The Power and the Money

The roots of Argentine street violence

The pension reform passed the lower house yesterday on a vote of 127-117. The legislative process has been fine, notwithstanding the near-fistfight on the floor and a lot of disingenuous rhetoric from the government. In those terms, and those terms alone, Argentine representative democracy looks to be in better shape than American representative democracy.

But the street response has been nothing less than shocking.

Why? Well, there are two hypotheses.

The first hypothesis is that the mobs were organized by the Peronist opposition to discredit the Macri’s Cambiemos coalition. In this view, the pension reform is only a convenient excuse for an opposition facing an existential struggle against its ideological opponents.

The second hypothesis is that the Macri administration miscalculated the meaning of its recent electoral victory. It failed to realize was how little trust it enjoyed. In this view, the violence is an inevitable product of the government’s attempt to offload adjustment onto the middle class in a society even more polarized than the United States.

Which view is correct? Likely both.

There is certainly a history of Argentine political actors orchestrating street violence for political ends. Consider Javier Auyero’s (U.T.-Austin) magisterial study of the 2001 riots. In his words: “Three mechanisms [operated] during the episodes: 1. the creation of opportunities by party brokers and police agents, 2. the validation of looting by state elites, and 3. the signalling spiral carried out by party brokers.” Similarly, soccer fan clubs have employed violence to help politicians. Politicized soccer violence emerged during General Jorge Videla’s dictatorship (1976-83). Videla organized fans to pressure potential opponents; the “barras bravas” also became a convenient venue to channel payoffs to regime supporters. After democracy returned in 1983, the barrabravas began to sell their “services” to various politicians. In short, there is a history of party politicians inciting and using violence; it would be more surprising if nobody abetted the recent riots. The President certainly thinks that somebody did.

But the Macri administration has ] given working or middle class Argentines little reason to trust it. He has made no moves to apply scratchy hairshirts to the richest: the (unavoidable) austerity is going to fall squarely on the middle class. The pension reform came in the wake of a  punishing series of electricity rate hikes with no commensurate increase in service.* It also comes in the wake of Macri’s post-election declaration that he wants to cut taxes on business and investors; no sign of a progressive tax reform here, a la Chile or Uruguay. (More on Uruguay here.) Pain always goes down better when it’s shared.

It is true that some sort of pension reform will be necessary and it is true that the opposition has both the means and the desire to foment street violence. But it’s the reluctance to spread the pain of austerity up the income ladder that lies, I think, at the heart of the problem.

* Electricity reliability is measured via two indices. SAIDI measures the average annual outage time per customer. In the United States, the median utility has a SAIDI around 1.5 hours (NYC is 0.3); in Argentina, it’s 4.5. SAIFI measures the average annual number of outages per customer. In the U.S., it’s about 1.1 (with NYC having 0.1). In Argentina, it’s 16.2. Mexico, for further comparison, is 0.8 and 1.0 in Mexico City and 0.5 and 0.6 in Monterrey. (The World Bank tracks these numbers.) To be fair, one wouldn’t expect electricity provision to improve in a day after a decade of Peronist mismanagement, but that is a reason for Macri to tread lightly.

Observatorio argentino 37: A long hot summer of pension reform

It is summer in Buenos Aires. And it is proving to be a hot one. 

Political violence right before Christmas is a recent Argentine regularity. In December 1999, a protest by workers owed back salaries in Corrientes province grew out of hand and resulted in two deaths. In December 2001, the forced conversion of people’s dollar bank deposits into pesos worth a third as much provoked riots that killed 39 people. In November 2005, I was in Mar de Plata for the riots around a visit by President Bush. In December 2010, thousands of Paraguayan and Bolivian immigrants occupied a park in the southwestern reaches of the city. As you can imagine, the locals did not react well: Mayor Mauricio Macri called in the police and four people died before the federal Gendarmerie and naval special forces broke it up and cleared the area. In December 2013 the police themselves went on strike; in Córdoba, the result was looting, the arrival of the Gendarmerie, and at least one death. 

And now there is December 2017. Nobody has died, so far, but at last count 81 people were in the hospital ... 48 of whom are cops. A general strike is on, shutting the airports and the subway. That is today; on Thursday there was an earlier wave of rioting resulting in busted windows and burning cars. 

What is it all about? Short answer: pension reform. On November 29, the Senate voted 43-23 to advance an administration proposal to rejigger the formula for state pensions.  Rejigger how, exactly? Well, that has been giving me a headache but I think I have got it. 

The current pension formula adjust pensions as follows. Every six months, the pension fund averages the wage index (the higher of the Ripte or Indec indexes) and the nominal growth in total social security tax receipts. The resulting number (plus a top-off that I still do not understand) gives the percentage hike in pensions. The law has a floor: nominal pensions cannot fall even if nominal salaries and nominal tax collections decrease. (To be frank, in an inflationary economy like Argentina, a nominal fall in anything is unlikely in the extreme.) 

On paper, this does not seem like a bad system. It links changes in outflows to changes in inflows. Pension spending might be too high given the level of tax collection, but they should not grow out of control, at least not because of the formula.

But ... the formula does make pensions volatile. For example, in 2015 pensions grew by 4% in real terms, but they fell 6% in 2016, only to recover 3% this year. In other words, there is a case for pension reform beyond the vague “pensions are too expensive” that you usually hear. 

Of course, that case would be more persuasive if, well, pensioners were the ones pushing the reform.

The real issue is that the pension system has been underfunded ever since President Kirchner granted state pensions to slightly more than 2 million elderly who had never worked in the formal sector. It does not matter if the current indexing formula is a fine one if the system is paying out more than it takes in. Something needs to be done and this is something. 

The proposed change (text here) switches the index to the following: 70% inflation and 30% wage increases, plus a top-up for GDP growth that I do not understand. The adjustments will be switched from every six months to every three months. The reform implies that the pension administrator will miss a top-up during the changeover to the new system, so it proposes an extra one-time adjustment, aka “the splice.” Weirdly, however, the adjustments will still be delayed six months: the end-of-March increase, for example, will reflect inflation in October-December, not January-March.

Does your head hurt yet? Mine certainly did. I found a nice chart at Infobae that runs down the difference between the old and new systems. Short version: most pensioners will come out behind under the new scheme compared to the old one. It might save around $4 billion in the short term, perhaps. In the long term, who knows? But it is likely to reduce expenditures relative to the old formula.

The vote sailed through the Senate based on a deal President Macri struck with the state governors. As part of that deal, he got the governors to agree to let him transfer quite a lot of money to Governor María Eugenia Vidal of Buenos Aires province. Vidal is a member of Macri’s political party, the Republican Proposal (PRO); he needs her to succeed. So it is hard to get past the idea that President Macri is using pension reform to finance Governor Vidal. 

The lower house had to cut off debate when it looked like it was about to devolve into a fistfight.

So there you have it. The reform is basically a cut in pensions. Most of the short-term savings will go to the provincial governments in return for their agreement to drop a lawsuit claiming funds from the federal government. The big winner if it passes will be B.A. province, where a PRO governor recently took it back from the Peronists for the first time in 30 years. But the formula change is tinkering around the edges of a massively underfunded pension system; very little economic gain for a lot of political pain.

That said, by current American standards the whole debate seems refreshingly honest, wholesome, fair and open. And no, that is not something I thought I would have written a year ago.

The GOP lost even bigger on the grand bargain than Vox says

Short recap: in 2011, President Obama offered to cut Social Security and Medicare in return for tax hikes. The GOP said no. As a result, the tax hikes happened anyway and social insurance was not cut. This was, a Matt Yglesias writes, a disaster for anyone who honestly believes that the American state should redistribute no more income that necessary to prevent absolute penury among the elderly.

But it is even worse than that. The GOP would have eventually won an election; cutting taxes when that happens will be easy with a Congressional majority. Cutting entitlements, however, may be off the table forever. 

I think Paul Ryan knows that. (Click the link. It’s big news, even if not quite an endorsement.)

De tocho morocho, dice el IMF a la madre patria

 The IMF just published its report on the Spanish economy. It isn’t good. As for what to do? Well, the boffins at the Fund recommend a little of everything:

• Fix the wage-bargaining system ... the IMF thinks an agreement will be ready by May, not apparently realizing that it already is May;
• Lower severance payments to fired workers;
• Change to an “opt-in” rather than “opt-out” system for collective bargaining, whatever that means;
• Eliminate indexation;
• Speed up implementation of the E.U. Services Directive (although the madre patria has done pretty well on this tip;
• Liberalize more product markets (big boxes and power centers, here you come!);
• End the subsidies to homeowning over renting;
• Cut the deficit by 5 percentage points in 2010 and 2011;
• Cut tax subsidies and raise VAT and excise rates;
• Raise the retirement age to 67 right now;
• Do something to get spending by the Autonomous Communities under control — they recommend Belgium as a role model;
• Fix the damn banks, mostly via consolidation;
• Reform the savings banks, basically by eliminating them as a category.

Sort of like an evil twin version of Wilson’s Fourteen Points. It might even work. But it is a very full menu — the government is being asked to reform basically everything — and it will require a great deal of social solidarity. It is not clear to me that Spain has it. The unions don’t really trust the Socialist Party, and the People’s Party hasn’t been able to resist making political hay out of the eurocrisis. (I mean, really?) It is asking a lot of a government to try to alter the labor market, financial system, pension scheme, tax structure, and federal relations all at once. De tocho, indeed. Of course, presumably the consequences of doing nothing will be worse, but it is hard to sell people on stuff that will make them suffer by using counterfactual reasoning.

That said, Spain is in the lucky position of being able to get rid of its army if need be. How many other countries have gone into fiscal crises with that luxury? Maybe tis time to revisit that old EDC treaty ...

Public pension systems

  A few posts back, Megan McArdle took issue with my taking issue over her depiction of the social security reform debate of 2005.  (Follow that?)  Our differences fell into two boxes.  The first is whether the Bush Administration was willing to countenance payroll tax hikes.  She says that Andrew Biggs claims that they were.  On balance, I think she was right.  I found an L.A. Times piece from February 18, 2005, that claimed that the President “said earlier this week that he would not rule out paying those transition costs by raising the current wage cap of $90,000.”   The actual quote from President Bush is a little vaguer: “The one thing I'm not open-minded about is raising the payroll-tax rate, and all the other issues are on the table, and that's important for people to know.”  That said, the papers all seemed to think it was a genuine offer. 

In short, the Bush Administration showed some sign that it was willing to countenance a tax hike to pay for transition costs.  McArdle right, Maurer wrong.  That latter bit is sadly not uncommon.  I think Megan was too busy to point me to this post, which is where I think she got her claim from, but I understand.  She has a demanding job.  I do have to say, however, that Biggs’ account comes entirely from the same secondary sources that I’ve linked to here. 

The other debate was more abstruse.  “Carve-outs” and “add-ons” and other such wonkery.  The problem with such conservations is that all too often the conversators forget what exactly it is that public pensions systems do.   When you drill down into the issue, the difference between a pay-as-you-go (e.g., “paygo”) systems, like Social Security, and a privatized forced-saving scheme, like they have in Chile, becomes much less than it seems at first glance. 

So what is it that public pension systems actually do?

Long wonkish discussion below the fold.

McArdle redefines centrism

  I am on record as liking Ms. McArdle's writing.  But this post is really stupid.  President Bush proposed a carve-out in social security with no way to pay for transition costs except via benefit cuts.  That is not a compromise.  It is also not true that the returns from a portfolio linked to the profits of publicly-traded companies is better than the returns from a portfolio linked to the general level of wages unless you believe that markets are irrational.  Had the GOP put forward an “add-on” proposal, which would have in essence raised payroll taxes to fund a tax-free system of private retirement accounts, it would have attracted a lot of Democratic support.  Even a voluntary add-on, in effect a giant investment tax-break, would have attracted such support.  But Bush drew strong redlines and held on to them for a very long time.  Democratic politicians were given no incentives to compromise, even though many (like Joe Lieberman) would have liked to.

It is entirely legitimate to favor a privatized pension system.  If the Bush proposal had materialized, the Republic would not have fallen.  But here McArdle confuses her own policy preference with the facts about a policy debate.  The truth is that President Bush put forward a near-maximalist proposal, the equivalent of Medicare-for-all, and refused to put forward a way to pay for it without cutting the system's payout formulas.  The fact that McArdle would prefer an even more maximalist proposal does not change that.  Nor does it change the fact that Social Security reform never even made it out of committee, let alone face a filibuster. 

I am, therefore, a bit puzzled by the post.  She seems to be looking for equivalence where there is none.  Strange, for a generally nonpartisan writer.

Observatorio Argentino 7: Argentina’s inexplicable pension nationalization

 I’ve been asked to discuss what's going on in Argentina.  So what’s going on in Argentina?  The short answer seems to be simple:  President Fernández just made a huge political mistake.  She’s nationalized the pension accounts funded by mandatory contributions in a most unwise fashion for a rather unnecessary reason, and probably sealed her political doom in the process. 

Hat tip:  Leticia Arroyo Abad. 

There are two ironies.  The bigger one I’ve already mentioned:  AFAICT, it’s bad politics, rather than just bad economics.  The smaller personal irony is that I am not a fan in general of “privatized” pension schemes in general (although they can, if designed right, increase savings) and I am certainly not a fan of the Argentine scheme in particular, yet I find myself thinking that ending the scheme the way the government wants to do it is simply insane.

And the weirdest thing is that it seems politically insane.  Weren’t the Kirchners supposed to be excellent politicos? 

As often, though, it gets a little complicated. 

Argentina’s pension system is not a simple thing.  There are (I think; it’s been a headache to try to figure all this out) three pillars in the system.  The first is the Basic Universal Pension.  Everyone gets it, and it’s financed from current taxes.  It also sucks, coming to the impressive amount of US$955 per year for someone with a 45-year work history. 

The other two pillars consist of a public and a private pension system.  An Argentine worker gets a choice between then.  (Before last year anyone who switched into the private system was not allowed to switch back out to the public one.)  The government withdraws mandatory contributions equal to 11% of wages, up to a wage ceiling of US$24,913 per year.  The contributions finance current retirees in the public system, and pays out on retirement (again, I think) 10.2% of the workers’ last ten years of salary up to a cap of US$2,491, not including the basic pension.  The private pensions take the mandatory contributions and give it to the private fund of the workers’ choice.  The workers then get an annuity upon retirement, financed by their savings. 

I am on record as saying that such funds have been unsuccessful in Mexico. In Argentina, they seem to have performed even worse.  Since 1994, through April 2008, the funds earned an average nominal return of 12.3%.  That’s 6.3% after inflation, but Argentina CPI figures can’t be trusted.  So in dollar terms, then, they’ve earned only 3.5%.  

To add insult to injury, those returns don’t include fees, which eat up of fifth of the profits.  So it wouldn’t be hard to argue that the new system is worse than the public one that preceeded it.  In fact, since the government pressured the funds into buying federal bonds during the 1999-02 depression, it’s really hard to see how changing the system was any improvement.   After all, taking out payroll taxes and lending them to the government is exactly how the American social security system works. 

If you’re going to have an American-style system, why bother with the middlemen?  At its peak in 2001, the private system had almost 80% of its assets in government bonds, and even now it’s only down to 56%, including a small number of state bonds.  The poor returns generated by the private system is why, in 2007, the government made it possible for workers to choose to transfer back into the public system.

Logical or not, well-designed or not, the system is what it is, especially now that workers have the option to transfer back to the state system.  People paid in, and got title to an account that gave them a claim on the income generated by the portfolio of assets owned by a fund manager of their choice, even if we hand-wave for a moment how informed that choice was or how much it actually mattered. 

So now comes President Fernández to putatively rescue the pensioneers from the collapse of the private funds with a bill to transfer management of the fund assets to the federal government.  According to the (fuzzy and incomplete) version that I’ve seen, pension benefits will be standardized to be the universal minimum plus 18% of the workers’ pre-retirement salary over the last ten years.  In addition, anyone who contributed more than the statutory amount into their account will be entitled to withdraw it from the state system and re-invest it however they would like.  The workers will retain their accounts under federal administration, although its not clear what that will mean.

Okay ... what a stupid idea.  What a mind-bogglingly stupid idea. 

Does the transfer of administration help the government’s financial situation?  Not really.  Even if the government liquidated every last penny of the funds’ non-governmental assets, and even if the government didn’t lose a penny on doing so, it would net all of US$13.2 billion.  That’s enough to cover the country’s financing needs for 2009 ... but there is still US$48 billion stashed away in the central bank.  So the money isn’t desperately needed.  

And even if there were no reserves in the central bank, it’s easy enough for the government to just default on its debt as it rolls over.  Hell, it doesn’t have access to international credit markets now.  And investors have very short memories.  So why anger your voters when you can simply piss off foreign financiers who aren’t planning on lending you any fresh capital anyway? 

At the same time, if all the government wanted to do was grab the payroll tax revenues, it would be easy enough to force the funds to start investing in federal bonds on the margin without appearing to seize people’s savings.  They did just that back in 1999.  Keep the private accounts, but just force all incoming money into the system to be used to buy government bonds.  That’s a cool US$4 billion a year.

Does the transfer of administration at least help pensioners?  Well, no.  The new minimum pension is a good thing, but the government doesn’t plan to start liquidating the funds in order to finance it.  Meaning that the government could easily raise the minimum pension while leaving people’s past savings in their hands, since it has to be financed out of tax revenues or new borrowing anyway. 

Does the transfer of administration help the government politically?  Hell, no.  Argentines, like Americans, like their property.  It’s one thing to alter the way their payroll taxes are invested from this moment on.  It’s one thing to raise their payroll taxes to guarantee a higher minimum pension.  It’s one thing to screw over foreign investors. 

It’s quite another to take something away from them that they already have. 

Crystallized opposition, loads of lawsuits, lots of anger ... and no real economic gain over other options.  So what’s the point?  I just don’t understand.

Even more humorless, I am

I'm losing my sense of humor about the election.  (Yes, I know that some of my readers believe that I never had any.  They're probably correct.)  I could handle the lying, that's what Republicans do, and anyway, we've hit back.  (McCain doesn't really oppose stem cell research and McCain isn't really anti-immigrant, although he really doesn't like Social Security and won't say how much he'd like to cut it.) 

But this crap is too much.  Senator McCain lies about suspending his campaign.  Then he flies to Washington for a big meeting.  At which he takes no stance.  The congressional GOP procedes to propose a plan which makes absolutely no sense.  Viz, as far as I can understand it:

(1)  Insure all mortgages.  Charge premiums high enough to make the insurance self-financing.  Okay ... but the mortgages currently in default never paid any insurance premiums in the past.  So how are you going to pay to insure existing mortgages?  Magic?  Brazilian foreign aid?  I think Brazil might have enough foreign reserves to do that, and they owe us ... oh, wait, no, they don't owe us.

(2)  Cut taxes to get private money to recapitalize the banks.  Uh, okay ... but y'all aware that people who have underwater assets are currently subsidized by the tax code?  Cut taxes, and you cut those subsidies.  They want to cut capital gains taxes on assets that are already underwater to encourage financial institutions to sell them?  Huh? 

Besides which, why is raising expected returns from 4% to 4.6%, or 10% to 11.5%, or whatever, going to enough to persuade that tidal wave of capital to unlock itself and pour into financial institutions?  Spreads are already huge and nobody wants to lend. 
                        
(3)  Require that Fannie and Freddie no longer securitize unsound mortgages.  Wait, didn't you just call for the federal government to insure said mortgages?  Oh.

Now, normally this nonsense wouldn't mean anything.  Nancy Pelosi controls the House; with Bush in office, she wants Republicans to sign on for political cover.  Meanwhile, over in the Senate, they only need to peel off nine Republicans to pass the Dodd plan.  But now McCain is refusing to commit himself and has made positive noises about the above bit of gobbledygook, meaning that nothing will get done for forty days.  At least.  Okay ... but why all the sturm-und-drang from McCain then? 

The political logic escapes me.  The economic logic escapes me.  John McCain appears to have escaped the bounds of gravity.