Supplemental Security Income: Where the Program Stands

I have sometimes said that Supplemental Security Income, or SSI, is the federal program to those who are both old and low-income. But while that was an OK if inaccurate shorthand a few decades ago, its no longer appropriate. SSI does cover the low-income elderly, but it also covers those who are low-income from ages 18-64 with disabilities, and also disabled children under the age of 18 in low-income household. Back in 1980, about half of those receiving benefits were in the over-65 low-income. But at present, only 25 percent of the people covered by SSI are elderly, and they receive only 19 percent of the payments from this program. The Congressional Budget Office offers this and other facts about the program in its just-released report: "Supplemental Security Income: An Overview."

Here a figure from CBO showing the three main groups in the SSI program, and how their numbers have evolved over time.

Given this shift in SSI toward those who are disabled, an obvious question is how SSI relates to the other other main federal program for those with disabilities, the Social Security Disability Insurance program. For a quick overview of that program with some suggestions for reform, see this post from August 2011 on "Disability Insurance: One More Trust Fund Going Broke." The CBO report explains the practical differences in this way:

"Social Security Disability Insurance (DI), the other major federal program that provides cash benefits to people with disabilities, uses the same disability standard for working-age adults that applies in SSI, but it differs from SSI in several respects. For example, DI is available only to adults (and their dependents) who have a sufficient record of work, but past work is not a requirement for SSI eligibility. DI also places no limits on beneficiaries’ income or assets, but SSI recipients must have low income and few assets. In addition, DI is funded primarily by means of a dedicated payroll tax, but SSI is funded out of general revenue."

 Here's a quick overview of eligibility rules for the three main groups in the SSI program. For those in the single largest category of age 18-64, low-income, and disabled, the rules look like this:

"To qualify for SSI, those recipients must demonstrate that their disability prevents them from participating in “substantial gainful activity,” which in 2012 is considered to mean work that would produce earnings of more than $1,010 a month. (That amount is adjusted annually for average wage growth.) Older adults are more likely than younger adults are to receive payments: Fewer than 2 percent of people between the ages of 18 and 29 receive payments; slightly more than 3 percent of people between the ages of 50 and 64 do. Especially among younger adults, eligibility for the program is determined most commonly on the basis of mental disability: Three-quarters of participants ages 18 to 39 were awarded payments primarily because of a mental disorder. That share declines with age, as conditions such as spinal  disorders and heart disease become more prevalent. Among SSI recipients between the ages of 60 and 64, for example, one-third receive payments because of mental disorders, one-quarter receive payments because of musculoskeletal disorders, and one-tenth receive payments because of circulatory disorders ... The share of adults ages 18 to 64 receiving SSI payments has increased over time, rising from slightly more than 1 percent of the population 30 years ago to more than 2 percent today."

For children to qualify for SSI, here are the standards:

"Children who qualify for SSI must be disabled and, in most cases, must live in a household with low income and few assets. To be considered disabled, a child must have a physical or mental impairment that results in marked and severe functional limitations and that is either expected to last for at least 12 consecutive months or to result in death. Most child recipients—three-quarters of recipients
between the ages of 5 and 17 and one-third of those under the age of 5—qualify because of a mental disorder.

And for the elderly, the rules for SSI are based on low income. The low-income elderly rely less  on SSI than they used to in part because of broader participation in Social Security -- for example, more women with an earnings history that brings non-negligible amount of Social Security payments--and also because of how Social Security benefits have been indexed to rise with inflation over time.

"People age 65 or older can qualify for SSI on the basis of low income and assets alone; they need not be disabled. As a result, people in that age group are more likely than younger people are to qualify for the program; about 2.1 million, or 5 percent of the elderly population, do. (About half of those recipients qualified as disabled recipients before they turned 65.)

"The share of the aged population that receives payments has fallen by more than half since 1974 because of the increase in the share of that population eligible for Social Security and because of the real (inflation-adjusted) increase in the average Social Security benefit. Many more women now have had sufficient earnings to qualify for Social Security benefits based on their own work. In addition, the Social Security benefits that each new group of beneficiaries receives are linked to average wages in the economy, which generally increase faster than SSI benefits, which are linked to prices. As more people qualified for Social Security benefits and as the benefit amounts rose, fewer people met SSI’s income standard."

The SSI program will cost about $53 billion this year. Over the last 20 years or so, spending on the program expressed as a share of GDP is fairly flat.

As with any program oriented to those with disabilities or with low incomes, I'm sure there should be a continual process of re-considering just how "disability" is defined and what incentives to work at least part time are being provided by the benefit structure. But this program isn't one where I would expect even a fairly rabid budget-cutter to find substantial spending cuts.

Cautionary Details on U.S. Manufacturing Productivity: Susan Houseman

There's a basic and often-told story about output and employment in the U.S. manufacturing sector: I'm sure I've told it a time or two myself. The story begins by pointing out that the total quantity of U.S. manufacturing output has actually held up fairly well over recent decades, although it hasn't grown as quickly as the services sector. However, productivity growth in manufacturing has been rising quickly enough that productivity growth. However, manufacturing productivity has been rising quickly enough that, even though manufacturing output has remained fairly strong, the number of jobs has been falling. The standard historical analogy is that just as rising agricultural productivity meant that fewer U.S. farmers were needed, now rising manufacturing productivity means that fewer manufacturing workers are needed.

That story isn't exactly wrong, at least not over the long-run, but Susan Houseman has been digging down into the details and finding arguments which suggests that it is a seriously incomplete version of what's happening in the U.S. manufacturing sector. Houseman presented some of these arguments in a paper written with Christopher Kurz, Paul Lengermann, and Benjamin Mandel, called  "Offshoring Bias in U.S. Manufacturing," which appeared in the Spring 2011 issue of my own Journal of Economic Perspectives. (Like all articles in JEP back to the first issue in 1987, it is freely available courtesy of the American Economic Association.) In turn, their JEP paper was a revision of a more detailed Federal Reserve working paper in 2010, available here. However, Houseman offers a nice overview of her arguments in an interview recently published in fedgazette, a publication of the Federal Reserve Bank of Minneapolis.

For background, here are four figures created by the ever-useful FRED website maintained by the Federal Reserve Bank of St. Louis. The first shows level of manufacturing output, which since the official end of the recession in 2009 has recovered to the level in 2000. The second shows manufacturing employment, which has dropped off substantially over that time. The third shows annual rates of change in manufacturing productivity, which is volatile, but seems often to be rising at 2-3% per year. And the fourth shows levels of manufacturing compensation, which hasn't been rising since 2000--as one might have expected based on rising productivity in thus sector.

 

After reading Houseman, when you hear the standard story about how high productivity in manufacturing is leading to reduced employment, the following thoughts should rattle through your head:

1)  Most of the productivity growth in manufacturing is computers. Houseman: "First, a very important fact, but one I find most people don’t know—including some people who write a lot about the manufacturing sector—is that manufacturing growth in real [price-adjusted] value added and productivity wasn’t that strong without the computer and electronics industry. The computer industry is small—it only accounts for about 12 percent of manufacturing’s value added....  But we find that without the computer industry, growth in manufacturing real value added falls by two-thirds and productivity growth falls by almost half. It doesn’t look like a strong sector without computers."

2) Most of the productivity growth in manufacturing computers is because computers are becoming so much faster and better over time, and government statistics count that a productivity growth, not because an average worker is producing a dramatically greater quantity of computers. Houseman: "The standard argument is that the rapid productivity growth in computers is coming from product innovation. This year’s computers and semiconductors are faster and do more than last year’s models. And that product innovation essentially gets captured in the price indexes the government uses to deflate computer and semiconductor shipments. The price indexes for most products increase over time—that’s inflation. But, for example, the price indexes used to deflate computer shipments have actually fallen by a whopping 21 percent per year since the late 1990s. Those rapid price declines largely reflect adjustments for the growing power of computers. And that extraordinary decline in computer price indexes translates into extraordinary growth in real value added and productivity in the computer industry as measured in government statistics. So, in some statistical sense, today’s computer may be the equivalent of, say, 13 computers in 1998. ... The reason jobs in computers have been lost is not because productivity growth has crowded them out; not at all. It’s because much of the production has gone overseas...."


3)  A sizeable share of what looks like growth in manufacturing productivity is actually from importing less expensive inputs to production. Houseman: "[T]here’s been a lot of growth in manufacturers’ use of foreign intermediate inputs since the 1990s, and most of those inputs come from developing and low-wage countries where costs are lower. We point out that those lower costs aren’t being captured by statistical agencies, and so, as a result, the growth of those imported inputs is being undercounted. ...  Suppose an auto manufacturer used to buy tires from a domestic tire manufacturer. Then it outsources the purchase of its tires to, say, Mexico, and the Mexicans sell the tires for half the price. That price drop—when the auto manufacturer switches to the low-cost Mexican supplier—isn’t caught in our statistics. And if you don’t capture that price drop, it’s going to look like, in some statistical sense, the manufacturer can make the same car but only needs two tires. ... Our statistical agencies try to measure price changes, but they miss them when the price drops because companies have shifted to a low-cost supplier. So because we don’t catch the price drop associated with offshoring, it looks like we can produce the same thing with fewer inputs—productivity growth. It also looks like we are creating more value here in the United States than we really are."

4) If productivity in manufacturing rises because of automation, then those gains in productivity may benefit the owners of the machines--that is, benefit capital rather than labor. Houseman: "And then another standard story has to do with automation. Basically, capital is substituting for labor. Automation can lead to job losses. And the returns from automation, or higher capital use, won’t necessarily be shared with workers."

5) If low-wage labor-intensive manufacturing tasks are now more likely happen overseas, an higher-wage tasks remain in the U.S., then it may appear as if the productivity of an average U.S. manufacturing worker is higher--but it's just a shift in the composition of U.S. manufacturing workers. Houseman: "Then, finally, there’s probably been some shifting in the sorts of production that occur here. In particular, less of the labor-intensive production is done in the United States, and that would result in job losses and higher labor productivity. Again, the gains from that productivity growth aren’t necessarily going to be shared with remaining workers. So part of the answer to the puzzle is that even if productivity gains are real, there’s really nothing that guarantees those gains will be broadly shared by workers."

Add all these factors up, and the condition of U.S. manufacturing looks more ominous than the standard story of high productivity and resulting job losses. For more on the future of global and U.S. manufacturing, see this November 30 post on "Global Manufacturing: A McKinsey View."

Rock-Bottom U.S. Mobility Rates

Everyone knows that Americans are a mobile society, moving toward opportunity and jobs, right? Not according to the data from the U.S. Census Bureau, which shows that of geographic mobility in 2011 were at their all-time low since the start of the data in 1948, and were only a tad higher in 2012. Here's the figure just released by the U.S. Census Bureau. The blue bars show the absolute number of moves, as measured on the left-hand axis. The black line shows the rate of mobility, as measured by the percentage of U.S. households that moved.

Another chart gives a sense of how far the move are. Most moves are within a given county, or between nearby counties, while relatively few involve moves to another state or abroad.

Why is the mobility rate down? One potential set of explanations focuses on the Great Recession: with jobs scarce, and declining home values in many areas, people stayed in place either because of a lack of jobs to move to, or by the unexpectedly low price of their home, or both. But this explanation is at best a very partial one.The downward trend in U.S. mobility goes back well before the start of the recession. People who are unemployed are often more likely to move, not less likely, as a report accompanying these charts pointed out.  And if the issue is declining home values, it's hard to explain why mobility rates are down for both renters and for homeowners. 

The Census Bureau puts out the data, but often sidesteps much discussion of underlying causes. However, in the Spring 2011 issue of my own Journal of Economic Perspectives, Raven Molloy, Christopher L. Smith, and Abigail Wozniak fill this gap with a discussion of "Internal Migration in the United States." Like all articles in JEP back to the first issue in 1987, the article is freely available compliments of the American Economic Association. 

Molloy, Smith, and Wozniak consider possible long-term explanations for a declining rate of mobility, like the possibility that an aging population less likely to move. As they put it: "However, these differences across groups are not useful in explaining why migration has fallen in recent decades. The decrease in migration does not seem to be driven by demographic or socioeconomic trends, because migration rates have fallen for nearly every subpopulation ..."

They freely admit that there is not yet an answer in the economic research as to why geographic mobility has been declining, but they offer some hypotheses.

For example, one argument is that migration was high in the post WWII years as part of a significant population shift to the South, a shift which has been diminishing every since. But this factor doesn't seem to be significant enough, given the observed data on interregional migration.

Another hypothesis is that there are more two-earner families, and so when one person loses a job the household may be more reluctant to relocate. But this argument faces the problem that "the percentage of households with two earners has been quite stable over the last 30 years."

Yet another possibility "is that technological advances have allowed for an expansion of telecommuting and flexible work schedules, reducing the need for workers to move for a job." However, the data on telecommuting doesn't show that it is a large enough factor to explain the decline in mobility.

And yet another possibility "is that locations have become less specialized in the types of goods and services produced, making the types of available jobs more similar across space. ... A related idea is that the distribution of amenities has become more homogeneous across locations, making residence in any particular city less attractive." This explanation may have some truth in it, but it's proven difficult to gather data that would allow it to be tested in any definitive way.

Finally, it may just be that many Americans are shifting their preferences away from being willing to move. Molloy, Smith and Wozniak present evidence that "the secular decline in geographic mobility appears to be specific to the U.S. experience, since internal mobility has neither fallen in most other European economies nor in Canada—with the United Kingdom as a notable exception."

Whatever the reason behind the decline in geographic mobility, there are implications for the economy if the workforce becomes less flexible and less willing to move from areas where the economy is weaker to where it is stronger. In addition, lower mobility has broad implications for what its like to live in America.  People find it  harder to envision their lives as involving a big move.  Social networks are reshaped. When mobility drops, we become a country where you are less likely to end up living and working with people from other states, other counties, or even other parts of your own county.

Paper Towels v. Air Dryers

After washing your hands with anti-microbial soap, is it better to dry them with a paper towel or with an air dryer? Like many economists, I'm always on the lookout for persuasive analysis of the benefits, costs, and tradeoffs of life's difficult questions. Thus, I was delighted to run across  "The Hygienic Efficacy of Different Hand-Drying Methods: A Review of the Evidence," by Cunrui Huang, Wenjun Ma, and Susan Stack, which appeared in the August 2012 issue of the Mayo Clinic Proceedings
(87: 8, pp. 791-798).

Basically, paper towels win out over regular air dryers, jet air dryers, and cloth rollers, at least in settings like health care provision where hygiene is especially important. But here's a sketch of the arguments,based on a review of 12 studies on hand-drying since 1970. Summary statements are mine: quotations are from the study. As usual, footnotes and citations are omitted for readability.

Removing water from hands after hand-washing is an important part of killing the germs. 

"For centuries, hand washing has been considered the most important measure to reduce the burden of health care–associated infection. ... Although studies have reported the importance of thorough hand drying after washing, the role of hand drying has not been widely promoted, and its relevance to hand hygiene and infection control seems to have been overlooked. Lack of attention to this aspect may negate the benefits of careful hand washing in health care."

Paper towels are the most hygienic of the hand-drying options: they dry skin faster, help remove contamination through friction, and don't risk spreading germs through the air.

"Although jet air dryers had drying efficiency similar to paper towels, their hygiene performance was still worse than paper towels. The differences in bacterial numbers after drying with air dryers and paper towels could be due to other factors rather than the percentage of dryness alone. Friction can dislodge microorganisms from the skin surface during both hand washing and drying. Antimicrobial agents in soaps have too little contact time to have bactericidal effects during a single use or with sporadic washings, making friction the most important element in hand drying. It is likely that paper towels work better because they physically remove bacteria from the hands, whereas hot air dryers and jet air dryers cannot. In many instances, however, rubbing hands with hot air dryers to hasten drying would only lead to greater bacterial numbers and airborne dissemination. It might be that rubbing hands causes bacteria to migrate from the hair follicles to the skin surface. Many studies have found friction to be a key component in hand drying for removing contamination. ..."

"Hot air dryers are generally not recommended for use in health care settings because such dryers are relatively slow and noisy and their hygiene performance is questionable. Cloth roller towels are not recommended because they can become common use towels at the end of the roll and can be a source of pathogen transfer to clean hands. Recently, jet air dryers have undergone independent certification within the food safety arena in Australia, attesting to their increased hygiene benefits as opposed to the traditional hot air-drying method. However, the criteria and process of obtaining this type of certification remain questionable. The health and safety aspects of jet air dryers for use in locations where hygiene is paramount should still be carefully examined by the scientific community. Therefore, this makes paper towel drying, during which little air movement is generated, the most hygienic option of hand-drying methods in health care."

Air dryers, and especially jet dryers, are noisier. They can irritate skin.

"Air dryers, particularly jet air dryers, are obviously noisier than paper towels or cloth towels. ... [T]he mean decibel level of using a jet air dryer at 0.5 m was 94 dB, which is in excess of that of a heavy truck passing 3 m away. When 2 jet air dryers were used at the same time, the decibel level at a distance of 2 m was 92 dB. Therefore, in washrooms with jet air dryers, the noise level could constitute a potential risk to those exposed to it for long periods. ... "

"Use of air dryers may cause hands to become excessively dry, rough, and red. ... Affected persons often experience a feeling of dryness or burning; skin that feels rough; and erythema, scaling, or fissures. When the hands become irritated, health care workers may not wash their hands as often or as well. Concern regarding this effect of air dryers could become an important cause of poor acceptance of hand hygiene practices."

The environmental effect of paper towels is slightly worse than air dryers, but only very slightly. 

 "[T]he paper towel method emits relatively higher greenhouse gases than the hot air dryer method (1377 vs 1337 kg of carbon dioxide equivalent). In terms of environment sustainability, the hot air dryer method surpasses the paper towel method with better scores for 6 indicators (respiratory organics, respiratory inorganics, ozone layer, ecotoxicity, acidification/eutrophication, and fossil fuels) compared with 5 indicators (carcinogens, climate change, radiation, land use, and minerals) for paper towels."

Paper towels cost slightly more than air dryers. 

"Using paper towels is more costly than using air dryers. Paper towels must be replaced frequently, whereas air dryers usually require little maintenance. ... However, air dryers can be costly to purchase and install. Therefore, those responsible for facility management should perform a careful cost analysis to determine whether they are cost-effective in their building."

People prefer to use paper towels--and people's preferences have value in this overall calculation, too. 

"Another survey of 2516 US adults in 2009 still found that most people preferred to dry their hands with paper towels. If  they had a choice, 55% of respondents selected paper towels, 25% selected jet air dryers, 16% selected hot air dryers, 1% selected cloth roller towels, and 3% were not sure. ... Hence, given the strong preference for using paper towels, hand hygiene adherence would possibly decrease if paper towels are not available in washrooms."

As the conclusion of academic studies often love to point out, there are vast possibilities for future research on this topic that go beyond the questions already discussed. 

"Does the quality of paper towel have an effect on hand hygiene adherence? When recycled paper is used for hand drying, what kinds of studies are appropriate to assess the cost benefit of using recycled paper? Many questions remain unanswered. ... The maintenance of a clean environment around paper towels is also important. Paper towels deposited in bins could act as a bacteriologic reservoir if disposal is not managed properly. ...  The risk of potential contamination among dispenser exits, paper towels, and hands should be considered in the design, construction, and use of paper towel dispensers. Architects working in the health care industry should also be aware of these issues when designing equipment for new facilities."

Some Facts On Foreign Aid

The OECD has just published its Development Co-operation Report 2012: Lessons in linking sustainability and development, which includes a number of essays about various aspects of foreign aid and its role in development. (Fair warning: Those looking for deeply skeptical viewpoints about foreign aid will not find them well-represented in this volume.) Here, I'll stick to some of the big-picture facts about patterns of foreign aid and present a few figures from the Statistical Annex. (And yes, I'm the sort of person who, when getting a report, has a tendency to read the Statistical Annex first.)

First, here's the trendline of official development assistance over time, expressed in constant 2010 dollars, and showing some context of private capital flows. The heading refers to the DAC, which is the Development Assistance Committee, a group of the OECD countries that give most of the aid. The bottom blue area is official development aid. The two small ribbons in the middle are other official aid flows and grants from private voluntary organizations. The gray area at the top is private capital flows to these aid-recipient countries. Clearly, private capital flows fluctuate a lot, and it's always useful to remember that the countries which need aid the most are often not the countries that are especially attractive for private sector investment. Still, it's striking that in most years over the last three decades, private capital flows to the group of countries receiving aid is considerably larger in size than foreign aid.

This figure puts foreign aid in perspective in two other ways. In constant 2010 U.S. dollars, as measured on the right-hand axis, foreign aid from all countries in the world now exceeds $120 billion. In my checking account, this would be untold riches. But spread over the context of the world economy, it is not an especially large amount. The right-hand axis shows foreign aid as a percentage of the Gross National Income of the donor countries: since the 1960s, this share has sagged from about 0.5% of GNI to about 0.25-0.30% of GNI. To put it another way, the economies of donor countries have been growing faster than their foreign aid spending over the last half-century.

The final figure shows the sources of official development aid. Clearly, foreign aid is primarily a European project, although the U.S. also gives a significant share.

Many Americans wildly overestimate how much the federal government spends on foreign aid. For example, this 2010 survey found that Americans believe that the federal government spends 25% of its budget on foreign aid, and would like to cut that amount to 10%. In reality, only about 1% of federal spending is foreign aid. Maybe this is 1% is still too much! But as a matter of arithmetic, trimming foreign aid would have an essentially negligible effect on the U.S. governments deficit problem.

 

Three on China: Currency, Over-Investment, Division of Labor

A couple of weeks ago, I posted on "China's Economic Growth: A Different Storyline." Here, I'll follow up with three snippets about China's economy that crossed my desk recently: news on China's currency, on over-investment in China, and a way in which the U.S. and Chinese economies are increasingly and intriguingly intertwined. 

The value of China's currency

One of the most common complaints against China is that it preserves an undervalued currency as a way of stimulating its exports in world markets. As I pointed out in my earlier post, China's currency was actually weakening when China was running a near-zero balance of trade through much of the 1980s and 1990s, and China's large trade surpluses of the last few years have actually been accompanied by a strengthening renminbi yuan. The U.S. Department of the Treasury presents a semi-annual Report to Congress on International Economic and Exchange Rate Policies. In discussing China's exchange rate the report says: 

"From June 2010, when China moved off of its peg against the dollar (that it had reintroduced in 2008), through November 9, 2012, the RMB has appreciated by a total of 9.3 percent against the dollar. Because inflation in China has been higher than in the United States over this period, the RMB has appreciated more rapidly against the dollar on a real, inflation-adjusted, basis, appreciating 12.6 percent since June 2010 and 40 percent since China initiated currency reform in 2005. ... China’s real effective exchange rate (REER) – a measure of its overall cost-competitiveness relative to its trading partners – has appreciated since China initiated currency reform in mid-2005, after declining between 2001 and 2005. From July 2005 to October 2012, China’s real effective exchange rate appreciated by 27 percent. ... [T]he IMF concluded that the RMB was moderately undervalued against a broad basket of currencies, and Table 5 in the IMF’s Pilot External Sector Report shows the RMB was undervalued by between 5 and 10 percent on a real effective basis, as of July 2012."

Thus, whatever the merits of the complaints about undervaluation of China's currency back in 2005, large changes have happened since then. Some further strengthening of the yuan seems in store, as well.

Overinvestment in China

From a U.S. point of view, the idea that over-investing could harm an economy seems almost nonsensical. But after all, investment involves a tradeoff: less consumption now in return for more production and consumption in the future. In addition, investment will tend to have diminishing marginal returns--that is, increasing a country's investment rate from 10-20% of GDP will have a bigger payoff in the future than increasing that same country's investment rate from 40-50% of GDP. At some point, the social costs of giving up present consumption will be greater than the benefits of ratcheting investment a little higher.


Il Houng Lee, Murtaza Syed, and Liu Xueyan analyze these questions in "Is China Over-Investing and Does it Matter?", which appears as IMF Working Paper WP/12/277 published in November. Based on their model, they find: "Even allowing for elevated investment levels associated with most
economic take-offs, the econometric evidence suggests that China is over-investing. China’s
predicted investment norm over the last thirty years has ranged between 33-43 percent of GDP. In reality, it has fluctuated in a much broader band of 35-49 percent of GDP."

They offered a comparison of investment levels across emerging market economies that I found interesting. The first figure compares investment levels and growth rates for these countries in the early 1990s, when China's investment and growth patterns were not all that different from others in this comparison group. The second figure shows the same comparison in a more recent period, when China has clearly become an outlier.

The Chinese government has recognized for several years now that its economy needs "rebalancing" from being investment-driven to being consumption-driven. The U.S Treasury semi-annual report says it this way: "Chinese leaders have identified shifting away from growth driven by exports toward a greater reliance on domestic consumption as a critical goal for sustaining growth in the medium to long term. China has partially succeeded in shifting away from a reliance on exports for growth, and China’s current account surplus has fallen markedly over the past four years, from 10.1 percent of GDP in 2007 to 2.8 percent in 2011. In the first three quarters of 2012, China’s current account fell to 2.6 percent of GDP ..."



Western Innovation Intertwined with Chinese Production

Nick Bloom, Mirko Draca, and John Van Reenen have an interesting article about "China Prompting Western Creativity" that appears in the December 2012 issue of Finance and Development. They discuss the following pattern:

"When the California high-tech company Eye-Fi introduced a new memory chip in 2005 with built-in wi-fi capability it faced a challenge common to many technology firms: how to take a promising prototype and turn it into a mass-market, low-cost product—and get it to market before its rivals.
Eye-Fi’s solution was an approach that Western firms increasingly are taking in response to the emergence of China as a manufacturing superpower. It used a local California boutique manufacturer to develop prototypes, which Eye-Fi’s engineers refined on an almost daily basis. As demand took off and the product was widely marketed, Eye-Fi moved from low-volume boutique production in the United States to high-volume, low-cost production in China. The high-skill innovation and development took place in the United States, but the lower-skill mass production was moved offshore. As Chinese mass manufacturing increasingly dominates global production, this story is being repeated across the United States, Europe, and Japan.The stories of Apple’s iPhone and iPad are similar."

They report the results of a more systematic statistical study: "Events such as China’s accession to the WTO [in 2001- are natural experiments for examining the effect of competition from low-wage countries—an opportunity we put to use in our research. In the largest ever study of the impact of China on Western technological change, we tracked the performance of almost half a million manufacturing firms in 12 European countries over the past decade ... A startling finding is that about 15 percent of technical change in Europe in the past decade can be attributed directly to competition from Chinese imports, an annual benefit of almost €10 billion to European economies."

In the globalizing economy of the future, at least some of the dynamism and competitiveness of the U.S. economy will be determined by the ability of U.S. firms to build these sorts of ties with operations in China, as well as India, Latin America, eastern Europe, and probably Africa, too.

U.S. Debt Problems: Brewing for Decades

A lot of folks have a version of chronic fatigue syndrome when the topic of budget deficits comes up. After all, wasn't there a big spat over budget deficits through most of the 1980s and into the 1990s? And wasn't there a big spat over deficits through the middle years of the George W. Bush presidency in the mid-2000s? Every time you turn around the last few years, it feels like the federal government is about to the official "debt ceiling" and there's yet another round of breathless high stakes negotiating that pushes the problem back until after the next election, when we get to do it all again.

Thus, it's important to understand that America's current trajectory of deficits and debt is not just one more round  of political games. Instead, we have entered a situation where deficits and debt are already well outside usual parameters. What's often hard to explain is that the U.S. deficit and debt problem isn't (yet) an emergency situation that is likely to rock the U.S. economy in the next year or two or three. There's still some time for adjustments. But we really don't want to waste that time. Daniel Thornton offers useful overview and insights in "The U.S. Deficit/Debt Problem:A Longer-Run Perspective," in the November/December 2012 issue of the Review published by the Federal Reserve Bank of St. Louis.

For starters, here's a figure showing U.S. annual budget deficits over time going back to 1800. There are five episodes of major budget deficits in the history of the U.S. government: the Civil War, World War I, the Great Depression, World War II, and the last few years. The deficits of the last few years don't match those of the major wars in U.S. history, but as a share of GDP, they do exceed the deficits of the Great Depression.

For another perspective, here's the ratio of accumulated gross government debt/GDP. The main episodes of high budget deficits are visible here as upward bumps in the ratio. The debt/GDP ratio is approaching levels that have only been broached by the funds borrowed to fight World War II.

Thornton emphasizes that the roots of our current deficit and debt troubles go back well before the Great Recession of 2007-2009, and well before Bush tax cuts earlier in the 2000. Instead, Thornton locates the start of the problems back to about 1970. In the chart of annual deficits, for example, notice that after about 1970 a pattern of volatile but growing deficits emerges. The pattern is interrupted for a few years in the late 1990s by the higher tax revenues and lower social spending resulting from the unsustainable dot-com boom, but a return to the larger deficits was coming eventually. Similarly, the debt/GDP chart shows that ratio bottoming out around the mid-1970s, and then beginning to climb--again with a bump for the dot-com years of the late 1990s.

What factor has been driving spending higher? Thornton's answer is straightforward: "[M]ost of the increase in spending that generated the persistent deficit over the 38 years before the financial crisis was spending for Medicare and Medicaid, particularly Medicare."

My own take is that it's been clear since at least the 1980s, and arguably earlier, that the U.S. budget was going to run into severe difficulties when the baby boom generation started retiring. The leading edge of the boomer generation was born in 1946, and thus is just now hitting age 65 and heading into retirement in substantial numbers. This demographic shift was going to cause problems for Social Security, but those problems could be dealt with by phasing back the retirement age and tweaking formulas for payments and benefits. In comparison, there is no easy way of addressing the combination of an aging American and steadily rising health care costs. 


In other words, a fiscal crisis has been coming for the U.S. budget for some decades. But before the Great Recession, we thought we had 20 years or so to make adjustments before we hit the danger zone. When the Great Recession squashed tax revenues and the attempt at fiscal stimulus pushed up spending, much of that lead time evaporated. The Congressional Budget Office focuses on a somewhat different number than Thornton does, looking at debt "held by the public" rather than "gross" debt--essentially leaving out debt that the federal government owes to itself, like Treasury bonds held in the Social Security trust fund. By that measure, back in December 2007 before the Great Recession hit, long-term budget projections from CBO were that the debt/GDP ratio would rise to the danger zone of 100% by around 2030.  Eighteen months later, after the Great Recession hit, the June 2009 report from the CBO forecast that the debt/GDP ratio would hit 100% around 2022.

Of course, it would have been far more sensible to address these issues of high and rising health care costs and the looming problems of large fiscal deficits back before a Great Recession hit, but it wasn't politically possible to do so. So now we get to face these problems, decades in the making, in a weak economy and with a shortened timeline.