Economy Faces a Jolt as Benefit Checks Run Out

When there is a lack of aggregate demand due to high ‘savings desires’ as the unemployed take jobs when benefits expire, it just means someone else loses a job, and then some, as govt deficit spending falls as well, further reducing aggregate demand. It also serves to drive down wages, as per the latest jobs report.

Economy Faces a Jolt as Benefit Checks Run Out

By Motoko Rich

July 11 (NYT) — An extraordinary amount of personal income is coming directly from the government.

Close to $2 of every $10 that went into Americans’ wallets last year were payments like jobless benefits, food stamps, Social Security and disability, according to an analysis by Moody’s Analytics. In states hit hard by the downturn, like Arizona, Florida, Michigan and Ohio, residents derived even more of their income from the government.

By the end of this year, however, many of those dollars are going to disappear, with the expiration of extended benefits intended to help people cope with the lingering effects of the recession. Moody’s Analytics estimates $37 billion will be drained from the nation’s pocketbooks this year.

In terms of economic impact, that is slightly less than the spending cuts Congress enacted to keep the government financed through September, averting a shutdown.

Unless hiring picks up sharply to compensate, economists fear that the lost income will further crimp consumer spending and act as a drag on a recovery that is still quite fragile. Among the other supports that are slipping away are federal aid to the states, the Federal Reserve’s program to pump money into the economy and the payroll tax cut, scheduled to expire at the end of the year.

“If we don’t get more job growth and gains in wages and salaries, then consumers just aren’t going to have the firepower to spend, and the economy is going to weaken,” said Mark Zandi, chief economist of Moody’s Analytics, a macroeconomic consulting firm.

Job growth has remained elusive. There are 4.6 unemployed workers for every opening, according to the Labor Department, and Friday’s unemployment report showed that employers added an anemic 18,000 jobs in June.

In Arizona, where there are 10 job seekers for every opening, 45,000 people could lose benefits by the end of the year, according to estimates from the state Department of Economic Security. Yet employers in the state have added just 4,000 jobs over the last 12 months.

Some other states will also feel a disproportionate loss of income unless hiring revives. In Florida, where nearly 476,000 people are collecting unemployment benefits, employers have added only 11,200 jobs in the last year. In Michigan, employers have added about 40,000 jobs since May 2010, but about 267,000 people are claiming jobless benefits.

Throughout the recession and its aftermath, government benefits have helped keep money in people’s wallets and, in turn, circulating among businesses. Total government payments rose to $2.3 trillion in 2010, from $1.7 trillion in 2007, an increase of about 35 percent.

While some of that growth was in Social Security and disability benefits as the population aged, the majority resulted from payments to people continuing to suffer from the recession, said Mr. Zandi. Unemployment benefits, including emergency and extended benefits, are more than three times their prerecession level, he said. The nearly 20 percent of personal income now provided by the government is close to a record high.

Approved by Congress last December, the final extension of jobless benefits — for a maximum of 99 weeks for each unemployed person — is scheduled to conclude at the end of this year. A handful of states, like Wisconsin and Arizona, have already cut off weeks 80 through 99 for their residents. Meanwhile, more of the long-term unemployed are bumping up against the 99-week limit.

Consumers account for an estimated 60 to 70 percent of the country’s economic activity, but two years into the official recovery, businesses are still complaining that people simply are not spending enough.

“Regardless of why people have less money to spend, it affects all retailers in all industries,” said Michael Siemienas, spokesman for SuperValu, which operates grocery chains including Cub Foods, Shop ’n Save and Save-A-Lot. Mr. Siemienas said that the number of SuperValu’s customers using electronic benefit transfers to pay bills had grown over the last year.

Because benefit payments tend to be spent right away to cover basic needs like food and rent, they provide a direct boost to consumer spending. In a study for the Labor Department, Wayne Vroman, an economist at the Urban Institute, estimated that every $1 paid in jobless benefits generated as much as $2 in the economy.

For many of the nearly 7.5 million people collecting unemployment benefits, those payments are keeping them afloat. Laura Metz, 42, was laid off from a clerical job paying $15.30 an hour at a home health care provider near her home in Commerce, Mich., nearly 15 months ago. She has been collecting $362 a week in unemployment insurance and about $50 a month in food stamps.

That covers the basics. But Ms. Metz stopped making her mortgage payments last year on the modest home she shares with her 19-year-old son. A program that allowed her to make a lower monthly payment has expired, and she is waiting to see if the lender will modify her loan. She can no longer make her student loan payments for her bachelor’s degree or master’s in business administration, and she has downgraded her Internet and cable service and cut back on car trips and snacks.

Ms. Metz, who has been applying for administrative jobs, has been shocked at the dearth of opportunities. A decade ago, when she applied for clerical jobs, “as soon as I walked up, there was a sign saying ‘We’re hiring,’ but it’s not like that now,” she said. “It’s really, really difficult.”

Businesses that rely heavily on low-income shoppers worry that their customers will have little to spend. Najib Atisha, who co-owns two small grocery stores in Detroit, said people receiving government assistance made up about a third of his customers downtown and as much as 60 percent at his store on the west side of the city.

“Of course, we’re hoping that things will turn around, but it’s always easier to lose jobs than it is to gain jobs,” Mr. Atisha said. “I think it’s going to take twice as long to rebound as it took to get where we are now.”

Some business groups argue that extending unemployment benefits has had deleterious effects on employers and potential workers.

“It’s having a chilling effect on hiring,” said Wendy Block, director of health policy and human resources at the Michigan Chamber of Commerce. “At one point, our unemployment taxes were just a blip on the balance sheet, but when you’re talking over $500 a head, this is significant.” Last year, Michigan spent $6.2 billion on jobless benefits, according to the National Employment Law Center.

Some economic studies show that people who collect unemployment benefits are less likely to look for or accept work until their benefits are close to running out.

“Unemployment insurance extends the typical amount of time that people will spend off the job and not looking for work,” said Chris Edwards, an economist at the Cato Institute, a libertarian organization.

In Michigan, Ms. Metz said that if all else failed, she would have to move in with her parents, who live on a fixed income. But she is determined to find work before her benefits run out and plans to expand her search to include light industrial manufacturing. “It’s getting close to the end,” she said. “And I got to do what I got to do.”

Modern Monetary Theory: The Last Progressive Left Standing

Modern Monetary Theory: The Last Progressive Left Standing

By Warren Mosler

social security solvency

>   
>   (email exchange)
>   
>   Joe wrote:
>   
>   The argument Stephanie used in the youtube clip is summarized by her here.
>   
>   Here’s the quote:

“Funding Social Security is always and everywhere a political choice. The strongest evidence of this comes directly from the 2009 Annual Report of the Trustees. In that report, they predict gloom and doom for Social Security because “there is no provision in current law that would enable full payment of benefits, once the Trust Funds are exhausted”.

In contrast, the Supplementary Medical Insurance (SMI) Trust Funds are “both projected to remain adequately financed into the indefinite future because current law automatically provides financing each year to meet next year’s expected costs.”

It is that simple. The former is in ‘trouble’ because the government isn’t committed to making the payments, and the latter gets a clean bill of health because the government will always make the payments.”

>   
>   I think this really underlines how arbitrary the projections of financial doom from the
>   Peterson crowd, CBO, and other Government agencies are. Apart from the silly and
>   unreliable projections as far out as 25-65 years from now, the predictions of doom are
>   really based on provisions in law that Congress can change at any time. Which means that
>   just like the fake national debt crisis, the fake Social Security solvency crisis is
>   Congress’s fault.
>   
>   Washington politics at its finest.
>   

Town hall meetings suggestions

The National Commission on Fiscal Sustainability is holding town hall meetings June 26, with an eye towards ‘fixing’ Social Security.

Here’s a suggested question for anyone attending:

‘I agree with statements by both Bernanke and Greenspan as well as David Walker from the Peterson Foundation that as a matter of monetary operations there is no solvency issue- the US always has the ability to make all dollar payments on a timely basis, regardless of revenues or deficits. And therefore there is no solvency issue regarding meeting all social security payments and medicare payments. Do you not agree with our Fed Chairman and the Chairman of the Peterson Foundation?”

David Walker’s recording is here.

senator kohl on SS “solvency”

Press Release of AGING – NON Committee

KOHL: SOCIAL SECURITY SOLVENCY, TARGETED BENEFITS CAN BE IMPROVED WITH MODEST TWEAKS

Aging Committee Report Delivered to Members of the Fiscal Commission
Contact: Ashley Glacel (202) 224-5364
Tuesday, May 18, 2010
WASHINGTON, D.C. – Today U.S. Senator Herb Kohl (D-WI), Chairman of the Senate Special Committee on Aging, released an official Committee report on Social Security. The report outlines the challenges currently facing America’s retirement program and highlights options for addressing program solvency,

There is no solvency issue. The premise for the changes is a mistake.

benefit adequacy, and retirement income security for economically-vulnerable groups. Emphasizing that a majority of America’s seniors rely on Social Security as their primary source of income, the report calls on Congress to enact modest changes to Social Security in the near future to bring its long-term financing into balance and improve benefits for those who need them most.

“This report shows that, contrary to popular belief, the sky is absolutely not falling for Social Security. By implementing one or more of these modest changes, we can ensure solvency and even strengthen benefits for those who count on their monthly check the most,” said Chairman Kohl.

The sky is not falling even with the ‘modest changes’

Copies of the report were delivered to all eighteen members of President Obama’s National Commission on Fiscal Responsibility and Reform. Many of the Commission’s members have publicly mentioned their interest in addressing Social Security as part of their work to reduce the federal deficit.

Deficit reduction also stems from an incorrect premise

“Social Security has never been responsible for one penny of the federal deficit, and by law is barred from doing so. In fact, it has been in surplus every year since its inception. If the Commission chooses to take a look at the program, it is my hope that they find our Aging Committee report of use,” Kohl said.

Whether it is in surplus or deficit alters aggregate demand, not solvency. Solvency is not the issue.

The report points out that the nation’s demographics have changed significantly since the Social Security program began in 1935. Americans are living longer, women’s participation in the labor force has significantly increased, and with a rise in the divorce rate, household composition has changed. The labor force is also growing more slowly and with fewer companies offering pensions, the nature of work and compensation has altered in ways that affect workers’ ability to save for retirement. Therefore, in addition to improving solvency,

Solvency is not an issue

any future reforms to the program should take into account America’s evolving demographics in order to ensure that benefits are adequate and equitable for generations to come.

Those are the only relevant criteria.

The report includes an important disclaimer that the options laid out represent a range of commonly-considered proposals, and that none of them should be construed as having been endorsed by the Committee or its members. In the foreword, Chairman Kohl asserts: “Many members of the Committee, including myself, do not support and actively oppose many of the options. However, a full and informed debate begins with the collection of research and information, and it is our hope that this report will serve as a resource to Congress and policymakers as they discuss ways to ensure that Social Security will remain strong for another 75 years.”

Fighting back against the move to slash Social Security

Social Security is not being attacked on its merits.

Therefore the bleeding heart arguments will not prevail.

The protagonists believe the problem is that the federal government is on the road to financial ruin, and not merits of Social Security per se .

My conclusion is the only message that will work is that operationally social security is not broken as the protagonists believe.

Their central premise is simply wrong and they can be proven wrong on that central contention.

Government checks don’t bounce- all Federal spending is done by using their computer to mark up numbers in bank accounts (Bernanke quote)

The Federal government will always be able to make all its payments including Social Security payments (Greenspan quote)

Federal spending is in no case operationally dependent on revenues from taxing or borrowing and everyone in Fed operations knows it.

Spending begins to cause inflation only after all the unemployed have been hired and all the excess capacity is used up.

Government deficit spending = world dollar savings, to the penny and everyone in the CBO and OMB knows it.

If government spending isn’t enough to allow the economy to pay its taxes and meet its savings desires
the result is unemployment, excess capacity, and deflationary forces in general.
All as a point of logic.

The wholesale interest rates for the banking system, which also determines interest rates the Treasury pays, are set by the Federal Reserve Bank, not market forces.

The move to cut Social Security is an innocent fraud coming from a position of ignorance of monetary operations.

It is coming from those who mistakenly believe that the federal government has run out of money,
that federal spending is dependent on borrowing that our children will be left to repay,
and that any deficit spending always risks hyper inflation.

It is driven predominately by people who would support Social Security if they didn’t believe the federal government was on the road to financial ruin.

Social Security commentary published


[Skip to the end]

Social Security: Another Case of Innocent Fraud?

By Mathew Forstater and Warren Mosler

August 6th — In his recent book, The Economics of Innocent Fraud, John Kenneth Galbraith surveys a number of false beliefs that are being perpetuated among the American people about how our society operates: innocent (and sometimes not-so-innocent) frauds. There is perhaps no greater fraud being committed presently—and none in which the stakes are so high—as the fraud being perpetrated regarding government insolvency and Social Security. President Bush uses the word “bankruptcy” continuously. And the opposition agrees there is a solvency issue, questioning only what to do about it.
Fortunately, there is a powerful voice on our side that takes exception to the notion of government insolvency, and that is none other than the Chairman of the Federal Reserve. The following is from a transcript of a recent interview with Fed Chairman Alan Greenspan:

    RYAN… do you believe that personal retirement accounts can help us achieve solvency for the system and make those future retiree benefits more secure?

    GREENSPAN: Well, I wouldn’t say that the pay-as-you-go benefits are insecure, in the sense that there’s nothing to prevent the federal government from creating as much money as it wants and paying it to somebody. The question is, how do you set up a system which assures that the real assets are created
    which those benefits are employed to purchase. (emphasis added)

For a long time we have been saying there is no solvency issue (see C-FEPS Policy Note 99/02 and the other papers cited in the bibliography at the end of this report). Now with the support of the Fed Chairman, maybe we can gain some traction.

Let us briefly review, operationally, government spending and taxing. When government spends it credits member bank accounts. For example, imagine you turn on your computer, log in to your bank account, and see a balance of $1,000 while waiting for your $1,000 Social Security payment to hit. Suddenly the $1,000 changes to $2,000. What did the government do to make that payment? It did not hammer a gold coin into a wire connected to your account. It did not somehow take someone’s taxes and give them to you. All it did was change a number on a computer screen. This process is operationally independent of, and not operationally constrained by, tax collections or borrowing.

That is what Chairman Greenspan was telling us: constraints on government payment can only be self-imposed.

And what happens when government taxes? If your computer showed a $2,000 balance, and you sent a check for $1,000 to the government for your tax payment, your balance would soon change to $1,000. That is all—the government changed your number downward. It did not “get” anything from you. Nothing jumped out of the government computer into a box to be spent later. Yes, they “account” for it by putting information in an account they may call a “trust fund,” but this is “accounting”—after the fact record-keeping—and has no operational impact on government’s ability to later credit any account (i.e., spend!).

Ever wonder what happens if you pay your taxes in actual=2 0cash? The government shreds it. What if you lend to the government via buying its bonds with actual cash? Yes, the government shreds the cash. Obviously, the government doesn’t actually need your “funds” per se for further operational purpose.

Put another way, Congress ALWAYS can decide to make Social Security payments, previous taxing or spending not withstanding, and, operationally, the Fed can ALWAYS process whatever payments Congress makes. This process is not revenue constrained. Operationally, collecting taxes or borrowing has no operational connection to spending. Solvency is not an issue. Involuntary government bankruptcy has no application whatsoever! Yet “everyone” agrees—in all innocence—that there is a solvency problem, and that it is just a matter of when. Everyone, that is, except us and Chairman Greenspan, and hopefully now you, the reader, as well!

So if solvency is a non-issue, what are the issues? Inflation, for one. Perhaps future spending will drive up future prices. Fine! How much? What are the projections? No one has even attempted this exercise. Well, it is about time they did, so decisions can be made on the relevant facts.

The other issue is how much GDP we want seniors to consume. If we want them to consume more, we can award them larger checks, and vice versa. And we can do this in any year. Yes, it is that simple. It is purely a political question and not one of “finance.”

If we do want seniors to participate in the future profitability of corporate America, one option (currently not on the table) is to simply index their future Social Security checks to the stock market or any other indicator we select—such as worker productivity or inflation, whatever that might mean.

Remember, the government imposes a 30% corporate income tax, which is at least as good as owning 30% of all the equity, and has at least that same present value. If the government wants to take a larger or smaller bite from corporate profits, all it has to do is alter that tax—it has the direct pipe. After all, equity is nothing more than a share of corporate profits. Indexation would give the same results as private accounts, without all the transactional expense and disruption.

Now on to the alleged “deficit issue” of the private accounts plan. The answer first—it’s a non-issue. Note that the obligation to pay Social Security benefits is functionally very much the same as having a government bond outstanding—it is a government promise to make future payments. So when the plan is enacted the reduction of future government payments is substantially offset” by future government payments via the new bonds issued. And the funds to buy those new bonds come (indirectly) from the reductions in the Social Security tax payments—to the penny. The process is circular. Think of it this way. You get a $100 reduction of your Social Security tax payment. You buy $100 of equities. The person who sold the equities to you has your $100 and buys the new government bonds. The government has new bonds outstanding to him or her, but reduced Social Security obligations to you with a present value of about $100. Bottom line: not much has changed. One person has used his or her $100 Social Security tax savings to buy equities and has given up about $100 worth of future Social Security benefits (some might argue how much more or less than $100 is given up, but the point remains). The other person sold the equity and used that $100 to buy the new government bonds. Again, very little has changed at the macro level. Close analysis of the “pieces” reveals this program is nothing but a “wheel spin.”

Never has so much been said by so many about a non-issue. It is a clear case of “innocent fraud.” And what has been left out? Back to Chairman Greenspan’s interview—what are we doing about increasing future output? Certainly nothing in the proposed private account plan. So if we are going to take real action, that is the area of attack. Make s ure we do what we can to make the real investments necessary for tomorrow’s needs, and the first place to start for very long term real gains is education. Our kids will need the smarts when the time comes to deal with the problems at hand.

References

•Galbraith, John Kenneth, 2004, The Economics of Innocent Fraud: Truth for Our Time, Boston: Houghton Mifflin.

•Wray, L. Randall, 1999, “Subway Tokens and Social Security,” C-FEPS Policy Note 99/02, Kansas City, MO: Center for Full Employment and Price Stability, January, (http://www.cfeps.org/pubs/pn/pn9902.html).

•Wray, L. Randall, 2000, “Social Security: Long-Term Financing and Reform,” C-FEPS Working Paper No. 11, Kansas City, MO: Center for Full Employment and Price Stability, August, (http://www.cfeps.org/pubs/wp/wp11.html).

•Wray, L. Randall and Stephanie Bell, 2000, “Financial Aspects of the Social Security ‘Problem’,” C-FEPS Working Paper No. 5, Kansas City, MO: Center for Full Employment and Price Stability, January, (ht tp://www.cfeps.org/pubs/wp/wp5.html).


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