between our two nations. I want to thank the Government of India for welcoming and supporting our delegation, a reflection that India also understands that the deep and broad partnership our countries are forging is one based on common history and values. And it is because of that that it is destined to grow even stronger in the future. So I wish you Godspeed and a great deal of – oh, shall I say, jealousy that (laughter) – that you are retracing these footsteps.

And now I’d like to introduce some of my friends and those who will be making this journey, starting with Martin Luther King III, followed by Congressman Lewis and Congressman Bachus, if you would also like to say a few words, and ending up with Herbie Hancock.

MR. KING: Thank you so much, Madame Secretary, and thank you, Congressman Lewis, Congressman Bachus, and of course, the great Mr. Herbie Hancock. I must also thank the Government of India and Ambassador Sen, for this is a very special journey for me personally, my wife and I, to retrace the steps that my parents engaged in 50 years ago. On behalf of everyone at Realizing the Dream, an organization I started, I am honored to be making this journey on this 50th anniversary of that incredible visit.

In 1959, at the invitation of the Gandhi National Memorial Foundation, my parents, Dr. Martin Luther King, Jr. and Coretta Scott King, traveled to India to immerse themselves in Gandhi’s nonviolence movement, and to identify with and give support to the people of India who were struggling to overcome the evils of poverty and discrimination.

By working to foster peace through nonviolence, I hope this pilgrimage will inspire others to end the dependence on violence for nominal change, and instead look to reconciliatory power of nonviolence to create sustainable progress and diplomacy.

The impact that Gandhi’s life had on my father was quite profound. And it is in that spirit that I set out on this journey in just a few days. Thank you. (Applause.)

MR. LEWIS: Madame Secretary and His Excellency Mr. Ambassador Sen, I would like to thank you, the United States Department of State, and the Government of India for all that you have done to support this delegation. It is with great pleasure and delight that I embark on this journey with Representative Bachus, my friend and my brother and my colleague from Alabama, co-leader of the delegation; other colleagues in the House; Martin Luther King III; Herbie Hancock and their delegation to pay tribute to the abiding link between Gandhi and Martin Luther King, Jr.

The two men were not politicians or lawmakers. They were not presidents or popes. But they were inspired human beings who believed deeply in the power of nonviolent resistance to injustice as a tool for social change. Because of their courage, commitment, and vision, this nation has witnessed a nonviolent revolution under the rule of law, a revolution of values and ideas that have changed America forever. We are all a beneficiary of this powerful legacy.

It is a great honor to retrace the steps of Gandhi and Martin Luther King, Jr. in India. Madame Secretary, I don’t where I would be if it had not been for the teaching of Gandhi and Martin Luther King, Jr. We are looking forward to fulfilling an inspiring journey. Thank you, Madame Secretary, for all your help in making this possible. Thank you.

SECRETARY CLINTON: Thank you so much. (Applause.)

MR. BACHUS: I walked into my office this morning and there was music playing, and my staff was just ecstatic that Herbie Hancock – (laughter) – was – I would be traveling with Herbie Hancock, and they knew about Martin Luther King. And I first want to say that thank you for your father. I’m the congressman from Birmingham, Alabama. And Birmingham is a better place today than it was, because of Martin Luther King. As Congressman Lewis, when he called me and asked me to head this delegation, I was overwhelmed, because we in Birmingham, probably more than anywhere else, know about the ills of discrimination and racism.

I buried my father two years ago, and I’m proudest of him for crossing that color line and being the first contractor in Birmingham to hire subcontractors. He had vandalism of worksites, but he had the vast support of the people in Birmingham when he did that. And I want you to know that Birmingham is a better place. And I’m not sure there’s any place more committed to equality than a place which suffered from inequality. And for that, I thank you and I thank your father. Thank you. (Applause.)

MR. HANCOCK: Madame Secretary, members of Congress, Mr. Ambassador, members of the Diplomatic Corps, Martin Luther King, Jr. – Martin Luther King III – and honored invited guests, it is a privilege for me to be here today among such esteemed company.

As chairman of the Thelonious Monk Institute of Jazz, I am honored to be traveling to India with my fellow musicians, singers Chaka Khan, Dee Dee Bridgewater, pianist George Duke, and young students who are studying with the Thelonious Monk Institute of Jazz performers in New Orleans. We are honored to be partnering with the State Department and to be taking this journey with Martin Luther King III, Congressman John Lewis, and other members of Congress. And we look forward to bringing music and jazz education to the people of India through this historic tour that celebrates the philosophies of Dr. King and Mahatma Gandhi, two very inspirational political and spiritual leaders whose teachings have really encouraged me to lead a life of peace, honesty, and filled with love for my fellow man.

And of great importance to me and my fellow artists, their philosophies of cooperation, communication, and harmony are also essential elements of every jazz band. (Laughter.) The Thelonious Monk Institute of Jazz has partnered with the State Department now for over 15 years, and this is our third trip to India. On the first trip I was humbled meeting Mother Teresa, as I have told you, Madame Secretary, and then filled with joy having several opportunities to contribute to the cultural fabric of the Indian people through performance and jazz education workshops.

We look forward to being a part of the Living Dream concerts in Mumbai and Delhi, and then working with the students who attend the Ravi Shankar Institute of the Performing Arts, where our students are going to be able to exchange valuable lessons with the young Indian musicians and prove again that the language of jazz knows no boundaries.

On behalf of the institute, all the musicians on the tour, and myself, I’d like to say a very, very warm and heartfelt thank you to our good friend and Secretary of State Hillary Clinton, and to the U.S. Department of State for continuing your support of culture, jazz, and music education throughout the world, and for giving us the opportunity to represent the United States and to be a part of this historic tour. Thank you. (Applause.)

SECRETARY CLINTON: Well, as you can tell, it’s going to be quite a journey and all of us wish you well. I think it’s important to really underscore the significance of this kind of cultural and historical diplomacy. It’s exactly what the State Department should be doing even more of, reaching out and learning from as well as sharing with people around the world.

And it is also a reminder that nonviolence works. And if more people were able to understand that and remember the teachings of Gandhi and Dr. King, not only would the world, I think, be a more peaceful place, but I honestly believe that the injustice that persists would be far more likely to be remedied.

So it’s a real pleasure during this Black History Month. I want to thank John Robinson and the Office of Civil Rights for what they do during this month, and this is part of that commemoration and celebration. And to all of you, it’s a great reminder from the incomparable Herbie Hancock that jazz is not just about music. I think jazz is a pretty good guide to most things in life, and I can tell you, as Secretary of State, I’m improvising every single day. (Laughter.) Thank you all very much. (Applause.)

Those of you who would like to --

QUESTION: Madame Secretary --

SECRETARY CLINTON: Just a second. Those of you who would like to meet our guests, please come up, and before they have to leave, I know they’d like to say hello to some of our guests. So, please, come up.

QUESTION: Madame Secretary, do you believe that --


QUESTION: -- Dr. King’s dream has come full circle now with President Obama’s election, and also, if the change began with Mahatma Gandhi and Martin Luther King?

SECRETARY CLINTON: Well, I think President Obama would tell you that it is not about him. His election, his victory, is a victory for the American people as well as for his philosophy of change and his deep commitment to American values. There’s still a lot of work to be done. I mean, the work of justice never ends. But we’re very proud in the United States that our President represents, in great measure, the dream of Dr. King. And certainly, we all have to now continue that work, and I know that the President feels that responsibility acutely.

But it’s not just the work of a president or not just the work of diplomats or members of Congress. It is the work of everyone, and that’s why it’s so important to have people like Martin and his nonprofit organization continuing that work, artists like Herbie and others of great talent continuing that work. So if anything, the philosophy and the examples of Gandhi and Dr. King should spur each and every one of us to even do more.

Thank you all very much. (Applause.)

PRN: 2009/125

US Gov't Help: Gaza Humanitarian Relief

Gaza Humanitarian Relief
Robert Wood, Acting Spokesman, Office of the Spokesman
Public Affairs, Washington, DC, February 12, 2009

Question Taken at the Daily Press Briefing on February 10, 2009

Question: Have we provided or do we have plans to provide additional humanitarian aid to Gaza (in addition to the 20 million)?

Answer: At this time, the United States government has contributed almost $60 million for the provision of food, potable water, medicine, and plastic sheeting for emergency shelter needs.
In addition, the State Department has contributed money to support the United Nations Relief and Works Agency for Palestine Refugees in the Near East (UNRWA) and the International Committee of the Red Cross. For example, since the beginning of the most recent conflict, it has dedicated nearly $55 million to these two organizations for food, shelter and other emergency relief in West Bank and Gaza.

Moreover, USAID has provided almost $6 million for emergency assistance to Gaza. Food, milk powder, blankets, plastic sheeting, and other nonfood items have been distributed to beneficiaries, and the distributions are continuing. This assistance is distributed to beneficiaries through USAID’s implementing partners under several recently awarded grants, including grants to Mercy Corps, American Near East Refugee Aid (ANERA), CHF International, Relief International, Catholic Relief Services, and CARE International. Food distributions are done through USAID’s grant to the World Food Program (WFP).

The needs of Gaza’s Palestinians remain acute. The U.S. government will continue to monitor the situation to judge what additional contributions would be the most helpful.

PRN: 121

The Seoul Solution to the Banking Crisis: no need to sell off toxic assets immediately

The Seoul Solution to the Banking Crisis, by Weijian Shan
Geithner doesn't need to sell off toxic assets immediately.
WSJ, Feb 12, 2009

Let's face it: the American financial system is basically insolvent. To date, the U.S. government has committed, on behalf of taxpayers, more than $7 trillion of capital injections and guarantees to financial institutions. Treasury Secretary Timothy Geithner said Tuesday the government will pour up to $1 trillion more into a "Public-Private Investment Fund," which will be tasked to buy up banks' bad assets -- the real blockage in the credit pipeline. The trouble isn't, however, that banks don't want to sell loans. They just don't know what a fair price is in a now-illiquid loan market because there are no buyers.

How should the government price toxic assets? If the government overpays, current shareholders will be unjustly enriched at the expense of taxpayers. Rewarding reckless behavior would only encourage more of it. If the government underpays for assets, it will amount to an expropriation of private properties without just compensation, and make the banks' capital positions even weaker than they are now. There's another complicating factor, too: Since most bank deposits are government-guaranteed, the government has the ultimate responsibility to save failing banks. That means Washington must take over the failed bank before selling it off. The government will own the assets and sell them when private capital is brought in to recapitalize the bank.

How should the government price these assets? Mr. Geithner's plan suggests that the determination of the prices will be left to private investors. But what if the government is the seller? How does the government get it right? How do private investors get it right? It seems to be an impossible task, because currently there is simply no market for toxic assets, and if there is, the market will deeply discount them, either bankrupting the bank or costing taxpayers dearly. It is a major dilemma which needs to be resolved. But there is a proven way to solve the problem, and it should be used again.

During the latter part of 1998, the financial system of South Korea -- at that time, the 10th largest economy in the world -- was basically insolvent. Many banks failed as bad loans mounted. Capital flight reduced Korea's foreign exchange reserves so much that the country teetered on the verge of sovereign debt default. Korea had to request emergency funding from the International Monetary Fund, which, working closely with the U.S. Federal Reserve, eventually provided the country with a $58 billion rescue package.

The package came with strings attached, one of which was for the Korean government to sell off to foreign investors a clutch of failed and nationalized big banks including Korea First Bank. The Fund reasoned that the failure of Korea's banking system was due to a total lack of a "credit culture," as lending had typically been done on the basis of either government policies or collateral without much regard to the creditworthiness of the borrowers. Seoul thought foreign investors could help inculcate this culture into the banking system.

U.S.-based private equity firm Newbridge Capital was one of the only two bidders -- among more than 40 invited -- to attend the government-mandated auctions. I represented Newbridge at these meetings. After weeks of negotiations, we reached a preliminary agreement with the Korean government to give us the exclusive right to acquire Korea First Bank. The key part of the deal was that all the assets be priced at fair market value. The memorandum of understanding specifically called for all assets to be "marked to market" on a loan-by-loan basis, after which Newbridge and the government would jointly invest into the bank to recapitalize it.

"Mark to market" accounting, however, turned out to be completely inoperative in a financial crisis because then, as now, there was no market for bad loans. Sellers thought that assets would be worth more when the economy eventually recovered. Buyers worried they might be worth less if the economy continued to deteriorate. Both were right because there was a significant probability for either to happen, but their divergent expectations made it impossible for them to agree to the right price.

Then the parties discovered a simple methodology that resolved the dilemma -- and could resolve America's dilemma, too.

Since the market was illiquid, we realized that it was impossible to determine the "fair value" in the near term. We thus agreed to a so-called future "buy or sell" arrangement. Over the following three years, on the anniversary of our agreement, the bank would name the price for any existing loan on its books, and the government would have the option to "buy" or "sell" that loan at that price.

The goal was for the government to minimize the amount of money it would have to inject to make up the difference between the market and face values of bad loans, and for us not to have to bear the losses from the bad loans we had inherited when we bought the failed bank from the government. This arrangement gave us the time to work out or to improve the value of these loans, and perhaps for the loan value to recover over time. If it didn't fully recover, and on one of the anniversaries we valued a problem loan at 70 cents on the dollar and the government agreed, we would receive an injection of 30 cents to make us whole. But if the government thought we were lowballing it, the government could buy the loan from us at full face value -- $1 -- and sell it to other investors at a higher price, say 80 cents. This would leave taxpayers with a loss of only 20 cents, as opposed to 30.

The beauty of this methodology is severalfold. First, the government did not have to sell bank assets to private investors at deeply distressed value in the depth of a financial crisis -- a move which would have incurred huge losses for taxpayers. Over time, as the economy recovers, the loan value is likely to improve.

Second, the bank was no longer crippled by the burden of bad assets because it knew they were ultimately protected by the government. The new investors could concentrate on fixing the operations of the bank and making new loans.

Third, the plan removed any incentive for the privatized bank to cheat the government. To a bank, an interest-yielding asset is more valuable than cash. Therefore a bank would want to hold on to an asset, and more importantly to a customer, as long as the loan is safe. In our buy-sell arrangement, if the bank mistakenly underpriced a loan or tried to lowball its value, the government would buy it with cash and the bank would lose the loan and the customer. If the bank overpriced the asset, the bank would risk losses as it would get stuck with a loan for less than its book value. Therefore, the bank was incentivized to work out the loan to the best of its abilities and to price it as accurately as possible.

This methodology worked so well for the Korean government that, three years later, after the program ended, the government had spent a fraction of its original budget to rescue the bank. Under the new owners, many of the nonperforming loans were worked out and recovered, along with the recovery of the Korean economy.

In retrospect, the methodology was the best deal for taxpayers. It did not give investors as much gain as government-assisted bank deals elsewhere at that time, which allowed new investors to buy assets at substantially marked down values and capture significant windfall gains when the market and asset value recovered. We earned our upside from revitalizing and building up the bank, not from gains on legacy assets at taxpayer expense. Both the Korean government and Newbridge eventually realized many times their investments when the banks recovered and were sold off five years later.

Like Korea a decade ago, the U.S. government is left with little choice but to nationalize insolvent banks. Mr. Geithner now needs to flesh out the methodology through which he's going to relieve these banks of their bad loans. There is no lack of capital in America today, or in the world beyond it. Mr. Geithner can make it flow again, if he only looks to Seoul's example for how to do it.

Mr. Shan is a partner at TPG Capital. The views expressed in this article are strictly his own.

Will You Have Enough to Retire On?

Will You Have Enough to Retire On? By Andrew G. Biggs
The Retirement Security "Crisis"
AEI, Wednesday, February 11, 2009

Excerpts w/no references:

Americans are concerned about the state of preparedness for retirement, and many believe that retirement security is nearing a crisis. As life expectancies increase, traditional defined-benefit pensions decline, and Social Security faces significant reforms, many argue that a significant share of Americans will be at risk of an inadequate income in retirement. But despite these anxieties, most older Americans seem well prepared for retirement. Controlling for household composition, the Social Security replacement rate for typical workers born in 1940 was 63 percent of average preretirement earnings, and the median total pension replacement rate was 92 percent of prior earnings--well over financial planners' recommended rate of around 75 percent. Even among the younger 1960 birth cohort, for whom the projected median Social Security replacement rate declines to 54 percent, the median total pension replacement rate remains at 82 percent. While policymakers should work to strengthen Social Security and private pension savings, talk of a crisis in retirement income preparedness appears premature.

Policymakers and the general public are increasingly concerned that a significant share of Americans are at risk of having insufficient retirement income. A common rule of thumb for financial advisers is that retirees should have enough income to replace roughly three-quarters of their preretirement earnings. A survey of financial planners and educators recommended mean and median replacement rates of 74 and 75 percent, respectively.[1] This Retirement Policy Outlook will accept these recommendations as at least approximately correct.

In this Outlook, I use a microsimulation model of Social Security and private pension benefits to analyze the level and distribution of combined pension benefits for retirees in the 1940 and 1960 birth cohorts as of age seventy. I use two integrated microsimulation models--GEMINI, which simulates Social Security taxes and benefits, and PENSIM, which simulates defined-contribution and defined-benefit pension benefits--to calculate replacement rates for retiree households in the 1940 and 1960 birth cohorts. I then adjust replacement rates for differences in household composition. Replacement rates have come under criticism for being a relatively crude tool for retirement planning,[2] but they can be refined by adjusting them for the presence of children and for economies of scale in household size.[3]

The life-cycle model of consumption implies that individuals will use borrowing and saving to smooth consumption over time, seeking to consume roughly the same amount in working years as in retirement. However, without accounting for the costs incurred in raising children and efficiencies achieved in household size, traditional replacement rates may give misleading readings of preparedness for retirement. Children can consume a significant portion of a household's income, leaving less to be consumed by their parents. Although children are often an economic burden during their parents' working years, the lower preretirement consumption by parents implies that a lower level of retirement income is needed to match that preretirement consumption. As John Karl Scholz and Ananth Seshadri of the University of Wisconsin- Madison argue, "financial planning rules of thumb, and specifically replacement rates, ignore the role that children play in optimal life-cycle wealth decisions."[4] Adjusting for the presence of children will generally increase replacement rates for households with children, although it can reduce replacement rates for individuals who continue to support children while in retirement.

Economies of scale in household size imply that households with more than one member have lower relative costs of living than single-member households. Spouses (and children) sharing housing, food, transportation, and other costs can reap significant savings versus individuals living alone. Economies of scale in household size exist during working years as well as in retirement, so the net effect on measured replacement rates of adjusting for economies of scale depends upon individual circumstances.

Shared Earnings and Retirement Income

Following standard practice in Social Security analysis, income during working years and retirement is calculated on a "shared basis." Shared income is designed to account for two factors: first, that spouses tend to share income and costs equally, and second, that household composition changes over time due to marriage, divorce, birth, death, and so on.

The shared approach divides income equally between spouses in any year in which a spouse was present. Consider a household in which the husband earns $50,000 per year while the wife earns $20,000. Under the shared approach, their total household earnings of $70,000 would be divided by two, giving each spouse a "shared" income of $35,000 for that year. Likewise, a couple's Social Security benefits and pension income are deemed to be shared between them.

Replacement rates are calculated by dividing an individual's shared Social Security benefit or combined Social Security and pension benefit as of age seventy by average preretirement earnings.[5] Age seventy is chosen because, by this time, almost all individuals have claimed Social Security benefits and most have exited the paid workforce.

Some have argued that replacement rates should be adjusted for increases in Medicare premiums (which are automatically deducted from Social Security benefits) and for out-of-pocket health care costs.[6] Doing so would reduce measured replacement rates. However, this concern seems misplaced. If health care provides a value at the margin equal to its cost, such that individuals would rather spend their income on health care than on other goods or services, then there seems little reason to treat health care provision differently from other items in a household budget.[7]

Accounting for Household Size and Composition

The method used here extends the shared earnings approach described above by adjusting earnings and pension income for the presence of children and for economies of scale in household size. In doing so, it constitutes an improvement over previous analyses using other models that do not include the presence of children.[8]

In most previous analyses of retirement income, children would be effectively ignored. Total household income would simply be divided by the number of adults living in the household to calculate each individual adult's share. Yet, we know that children consume resources during an individual's working years, and we also know that a household consisting of multiple adults will have lower costs of living than had those adults lived separately. I use a formula devised in a National Academy of Sciences (NAS) project to measure poverty.[9] This formula calculates the number of "adult equivalents" living in a household. In my approach, shared income is adjusted for the presence of children and economies of scale in household size by dividing total household income by the household's number of adult equivalents.

The first issue to consider is how the presence of children affects their parents' need to save for retirement. Dartmouth economist Jonathan S. Skinner describes the effect of children on retirement income needs in simple terms:

Parents are already used to getting by on peanut butter, given that a large fraction of their pre-retirement budget has been devoted to supporting children, so it's not difficult to set aside enough money to keep them in peanut butter through retirement. By contrast, childless households with the same income accustomed to caviar and fine wine must set aside more assets to maintain themselves in the style to which they have become accustomed.[10]

That is to say, the costs of raising children imply that the consumption of goods and services by the parents will be significantly lower than in a childless household with similar income. While parents have lower standards of living than nonparents at similar earnings levels during their working lives, this also sets a lower bar that their retirement savings must meet. Replacement rate measures should account for these differences.

The second issue I consider is how economies of scale in household composition during working years and in retirement affect the income level required in retirement. Two can generally live more cheaply than one; a couple has a lower cost of living than two singles. Moreover, a child generally consumes less than an adult, so adding a child to a household does not necessarily imply a proportionate increase in costs of living.[11]

Household equivalence scales are designed to account for how differences in the size and composition of households affect a household's true cost of living. The adult equivalence scale from the NAS has been widely used.[12] It takes the form

Adult equivalents = (A + PK)F

where A is the number of adults in the family, K is the number of children, P is the cost of a child relative to an adult, and F is a factor reflecting economies of scale in household size. Lower values of P will result in relatively lower costs of living for a child versus an adult household member, while lower values of F will result in larger economies of scale as household size increases.

The NAS recommends a value for P of 0.7 and a value for F of between 0.65 and 0.75; I will use a value of 0.7 for both variables. A P value of 0.7 implies that a child costs 70 per-cent as much to support as an adult. The F value's interpretation is less intuitive, but it implies that as additional household members are added, the incremental cost of supporting each new additional household member declines.[13]

I adjust for household size by dividing the household's total earnings by the number of adult equivalents in the household. Assuming an economy of scale factor (F) value of 0.7, a household consisting of two adults would have only 1.6 adult equivalents. To illustrate, if total household earnings were $70,000, dividing by 1.6 would produce a shared earnings value for each spouse of $43,750. This value implies that their standard of living would be equivalent to that of a single individual earning $43,750. If the couple had two children, the adult equivalent factor would then be 2.4, and each adult's attributed share of total earnings would be $29,167. This value would reflect both that larger households use resources more efficiently and that a share of the household's total earnings flows to the children rather than the adults.

In each year, the number of adult equivalents in the household is calculated, and household income is divided by this figure to produce the shared income for that particular year. This adjusted shared income is used both for calculating pre-retirement earnings and Social Security and total pension income as of age seventy. Dividing the adjusted Social Security or total pension income by adjusted preretirement earnings produces a replacement rate adjusted for household composition.

Replacement Rates for the 1940 Cohort

In this section, I report projected replacement rates for members of the 1940 birth cohort as of age seventy. It is worth noting that these projections are not adjusted for recent economic conditions, which doubtless have affected the assets and incomes of many retirees. Retirees are in many ways less exposed to an economic downturn than working age individuals, as many have left the workforce and derive income from Social Security and defined-benefit pensions, meaning that higher unemployment and lower financial asset prices may have less effect. However, retirees also are far more dependent on asset income than working age individuals and have less time to allow asset values to recover. For these reasons, figures shown here should be taken to be generally representative of the retirement income adequacy of current new retirees, based on broad trends in Social Security and pension income.

Results of the simulation are first shown to illustrate the effects of the adult equivalent adjustment factor on replacement rates. [...]


In fact, one could argue that many current retirees have oversaved. While of lesser concern than undersaving, there are large numbers of retirees with replacement rates significantly exceeding their preretirement earnings; 44 percent of individuals in the 1940 birth cohort have retirement incomes exceeding 100 percent of preretirement earnings, and 16 percent have replacement rates exceeding 150 percent. Although it is impossible to know how each individual would optimally choose to allot consumption between working years and retirement, these individuals may have inadvertently sacrificed consumption earlier in life to amass a retirement income significantly out of proportion to their needs or their ability to spend it enjoyably. These retirees may have been better served to save less during their working years, although surely many would not regret preparing for retirement as effectively as they did.

Replacement Rates for Future Retirees

While a strong majority of the 1940 birth cohort appears to have adequate retirement income to replace their preretirement earnings, many are concerned about how future retirees will fare. Social Security benefits will be lower, and private pensions will shift from defined-benefit schemes--which are perceived to be more generous--to defined-contribution plans.[18] To examine these questions, I analyze projected replacement rates for members of the 1960 birth cohort, who will retire in the 2020s.



Accounting for differences in household composition can have a significant effect on judgments about the adequacy of retirement income. Adjusting for household size and the presence of children increases the typical replacement rate for the 1940 birth cohort by approximately fifteen percentage points, although measured replacement rates decline for roughly one in ten retirees.

For the 1940 birth cohort, overall retirement preparedness appears to be strong. The typical Social Security replacement rate adjusted for household composition is 63 percent of preretirement earnings, while the median total pension income replacement rate is 92 percent. This latter figure significantly exceeds financial advisers' recommended replacement rate of around 75 percent.

Projected replacement rates for the 1960 cohort are lower, with a median adjusted total pension replacement rate of 84 percent. But even this reduced level is adequate on average, and if individuals were to choose to remain in the workforce for just one more year, the median replacement rate would rise to around 89 percent.

The most significant gray area surrounding these projections is when and how the Social Security program will be reformed to improve its financial soundness. While the program is projected to be solvent until the 2040s--meaning that scheduled benefits should be payable as of the 2020s, when the 1960 cohort will retire--changes to taxes and benefits are likely to occur in the near future. These changes are likely to reduce average replacement rates, although they will probably shield low earners from the greatest changes. While it is important to reduce the growth of Social Security benefits to ease pressure on the federal budget, Social Security reform should also include provisions to increase individual retirement savings outside of Social Security so as to help maintain income replacement rates at retirement.

While policymakers should not ignore policies to help individuals build sufficient income for retirement, such as reforming Social Security and automatically enrolling employees in pension plans, neither should they panic or assume a crisis is at hand. Most Americans, both current retirees and future ones, appear to be reasonably well prepared to support themselves in retirement.

Andrew G. Biggs is a resident scholar at AEI.

AEI research assistant Adam Paul worked with Mr. Biggs to produce this Retirement Policy Outlook.

Taxing fuels, vehicles, and passengers: EEA’s vision of ’sustainable’ transport

Taxing fuels, vehicles, and passengers: EEA’s vision of ’sustainable’ transport. By Marlo Lewis
Master Resource, Feb 10, 2009

Europe taxes gasoline at $3-4 a gallon, imposes the world’s most stringent fuel economy standards, and mandates the blending of biofuels into the region’s motor fuel supply. Yet European Union (EU) transport-sector greenhouse gas (GHG) emissions increased by 26 percent from 1990 to 2006, according to “Beyond Transport Policy,” a recent European Environment Agency (EEA) report. Why have these policies failed to reduce GHG transport-sector emissions?

The EEA report spotlights the unheard-of fact that the “key drivers” of demand for transport services are “external” to the transport sector. So despite what you’ve been told, people don’t drive around just for the heck of it, buy airplane tickets for the sheer thrill of flying, ship products or order deliveries just to make work for truckers, sailors, and airmen. No, most people use transport vehicles to shop, work, educate their children, vacation, or supply products to customers. And—horrors—they do these things “without considering the consequences on transport demand and greenhouse gas emissions”!

What this implies, of course, is that we cannot have what the EEA calls a “sustainable transport system” until politicians and bureaucrats control those pesky “external drivers”—the other economic sectors that generate the demand for transport services.

The EEA report provides detailed case studies on how three external drivers—food production and consumption, short-haul air travel for business and leisure travel, and education—increase emissions by increasing the demand for transport. Each study reveals what every sober adult should already know. Work causes emissions. Play causes emissions. Wealth causes emissions. Trade causes emissions.

In short, life causes emissions, especially where people are prosperous and free to work and play.

Let’s begin with food. Do grapes cause global warming? According to the EEA, importing a kilogram of grapes from Chile to Austria emits 7,410.8 grams of carbon dioxide (CO2), compared to only 8.8 grams for grapes grown closer to home. So if you’re an Austrian and you eat Chilean grapes, your carbon foot print is 842 times bigger than if you eat locally-grown grapes. But Europeans like fresh produce, and they can afford to import it year-round. How decadent! Why can’t they live like their noble ancestors and eat canned fruit in the winter, or simply abstain?

To counter the fresh produce peril, the EEA calls for a labeling program alerting consumers to the transport-based carbon-intensity of the food they eat. However, that would hardly be enough to instill in Austrians, for example, an aversion to Chilean grapes, South African apples, Spanish strawberries, Dutch tomatoes, or Israeli peppers. The logical next step—which the EEA recommends—is to impose carbon taxes “to internalize the external costs of transport.” Such tariffs would also keep lots of developing country produce out of European markets. The EEA proposal is protectionism by another name.

The EEA also bemoans the vicious circle created by prosperity and air travel. As Europe becomes wealthier, more economically integrated, and more connected to the global economy, more Europeans want to fly for both business and pleasure. This has led to an expansion of aviation facilities and infrastructure, with airports functioning not only as transport hubs but also as retail centers, conference and meeting venues, and accommodation facilities. By making flying more convenient and useful, these developments further increase demand for air travel. When will the flying end!

To mitigate this dastardly trend (never mind that accelerating the movement of goods, persons, and ideas enhances wealth creation—the foundation of all environmental improvement), the EEA recommends new carbon-based aviation fuel taxes, passenger duties, and landing fees. Well, what else did you expect?

Education is the third and last “external driver” examined in the report. Here’s the gist. Millions of parents would rather drive their kids to safe, high-quality schools across town than make the children walk or bicycle to underperforming, bully-infested schools nearby. The EEA report offers several antidotes to this malady, including cycle lanes, car pooling, “walking buses,” car-free action days (or weeks), consumer information, and improvements in public transport. Well, I don’t know about you, but if my son can get beat up and have his lunch money stolen at a school with a “walking bus” program, then I’m definitely going to enroll him there rather than drive him to a good school a few miles further from home.

Although the report doesn’t specifically mention taxes in this context, it states that “revenues from a carbon-based tax can be used to cover costs of cycling and walking infrastructure,” and opines that “people may be more favorable if they are given adequate information about what would happen without the tax increase.” Sure they will! ‘Monsieur Blanc, please fork over an additional €1,000 in motor fuel taxes or the Greenland Ice Sheet will collapse.” That doesn’t sound like a winning sales pitch.

Here’s the bottom line the EEA doesn’t want to face. Until somebody mass produces electric vehicles or alternative fuels that outcompete combustion engines or petroleum-based fuels, transport-sector CO2 emissions will continue to increase along with demand for transport services.

Although transport demand comes from “external drivers” on which transport policies have had little impact, the EEA report tries but fails to go “beyond transport policy.” The EEA’s default solution to the alleged problem of too many people driving, flying, shipping, and importing is the most boringly familiar transport policy of all–increase taxes on fuels, goods, passengers, and vehicles.

Comment on post " transparencia genera confianza"

Comment on post " transparencia genera confianza". By Jorge Mata, Feb 10, 2009

hola, quisiera hacer una matización, dada la redacción empleada en y en estos posts. no es un esfuerzo sin precedentes por reducir ineficiencia, despilfarro, etc. Apena ver la tendencia que todos tenemos a no estudiar lo que ya han hecho nuestros antecesores.

Todo esto ya empezó en el primer mandato Clinton (junto con el Congreso, por supuesto). En esa época, el presidente y el Congreso federales acordaron estas leyes (cronológico inverso):

. Government Paperwork Elimination Act of 1998 (GPEA) . Clinger-Cohen Act of 1996. Federal Acquisition Streamlining Act of 1994, Title V (FASA V). Government Performance Results Act of 1993 (GPRA)

Estos esfuerzos se ampliaron ya desde el primer mandato Bush 43 + el Congreso, incluyendo cosas tan imprescindibles hoy como la adopción de RSS y videos de las press conferences & daily press briefings tanto en como en (del que salió, además de la creación de portales como (luego renombrado a, etc. Menciono esto de los videos porque todavía no están los vídeos de los press briefings en, y las transcripciones ha costado mucho ponerlas completas (y sigue costando), y un sinnúmero de fallos (inexcusables si se presume de estar muy al día, permítanme decir ahora que no nos ve nadie).

De hecho, no es la primera vez que se crea algo en un mandato con la intención de ser novedoso y resulta, siento decirlo, no serlo y además duplica esfuerzo. El Congreso federal tiene una biblioteca de merecida fama que asiste, sobre todo, a los legisladores. Allí hay una dirección,, que da paso a toda la información legislativa imaginable. Pues bien, a alguien se le ocurrió en la última campaña presumir de apertura republicando los proyectos de ley en curso en las cámaras en, que es el site del Ejecutivo. So much for separation of powers.

Y no digamos eso de que las cámaras hayan aprobado un proyecto y el Ejecutivo esté de acuerdo pero que, aún así, se quedará cinco días en espera para recibir comentarios públicos. So much for respect for Congress, which already receives much more calls than anybody else of groups and individuals. Por no mencionar que a veces no se podrá cumplir lo de los cinco días porque eso puede convertir en vetadas las leyes en ciertas circunstancias, nada raras.

Bueno, a lo que iba: la Federal Funding Accountability and Transparency Act of 2006 (FFATA) hace que the Office of Management and Budget (OMB) organice un web site que permita el acceso centralizado en una sola DB de todos los gastos federales, incluidos los contratos, los préstamos, las becas, etc.:

Aquí se puede ver:

- The name of the entity receiving the award.The name of the entity receiving the award.
- Information on the award including transaction type, funding agency.
- The location of the entity receiving the award.A unique identifier of the entity receiving the award.

En una de las queries posiblemente más usadas, Top 100 Recipients of Federal Contract Awards for FY 2009 1Q (, verán una lista ejemplo. Elijan cualquier gasto y verán qué cantidad hay sin explicar, qué distritos (y diputado) han recibido el gasto, qué departamentos lo han gastado, qué tendencia de gasto ha tenido ese contrato en los años anteriores con ese contratista, etc.

Sin duda que el Congreso federal (que les recuerdo lleva en manos demócratas dos años) seguirá profundizando en las mejoras que pueden hacerse a estas medidas. Todo trabajo humano es perfectible.

Gracias por esta oportunidad de matizar los esfuerzos del Congreso y presidente federales por cumplir con sus obligaciones con el pueblo.

Best Regards,
Jorge Mata
Press OfficeBipartisan Alliance,
a Society for the Study and Defense of the US Constitution