Jane the Actuary General Interest

The layman’s guide to the new pro-mask research study

Do we now have conclusive proof that masking works?  No.  Do we have data that strongly suggests this to be the case?  Yes.  Is it all wrapped up in questions of how to interpret such studies, and the inherent difficulty of studies that can only attempt to approximate an experiment rather than truly being one?  Also yes.

Here’s the background:  a group of researchers and aid workers from Poverty Action, funded by the charity Give Well, undertook a massive study in Bangladesh to test mask-wearing — but you can’t simply force one group of people to wear masks and prohibit another group, particularly at the village-by-village level, so what they undertook were a series of actions designed to promote mask-wearing.

To begin with, they designated certain villages “control” and others “treatment” in the same way as, with a test of a medication, a certain group would get the placebo and others, the real medicine.  The control villages received, nothing, but the “treatment” village, through a process of randomization, either were given cloth masks or surgical masks, for the duration of a 10-week period, and, with further randomization, were given further inducements to wear masks, such as encouragement from imams and other “village elders,” or texts from experts encouraging mask-wearing as an altruistic action or for one’s own benefit, or other such encouragements.  They then measured the degree to which these inducements resulted in more mask-wearing, by having observers count the number of people wearing masks in public places, and found that they were able to triple the rate at which people wore their masks in public.

Now, to be clear, the entire “package” was implemented for the main test group:  free mask distribution alongside encouragement to wear the masks and role-modeling by public officials and community leaders, which included a video with the head imam and a national cricket star shown when the masks were distributed, as well as promotion by local imams during Friday prayers using a scripted speech and further unspecified “mask promotion in public spaces.”  Some villages also received monetary or non-monetary incentives for village-wide compliance, a program of asking households to commit to mask-wearing with a pledge and a front-door sign, and a set of text messages; and villages were also randomly assigned to receive either cloth or surgical masks.  After 8 weeks, they stopped the “intervention” but kept tallying mask-wearing for a further two weeks.

The result was that mask-wearing in the treatment villages increased by 29 percentage points or, using a different method of analysis, 28.1 points, relative to a baseline of 13.3%.  Surprisingly, the additional boosting efforts had no effect: none of the by-village monetary incentive, text-encouragement, or public front-door sign program made a difference – in fact, these most likely reduced levels of mask-wearing.  The only factors that were associated with greater rates of mask-wearing were being given a surgical (rather than cloth) mask and being given a mask that was blue rather than green or purple rather than red.

(Yes, really – the effect on mask-wearing of having a purple cloth mask was quite substantial.  The mask colors were used to identify people who had received different sorts of “private” nagging in terms of the text messages, but the meaning of the color used was varied between village.  Green symbolizes Islam; was this color seen as sacrilegious?  Was there a different, negative connotation to red, or positive connotation to purple?  This unexpected difference is a bit disconcerting, because it suggests that the researchers did not have the understanding of local culture that they should have to conduct research, even if there’s nothing else fishy about it.)

But this was only the first step in their study.  Their larger objective was to measure the degree to which the free-mask/mask-encouragement-induced greater mask-wearing reduced covid cases – and, indeed, they find substantially lower rates for the treatment than the control groups, based on testing everyone who reports covid symptoms during the study period.  (Two complications here:  first, they only tested those who reported symptoms, and only about 40% of those reporting symptoms agreed to be tested.)

The results here are fairly dramatic, or are so at first glance, at least: relative to the control villages, those villages given surgical masks had an 11% reduction in (symptomatic) covid prevalence over the 10 week period.  For those above 60, those at highest risk, the results are even more dramatic, a decrease in infection of 35%.  Considering that, even with these interventions, fewer than 50% of people observed wore masks, this suggests that consistent mask-wearing by everyone would have an even greater effect.  And, in fact, the authors do the math of how much it cost them to provide the masks, the mask-promotion, and the mask-wearer counting, to conclude that it is entirely feasible, in terms of lives saved, to expand these efforts.

The study also looked at the impact of mask-wearing on physical distancing – not so much because it was their goal to push Bangladeshis into more distancing but because one theory was that mask-wearing would, due to risk-compensation, result in people distancing less.  Instead, within mosques, people distanced as much as before, but in other circumstances, distancing increased.

But the study left a number of questions unanswered – or, at least, I didn’t see the answers.

We know that treatment villages were given masks and non-treatment villages were not – but the latter villages were still surveyed by phone and asked about symptoms, then those reporting covid symptoms were asked to test, which about 40% consented to.  The study did not indicate what percent of villagers responded to the survey, or how they perceived the study, or whether they resented being called and asked questions when only the neighboring village, not they themselves, received masks.

The study also did not report on any issues of variation within the treatment villages, except to the extent that standard errors are reported for mask-wearing (and, honestly, I’m not good enough at the stats part to get a sense of interpretation here).  Was there an (inverse) correlation between village-wide mask-wearing and covid prevalence?  That would make the relationship between masks and covid-reduction clearer.  Is there a reason why this statistical calculation/test would be invalid?  The villages are all also presented as simply generic “one no different than the next” villages, and maybe that’s indeed true, or the randomization process makes differences irrelevant, but I would imagine that there are still real differences, whether they be a matter of some regions of the country being richer or poor than others, or having different age pyramids (different fertility rates, different rates of out-migration to the city).

Also, all observations were conducted outside except for mosques, because there simply weren’t non-mosque indoor spaces.  But it is generally not considered particularly risky to wear masks outdoors, and the paper doesn’t state whether villagers were told to wear masks any time they were outside their own homes, or what instructions in particular they were given regarding times and circumstances in which it was necessary to wear a mask, and when the risk was low enough not to.  Or is Bangladeshi public/outdoor life as crowded as indoor American life?

Another surprising element is the two pilot studies that informed their ultimate large-scale study.  In the first study, they had free masks and an educational campaign, and boosted mask-wearing rates by 10.9 percentage points.  In the second pilot, they added the presence of workers whose role was to “remind” villagers to wear their mask, and they boosted the rate to a level matched in the final study, 28.4 percentage points.  Honestly, I have trouble making sense of this – isn’t a village in Bangladesh exactly the sort of place where outsiders would be very visibly “outside” and not able to persuade much?  Or were “locals” hired in this role?  This seems to be another “cultural” issue.  As it happens, one of the criticisms of the study is that symptoms were self-reported rather than based on objective testing, so that if the villagers in test villages believed that there was a particular reason to minimize symptoms (to prove they were compliant, to avoid dishonoring the village, to show loyalty to village elders, etc.), this would cause problems with the study, and their surprising degree of responsiveness to individual “persuaders” suggests to me that this is possible.

Another issue is the differentiation between surgical and cloth masks.  The key data element is, again, that control villages had a prevalence of covid of 0.76% cloth mask villages had a prevalence of .74%, and surgical mask villages, .67%.  There was therefore no statistically-significant effect from cloth masks – which of course should raise concerns for places such as the US where “even a bandana will do” has been the operative approach.  But in any case, there was a higher rate of mask-wearing for surgical mask villages, even though the difference wasn’t statistically-significant.  It does nonetheless raise the question of whether the surgical mask was what made the difference, or the greater likelihood of mask-wearing in surgical-mask villages.

Another issue:  age group differences.  For surgical mask villages only, they split out covid rates by age.  For those younger than age 50, there was no difference in covid infections between this villages and the control villages.  For those 50 – 60 years old, there was a decrease of 23%.  For those over age 60, there was a decrease of 35%.  What would account for this difference?  The study does not identify different mask-wearing rates for different ages (presumably they did not attempt to guess the age of the mask-wearers or non-mask-wearers they saw), and, in theory, this shouldn’t matter, as the theory of mask-wearing is that it protects others, so that the entire community should see declines.  However, the study (to prove risk compensation was not happening) showed that there were greater degrees of physical distancing in treatment villages.  Did the project of mask-wearing result in overall greater degrees of caution, especially among older Bangladeshis?

This is a point of contention among critics, as well as the general element of the increased physical distancing.  If physical distancing could be the cause of reduced spread, or if other elements explain the reduction only among the old, then did the intervention “work”?  Or, rather, what does it mean to say the intervention “worked” if it was plausibly the knock-on effects of mask-wearing and what we want to demonstrate is that masking can substitute for undesirable alternate interventions like distancing or lockdowns?

Here are some other criticisms I’m seeing.

First, from an anonymous commenter on twitter:  the difference between cloth and surgical mask-wearing isn’t statistically significant when measured with something called an “intervention prevalence ratio,” which is more-or-less the difference in rates provided above.  On this basis, a confidence interval for either cloth or surgical mask shows that there is definitely a decrease in covid prevalence, but, because of the necessary differences in standard error for the smaller sample sizes for each group individually, the confidence intervals for cloth vs. surgical individually are wider, overlap, and are not even definitively proven to be effective, with only the surgical mask being significant at the 10% level.  Even with the large number of villages recruited into the study, the overall prevalence rates were low enough so as to not definitively establish the desired conclusions.  Given the uncertainties in the study in general, you’d really like to see some slam-dunk numbers here.

Second, a substack site “bad cattitude” levies a number of criticisms.  Some of them are, I think, too nit-picky, for example, leaning very heavily into complaints that the authors did not definitively establish that the villages were truly sufficiently identical to each other for the randomization to be effective.  In particular, they did not have a starting value for covid-prevalence, just the ending point.  It seems unlikely to me that there would have been such a difference as to have invalidated the study but he says “this is a tiny signal (7 in 10,000) [so] we need a very high precision in start state” and “even miniscule variance in prior exposure would swamp this.”  It would be helpful to have seen some math demonstrating the possible effect of different levels of variance that are within statistical possibility.

This author’s larger criticism is of the self-reported nature of symptoms that I observed earlier.  Now, we already know that there are two elements of Bangladeshi village culture that are “non-WEIRD” — the fact that mask color has a statistically-significant effect on whether villagers choose to wear them, and that mask-reminders have a dramatic impact on use.  (Just try to imagine that happening in small town USA!)  The substack author also points out that there was a very wide discrepancy between self-reports of mask-wearing (80%) in their own prior survey and actual use.  It seems to me likely that Westerners cannot necessarily predict how Bangladeshi villagers would respond to being given masks, then being called and asked to self-report whether they have any of a set of symptoms, but it also seems to me that there’s a good chance that their response would not be the same as Americans, in one direction or another.  That site also quotes twitter account @Emily_Burns_V, who says, “Is it possible that highly moralistic framing and monetary incentives given to village elders for compliance might dissuade a person from reporting symptoms representing individual and collective moral failure — one that could cost the village money?  Maybe?”  And, indeed, the study’s authors say that there was no effect of the text-nagging or the incentives, on mask-wearing, but do not report whether there are differences between these groups, and the symptom-reporting.

Finally, Bad Cattitude has an interpretation of the age-differences which seems more plausible than “masking had a greater effect on the old”:  “the odds on bet here is that old people were more inclined to please the researchers than young people and that they failed to report symptoms as a result.”

One last set of comments on the study, from researcher Lyman Stone, again via twitter.  He defends the study authors against the accusation that they failed to pre-test to establish a baseline, by saying that the study authors themselves acknowledged that this was still underway, and this was, after all, a working paper, not the final product, and reports that it is the norm to provide preliminary reports even when the data analysis is complete.

Stone also observes that the differences in results between cloth and surgical masks is an indicator that there was a sort of unplanned “blindness” to the study, in that both the cloth and surgical mask recipients were aware they were a part of a study, so if the effects we see are a result of their response to this, we’d see the same effects for both cloth and surgical — but we don’t.  (Of course, Stats with Cats observes that the difference between the two groups is not a slam dunk because of confidence intervals, and, as tempting as it may be to do otherwise, it is important to take the confidence intervals seriously.)  (For what it’s worth, Bad Cattitude rebuts the rebuttal in a follow-up piece.)

The bottom line:  when this study first came across my twitter feed, I enthusiastically retweeted it.  Now I’m disappointed — I would have really liked to have seen more answers, and be left with fewer questions that mean it becomes “one data point among many” rather than the slam-dunk evidence that some of its promoters think it is, especially since the whole debate has now resulted in mask-promoters asserting that mask-wearing is always and everywhere cost-free while ignoring that for some people it creates real health issues and for children, poses risks of developmental delay.

Finally, as a reminder for those who don’t know my background, very early in the pandemic I was not merely an enthusiastic mask-wearer, but a die-hard mask-maker, donating some 150 of them to healthcare workers and others, which means that anyone who judges these comments as those of a crazy anti-masker wholly misunderstands them.

coronavirus

Jane the Actuary General Interest

Revisiting the Minimum Wage and a questionable “seminal study”

Yes, readers, I have gone back to school and am studying economics.  And I’m killing two birds with one stone by writing my commentary on a class-assigned paper in blog format.

The paper in question is, in fact, the 1994 paper which shifted economists’ thinking on the minimum wage, because of its claim that minimum wage boosts had no ill effects on employment and were, basically, “free money.”

Here’s how Vox characterized it:

[F]or years many economists assumed, almost without questioning, that minimum wages destroyed jobs. They might be worthwhile, sure, but you have to weigh the harm they do to the demand for labor against their benefits for workers who remain employed.

In a paper first published by the National Bureau of Economic Research in 1993, Krueger and his co-author Card exploded that conventional wisdom. They sought to evaluate the effects of an increase in New Jersey’s minimum wage, from $4.25 to $5.05 an hour, that took effect on April 1, 1992. (At 2019 prices, that’s equivalent to a hike from $7.70 to $9.15.)

Card and Krueger surveyed more than 400 fast-food restaurants in New Jersey and eastern Pennsylvania to see if employment growth was slower in New Jersey following the minimum wage increase. They found no evidence that it was. “Despite the increase in wages, full-time-equivalent employment increased in New Jersey relative to Pennsylvania,” they concluded. That increase wasn’t statistically significant, but they certainly found no reason to think that the minimum wage was hurting job growth in New Jersey relative to Pennsylvania.

Card and Krueger’s was not the first paper to estimate the empirical effects of the minimum wage. But its compelling methodology, and the fact that it came from two highly respected professors at Princeton, forced orthodox economists to take the conclusion seriously.

And with that in mind, join me as I dig through the meat of the study:  “Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania.”  (This is not actually the “class assignment”; I will need to distill my thoughts even further into 250 – 300 words, which will be harder!)

The core concept of the study was this:  generally speaking, it’s hard to measure the effects of a change in the minimum wage, because there’s so much much else happening at the same time.  For example, the latest change in the US federal minimum wage occurred at the same time as the “Great Recession.”  But in 1992, New Jersey increased its minimum wage to a level above the federal minimum, $5.05 rather than $4.25, and next-door Pennsylvania did not.  The authors believe that looking at changes in employment patterns, wages, costs, etc., at fast-food chains in those two states provide a means of analyzing the impact of the minimum wage hike.

In order to do so, they (or rather their employees) conducted phone surveys of fast-food restaurants in those two states in late February/early March of 1992, just before the minimum wage hike was implemented, and in November-December 1992, after the April 1992 change had had some time for effects to be seen.  They had, all things considered, reasonable response rates to their surveys (72.5% in PA and 91% in NJ, with different numbers of attempts made in the two states) for the first wave, and bolstered their response rate for the second wave with in-person visits as needed.

Their core findings:

In the New Jersey restaurants, the number of employees per store actually increased during this time frame, even as they decreased in Pennsylvania due to the recession at the time.  At the same time, within New Jersey, among stores which had previously had a starting wage equal to the minimum wage, as well as those stores with a starting wage above the minimum but below the new minimum, the number of employees increased; but in those stores where wages were already above the minimum, employment decreased.

The authors then get mathier.  They perform two regressions, one to estimate the effect on employment of a store being in New Jersey, and another to estimate the effect of a store having previously paid less than the new minimum wage.  This is where my interpretation is a bit marginal, but here goes:

The change in the number of FTE employees per fast-food restaurant in NJ compared to the change in PA, was 2.51.  The regression model calculates, stripping out other impacts, that New Jersey-ness accounted for 2.3 new employees per store.  Having to raise wages (compared to NJ restaurants already paying the new minimum) produced a regression factor of 11.91 times the “wage gap” when controlled for differences in different regions within NJ as well as for differences among the different large chains surveyed; this is a high factor because it gets reduced by this gap-factor, which is .11.

They also perform additional statistical tests by fine-tuning their calculations, for example, excluding New Jersey shore area stores because of their tourist economy, adjusting the weightings of part-time employees in calculating full-time equivalents, etc.  These produce different employment impacts but still the same conclusion, that the minimum wage increase actually increased employment.

The authors also assess whether the minimum wage hike affected other aspects of the restaurants’ operations.  There was an increase in full-time workers in New Jersey, but no significant effect with respect to restaurants who had paid less vs. more in NJ.  There was no statistically-significant change in the restaurants’ opening hours, the free/reduced-price meal benefit, the amount of the first raise or the time until that first raise is given.

They did find that prices in New Jersey increased by 4%, a slightly greater increase than would be needed to make up for the higher wages (taking into account the wage increase and the proportion of the restaurant’s costs due to labor), but they discard this as a relevant consideration because prices increased at the same level regardless of whether an individual restaurant was impacted by the wage hike or not (based on whether their starting wage had been below the new minimum or not).

Finally, they assessed whether the wage increase prevented new stores from opening, looking at broader data, and found no statistically-significant evidence.

After presenting their statistical tests, they propose various explanations.  They consider alternate labor-market theories “monopsonistic and job-search models”), but discard them.  They theorize that employers obliged to pay higher wages may decrease their quality (longer lines, reduced cleanliness) or may shift pricing of some products relative to others, but ultimately conclude with the simple statement that “these findings are difficult to explain.”

So what’s to be made of this?

Their analysis is certainly more useful than one without any “control group” and it’s the new “one weird trick” of economists to find and exploit what they consider to be “natural experiments” (though I suppose “new” is all relative).  It also has, I think, particular merit in looking at employment at specific businesses, rather than at unemployment rates across a region, so as to drill down to the question of “how do employer manage an increased labor cost?”

But there are plenty of deficiencies:

One common gripe of Krueger’s critics (e.g., at the Foundation for Economic Education) is that the time frame of Krueger’s analysis is simply too narrow.  By late February, employers already knew they would need to offer a much higher minimum wage, and would likely have been taking that into account by avoiding hiring and reducing staff with attrition.  It could even be that the increase in employees was an indicator that they found, on average, that they had been too cautious in the period leading up to the hike.  It also seems likely that employers wouldn’t have been sitting on some innovation that would allow them to reduce staff which they would suddenly implement immediately upon increasing wages, but that labor-reduction initiatives would take time, so that the long-term effect of the wage hike would take some time to materialize.  (For example, the free refill was introduced by Taco Bell in 1988, but became commonplace in the 90s.  Was this merely a coincidence that this marketing tactic occurred roughly at the same time as a significant nationwide minimum wage increase, with a phase-in that was driven by the time and effort to remodel locations, or did stores find it more advantageous to reduce worker time in this fashion, when labor increased in cost?  Other changes, such as the self-service ordering kiosk, required advances in technology that will presumably be motivated by higher labor cost but not simply “waiting in the wings.”)

It also seems too simplistic to simply discard the increase in prices just because those prices increased at all New Jersey restaurants, including those which had already been paying higher wages. It would seem fairly reasonable that once the previously-lower-paying restaurants had increased their prices, the rest would follow, or that, if certain franchise owners had a mix of higher- and lower-wage restaurants, they might have raised prices in parallel.  Consequently, this consistent price-hike across stores is not the counter-evidence Krueger claims.

In fact, it would seem to merit a closer review, to identify the characteristics of those restaurants previously paying higher wages, especially because they did not boost their wages to remain a “higher wage employer.”  Were these particularly-profitable restaurants?  Restaurants which had difficulty recruiting employees due to locally-tight labor markets?  For instance, restaurants in wealthier suburbs tend to recruit workers from further away and offer higher wages to make the additional travel time worthwhile.  Would they, in the longer term, have difficulty finding workers without boosting that wage differential?

Lastly, they measure the impact of the wage increase on overall work hours by asking whether the opening hours have changed, whether the number of cash registers have changed, and whether the there is a change in the number of cash registers typically open at 11:00 AM.  But it seems likely that a key way that employers will seek to mitigate the effect of a wage hike is by lower staffing at slower times in the day, either by scheduling employers for fewer hours, or by being readier to send employees home.  And they ask whether employees work on a full- or part-time basis but do not actually ask in their survey what the total or average work hours is at each surveyed store.  Perhaps this is a piece of information that they considered too difficult for store managers to provide, so did not ask it so as to ensure they would receive a response to their request, but without knowing this, we simply cannot know whether the study’s data is what it claims to be.

Now, I’ve said that this is considered to be a key study that shifted the debate about the minimum wage, and, it turns out, it wasn’t without pushback.  Richard Berman of the Employment Policies Institute criticized the study in a 1996 report, “The Crippling Flaws in the New Jersey Fast Food Study,” and Krueger and Card responded with their own criticism of Berman’s criticism, as well as a further study by economists William Wascher & David Neumark (not available without paywall), in 2000.  Krueger finds fault with the attempts by Berman and by Wascher and Neumark to re-do the analysis using better or alternate data sources, but does not directly address Berman’s “crippling flaws” (or if they do so, it is so briefly addressed that I missed it).  What were these flaws?  First, that there were significant numbers of stores with clear data errors, such as shifts in the number of part-time and full-time employees as well as a failure to specify, in the price-increase portion, what defines a “regular hamburger” (is it a Big Mac? A Quarter Pounder?  A dollar-menu basic hamburger?).   EPI researchers went back to many of the surveyed restaurants and could not match the employment numbers, and Berman believes this is simply because of inconsistencies in definition of part vs. full-time and the basic fact that the manager or assistant manager answering the survey would have been juggling multiple duties and relying on memory for these numbers.  In any event, Krueger and Card dial back their claims, from 1994’s statement that “we find that the increase in the minimum wage increased employment” to a more cautious, “the increase in New Jersey’s minimum wage probably had no effect on total employment in New Jersey’s fast-food industry, and possibly had a small positive effect.”

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Jane the Actuary General Interest

Fact vs. Fiction on the Obama Center’s Economic Impact

I’ve long been a critic of the Obama Museum, which will not be a “presidential library” but literally just a museum as well as ancillary services and programming.  But with the construction now beginning, I finally got around to looking at Obama.org‘s projection of economic impact, and it’s worth evaluating.

Short-term jobs (construction)

The building is expected to employ 3,682 people, with a total of $214,635,630 in “labor income,” during the course of construction.  That’s an average of about $60,000 per job — because these are mix of various types of jobs, but all short-term.

Ongoing employment

Ongoing payroll for the Obama Center is forecast as $19 million in payroll.  However, Only 43% of the jobs are expected to be held by South Side Chicagoans, with only 16 people employed in “admissions,” for example, and 10 in “Museum Operations and Administration.”  Security guards and janitorial staff will be contracted out rather than directly employed.

Museum revenue

The consultants predict $3.1 million in revenue for the planned four-star restaurant and cafe, but recognize that only 25% of the revenue will be “new” (that is, that many of the diners would have otherwise eaten elsewhere).  They forecast $6 million in gift shop revenue.  They forecast $110K in “net new” private event spending, because 80% of private events held at the venue would have been held elsewhere in Cook County.

The forecast for museum attendance uses an upper bound based on a hypothetical maximum based on the number of opening hours, fire capacity, average visit length, etc., then multiplied by a factor of 30% to reflect utilization, and a “historical and cultural significance multiplier” of 1.15 (that is, the expectation that the Obama museum will be exceptionally popular) — which, honestly, seems fairly suspect.  The lower bound is calculated based on actual visitors to real-world presidential museums for recent presidents — but using some math which determines that, even though the highest visitor counts from any of these (excluding the first opening year) was 426,000 for the Reagan museum after it became the recipient of Air Force One, the Obama Museum would have 50% more visitors than even this high, because of the greater size of the Chicago metro area and the number of tourists.

Ticket prices are expected to be $18 per adult, $11 for children, $10 for out-of-state students, and free for in-state students.  Parking cost would be $22.  In addition, visitors are forecast to spend on average $5 in food purchases and $10 in the gift shop.

Tourist revenue

Outside the museum, they calculate that visitors will spend

$45 per person for lodging, for in-state out-of-town visitors, or $112 for out-of-state visitors.  Why out-of-state visitors would spend more on their hotels is not clear.

$19 per person in retail spending, for in-state out-of-town visitors, or $56 per person for out-of-state visitors.  This category is not at all clear to me.  Are they saying that people will travel to Chicago specifically for the Obama Museum and, once here, will take in a bit of Magnificent Mile shopping?

$32/$102 per person for spending on food.  Again, the only way this makes sense is if they assume the visit will be motivated by the Obama Museum, rather than it being an add-on to an existing visit.  Or do they “take credit” for longer visits on the assumption that the Obama Museum will be the tipping point in people deciding on Chicago in their vacation planning?

Non-tourist visitors

This was the part that was the biggest surprise:  we kept reading about how the Obama Center will contribute to the public good with conferences of various kinds.  But those aren’t free.  However, it is not clear to me to what extent the registration fees are meant to cover the cost of the event, whether it’s subsidized, whether some participants will have a reduced fee, etc.

Their largest event is planned to be an Annual Summit with 5,000 participants.  Each of them will pay on average $577 for the event (the unround number suggests some would be given reduced rates), for a total revenue of $2.9 million for an event expected to cost the Obama Museum $4.2 million.  Where the additional funds come from isn’t explained — is it from the endowment?

Air Force One non-sequitur

Finally, the document closes with a slide on the “possible impact of Air Force One exhibit” — but this is an appendix and we don’t know what the accompanying talking points were.  Is it meant to suggest that the attendance numbers used for calculating estimates, were overstated?  That they hope to get a similar “big draw” here?  Dunno.

What about the rest of the Center?

The Obama Center won’t just have a museum.

There will be a new public library branch there.  Honestly, it is not at all clear whether the money for this is coming from the Obama Foundation or whether the Public Library is simply using their own budget, and, in fact, whether the space will be provided or rented out.  Similarly, there will be a “program, athletic, and activity center” with “recreation, community programming, and events.”  Will these activities be provided free of charge, for a fee, or by means of the Chicago Park District using this as a site for its programming?

None of these other activities are reflected in the impact calculations; if the generosity of donors worldwide was expected to benefit Chicagoans through use of Obama Foundation funds on these activities, you’d expect to see them taking credit for this.  What’s to be made of its absence?

In any case, the fight against the Museum appears to be over.  What remains is a fight to ensure that public funds are not spent on its ongoing expenses.  But, unfortunately, Chicago being Chicago, and Illinois being Illinois, this is likely to be a losing battle.

Obama – public domain (wikimedia commons). https://commons.wikimedia.org/wiki/File:Barack_Obama_at_Las_Vegas_Presidential_Forum.jpg
Jane the Actuary General Interest

Illinois is Broken, Secretary of State Race edition

Non-Illinoisans, what does your Secretary of State do?

In some instances, state Secretaries of State made national news in the last election, due to the choices they made in modifying state election law or its implementation, due to COVID, and their validation of election results, most notably Georgia Secretary of State Brad Raffensperger, who even now shows up in news reports.

Which means that a non-Illinoisan might not think twice about this promise from Democratic candidate for the Illinois Secretary of State, Alexi Giannoulias (image posted at bottom in case of tweet deletion):

And his website contains similar promises:

He supports Defending Voter Rights:  “We must ensure access to registering to vote and individual rights at the ballot box are protected to prevent disenfranchisement.”

He advocates for Safeguarding Against Financial Fraud:  “With the economic downturn making our most vulnerable citizens susceptible to fraud, deception and unfair practices, we must protect financial well-being of Illinois residents against those who prey on them.”

He promises he will go about Strengthening Ethics Laws:  “With recent corruption scandals plaguing Illinois, we must toughen state ethics laws and reform the system to curb abuse.”

But in Illinois, the Secretary of State’s office is primarily Illinois’ equivalent to the Department of Motor Vehicles elsewhere, administering driving tests and issuing driving licenses and vehicle registrations, as well as secondary duties in administering the registration of corporations, lobbyists, and notaries, as well as overseeing the state archive and the state library.  Were he to be elected, he would have nothing to do with voting (except for the minor element of “motor voter” registration), financial fraud (that’s the Attorney General), or ethics (that’s an office in the executive branch with no particular head other than the governor).

Giannoulias also promises he will “protect our privacy of Illinois residents and safeguard their data, photos and personal information from those who seek to abuse it,” and, sure, to the extent that the Secretary of State’s office holds data on Illinois drivers, there’s a privacy element, but this is small potatoes.

And he promises he will go about “making our roads safer” which sounds fine as far as it goes but then continues that he will do this by “strengthening safety guidelines for motorists and protecting the environment,” which seem to have a lot more to do with legislation than the administrative job of the Secretary of State.

Finally, he claims he will go about Modernizing Services:  “COVID-19 has changed how all offices need to operate and deliver services – with the health and safety of the public a top priority – to improve the customer experience.”  But this is trite and meaningless, all the more so since on his homepage he praises the outgoing Secretary of State, Jesse White’s “outstanding service.”  And, to be honest, the Secretary of State took its time about implementing an appointment system for drivers’ license renewals, but now they have and it appears to work smoothly.  And other than this, the biggest “customer experience” problem were the delays caused by the extreme length of time the office was closed, both in spring of 2020 and again over Christmastime — delays which may have been fine for many of those whose expiration dates were simply extended but caused significant difficulties for those seeking licenses for the first time.  But his emphasis on “health and safety” suggests this is not a concern of his.

What it comes down to is this:

Alexi Giannoulias is not running for the office of Secretary of State.

What does he really want?

He is running to obtain the status of “next-in-line for governor.”

Here’s the Chicago Sun Times, from this past June:

Nevertheless, presiding over that state office is one of the most coveted prizes in Illinois politics.

“Next to being governor, that’s the biggest political office statewide,” said former Republican Gov. Jim Edgar. . . .

Political insiders say former state Treasurer Alexi Giannoulias is leading the pack, racking up crucial endorsements and building the most fully stocked political war chest. He is closely followed by Chicago City Clerk Anna Valencia, who has won her own share of endorsements, but in the money contest has so far been outraised by Giannoulias more than five-to-one. . . .

One of the allures of the office is its potential to serve as a political stepping stone.

Edgar, a former Illinois secretary of state who parlayed his tenure into a successful gubernatorial bid, said the current crop of candidates may be looking to do the same, since the office offers plenty of the tools to do so, from jobs to fill to publicity to take advantage of.

“You also have respect throughout the state. Your name — next to the governor’s — is the most visible name in state government, because you’re on everybody’s driver’s license,” Edgar said. “There’s a lot of political advantages.”

Now, to be sure, Giannoulias isn’t the only one doing this.  Valencia’s website likewise claims new responsibilities for the Secretary of State, usurping the powers of the Illinois State Board of Elections, by calling for an “Illinois Voting Access Commission,” which would “bring together diverse stakeholders from across the State to identify ways to expand and protect voter registration, voting and vote counting. Our stakeholders will include the Illinois State Board of Elections, members of the Illinois General Assembly, County Clerks, community and business leaders, universities and foundations.”  This commission would evaluate expanding Vote By Mail, Automatic Voter Registration, transportation to the polls, election judge recruitment, and would update voting technology — again, nothing that has anything to do with the roles of the Secretary of State.  She would also create an “Illinois Civics Corps” — which would “give Illinois college students a stipend to register and educate their communities on how to become civically engaged.”

Again, none of this has anything to do with the responsibilities of the Illinois Secretary of State.  (And, for that matter, none of the changes in election law in other states has anything to do with Illinois’ own election laws, and in fact, Illinois has been busy legislating expanded ease of voting, including expansion of vote by mail, expanded voting hours, and more.)  Valencia is similarly trying to benefit from voters’ lack of knowledge, and their gullibility in believing that voting access is at risk and their association of state Secretaries of State with voting administration.

Now, in fairness, the three remaining candidates, Mike Hastings, David Moore, and Pat Dowell, make no such promises, touting instead their records of public service and business/oversight experience.  But they are, as the Sun Times article states, the also-rans.  And one of Giannoulias or Valencia will undoubtedly win, with Gianoulias’s ability to plaster the airwaves a definite advantage.  Whether the winner then remembers that their job is limited to properly administering the Secretary of State’s office, or uses their platform to grandstand, or even abandons the public service daily grind in ways that cause hardship to Illinoisans just trying to go about their daily life, remains to be seen, but in any case this election will serve as a reminder that Illinois is fundamentally broken.

 

Illinois state capitol; public domain
Jane the Actuary General Interest

Should, would, could the Bears move? The view from Arlington Heights

When we first moved to Arlington Heights, 23 1/2 years ago, we lived a mere three blocks away from Arlington Park, the race track.  In fact, the neighborhood itself was called Arlington Park, and was platted at the same time as the racetrack, which is just a few years shy of its 100th birthday.  (No houses were actually built until after the war, as only speculators bought lots, but that’s your obscure trivia for the day.)  Shortly after we moved in, the racetrack shut down for two years — Wikipedia states, unfootnoted, this was “due to contract disputes,” but the disputes were not with some sort of union but with the state, as management had said they simply couldn’t run the track at a profit, and the state eventually promised that some cash from casino profits would go to enhanced purses — or maybe that happened later; I’m not sure.  In any case, there were a few concerts held there in the meantime, and there was talk of auto racing or other uses for the property before racing restarted.

Now Churchill Downs, the owner, has announced they are selling the track.  There were suggestions initially that this was just a bargaining position, an attempt to get the state to reduce its taxes, and there were likewise hopes that other investors could purchase the track and keep the tradition of racing alive.  Perhaps it is still possible to make a profit, in terms of operating costs, at the racetrack, but, presumably, such a group of investors wouldn’t be able to top bids of those hoping to put the 350 acre property to more lucrative uses.  Is this a matter of the state unjustly making racetracks unprofitable by expanding casino gambling excessively?  Is this, rather, a matter of the state simply relenting on its prior restrictions on gambling?  Or were the state’s taxes on the racetrack indeed unreasonably high and the difference between profitability and loss, in an era when the number of people who visit the racetrack and the sums of money they spend out of enjoyment of that form of entertainment isn’t supplemented by people who simply want to gamble in any fashion available?  I don’t really know, but in any case, there was no discussion of whether regulations needed re-writing, and we seem to be past that point.

Which brings us to the Bears, who have put out a statement that they have made a bid on the racetrack.  Tom Hayes, the mayor of Arlington Heights, thinks it’s dandy.  Mayor Lightfoot, not so much.  Even a year ago, a columnist at Sports Illustrated addressed the question, concluding that the owners, the McCaskeys, didn’t have the deep pockets necessary to fund a new stadium so would stay with the low-cost deal with Chicago, and the consensus, at least of many people who claim to know what they’re talking about, is that the Bears are just using this threat to push the city for more enhancements to the stadium.

But let’s consider the question: what if they are serious?

On the local Facebook pages, some of my fellow Arlington Heights-ians are getting excited about the prospect. They imagine it would be an engine of prosperity, and bring us a magnificent new entertainment showpiece — but really?  8 games a year and a few concerts are not going to provide enough predictable revenue for restaurants, hotels, etc.  It doesn’t make sense.  To be sure, my fellow Arlington Heights-ians have plenty of other fantasies as well, dreaming of a nature preserve or a botanic garden or a museum, or other uses that require that some billionaire be interested in buying the property just to fritter away money rather than to make a profit off of the investment, but none of this is realistic.

At the same time, well, Soldier Field, or at least its shell, has a 100 year old-ish history, but the Bears have only played there since 1971.  This is not some unbreakable bond.  Is an infrequently-used stadium surrounded by a sea of parking lots really the best use for Chicago’s lakefront?  If it isn’t, Arlington Park is probably as practical a place to locate a new stadium as any, with its proximity to Route 53 and the Metra station — so, given the principle that a city has no business getting in the way of a business transaction if it doesn’t do harm to the community, I don’t see what grounds Mayor Hayes and the city would have for blocking the transaction.

But on the third hand — again bearing in mind that the rebuild from 2002 was $600 million funded by the city, rationalized as money to be paid back by out-of-towners through hotel taxes and the like — I am tremendously leery that the mayor and the trustees will be able to resist the lure of fame, the promise of something that puts Arlington Heights on the map, some consultants’ calculation of enormous sums of money to come in the future, and rationalize tax breaks, bonds the city would be on the hook for, tax hikes crafted in a way that’s meant to hit only out-of-towners (but it never really does), and so on. After all, consider what happened to Bridgeview, which thought it would create a moneymaker by building a stadium for the Chicago Fire soccer team at a cost of $100 million; instead, residents’ tax bills had tripled, as of 2012 reporting, with the expectation that the costs would grow even more.

And it’s easy to say, “oh, Arlington Heights would never be so foolish,” and, indeed, Bridgeview’s decision was as much about corruption as foolishness; as the Trib reported, “Once Bridgeview started borrowing the cash, millions flowed to those who contribute to political funds controlled by town leaders.”  Surely Arlington Heights isn’t corrupt!

But are we really so protected from this sort of bad decision-making?  If the Bears are serious, and if they have made an offer to Churchill Downs that beats their alternatives, and if the Bears condition that offer on tax breaks designed in such a way to allow promoters to claim they “pay for themselves,” then Hayes and the trustees may find it hard to resist the temptation of that national name recognition, especially in their pursuit of something “special” rather than a generic mixed-use development or, heaven forfend, a commercial or (light) industrial use instead.

Which means I’d just as soon not take that chance.

https://commons.wikimedia.org/wiki/File:Chicago_Bears.jpg; Mike Morbeck, CC BY-SA 2.0 <https://creativecommons.org/licenses/by-sa/2.0>, via Wikimedia Commons

 

Jane the Actuary General Interest

The crucial reason why Pritzker should say “no” to an elected school board in Chicago

An elected school board, it would appear, is headed for Chicago.  As Capitol Fax reports, the Illinois House voted for the bill on Wednesday and passed it to Pritzker to sign.  This bill would create a 20 seat bill, initially split between mayoral appointees and elected members, with a phase-in to a fully-elected board and a board president elected by the entire city.

Boards members would be elected from individual districts rather than at-large, which the bill’s supporters claim would help ensure that the candidates are people involved in the community rather than outsiders or special-interest-supported people (and in particular counter claims that the school board will be union-dominated in this way), but each board member would represent about 135,000 people, which is a number that’s far higher than that threshold (whatever it is) at which people are elected by being known in their community vs. being elected by gathering the funds for mailers.  For reference, each state House representative represents about 110,000 people, and no one imagines they are elected by “communities” who choose that one person who most closely represents their concerns due to intimate knowledge of them.  The reality is that when the Democrats were building their maps, they openly stated that their view of the election was “party first” — here’s Stephanie Kifowit of Oswego, per Capitol Fax:  “The party is what connects with voters, represents the voters and therefore gets elected by the voters. That is the true essence of being an elected official.”  And here, too, the General Assembly would draw those maps, presumably based similarly on, perhaps not partisan geographies, but concentrations of various ethnic minority groups.  How precisely this all plays out — whether there are factions, parties, and slates even in a nominally non-partisan election, and how much power the board president has and which faction has the power to win that election, is yet to be seen, but in any case, the notion of a community sending as its representative a dedicated parent known and cherished by all, is a bit of a fantasy.

But nonetheless, supporters say that it’s a matter of having “an elected representative school board that is accountable to us,” according to Rep. Delia Ramirez of Chicago and a move towards “providing democracy and voice to students and their families,” according to the CTU’s statement.

Is it really?

Does the current school board structure lack democracy?

Not at all.

You’d think the Chicago Public Schools are run by outsiders, or by some sort of dictator, or maybe a billionaire or two has seized control.  But in fact, it is the elected mayor of the city of Chicago who, at present, controls the schools, who has ultimate authority over key decisions such as union contract negotiations and the recent union negotiations over school reopening processes.  And, frankly, that’s as it should be.

Schools, after all, do not exist in a vacuum.  While they set their property tax revenues independently (more or less), the level of property tax levied is part of a larger picture, and schools cannot simply boost their revenues endlessly and expect the city to moderate its taxes to keep the overall tax burden in check.  And at the same time, especially in a city like Chicago, schools and other governmental bodies work together to provide services: should schools be a source of healthcare for students?  What about mental health treatment or referrals?  Referral for other sorts of social services?  Finally, there are aspects of CPS expenses which are funded by the city.  (Don’t ask me for the details.)  Especially when enhanced social services has been such a key part of Lightfoot’s promises to the community, it makes far more sense for these sorts of decisions are made by a single governmental body, rather than setting up clashes between the mayor and the board president.

So, yes, suburbs have elected school boards.  But that’s more of a historical anomaly, due to the fact that school district borders do not generally pair with city borders, and that even unincorporated areas have school districts.  And (yes, speaking from experience) an elected school board does not ensure community representation; all too often, it is the unions which, through their activism and their money, ensure their candidates win their seats.  This is not a model to follow for a city where it is an uphill battle to ensure that poor students have a level of education that enables them to improve their lot in life.

school bus
school bus, public domain, https://www.maxpixel.net/Bus-Vehicle-Education-Transport-School-Bus-School-4406479
Jane the Actuary General Interest

Forbes post, “What Are The Long-Term Consequences Of Our Aging Population? It’s All Guesswork”

Originally published at Forbes.com on May 26, 2021.

 

Last Friday, the New York Times made a splash with its report, “Long Slide Looms for World Population, With Sweeping Ramifications,” laying out the consequences of persistently-low fertility rates all across the globe.

“The strain of longer lives and low fertility, leading to fewer workers and more retirees, threatens to upend how societies are organized — around the notion that a surplus of young people will drive economies and help pay for the old. It may also require a reconceptualization of family and nation. Imagine entire regions where everyone is 70 or older. Imagine governments laying out huge bonuses for immigrants and mothers with lots of children. Imagine a gig economy filled with grandparents and Super Bowl ads promoting procreation.”

This is not just a matter of those countries with historically low birth rates, like Japan or Italy: “Even in countries long associated with rapid growth, such as India and Mexico, birthrates are falling toward, or are already below, the replacement rate of 2.1 children per family.”

And the consequences are not merely a matter of closed maternity wards, kindergartens and schools converted to nursing homes, or universities competing for students instead of vice-versa. Instead, scholars and researchers are asking questions such as these:

  • How will the need to provide financial support as well as medical and personal care to an increasing proportion of the population affect a country’s economy?
  • How will these shifting needs, and the shrinking proportion of the population in the labor force, affect the country’s ability to function, purely from a labor market perspective?
  • What less quantifiable impacts will a greying population have on a country’s vitality and prosperity?

Some of this is a simple matter of math. The World Bank provides old-age dependency ratio projections through the year 2050, based on consensus assumptions regarding future fertility and mortality rates. In 2010, the ratio for the US stood at about 20 oldsters (age 65 and above) per 100 working-age people (ages 15 to 64); in fact, this ratio had been more or less level throughout the 90s and aughts as well, but then it began to climb. In 2020, the ratio stood at 26. In 2038, it’s forecast to hit 35, at which point it more-or-less levels off again.

(To be sure, the standard population forecasts at the United Nations from which this data appears to be derived, are based on assumptions around fertility rates which may not, or may no longer, be reasonable, in particular for the United States, where the calculations, as of 2019, are based on a fertility rate of 1.78 children per women, projected to increase gradually, to 1.80 in 2030 and 1.82 beginning in 2065. The most recent actual data is a fertility rate of 1.64 for the year 2020 (that is, with only a small impact of Covid 19 and generally reflecting longer-term declines); while these low rates have been explained as only temporary and artificial due to a calculation method that uses old and no-longer-valid expectations of childbearing ages, recent calculations at Brookings project a longer-term TFR only recovering up to 1.77 children per woman, using “moderate” assumptions, but potentially declining to as low as 1.44 if using more conservative assumptions. For comparison, the UN forecasts that fertility rates for Germany will recover from 1.61 now to 1.71 in 2050, for Italy from 1.30 to 1.51, for Japan from 1.37 to 1.57, and for Korea from 1.08 to 1.44.)

Worry 1: finances

This math is daunting, to be sure. But in the year 2020, the old-age dependency ratio for Germany already stood at 33, almost as great as our projected “doom” scenario. And in Japan, that ratio already stood at 48. Both of these countries remain economic powerhouses, with reports on worries about the impact of needing to provide for the elderly in those countries always framed as a concern for the future. The balance of workers to the elderly in Germany has not affected the country’s debt-to-GDP ratio, which stands at 57%, And while Japan has a ratio of 238%, this has been a matter of deliberate fiscal policy rather than a crushing burden of caring for the elderly.

To what extent is Japan, right now, experiencing the ill effects of a population imbalance, in terms of its finances and its government’s ability to meet the needs of its people without destructively-high levels of government spending? Readers, each time I’ve tried to find the answer to this question, I’ve come up empty.

Worry 2: labor shortages

Germany, in 2015, publicly welcomed a mass migration of asylum-claimants with hopes that they would fill in forecast holes in the labor force, though optimistic reports at the time of highly-educated Syrians faded and Germany struggled to integrate its new residents with a forecast that even after five years in the country, migrants still had only a 1 in 2 chance of being employed.

Japan has had similar ongoing worries of labor shortages, with government attempts to find solutions in immigration, an increase in women’s labor force participation, and a change in its work culture. But, more crucially, Japan is playing a leading role in increasing automation/robotics to solve this problem, for example in the construction industry, as well as in eldercare.

And, indeed, however much immigration advocates use forecasts of future labor shortages as grounds for increasing legal immigration normalizing illegal immigration (e.g., Vox, in 2019: “The US economy needs more low-skilled immigrants”), at the same time, there is no shortage of predictions of worker displacement due to automation, such as this 2019 Brookings forecast that a quarter of U.S. workers could be displaced by automation. Some even believe that worker displacement will be so dramatic that it will warrant a Universal Basic Income to accommodate a significant portion of the population exiting the labor force without suffering in poverty.

What future we’re actually headed towards is unknown, but adds up to, at least, less cause to worry about shifts in the proportion of workers.

Worry 3: less-quantifiable changes in vitality and prosperity

What happens when a country shifts from young to old, and when its population declines in absolute terms?

This question is the hardest to answer.

One set of concerns is with absolute population decline. A columnist at The Japan Times, Hisakazu Kato, posed some hypotheses:

“First, the larger the population, the higher the chance that great innovators will emerge. This is called the ‘genius hypothesis,’ and since the innovation is the source of technological progress, a simple inference shows that economic growth will stagnate as the population declines.

“Second, a larger population increases the opportunity for intellectual interchange with diverse human resources, which in turn promotes technological progress . . . .

[Because of t]he aging of the population . . . society gradually loses the creativity and aggressiveness associated with younger people.”

But how can you quantify the number of people, or of young people specifically, needed to maximize innovation and creativity? Certainly at some point there are diminishing returns here.

The other half of that question, issues around the effect of a age shift in the population on the culture itself, is just as difficult to address, in part because those cultures which have had low birthrates for long enough to be far along this path are distinctive in other ways. Is it possible to identify elements of Japan’s cultural distinctiveness which are a result of its aging society, rather than being the cause of the low birth rate, or unrelated to it?

One piece to the puzzle is what’s called the “low-fertility trap hypothesis,” an idea put forth that suggests that countries which reach a particularly low level of fertility will be unable to return to “replacement fertility.” The key paper here, from 2007, asks the same question I’ve been asking: how can researchers justify assuming that every country will regain a higher fertility rate? The authors propose several reasons why fertility rates will continue to decline once a decline has begun. In the first place, generally speaking, people tend to have fewer children than they consider “ideal” but that ideal family size is driven by what they see around them, so that as each generation shrinks their expectations and their actual family size will continue to shrink. In addition, each generation boosts its material asperations, seeing a prior generation’s luxuries now as necessities and perceiving themselves as less well off and more reluctant to have children. What’s more, as fertility rates decline, generational inequity (e.g., government spending shifting to the elderly) increases and reduces fertility rates further.

To be clear, this is a hypothesis, and has neither been proven nor refuted. The cases of countries with “recovered fertility” are few and the “recovery” may be only temporary (e.g., Sweden) or due to migration from high-fertility countries (Germany).

But beyond that, think for a moment about what values a society holds and how it lives out those values. Countries like China and Japan were historically based on a Confucian values system emphasizing respect for elders; how this may change (or has already changed) when to be old is not rare or unusual, is unknown.

In the United States, even without the social welfare policies of European “social democracies,” we have a self-image as “child-friendly.” If it remains the case that most American adults are parents, though of fewer children each, this may still be a part of our identity. On the other hand, if the age at which Americans have children continues to climb, and the share of Americans who do not have any children at all does likewise, then fewer of us, generally speaking, will identify as “parents,” with all the consequences that entails.

 

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.

Jane the Actuary General Interest, Retirement

Forbes post, “Why Biden’s American Family Plan’s Family Leave – Reportedly – Gets Social Insurance Completely Wrong”

Originally published at Forbes.com on April 22,2021.  The legislation has failed in the meantime, but the issue of Family Leave has not gone away.

Earlier this week, the Washington Post reported on some initial details on the American Families Plan, the third of the Biden administration’s massive spending bills, expected to be unveiled next week, and following on the American Rescue Plan already passed and the American Jobs Plan of infrastructure and social spending. The proposal is expected to include

  • $225 billion for child-care funding;
  • $225 billion for paid family and medical leave;
  • $200 billion for universal prekindergarten;
  • Hundreds of billions in education funding, including his “free community college” campaign promise; and
  • An extension of the expanded child tax credit/child allowance through 2025.

The plan is intended to be funded by tax increases on “wealthy Americans and investors, in addition to beefing up enforcement at the Internal Revenue Service.”

The Post did not provide details on the time frame over which these costs would be incurred or funded. (Recall that the “jobs plan” spends over 8 years and funds over 15.) But one might assume that his proposal for family and medical leave would be based on his campaign promise, that is,

“Biden will create a national paid family and medical leave program to give all workers up to 12 weeks of paid leave, based on the FAMILY Act. Workers can use this leave to care for newborns or newly adopted or fostered children, for their own or family member’s serious health conditions, or for chosen family; or to care for injured military service members or deal with “qualifying exigencies arising from the deployment” of a family member. During their time away from the job, workers will receive at least two-thirds of their paycheck up to $4,000 so they can better afford to take leave — with low- and middle-wage workers receiving larger shares of their paycheck.”

Now, the FAMILY Act is an existing legislative proposal which would provide 12 weeks of leave at 66% of pay, paid for by 0.2% of pay (employer/employee) contributions. And as it turns out, this proposal has been around since at least 2013, when on another platform I critiqued the bill not just for its egregious acronym (the bill title is the Family and Medical Insurance Leave Act, which ought to be the FAMIL Act, and even then “insurance leave” rather than “leave insurance” doesn’t even make sense, but it’s rearranged to get the acronym) but for the fact that the contribution level appear to have been chosen as a politically palatable tax rate rather than based on any actuarial analysis of the cost of running such a program. In fact, in January 2020, the Social Security Chief Actuary provided an analysis of the bill’s cost, and found that rather than the proposed payroll tax rate of 0.4% would be insufficient and instead 0.62% would be required to fund benefits — and that under a surprisingly low set of assumptions around use of the benefits, that only 35% of new parents would take advantage of the program, that 4% of workers would have medical conditions of their own and 0.4% of workers would need to care for a family member, and that, on average, they would receive benefits for only two rather than three months. Yet nowhere in the legislation is there any means of adjusting the payroll tax to meet actual financing needs, nor adjusting benefits to meet the revenue available.

Financing issues aside, however, this approach is a reasonable form of social insurance provision. Quite simply, this is how social insurance works. We, collectively, want a means of collectively providing funds to people as circumstances require — retirement, disability, unemployment, family leave needs — and the mechanisms of social insurance deliver: universal payroll taxes with rates set as needed to fund these payments.

Consider a few international examples, based on the data available at the International Social Security Association website (and highly simplified):

France provides sickness benefits and maternity/paternity/adoption leave, for up to 10 weeks after birth, funded with a 13.3% payroll tax, plus family allowances funded with a 3.45% payroll tax, which include both cash benefits, childcare subsidies, and benefits for reduced work hours, paid for 2 years, more or less.

Netherlands provides a maternity leave benefit for up to 16 weeks, funded through its unemployment insurance program (2.85% payroll tax).

Sweden’s benefits have a parental benefit-specific payroll tax of 2.6% of pay as well as a 4.35% payroll tax for sick leave.

Germany provides maternity and sick leave with a payroll tax that’s combined with the costs for medical benefits, at 7.3% for each of employees and employers, for up to 8 weeks. Additional benefits, including a child benefit and a one-year 67% parental leave benefit, are funded out of general revenues.

And — as a reminder — when other “western” countries do fund their benefits from general revenues, this means they fund them from income taxes in which there is no special effort to “soak the rich” but instead their top tax bracket applies, generally speaking, to everyone middle-class (or upper-middle-class) and above.

This means that Biden’s proposal to fund family leave through a tax hike on the wealthy is not just ill-conceived but far from the international norm. And it won’t get us where its supporters want us to be. If we define social insurance not as something we all pay for and benefit from, but as government benefits “paid for by other people,” it will create a dead-end that will impact the prospects for social insurance, generally speaking — including reform of Social Security itself.

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.

Jane the Actuary General Interest, Retirement

Forbes post, “Would Baby Bonds Save Retirement? Be Careful Of Quick Fixes And No-Cost Solutions”

Originally published at Forbes.com on February 24, 2021.

 

What’s a Baby Bond?

The name implies borrowing of some sort or another, as if a parent might borrow money and pay it back later. But the concept is really quite different, a sort of “universal personal account.” There are two different proposals circulating at the moment: one is meant to provide a sort of start-up fund for adult life, and the other, a retirement benefit. But they both are based on the idea of building up an account balance from government contributions while children are young.

The Booker Baby Bonds

Sen. Cory Booker of New Jersey introduced legislation earlier this month to establish what he calls “opportunity accounts.” The bill involves an initial “contribution” of $1,000 for each child at birth, and as much as $2,000 per year afterwards based on household income, with the full amount for families with income of less than 100% of the poverty line, phasing out to $0 at 500% of poverty rate; each of these dollar amounts would increase with the rate of inflation from year to year. These are described as “savings accounts” but there is one large fund, funded by the federal government, with individual account balances tracked nominally within that fund.

And — this makes my head hurt a bit — even though the money for the fund comes from the federal government, and even though, in the year 2021, like pretty much every other bit of government spending, the government would borrow the money to put in this fund (or money-print the money), the money is then “lent” back to the government, in the form of “special interest-bearing obligations of the United States,” with an interest rate equal to the average market yield of all US public debt with a maturity of greater than 10 years. According to Politico, this would be a 3% interest rate, but it’s not clear to me how Politico came up with that rate when a 20 year Treasury is currently 1.63% and even a 30 year Treasury is only 2.19% at the moment. At the same time, the bill implies that there are possibilities of investment losses, but perhaps there were drafting inconsistencies and versions of the proposal that involved equity investments?

So is it “real” money, or is it all a bit of a fiction? Like the Social Security Trust Fund, it’s both, or neither.

And this money could be spent in a limited number of ways: on higher education expenses (including trade school), on the purchase of a home, “any other investment in financial assets or personal capital that provides long-term gains to wages and wealth” (presumably this is meant to allow for investments in starting a small business), or any spending after age 59 1/2. In any case, this is all money that would be available on top of any financial aid rather than taken into account in calculating eligibility for financial aid.

Would this work?

Various proponents have claimed that this would have all manner of beneficial effects, and in particular would “narrow the racial wealth gap,” as the Urban Institute says, because black and Hispanic families are more likely to be poor, and white families are more likely to have inheritances from earlier generations. The cost would work out to $60 billion annually, according to Booker, or $650 billion over a decade according to the Committee for a Responsible Federal Budget, which reports on a prior iteration in which the plan would have been paid for by increasing capital gains taxes and estate taxes. At the time of their analysis, in 2019, 30 year Treasury rates had been level at 3% for two years, so they used this as their assumption to calculate that a child whose family had been in poverty for his/her entire lifetime would have an account of $46,215 at age 18; for a more middle-class family, with income of $56,000 for a family of four, the account balance would be $12,815. (My own math is somewhat different and arrives at an account balance of $38,000 adjusted to strip out the effect of inflation over time, but, eh, you get the picture.)

Would this achieve the goal of the program, helping young adults who had grown up poor get a good start in life? It seems obvious that having this money, over and above what financial aid programs would provide, would increase their financial well-being. But what is the purpose of building up an “account,” especially a notional account, over time? Why create a program which won’t provide any benefits for the next 18 years, when there is no particular rationale except to implement the spending gradually, so that only 18 years from now will the program be operating at full cost? Since all the money is borrowed anyway, what meaningful significance is there to the interest accrual and the lending-back of borrowed money for the purpose of “earning interest”?

And once a recipient leaves young adulthood, the notion of using these accounts as retirement income becomes shaky, because it makes so little sense to require that they continue accruing interest at the very low level of a government bond.

So what is the point of a “Baby Bond” rather than simply beefing up financial aid for education and grants for would-be entrepreneurs? One presumes that there’s a strategy in allocating the funds $2,000 at a time, and with $1,000 for all children regardless of income, to give it the “feel” of a broad-based program and a “savings account” just like the savings accounts we might encourage our children to start for themselves.

The RISE account – a Baby Bond for retirement

There is a second “Baby Bond” proposal which aims much more directly at retirement, because, in this version, the money isn’t accessible at all until retirement age. This proposal comes from financial advisor Ric Edelman, with a description at, among others, the Washington Post.

Here’s how his proposal would work:

The government would issue bonds and use the proceeds to fund accounts for children born in the US, just as with the Booker proposal. However, the bonds would be issued and the funds credited upon a child’s birth, be invested in diversified funds similar to a pension fund. Then, after 20 years, the bonds would be redeemed, but the investment earnings would be greater than the initial bond and interest, so this net earnings would remain in the fund and continue to grow for the next 50 years, at which point the individual would begin to receive retirement benefits in a spend-down using financial planners’ rules of thumb, and any funds remaining upon their death would be used to supplement funds for those who outlive their assets by living past 100.

Edelman does not provide the full details of his plan, and the biggest missing piece is his math around which children would get how much money. Similar to Booker’s plan, babies would be credited with different amounts based on parents’ income, with an average funding of $5,884, which he projects would create an annual payment stream of $26,810, in today’s dollars.

But his two key assumptions are these:

First, he assumes that the government would be able to issue bonds at the low interest rates earned by traditional “savings bonds” (EE bonds), which stands at 0.1%. (It is not clear if he builds into his calculation the one-time adjustment at 20 years which means that savings bonds double the saver’s money, for an annualized rate of 3.5%.) But the program would need to issue bonds of over $23 billion per year, by his own numbers ($5,884 per child and 4 million children born per year); however, the total series EE bond outstanding as of November 19 was $125.8 billion. He assumes that enough investors will choose these savings bonds for the “feel-good” element of the program, but that seems a bit of a stretch over the long term, especially when you’re no longer speaking of helping poor children but funding retirements 70 years in the future for people who may or may not be poor as adults.

Second, he assumes that the program will reliably earn the projected 7.27% in investment earnings. It’s important to note that this is the average assumed rate of return reported by public pension plans in the United States, which is, let’s face it, just about the most aggressive such assumption available — and this isn’t just a matter of the usual accusations of public pensions being to aggressive in order to report lower liabilities and make lower contributions. In the same manner as interest on government bonds is a fraction of what it had been a generation ago, so, too, are expectations for stock market returns declining as the population ages; even before the pandemic or the Trump administration, McKinsey was forecasting long-term declines in U.S. and European equity growth (see this December article on another similar proposal); more recently, Morningstar summarized long-term expectations coming in at anywhere between flat/negative to 5.7%, for U.S. equities, at best. Considering that it would be necessary to beat a 3.5% annualized return, on average, for 20 years, this is not actually a sure thing.

And Edelman acknowledges that the proposal is not truly risk-free, and suggests that “Congress could choose to give the Commission authority to use a surplus from one year’s program to compensate for a deficit incurred by another. Alternatively, Congress could choose to provide funding to eliminate a shortfall experienced by any birth year. Absent these actions, babies from each birth year will simply be limited to receiving only as much income as the program can provide.”

Finally, would it be fair to provide this retirement income only to those children who had been born into poor families? Edelman himself had made an earlier proposal with a flat benefit for all.

Would this proposal work?

My first reaction is that there’s simply no way to implement a plan which would first start to pay out benefits in 70 years, and that Americans further wouldn’t stand for there being differences in payouts by year of birth from what’s nominally a government program for all.

But looking at the core idea, rather than the specifics: this is a proposal for a sovereign wealth fund. Sure, it has a specific objective — providing retirement savings — and yes, unlike the sovereign wealth funds of nations with oil wealth, it would be funded by issuing debt, and its meant to be managed by private-sector investment managers, but in its core concept, functionally, the government would be acting as private-sector investor and earning money with the expectation that it investment revenue would exceed the interest on bonds.

And, in fact, there have been multiple proposals circulating recently. Most recently, in January, in “It’s Past Time for a U.S. Federal Sovereign Wealth Fund” at The National Interest, Richard Caroll proposed that the royalties the U.S. government receives from wealth-extraction on federal lands (with those royalties to be hiked substantially as well), as well as revenues from the Federal Reserve Open Market Operations’ bond purchasing program, should be directed into at U.S. Sovereign Wealth Fund rather than merely the U.S. Treasury, for the purpose of creating investment income as a future income stream given the growing indebtedness of the country. Back in May, Nir Kaissar at Bloomberg argued that instead of bailing out companies, the U.S. should have bought their equity or bonds:

“Like any private investor, the fund would buy the equity or debt of struggling companies at deeply discounted prices, handing the losses to owners or creditors of those companies and imposing the same onerous terms one would encounter in private-sector deals. That would remove questions about whether and which companies deserve to be bailed out because investment would be motivated by profit rather than charity. It would also allow the government, and all Americans by extension, to fully participate in the gains when companies turn around.”

The question of issuing debt to make investments would not be relevant, in this case, because the government would be borrowing to fund the bailouts, in any case, though Kaissar also suggests borrowing additional money to build up the fund even further.

As it happens, we have an example of a retirement-oriented Sovereign Wealth Fund just to the north of us: the Canada Pension Plan has a trust fund which invests in a wide variety of assets. As of 2018, they fully or partially owned Petco, Univision, and Neiman Marcus, for example. But they did not borrow money in order to make these investments; they used the surplus income coming into their Social Security system and are now using the funds generated by a tax hike to build up funds to fully pay for new benefits which will accrue over time. In other words, they are not promising that a plan will “pay for itself” but simply using tax revenues to build up a pension fund.

The long and short of it is this: people want a solution to retirement shortfalls (may I remind you of my Social Security reform proposal?) and to persistent demographic disparities, and this offers the promise of being something new and innovative. But just because something is “innovative” doesn’t necessarily guarantee it’s the right path forward.

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.