ENGLISH AND MATH PREP CAN CUT COLLEGE COSTS

          ENGLISH AND MATH PREP CAN CUT COLLEGE COSTS

          In discussions of college costs  --  the high and rising price tag, the necessity of taking out student loans and the burden of repaying them,  the fairness of forgiving some or all of those loans, the foregone opportunity to work and earn instead of going to college  --  an important element is often left out:  how to maximize the long-term personal and financial benefit from those college years. A college education is a lifelong asset requiring investment of both time and money.  There is a lot riding on how those investments are made: earning good grades in a rigorous course of study, discovering and developing talent and passion into lifelong learning, lifetime friendships, and associations, and increased lifetime income.  

To Reduce College Costs, Students Should Enter Prepared in Math and Writing Skills

         The difference between what is expected in high school versus what is expected in a rigorous college program can come as quite a shock to entering students.  Good colleges require students to organize and develop a large amount of work product and to record and communicate their findings in written and oral form.   English and math are the two languages in which this requirement is met; students should use the time in high school to deepen their working knowledge of them.  This preparation enables students to progress from passive to active learning, from routine derivative thinking to inventive thinking, from working with materials created by others to more actively creating their own work product.  Prepared students have the foundation to earn higher grades in more rigorous disciplines, allocate their time efficiently, reduce the burden of student loans, and maybe even reduce total cost.  

Emphasizing  High School Writing    

   Opportunities to improve writing skills while in high school occur most obviously in English classes.  Students should be smart consumers, enrolling in courses where a dedicated teacher will assign writing regularly, impose strict deadlines, and, most importantly, mark up draft essays and -- because advanced writing involves multiple revisions -- provide an opportunity to revise and resubmit the draft written work.   Applying this pattern to increasingly complex topics enables the student to take organization and communication skills to a much higher and more innovative level and become a more analytical thinker and writer.  All this effort also instills time management, starting projects as early as possible to permit those productive revisions. 

Elective courses in history and social studies will solidify this discipline if they include additional written work and the opportunity to revise after teacher feedback.       

Emphasizing  Math Word Problems

          A working knowledge of math is acquired through diligent, steady work of two kinds: working through routine exercises and solving word problems. Exercises challenge the student to use well-known steps or algorithms to solve arithmetic calculations or algebraic equations.  In contrast, word problems require the student to set up an exercise by reading a problem description, separating the germane from the irrelevant, developing a math model and solving it, and then writing a short statement explaining their results.  The importance and applicability of math can be conveyed in word problems derived from a wide range of real-world topic areas such as business, engineering, sports or personal finance.   Examples could include the power of compound interest and the importance of saving when young; how to choose a car and pay for it with a car loan; navigating an airplane or ship in strong wind and water currents; calculating the time required to travel to Mars and return;   how to decide whether to kick a field goal or run the ball on fourth down; and perhaps the most immediate word problem: how much to borrow to pay for college.

Finally, the high school years are a good time to hone computer skills needed in college. Requirements for essay writing and math problem-solving,  complemented by computer skills, appear in virtually all disciplines across any college campus from science and engineering to social science humanities and fine arts.  In many instances, electronic textbooks have replaced physical books. E-books and their electronic ancillaries are festooned with electronic problem sets and video clip tutorials. Students are expected to use their computer skills to enhance communications with professors, teaching assistants, and other students.  

 OK, But How Does Such Preparation Ease the Financial Burden? 

  Once in college, prepared students can produce written work with greater speed and sophistication.  For them, college work is more time-manageable as well as higher quality.   The prepared students can therefore choose from a much wider selection of majors, and enjoy a greater chance of discovering what they love, both for personal pleasure and to earn a living.   They save money when they enter a rigorous major earlier, select more advanced courses in that major, and graduate in the traditional four years rather than the five or six years that too often results from insufficient planning.  The prepared student can justify borrowing for their education, bypassing low-paying part-time jobs that add very little to their human capital. They can devote more of their time to investing in the durable asset of an education of greater value.  

              

   

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JOE BIDEN ENDORSES LARGE  TUTORING PROGRAM

         On the steps of the Lincoln Memorial that sweltering afternoon of August 28, 1963, Martin Luther King told the nation of his dream, and how long his people had been waiting. Seared into that speech was "the fierce urgency of now."

         "Now" was 59 years ago. Much progress has been made on voting, housing, and employment, but not in many high-paying occupations.  Among the remaining barriers to opportunity that has been getting far too little attention: gaps in math education and attainment across the social and economic spectrum. 

         Those deprived of solid math preparation are denied entry into many highly paid occupations.  The lack of diversity in high-paid and rewarding professions, including the obvious ones  – – engineering, science, IT,  medicine, business analysis and finance,  economics -- and, in this high-tech age, even history, political science, journalism, and the arts -- has lasted generations, reinforcing the income and wealth gap across race, ethnic and gender lines.

Investments

          Unlike subsidies for rent, utilities, food, and other important assistance, a working knowledge of math cannot simply be transferred.  Instead, that knowledge must be learned through an organized time commitment, involving both instruction and practice.   For most of the math deprived, circumstances prevent them from making the necessary investment themselves. If the investment is to be made, and latent talents developed for the benefit of the individual and society as a whole, it must be done at public expense.  

Investment in the Math Teacher Corps

         Teaching math requires an educational background, experience, and love of the subject.  These attributes are transferrable to many employment options; teaching is only one of them.  To attract more highly qualified individuals to the teaching profession, pay them more and invest in smaller classes.  

Invest in Tutoring

         Many students find it difficult to get accurate and timely help with homework. One way to reduce this math-help gap is to offer online tutoring through virtual meeting technology like Zoom or Google Meet.  To reverse this gap, widened even further by the Covid pandemic, researchers at Johns Hopkins and Brown University propose a massive increase in tutoring online. They outline a tutoring service staffed by 300,000   college students and other community members who could interact with students struggling with their math and reading:

 "What we and many other researchers have found is that the most effective strategy for struggling students, especially in elementary schools, is one-to-one or one-to-small group tutoring. Structured tutoring programs can make a large difference in a short time, exactly what is needed to help students quickly catch up with grade level expectations."

         Matthew A. Kraft, and Grace Falken of the Annenberg Institute at Brown University,  set forth a ten-point  "blueprint" for implementation.  They propose that tutoring, greatly scaled up, could become a permanent feature of the U.S. public education system.  "Tutoring is among the most effective education interventions ever to be subjected to rigorous evaluation."  (https://www.edworkingpapers.com/sites/default/files/ai20-335.pdf)

Biden Tutoring Plan

         Joe Biden endorses the plan to engage such a large number of tutors.  Under the plan,  "peer" tutoring be organized where successful students, properly trained, would provide the service for struggling students a few years younger: with high-schoolers earning class credit for tutoring elementary school students; college students earning work-study pay or course credit or partial loan forgiveness for tutoring high school students; and college graduates tutoring in high schools under the AmeriCorps program.  Biden is including such a massive tutoring plan as part of his administration’s support for student success (https://www.whitehouse.gov).  Finally, the state of modern technology should compel state and local governments to provide all students with laptops and WIFI hotspots so that students and school systems can take advantage of this tutoring option.  

William L. Holahan is Emeritus Professor and former Chair of Economics at the University of Wisconsin-Milwaukee.

 

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SENATOR JOHNSON STEPS ON THE POLITICAL "THIRD RAIL"

         The third rail of subway systems provides high-voltage electricity to the subway cars; anyone who touches it is likely to be burned to a crisp.  The analogous "third-rail of politics" is Social Security, and yet Senator Johnson of Wisconsin seems willing to risk political electrocution.  Famous for recommending Listerine for Covid, and claiming that climate change is a hoax, he now claims Social Security is bankrupt, and to cure this alleged fiscal condition he wants Congress to adjust Social Security payments annually.   In other words, rather than use the system formulas for determining retiree benefits, Johnson would substitute congressional "discretion," shifting the Social Security program to an annual budget item rather than a permanent program.  Before assessing Johnson's proposal, voters should be aware of how the Social Security system determines benefits now.

         The program works under two arithmetic formulas,  first, to generate revenue via the payroll tax, and second to calculate the benefits that workers receive upon retirement.   These two formulas determine the obligations income earners have and the earned entitlement during their retirement.   

The Payroll Tax

            In 1935, President Franklin Roosevelt designed Social Security as a government-mandated retirement insurance program to reduce poverty in old age. He chose to finance the program with a payroll tax as a kind of insurance premium.  This had the effect of stabilizing the system in the face of strong "conservative" opposition.   Because program benefits are tied to worker earnings, voters do not perceive Social Security as “welfare." Roosevelt said:   “We put those payroll contributions there to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits. With those taxes in there, no damn politician can ever scrap my Social Security program.”  To this day, any “damn politician” who proposes to curtail any aspect of Social Security can expect to encounter opposition from a huge majority of the electorate.  

         There is no mystery about the payroll tax withheld from earnings: it appears right on a worker's pay stub as the FICA (federal insurance contribution act) tax. This year, for example, the FICA tax rate is 7.65 percent (on the first $147,000 of earnings for the 6.2% deducted for Social Security; no income cap for the 1.45% deducted for Medicare).  Both the employer and the employee pay this amount for a total of 15.3% (The self-employed pay both halves).  In effect, this is an insurance premium.

The Benefit Formula  

          In addition to the payroll tax, the benefit formulas also add to the stability of the system. The method for calculating benefits is described at the website ssa.gov.     In a series of steps, the method leads to the retirees' Primary Insurance Amount (PIA), i.e., the amount of the retiree's first monthly check.   That monthly amount is adjusted for inflation to provide a rough estimate of a constant level of purchasing power.  The United States of America has not missed one payment in the 82 years of the program.

Arithmetic details

         Step one in the calculation of the PIA is the determination of the average indexed monthly earnings, or AIME.  This is a tabulation of the worker's earnings during their top 35 earning years, up to a maximum amount designated for each year  ($147,000 for 2022).

  These past earnings are then adjusted via a wage index to reflect the average worker's contribution to the nation's productivity.   This adjusts the past dollar earnings not only for inflation during the period between the performance of the work and the present, but also for productivity growth. In other words,  the prosaic arithmetic is designed to reflect the worker's participation in the steady growth of labor productivity, which has averaged 1.5%  annually.  Using this wage index ascribes to past work the same purchasing power as if the work were produced in the current year.  

The next step in establishing the PIA is a three-part summation. In the first part, each dollar of the average indexed monthly earnings up to the first $1,024 adds 90 cents to the benefit check; in the second part each dollar between $1,024 and $6,172 adds 32 cents; and finally, in the third part, each dollar above $6,172  adds a mere 15 cents. Note that while the benefit amount rises with earnings, the rate of increase drops very fast at the $1,024 and the $6,172 “bend points."  The result of adding these three parts is the amount of the retiree's monthly check.  This amount is adjusted for inflation beginning each May, and checks are sent for the remainder of the retiree's life.

  Roosevelt's reliance on the payroll tax formula and the benefit formula manifests a social contract with carefully specified contractual terms.  The payroll tax formula and the benefit formula are conditions of employment in the United States. They are part of what workers agree to when they accept their terms of employment.

For Johnson's proposal to have any meaning, he must be talking about reducing the benefits below the benefit formula that people have relied upon for their entire work life.   In effect, Johnson would have the benefits reduced long after the work that earned those benefits had been performed and accepted by employers. The worker cannot reclaim the value of that work if the terms of the benefit formula are reneged upon after the work is performed, a portion of the value of that work will have been stolen.

           William L. Holahan is Emeritus Professor and former Chair of Economics at the University of Wisconsin-Milwaukee.

 

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CHIPS ARE DOWN FOR ROJO

         Microchips are incorporated in nearly every good and service these days, as well as the processes by which they are made.  A short list includes major appliances;  heating and air conditioning systems;  electric, internal combustion, and hybrid vehicles; waste disposal; and of course cell phones and computers.  A shortage of chips during the pandemic led to a shortage of all of those products, as well as slowing the effort to renovate the electricity grid, an essential step in addressing climate change.   The shortages also led to higher prices for those products and processes, contributing to the supply-side part of the inflation now disrupting the United States.

         With bipartisan support, the "Chips and Science" bill is working its way to President Biden's desk after the Senate passed the bill on July 27 by a margin of 64 to 33.  Officially known as Creating Helpful Incentives to Produce Semiconductors or CHIPS, this bill will allocate $52 billion to chip manufacturing within the United States, and $200 billion to research in the ongoing improvement of chips plus education and training programs to increase the number of chip-manufacturing employees.

         The CHIPS bill is designed to foster discoveries made in the USA that contribute to the ongoing improvement in speed, accuracy, durability, and capacity of chips.   To stay on the "cutting edge," microchip manufacturing requires ongoing research by firms in the private sector, by university technicians and professors as well as scientists at national and private labs.   The aim is to assure that conceptual breakthroughs and their applications take place in the United States, including in the advanced manufacturing sector of the State of Wisconsin with its 187,000 employees.   

         Wisconsin Senator Johnson voted against CHIPS. He labeled CHIPS "corporate welfare," and "socialism."  He also declared that the bill would be "inflationary."  These charges reveal economic misunderstanding that is harmful to the nation and to Wisconsin.     

         The core concept behind CHIPS is that these improvements in the US semiconductor industry are a public responsibility.  The alternative is unregulated market activity, or "free markets." As previous essays in this Econ4Voters series have argued, that free-market default is superior only when the pre-conditions for market efficiency, including competition, are present; microchips are a textbook example of the opposite.   In the worldwide market, the manufacturing of chips gravitated toward countries like China, where their highly precise labor input can be hired for very low wages. This natural result of market activity left the US vulnerable to cut-offs, whether due to the pandemic or to military threats.

         Similarly, the notion that the CHIPS bill would be inflationary has it backwards. An increased supply of microchips reduces the cost of producing the modern goods and services that require microchips and the production processes that supply them. Both economic principles and empirical evidence show that productivity and cost are inversely related; increasing the supply and quality of microchips will fight inflation, not cause it.  Moreover, making the US economy more competitive globally will strengthen the dollar as an international currency which in turn would also fight inflation by making foreign goods cheaper.

         Johnson’s "socialism" charge reveals a particularly worrisome misunderstanding of economics. A capitalist system requires an efficient public sector to support the market system,  providing those things that the market system needs but will not produce for itself. Market activity requires streets, roads, sewer, water services, the legal system, police and fire protection, national defense, and a host of other public services. It is also a public responsibility to support specialized research that produces very uncertain investor return, as in the case of advanced semiconductors.  To conflate capitalism's public sector with socialism is a demonstration of incapacity to evaluate public policy.   It is not conservatism. It is confusion.

William L. Holahan is Emeritus Professor and former Chair of Economics at the University of Wisconsin-Milwaukee.

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If You Have a Business, Who Built What?

         The fall election season will bring the familiar type of campaign ads accusing Democratic Party candidates of fiscal irresponsibility and wasteful government spending, even on infrastructure spending that will boost productivity and competitiveness. Expect to hear an old favorite: the story of how  President Obama stumbled into a rhetorical thicket when he said, “If you have a business, you didn’t build that. Someone else did that.”    

         Standing alone, these two sentences are outrageous. Accordingly,  by omitting the immediately preceding sentences, these words became part of Republican campaign ads,  declaring that they showed Obama’s socialist tendencies.  

The Importance of Interdependence   

         In his 2019 book, The Conservative Sensibility, George F. Will does his readers a great favor: he includes the entire paragraphs of Obama’s quotation, words that demonstrate that Obama was speaking about the role of government in providing public infrastructure essential to the business sector but which businesses do not provide for themselves.  Immediately preceding the famous quotation above, Obama said, Somebody invested in roads and bridges.” He was making a case for increased government investment in the nation’s deteriorated infrastructure, claiming such spending would improve business profits. His point was that firms do not have to build the entire infrastructure they use, that they can focus on what they do well and support government efforts to provide such public assets as bridges, roads, water, sewer, and police and fire protection.

         Obama further noted that firms need not build many of the other assets they need and can simply buy or rent them in the marketplace. He was appealing to bedrock economics which for 250 years has demonstrated how markets guide the inter-dependence of the citizens in a market economy. He further said, Somebody helped to create this unbelievable American system that has allowed you to thrive,”   emphasizing the importance of this interdependence in enhancing the firm’s pursuit of profit.

Instructional Episode in The Role of Government in a Market System.

         Two lessons can be drawn from the episode. First, without streets and roads,   reflexively anti-government "free market" advocates would have a hard time moving their goods and services to market and having their employees show up for work. These complements to business are built by government and paid for by taxes. 

         Second,  an important lesson for political speech writers: don’t use pronouns with an antecedent that lies in another far-off sentence! A lot of ad-writer opportunism would have been avoided if Obama had simply said, “If you have a business, you didn’t build the streets, roads, bridges, water and sewer systems that you rely on to run that business. Some level of government did each of those things,  and we all paid taxes to enable them to make that happen.” That’s it: no pronoun, no link to an antecedent that can be de-linked.  

         Rhetorical vulnerability aside, Obama’s meaning is essential: the private enterprise sectors of the economy depend strongly on the public sector. Reciprocally, the various levels of government rely on market activity to generate the value added to the economy from which the resources are drawn to finance the public goods.  Markets rely on government and vice versa. 

William L. Holahan is Emeritus Professor and former Chair of Economics at the University of Wisconsin-Milwaukee.

 

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THE FREE MARKET MODEL, "A SYSTEM OF NATURAL LIBERTY"

Webster’s Dictionary defines a “conservative” as someone who adheres to established beliefs and practices,  adopting new ideas for long-held views only if rigorous examination compels that change.   Consequently, the dictionary definition of the word “conservative” suggests a principled approach to thinking about public policy.  By comparison,  if you ask a self-described conservative what the word means, you are likely to get a response that includes slogans like: individualism; personal responsibility, smaller government, limited government, liberty, freedom, and fiscal responsibility. Moreover, there is a headliner attribute -- "free markets"  -- that they confidently claim assures that all these goals can be met within a robust economic system where self-regulating markets can better serve the public than if the government intervened.  

Economists refer to markets favorably too; they conclude that under certain preconditions, markets expand individual access to resources,  contributing to greater economic freedom from Nature's scarcity.  But, this "pro-market" preference comes with a warning: for markets to function in the public interest, certain prerequisites must be met.   

The Free Market Model

To understand complex systems like markets it is common to build "models." These are detailed descriptions of an idealized version of a real thing. Building models is a centuries-old art; Archimedes (287BC - 212BC) taught engineering by explaining frictionless "natural machines," including pulleys, levers, inclined planes, etc.   Although there is no such thing as a frictionless machine, engineering students from Archimedes' time to the present begin their study of real machines by first studying imaginary frictionless machines. Economists do the same thing with "the free market model," a set of principles describing how a market would function under idealized conditions.  

The Free-Market Model

In the free-market model, business and private investors base their decisions on their expectation of profits and losses.  They invest, invent, innovate, buy equipment and hire people, all free of government direction or interference.    Firms seek profit by selling to buyers. The process of competition among profit-seeking firms establishes market prices that eliminate shortages and surpluses: the amount buyers want to buy equals the amount sellers want to sell.   

The model describes how markets adjust to change; for example,  if demand for an industry’s goods and services increases, price and the expected profits will rise, encouraging the expansion of supply via the participation of more profit-seeking investors.  This inflow of new competitors increases the choices available to consumers, driving down prices until it is no longer attractive for additional profit-seeking suppliers to flow in.  This process of entry and exit transforms the  original profit potential into a benefit to consumers, reducing  price to the level that covers  production and distribution costs including a "fair rate of return to investors."  

If demand decreases, the system works in reverse;  price falls, threatening losses and encouraging some firms to leave the market. This outflow of some firms reduces supplies of goods, causing prices to rise for the remaining firms until once again price covers cost including a fair rate of return to investors. Through this process of profit and loss, prices are determined not by the individual firm but by the interplay of all market buyers and sellers.  The final results of these competitive pressures are lower prices, improved products, innovative ways to produce products, and control costs, ultimately for the benefit of consumers.

This model reflects the keen insight of Adam Smith, the Founder of Modern Economics: in competition, profit-seeking firms serve the public interest even though the firms do not have public interest in mind as they seek profits; that “is no part of their intent.” Because there is no coercion, these are called "free markets." Investors are free to add or withdraw their investment and free to expand or contract their offerings of products and services to buyers. Firms are free to innovate, i.e., to change those products or the way they are made, sold, warranted, or financed.    Meanwhile, buyers are free to buy the quantity they prefer, provided they have the ability to pay. They earn the ability to pay in another free market: the market for their uncoerced labor.  All of this operates without government interference.  Smith referred to this description as a “system of natural liberty.” 

Product warning: If the preconditions for competition do not exist in a particular sector of the economy, the beneficent outcome ascribed to the free-market model cannot be expected.    For example, the pre-conditions for competition are not present if firms collude, i.e., obstruct the process of competition by forming agreements to reduce total output to force prices up. The anti-trust laws are designed to protect the competitive process by criminalizing such collusion.

Contradiction: Markets cannot exist without government.

          Real markets cannot function without certain foundations provided by government, including rule of contract law, property rights law, ownership rights law, and other sectors of the law that form the “rules of the game.” There are no investor returns to these laws or their enforcement.  Although they are prerequisites for markets, markets cannot provide these laws.    Those who favor market allocations over central planning allocation of resources must still favor complementary government activity.

Strictly speaking, there is no such thing as a free market.  However, the free-market model has broad applicability not only as a preliminary tool of analysis and critique but also as a guide to public policy. The model captures the role of competition and the role of the price system in the coordination of the economic affairs of independent-minded people in a free society.   

Future essays in this series on Econ4Voters for Grassroots North Shore will explain the compatibility of regulated markets with representative government;  how the powerful forces of markets can be used to address climate change;   regulate utilities such as electricity, natural gas, cable TV; and guide the construction and operation of infrastructure such as streets, roads, bridges and airline flight-paths.   Examples such as these, and more, will show the importance of economic understanding in the development of public policy and in the evaluation of politicians at election time.

William L. Holahan is Emeritus Professor and former Chair of Economics at the University of Wisconsin-Milwaukee.

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Will Social Security "Go Broke" in 2035? No.

         Every year the Social Security Administration issues a trustee report stating the condition of the system, including the "bond fund," or, as it is officially known,  the "Social Security Trust Fund." This year the trustees estimate that the bonds in the trust fund will "run out" in  2035. (Find the report summary here:  https://www.ssa.gov/oact/TRSUM/)  And every year there is confusion about what it means for the trust fund to be exhausted.  Will retiree payments be cut? Will taxes have to be raised? 

         Soon after the Social Security Administration trustees report landed, the Washington Post ran opinion-writer Megan McArdle's June 9, 2022, front-page article under the screaming headline:  "As Our Entitlements Crisis Gets Closer, A Solution Moved Farther Away." She describes the pending "insolvency" of Social Security and the fraught choice that will face the Congress at that time.

         This commonly-held description implies that the country’s most popular government program is in serious trouble. Current retirees, as well as current workers who've paid into the system during their entire work life and who anticipate reliable payments during their retirement, all have reason to be alarmed when such reports appear in leading newspapers.

         Moreover, there is no doubt that this issue will play a role in the election season.  For instance, in the race for the US Senate seat in Wisconsin, two-term incumbent Ron Johnson, now seeking a third term,  has claimed  that Social Security is a "Ponzi scheme" and it's  pending "insolvency" is just another example of "democrat (sic) socialist programs bankrupting the country."

Follow the Money. Follow the Bonds

           Fortunately, the system is not going broke. The correction of this common misunderstanding and the political opportunism derived from it must begin with a review of how the social security system gets its money. As designed in 1935, the chief source of revenue for Social Security is a designated tax: the payroll tax on earned income.   Originally this payroll tax was to be "pay-as-you-go," workers paying for retirees in a rolling obligation, each generation of workers paying for the Social Security benefits of the retirees. But it is easy to overlook this economic reciprocity: each generation of workers inherits the knowledge and physical capital produced in the past, resulting in an average growth of productivity of roughly 1.5% per year.

         No one could have predicted in 1935 that the hugely disruptive World War II would be followed by an 18-year "baby boom" of 77 million people, in turn, followed by an 18-year "baby bust" of 47 million people.          This pattern of boom and bust birth rates predetermined a boom of retirees collecting benefits and a bust of workers to finance those benefits. This meant that the pay-as-you-go system based on payroll tax revenue would place a financial strain on workers when the baby boomers retired.  To avoid this excess burden, beginning in 1985, President Reagan raised the payroll tax above the amount needed to meet the retirement benefits year by year.  That "surplus" amount was used by the Social Security System to purchase special Treasury bonds on behalf of the boomers.  In effect, this combination of taxes on boomer income and investment in bonds forced the boomers to invest in partial payment of their own retirement benefits.  The reserve of those bonds is known as the "Social Security Trust Fund."       The plan was to build up this fund during the working life of the baby boomers, using the cash for the good of the country during those years, and then return the cash with interest during their retirement years.    The sale of the bonds would be the accounting transaction in exchange for the cash.

         The revenue gained from this sale of bonds would be added to the payroll taxes paid by the workers during those years. As a result, the payroll tax rate paid by workers would be set lower than if the workers had to finance the entirety of baby boom retirement benefits.   The System would sell bonds from the Trust Fund back to the Treasury in exchange for cash sufficient to pay for about 1/4 of the retiree Social Security benefits;  the payroll tax paid by workers would pay the other 3/4.

Crisis? What Crisis? 

         According to estimates made in 1985 when the bond reserve was established, the boomers would be forced to save enough to pay their share until the year 2060, and accordingly, the bonds would be sold out by the year 2060.  By then all but a few persistent boomers will be gone and no longer collecting retiree benefits.    As the trustees now report, however, the bonds will run out in 2035 when over half of the boomers will still be very much alive and collecting retirement benefits. Where will that money come from when the bonds are gone?

         The great fear presented by the predicted exhaustion of the bond fund by 2035 is that Congress will have to choose between cutting benefits by 1/4 or raising taxes to pay 1/4 of the benefits. Fortunately, the math shows that fear is unfounded: the retention of the planned benefits schedule will not require an increase in taxes or borrowing after the bonds run out.

         If after 2035 Congress orders the Social Security Administration to maintain scheduled benefits, the amount required will be the financial difference between retirement benefits and worker payroll tax revenue.  The retirement benefits schedule depends upon the summation of the individual retiree's highest 35 years of earnings during their working years. The payroll tax revenue depends upon worker earnings. Neither of these two formulas depend upon past savings; the exhaustion of the bond fund does not affect the difference between them.

          The bonds are going to run out sooner than expected because the savings were offset by expenditures not anticipated in 1985, including cuts in general taxes; increased defense costs; the multi-trillion-dollar response to the economic downturn of 2008/9;  the pandemic–induced economic downturn of 2020.  But such diversions should not be paid for by boomers in the form of reductions in their retirement benefit checks. Like all citizens, they will pay their share of those government expenditures through their general taxes.  They should not have to pay twice; i.e., once through their general taxes and a second time through reductions in their retirement checks.  

            Because the amount to be supplemented is not dependent on the existence of bonds, neither the rate of taxation nor the rate of government borrowing will have to change after the bond fund is exhausted. If in 2035 Congress orders the Treasury to continue to supplement Social Security retirement checks, the Treasury can provide the required supplementary money without raising tax rates or borrowing.   

William L. Holahan is Emeritus Professor and former Chair of Economics at the University of Wisconsin-Milwaukee

    

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URGENT: MAKE A CARBON TAX PART OF CLIMATE CHANGE POLICY NOW

         The latest UN annual report on climate change issues the sternest warning yet that climate change due to human activity is accelerating. This series of reports has triggered two types of responses. The first type calls for government command and control measures that would phase out all fossil fuel-based energy by 2030; this has gained a great deal of attention with the introduction of the Green New Deal.  The second favors the carbon tax, a pro-market approach that would use price incentives to induce market participants to reduce their greenhouse gas emissions. Both strategies will be needed, but the carbon tax is misunderstood and needs further explanation. 

   The atmosphere is a “common access resource.” Consequently, an unregulated “free market” does not require payment when polluters emit CO2 into the atmosphere.  They have an incentive to save abatement costs by using the atmosphere as a free disposal site.  The implementation of a tax per unit of carbon emitted into the atmosphere would insert the missing price per unit of CO2 emission. Profit-seeking firms would be incentivized to direct their engineers and scientists to seek emission-reducing methods that are cheaper than paying the tax.

 Reducing carbon emissions costs money. In an unregulated "free" market, a firm that voluntarily incurs abatement costs places itself at a competitive disadvantage relative to competitors that do not abate their emissions.   The carbon tax applied to all emitters levels the playing field by eliminating the emitters’ advantage:  without the carbon tax, a firm can gain a competitive advantage by emitting more carbon; with the carbon tax, a firm can gain a competitive advantage by emitting less carbon.  

 As the carbon tax is passed on to consumers, they will perceive a change in the relative prices of different energy sources. For example, due to coal's relatively high carbon content per unit of energy, the carbon tax for coal would be roughly twice that for natural gas, providing coal users with a strong incentive to switch to gas. Energy buyers would perceive even lower relative prices for non-fossil energy, like wind and solar, provided they can work around natural interruptions of those sources.  

The Bipartisan Approach

Recognition of the potential of this tax to curtail climate-altering CO2 emissions is growing, and support for it is gaining ground on both sides of the aisle. Recently, Senators Whitehouse (D-RI) and Schatz (D-HI) proposed charging polluters $49 per ton for their carbon emissions. Meanwhile, the Climate Leadership Council (CLC),  a "conservative" organization,  endorsed a fee of $40 per ton. 

This measure would generate considerable revenues (e.g., the CBO estimates that the Whitehouse/Schatz proposal would generate over $2 trillion per decade).  The money could be spent partially offsetting the increase in the national debt resulting from the 2017 recent debt-financed tax cut. Or, the money could be spent to beef up safety net programs for the poor, shore up the national retirement and health programs, and fix the nation’s crumbling infrastructure. Or, it could be spent on speeding up the development of alternatives to fossil fuels. After all, if the scientists are right, we need to make up for lost time.  Finally, the CLC has proposed that the money could be returned to the public in the form of an equal per-person “citizen dividend.” At $40 per ton, that annual dividend is estimated at roughly $2,000 per family of four.  

The Carbon Tax Complements Other Government Regulation.

 Many “small government conservatives,” who recognize the need to reduce CO2 emissions, over-estimate the effectiveness of a “free-market solution” offered by the carbon tax. It has great appeal for them because, as a complement to market forces, they regard it as a substitute for the "heavy hand" of government command and control actions (quotas, bans, equipment requirements, measurement techniques, inspections, and compliance rules that restrict managerial prerogatives). However, while a carbon tax reduces the scope of the required regulatory oversight, it does not eliminate the role for regulation.  The regulatory authorities still will be required to continually monitor carbon emissions to determine how high to set the tax - the higher the tax, the lower the emissions. Moreover, the government must also monitor compliance. So, while the carbon tax creates compatible incentives to reduce emissions, it is not sufficient to absolve the government of all its responsibilities.  

The Carbon Tax is a Start on Net Zero CO2 Emissions by 2050

 According to the CLC, such a hefty tax would induce investment in abatement methods that would keep our emissions far below the 2030 target levels agreed to in the Paris accords. That would be a good start on the "net zero" by 2050,   regarded by scientists as a necessary condition to keep global temperature increase to 2°C. So the carbon tax is a good component in the large set of proposals that must work to re-organize the incentives of 340 million ideologically mixed citizens. The carbon tax gives all decision-makers an incentive to act in ways that save the planet, even if that is no part of their intent.

William L. Holahan is Emeritus Professor and former Chair of Economics at the University of Wisconsin-Milwaukee.

 

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Roe v. Wade Repeal: Predicted Economic Impact on Women and Families

         On May 10th, in her testimony before the Senate Banking Committee, Treasury Secretary Janet Yellen stated,  “I believe that eliminating the right of women to make decisions about when and whether to have children would have very damaging effects on the economy and would set women back decades.”  She predicted that the labor force participation of women would fall, that their incomes would fall, and that their career paths would be delimited. Committee-member  Senator Scott (R-SC) responded by labeling her analysis "callous." He spoke over her while she was talking, smothering her response: "... that's the truth."     A few days later,  Scott posted an opinion piece in the Washington Post stating that his extremely hard-working single mother had raised her children while working multiple jobs (which would seem to buttress Yellen’s argument, not his). [1]

         Economists have produced a large body of economic research on the relationship between abortion access and the economic status of women. An excellent place to initiate study of the topic appeared on November 30, 2021, on the Brookings Institution website, entitled  "What can economic research tell us about the effect of abortion access on women's lives? [2]" by two economists, Professor Caitlin Myers of Middlebury College and economist Morgan Welch of the Brookings Institution. They point out that in their plea before the Supreme Court to overturn Roe v. Wade, the State of Mississippi asserts “there is simply no causal link between the availability of abortion and the capacity of women to act in society” and hence no reason to believe that abortion access has shaped “the ability of women to participate equally in the economic and social life of the Nation.”  In strong disagreement, 154 distinguished economists provide hard evidence in their September 20, 2021 amicus brief ("friend of the court brief")[3].

The amicus brief is rather long, but a few samples of the findings can be summarized here. From page 10: ”For young women, the estimated reduction in birth rates due to abortion legalization was three times as much as that of all women. Legalization of abortion, together with policies specifically granting young women the ability to obtain an abortion without parental consent, reduced teen motherhood by 34% and reduced teen marriage by 20%.”

Several findings appear on Page 14, which can be summarized: Abortion legalization has shaped families and the circumstances into which children are born, reducing the number of children who lived in single-parent households, lived in poverty, received welfare and social services, suffered child neglect and abuse. Moreover, children in those families with abortion access had increasing rates of college graduation. 

And, from page 23: “Approximately 49% of women who seek abortions are poor, 75% are low income, 59% already have children, and 55% report a recent disruptive life event such as the death of a close friend or family member, job loss, the termination of a relationship with a partner, or overdue rent or mortgage obligations.”

              Because the amicus brief was submitted in mid-September,  the justices and their interns had two months to consider the arguments and evidence presented in it.  But during those oral arguments in December, Chief Justice Roberts interrupted the presentation of the economic evidence and waved it off as irrelevant. Furthermore, in the famously-leaked draft opinion written by Justice Alito, there is no evidence that the economics studies detailed in the amicus brief were taken into consideration, or even read. Evidently, the predictable economic consequences of the court's decision are not considered a part of the decision-making process.[4]  

 

[1] (https://www.washingtonpost.com/opinions/2022/05/17/tim-scott-abortion-single-black-mothers-economic-problems/)

[2] (https://www.brookings.edu/research/what-can-economic-research-tell-us-about-the-effect-of-abortion-access-on-womens-lives/)

[3] (https://www.supremecourt.gov/ DocketPDF/19/19-1392/193084/20210920175559884_19-392bsacEconomists.pdf).

[4] Anyone wishing to pursue this topic further would be well served by first reading the Myers/Welch article in Brookings before reading the wealth of information and references contained in the economists' amicus brief.  

William L. Holahan is Emeritus Professor and former Chair of Economics at the University of Wisconsin-Milwaukee.

 

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A FIRST LOOK AT MARKETS AND POLICY

    A FIRST LOOK AT MARKETS AND POLICY[1]

         To foster the economic prosperity of a society of 330 million people, the US relies on both a market system and different levels of representative government.  Often public policy questions center on the proper role of government in complementing market activity, and when to let the market self-regulate.  Contemporary headliner examples include whether to control or end the use of fossil fuels; or to regulate health insurance markets or nationalize that service; or to subsidize higher education tuition versus enabling students to finance their education through long-term borrowing.   Questions of this type are inherently political questions, often accompanied by great polarization, angst, and concern over election outcomes.

        Advancement of public discourse about economics requires a common "language," i.e., an understanding of what people mean when they use key economic terms and concepts.  Of particular concern is the frequent use of the misunderstood term: "free markets," a term at odds with core economic analysis of markets.  

        The powerful forces of markets can be used to complement the regulation of utilities such as electricity, natural gas, and cable TV; to guide the construction and operation of infrastructure projects such as streets, roads, bridges, and airline flight paths; and to modulate climate change.  Examples such as these, and many more, show the importance of economic understanding in the development of public policy and in the evaluation of politicians at election time.

       Although every societal problem has a significant economic component, Democrats seem disinclined to use economics in their policy development and public discourse, preferring to frame issues with vague references to fairness and justice.  Meanwhile, self-branded conservatives invoke with gusto the verisimilitude of economics, confidently asserting that economic goals of growth and prosperity can be met within a robust market system that is free of government intervention.   In their telling, "free markets" are self-regulating,  serving the public better than if the government were to intervene.   

Model-Building in Economic Education

   In contrast to contemporary liberals and conservatives, economists are more cautiously analytical in determining whether and how markets can serve the public interest.   Economists introduce economics through the  "competitive market model," a composite of principles describing the conditions required for a market to help society improve its economic well-being despite Nature's scarce resources.

 Profit and Loss

   The process of competition coordinates myriad choices. When buyers can choose among a large number of sellers, those sellers are incentivized to provide goods and services of reliable quality, durability and price. Price is determined by the interplay between sellers’ supply and the buyers’ demand for goods and services.  Investors enter an industry when profits can be expected, and exit to avoid expected losses. Price is forced down by entry or up by exit, until a "Goldilocks" price level is reached at which shortages and surpluses are eliminated: at that price the amount buyers want to buy equals the amount sellers want to sell.  

 

The most surprising and counter-intuitive result from this model is that each of the competitors intends to improve their own profit but the process of competition transforms that intent into a greater quantity and lower price for the benefit of buyers.   This was first proposed by Adam Smith: self-interested profit-seekers  guided by the process of competition – – "as if by an invisible hand" -- to serve the public interest "even though that is no part of their intent."   Smith referred to this as a “system of natural liberty.” 

   This competitive market outcome requires key preconditions, including a large number of independent sellers as well as well-informed buyers.  Economists beginning with Smith have warned against over-reliance on the beneficent outcome of competitive markets without regard to these preconditions. He emphasized the incentive for individual sellers to attempt anti-competitive efforts:   "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices."  For example, if firms obstruct the process of competition by forming cartels -- i.e.,  agreements among competitors to reduce total output to force prices up --  consumers are denied the benefits of competition, such as reasonable prices for drugs or gasoline or meat.

Further Toward Realism: Competitive Markets Require Rules Set by Government

   Markets cannot function free of government. Instead, they require certain foundations provided by government, including rule of contract law, property rights law, ownership rights law, and other sectors of the law that form the “rules of the game.”  Because mutually beneficial exchange is central to the functioning of the competitive market, tradable ownership rights must be created and protected.  Although these legal systems are prerequisites for markets to function, they are a public responsibility; markets cannot provide them. 

Another implication of the model that becomes explicit in practice: for the competitive process to serve the public interest, exchanges must be mutually beneficial to all parties affected by the transaction.  Consequently, all costs must be borne by buyers or sellers or shared between them, not shed to "third parties" external to the market's buyer-seller transactions. An example of such external costs would be an agreement between buyers and sellers that imposes noise, or danger, or the sight of ghastly architecture onto people who are not parties to the arrangement.  

"Free Markets" versus Economics   

       The term "free market" is used very frequently in public discourse, particularly by people who brand themselves "conservative," and whose all-purpose policy prescription is tax cuts and deregulation.   When the word "free" is affixed to "market" it conveys a market that is free of government involvement in its operation.    

       Because the economics profession has devoted a great deal of attention to the benefits of competition, "free markets" are often conflated with "competitive markets."  This is a mistake; they are very different concepts.    Economists frame economic problems as seeking ways to improve economic well-being by overcoming some of Nature's constraints on resources -- land, labor, capital equipment, and time.   In that conception, economic freedom rises or falls depending upon whether the society's access to resources increases or decreases, whether that involves government or not.    

Fossil Fuel Freedom?

       The competitive market model not only lays out the preconditions for market efficiency, but it also pinpoints possible remedies when those preconditions are not met.   That is, if those missing pieces can be provided through regulation, then economic freedom rises even though the market is less free from government.  For instance, as the competitive model shows, the market will tend to ignore external costs of the use of fossil fuels (i.e., pollution, emission of heat-trapping gas), and consequently underprice and, thereby, encourage overuse of those fuels.    To correct for the too-low price of fossil fuels, economists recommend implementation of a carbon tax to force buyers and sellers to factor in the external costs to their decision-making. With that correction, economic efficiency rises because of, not in spite of, increased government involvement.  While the market will be less free, economic performance and economic freedom improve.   This example and many more show the inherent contradiction between free-market concepts and the peer-reviewed findings of the economics profession.  

William L. Holahan is Emeritus Professor and former Chair of Economics at the University of Wisconsin-Milwaukee.

[1] This is the first of several articles on markets and public policy, written with the conviction that misunderstanding of this concept, deepened by dis-information from economic opportunists, is central to the polarization facing the nation.  

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