The problem with journalism is that people don’t care about facts. People are not looking for well-reasoned analysis or for you to change their beliefs. Few will read long articles that take a nuanced view on a complex issue; however, idiots are more than happy to take absolutist views on said complex issues. Today, Al Jazeera1 decided to cover the fun topic of Social Security’s finances and how to fix the projected shortfall.
To be specific, I object to the idea that the Fed should not raise interest rates to help Social Security’s finances. First, the argument is weak. Yes, raising rates usually causes some sort of increase in unemployment. And yes, generally lower unemployment gives some workers more bargaining power. I’d agree that for middle class workers, it is indeed true that they gain some bargaining power. However, low-income workers will be unlikely to benefit from low unemployment. Low paying jobs are too easy to fill, even if the unemployment rate is 4%. While the changes in the unemployment rate undoubtedly impact Social Security’s future shortfall, how would the author propose that be measured and dealt with? I’ll even leave aside the massive assumption that by leaving rates near zero, unemployment will eventually fall to around 4% or 5%2.
“According to the most recent projections from the Social Security trustees, average hourly compensation in 30 years will be more than 60 percent higher (after adjusting for inflation) than it is today. If the tax rate were increased by 1 to 2 percentage points in order to prevent cuts to scheduled benefits, workers would still pocket close to 60 percent more for each hour of work in 2044 than they do today, assuming the gains from growth are evenly shared.
Whether most workers share in the gains from economic growth or we continue to see the massive upward redistribution of income of the last three decades will depend largely on the policies of the Fed. If the Fed allows the unemployment rate to fall back to the levels we saw in the late 1990s, then workers could anticipate substantial wage gains in the decades ahead. Covering the cost of Social Security will pose little problem.“
Yes, the projections do say that. That’s about the only true statement in those paragraphs. For homework, try to list every assumption that was made in this analysis. To get you started:
- Making assumptions about future inflation.
- Assumptions about future growth.
- That all gains from future growth will be equally shared.
- That unemployment falls and continues to stay low. Really? As if there will not be a recession between now and 2044.
- The idea that Congress will not completely invalidate the entire analysis by changing laws in the next 30 years. The projections always assume a static universe and we don’t live in a static universe. Tax rates change, the cap on the tax changes, economic growth is dynamic….
The most annoying part is this:
“On the other hand, if those pushing for higher interest rates get their way, then most workers will not see their wages rise by much. In that case, paying for Social Security through the current payroll tax could be a problem.“
Ok. There are plenty of idiots out there. So many, in fact, that members of Congress keep getting reelected (QED). Now, I would find it perfectly acceptable if the author had written: “person X says rates should be increased soon for reason Y, but analysis of data A and B show that this argument doesn’t hold/is weak/not enough to justify raising rates.” I don’t see much of a reason that rates need to rise immediately, but it is at best misleading and at worst dishonest to not explain why anyone would say that rates should rise. Also, it is cowardly not to give names, who is pushing for higher rates? Readers will not be able to look up what those people give as reasons for raising rates. No offense to Al Jazeera’s readers, but it’s not a finance/economics site. It strikes me as unlikely that the average reader would have the requisite background to understand the debate. That’s why I consider it to be misleading to not give any sort of counter-argument or at least to reference one. I absolutely hate when someone is trying to push what they want as if it is simply a fact that this is the only thing that makes any sense at all, has no downsides, helps the middle class and the poor, and bla bla bla. I may be young, but I have enough experience to know that simple-minded thinking like that only causes problems.
“People who are concerned about the future of Social Security, then, should be paying a great deal of attention to what the Fed does. Raising interest rates will not only affect the economy today but also affect Social Security tomorrow.“
We should pay attention to the Fed because the Fed makes important decisions. But the Fed’s job is not to fix Social Security. Thankfully, we already have a group of people responsible for doing just that, Congress. If nothing else, this article reflects just how little we think of Congress, we’re not looking for the Fed to solve all the nations financial problems. It’s not going to work. At some point, Congress will have to act. Given the maturity of the average member of Congress, they will act a few weeks after we hit the iceberg, have drowned, and they’ll find a way to kill off any survivors.
1. It's all too rare to find good articles on economics and finance from sources like Bloomberg. There is an endless amount of misleading nonsense from so-called experts who haven't a clue what they are talking about. For non-finance/economics sites, you should expect nearly everything to be wrong one way or another. You'll either be pleasantly surprised or, more often, satisfied that you were correct.
Is that being smug and condescending? Yes, sure it is. But that doesn't mean that those sources are correct about anything. Truth is not what sells, keep that in mind.
2. Why? Well, the Federal Reserve sets interest rates, but the Fed does not have absolute control of all the outcomes. There are countless other factors that contribute to changes in unemployment, it's stupid to assume it all comes down to interest rates. Put it this way, if the answers to such massive economic problems were so simple, it would have been done already.