Economic ignorance never dies. Seeing bad arguments repeated, again and again, even when correct information is widely available is the most disheartening thing about teaching economics. Two recent examples in the media show how misunderstandings and mistakes can worsen, rather than improve, public understanding.
MISUNDERSTANDING ‘LIFE EXPECTANCY’
On a recent radio program, the governor of a northeastern state argued his state’s pension funds were in trouble because “when they were set up, life expectancy was only 58, so hardly anyone lived long enough to get any money.”
Two weeks ago, a prominent Wall Street pundit, after noting average life expectancy was 61 when the Social Security Act was passed, asserted, “So FDR set the retirement age four years above the average life expectancy. So much for compassion. He assumed you would work into what was for them advanced old age.”
Both these people obviously don’t understand what was meant by life expectancy nor why it has risen over time.
“Life expectancy at birth” for a given year is the mean age to which someone born that year would live if mortality rates for all age groups remained at the levels of that year. It is not “the age by which most people are dead.” And, as with any mean or median, some individuals die well before this age and many well after it.
Life expectancy at birth is highly influenced by infant and young child mortality rates. It was so low 75 years ago because many children died. But many other people lived into their 70s and 80s.
In 1940, when the first Social Security checks went out, 9 million people, or 7 percent of the population, were over 65. Most did not qualify for Social Security because they had never paid in. But there clearly were many old people in the population.
At 1940 mortality rates, 60 percent of people born reached age 65, and 23 percent lived to age 80. So the idea that hardly anyone lived long enough to benefit when Social Security was instituted betrays abysmal ignorance of history and introductory statistics.
Yes, from 1940 to 2009, life expectancy at birth did increase from 62.9 to 78.2 years. However, a third of the increase took place in the 1940s alone. And yes, some 83 percent of people now survive to age 65 instead of 60 percent. But again, most of that improvement came from better health in infancy and childhood. In 1940, 5.8 percent of people born died by age 5. That fell to 2.3 percent by 1970 and 0.8 percent at the turn of the last century.
However, over the same seven decades, the number of additional years that people reaching 65 can expect to live has increased by only 5.7 years, from 12.8 to 18.5. (About two of those 5.7 years have occurred since normal Social Security retirement ages were raised in 1984.)
Increased life spans are an important factor in Social Security’s solvency problems. But they pale in comparison with the impact of the baby boom and the subsequent birth dearth. At the time it was created, Social Security was not a cynical scam.
INTEREST RATES AND INFLATION
The second example, from the Associated Press, focused on the European Central Bank’s Oct. 6 promise to loan unlimited amounts of money to any bank that needed it. The ECB did not, however, lower its target interest rate.
The reporter contrasted this with the Bank of England, which has lowered its target rates and is increasing the money supply by purchasing bonds. He hailed the ECB’s policy as one of “fighting inflation, which can be worsened by rate cuts.”
This confuses cause and effect. Low interest rates don’t cause inflation. Excessive growth of the money supply does.
Many men lose hair and have poorer vision as they age. But baldness does not cause bad eyesight, the two simply have a common cause, aging. Yes, money growth, from whatever policy action, does lower interest rates. It also can increase the price level. But both the interest rate change and inflation are results. One does not cause the other.
For the ECB to make unlimited loans to banks, it has to create new money just as surely as the Bank of England does in buying up bonds.
Either method of money creation will, other things kept equal, push interest rates lower than otherwise, regardless of whether the ECB keeps some symbolic rate fixed.
Any money supply increases have the potential to raise inflation, regardless of whether the extra money is created to make direct loans to banks or to buy up securities.
So the ECB is being no more careful about inflation than the BOE.
Why does this matter? The global economy hangs on the cusp of a second recessionary wave in the ongoing economic debacle that opened four years ago. The world’s central banks, in contrast to officials in charge of fiscal policy, are not paralyzed. But what they can do is limited.
We are better off if citizens understand both the capabilities and limitations of such banks. But that is stymied by media stories that get causal relationships in monetary policy backwards.
© 2011 Edward Lotterman
Chanarambie Consulting, Inc.