Tuesday, October 23, 2007

P2: Dean Baker is a Dweeb!

Trade and Social Security: Why Are Fox and the Post Surprised?
Actually, it is very reasonable to cite trade in reference to these shortfalls. The growth in wage inequality over the last quarter century is responsible for more than half the 75-year shortfall projected by the Congressional Budget Office for Social Security. Increasing wage inequality has caused the share of wage income falling over the taxable cap for Social Security to increase from 10 percent in 1983 to almost 17 percent at present.
I know that Dean has some analysis that he is looking at for these conclusions but I have to question whenever someone states that if more money was collected by SSA then there would not be a shortfall. But payments in equal future entitlements. So even if more water goes into the tub the outflow in future years is greater. As far as more wage income being earned over the taxable cap could also indicate that adjustments for inflation has not kept up. Just because the total percentage of taxable amounts goes down does not even indicate that the SSA could be collecting more money.
Trade policy has been an important factor in the rise in inequality. Trade can also be an important factor in reducing inequality. If policy is focused on increasing competition in highly paid professions then a larger share of wage income will again fall underneath the taxable cap. Perhaps more importantly, if trade policy is oriented toward improving the living standards of ordinary workers they will be far less concerned about the possibility that in thirty or forty years they will see the same sort of tax increases they experienced in the decades of the 50s, 60s, 70s, and 80s.
But labor markets can often not 'behave' like general economists may think of supply and demand. How does he think inequality can be reduced through trade? Here Dean thinks that higher competition will lower pay to the high paid. But this by itself will not improve the money collected in the taxable cap. That is if the average pay of job x,y or z is $150k and it is reduced to $125k then this has no effect on the taxes collected. Larger share has nothing to do with actual dollars collected. The aspect that could change collected Payroll Taxes is if more people are hired. But again I go back to the more money into the system the more drainages from the system. We hire more H1 Visas and more people are on the payrolls and thus more Payroll Taxes collected.

Lastly, I see "highly paid professions" may have other factors that influence rates than just simplistic supply and demand factors. For one aspect is synergy. Since these paid professionals are paid on their marginal productivity then conceivably as more gather together then wages are actually driven up. Just think of Silicon Valley and the wage rates effects then. I read recently that the highly trained professionals have unemployment rates of less than 2%. Thus any increase in supply could have the effect of not lowering rates but just provide a larger pool of transitional unemployment. Technically we could see a labor market that is highly elastic for demand of labor and supply is constrained so as supply increases prices do not change for the short term.

I wonder what Dean is thinking of with regard to "trade policy is oriented toward improving the living standards of ordinary workers". How would you devise such a plan? And what do you define as "ordinary workers"? I mean how many businesses ask for ordinary workers?
Trade can also go far toward alleviating the projected shortfalls in Medicare. If Congress proves incapable of repairing the U.S. health care system, Medicare can reap enormous savings by allowing beneficiaries to buy into the health care systems of the countries with longer life expectancies than the United States.
First I agree with the idea that consumers in the USA being able to have a chance to get medical services overseas. Thus it could break the monopolistic powers in the USA health industry-not the least starting with the AMA. But then the hand wringing will begin when shabby work is shown and the Liberal establishment wanting regulations.

BUT Dean so completely misses the mark on the "buy into the health care systems of the countries with longer life expectancies". It is not the health system that drives life expectancy is lifestyle choices. So unless he figures out how to import different lifestyles to US citizens then no matter what country you get health services from the life expectancy will not change. Our lifestyle is dictating our life expectancy. Eliminate smoking, excessive drinking and obesity (diabetes) and our life expectancy would rise meteorically. But as libertarian I can not support even such thoughts but maybe some more application of libertarian paternalism...
For the record, the upward redistribution that results from placing less educated workers in competition with low-paid workers in the developing world IS the orthodoxy of free trade. That is what mainstream economists should expect to happen from the current pattern of trade. Unfortunately, many of them are not honest enough to adhere to their own theory.
This was in the comments section. Of course again Dean's simplistic views are laughable. As Ben would say returns to education are quite high now and there is plenty of opportunity here in the USA to improve job skills. We could also look at the other side of the coin that people living in poverty are more willing to do jobs that we would prefer not to do. And this is through regulations or laws or just the going wage rate is lower than other alternatives.



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