QUICK TAKES

1. On deficits and stimulus spending. Alas, politically speaking, a meaningful 2nd stimulus is not possible. But if it were, I think most savvy economists, like Krugman and Stiglitz (the liberal Nobelists), would argue that current benefits would outweigh future costs (higher future interest payments). It is even possible that a meaningful 2nd stimulus would “grow” the economy, and with it governmental revenues, such that, over time, total interest payments would be lower.

2. As for inflation, it is a problem one should not be so fearful of, as the Federal Reserve will raise rates and slow down the economy once it appears. The increase in the discount rate, yesterday, 2/18, suggests that the Fed may act, sooner than needed, to prevent any significant rise in prices. We are not in a
1970's situation, where out of nowhere, so to speak, inflation soared because of OPEC. Any inflation that may appear these days will likely come gradually since so many are unemployed. Or, worst case, and a realistic possibility, inflation starts, even with high unemployment, because the dollar weakens. If this is happening, the Fed will raise rates, favoring, as it almost always does, policies to lower inflation rather than policies to reduce unemployment. But barring an unexpected and disastrous overnight collapse of the dollar, inflation is not around the corner. And there are many economists who believe small increases in inflation are good, in that they will be appearing because more demand exists–i.e., more jobs and less unemployment.

3. Social Security, as I have previously written, is in good shape. During the campaign, Obama argued that the small shortage that will appear in 2040–I don’t think he mentioned the date or even explained the shortage–can be overcome by taxing all income at 6.2 %, matched by the employer, instead of stopping at an income that increases over time, because it is adjusted for inflation, but is now about
$105,000. Incomes over this amount are not taxed at all, in contrast to Medicare, in which incomes are taxed at 1 1 /2 percent, on all incomes, with no upper limit.

Social Security will run short in 30 years, but not that short. It will be able to pay about 70% of what it owes people, assuming that the US Treasury pays the Social Security Administration what it owes it. (SS was required to invest its surpluses in Treasury bonds and these holdings now add up to trillions.) Being paid 70 % of what it owes, in 2040, will probably be a higher amount than what people are getting now, unless wage rates fall and delayed retirement doesn’t offset this fall. [See my Pearl Harbor Day article (12/7/09) on why this is so, but basically it is because SS is an income retrieval system and 30 years for now people will presumably be earning more than they do today, although maybe not as much as some people predict.]

But Obama’s campaign argument--6.2 on all income--would probably avoid any cuts for a 75 year period, if passed within the next 10 years, and if not, the retirement age could be raised to 68 or 69, or the 6.2 % can be raised to about 7 %.

4. Most economists, I think–whether liberal or conservative–believe that after a difficult and stagnant period that might last for years, GDP growth will return to the rates that used to exist or, if not quite that, to rates that are smaller but respectable. But I fear that what is likely is that we will have very low rates for an indefinite period. Behind this fear is our large and seemingly irreversible trade deficit, our declining manufacturing and the fact that we live in a world where a huge country–China–is determined to grow and has wage rates that are a small fraction of what ours are. Unless we learn from the Germans--see reference below--our jobs will continue "to move" to China.

5. In 2008, Germany had a per-capita GDP of $44,600, within hailing distance of ours, which was $47,500. But we work longer. In 2008, the typical American worked 1,792 hours, while our German counterpart put in just 1,432 hours. Depending on how one evaluates leisure, Germany probably has a higher living standard. Dividing the per-capita GDP by the hours worked gives, I think, an average wage per hour. Ours is $26.5, while theirs is $31.1. For more, read “Germany’s Economic Engine” in the March issue (2010) of The American Prospect.