A Proper April Fools Day!

Yep. It's time for Donald Luskin:

Donald Luskin: Click here to read a draft (typos and all) of the 'paper' that 'economists' Dean Baker, Brad DeLong and Paul Krugman will 'present' today at the Brookings Institution (this is a leaked copy obtained at great personal hazard -- as of this posting, Brookings has taken down its link to the final paper on its web site).

But it's not "leaked": it's freely accessible. The Brookings link is active: http://apps49.brookings.edu/dybdocroot/es/commentary/journals/bpea_macro/forum/bpea2005_baker.pdf. And the link from my website is active: http://delong.typepad.com/sdj/2005/03/asset_returns_a.html

Don't be fooled by the academic veneer. This is just more propaganda aimed at blocking Social Security modernization. It's basically just a tarted up version of Paul Krugman's February 1 New York Times column (which I debunked thoroughly here)...

But Luskin didn't debunk it. He agreed with it. Our main point is that stock returns in the neighborhood of 6.5 percent will not be possible over the coming 75 years if economic growth is as low as the 1.9 percent rate used by the actuaries of the Social Security Administration in their solvency estimates. And what did Luskin write? He wrote:

Krugman does make one good point... stock returns in the neighborhood of 6.5 percent will not be possible over the coming 75 years if economic growth is as low as the 1.9 percent rate used by the actuaries of the Social Security Administration in their solvency estimates...

Why say that you debunked it when you agree with it--as anyone who can click on a link can see? Why say it was hard to obtain when it was easy--as anyone who can click on a link can see? What's the upside for Luskin here?

Comments

[dilbert dogbert]

Happy Fools Day to you all!!

[cynic]

I read it typos and all and thought it was great. Probably too rigorous for most readers, but that is exactly what is need, logical rigor. Why couldn't SS do something like this? (They probably could if the powers that be would let them.) The interesting thing to me, is that it does not really reject the idea of private accounts per se, but mearly suggest we get the math and assumptions right.

[hrned]

Luskin doesn't expect people to get past the first couple of lines and lies. He once referenced a Krugman article, completely misrepresenting Krugman, and offered the NYTimes link to prove his point. It was expired, but I paid the $2.75 to read it, and "what a surprise" - it supported Krugman, undermined Luskin and proved him a liar.

[cynic]

Luskin says "great personal hazard". I cannot imagine what the hazard would be other than actually trying to understand the math. Most good undergrads could!

[pgl]

Perfect April Fool - that being Luskin. But you had a typo in the link. Should be socialsecurity.com.

[kharris]

Who you gonna believe - Luskin or your lying research?

[ispivey]

Heh, I just e-mailed Don, advised him of the fact that the link is still there, and asked him to clarify something I didn't understand in his article debunking Krugman; namely the contradiction Brad just mentioned. So sorry for misrepresenting your ideas as mine, Professor, but I'm kind of curious to see if I can get any response by being civil (and pandering).

[anon]

http://www.poorandstupid.com/2005_03_27_chronArchive.asp#111225198740676144

The Luskin Link

[enfant terrible]

"I cannot imagine what the hazard would be other than actually trying to understand the math."

That seems dangerous enough for Luskin.

[yam]

The upside for Luskin? Simple, he gets to have his name tied to real economists in a Google search and all the privileges you get by being linked to Dean Baker, Brad DeLong and Paul Krugman.

[Larry M]

Remo,

Uh, no one seems to want to educate the stupid troll. (Or was your post a spoof?) You are most likely correct - the point, however, is that the dire predictions about the future of SS are premised on such a low growth rate. If growth is substantially higher than 1.9%, the problem with SS as it currently exists are greatly reduced or even disappear.

Or, to put it another way, the problem with the way that Bush is selling privatization is that he makes two contradictory assumptions - 1.9 % growth and stock returns of 6.5%.

[tomf]

That takes care of April Fool's Day, but how do you explain Luskin the other 364 days of the year?

[ispivey]

Donald Luskin responds to my inquiry!

I say:

"And I'm a little confused about the paper and Krugman's column, if you could clarify. In the link you provide debunking Krugman's column, you ended the financial analysis with:

'But Krugman does make one good point in Tuesday's column. He states that stock returns in the neighborhood of 6.5 percent will not be possible over the coming 75 years if economic growth is as low as the 1.9 percent rate used by the actuaries of the Social Security Administration in their solvency estimates.'

Are you saying that the actuaries are wrong? Because I looked at the paper, and that seems to be what the authors are saying -- the thing you agree with."

Luskin says:

"I don't particularly disagree that the actuaries are using numbers that don't seem to fit together. I just disagree that it matters. And I disagree with the way Krugman et al make their case."

Wait, what? He doesn't disagree that the actuaries are wrong. So he thinks they're wrong. He also thinks that it doesn't matter that they're wrong, because... well, forgive me for not being caught up on Donald Luskin's argument (and for the life of me, I don't know what it is after reading the 'debunking'), but I don't know why it doesn't matter. And he think that Brad DeLong smells funny. Capiche.

[Tom Hilton]

Good god...is Donald "I'm not an economist, but I play one at National Review" Luskin actually suggesting (via scare quotes) that Dean Baker, Brad de Long, and Paul Krugman aren't real economists?

The word 'chutzpah' is entirely inadequate...

[Bartkid]

>What's the upside for Luskin here?
Upside is downside.
Blackside is whiteside.
Warside is peaceside.
Etc., etc., and so forth and so on.
He's just keeping in practice.

[Nathan Smith]

That the 7% average returns on the stock market can't be sustained is becoming conventional wisdom. But it still doesn't make sense to me.

The argument seems to be that because stock prices have been rising faster than economic growth, they'll have to slow down. But just because prices don't grow as fast doesn't mean returns have to fall. Returns are capital gains plus dividends. It's possible that the rise in stock prices will slow down but dividends will recover. That's consistent with recent stylized facts about the economy, e.g. the high dividends of 2004.

7% seems to me like a decent compensation for stock market risk. It may be a sustainable market equilibrium. Anyway, what's wrong with Paul Krugman's piece was never the point about P/E ratios, it's that he doesn't understand the treadmill problem that results from wage-indexing.

[Anon]

Yeah, Tom, the scare quotes are the funniest part of this. Not only is he denying that DeLong, Baker, and Krugman are economists, he's also denying that it's a paper and that they're presenting it. Pathetic.

[Dilan Esper]

I love Luskin's use of "scare quotes" around the word "economists". He won't even admit that Krugman is one.

[Warren Terra]

In response to Nathan Smith's post ("7% seems to me like a decent compensation for stock market risk"), I'm in no way an economist, so I may be completely off the wall here. But I don't understand how 5% faster growth in the market than in the economy is supposed to compensate for risk. A multiplier, I can see (say, the stock market being worth 5% more than the economy because of the chance the market will go down the drain at any time), but - at least using very simple math, i.e. (1.07-1.02)^75 - this difference means that if the stock market and the economy are currently equal, in 75 years the stock market will be worth 4 times as much as the economy. And so the "compensation .. for risk" increases, proportionally, every year.

How is that reasonable?

[Uncle Jeffy]

Does anybody (other than people whose minds are already made up, so they won't be confused by either facts or logic) pay attention to Luskin anymore? Personally, I'd rather set my hair on fire and put it out with an ice pick than read his stuff....

[anne]

Where are the high dividends of 2004? The Total Stock Market Index pays 1.4% dividends and the S&P Index pays 1.6% after Vanguard costs.

Returns to stocks of 7% may be possible if price earning ratios hold. Dividends contribute 1.6% to returns, while share buybacks could add another 1.0%. Then 4.4% economic growth would allow for 7% market returns. But, the long term growth projection for the economy by the Social Security trustees is 1.9&. That would give 4.5% stock market returns. There is the problem.

Also, Brad DeLong and Paul Krugman and Dean Baker understand quite well that wage indexing will preserve Social Security and is essential.

[Auros]

Warren Terra has explained why high stock returns from high capital gains is inconsistent with slow growth in the total economy -- the stock market becomes worth far more than the total economy.

The reason why the returns can't come from dividends is that dividends come from profits, and profits are themselves a portion of the total economy, and thus cannot, in the long-run, grow faster than the total economy. They could over the short-run become a larger portion of the whole, however this is not likely to last long or be permanent: it's empirical fact that corporate profits have run at about 10% of GDP for as long as records have been kept, excepting major market crises. Furthermore, if it did, it would be a disaster for workers, because the way that the allocation of the economy shifts towards profits (i.e. return to capital) is by cutting into the return to workers. Which is to say, if returns on stocks are driven up in this manner, the returns to the current investing class will be large, and the returns to workers who are given "Personal Savings Accounts" will be more than offset by the stagnancy of their wages.

[Auros]

BTW, a link with a nice graph of profits and GDP is here:
http://www.efficientfrontier.com/ef/702/2percent.htm

Oh, and let's address Nathan's closing point, in which he embarasses himself by saying: "[PK] doesn't understand the treadmill problem that results from wage-indexing."

As Brad pointed out here...
http://delong.typepad.com/sdj/2005/03/why_oh_why_cant_7.html
...there is no such treadmill problem.

Bear in mind that once you retire, your SS benefit is no longer wage-indexed -- it only rises with inflation, hence in real dollars it is fixed. So if GDP goes up faster than inflation, your benefit is a shrinking share of GDP, and productivity thus helps fund SS. Yes, wage indexing reduces the amount by which productivity helps, but it doesn't eliminate the benefits. And indeed, under the low-cost assumptions, a 0.3% difference in productivity assumptions COMPLETELY WIPES OUT SS's long-term deficit.

[Auros]

BTW, a link with a nice graph of profits and GDP is here:
http://www.efficientfrontier.com/ef/702/2percent.htm

Oh, and let's address Nathan's closing point, in which he embarasses himself by saying: "[PK] doesn't understand the treadmill problem that results from wage-indexing."

As Brad pointed out here...
http://delong.typepad.com/sdj/2005/03/why_oh_why_cant_7.html
...there is no such treadmill problem.

Bear in mind that once you retire, your SS benefit is no longer wage-indexed -- it only rises with inflation, hence in real dollars it is fixed. So if GDP goes up faster than inflation, your benefit is a shrinking share of GDP, and productivity thus helps fund SS. Yes, wage indexing reduces the amount by which productivity helps, but it doesn't eliminate the benefits. And indeed, if you compare the assumptions of the Low-Cost and Intermediate-Cost predictions in the Trustees' reports, you'll find that a very small increase in productivity assumptions COMPLETELY WIPES OUT the long-term deficit.

[Keith M Ellis]

The square quotes are so absurd as to be almost unbelievable for someone who wants to be taken seriously.

[anne]

Payroll taxes and Social Security benefits are both indexed to wages. When wages increase however the amount collected in payroll taxes is more than the amount of added benefits since there are always more workers than retirees. Changing from a wage indexed to a price indexed system would destroy Social Security because benefits would fall further and further behind average wage levels.

[cloquet]

What difference does it make whether you have private accounts or not? If the economic factors are correlated, wouldn't a poor economic environment mean that stock returns and employment would both be depressed?

The economy will have to adjust by gradually accomodating to fewer workers supporting more retirees, and I don't think the questions are going to be answered by arguing over private accounts.

In out state we are seeing a small change. The defined benefit contribution for employees was just raised, maybe to pay for the early retirees that were laid off to save the state money.

Maybe some deflation wouldn't be a bad idea either. Deflation in house prices would make things easier for workers, and deflation in insurance cost would make things easier for retirees.

Another factor- perhaps there will be more multi-generational families to help defray costs of those mongo houses we have built. Has household size continued to decrease, or is it increasing again? That would be interesting to know.

[Frank]

Ann- Except that there aren't allways more workers than retirees. It is still the case that rising wages improve income to the SS system more than the increasing benefits raise costs.

[Bernard Yomtov]

"The square quotes are so absurd as to be almost unbelievable for someone who wants to be taken seriously.'

Scare quotes, I guess. Looking at Luskin's site, a painful experience, suggests that putting quotes around the word "paper" is his way of saying he disagrees with the paper. Much easier than actually refuting anything.

[chris]

Upside? It's just sloppy argument. Robert Novak gets away with it on tv anytime he says "in full disclosure," while he goes silent on the Plame deepthroat. The readers of his publication aren't going to click through. I find it hard too to follow the details of social security returns.

[chris]

Juan Cole wrote too about writing from his blog's detractors for strategic Google position. That would be a clever move by Luskin by putting his name into the same search as "economists" Krugman, Baker and DeLong. That's a good observation by yam.

As for print, there has to be lots of N R readers who are looking for a good rebuttal to proposals by economists like the three to a plan that hasn't even been submitted yet. A piece that is about one page long for busy people, CEOs maybe. Then when the CEOs want to stretch their minds and listen to a serious speaker they hire Luskin. How much does Luskin get for a speech? That's where some of the high earnings are going.

Thanks for sharing ispivey.

[Bruce Webb]

"Ann- Except that there aren't allways more workers than retirees."

Well except that there always are. Even given Boomer demographics the numbers of Americans 21 to 67 should always exceed those aged 68 to 114. Same 46 years, big differences in mortality. You can play with labor participation and unemployment numbers, but you are going to have a hard time driving worker/retiree ratio below 1/1. Even under Intermediate Cost's dismal numbers the dependency ratio of aged to working age never gets above .431 (about 2.1 working age persons to each aged one).
2005 Report: Dependency Ratios http://www.ssa.gov/OACT/TR/TR05/V_demographic.html#wp167717

[anne]

Bruce Webb

We must become more knowledgeable about Medicare issues as well as Social Security, for there is everywhere a problem with proper medical insurance coverage culminating in the need to sustain and improve Medicare.

[peBird]

I suggest that from now on we refer to Luskin as "Luskin".

[Bruce Webb]

Anne, absolutely agree on Medicare. But let us not forget that that portion of Medicare that relies on payroll tax programatically assumes income based on Social Security Intermediate Cost projections. To the degree that we agree growth numbers are artficially reduced to show Social Security "crisis", we should agree that there is a big income stream likely to flow in to Medicare that is wholly unanticipated by the current models.

Where Medicare rests on the crisis/problem spectrum depends a great deal on the ultimate fixed point of Social Security we assume.

[anne]

Bruce Webb

Perfect, and the basic solvency of Medicare will have to be often repeated as the case is made for the affordability of Medicare and helath care.

[anne]

http://www.nytimes.com/2005/03/31/business/31scene.html?pagewanted=all&position=

Public Health Measures Always Involve Trade-Offs
By ALAN B. KRUEGER

Interesting...

[Julian Elson]

I can understand why Luskin is so mad at the conspiracy to keep people stupid -- he's one of its most heavily wounded victims.

[ritchie]

"Even given Boomer demographics the numbers of Americans 21 to 67 should always exceed those aged 68 to 114. Same 46 years, big differences in mortality. You can play with labor participation and unemployment numbers, but you are going to have a hard time driving worker/retiree ratio below 1/1."

Iraq, Syria, Iran, North Korea, China...

Come on, Bush could do this. You know he can.