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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.

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Denver: Historically, which tends to recover faster: existing or new home sales? I ask because of their prediction that existing has hit bottom, but new has not. We are looking for a house in the Denver metro, and it really seems to me that new homes here have been far more responsive to the changed markets, to the point that when all else is equal the new houses are a less expensive. I would have thought that if anything new construction would recover faster simply because overall it seems they are pricing new construction more aggressively, but maybe that is just here. Do you have an opinion on which will recover faster nationwide?

Daniel Gross: Hi Denver—I'm not sure which tends to recover faster, but it seems to me that new housing goes south before existing homes do, and that you're far more likely to see sharp decreases in prices in new homes and condos than you are in existing homes. A developer of a new home is always racing against the clock. Every day he or she doesn't sell a property is a day their interst cost rises. And they've got lenders looking over their shoulders—eager to get paid back or willing to step in should they falter. So when you get a motivated seller of new homes, you tend to get firesales—big discounts. One of the big home-builders (I forgot which one) had a big nationwide weekend firesale where it slashed prices on thousands of units by 30 percent.

By contrast, with existing homes, those are on a case by case basis. Sure, some sellers are really motivated. But most aren't in such dire straits.

As far as recovery, in terms of activity I think new homes are likely to lag. After lenders and developers are burned, they tend to lick their wounds and only get back into building once the market has improved for a few years. So if I had to say, I'd say that existing home sales would likely recover faster.

_______________________

Princeton, N.J.: Never met the esteemed Professor Krugman. Here my take on health care: Let's just look at efficiency. Forget the immorality of the uninsured that lets poor people die; forget the burden on businesses that make them less competitive. Just consider health care financing as a business decision. Develop statistics for measuring how we are doing. Look at the competitors (other countries). Look at their cost. If you are honest, you will become an advocate of a single-payer system. Here are some facts. They can be checked at this Web site.

If you look at the 13 wealthiest countries and rank them according to the 16 basic public health statistics, the U.S. ranks 12th or 13th in each one—yet we spend 2.5 times as much per person as the average of these countries! Other countries get much better health care at much lower cost. (As a sanity check, the World Health Organization ranked the U.S. 37th in the world in health care, above Bolivia but below Slovenia.)

All of these other countries use some form of single-payer system. Of course, they have some problems, but most of these are because they are not spending enough—we would not have those problems. In spite of all these so-called problems, they get better care. Medicare is a single-payer system, and it is one of the most popular programs in the history of our country. The plan I like simply gives Medicare (without limitations, copays or deductions) to everyone. We could do this without spending any more than we are now.

The reason for this is that we waste at least $200 billion a year on excess paperwork by physicians and at least $100 billion a year on the high overhead (15 percent vs. 1.3 percent for Canadians) of private insurance, not to mention unconscionably high drug prices charged by companies that spend three times as much on marketing as on research.

Look here is a simplified example of what we are doing: Suppose you have $100 to give to 10 people. You could give $10 to each person. Alternatively, you could develop criteria that determine who is deserving, and then investigate each person. You might find that according to your criteria, only five people deserve the money—but you spent $75 on your investigations, so now you can only give $5 to the five deserving ones. We spend much too much money denying people health care.

The basic problem is that the rules are made by private insurance companies, the only goal of which is to make money, not be efficient or provide good health care. If they can save a buck by having a physician fill out a 40-page form, they will do so. What about choice? I am 69 years old and retired. During my career I had five HMOs and five indemnity health plans. I have much more freedom of choice under Medicare than I had under any of the private insurance plans. I have no more referrals, no more in-plan/out-of-plan nonsense. As for choice of insurance plan, why would anyone want choice if everyone had a plan that covered everything? In any case, you still could have private insurance for those who could afford it, as most European countries still do.

Daniel Gross: Hi Princeton—thanks for this. With health care, we're venturing a bit beyond my comfort zone. But your suggestions are eminently sane.

_______________________

Falls Church, Va.: Daniel, believe next year the biggest factor impacting the consumer spending (21 million Americans according to a CNN report) would be the alternative minimum tax, if Congress doesn't fix it soon. My brother and his wife are projected to pay more than $4,000 extra on taxes next year after all the deductions. They have canceled plan to buy big-ticket items already. Do you agree ?

Daniel Gross: Hi Falls Church - as someone who gets hit with it every year, I'm tempted to agree. But taking a step back, I'm not so sure that it would be the biggest factor—rather than one factor. First of all, it's highly regional. It really comes into play in places where you have lots of people with high income, relatively high housing costs and property taxes, and in states that have income taxes (because under the AMT you effectively lose the federal deductions for some of those items).

In Florida and Texas—big states, no income tax—the AMT is no big deal. In Mississippi, where income is pretty low, it wouldn't be much of an issue. In New Jersey, New York, California—obviously much more of a big deal. What's more, AMT tends to hit people in the middle- to upper income brackets. And while that hurts, a family making $150,000 having to pay an extra $4,000 in taxes isn't going to hurt as much as a family making $60,000 having to pay an extra $5,000 a year on their mortgage when their ARM resets.

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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.
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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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