2007-01-22
■Greg Mankiw's Blog: Bernanke on the Fiscal Gap
リンク: Greg Mankiw's Blog: Bernanke on the Fiscal Gap.
We have heard all this before, but Ben Bernanke does a particularly nice job of laying out the long-term fiscal challenge in his testimony yesterday:
Federal government outlays in fiscal 2006 were 20.3 percent of nominal gross domestic product (GDP), receipts were 18.4 percent of GDP, and the deficit (equal to the difference of the two) was 1.9 percent of GDP. These percentages are close to their averages since 1960....Unfortunately, we are experiencing what seems likely to be the calm before the storm. In particular, spending on entitlement programs will begin to climb quickly during the next decade. In fiscal 2006, federal spending for Social Security, Medicare, and Medicaid together totaled about 40 percent of federal expenditures, or roughly 8-1/2 percent of GDP. In the most recent long-term projections prepared by the Congressional Budget Office (CBO), these outlays are projected to increase to 10-1/2 percent of GDP by 2015, an increase of about 2 percentage points of GDP in less than a decade. By 2030, according to the CBO, they will reach about 15 percent of GDP. As I will discuss, these rising entitlement obligations will put enormous pressure on the federal budget in coming years.
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13 Comments:
edgardo said...
We all know that benefits will be cut. We don't know when and how they will be cut, but more importantly we don't know at what cost in terms of output loss because of the conflict on how to distribute the limited fiscal resources between programs and within each program. The tax burden will hardly increase, although many politicians will attempt to increase it. You should take a look at the many fiscal reforms implemented in Latin America and elsewhere in the past 30 years (in my view the most successful one was the one implemented in Chile starting on April 1975). Anyway, from my reading of those experiences and the dynamics of US politics, I think it will take at least 10 years before US politicians start to discuss seriously how to cut benefits.
6:33 AM
ron cronovich said...
If you want to learn more about this problem, read The Coming Generational Storm by Laurence Kotlikoff and Scott Burns (only $12 or 13 at Amazon). It's well-written, well-documented (sometimes excessively so), and gripping. Kotlikoff is a highly-regarded mainstream economist and his book is very credible (unlike, say, any of Ravi Batra's The Coming Great Depression of [current year + 3] books).
Kotlikoff lays out the options for dealing with the looming fiscal crisis, and calls them "the menu of pain." He notes, as have Greg and many others elsewhere, that the longer we wait to address this problem, the worse the pain will get.
The options, basically, are: raising taxes, cutting government spending, cutting benefits, and raising the retirement age (which is basically a benefits cut).
I will add another option to the menu: rescind all restrictions on smoking. Allow smoking on airplanes, in restaurants, in churches, hell, even in public schools. Teach kids that it's "cool" to smoke, that they are wusses and have no self-worth if they don't. Drop the cigarette tax - this is one tax cut that really will pay for itself, though not because of any Laffer curve type effect.
Getting back to reality (for the moment):
The spring 2005 issue of the Journal of Economic Perspectives has three excellent articles on Social Security. The first, by James Hines and Timothy Taylor, lays out the problem. The second, by Peter Diamond and Peter Orszag, argues that we can "save" Social Security with relatively minor tweaks, and that a more drastic overhaul such as implementing private accounts is a bad idea. The third, by Martin Feldstein, takes the opposite view. All three articles are very much worth your time, as is the longer but somewhat easier to read book by Kotlikoff.
10:11 AM
Rusty said...
Is Big Ben willing to criticise the don't-tax-but-spend-wildly Bush administration?
The day I retire I will have paid SS taxes for 52 years. I imagine about 2 days before that the feds will announce that there isn't enough money. Swell.
11:14 AM
Anonymous said...
Prof Mankiw,
Unrelated to the fiscal gap,
It seems you have changed your RSS feed so that it only allows excerpts to be read in aggregators, without functional links.
Its made it less enjoyable and more tedious to stay caught up on your blog, even though it is my favorite.
The only reason bloggers do this is so that they get more impressions on their website for their ad revenue. Please don't let that be your motivation...lv
12:28 PM
Foobarista said...
Rusty: there's exactly nothing that can be done about it now. Raising taxes today won't do diddly-squat other than give Congress more money to spend today, unless the "overage" is saved outside the government in something like a Singapore-style provident fund, or into personal accounts which would be coupled with a pay-as-you-go component.
If it's "saved" into government bonds, as is done now, it just internalizes the public debt, but relies on future tax income to actually service that debt.
This is why the "trust fund" as currently put together is a mythological beast.
1:52 PM
Lord said...
these rising entitlement obligations will put enormous pressure on the federal budget in coming years
It's about time. Long overdue in fact. Medicare is the problem and it will require solving healthcare. We need to start now since it will take a while to find out what works.
2:49 PM
Lord said...
Kotlikoff's failing is trying to apply the finance of an individual to that of a society. There is little a society can do to "save" for retirement. See "What if Boomer's Can't Save for Retirement" for the rejoinder.
2:55 PM
Roland Patrick said...
'Is Big Ben willing to criticise the don't-tax-but-spend-wildly Bush administration?'
As Bernanke noted both tax revenues and spending are at their averages since 1960.
6:24 PM
john said...
David Walker, who heads GAO has been trying to trumpet these inconvenient fiscal truths for some time now. But when the Fed Chief says it, it does not go unnoticed. American's unwillingness to realize that government is needed and their increasing unwillingness to pitch in is a sad commentary on where we are as a nation. We have probably already passed the financial tipping point. Great empires of the past were rarely lost from the outside. They rot from within - usually with fiscal sypmtoms showing first.
8:07 PM
Foobarista said...
Where, exactly, would you "pitch in"? Raising taxes today does diddly-squat for tomorrow's obligations. It only internalizes the budget deficit by allowing the government to print bonds and stuff them in a file cabinet.
Without an external savings pool that is beyond the reach of Congress, there is precisely nothing that raising taxes will do today.
Remember that the "SS trust fund" is just a bunch of bonds. It has no market value other than being a claim on future revenue, so by raising taxes today - and allowing Congress to increase spending - all you're doing is raising taxes in the future. The "trust fund" can't ever be "solvent" as long as it is stored this way.
SS will _always_ be a pay-as-you-go system unless it's backstopped by either private accounts (my preference) or some sort of Singapore-style provident fund that's invested in the market. (I don't like this, since it would have $trillions in it, so I wouldn't want Congress or bureaucrats anywhere near it.) If we did something like this, the pay-as-you-go component could be dealt with, but it will always be there.
8:59 PM
Anonymous said...
Social Security vs. health care.
What to cut and how to cut?
Across the board or more of one than the other?
Does the nation really need to encourage longer lives?
Does Medicare extend lives and thus raise the cost of Social Security?
Should we then cut health care and let a static or decreasing life span take care of reducing Social Security costs?
Us non-economists want to hear.
10:02 PM
DLK said...
All this talk about money. How mysterious.
Dr. Bernanke knows perfectly well that money is just money. Increasing taxes today, or setting aside money today, isn't an answer of any kind for providing entitlements in the future.
Even if the federal government did take actual pictures of dead presidents printed on special paper and put them in Al Gore's "lock box," that wouldn't change the federal government's ability to provide entitlements in the future.
In the end, it's about production of real goods and services, not money. As Dr. Bernanke and all other good economists know, the money can be and will be provided to finance federal government spending in the future as it's needed. The result will be inflation, just as it always has been from ancient times.
If the federal government is able to provide entitlements to real people in the real future, it will be able to do so only because real production of goods and services is sufficient in the future to cover consumption demand.
Never mind how much money the feds say is lying around somewhere, now or in the future.
If real health care and other real goods and services are available as entitlements in the future, it will be because some part of our population is willing and able to produce real goods and services in the future. The money people will use to buy those real goods and services will come from taxes paid in the future or money creation that occurs in the future.
10:01 AM
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5:35 PM
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Bernanke Testimony
An excerpt from the Fed Chairman’s recent testimony via Greg Mankiw’s blog. For reference, US GDP is around $13322600000000. Federal government outlays in fiscal 2006 were 20.3 percent of nominal gross domestic product (GDP), ...
posted by Administrator @ 8:46 AM
Bernanke on the Fiscal Gap
■Economist's View: Does Consumption Respond Differently to Changes in Housing and Financial Wealth?
リンク: Economist's View: Does Consumption Respond Differently to Changes in Housing and Financial Wealth?.
This Economic Letter from the San Francisco Fed uses international evidence to examine whether consumption responds differently to changes in housing and financial wealth, something that will be helpful in assessing the likely consequences of the housing slowdown:
Disentangling the Wealth Effect: Some International Evidence, by Eva Sierminska and Yelena Takhtamanova, FRBSF Economic Letter: Over the past several years, movements in asset prices have substantially raised household wealth. For the U.S. and many other industrialized countries, the most recent boost has come more from the appreciation of house prices than financial assets. In the U.S. housing wealth has moved back above financial wealth in terms of the share of assets. In a number of other industrialized countries, including three examined in this Economic Letter, housing wealth makes up an even larger share of individuals' portfolios than is the case for the U.S. (see Figure 1).
Movements in housing value and other asset prices can have implications for economic outlook for a number of reasons. One is the so-called wealth effect channel—the extent to which consumer spending responds to changes in wealth (asset values). With the recent cooling in the U.S. single family housing sector and potential "correction" in other countries, analysis of the possible wealth effects from housing have moved front and center.
In this Economic Letter, we report on research that takes advantage of newly available international data and examines in some detail the wealth effect in three countries, Canada, Finland, and Italy (Sierminska and Takhtamanova 2007). First, we investigate whether consumption responds differently to changes in housing and financial wealth. Second, we investigate whether there are differences in consumption responses to changes in wealth across different age groups.
Theoretical considerations
The life cycle theory of consumption, which underpins most efforts to model wealth effects, argues that consumers try to smooth consumption over their life span. For example, because incomes are expected to rise at least over a typical person's initial working years, consumers are likely to borrow against their future earnings when they are young, build wealth (save) and pay their debts during middle age, and run down their wealth in retirement. In this framework, a typical consumer will spread out the benefit or deficit from an unexpected gain or loss in wealth by boosting or cutting current spending by a fraction of the value of the change in wealth and maintain that new level of spending over time.
Not all wealth is the same, however, and researchers have argued that it makes sense to distinguish between financial asset wealth and housing wealth, because the characteristics of each may have different effects on people's propensity to consume. Economic theory suggests that the consumption response to a positive asset shock is larger if the asset is more liquid (easier to buy and sell). The response is also larger if households think the asset value is easier to measure, if they perceive the asset to be more appropriate for financing current consumption, and if they view the shock to be more permanent.
Given these characteristics, it is not obvious whether to expect a larger wealth effect out of changes to housing or financial wealth. For example, traditionally, financial assets have been viewed as more liquid (though financial innovations have made it easier for homeowners in many countries to extract equity from their houses), more trackable (because they are more homogeneous and traded more frequently than houses), and more appropriate to use for current consumption. On the other hand, shocks to housing wealth might be viewed as more permanent (Pichette and Tremblay 2003). Finally, the relative effect of the two types of wealth may depend on how broadly they are distributed across the country.
Furthermore, as already mentioned, the life cycle theory predicts that the marginal propensity to consume out of wealth increases with the consumer's age. This insight is especially important given that the share of older households is rising in many countries, including the U.S., because it implies that wealth shocks would be expected to cause a larger aggregate consumption response
Financial and housing wealth effects
Previous studies attempting to assess wealth effects have relied on either aggregated data or data on individual households. In recent studies using time series data aggregated at the national or regional level for the U.S. and Canada, the estimated wealth effect out of housing wealth has been found to exceed that of financial asset wealth consistently (Davis and Palumbo 2001, Carroll 2004, Pichette and Tremblay 2003). The macroeconomic evidence on the relative sizes of financial and housing wealth effects in other OECD countries is mixed (Carroll 2004). A concern with the evidence from studies using aggregated data is that estimates of the wealth effects may reflect spurious relationships; that is, wealth fluctuations can be affected by many factors that also affect fluctuations in expenditures (such as overall macroeconomic prospects).
An alternative approach is to use survey data on individual households (micro data), as household wealth may be less influenced by macroeconomic circumstances. However, existing estimates of the wealth effect for different countries are obtained using different methods and, for the most part, the data are not comparable. We use data available through the Luxembourg Wealth Study (LWS), a project under development within the larger Luxembourg Income Study (LIS), which makes cross-country analysis with more comparable data possible. Based on the availability of expenditure data, our analysis focuses on a sample of homeowners in three countries, Canada (1999), Finland (1998), and Italy (2002).
In our framework, at any given period, the amount a consumer spends depends on his or her expected remaining life span (age), expected future labor income stream (permanent income), net financial asset holdings and net housing holdings (wealth), and rate of time preference. Our measure of consumption is total expenditures, created by summing the available expenditure components in the surveys (see the Appendix in Sierminska and Takhtamanova 2007). Finland and Italy have an extensive list of expenditure components. Canada includes housing, transportation, and child care. Our measure of wealth focuses on consumers' financial and housing wealth. Our measure of financial assets includes deposit accounts, stocks, bonds, and mutual funds. Nonfinancial assets include consumers' principal residence and investment real estate. Housing wealth refers to nonfinancial assets net of home-secured debt. We also account for a variety of demographic variables, such as education, the gender of the head of household, marital status, and the number of children.
As a first pass, we allow age and the other demographic and socioeconomic variables to affect only the average level of consumption. Our estimates show that, for all three countries, the housing wealth effect is substantially larger than the financial wealth effect. The estimated effects are the percent change in consumption caused by a 1% change in wealth. As shown in Figure 2, our estimate with respect to financial wealth is negligible in Canada, about 2% in Finland, and 4% in Italy. The housing wealth effect is much stronger. A 1% increase in households' housing wealth raises households' expenditure by about 12% in Canada, 10% in Finland, and 13% in Italy.
Although our results are significant, it is possible that the reason housing wealth has such a large effect is that it serves as a proxy for permanent income, which is an important determinant of household consumption. Nonetheless, our estimates are broadly consistent with some other studies using micro data (Bostic et al. 2006 for the U.S. and Guiso et al. 2005 for Italy). Moreover, we make an extensive effort to control for permanent income by including a variety of sociodemographic characteristics of the households.
Wealth effects across age groups
Recent studies that address differences in wealth effects across ages tend to focus only on housing wealth (see, for instance, Lehnert 2004 for the U.S.; Grant and Peltonen 2005 for Italy) and find stronger wealth effects for older households.
We divide our sample into several age groups and find no clear pattern in the financial wealth effects among them. However, a clear pattern emerges for the housing wealth effect, as Figure 3 shows. In all three countries, the housing wealth effect is significantly lower for younger households and is strongest for those aged 55-64 in Finland and Italy and those aged 75 and over in Canada. In Canada the effect consistently increases from age 55 onwards, and in Finland and Italy the effect increases up to the group aged 55-64 and then is lower in the two oldest age groups.
Conclusion
In our study we consistently find that the housing wealth effect is greater than the financial wealth effect for homeowners in three industrialized countries—Canada, Finland, and Italy. We caution, however, that our estimates must be considered tentative as the analysis is based on the beta version of a developing data source and as the existing econometric evidence does not completely agree on this subject. Our finding that the housing wealth effect is consistently stronger for older households in the three countries we examine also lends some support to the life cycle theory and bolsters the results of other studies.
These results suggest that it is important for policymakers to keep an eye on housing market developments separately from financial markets. If it is true that the housing wealth effect dominates the financial wealth effect, at least in some countries, then the effects of a softening in the housing market in a number of industrialized countries could have a more dramatic impact than the historically large stock market declines that began in 2000. Additionally, if the wealth effect is stronger for older households, the demographic changes around the world could make housing wealth effects even more important in the future.
References
Bostic, R., S. Gabriel, and G. Painter. 2006. "Housing Wealth, Financial Wealth, and Consumption: New Evidence from Micro Data." University of Southern California, Lusk Center for Real Estate Working Paper.
Carroll, C. 2004. "Housing Wealth and Consumption Expenditure." Unpublished manuscript, Johns Hopkins University.
Davis, M., and M. Palumbo. 2001. "A Primer on the Economics and Time Series Econometrics of Wealth Effects." Federal Reserve Board, Finance and Economics Discussion Series 2001-09.
Grant, C., and T. Peltonen. 2005. "Housing and Equity Wealth Effects of Italian Households." De Nederlandsche Bank Working Paper 43.
Guiso, L., M. Paiella, and I. Visco. 2005. "Do Capital Gains Affect Consumption? Estimates of Wealth Effects from Italian Households' Behavior." Banca d'Italia Working Paper 555 (June).
Lehnert, A. 2004. "Housing, Consumption, and Credit Constraints." Federal Reserve Board, Finance and Economic Discussion Series 2004-63.
Pichette, L., and D. Tremblay. 2003. "Are Wealth Effects Important for Canada." Bank of Canada Working Paper 2003-30.
Sierminska, E., Brandolini, A. and T. Smeeding. 2006. "Comparing Wealth Distribution across Rich Countries: First Results from the Luxembourg Wealth Study" Luxembourg Wealth Study Working Paper 1.
Sierminska, E., and Y. Takhtamanova. 2007. "Wealth Effect out of Financial and Housing Wealth: Cross-Country and Age Group Comparisons." FRBSF Working Paper, forthcoming.
Posted by Mark Thoma on January 19, 2007 at 03:12 PM in Economics, Housing | Permalink | Comments (1)
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Comments
The American case shouldn't be far off:
The stock market bubble boosted consumption due to the wealth effect, but more so among (wealthier) households that held more stocks.
The housing bubble boosted consumption due to the wealth effect as well, though more evenly so as about 70% of households are headed by homeowners.
Posted by: Emmanuel | Jan 20, 2007 2:25:43 PM
■日銀のとるべき説明
日銀はマスメディアに少しずつ不規則にリークするより、米国バーナンキ議長のように国会で相対で2時間でも3時間でも質疑応答していることを国民に見せるべきだろう。我々はバーナンキ議長の考え、生の言葉は聴ける。日本は予定された記者の質問に答えるだけの会見や日本の国会での瞬間答弁では理解できない。
野村雅道のID為替研究所（Day): デイトレはマスメディアに踊らされよう
首肯。
■納豆疑獄とメディアの凋落
http://blog.tatsuru.com/2007/01/21_1029.php
テレビは広告出稿の激減による制作費の切り下げとスタッフの劣化については何も報道しない。
新聞は新聞購読者の減少や、広告出稿の減少や、新聞の社会的影響力の低下について分析しない。
20070122クリッピング作業
■20070120日経大機小機 香港返還10周年と人民元の国際化
最近の新聞報道をベースにかくとこういった内容になるのは自然だが、香港がこれまで90年代初頭以降国際金融センターとしインフラ整備に努力してきたこと、香港における人民元建て債券発行についても2000年頃から中国に働きかけてきていること、人民元の価値上昇はあくまで現金の両替商ベースの話で通貨の交換性の問題が別にあること、等はここでは全く触れられていない。この点
■20070120SCMP Beijing mulls forex investment vehicle
2000億米ドル相当を新しいvehicleに移し海外での証券、商品、企業（債券あるいは株式という意味）に投資する、かつ、その多くはglobal asset managerに運用委託(outsource)される。この点、National Social Security Fundの例が引かれ丁いる。
■20070122日経金融 アジア開銀・黒田総裁インタビュー
統合に向けてASEANのまとまりがでてきており楽観的に見ている、とのこと。「通貨危機の後は協力の機運が余話またが、危機を克服して、10人の首脳が明確にASEAN共同体の構築にコミットしている。」としているが、コミット云々というのは先の東アジアサミットでの発言やコミュニケを指すものだろうか。通貨危機の後は協力の機運が弱まったというところが具体的に何を指すのか、興味あるところ。
■20070119SCMP Yam warns of more volatility n market
香港の株式がかなり高いレベルにきていることに言及して、投資家が高いリスクに備えるべき、との言い方をしている。面白いのは、ogvernments in the region might interfer in their markets, citing the recent regulatory changes in Thailand as an exampleとしている点。香港ではそのような措置が取られる可能性は低いと思うが、香港経由北京あるいは東アジアへの投資に向かう短期資金が少なくなっているので自信があるということではないでしょうね。
■20070119SCMP Tianjin eyes hub role with exchange for shore transfer
中国の沿海部主要都市が競争しているが、天津は前の人民銀行総裁を市長に頂くだけに熱心。なお、見落としていたが、Binhaiでは、limited convertibility programとよばれるものがあり、海外での収益のうち人民元に交換せず保有することができるという制度がある。天津では、Bohai Industry Investment Fundに200億人民元をおいて中国で初のprivate equity fundを作った。そこにはnational pension programも投資家として含まれている。天津には他に国内不動産投信の計画があり許可待ちだが詳細不明。
20070120SCMP Mainland regulators' growing efficiency a wake-up call for HKEx.
20070119SCMP Lawmakers prepared to create bank safety net
今回中国の指導者達が預金保険制度の設立に向けゴーサインを出そうという観測記事。
20070122日経金融 取引所未来形 大証と欧州 オランダの成功 CO2売買は常識20070122日経金融 日本に世界的M&Aの波 ジョセフ・ペレイラ
