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Money TalksDaniel Gross takes readers' questions about the economy, housing market, and credit crisis.

Posted Friday, Dec. 14, 2007, at 12:37 PM ET

Slate columnist Daniel Gross was online on Washingtonpost.com on Dec. 13, 2007, to discuss the National Association of Realtors' sunny report on the housing market and other financial topics. An unedited transcript of the chat follows.

Daniel Gross: Hi all—Dan Gross here, Moneybox columnist at Slate and the Money Culture columnist at Newsweek. Sorry for the delays in getting started—we're having some weather issues here in the northeast. I'm looking forward to answering as many questions as I can in the next hour about the housing market, the credit crunch, the Federal Reserve, etc.

_______________________

Marion, N.C.: Does anybody actually expect the National Association of Realtors to come out with an analysis of the actual condition of the housing market? NAR recently got rid of an "all is well" economist, but have they changed? NAR's job is to help real estate brokers sell houses—period. Anyone who wishes to think differently is naive.

Daniel Gross: Hi Marion—I think your cynicism is well-founded. The column we're discussing was about how the media—the financial media—always pays a great deal of attention to the National Association of Realtors' forecasts. After all, NAR is the relied-upon source for things like home sales. The point of my article is that NAR's economists have been willfully upbeat, even as the housing market plummeted. And, of course, as you point out, the NAR's job "is to help real estate brokers sell houses—period."

That's true. But from an economics perspective, NAR serves one relatively neutral function—they produce the data on home sales from their members. Nobody really quibbles with the data they produce as being overly promotional—rather it's the spin and the forecasting that is problematic.

I just think the media—CNBC, the wire services, etc.—have to be a little smarter in covering NAR. Use the data they provide—the real hard numbers—and report it, since those numbers do tell us something about the market, but be more weary of quoting the inevitable spin and take the forecasts with several grains of salt.

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Two Times Your Income—Period: The vast majority of homeowners in this country are living beyond their means. The exact amount my husband and I make in a year is what we owe right now on our home. It is great. The problem is that people are making, say, $140,000 a year and they think they are flush. They are not. They should not have $60,000 in car debt, but they do. They should not have a mortgage for $400,000, but they do. It won't end until people realize that more car and house debt—no matter how much you make—only imprisons you.

Daniel Gross: Two Times Your Income—you are correct that a lot of people are living beyond their means. And, ironically, one of the messages we get from our culture and our media is that doing so is somehow part of our patriotic duty. If we don't buy cars, go to Disney World, and shop till we drop in December, our neighbors may soon be out of work.

And I think you're spot on about debt. People have come to confuse liquidity—i.e. the amount of money you have on hand—with the amount of credit that's available. They're two different things. And people tend to get into trouble when they think the latter is the former.

That's great that you and your husband have a combined income of what you owe on your mortgage. Unfortunately, in certain parts of the country, especially on the coasts, that's a pretty tough benchmark to meet—especially if you're a first-time buyer.

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Princeton, N.J.: I am a mathmatician. Here is my take on the Social Security projections, although most of the comments apply to any economic projection: The demographics: Doom-sayers say: "In 1945, for every Social Security beneficiary, we had 42 workers paying in. By 2002, we had just 3.3 workers per beneficiary. By 2030, we'll have only 2.2 workers per beneficiary." So what? I presume they somehow want us to conclude that Social Security is going to pot just by looking at this one statistic (workers per beneficiary), suggesting it dominates all other inputs. Because they do not tell us the state of Social Security at any point, we actually can conclude nothing from this argument, and if we put in its current state, this argument shows exactly the opposite of what they want us to conclude!

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Today Social Security is in the best state it ever has been—the yearly surplus last year was the largest in its history. The Social Security Trust Fund is $1.5 trillion, which is also its maximum. I don't have the figures for 2006, but they are similar. So what we have is that from 1945 to 2002, the number of workers per beneficiary decreased by 92 percent, but the health of Social Security is vastly better. Clearly there are other factors that dominate this one demographic statistic. Furthermore, if Social Security could improve its condition with a 92 percent decrease in this statistic, why should we worry about the 33 percent decrease they predict for the period 2002 to 2030?

The projections: Dr. Steven Goss, the chief actuary of the Social Security Administration is careful to point out that what he makes are projections, not predictions. They are based on assumptions, i.e. he says that if this happens then this will happen. These assumptions cannot be computed, he says, because they are event-driven. You would have to be a fortune-teller to even make an estimate. Because of this, he actually makes three projections. The one most people quote is the "middle" projection. If you look at the record, you will see that his "high" projection consistently and significantly has been more accurate than the middle one. The high projection says that the Social Security Trust Fund will not go to zero during the next 75 years, that Social Security will be able to pay all promised benefits, and that there will be a surplus in the trillions at the end of the period.

An assumption: The middle projection of the Social Security Administration (the one you quote) assumes that the average growth in the GDP will be 1.78 percent in the next 75 years. If you just change this one assumption—keeping all the horrible demographics that you believe in—to 2.7 percent and do the exact same computation, then you find that the Social Security Trust Funds never will go to zero, all promised benefits will be paid and there will be a huge surplus at the end of the period. The average growth in the GDP in the past 75 years was 3.1 percent. I am not saying what the growth in the GDP will be (that would not be mathematics, but fortune-telling), I am just saying that the exact same mathematics that gives you the bad forecast with the very low assumption gives you a good forecast with a more reasonable one.

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Daniel Gross is the author of Forbes Greatest Business Stories of All Time and Bull Run: Wall Street, the Democrats, and the New Politics of Personal Finance. He is also the editor of STERNbusiness, a management journal published by New York University's Stern School of Business.
COMMENTS

Remarks from the Fray:

I'm no economist, but I'm under the impression that this is a piece of fiction. I thought the story was the whole fund is used to buy T-Bills - which are then kept off the books when tallying the "official" national deficit.

Assuming my impressions are correct, what happens if no substantial changes are made in the next 20 or so years? The system goes into the red and starts "drawing on its trust fund" (in quotes because I consider it fiction), and instead of a 12 figure number written in black in the total national budget, we have a 12 figure number written in red - it would bankrupt us.

The reason I would consider it a crisis now is that you can't just wake up in 2045 and say "Whoops folks, we can't afford this program anymore, everybody's payments are cut by 30%". To be fair, you need to maintain payments to current retirees, and probably grandfather in people over 60.

This isn't to say I disagree with you about Medicare, just that I'm pretty sure the "Lockbox" is a fictional pretense for inaction.

--atworkforu

(To reply, click here.)

I won't pretend to know the numbers or assumptions involved in projecting the Social Security Trust fund balance in the future, but I do know some of the arguments of Princeton and Gross are flawed.

First, Princeton is dismissive of the demographic projections, but unlike the economic, there is a high degree of confidence in these. We know pretty precisely the number and ages of people here now, and we can make pretty good guesses about how long they will work, live and migration rates. It doesn't take a "doomsayer" to be concerned that we will have an unprecedented shift in the proportion of the population that is in it's later years, and to worry about the economic outcomes of that.

Princeton and Gross both refer to the present surplus and high balance in the Trust and conclude that "Today Social Security is in the best state it ever has been." No! We're looking at only half the equation here. If you have a defined benefit retirement plan at your company, be glad these guys do not run it!

If you want to examine health of a retirement or insurance fund (social security is both), you have to look at both the fund balance and liabilities.

This is where those demographic projections become important. There really is a large demographic bubble in the population born in the 1945-1963 period. That isn't made up, it's very real. Those people are in their prime earning years now, so Social Security damn should be running a large surplus and have a large balance. That's no reason itself to celebrate, because that large wave of people will soon retire. Social Security is building up funds, but also liabilities. It's obligated to pay those persons back someday. Actually, projections have the fund going into the red within 10 years (a timeframe for which economic projections are more robust than reading goat entrails). The question isn't how much the fund has relative to past fund balances (as if), or how much the intake is in any given year, the question is if there will be enough in the future to pay back all the people who are now paying into it.

Of course, Princeton did address this, saying that some projections have us maintaining an above zero balance, finishing a 75 year period with a surplus of "trillions". This raises the question of what balance we should be maintaining. Do we want every age group to get back roughly what they put in, or do we want economic growth and higher future relative earnings to continually subsidize the immediate preceding generations as they retire. If it's the former, we should be maintaining trillions in surpluses at all times, never going anywhere close to zero (how secure would you feel if you were told that your company's defined benefit plan had a near zero fund balance after you've worked there a number of years?). If it's the latter, then the fund could hover above the zero mark and still be considered a success.

The statements of Princeton and Gross seem to indicate they are in the latter camp. They make no mention at all of maintaining balances to pay future liabilities.

That's important when considering the worker/beneficiary ratio. Princeton notices we've seen a sharp decline in that number, and it hasn't hurt us yet, and concludes that it therefore won't hurt us in the future. What? To understand the flaw in this, one needs to understand why that number is significant.

If we are going to run SS in such a way that it hovers just above zero, rather than actually maintaining the funds on hand to pay future liabilities, then we are taking on a risk. What if our projections are wrong? Princeton is very derisive of economic forecasting, saying that things could very well be better than projected, but what if they turn out to be worse? What then?

Well, then either SS has to cut payments to beneficiaries to close the shortfall, or general fund tax revenues have to be diverted to shore up the system. That's where the ratio becomes important. Making up a forecasting error when there are 42 workers per beneficiary probably won't be a major burden on those workers. A forecasting error when the ratio is 2.2 to 1 could be devastating. We're talking potentially percentage points of GDP here.

This at a time when we also project huge shortfalls in Medicare, which will also have to be severely cut or paid out of the general fund, at a time when proportionately less of America is working age.

Princeton may ultimately be right that things will simply work out. What he is wrong about is that we should assume so simply because there is a fund balance and surplus now. He's also overly dismissive of economic forecasting. Yes, it's difficult and requires educated guessing, but it's also essential for smart planning, because we really should want to know if that fund balance we have today is sufficient to cover the liabilities that must be paid tomorrow. Anticipation and preparation for the future, even in the face of multiple unknowns, is smart policy.

--Sanjait

(To reply, click here.)

(12/16)

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