I found an interesting debate on FDR’s policies to fight the great depression. If you love economics you will enjoy this video a lot. I figured this was a good video to watch on labor day if you have some free time.

I think this topic is a fair debate. However, I will decline from weighing in on my opinion. However, I must say the speaker on the “right” who attacks FDR policies just sticks to some talking points. They could have found a more articulate debater on the topic.

Enjoy!

On July 9, 2010 at the FreedomFest Conference in Las Vegas (www.freedomfest.com), FEE president Lawrence W. Reed debated University of Nevada-Las Vegas economist Bernard Malamud on the subject of the New Deal policies of Franklin Roosevelt. This is a video recording of that 50-minute debate.

FDR’s Depression Policies: Good Deal or Raw Deal? from FEE on Vimeo.

Great article on the estimates used for pension returns. The debate boils down to whether to use the historic return of 8%, or the current rate on long term treasuries which is close to 3.5%. I must side with the use of a lower estimate A. Not only should future bond returns below due to zero interest rates, but future stock returns should be low since the Shiller 10 year P/E is above 20 (implying real returns for stocks of less than 2%). B. It is ALWAYS prudent to use a lower estimate which is more conservative. Regardless of what estimate you use, pensions seem to be severely under funded.

This article is reprinted with permission http://advisorperspectives.com/newsletters10/32-showdown.php.
By Charlie Curnow

It’s high noon in the showdown over public pension accounting methodologies. On one side we have actuaries, who say that pension liabilities should be discounted at the rate historically returned by the funds’ assets – 8 percent. On the other side are economists, who say this is nonsense – a risk-free rate, currently around 3.5 percent, should be used in the discounting calculation.

At stake is $2 trillion dollars. That is the approximate difference in just how underfunded our state pension systems are depending on which calculation you favor.

Both approaches have merits, according to a recent paper, “Valuing and Funding Public Pension Liabilities” by John Minahan, a senior finance lecturer at the MIT Sloan School.

The actuaries, so far, have had the upper hand; their approach is endorsed by Generally Accepted Accounting Principles. What ultimately matters, however, is whether the triumphant accounting method in this struggle leads pension funds to set aside enough funds to meet future promises to retirees. On that score, a risk-free approach may provide a more realistic assessment of future needs.

State pension systems currently have about $2 trillion saved up, but actuaries using traditional accounting standards estimate that states really need a total of $3 trillion nationwide, suggesting a fiscal gap of about $1 trillion before the pension plans can be considered fully funded. Minahan and other economists, however, argue that the amount that state pension systems should really set aside is closer to $5 trillion.

To illustrate the debate over accounting methodologies, Minahan uses the example of an employer who promises to pay an employee $100 one year from now and says that he will “fully fund” that promise. If the employer is able to earn 5 percent per year by investing in a “risk-free” asset such as U.S. Treasury bonds, this means he would only need to set aside $95.24, the amount that if increased by 5 percent, would equal $100. This changes, however, if the employer decides to invest in riskier assets, such as stocks. Suppose the employer decides to invest in an asset that has a 50/50 chance of earning as much as 8 percent per year, or as little as 4 percent per year. Actuaries using accounting methods currently favored by pension managers would say that the employer could assume a 6 percent return on average, and thus could set aside just $94.34. According to Minahan, however, the employer would really have to set aside $96.15, the amount that if increased by just 4 percent would equal $100, in order to guarantee full funding even in the worst-case market scenario.

Even though the dispute over public pension accounting methodologies may seem like technical hairsplitting, the policy implications of the ongoing debate are enormous. If states decided to play it safe and set aside an additional $3 trillion instead of $1 trillion in order to fully fund employee pension plans, that decision would have a huge ramifications, such as significantly reduced benefits and higher contribution rates for hundreds of thousands of state employees.

Public pension managers continue to defend the use of traditional actuarial methods to calculate assets and unfunded liabilities. Keith Brainard, research director at the National Association of State Retirement Administrators, responds to criticisms like Minahan’s by pointing to the long-term performance of state pension assets relative to assumed rates of returns. While returns have indeed fluctuated wildly over the past few years — last year brought a positive return of 20 percent, while the past three years have seen an overall loss of 1 percent — the median rate of return over the past 25 years has been 9.25 percent, which actually beats the common actuarial estimate of 8 percent.

Using either valuation method, however, state pension plans are still underfunded relative to federal guidelines. The Government Accountability Office considers current and projected assets covering 80 percent of all present and future liabilities to be a healthy funding level for public pension systems. Traditional actuarial methods suggest that current and projected assets cover about 70 percent of all present and future promises nationwide. Methods supported by Minahan and other economists however, suggest that the aggregate funding level is actually closer to 40 percent.

Ultimately, market performance may settle the ongoing debate between state actuaries and economists. If Grantham Mayo Van Otterloo chairman Jeremy Grantham’s forecast of 3.5 percent returns for a balanced 60/40 equity fixed income portfolio over the next seven years is correct, states would be wise to hew to the more conservative approach of Minahan and other economists. In that case, continuing the assumption of 8 percent annual growth would force pension managers to invest in even riskier portfolios than they currently own. That might be fine if pension funds had an unlimited time horizon, like university endowments. Pension funds, however, must be able to meet the liabilities of employees as they retire, which suggests an average time horizon of 20 or 30 years. A more endowment-like approach to investing — and a trend toward ever-riskier assets — could therefore be disastrous for public pension funds if the next few decades are like the last quarter century, during which stocks actually earned less than bonds.

I have penned several articles about the dangers the current pension system is in across the nation. The problem is in both the private and public sectors. Many companies like Google refuse to offer pensions because they realize the danger in making a life time commitment to people, when it is impossible to know how long they will live. Estimates of underfunded pensions run from a few hundred billion to several trillion dollars. To read a great book on the topic check out While America Aged: How Pension Debts Ruined General Motors, Stopped the NYC Subways, Bankrupted San Diego, and Loom as the Next Financial Crisis by best selling author Roger Lowenstein. Since the pensions are guaranteed we the tax payer will end up paying for it. How we will come up with the money I am not sure, maybe we can ask China for some more help. Below is an excerpt from an article from the Economist regarding this danger:

SOMETIMES a website can catch the zeitgeist, as condoflip.com did during the housing boom and the implode-o-meter did during the bust. One of the big issues in the next few years is bound to be pensions, particuarly those in the public sector. So I was intrigued to come across the pension tsunami website which does a good job (albeit with a right-wing slant) of collating news stories about the issue. It also has a Californian tinge but then California always seems a few years ahead of everyone else.

Read it and weep at some of the largesse that has been showered on public sector employees at the tapayers’ expense, including the 9,111 Californina retirees who take home more than $100,000 a year in pensions. One lucky devil even gets more than $500,000, after a career in charge of Vernon, a city with fewer than 100 inhabitants. Because public sector pension funds are so much in deficit (one estimate is $1 trillion, another is $2.5 trillion) and because state budgets are so constrained, politicians are facing the choice of maintaining pensions or maintaining local services. In LA, one official has estimated that a third of the budget will be devoted to pension costs by 2015.

The full link is here.

Kenneth Rogoff was on Charlie Rose earlier this week. Below is part of the transcript where Rogoff discusses job creation, followed by a link to the interview. For all readers unfamiliar with Rogoff here is a brief bio:

Kenneth S Rogoff teaches in the Economics Department of Harvard University where he is Thomas D Cabot Professor of Public Policy. During 2001-2003 Rogoff went on public service leave to the Internatonal Monetary Fund, where he served as chief economist and Director of Research. Rogoff’s 1996 treatise with Maurice Obstfeld on the Foundations of International Macroeconomics remains the standard graduate reference in the field. His monthly column on global economic issues is published in over forty countries, in more than half a dozen languages. He is also a frequent commentator in the media, including NPR, BBC, The Financial Times, the Wall Street Journal, CNN, CNBC and ABC news. His newest book This Time Is Different: Eight Centuries of Financial Folly , with Professor Carmen M Reinhart of the University of Maryland, exploits an extensive new database (developed by the authors over many years) to show the remarkable quantative similarities in deep financial crises across time and regions.

And I begin with this question I suggested earlier — that job creation is the most important economic challenge the president faces. Ken?

KENNETH ROGOFF: Well, absolutely. I mean, the unemployment rate is really unacceptably high, hovering around 10 percent as the president’s noted, and unfortunately it’s not going to come down quickly. And the question is how can we grow jobs to get the unemployment rate falling again? It’s a very grim picture. There are industries that are strong like the health care industry. It has jobs. Industries that are weak, like the auto industry. How do you make that massive switch across the American economy so that we get growth going again and get employment back up?

CHARLIE ROSE: How do you do that?

KENNETH ROGOFF: Well, unfortunately, there are very, very limited tools at the disposal of the government. There are some easy things. I think the states are not able to borrow the way that the federal government can. The local governments can’t borrow the same way. So certainly continuing transfers to the states and local government system so they don’t have to rein in their jobs too fast, that’s, I think, a no brainer. We also probably need to do at the margins things like trying to help with adult education, jobs programs for youth in the summer. But really, this is a typical post financial crisis problem, and there is no magic bullet. There is no overnight cure. It’s a slow healing process. The link to the video is here-http://www.charlierose.com/view/content/11154

Niall Ferguson

Niall Ferguson of Harvard University spoke with Bloomberg Television on the subject of bond markets and the threat of a speculative bond attack against the United States.