Quote of the Week
“In order that people may be happy in their work, these three things are needed: They must be fit for it. They must not do too much of it. And they must have a sense of success in it.” – John Ruskin
This is Tuesday morning, and the markets are selling off bigtime. I am flabbergasted that Mr. Trump has threatened to raise tariffs on China again. I have multiple times in the last five months explained the folly of this strategy. I have tried to remain above the political fray, and I will continue to remain neutral on the political issues of the day. However, when it comes to economics, I can not keep quiet any longer.
This move by Mr. Trump, if it is enacted, will have huge negative ramifications to the U.S. for years to come. The cost of living will go up in the U.S. (think iPhones made in China) because we buy billions of dollars’ worth of products from China. It has been falsely stated by Mr. Trump that the Chinese government pays the tariffs. We as consumers pay the tariffs.
I listened to an interview on the radio this morning of a soybean farmer in Ohio. Since the Chinese put a retaliatory tariff on soybeans from the U.S., the price of soybeans has dropped from around $10.50 a bushel to $7.50 a bushel. The farmer stated that he would lose $40,000.00 dollars this year. The supply chains that have taken 30 years to establish are now broken.
Paul Krugman in today’s New York Times has written an opinion piece on this subject that I think states the serious issues of this policy:
Trade War, What is it Good For?
If you’re trying to understand why we may be on the brink of a full-scale trade war, with a huge expansion of U.S. tariffs on Chinese goods and, inevitably, Chinese retaliation, it may help to remember what happened a few weeks ago, while Notre Dame was burning.
As you may recall, Donald Trump decided to tell French firefighters how to do their job, tweeting that they should use “flying water tankers” to douse the flames. The French civil defense department responded with a tweet — in slightly fractured English — that didn’t mention Trump, but pointed out that water-bombing could cause the entire cathedral to collapse.
What does this have to do with trade? What the water-bombing incident shows us is that Trump has strong opinions on everything, even when he is completely ignorant of the subject. Fortunately, when it came to French firefighting, he couldn’t turn those opinions into action. Unfortunately, when it comes to trade policy, he can: U.S. trade law gives the president enormous discretionary authority to impose tariffs.
Trump’s tweets over the past few days may well be featured in future economics textbooks as perfect illustrations of how people misunderstand the basics of international trade and trade policy. In fact, I can pretty much guarantee it, since I’m the co-author of two textbooks.
First, Trump is still saying that because we run a $500 billion trade deficit with China — it’s actually $379 billion, but who’s counting? — that means we lose $500 billion. As some economists quickly pointed out, by this logic we all lose when we go shopping at our local supermarkets. After all, do the supermarkets buy anything from us in return? No!
Second, Trump keeps asserting that China is paying the tariffs he has already imposed. This could be true, if tariffs were driving Chinese prices down; in fact, the threat of more Chinese tariffs on U.S. agricultural exports is one reason grain prices have just plunged to a record low.
But enough time has passed for economists to look at the actual results of Trump’s trade policy so far, and the Chinese are not, in fact, paying the tariffs. As I wrote a couple of months ago, “to a first approximation, foreigners paid none of the bill, U.S. companies and consumers paid all of it.”
So if you’re trying to make sense of what’s happening on trade, you should start with the basic point that Trump has no idea what he’s doing, that there isn’t any coherent U.S. policy goal.
That still leaves the question of why what seemed to be a deal in the making may have fallen apart (or maybe not: this could all be theater.) Last week it looked as if China would mollify Trump by offering some “tweetable deliveries” — promises to buy U.S. products that would let him claim victory without leading to any substantive change in Chinese policy. Did the Chinese actually, as the administration claims, start to walk back some of their promises? Did a trade hard-liner get Trump’s ear? Did Trump hear that the likely deal would probably be panned by the news media? Nobody knows.
One thing is certain, however: If we do get into a full-scale trade war, for whatever reason, it will be very hard to end it, and the world economy will never be the same.
Krugman, Paul. “Trade War, What is it Good For?” New York Times, https://static.nytimes.com/
Accessed May 6, 2019
|Name||Wkly %Chg||YTD %Chg||12-mo %Chg|
|Dow Jones Industrials||-0.14||+13.62||+09.24|
|10-yr Treasury Yield||+0.03||– 0.15|
|*5-day performance ending Friday|
The Future of Social Security and Medicare: Here’s What Trustees Are Projecting
Most Americans will eventually receive Social Security and Medicare benefits. Each year, the Trustees of the Social Security and Medicare Trust Funds release lengthy reports to Congress that assess the health of these important programs. The newest reports, released on April 22, 2019, discuss the current financial condition and ongoing financial challenges that both programs face, and project a Social Security cost-of-living adjustment (COLA) for 2020.
What are the Social Security and Medicare Trust Funds?
Social Security: The Social Security program consists of two parts. Retired workers, their families, and survivors of workers receive monthly benefits under the Old-Age and Survivors Insurance (OASI) program; disabled workers and their families receive monthly benefits under the Disability Insurance (DI) program. The combined programs are referred to as OASDI. Each program has a financial account (a trust fund) that holds the Social Security payroll taxes that are collected to pay Social Security benefits. Other income (reimbursements from the General Fund of the U.S. Treasury and income tax revenue from benefit taxation) is also deposited in these accounts. Money that is not needed in the current year to pay benefits and administrative costs is invested (by law) in special Treasury bonds that are guaranteed by the U.S. government and earn interest. As a result, the Social Security Trust Funds have built up reserves that can be used to cover benefit obligations if payroll tax income is insufficient to pay full benefits.
Note that the Trustees provide certain projections based on the combined OASI and DI (OASDI) Trust Funds. However, these projections are theoretical, because the trusts are separate, and generally one program’s taxes and reserves cannot be used to fund the other program.
Medicare: There are two Medicare trust funds. The Hospital Insurance (HI) Trust Fund helps pay for hospital care (Medicare Part A costs). The Supplementary Medical Insurance (SMI) Trust Fund comprises two separate accounts, one covering Medicare Part B (which helps pay for physician and outpatient costs) and one covering Medicare Part D (which helps cover the prescription drug benefit).
Highlights of Social Security Trustees Report
- Social Security’s total cost is projected to exceed its total income (including interest) in 2020 and remain higher for the next 75 years. The U.S. Treasury will need to withdraw from trust fund reserves to help pay benefits. The Trustees project that the combined trust fund reserves (OASDI) will be depleted in 2035, one year later than projected in last year’s report, unless Congress acts.
- Once the combined trust fund reserves are depleted, payroll tax revenue alone should still be sufficient to pay about 80% of scheduled benefits for 2035, with the percentage falling gradually to 75% by 2093.
- The OASI Trust Fund, when considered separately, is projected to be depleted in 2034. Payroll tax revenue alone would then be sufficient to pay 77% of scheduled benefits. These figures are unchanged from last year’s report.
- The DI Trust Fund is expected to be depleted in 2052, 20 years later than projected in last year’s report. The significant depletion date change reflects the fact that both benefit applications and the total number of disabled workers currently receiving benefits have been declining over the past few years. Once the DI Trust Fund is depleted, payroll tax revenue alone would be sufficient to pay 91% of scheduled benefits.
- Based on the “intermediate” assumptions in this year’s report, the Social Security Administration is projecting that the cost-of-living adjustment (COLA), announced in the fall of 2019, will be 1.8%. This COLA would apply to benefits starting in January 2020.
Highlights of Medicare Trustees Report
- Annual costs for the Medicare program exceeded tax income each year from 2008 to 2015. There were fund surpluses in 2016 and 2017. In 2018, expenditures exceeded income, and this year’s report projects that costs will exceed income by increasing amounts (excluding interest income). The report notes that in 2007, assets represented 150% of expenditures, but by the beginning of 2019, the ratio of trust fund assets to expenditures had fallen to 66%.
- The HI Trust Fund is projected to be depleted in 2026, the same year as projected in last year’s report. Once the HI Trust Fund is depleted, tax and premium income would still cover 89% of estimated program costs, declining to 78% by 2043 and then gradually increasing to 83% by 2092. The Trustees note that long-range projections of Medicare costs are highly uncertain.
Why are Social Security and Medicare facing financial challenges?
Social Security and Medicare are funded primarily through the collection of payroll taxes. Because of demographic and economic factors, including higher retirement rates and lower birth rates, there will be fewer workers per beneficiary over the long term, worsening the strain on the trust funds.
What is being done to address these challenges?
Currently, not much, but both reports urge Congress to address the financial challenges facing these programs soon, so that solutions will be less drastic and may be implemented gradually, lessening the impact on the public. Combining some of these solutions may also lessen the impact of any one solution.
Some Social Security reform proposals on the table are:
- Raising the current Social Security payroll tax rate. According to this year’s report, an immediate and permanent payroll tax increase of 2.7 percentage points to 15.1% would be necessary to address the long-range revenue shortfall (3.65 percentage points to 16.05% if the increase started in 2035).
- Raising or eliminating the ceiling on wages currently subject to Social Security payroll taxes ($132,900 in 2019).
- Raising the full retirement age beyond the currently scheduled age of 67 (for anyone born in 1960 or later).
- Reducing future benefits. According to this year’s report, to address the long-term revenue shortfall, scheduled benefits would have to be immediately and permanently reduced by about 17% for all current and future beneficiaries, or by about 20% if reductions were applied only to those who initially become eligible for benefits in 2019 or later.
- Changing the benefit formula that is used to calculate benefits.
- Calculating the annual cost-of-living adjustment for benefits differently.
You can view a combined summary of the 2019 Social Security and Medicare Trustees Reports and a full copy of the Social Security report at ssa.gov. You can find the full Medicare report at cms.gov.
Copyright 2019 Broadridge Investor Communication Solutions, Inc
By the Numbers
LONG-TERM ISSUE –The estimated Social Security shortfall today (i.e., a present value number) between the future taxes anticipated being collected and the future benefits expected to be paid out over the next 75 years is $13.9 trillion. The entire $13.9 trillion deficit could be eliminated by an immediate 2.70 percentage point increase in the combined Social Security payroll tax rate (from 12.40% to 15.10%) or an immediate17% reduction in benefits that are paid out to current and future beneficiaries (source: Social Security Trustees). Michael A. Higley, BTN 05-06-2019
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