Grasping Reality with Both Hands

Entitlement Summit: The Back of the Envelope Version

Paul Krugman:

Entitlements on the back of an envelope: Right now, the federal government spends about 9 percent of GDP on the three biggies, Social Security, Medicare and Medicaid, with the total roughly evenly divided between retirement and medical care. We have an aging population, which will tend to increase the share of GDP spent on these programs. Looking ahead to circa 2050, we’ll go from about 3 workers per retiree to 2. This would, other things equal, raise spending on the programs by about 4 percentage points of GDP. (Not 4.5, because only part of Medicaid is age-related). That is, we’d spend 6.75 percent of GDP on retirement, 6.25 percent on health care. Now, 4 percent of GDP is a lot, but not catastrophic: remember, the share of GDP spent by the government currently is 10 percentage points or more higher in a number of wealthy countries than it is here.

What makes the projections you actually see so scary is the assumption that “excess cost growth” in health care will continue — that is, health spending per person will continue to rise at close to 2 percent faster than GDP per capita. This means, circa 2050, that health care costs will be roughly double what pure demography would predict, adding another 6 plus percentage points to the entitlements projection. Looking beyond that, demography adds very little — it’s all health care.

So if excess cost growth in health care can be brought under control, the entitlement problem is manageable. If not, even savage cuts in Social Security will make little difference.

Now Might Be a Good Time to Take the Social Security Trust Fund Balance Out of Treasuries and Move It into Equities

Buy low, sell high after all.

Just saying...

Yet Another Reason to Vote Against John McCain

Ezra Klein:

Ezra Klein Archive: Today, John McCain said, "Wall Street has betrayed us. They've broken the social contract between capitalism and the average citizen and the worker. And workers are paying a very heavy price while a lot of them are not only emerging unscathed but some of them are left with packages of a hundred million dollars or so. This is a result of excess and greed and corruption.... And we got to fix it.... We have to have a 9/11 commission to find out what went wrong.... And as president, I guarantee you, it will never happen again"...

John McCain's contention is that Wall Street has, for years, been rotting in a toxic mixture of greed and overreach and corruption. Simultaneously, a 70-year-old regulatory structure has proven inadequate at checking the institution's excesses. This is, in other words, a crisis composed of trends, rather than a singular, unpredictable, catastrophe.

Three years ago, John McCain signed on to George W. Bush's efforts to privatize Social Security. He surveyed Wall Street and decided that it was a stable enough institution to entrust with the nation's pension funds. Three years ago. And this wasn't just an attempt to cozy up to Bush: McCain was arguing for privatization in 1999. So McCain's argument is that Wall Street is built atop an unstable regulatory foundation and is shot through with most of the seven deadly sins. That the situation has been allowed to fester so long is evidence that "people were asleep at the switch." Even so, McCain has consistently argued that much of Social Security should be turned over to... Wall Street. Either he wanted to tank the nation's pensions funds or he was one of the people asleep at the switch. But those are really the only two options here.

Draft: To Spend Is to Tax

We economists have a scenario that we call "current policy plus Bush tax cuts." It is made up of (i) the laws currently in force in the United States of America, plus (ii) the assumption that the defense, veterans, and other spending currently appropriated year-by-year by the congress remains the same as a share of GDP, plus (iii) the assumption that the tax breaks like the R&D credit and the regular pruning-back of the Alternative Minimum Tax that are voted for year by year by overwhelming congressional majorities continue to be enacted year-by-year, plus (iv) the assumption that the tax cuts George W. Bush proposed in 2001 and 2003 but made time-limited and set to expire early next decade are renewed. This "current policy plus Bush tax cuts" scenario has the federal government taxing about 20% of GDP over the next seventy-five years. It has the federal government forecast to spend 28% of GDP on average over the next seventy-five years. This is the fiscal gap.

A number of policies could be enacted to eliminate this fiscal gap. Simply doing nothing and letting the Bush tax cuts expire as current law requires them to do would reduce the fiscal gap from 8 percent to 6 percent of GDP. Raising Social Security taxes or cutting back future Social Security benefits by the about 1/7 needed to get the Social Security system back into projected 75-year balance would further reduce the fiscal gap from 6 percent of GDP to 5 percent of GDP. Returning military spending to its late-1990s share of GDP--not fighting wars in Iraq, et cetera--would reduce the fiscal gap from 5% to 3.5% of GDP. And eliminating "excess" cost growth in the government health care programs Medicare and Medicaid--allowing Medicare and Medicaid spending per eligible beneficiary to grow only as fast as the rate of growth of income in the economy as a whole--would bring the federal government into projected balance.

I believe that when we Americans look deep into ourselves and ask us what we want our government--because it is our government: it is our agent to do what we want with our money just as the guy in Florida we hire to keep grandma's one bedroom condo in repair is our agent--to do, we conclude the following:

1. We want to let the Bush tax cuts expire.
2. We want to close the 75-year Social Security gap, half by raising the limit on earnings taxed by Social Security so that the upper middle class and the rich pay more for Social Security and half by reducing the rate of growth of benefits at retirement.
3. We want to stop sending our soldiers--the best-trained and best-equipped high tech armed forces in the world--abroad to be military police in countries riven by sectarian conflict where they do not speak the language--and so return defense spending to its late-1990s share of GDP.
4. We want to reduce but not eliminate the "excess" cost growth in Medicare and Medicaid: we believe our doctors, nurses, and druggists will learn how to do wonderful things over the next two generations, and we do not want those wonderful things in the way of medicine applied only to the rich but to the poor and old as well.
5. Whether or not we decide to do (1) through (4) above, we want to raise taxes to cover whatever of the long-run fiscal gap remains, and so bring the federal budget back into balance over the long run.

Note that (5) is not optional. As the late Milton Friedman liked to put it: to spend is to tax. If the government buys things, it must get the money to buy them from somewhere. It can get the money from three places. It can tax. It can borrow--but then the borrowing has to be repaid with interest, and the more is borrowed the higher the interest and the worse the value the taxpayers ultimately get for their money when they are taxed to repay the borrowing. Or it can print the money and so inflate the currency--but that too is a tax, and an especially unfair, painful, and destructive one, as lots and lots of people victimized by inflation find their wealth doesn't buy what it used to and what they expected.

We can argue over whether (1) through (4) is what we want to do--that is what politics is about. But whatever we decide to do with (1) through (4), (5) is not optional--not, that is, if we want to continue to have a rich country in the long run. And the politicians who have told you that (5) is optional from Ronald Reagan to George H.W. Bush to Robert Dole to George W. Bush and now John McCain are not your friends, or America's friends.

Today's Additions to the Pile...

In today's mail:

• Alicia H. Munnell and Steven A. Sass ( 2008), Working Longer: The Solution to the Retirement Income Challenge.

And yet another copy of:

• Raymond Fisman and Edward Miguel (2008), Economic Gangsters: Corruption, Violence, and the Poverty of Nations.

I gave the last to Gerard Roland...

Greg Anrig on Tom Hamburger on Jason Furman

Apropos of LA Times reporter Tom Hamburger's gross mispresentation of Jason Furman:

Grasping Reality with Both Hands: The Semi-Daily Journal Economist Brad DeLong: Obama's selection of Jason Furman as economic advisor is criticized: [Jason Furman] was also quoted in a transcript from a CNBC interview in 2006 as suggesting openness to changes in Social Security that might include private accounts and benefit cuts. The approach he described sounded similar in some ways to that proposed at the time by President Bush. The Bush private accounts idea was anathema to labor activists, who successfully challenged the president's initiative.

Greg Anrig comments:

It wasn't a matter of "space" -- Hamburger simply got the facts totally wrong. If he had left out his errors about Social Security, he would have had more space. Jason may have been the single most effective wonk in the victory against SS privatization.

What was special about Jason's work was his relentlessness in turning around pointed analysis with fresh numbers every time new details came out about various plans, and all in nice user-friendly formats that the media could understand. Those kinds of skills are really huge assets for a campaign, as well as an administration.

And, yeah, Dean [Baker]'s work was also huge. As well as EPI's, TPMs, most of the economists, and many of the bloggers...
No sign of any climbdown on the part of the LA Times...

Why oh why can't we have a better press corps?

We Get an Email from Tom Hamburger...

Apropos of the astonishing and false claim in this morning's LA Times that Jason Furman is some sort of a crypto-Bushie with views on Social Security matters "similar" to those Bush proposed in 2005, I write to the reporter involved, Tom Hamburger. And he writes back:

Mr. Hamburger's bottom line appears to be that his leaving a lot of readers with a false view of Jason Furman's position on Social Security is OK because that was "not the point of this story..."

So I write back:

On Wed, Jun 11, 2008 at 12:22 PM, Hamburger, Tom wrote:

Dear Mr. DeLong: Thanks for writing. I'll respond briefly and welcome the chance to chat with you further, if you wish. 1/I not only googled "Furman and social security"...

Then how did you miss the first two substantive results in your search?

The Impact of The President’s Proposal On Social Security Solvency ... by Jason Furman, http://www.cbpp.org/5-10-05socsec.htm

Contrary To Claims By Its Supporters, The Congressional Budget ... by Jason Furman ... http://www.cbpp.org/4-29-05socsec.htm...

I don't understand how anyone can write in good faith that Jason Furman's views on Social Security were "similar in some ways to that proposed at the time by President Bush," or could in good faith write that "labor activists... successfully challenged the president's initiative" without also feeling under a moral obligation to note that it was Jason Furman's quantitative analyses of the Bush plan for CBPP that provided a lot of the most effective ammunition against the Bush Social Security plan.

What you wrote simply isn't fair. It also isn't true--unless you rely want to rely very, very heavily on your two weasel words "similar" and "in some ways." It would have been much truer and fairer to write that Jason Furman's views on Social Security are "very different in many ways from those proposed by President Bush, and Furman was at the time one of Bush's harshest critics."

You seem to offer a defense of your article that I can only call half-hearted:

I did not suggest [Jason Furman] was a cheerleader for Bush, only that he was open to discussing some things -- i.e. private accounts and benefit cuts, which is what he said on the show...

To which the rest of us can only respond that you mischaracterize your own article. The article you are now describing says that Furman's views on Social Security were "similar in some ways but different in many others from those proposed at the time by President Bush." To just say that his views were "similar"--and to suppress the role he played in analyzing the Bush proposal in 2005--is to suggest that he was if not a cheerleader at least neutral. Which is false.

You've left a lot of readers with a false impression of Furman's views on Social Security. You owe them a correction. And you owe yourself a correction as well.

Instead, you say:

I wish our anemic news business had more space to include more info. In the future I plan to include some of Furman's social security views. But that was not the point of this story...

To which the rest of us can only respond that a story that says that labor activists are worried that Jason Furman is a crypto-Bushie on Social Security but they are wrong because he was actually a harsh critic of Bush Social Security proposals back in 2005 informs the LA Times's readers, while a story that says that labor activists are worried that Jason Furman is a crypto-Bushie on Social Security and his views are indeed "similar" to Bush's proposals misinforms the LA Times's readers. And there is an important distinction here somewhere.

Why oh why can't we have a better press corps?

Notes on Social Security Reform

Andrew Biggs has a weblog, Notes on Social Security Reform, that is well worth reading...

Andrew Samwick on Social Security

He writes:

If It's Spring, There Must Be a Trustees Report: I always go first to this table, Table IV.B7, which shows the present value of Social Security's unfunded obligations over an infinite horizon. The number is $13.6 trillion, or 3.2% of taxable payroll or 1.1% of gross domestic product over the same horizon. I've blogged extensively about these summary numbers over at Vox Baby. For the present post, I'd like to make two quick points.

1. I tend to focus on the middle number--3.2% of taxable payroll--when describing what needs to be done to Social Security to remove its projected shortfall. The number itself means that if we increased payroll taxes by 3.2 percentage points, from 12.4 to 15.6%, and invested the near-term surpluses at the rate of return projected on Treasuries, there would be enough funds available to pay all projected benefits in perpetuity. That doesn't mean we have to follow that strategy, but it does indicate the size of the projected shortfall. Since the deficits come in future years, I don't see any good reason why we don't change the rules for future contributions and benefits to remove them.

2. Pete points out, as others like CBO Director Peter Orszag have, that the projected increases in per-capita medical expenditures in Medicare and Medicaid become a much larger fiscal challenge than the demographic-driven changes in both Social Security and Medicare expenditures....

Social Security's costs increase to 6% of GDP as the Baby Boomers move from the workforce to retirement. That shift in costs is permanent, even as the Baby Boomers expire, because of longer term trends toward longer lives and fewer children. That projected increase is swamped by the impact of projected medical expenditure increases. And unlike Social Security, there is very little in the way of projected revenue sources that aren't general revenues....

I think it is important to discuss comprehensive reform. The sooner, the better. On Social Security, I've put my name on a plan that could serve as a compromise. On Medicare, I think the best option is to raise the age of full eligibility for future beneficiaries, allowing younger retirees to pay their way in. But that's a blog for another day.

Immigration and Social Security

Kevin Drum:

The Washington Monthly: Last year the trustees estimated that Social Security had an overall 75-year deficit of 1.95% of taxable payroll. This year it's 1.70%. That's a pretty substantial improvement. What caused it?... Table IV.B9 has only one significant change from 2007: "Methods and programmatic data." And what might that entail?... immigrants. To be specific, better estimates of the taxes and benefits received by illegal immigrants -- or, as the trustees refer to them, "other-immigrants":

In previous reports, the other-immigrant population was projected using assumed annual numbers of net other immigrants with a static age-sex distribution. For this year's report, the annual numbers of net other immigrants are projected by explicitly modeling other immigrants and other emigrants separately.

Translation: instead of just pulling a net number out of a hat, the trustees built a model that estimated the actual demographic characteristics of both immigrants and emigrants. And guess what?

• Illegal immigrants tend to skew young. This benefits the system.
• Young people have more children than older people. This benefits the system.
• Some illegal immigrants pay taxes for a few years and then leave. This benefits the system.

Bottom line:

This year's report results in [...] a substantial increase in the number of working-age individuals contributing payroll taxes, but a relatively smaller increase in the number of retirement-age individuals receiving benefits in the latter half of the long-range period.

Give or take a bit, it turns out that this shores up the Social Security system to the tune of around $13 billion per year. Thanks, illegal immigrants!

Social Security Actuarial Balance in Historical Perspective

[Paul Krugman] sends us to:

And comments:

Paul Krugman: I think the key message is what has happened to the estimate of actuarial balance -- the difference between projected outlays and projected revenues over the next 75 years. This is the thing that is supposed to get steadily worse as time goes by, as the 75-year window contains ever fewer years in which the baby boomers are in the work force, paying payroll taxes, and ever more years when the boomers are out of the work force and collecting benefits.

In fact, however, the actuarial balance has been improving rather than worsening. It is now better than it has been since 1993. What this tells us is that projections made in the mid-to-late 1990s were, in the light of subsequent revisions, way too pessimistic.

Why Oh Why Can't We Have a Better Press Corps? (Yet Another Ruth Marcus/Washington Post Edition)

This morning Ruth Marcus writes:

Social Security: Five Myths and a Slur: [The claim that] "Social Security is only a big deal to people who hate the program and want to see it destroyed -- or to their ignorant dupes"... is worse than a myth. It's a slur -- on responsible people, Democrats and Republicans, who may differ about the Social Security cure but agree on the diagnosis and on the need for treatment.

This reads like a lame reply to what Clive Crook wrote last week at the Atlantic:

On an important point, [Democrats] are right: no great fiscal crisis lies in wait for social security... tweaks will be enough to deal with it.... A fiscal crisis is indeed looming over the next few decades – but its cause is Medicare, not social security. For the US, the real fiscal enemy is not the ageing of the population, but the relentless rise in healthcare costs.... [Any exclusive] focus on social security reform [is] both ill-conceived and, no doubt, deliberately misleading...

Indeed, today Ruth Marcus gives a lot of ground, no longer hiding from her readers the fact that:

The [Social Security] shortfall is small, and it's a lot smaller than the Medicare shortfall.... Social Security isn't the biggest budgetary challenge...

Indeed, by my count Social Security needs to take a number and get in line, being only the fifth-most serious budgetary shortfall, behind:

• Medicare hospitalization
• Medicaid
• Medicare drug benefit
• The Bush 2001 and 2003 tax cuts

But because Ruth Marcus lacks the ovaries to state that Social Security is only fifth in magnitude of our budgetary shortfalls, Dean Baker is still unhappy:

Beat the Press Archive | The American Prospect: A couple of quick points are in order. To claim unanimity of forecasts agree with SS trustees is simply false. The trustees assume that productivity growth will be markedly slower over the longterm horizon than its post-war average. They also assume that immigration will slow sharply from its rate over the last decade. Both assumptions make the projections for the program look considerably worse. One need only step over to the non-partisan Congressional Budget Office's website to find more positive projections on these variables...

The second key point to keep in mind is that the idea that taking steps earlier rather than later makes things easier means that it is better to either raise taxes on a cohort that has seen 30 years of wage stagnation or to cut their retirement benefits, even though most have accumulated little for retirement other than their SS.... Only the Post would argue that it's better to raise taxes and/or cut benefits on much poorer workers today than to risk the possibility that we may have to raise taxes or cut benefits on the much wealthier workers of the future...

And Paul Krugman is still--rightly--contemptuous:

The Social Security obsession, again: By any reasonable standard, Social Security is at most a second-tier policy issue.... The Social Security trustees estimate the 75-year financial shortfall of the program at 0.7% of GDP. That compares with a general fund deficit – the federal deficit outside of Social Security – of 3.3% of GDP last year (that is, not even taking into account future demands on Medicare and Medicaid.) Social Security, in other words, is in much better financial shape than the rest of the government.

Another illuminating comparison is to look at the sources of projected growth in entitlements spending. The last Congressional Budget Office long-term budget projection had Social Security spending rising from 4.2 percent of GDP now to 6.4 percent by 2050, a 2.2 percentage point increase – and Social Security, remember, is currently running a surplus to prepare for that eventuality. Meanwhile, Medicare and Medicaid spending are projected to rise from 4.5 percent of GDP to 12.6 percent, three times the Social Security increase – with negligible pre-funding. As a result, Social Security fades to insignificance in any realistic discussion of entitlements problems....

If you’re seriously worried about America’s long-run fiscal prospects, then, you should talk a lot about the general fund deficit and the problem of rising health care costs, and hardly at all about Social Security. But that’s not how it works in DC these days.

How obsessed are Beltway types with what is really a minor problem? Here are two snapshots:

First, from commenter “Low-Tech Cyclist” at Brad DeLong’s place:

The WaPo has a subset of its unsigned editorials where it comments on what it calls “the ideas primary.”

Five of the last seven Ideas Primary editorials have been on the Social Security ‘crisis.’ There have been 15 editorials in this series. One has been on global warming - the greatest crisis of our era - and two have been on our greatest domestic crisis, the lack of universal health care and the upcoming crisis in the Medicare trust fund.

Second, from Jon Chait:

One of the oddities of the entitlement hysterics is that they are far more obsessed with the minor problems of Social Security than with the massive problems of Medicare. Indeed, if you look closely at their dire proclamations, they inevitably follow the same pattern: They begin with an ominous summation about entitlements–thus lumping together Medicare with Social Security–then swiftly proceed to demand that Social Security be shored up forthwith.

Russert’s recent harangue at the Democratic presidential debate was a classic example. He began by warning of the crisis faced by “Social Security and Medicare” but proceeded to ask no fewer than 14 questions about Social Security, and zero about Medicare. It’s as if he began fulminating against crime in the greater New York area and then immediately began demanding a large new police deployment in Chappaqua.

Look, I know this is very embarrassing to those who have been walking around thinking that hyping the Social Security issue makes them Very Serious People. But the facts are the facts – and the Beltway obsession with Social Security reflects ideology and fashion, not the real problems facing America.

I Think Clive Crook Is Right and Wrong...

Clive Crook comes to Paul Krugman's defense, apropos of Paul Krugman's rebuttal of Ruth Marcus's shameful Washington Post op-ed column:

Clive Crook: Krugman and Krugman and Social Security: I think Paul's rebuttal is correct, so far as the "circumstances" [i.e., the economics of Social Security] are concerned...

I think so too.

He then moves on to other issues, where I think Clive Crook goes astray. I think that Clive Crook stays on the right track here:

...But the circumstances [i.e., the economics of Social Security] are of course not the only thing to have changed since he opined on this topic in the past. [Paul Krugman's] modes of analysis and expression have changed too, and radically, in ways that often seem calculated to obscure the fact that he is one of the four or five most brilliant economists of his generation. This is not incompetence or inadvertence on his part; it appears to be a conscientious choice...

But then he goes badly astray. This is simply wrong:

...[Paul Krugman] wants to fuel the rage of the administration's opponents more than he wants to help people think through the arguments. He feels that this now serves the greater good. Bush and his people are too wicked for dispassionate analysis, he believes; there will be time for Seriousness later...

Here Clive Crook is 180 degrees wrong. "Dispassionate analysis" begins with the observation that Bush lies, those on Bush's payroll lie, and Bush's other mouthpieces lie. By beginning his analyses with the presumption that Bush and company (including people like Ruth Marcus) are informed public-spirited people making serious arguments in good faith, Clive Crook is misinforming his readers. Indeed, by paragraph 11 of this very post Clive Crook is writing that "the Bush administration’s focus on social security reform was... deliberately misleading"--a conclusion that belongs much higher up in the article.

Here, however, Clive Crook is right:

...In my view, for what little it may be worth, this is a disservice to Paul's own remarkable talents...

In an ideal counterfactual world, Paul could indeed be using his remarkable talents more productively. But we do not live in the Republic of Plato, we live in the Sewer of Romulus. So here and now Clive is wrong when he writes:

...this is a disservice... as well as to the greater good...

If somebody else were holding down the reality-based slot on the New York Times op-ed page, that would be one thing. But nobody is--hence I don't see that Paul as a moral agent has a choice: he has to keep doing what he is doing.

And here Clive is right:

...But this is a complaint which, by now, he has heard a thousand times...

There follow some smart observations about Social Security, like:

On an important point, [Democrats] are right: no great fiscal crisis lies in wait for social security. On present policies, the retirement of the baby boomers is going to push the programme into a gently increasing deficit over the next few decades, but tweaks will be enough to deal with it.... A fiscal crisis is indeed looming over the next few decades – but its cause is Medicare, not social security. For the US, the real fiscal enemy is not the ageing of the population, but the relentless rise in healthcare costs.... [T]he Bush administration’s focus on social security reform was both ill-conceived and, no doubt, deliberately misleading....

And:

The case for [Social Security reform] has little to do with fiscal arithmetic.... Private saving in the US is roughly zero.... households have... relied on house-price inflation to provide capital to support them in retirement. Those bets are going bad at the moment. Many Americans, especially the least well off, are going to be much more tightly squeezed after they retire than they expect. Social security gives them a base that should not be jeopardised – but for many of the not-rich, with few other resources to draw down, it is not enough.

Politicians should be asking themselves how best to encourage more saving – and Democrats should co-opt “the ownership society” as a slogan of their own. So simple: just rebrand it “ownership for all”.

A big theme of Democratic thinking is the need to spread the benefits of capitalism more broadly. Middle-class anxiety is real. Support for liberal trade is collapsing. The answer, Democrats say, is shared prosperity: the rewards of globalisation should go not just to the shareholder class, but to workers too. Quite right. But does this spreading have to be mediated exclusively through higher taxes and higher spending on welfare programmes? Is there not a good liberal case for widening the shareholder class as well?

For genuine social security reformers, that is the real prize. Shore up the system for the least well-off, to be sure, and make the safety net more secure. Then add a new layer, through partial privatisation, of wider participation in equity ownership...

And one not-so-smart observation about Social Security:

Properly conceived, this is a programme for empowering the less well-off, supporting their financial independence and widening access to the benefits of capitalism. No doubt, Republicans have a self-interested tactical reason to support the idea: more shareholders might nudge the electorate their way. But is the Democrats’ equal and opposite reason for denouncing the idea any more noble or public-spirited?

I think Clive Crook has forgotten his recent history. Bush's Social Security "reform" plan was emphatically not "shore up the system for the least well-off" and "add a new layer... of wider participation in equity ownership." Remember Gene Sperling's slogan: "personal accounts as an add-on, not a carve-out"? That was a Democratic program (originally Ned Gramlich's)--not Bush's. It would be a good program. But it is not a program that you can get to if you start rom the idea--as Ruth Marcus and company do--that Social Security faces an imminent crisis.

Hoisted from Comments: Low-Tech Cyclist Watches the Utterly Disgusting Fecklessness of the Washington Post

Hoisted from Comments: Low-Tech Cyclist Writes:

Grasping Reality with Both Hands: Brad DeLong's Semi-Daily Journal: I know bringing up Fred Hiatt is like shooting fish in a barrel on this score, but the WaPo has a subset of its unsigned editorials where it comments on what it calls "the ideas primary."

Five of the last seven Ideas Primary editorials have been on the Social Security 'crisis.' There have been 15 editorials in this series. One has been on global warming - the greatest crisis of our era - and two have been on our greatest domestic crisis, the lack of universal health care and the upcoming crisis in the Medicare trust fund. None have been on Iraq and the power vacuum we've created in the center of the Middle East.

Interesting set of priorities, huh?

http://www.washingtonpost.com/wp-dyn/content/linkset/2007/04/27/LI2007042701687_1.html

As I have said before, there is something very wrong with everybody who is currently helping to put the Washington Post in newsprint on the streets of Washington these days. In the future everybody involved is going to be claiming that they spent the Graham-Downie-Hiatt years representing tobacco companies or lobbying for the government of Sudan.

Paul Krugman Writes About the Long-Term Budget Math of Social Security

Paul says:

Long-run budget math - Paul Krugman: Start with the current position. Last year, federal spending on Social Security, Medicare, and Medicaid was 8.5 percent of GDP, equally divided between Social Security and the health care programs. Dismal long-run projections, like those of the GAO, have this total rising by 10 percentage points of GDP by mid-century.

So, how much of this is a Social Security problem? Pundits like Tim Russert love to point out that in its early days Social Security had 16 workers paying in for every retiree receiving benefits. But this is irrelevant; looking forward, we’ll see the worker-beneficiary ratio fall from about 3 to 2 as the baby boomers retire. This will raise the percentage of GDP spent on Social Security from about 4 to 6 — that is, a rise of about 2 percentage points of GDP, which is a small fraction of the entitlements problem.... What’s more, Social Security has already been strengthened to deal with this rise. In 1983 the payroll tax was increased and adjustments made to the retirement age, so as to build up a trust fund.... This brings us to the claim that the trust fund doesn’t exist, because it’s invested in government bonds. The full explanation of why this is sophistry is here.

The bottom line is that Social Security is just not the major problem. Now, part of the projected rise in Medicare and Medicaid costs represents the effects of an aging population. But as a new report from the CBO explains, demography is only a minor factor — mainly it’s rising health care costs. What’s more, the proposed “solutions” for the Social Security problem have no relevance to the issue of rising Medicare costs.... The Beltway obsession with Social Security is a classic case of a little knowledge being a dangerous thing. People have picked up a few facts about demography, and think they understand the long run budget problem. They don’t.

PS: OK, from some communications I see that 2017 — the projected date at which payroll taxes no longer cover benefit payments — has raised its ugly head. But there is no interpretation under which 2017 matters. Social Security legally has its own dedicated funding; if you believe the government will honor the law, the surpluses the system is now running are building up a trust fund, which will finance the system for decades after 2017, and maybe forever. If you think the law will be ignored, then Social Security doesn’t really have its own budget — the payroll tax is just one of many taxes, and SS benefits are just one of many government costs. In that case the relationship between payroll taxes and benefits is irrelevant.

The only way to make 2017 matter is to change the rules midway: when SS runs surpluses they don’t count, but when it runs deficits they do.

"Fixing Social Security" Is the Only Regressive Tax Increase on the Menu

Josh Marshall makes a very good point: much lf the enthusiasm for "fixing" Social Security (rather than tackling any of the much more serious long-run fiscal problems we have that the Bush administration has done so much to worsen) springs from the fact that "fixing" Social Security by raising the payroll tax is the only regressive tax increase that might be politically palatable:

Talking Points Memo | Stop Saving Social Security: The problem on the political side of the equation is that the enemies of Social Security have spent a couple decades arguing that the Trust Fund doesn't exist or that it is simply a bookkeeping device with no true financial meaning. If that's true, it means that American workers have spent the last twenty-five years using their payroll taxes to subsidize general revenues and make it easier to float big tax cuts for upper-income earners without getting anything in return.

If we start pumping a lot more money into Social Security coffers now it will by definition go into more government bonds, which is another way of saying that it will go toward funding our current deficit spending. In fact it will enable more deficit spending and probably more upper-income tax cuts because it will make the consequences of both easier to hide....

[T]he window of time we had to seriously pare down the national debt to prepare for the retirement of the baby-boomers is close to over... our best way of ensuring the future health of Social Security is to stop running up the national debt now. So I'm very reluctant to put more payroll taxes in the pot while we're still running big deficits because of the Bush tax cuts. The money will just go to subsidizing that irresponsible fiscal policy. If there is any sense in which the 'Trust Fund' is not 'real' it is that it must be paid back from general revenues. And that will only be harder the more other debt we're running up. So rather than solving the problem, I think we're actually enabling it...

Ah. Stanford's David Kennedy Can't Quote Properly Either...

UPDATE: Apropos of my:

Walker does not offer adherence to laissez-faire as a requirement for being an economist: he explicitly rejects it...

David Kennedy writes:

so do I, and so does Paul Krugman, which is why I made the reference, by way of paying him the compliment of not adhering to the long-regnant orthodoxy of the Economics Guild. Walker wrote in a facetious vein, as did I, but I guess the joke was lost on a lot of people.

---

David Kennedy of Stanford opens his review of Paul Krugman's "Conscience of a Liberal" with a claim that AEA founding president Francis Amasa Walker defined an economist as a faithful believer in laissez-faire, “not... the test of economic orthodoxy, merely.... [But] used to decide whether a man were an economist at all.”

Why am I not surprised that Francis Amasa Walker actually said something very different?

Francis Walker did not say that belief in laissez-faire determined "whether a man were an economist at all." What Francis Walker said in "The Recent Progress of Political Economy in the United States" was: (a) the better part of economists had never imposed such a test, (b) the worse part of economists in the United States who posed as "guardians of the true [laissez-faire] faith" had lost their influence, and (c) the subject was much the better for it.

Here is what David Kennedy of Stanford wrote:

The Conscience of a Liberal - Paul Krugman - Books - Review - New York Times: [M]aybe [Paul] Krugman is not really an economist — at least not according to the definition offered more than a century ago by Francis Amasa Walker, the first president of the American Economic Association, who wrote that laissez-faire “was not... the test of economic orthodoxy, merely.... [But] used to decide whether a man were an economist at all.”

Here is the real context in which Kennedy's quote appears, in Francis Walker (1889), "The Recent Progress of Political Economy in the United States," Report of the Proceedings of the American Economic Association. Third Annual Meeting, Philadelphia, December 26-29, 1888, pp. 17-40:

Yet, while Laissez-Faire was asserted, in great breadth, in England, the writers for the reviews exaggerating the utterances of the professors in the universities, that doctrine was carefully qualified by some economists, and was by none held with such strictness as was given to it in the United States. Here it was not made the test ofeconomic orthodoxy, merely. It was used to decide whether a man were an economist at all. I don't think that I exaggerate when I say that, among those who deemed themselves the guardians of the true faith, it was considered far better that a man should know nothing about economic literature, and have no interest whatever in the subject, than that, with any amount of learning and any degree of holiest purpose, he should have adopted views varying from the standard that was set up....

The abandonment of Laissaz-Faire, as a principle of universal application, however strongly individuals may still maintain it as a general rule of conduct, at once makes communion and cooperation, not merely possible. but desirable among economists. When it is confessed that exceptions, not few or small, are to be admitted, every thinking man has a part to take in the discussion; every interested and intelligent person becomes a possible contributor; every class of men, whether divided from others by social or by industrial lines, have something to say on this subject, which no other class can say for them, and which no other class can afford not to hear from them. The characteristic institutions of every nation, the experiences of eyery distinct coinmunity not only become pertinent to the subject, but constitute a proper part of the evidence which is to be gathered, sifted and weighed....

That barrier removed, political economy becomes something which never is, but is always to be, done; growing with the growing knowledge of the race, changing, as man, its subject-matter, changes; something which, in the nature of the case, must be the work, not of one mind but of many; something to which every man in his place may contribute, to which all classes and races of men must contribute, if the full truth is to be discovered; something to which every clime and every age bring gifts all their own; something to which the history of institutions, the course of invention, the story of human experience are not pertinent only but essential.

In such a work who would not wish to join? In such a work who would not welcome every faithful and honest helper?...

Socialsecuritymedicareandmedicaid

Paul Krugman on the failings of public discourse:

Socialsecuritymedicareandmedicaid: This is largely Dean Baker’s beat, but I’ve also been noticing what he’s noticing: sloppy doomsaying on Social Security seems to be making a comeback. During the great 2005 debate over privatization, I thought people like Dean and myself had managed to get across the points that there is no such program as Socialsecuritymedicareandmedicaid; that Social Security is in pretty good shape, so that projections of huge future spending on Socialsecuritymedicareandmedicaid are mainly about the Medicareandmedicaid part of it; and that in general, what we have is a health care crisis, with the costs of an aging population much smaller and more manageable.

But now casual talk about the need to “fix” Social Security is creeping back into the discourse. Folks, Social Security is in pretty good shape; it’s not clear that there even is a long-run shortfall, and if there is it’s a much less pressing problem than many others. The only reason we hear so much about Social Security is that there are powerful political forces that want to kill it, for ideological reasons.

Tyler Cowen Thinks Naomi Klein Believes Her Own Bulls---

He reads her book. He doesn't think it meets minimum intellectual standards. I think he is right: now I can borrow Tyler's ideas and have an informed view:

Shock Jock - October 3, 2007 - The New York Sun: Rarely are the simplest facts, many of which complicate Ms. Klein's presentation, given their proper due. First, the reach of government has been growing in virtually every developed nation.... [T]he reach of government has been shrinking in India and China, to the indisputable benefit of billions.... [I]t is the New Deal — the greatest restriction on capitalism in 20th century America and presumably beloved by Ms. Klein — that was imposed in a time of crisis.... China was falling apart because of the murderous and tyrannical policies of Chairman Mao, which then led to bottom-up demands for capitalistic reforms.... [T]he reader will search in vain for an intelligent discussion of any of these points. What the reader will find is a series of fabricated claims, such as the suggestion that Margaret Thatcher created the Falkland Islands crisis to crush the unions and foist unfettered capitalism upon an unwilling British public.

The simplest response to Ms. Klein's polemic is to invoke old school conservatism... reject[ing] the idea of throwing out or revising all social institutions at once. Indeed the long history of conservative thought stands behind moderation.... That tradition does advise a scaling down of free-market ambitions, no matter how good they may sound in theory, and is probably our best hedge against disasters of our own making. Such a simple — indeed sensible — point would not have produced a best-selling screed....

The clash between democratic preferences and policy prescriptions is, if anything, a problem for Ms. Klein herself. Ms. Klein's previous book, "No Logo" (2000), called for rebellion against advertising and multinational corporations, two institutions which have proved remarkably popular with ordinary democratic citizens. Starbucks is ubiquitous because of pressure from the bottom, not because of a top-down decision to force capitalism upon the suffering workers in a time of crisis.

If nothing else, Ms. Klein's book provides an interesting litmus test as to who is willing to condemn its shoddy reasoning. In the New York Times, Nobel Laureate Joseph Stiglitz defended the book: "Klein is not an academic and cannot be judged as one." So nonacademics get a pass on sloppy thinking, false "facts," and emotional appeals? In making economic claims, Ms. Klein demands to be judged by economists' standards — or at the very least, standards of simple truth or falsehood. Mr. Stiglitz continued: "There are many places in her book where she oversimplifies. But Friedman and the other shock therapists were also guilty of oversimplification." Have we come to citing the failures of one point of view to excuse the mistakes of another?

With "The Shock Doctrine," Ms. Klein has become the kind of brand she lamented in "No Logo." Brands offer a simplification of image and presentation, rather than stressing the complexity, the details, and the inevitable trade-offs of a particular product.... Klein... admitted that brands were never her real target, rather they were a convenient means of attacking the capitalist system more generally. In the same interview, Ms. Klein also tellingly remarked, "I believe people believe their own bulls---. Ideology can be a great enabler for greed."

When it comes to the best-selling "Shock Doctrine," that is perhaps the bottom line on what Klein herself has been up to.

Five points:

1. Margaret Thatcher did not create the Falklands War in order to crush unions and implement the rest of a domestic program that could barely get 40% of the vote, but she did take advantage of it--of the popularity generated by a short victorious war--to do so. There is only a very small amount of moral fault there: had she provoked the war for domestic political purposes there would be a great deal of fault, but she did not.

2. Tyler is right: Stiglitz ought to know better, for degrading the level of the debate is in your long-run interest only if you are one of the bad guys. And we are not.

3. Some governments can be trusted to run mixed-economy social democracies: those of Western Europe, of the British Dominions, of the islands and peninsulas off the coast of East Asia, and of California, Oregon, Washington, Wisconsin, Minnesota, New York, and New England come to mind.

4. Other governments cannot be trusted to run mixed-economy social democracies: Ghana and Zimbabwe and Egypt and Cuba and China and Mississippi come to mind. We do not know even much about how to predict which governments will fall into which category. We do not know how to change governments from one category to another. We do not have alternatives to recommend to governments that cannot run effictive mixed-economy social democracies.

5. And so the best advice really is Keynes's response to Trotsky: "Granted his assumptions, much of Trotsky's argument is, I think, unanswerable.... But what are his assumptions? He assumes that the moral and intellectual problems of the transformation of Society have been already solved--that a plan exists, and that nothing remains except to put it into operation.... An understanding of the historical process, to which Trotsky is so fond of appealing, declares not for, but against, Force at this juncture of things.... All the political parties alike have their origins in past ideas and not in new ideas and none more conspicuously so than the Marxists. It is not necessary to debate the subtleties of what justifies a man in promoting his gospel by force; for no one has a gospel. The next move is with the head, and fists must wait..."

Justin Fox Tries to Teach Dick Armey About Social Insurance Programs

The curious capitalist writes:

Dick Armey, Social Security, private accounts and the Dutch-Aussie solution - The Curious Capitalist - Justin Fox - Economy - Markets - Business - TIME: The two best national retirement systems... are those of Australia and the Netherlands. Both countries start with government old-age payouts... funded out of regular income tax revenue, and highly progressive (if you're poor, you get a significant payout; if you're not, you don't).

On top of those come much larger retirement savings plans. In the Netherlands... pension funds... in Australia... personal accounts... invested in stocks and bonds and other such things... managed by professionals... portable....

[T]he idea of a Social Security that gets smaller and more progressive over time, coupled with some sort of large, government-mandated private retirement accounts (or "opt-out" private accounts, where money is deducted from your paycheck but you can get it back at tax time if you're willing to jump through a few hoops) isn't crazy or regressive at all.... There's also the issue of how the money in the retirement accounts would be managed. Armey appears to be okay with the limits imposed by the federal Thrift Savings Plan. The TSP is essentially a really well-thought-out 401(k), so it's not the worst thing in the world to emulate.... What we absolutely shouldn't do is put the for-profit mutual fund industry in charge. Not quite sure how we'll manage that...

What is crazy is the idea that a system designed by Armey and his fellow travelers in order to please their various masters would move us toward a good Australia or Holland-like system.

Kevin Drum Is Shrill!

He pleads with Andrew Sullivan to stop the insanity:

The Washington Monthly: BEATING A DEAD HORSE.... At the end of a post where he freaks out over a preposterously inappropriate way of measuring the federal deficit, Andrew Sullivan says this:

I also noticed in my latest letter from the Social Security Administration that, as currently configured, I'll get 76 percent of what I'm due if and when I retire. My bet is that it will turn out to be less than half. The boomers are going to hog all of it for themselves.

Please. Just stop it. Assuming Wikipedia has his age right, Andrew will turn 65 in 2028. Even if we do absolutely nothing, CBO estimates that Social Security will pay out full benefits at least until 2053. Andrew will be 90 years old at that point. What's more, a very modest tax increase starting a decade from now combined with a very modest slowdown in benefit growth will keep the system solvent forever.

This is grade school arithmetic, and the basic data is available with no more than a few minutes of googling. Can we please knock off the scaremongering on this subject?

Fruitless. Of course.

Don't Let Jonathan Chait Draw Your Bathwater!

Here's something I wrote last November:

Grasping Reality with Both Hands: The Economist hopes for a grand bargain on Social Security reform:

So Washington is full of rumours that 2007 will bring a Grand Bargain on social security reform.... Nancy Pelosi and her friends may be loath to touch social security but they are worried that poorer Americans don't have enough of a retirement nest egg.... Democratic wonks have all kinds of ideas for getting ordinary Americans to save more.... If Mr Bush wants to sort out social security and the Democrats want to revamp the government's role in the rest of retirement security, there is clearly room for a compromise... combine the Gale/Gruber/Orszag ideas for restructuring retirement tax subsidies with the Liebman/MacGuineas/Samwick social security reform plan... [which] is probably the best bipartisan plan around and, importantly, includes a mandatory individual contribution to a personal retirement account. By restructuring tax subsidies for retirement saving so that poorer Americans got a hefty top up to their mandatory contributions from Uncle Sam and you might convince enough Democrats that a system which includes personal accounts makes sense...

Back in 1998, 1999, and 2000 there was a deal to be struck: bring the existing Social Security system back into balance with a combination of (small) tax increases and (moderate) future benefit cuts, and supercharge it with add-on private but regulated and insured personal accounts. But neither Gingrich, Hastert, Armey, Delay, or Lott were interested in such a deal--it would give another substantive public-policy victory to Bill Clinton, you see.... But the deal... is still there to be struck, if program design and decision-making can be moved out of the White House to locations with credibility.

And here's what Duncan Black--"Atrios"--of Eschaton said about me:

Eschaton: No!: Look, people who advocate adding "personal accounts" to Social Security are just stupid people. Really, just morons. There's no reason to do it.... If you think some Social Security contributions should be invested in the stock market (I don't) to raise returns overall, then... an index fund.... I still think that's a bad idea, but there's a rationale for it. There's no rationale for dividing that up into millions of individual accounts....

Social Security is a lovely program which works just fine and really needs no changes other than extraordinarily nonurgent tweaks to the tax formula at some point.... There's no need to strike a "grand bargain" which combines some stupid things with some smart things because there's no need to do so. Leave it alone.... People who continue to argue that there is [a problem] - and that the problem can be "solved" with the magic private accounts fairy - either have broken brains or are attempting to push an agenda for ideological reasons or for personal enrichment for themselves and their kind...

Here's what Jonathan Chait says about the relationship between people like Duncan Black and people like me:

Matthew Yglesias: [A]s Chait puts it in his conspiracy-minded phrasing, "the two groups [the activist liberal netroots and the 'wonkosphere' of more journalism-oriented bloggers] generally regard one another as allies and criticize one another tepidly if at all..."

Tepidly.

"Stupid people... morons... broken brains... push[ing] an agenda for ideological reasons or for personal enrichment..."

Tepidly.

Don't let Jonathan Chait draw your bathwater. I'm just sayin'.

Matthew Yglesias points out what is really going on:

A less conspiratorial way of putting it would be that we in the wonkosphere don't criticize netroots activists all that frequently or vehemently because we tend not to disagree with them on the merits all that frequently about matters of fundamental importance. And, after all, why should it be otherwise? I'm a liberal journalist, liberal activists are liberal activists, and the reason the adjective "liberal" fits in both cases is that we subscribe to similar worldviews. When we disagree, we disagree--but it's not extremely frequent...

Fixing Social Security

Duncan Black reads the Social Security Trustees' Report:

Eschaton: "Fixing" Social Security: In the summary overview we have this:

Social Security could be brought into actuarial balance over the next 75 years in various ways, including an immediate increase of 16 percent in payroll tax revenues or an immediate reduction in benefits of 13 percent or some combination of the two.

Roughly, this would require increasing both the employee and employer share of the tax from 6.2% to 7.05% (there might be some employment/wage impacts of such a change so this is a rough take). A small price to pay to ensure Robert Samuelson never writes another column.

How about just uncapping FICA, and making a few adjustments to make it harder to hide employee compensation from FICA by calling it an investment return? That would get us to actuarial balance too.

Note to Self: On Konstantin Magin's Social Security Privatization Project

Konstantin Magin strongly believes that the existence of the equity premium implies that large chunks of the Social Security system should be invested in equities in order that the poorer half of America's population can reap some of the extraordinary long run returns that follow equity ownership. (I agree.) He goes further than I do, however, and believes, for political economy reasons, that such investments should be made through the form of regulated, individual, private accounts.

The counterargument is that individual, private accounts are too risky to be a proper vehicle for the Social Security tranche of people's retirement savings. What if people misinvest--churn their accounts or fail to diversify or take on inappropriate systematic risks? Magin grants this point--such accounts would have to be regulated, and invested in a properly-diversified buy-and-hold portfolio. But there is a second bowstring to the counterargument: even if private accounts are invested in a diversified buy-and-hold portfolio, there is still the risk that the stock market will tank over the next generation--and that risk is inappropriate for the Social Security tranche of people's retirement portfolio.

Konstantin Magin's current project is to try to quantify this risk. How big a risk is a 35 year old running by placing the money he or she wishes to use to fund consumption at 75 in a unit beta diversified buy-and-hold stock market portfolio? The way that he quantitatively evaluates this risk is by running the obvious thought experiment: Suppose that the investor wants to insure him or herself against real declines in the value of the portfolio--wants to guarantee a real return of at least zero--by purchasing a put option on the portfolio that expires in 40 years with a strike price of the porfolio's current real value. What would be the value today of such a put option as a fraction of the value of today's initial portfolio investment?

The approach Konstantin Magin has taken has been to use Black-Scholes and the historical distribution of stock returns plus an assumed 1% or 2%$ per year riskless rate to value the cost of such a put: what would an insurance company that was going to then construct a dynamic hedge charge an investor who sought to insure his or her portfolio? There is, however, a second approach that he has started to explore: what would be the most that an investor with a specified coefficient of relative risk aversion would be willing to pay for such a put option?

The answer to Konstantin Magin's first question was that the cost of the put was small: about a nickel or a dime for each dollar invested. I think the answer to his second question is going to be much smaller for reasonable value of the coefficient of relative risk aversion--less than, say, five. I think this because the insurance company making the dynamic hedge is implicitly buying insurance from a market whose representative agent has a very high risk aversion--on the order of twenty or so. And so the willingness to pay for the put of an agent with a reasonable coefficient of relative risk aversion has to be a lot less than the cost someone would charge to write the put and then dynamically hedge it, which is what the value as calculated by Black-Scholes really is.

Here's a spreadsheet to do some preliminary finger exercises on this. The answers are--for historical returns and permanent components of variances--indeed smaller: mills rather than cents:

http://spreadsheets.google.com/pub?key=p_zylRhg4tozhBJyXhfclKw&output=xls
http://spreadsheets.google.com/ccc?key=p_zylRhg4tozhBJyXhfclKw&hl=en_US

This document at:

http://delong.typepad.com/sdj/2007/03/note_to_self_on.html

The Conspiracy to Keep Us Poor and Stupid Strikes Again!

I swear, I must have been very bad indeed in a previous life, and must be working off a huge karmic burden. Yes, it is Donald "George Soros Will Crash the Market to Elect Democrats!" and "Bond Yields Are Not Interest Rates!" Luskin--and once again he is far out of his depth:

The Conspiracy to Keep You Poor and Stupid: Brad DeLong sez....

[I]ndexation of benefits after retirement to the price level, not the wage level, adds a wedge between Social Security's costs and its resources roughly equal to half of life expectancy at retirement times the trend productivity growth rate. Each 0.1 percentage point increase in the growth rate of productivity reduces the long-horizon Social Security deficit by approximately 0.1% of taxable payroll.... Real wage and productivity growth of 3.0% per year (as opposed to the 1.1% per year assumed by SSA) would wipe out the 75-year deficit.

The system's unfunded obligation is $13 trillion.... Faster growth would increase both the future revenues and the future benefits in approximately equal measure. The revenues would arrive before the higher benefits must be paid, so there's an illusory improvement if you use a flawed metric like 75-year actuarial balance which counts the inflow but overlooks the outflow, but the actual total deficit, which is on the books already, isn't really affected.

The idea that faster economic growth will eliminate unfunded liability is simply incorrect, as Jagadeesh Gokhale demonstrates in a definitive paper...

Now that's not what the thoughtful and intelligent Jagadeesh Gokhale says. In an impressive and well-argued paper, Jagadeesh Gokhale (2006), "Wage Growth and the Measurement of Social Security’s Financial Condition," at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=920156#PaperDownload, Jagadeesh says two things:

• In a year-by-year pay-as-you-go-balance system, faster real wage growth makes the state of Social Security look better: because it raises each year's wages relative to that year's benefits, it means we need a lower tax rate in each future year less above their current levels in order to balance that year's Social Security tax collections with that year's Social Security benefits.
• In a substantially prefunded full-intertemporal-balance system with a sufficiently rapidly declining ratio of workers-to-beneficiaries, faster real wage growth makes the state of Social Security look worse: the declining worker-to-beneficiary ratio means that a larger share of workers than beneficiaries are in the near future (when faster wage growth makes relative wages lower) and a larger share of beneficiaries than workers are in the far future (when faster wage growth makes relative benefits higher), thus faster real wage growth raises average benefits more than average wages.

I have always thought that the right way to think about Social Security is as a system in which in the long run retirement age is a constant fraction of life expectancy, in which case faster real wage growth definitely helps the system. Jagadeesh taught me that things can work differently--if we assume that the retirement age will never rise, and that life expectancy will continue to grow, thus pushing the worker-to-beneficiary ratio downward.

But only somebody as far out of his depth as a Donald Luskin would ever say that the idea that faster real wage growth can help the Social Security system is "simply incorrect." If it is incorrect (which I don't think it is, not for the most relevant baseline), it is incorrect for a complicated, subtle, and debateable reason. Just listen to Jagadeesh Gokhale try to explain what is going on:

[A]nnual balance ratios... would be larger in all future years [with faster wage growth].... The infinite-horizon actuarial balance is usually interpreted as immediate and permanent payroll tax hike required to balance the system’s intertemporal budget constraint. A reduction in the actuarial balance under faster wage growth means that such a tax increase must be larger. However, an increase in each future year’s annual balance ratios under faster wage growth implies that the “pay-as-you-go” tax rate increase that must be levied in each future year would be smaller....

The conundrum mentioned earlier is resolved in the following sense. Although faster growth leads to smaller pay-as-you-go tax rate hikes in each future year, the share of future wages that is subject to larger tax pay-as-you-go tax rates (compared to the average rate under slower wage growth) increases. The latter (weighting effect) may be sufficiently large under faster wage growth to generate a larger actuarial balance.... The choice between pay-as-you-go and prefunding methods for resolving future financial shortfalls is no longer unambiguous...

Eddie Lazear: Social Security Crisis Postponed...

Or so Eddie implicitly says. Ampersand writes:

Alas, a blog » Blog Archive » Bush’s Chief Economist Predicts Social Security “Crisis” Will Never Happen: Capital Commerce1 quotes Edward Lazear, the Chair of Bush’s Council of Economic Advisers, answering a question about productivity growth:

I wouldn’t necessarily say 3 percent. But I would expect that we could expect to see high rates, perhaps not quite at the 3 percent level, but somewhere higher than 2 percent. I would expect somewhere closer to 3 percent … If I’m thinking about long-term productivity growth and asking, “Do the fundamentals exist for persistent high productivity growth in the upper 2 percent range?” I think we can still be there, again as long as we continue to maintain policies that are consistent with an open economy.

If Bush’s chief economist is right, then there’s no Social Security shortfall [over the next 75 years].... Predicting the future isn’t simple; the Trustees have to make certain assumptions. One of their assumptions is that productivity increases for the next 75 years will be, on average, 1.7% a year. If they’re right, then the next 75 years will feature the lowest productivity gains in American history....

But what if the next 75 years aren’t actually the worst 75 years in US economic history?... That brings us back to Edward Lazear’s prediction of near-3% growth in productivity. If he’s right, then maybe there won’t be any Social Security shortfall. Higher productivity means, at least in theory, that workers earn more; workers earning more means that, without raising taxes, payroll tax revenues go up...

And he cites me from January 11, 2005:

Brad DeLong's Semi-Daily Journal: A Weblog: Why Oh Why Can't We Have a Better Press Corps? (Why Haven't National Review's Funders Pulled the Plug? Edition): [C]onsider two alternative worlds--one with zero and one with two percent per year productivity growth--and look at the situation halfway through her retirement, when she reaches 73. And let's suppose that in alternative world 1, the world with zero percent productivity growth, her share of the taxes that Social Security collects cover only 90% of her benefits: with zero percent productivity growth, the Social Security system is running a deficit.

Now let's look at what happens in alternative world 2, the world with two percent per year productivity growth. The economy has been growing 2% faster for 11 years. That means that wages and the Social Security tax base are 22% (actually 24%--compound interest you know) higher than in alternative world 1. Instead of collecting revenues that cover only 90% of her benefits, the Social Security system collects revenues that cover 112% of her benefits: no Social Security deficit. No Social Security problem.

Faster productivity growth affects the cost of Social Security (initial benefits go up faster the faster is productivity growth). And it affects the revenues of Social Security (a richer economy pays more in Social Security taxes). But it affects revenues more.

The key is that the indexation of benefits after retirement to the price level, not the wage level, adds a wedge between Social Security's costs and its resources roughly equal to half of life expectancy at retirement times the trend productivity growth rate. Each 0.1 percentage point increase in the growth rate of productivity reduces the long-horizon Social Security deficit by approximately 0.1% of taxable payroll.... Real wage and productivity growth of 3.0% per year (as opposed to the 1.1% per year assumed by SSA) would wipe out the 75-year deficit.

Of course, after 2082 there is still in all likelihood a Social Security problem. And before 2082 there is a chance there will be a problem of Eddie's productivity forecasts (and mine!) turn out to be too high. And there is the question of whether pay-as-you-go is the right way to fund social insurance for retirement (I think probably not). And there is the question of the implications of a pay-as-you-go system for the rest of the government given our current political institutions and the overwhelming fecklessness of politicians, primarily Republican politicians. So that the fact that Social Security is not in crisis does not mean that all is for the best in this the best of all possible worlds.

But it is interesting to note that the crisis is, in Eddie Lazear's judgment as well as in mine, more likely than not to be postponed until the next century.

The Shape of American Conservatism Today

Matthew Yglesias writes:

Matthew Yglesias / proudly eponymous since 2002: Ross Douthat mostly says everything that needs to be said, but let me just state it very clearly--the idea that Ronald Reagan's charisma and sunny disposition won landslide victories for Barry Goldwater's substantive views on the size and scope of government is false. Very false.

Reagan was, famously, the political beneficiary of a backlash against the liberalism of the 1960s and 1970s... against programs that didn't exist during Barry Goldwater's 1964 campaign. It was only after Goldwater lost that "welfare as we knew it," Medicare, Medicaid, major federal involvement in education, federal environmental policy, federal consumer safety regulations, affirmative action, etc. came into exist. Reagan's political mobilization was aimed at a subset of this post-Goldwater flowering of big government. He didn't tilt against Medicare, by far the biggest Great Society program. And he certainly didn't campaign for the repeal of the New Deal (indeed, he repeatedly explicitly disavowed any intention of doing so).

The Goldwater-Reagan similarity is that they both led "conservative" factions of the GOP against "accommodationist" factions. But between 1964 and 1976 the country experienced a massive policy revolution that shifted the status quo way, way, way to the left.... Reagan... shift[ed] the conservative movement to the left--to acceptance of a federal responsibility for retirement security and quality education, to acceptance of the Civil Rights Act (opposition to which was, of course, Goldwater's only reliable vote-getter in '64), and to acceptance of popular middle class entitlement programs.

I agree with the substance of what Matt writes--with the proviso that many American conservatives today do not dare campaign on but still do believe in the elimination of the New Deal, believe in Dark Satanic Millian conservatism, that people can be moral only if they are fearful, insecure, and scared. But I disagree with his claim of agreement with Ross Douthat. For Ross Douthat says more, and I believe goes astray.

What Douthat writes is:

The American Scene: Heilbrunn... [writes:] "Tanner evokes a lost conservative golden age that stretched from Barry Goldwater to Ronald Reagan.... Reagan, Tanner suggests, was a paragon of fiscal restraint.... Reagan's successes, though, were quickly frittered away by his pallid successor, George H. W. Bush... "a man of no discernible ideology, who allowed government to begin growing again."... Tanner fingers neoconservatives like Irving Kristol who he thinks have always been dangerously complacent about accepting the existence of the welfare state.... Of course, something else happened after the Irving Kristols of the world joined the conservative movement--namely, conservatives started winning elections. The idea that the Right should talk more about reforming the welfare state than about abolishing it outright will never find favor at the Cato Institute, but it's been the basis for every successful national conservative campaign of the last twenty-five years...."

It wasn't just that the Gipper didn't fight hard to eliminate the welfare state while in office, as Heilbrunn notes; he didn't even really campaign on true-blue Goldwaterite themes, however much he may have believed in them.... [H]e governed as he spoke - as an Irving Kristol conservative, not a Michael Tanner libertarian. The same was true in 1994. Nostalgic small-government purists have convinced themselves that the Contract with America was a document of Goldwater-style libertarianism; in reality, it was a distillation of neoconservative politics, a laundry list of ideas to make government work better.... The Gingrich revolutionaries... were... a pragmatic rather than ideological conservatism, targeted explicitly to voters who wanted to keep the welfare state.... When they turned to a direct assault on the M2E2 cluster (Medicare, Medicaid, Education and the Environment), they were outflanked by Bill Clinton at every turn.

The inconvenient truth, for writers like Tanner, is that anti-welfare state libertarianism remains enormously unpopular with American voters, and so fiscal libertarianism can only have a place at the political table if it weds itself to something like an Irving Kristol-style neoconservatism.... [T]he marriage of libertarianism and neoconservatism... is still the best deal that libertarians are likely to get, so long as they care more about the size and scope of government than they do about lifestyle politics. If they want to leave the GOP coalition and throw in with the party of statism over stem-cell research and gay marriage, fair enough - but they shouldn't tell themselves fairy tales about the political history of the last thirty years along the way...

I disagree with Matt. I don't think Ross Douthat accurately depicts the movement of which he is a part. There are, I think, five factions in it:

1. Those who fear the foreign enemy--which used to be the Communists, and are now the Muslims.
2. Those who don't especially fear the foreigners, but think that the drumbeat can be useful for other purposes--to distract attention from rising income inequality or destructive domestic government programs or simply to hold on to power--who found it convenient to play up the fear of the foreigners, and now find it convenient to play up the fear of the Muslims,
3. Those who fear the domestic enemy--which used to be Jews and Blacks, and is now a bizarre combination of homosexuals, a ghetto-bound underclass, Mexicans living here, Hollywood actors, and George Soros.
4. Those who want low taxes because they think the government is inherently inefficient and wastes its money.
5. Those who want low taxes because they are too rich to value anything the government does other than protect their property.

Now you can't satisfy all five of these factions and win elections in America with an honest policy. A mighty war arsenal is expensive, and must be financed either by high taxes (thus losing factions 4 and 5) or by a full-fledged assault on the social insurance programs (thus losing elections). You can stage a phony war--say that the threat from abroad is mighty but that there is no need to spend money defending against that (and to some degree Bush has tried this strategy)--but then you lose faction 1.

The... um... "genius" of the neoconservatives was to wield these factions together with a dishonest policy: tax cuts that are claimed to raise revenue. This allows for a mighty military to defend against the foreign foe of the day without either alienating the fiscal conservatives or having to cut back the great social insurance programs. That the policy was dishonest was said openly and loudly in the public square by Irving Kristol back in 1995:

http://delong.typepad.com/pdf/20061226_Kristol_American_Conservatism.pdf: Among the core social scientists around The Public Interest [in the late 1970s] there were no economists.... This explains my own rather cavalier attitude toward the budget deficit and other monetary or fiscal problems. The task, as I saw it, was to create a new majority, which evidently would mean a conservative majority, which came to mean, in turn, a Republican majority - so political effectiveness was the priority, not the accounting deficiencies of government...

Without this fundamentally dishonest policy move, the whole thing falls apart.

The question is what an honest libertarian, or even an honest human being of any intellectual complexion, is doing in such company.

Arnold Kling vs. Brad DeLong on the New Deal

UPDATE: Bruce Bartlett writes:

I just read your WSJ piece and you make one mistake. If Hoover had been re-elected in 1932, Ogden Mills would have been Treasury secretary, not Andrew Mellon. Mills became secretary on Feb. 13, 1932.

---

Arnold Kling vs. Brad DeLong on the New Deal at the Wall Street Journal's website.

---

Here are my first drafts for the exercise:

Let me start with our collective best guess about what would have happened in an alternate history--one in which the press discovers and publishes the full details of FDR's polio injuries and irregular family life , and in which in November 1932 Herbert Hoover is reelected to a second term with a narrow margin, and "stays the course" with his first-term economic policies...

In that alternate universe, a group of Harvard economists headed by Joseph Schumpeter were brought down to the White House to advise Herbert Hoover what do about the banking crisis in the winter of 1933. They argued that banks are failing because their fundamentals are unsound, and that it would be improper to rescue bankers who have run their businesses into the ground or depositors who have not been prudent enough at watching the character of the people with whom they have deposited their money. Supported by the articulate Treasury Secretary, Andrew Mellon, they carried they day: "Liquidate labor, liquidate stocks, liquidate the farmes, liquidate real estate," said Mellon. A full-fledged panic would not be a bad thing: It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people..." But the consequence was not people working harder and living a more moral life. Instead, the consequence was an intensification of the Great Depression as the transmission channels analyzed by Ben Bernanke (1983), "Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression," grew much stronger than they were in our actual history.

As more and more banks failed and more and more of the deposits of Americans vanished, the downward spiral of economic activity continued through 1933, 1934, and 1935. Increasing economic uncertainty and fear drove an acceleration of gold outflows from the U.S. accelerated throughout 1933 and 1934. The Federal Reserve--itself under Mellon's, responds by following gold standard orthodoxy: an outflow of gold is a sign that your interest rates are too low and need to be raised. Contractionary open market operations to raise interest rates further reduced the money stock, and this falling-money-stock channels for the intensification of the Great Depression that was stressed by Milton Friedman and Anna Schwartz (1963), A Monetary History of the United States, grew much stronger than they were in our actual history.

As the unemployment rate rose from 25% in 1933 to 33% in 1934 to 40% in 1935, Herbert Hoover vainly tried to restore confidence. "America must cling to the gold standard, for it is our only life raft," Hoover argued. Only confidence that the dollar would stay as good as gold could produce the confidence in the future of America that would induce entrepreneurs to start investing in America once again and so bring about recovery. But as Eichengreen and Sachs were to argue in their 1986 "Exchange Rates and Economic Recovery in the 1930s," Hoover had it exactly backward: no country could even begin to halt the downward spiral that was the Great Depression until it abandoned the gold standard, devalued its exchange rate, boosted its exports, expanded its money stock, and lowered its interest rates.

In 1932 Herbert Hoover had unleashed General Douglas MacArthur to deal with the Bonus March. At his command, Major George F. Patton's 3rd cavalry and other units had driven them with tear gas, swords, and bayonets across the Potomac River bridges and fired their camps, defeating what MacArthur called a communist attempt to overthrow the government of the United States. In 1934 the Bonus Marchers came back--and this time not coming unarmed. In our history Eleanor Roosevelt went down to their camp and had coffee with the Marchers, and Franklin Roosevelt signed up many of them to work on extending U.S. Route 1 through the Florida Keys. Not in the history where Hoover stayed president. Employing marchers by increasing the deficit would destroy confidence, Hoover said. In fact, Hoover declared at the end of 1934, balancing the budget had to take priority over relief, and the federal government would leave all relief expenditures in the hands of the states. Food riots broke out at the start of 1935 in scattered cities.

The Marchers camped in Arlington Cemetery through the winter of 1934-1935. The camp grew, as they were joined by followers of Louisiana's Huey Long, who cried "Share Our Wealth!" and "Nail 'Em Up!" and followers of radio Priest Charles Coughlin, who believed that Herbert Hoover had ruined America in the interest of enriching Wall Street, the international bankers, and the Jews. They placed themselves under the command of retired Marine General Smedley Butler. In March 1935 General MacArthur told President Hoover that he could wait no longer. MacArthur's chief of staff, D.D. Eisenhower, had had grave misgivings in 1932 when MacArthur sent Patton to attack the Bonus Marchers. On March 24, 1935, Eisenhower went to visit General Butler...

[to be continued]

---

I, at least, think that as far as recovery was concerned the macroeconomic good done by the New Deal vastly outweighed the structural bad. Any reasonable counterfactual involving no New Deal that I can see has things a good deal worse in the middle and late 1930s than they were in our reality.

But there is an argument to be made that an even better New Deal would have been possible, and ought to have been attainable.

Had Milton Friedman been special assistant to and whispering in the ear of Fed Chair Marriner Eccles in 1936-1938, he would have successfully headed off Eccles's boneheaded idea of raising reserve requirements on banks. Then the late 1930s would have been a much happier time. Had FDR given his baton in 1933 to trustbuster Thurman Arnold rather than to cartelizer Hugh Johnson and had the initial round of the New Deal increased rather than decreased the degree of competition in the American economy, then... well, the neoclassical part of my brain thinks that 1934 and 1935 would have been somewhat happier--but the Fundie Keynesian part of my brain thinks that Hugh Johnson's NRA was irrelevant because aggregate demand was a much bigger problem then than aggregate supply.

Arnold Kling, however, wants to talk about the legacy of the institutions and practices created in the New Deal for us today. For example, do we really need a Securities and Exchange Commission in the form it was cast in 1933 and 1934. Back then everybody, unfairly, blamed Wall Street for the Great Depression. Remember Roosevelt declaration in his inaugural address that the "practices of the unscrupulous money changers stand indicted in the court of public opinion, rejected by the hearts and minds of men....The money changers have fled from their high seats in the temple of our civilization."

The New Deal essentially dusted off and implemented the unsuccessful Progressive Era program for the reform of American finance that had been pushed by the likes of Louis Brandeis during the 1900s and the 1910s. And Louis Brandeis was definitely on the side of the upwardly-mobile and the smart and technically competent, as opposed to the side of old wealth and new thrift.

Was dusting-off and implementing Louis Brandeis's generation-earlier plan a very smart idea?There are powerful arguments that in the long run it was not. Financial markets function well for the economy only when they do a good job of seeking out and transmitting information about the likely future of enterprises and industries and getting that information crystalized into prices. This requires that people be incentivized to seek out and uncover important pieces of information by being able to profit handsomely from doing so--which requires that there be a bright visible line between what you can do and what you can't, between legitimate research and illegitimate insider trading.

The SEC as born in the New Deal has always found it relatively difficult to draw such a bright visible line, because its crisis origins have led it to focus on a different problem. You see, financial markets also function well only when they mobilize great masses of savings from scattered individuals by giving them confidence that their investments are liquid in that they can be bought and sold at a fair price. This requires that you not be buying share of a company from a cousin of one of its directors who knows that its market share has collapsed in the current quarter, and not be selling to somebody who knows that the latest sample assayed was extremely encouraging.

Smart financial regulation attains a point of balance. There is not general agreement but at least a general worry that the system the New Deal has left us pays too much attention to the desirability of a level playing field for buyers and sellers, and not enough to the desirability of having truly informed buyers are sellers in the market, and that it gives too much power to entrenched managers and not enough power to insurgent financiers.

It is not possible for even an abnormal person to defend somebody like Chase's Albert Wiggin, who by massively shorting Chase's stock gave himself a mammoth financial incentive to manage the bank as badly as possible, or New York Stock Exchange President Richard Whitney, who reported to Sing Sing in April 1938 for embezzling from the New York Yacht Club as well as others including his own father-in-law. But the neoclassical part of my brain whispers that times of crisis are not the times to design the best institutions for normal times when other and different considerations than those of the then-current crisis should carry greater weight.

---

Let me agree with Arnold that deposit insurance was badly handled. But let's not lose sight of the fact that even badly-handled as it was, really-existing deposit insurance was a mammoth improvement over no deposit insurance at all. I think that that is a good thumbnail summary of the entire New Deal: badly-handled, but a vast improvement over the preceding system and over the politically-viable alternatives--with the exception, I would argue, of Agriculture Support and the NRA, which did little if any good at immense long-run cost.

But Arnold now wants to hunt other game: "Just as we revere the constitution as the basis for our government and we revere Abraham Lincoln for ending slavery and preserving the union, we are supposed to revere the New Deal as somehow providing the basis for our modern prosperity. Yet the policies of the New Deal are quite a mixed bag.... Social Security, and its offspring Medicare, are going to be the next great financial crisis in this country." Let me protest the phrase "its offspring, Medicare." Medicare and Medicare are Lyndon Johnson's Great Society--not FDR's New Deal. And let me note that whenever I do the math that back in 2000--before Bush II--the long-run non-health program finances of the federal government looked to be in fine shape. At least as I did the math, even factoring in the forthcoming recessionary period 2001-2003, with then-current tax laws the long-run on-budget surpluses significantly outweighed the long-run off-budget Social Security deficits.

It's more accurate, I think, to say that the U.S. federal government has two fiscal problems: (a) the Bush II administration--with its insistence on not paying for the spending it insists on undertaking (including both the Iraq War and Medicare Part D)--and our long-run health financing problem.

And the health programs... One way to look at it is that it is not a problem but an opportunity. If we restricted Medicare and Medicaid to offer to beneficiaries in the future the levels of care that Medicare and Medicaid recipients received in 2000, we wouldn't have a long-run health-care financing problem. We have one because we expect that Medicare and Medicaid will pay for more care in the future than has been possible in the past; because we expect our doctors, nurses, pharmacists, and researchers to learn how to do amazing things; because we expect these amazing things to also be amazingly expensive; and because we expect America to want to provide access to future medical miracles on the basis not of heal-the-rich-sick but of heal-the-sick.

Does our belief that in general medical care should not be rationed according to ability-to-pay spring from the New Deal, or does it have deeper cultural roots?

---

If I can rephrase Arnold Kling's position, it is that the partial success of the New Deal--the recovery from 25% unemployment to roughly 10% unemployment, the recovery from 50% of 1929 industrial production to approximately 120% of 1929 industrial production before WWII began, and then the production and employment (albeit not private consumption) boom of WWII accompanied by total victory--taught us Americans bad lessons about the role of government, or lessons that will be bad for us in the future.

We now believe, I think Arnold thinks, that it is the government's job to provide for us in our medical care, in our old age, and when things go wrong in our work or family life. As a result, we now save too little, have too few children to support us when we get old, and work too little (because we face substantial marginal tax rates). We would be a better society if people knew that if they didn't save for retirement they would be poor in their old age, that if they didn't save for future medical care needs they would die prematurely, that if they didn't have dutiful chldren they would be alone and unnursed in their old age, and if they did not pile up large lumps of precautionary savings then they would lose their middle-class status if they had a heart attack, lost their job, or got divorced.

I find myself agreeing with Arnold Kling to the extent that I think Social Security would work better as a real forced-saving program than it does as a pure pay-as-you-go program. I agree with Arnold Kling in fearing that the health-care financing system we have grown will lead us to fumble a good deal of the opportunities for extending human happiness that are going to be opened up by biomedical research in the next two generations.

But as for the rest of it... Well, I am reminded of my teacher Shannon Stimson's lectures on early Victorian political economy. She noted that to the Victorians private charity should be ample (because that was what Jesus taught, and to keep the poor from starving in masses the streets) but never comprehensive, so that there would always be a few of the poor visibly starving in the streets, so that the poor would know that charity was not something they could count on, so that the poor had the proper incentive to work, to save, to stay married, to have children and bring them up properly. She tries hard to recover this mode of thought, in which the purpose of the economy is to create morally prudent servants who live in the Fear of the Lord. And her students--hedonists living in the California sun early in the 21st century--find it very strange: the purpose of the economy is obviously to enable people to realize their human potential and to satisfy their needs, wants, and dreams.

We California-sun hedonists will readily admit that moral hazard--people gaming the system and not contributing their share--is a pronounced danger in all kinds of insurance programs, especially social insurance. But consider: America is already on the libertarian end of the spectrum of advanced industrial economies. Further leaps in a libertarian direction would make us more the odd one out. The payoffs in increased savings from making the old and the sick who haven't saved poor would have to be demonstrated to be very large before I would conclude that the big problem with American government is that the incentives facing Americans in the economy are too soft and encourage too much slacking. And I haven't seen that demonstrated yet.

---

Links:

I like J. Bradford DeLong's Journal of Economic Perspectives article http://econ161.berkeley.edu/pdf_files/Keynesianism_Pennsylvania.pdf and his still unpublished attempt to get at the guts of the economic advice Joseph Schumpeter and others were giving in 1933 http://econ161.berkeley.edu/pdf_files/Liquidation_Cycles.pdf--what John Maynard Keynes called "extraordinary imbecility." An online for-pay version of Joseph Schumpeter et al. (1934), The Economics of the Recovery Program is at http://www.questia.com/library/book/the-economics-of-the-recovery-program-by-douglass-v-brown-edward-chamberlin-seymour-e-harris.jsp. Schumpeter and company were fiercely critical of the New Deal. A contemporary review of their book by Princeton's Otto Nathan is here http://links.jstor.org/sici?sici=0022-3808%28193408%2942%3A4%3C537%3ATEOTRP%3E2.0.CO%3B2-D.

Wikipedia has good background entries on Huey Long http://en.wikipedia.org/wiki/Huey_Long, the Bonus March http://en.wikipedia.org/wiki/Bonus_march, and Father Coughlin http://en.wikipedia.org/wiki/Charles_Coughlin.

For Eichengreen and Sachs on the gold standard and the Great Depression: "Exchange Rates and Economic Recovery in the 1930s" http://scholar.google.com/scholar?num=100&hl=en&lr=&safe=off&c2coff=1&client=safari&q=Eichengreen+and+Sachs&btnG=Search

Ben Bernanke's analysis of the role played by unstemmed financial panics, industrial bankruptcies, and bank closings is Ben Bernanke, Ben, "Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression," American Economic Review, 73, (June) pp. 257-76 at google scholar http://scholar.google.com/scholar?num=100&hl=en&lr=&safe=off&c2coff=1&client=safari&q=Nonmonetary+Effects+of+the+Financial+Crisis+in+the+Propagation+of+the+Great+Depression&btnG=Search. Ben has a nice speech about money, gold, and the Great Depression http://www.federalreserve.gov/boarddocs/speeches/2004/200403022/default.htm.

Milton Friedman and Anna Schwartz's account of the role played in the Great Depression by gold-standard and other policies that contributed to the sharp decline in the money supply is in the "Great Contraction" chapter of their Monetary History of the United States http://scholar.google.com/scholar?num=100&hl=en&lr=&safe=off&c2coff=1&client=safari&q=Monetary+History+of+the+United+States&btnG=Search.

---

http://econ161.berkeley.edu/pdf_files/Keynesianism_Pennsylvania.pdf: Joseph Schumpeter, 1934: "[There is a] ...presumption against remedial measures [like cutting taxes, increasing spending, or lowering interest rates]... [because] policies of this class are particularly apt to...produce additional trouble for the future.... [Depressions are] not simply evils, which we might attempt to suppress, but...forms of something which has to be done, namely, adjustment to...change... [and] most of what would be effective in remedying a depression would be equally effective in preventing this adjustment..."

Social Security Private Accounts: An Add-On, Not a Carve-Out

Greg Ip finds former Bush Treasury Secretary John Snow saying that he was on our side of the Social Security reform debate--he thought private accounts should be add-ons rather than carve-outs too.

It would have been nice if he had signaled this at the time:

Washington Wire: A Bridge Too Far: Former Treasury Secretary John Snow says the Bush administration's first effort to overhaul Social Security failed because the Administration was "intransigent" on private accounts. Mr. Snow, who was Secretary of the Treasury from 2003 to 2006, says that the administration's insistence that a Social Security fix include private accounts carved out of the program shifted the focus away from making the retirement program solvent, and added that would have been better to propose private accounts on top of the existing program as some Democrats have suggested.

"You can't do health care reform or Social Security reform.... without a bipartisan consensus," Mr. Snow said at the Private Equity Analyst Outlook conference last week.... "If we made a mistake, it was not approaching it in more of a bipartisan way. We were pretty intransigent about the private accounts," he said.

Mr. Snow said the administration may have succeeded "If we had been a little cleverer and talked about augmentation of 401(k)'s, augmentation of private savings, but not by diverting money out of Social Security. I think that that was a winning formula. What wasn't salable was the fundamental argument that we make Social Security stronger for our children and grand children by diverting money out of it: putting it into private accounts, running up trillions of dollars of debt in the interim and it will all be okay in 2094," he said. "That was a losing argument."...

Current Treasury Secretary Henry Paulson, who succeeded Mr. Snow last year, is trying again to revive efforts to fix Social Security by reaching out to Democrats on Capitol Hill. But he has said that depoliticizing the issue so the next president can solve the problem may be the best he can do in the two years before Mr. Bush leaves office....

On a separate issue, Mr. Snow said, "I don't think a case can be made that Sarbanes-Oxley is making U.S. capital markets fundamentally less competitive," referring to the 2002 law that tightened the responsibilities and oversight of public corporations in the wake of the Enron and WorldCom scandals. Much of the loss of market share by U.S. capital markets, he said, reflects the natural, growing sophistication of other markets.... Mr. Snow said while Sarbanes Oxley should be re-examined, chief executives ought not to seek a wholesale change...

Why Oh Why Can't We Have a Better Press Corps? (Robin Toner/Social Security/New York Times Edition)

Ummm... Robin... Robin Toner's lead should have been: "Vice President Cheney tries to blow up Treasury Secretary Paulson's attempts to patch together a legislative deal on Social Security." It wasn't.

Robin Toner writes that hopes for Social Security reform are "fragile," and that "few other issues so clearly highlight the limits of bipartisanship these days, the mistrust and ideological division just barely below the surface.... It is, in short, a polarized debate, and likely to become all the more so..."

To back this up, we have:

People of both parties looking for a bipartisan deal: Senators Conrad, Baucus, and Gregg; Representatives Rangel and McCrery; Treasury Secretary Paulson; Assistant Treasury Secretary Davis.

Democrats afraid that Bush's pledges to negotiate in good faith are false: Senators Conrad and Baucus; Representative Emmanuel.

Democrats declaring that compromise with Republicans is unwise and unnecessary: "Brad Woodhouse of Americans United for Change, a liberal labor-backed organization."

Republicans declaring that compromise with Democrats is unnecessary: Vice President Richard Cheney, and Grover Norquist.

The people Robin Toner finds who aren't looking for a deal in the middle are named Cheney, Norquist, and Woodhouse. I guess it's fair to call this "polarized": Brad Woodhouse's standing and influence in the Democratic Party are about equal to the sum of Richard Cheney's and Grover Norquist's standing and influence in the Republican Party, after all.

Why oh why can't we have a better press corps?

Here's the story:

Fragile Hopes for Bipartisan Rescue of Social Security - New York Times: Social Security... few other issues so clearly highlight the limits of bipartisanship... mistrust and ideological division.... [A]ny fix -- which would be likely to involve a politically risky mix of benefit reductions, tax hikes or other painful changes -- will require broad and deep bipartisan support.

"The American people have to sense on these types of issues that it'a absolutely bipartisan and that the agreement was reached in an absolutely fair way," said Senator Judd Gregg, Republican of New Hampshire, the senior Republican on the Budget Committee.... Efforts have been made: Treasury Secretary Henry M. Paulsen Jr. has talked to crucial lawmakers, including Representative Charles B. Rangel of New York, the chairman of the Ways and Means Committee, "encouraging everyone to bring all their ideas to the table, and hoping that some kind of consensus can emerge," as Michele Davis, the assistant Treasury secretary, puts it. Mr. Rangel said he had also been talking about the possibility of action on Social Security with the ranking Republican... Jim McCrery.... Gregg and Senator Kent Conrad... a bipartisan working group....

But... Vice President Dick Cheney... said Mr. Paulsen's openness to all ideas did not indicate that the administration was open to any increase in the payroll tax.... "[N]othing's changed," Mr. Cheney said.... Conrad said that after those comments, his effort to move forward with his working group “is on life support.... People have interpreted that to mean that the administration is not willing to alter their position one iota.”... Rahm Emanuel... said that... it was all the more important “not to take away the one solid cornerstone of their retirement.” He added, “It’s not good politics and it’s not good economics.”

Senator Max Baucus of Montana... said... “I’m more than open, if the president is truly willing to look at all options.”...

[A] polarized debate, and likely to become all the more so.... [A]dvocacy groups are watching.... Grover Norquist... making a pre-emptive case against any payroll tax increase, although he had been assured by the president in December that he would hold the line.... “There is no reason for us, as a campaign working on this issue, and there’s no reason for the Democrats to compromise with this president on the most sacrosanct program to progressives after he lost the privatization debate and lost the election,” said Brad Woodhouse of Americans United for Change, a liberal labor-backed organization.

What Promises Have We Collectively Made to Ourselves with Respect to Social Security?

In the early 1980s, acting on the advice of the Greenspan Commission, President Reagan and the congress began "prefunding" Social Security--having the Social Security system run a surplus in the years from 1983 to 2017 or so in order for it to run a deficit later on. Reagan, George H.W. Bush, and the congresses of the 1980s and early 1990s (and George W. Bush and his congresses of 2001-2006) used this Social Security surplus as an excuse for not dealing with their enormous general-fund deficits: taxes were lower and spending was higher than if they had lived up to their responsibilities or not had the Social Security operating surplus to draw on.

What does this history entail for future fiscal policy, both as a matter of honor and a matter of prudence? Andrew Samwick tries to think through these issues, and gives his take. He says smart things:

Vox Baby: The federal government simply put a new Treasury [bond] in the trust fund and spen[t] the Social Security surplus on things other than buying back its existing debt from the public, as if the Social Security surplus were just like any other tax revenue at its disposal.... The federal government targets the unified budget deficit, which treats the Social Security surplus in this way. In my memory... the only time in the last 25 years when we did not [focus on the unified rather than the general-fund budget deficit was... in the [late] Clinton Administration.

President Bush [focused on the unified deficit] when he pledged "to cut the deficit in half in 5 years" (see this earlier post.) His Administration is doing it again with the more recent statements about budget balance by 2012. In all cases, the deficit in question is net of the Social Security surplus, and thus the policy presumes that the Social Security surplus is available to spend on general government expenditures.

I have in an earlier post argued that the government should be targeting the on-budget deficit and have Social Security in long-term balance. Bernanke stops short of saying this. That's the first way in which his testimony was not exactly what I would have said. There are two other things that I hope he stresses in his future public statements:

First, it is inconsistent for would-be Social Security reformers to be preoccupied with the debt burden placed on future generations due to Social Security's projected annual deficits but not with the debt burden placed on them by continued deficits in the General Fund. What is the rationale for running any deficit in the on-budget [general fund] account when the economy is in the up side of a business cycle?

Second, it is inconsistent for would-be Social Security reformers to be preoccupied with the debt burden placed on future generations due to Social Security's projected annual deficits while at the same time enacting legislation, like Medicare Part D, that will generate even larger annual deficits to be financed by these same future generations.

Readers of this blog know that I don't exhibit these inconsistencies. I have precious few compatriots among would-be Social Security reformers on the political right.

Returning now to Dean [Baker]'s second paragraph, he regards cutting Social Security benefits as theft, asserting that "workers have already paid for these benefits." I might believe that if the Social Security surpluses were actually being saved rather than spent. But they aren't. It would be more appropriate to say that what the workers--Dean, me, you, all of us--have paid for is all of the government services that the Social Security surpluses have purchased in the past 20 years. We've already consumed them. We have no compelling justification to assert that future generations of workers, who were not party to these decisions, should have to pay higher taxes to honor promises that our generation has made to itself.

But something has to be done, and the sooner it happens, the less disruptive it will be. As always, I recommend that policy makers start here.

Types of Social Security Reform

PGL at Angry Bear writes:

Angry Bear: [A]s Andrew [Samwick] has explained, policy makers have managed the rest of the Federal government such that the expected value of future income taxes cannot cover [existing] Federal debt [including the Social Security trust fund] plus the present value of expected future Federal spending outside of the Social Security program. This is the fiscal crisis that Ben Bernanke testified to -- as did Alan Greenspan when he was Federal Reserve chairman. So how does President Bush intend to address this general fund fiasco? Certainly not an increase in income taxes. Certainly not a reduction in defense spending. Certainly not a repeal of that expensive prescription drug benefit that he brags about in the same speeches where he brags that his tax cuts have given us our money back.

This kind of pandering and dishonesty is not the fault of Andrew Samwick or Ben Bernanke. And it's this kind of dishonesty that leads me to believe that President Bush is advocating what Brad called the second kind of [Social Security] "reform" [in which the current trust fund balance is forgotten, and future benefits are funded out of future Social Security taxes alone.]

Dean Baker calls this "default" and some uber-technical types object to his term. Fine -- let me call it grand larceny. If implemented, it would be a backdoor employment tax increase. Now if President Bush and his minions want to balance the budget by raising employment taxes, might we simply ask that they be honest about it? But then one could argue my suggestion is silly -- after all, how many thieves call the bank before they come over and clean out the vault?

I am not in favor of complete privatization as workers likely do want some form of defined benefits retirement plan. Mark Thoma has been excellent in discussing this aspect of the debate. Of course, one can reasonably ask whether we need as much longevity insurance as the Social Security program offers. Andrew and I might have a difference of opinion on this issue. But as I read Andrew's many excellent discussions on this, he is not advocating an implicit backdoor employment tax increase and nor am I.

Let's be honest -- President Bush and his minions are pushing for a backdoor employment tax increase...

What Kinds of Social Security Reform Are Tantamount to a Bond Default?

Felix Salmon protests that Social Security reform is not a bond default:

RGE - Is social security reform a bond default?: Dean Baker says so, prompting Brad DeLong and PGL to applaud loudly from the sidelines:

This is very important to understand when someone like Federal Reserve Board Chairman Ben Bernanke proposes cuts to Social Security. Workers have already paid for these benefits. The Social Security tax is very regressive. Its regressivity can be justified by the progressive payback structure of the program. However, if the benefits are cut, at a point when the program can still easily afford the benefits (e.g. 10-20 years), then the government has effectively stolen from the people who paid Social Security taxes. There are many people who want to do this – effectively default on the government bonds held by the Social Security trust fund....

Let's agree, for the sake of argument at least, that the social security trust fund exists, chock-full of government bonds. Like any trust fund, its trustees have control over what it pays out and when. If the trust fund reduces the amount it pays out, or only pays out later than currently mandated, that's a change in the trust fund. It is not a bond default. Insofar as the bonds in the trust fund exist, they will continue to receive their coupon and principal payments. It's what the trust fund does with those payments that's being debated.

I feel strongly about this one becuase I've spent a large part of my career following actual sovereign bond defaults, and they're not pretty things. Social Security reform is a serious subject, and it should be taken seriously. Spinning any change in benefits as tanatamount to default by the world's reference risk-free creditor escalates the rhetoric to unhelpful levels.... For me, the only question about whether something is a bond default or not is the question as to whether the bondholder gets paid or not. In this case, the bondholder is the social security trust fund. What the trust fund does with the money is entirely up to it.

It depends on what kind of Social Security reform we are talking about. There's one reform in which benefits are cut and taxes are raised but the equality:

(Current Value of Trust Fund) + (Present Value of Future Social Security Taxes) = (Present Value of Future Social Security Benefits)

is preserved. That's not a default.

There's another reform in which the principal purpose is to open up a gap between the left hand side and the right hand side and make:

(Current Value of Trust Fund) + (Present Value of Future Social Security Taxes) > (Present Value of Future Social Security Benefits)

That is tantamount to default.

Most proposals for Social Security reform that start out with statements like "The Social Security Trust Fund doesn't really exist" are proposals of the second kind.

Dean Baker on the Social Security Trust Fund

He preaches the lesson:

Beat the Press: Since the "entitlement" cutters seem to be on the warpath again, it might be time for another sermon on the Social Security trust fund. This one really should not be hard, but I am afraid that that there are many powerful people with a vested interest in creating confusion, and they have succeeded.

In 1983, Congress (following the recommendation of the Greenspan commission) deliberately raised the Social Security tax far above the level needed to pay current Social Security benefits. This led to a large surplus. Under the law, this surplus must be used to buy U.S. government bonds. Also, under the law, the bonds held by Social Security are liabilities of the federal government, just like any other bonds. When the program needs the money from the bonds to pay benefits, it can rely on the interest and eventually the principle from these bonds, just like any private pension or individual.

Note, that there was never any rule that any Social Security only gets government bonds if the government runs a surplus. In other words, from the standpoint of Social Security, it matters not an iota that the government has mostly run deficits for the last quarter century. This may have been bad policy, but it doesn'

t affect the size of the trust fund.

The most recent projections from the non-partisan Congressional Budget Office show that Social Security will have enough money between projected taxes and the bonds in the trust fund to pay all benefits through the year 2046, with no changes whatsoever. This is very important to understand when someone like Federal Reserve Board Chairman Ben Bernanke proposes cuts to Social Security. Workers have already paid for these benefits. The Social Security tax is very regressive. Its regressivity can be justified by the progressive payback structure of the program. However, if the benefits are cut, at appoint when the program can still easily afford the benefits (e.g. 10-20 years), then the government has effectively stolen from the people who paid Social Security taxes.

There are many people who want to do this -- effectively default on the government held by the Social Security trust fund. If this default is now on the national agenda, then it certainly seems reasonable for the workers who are losing their benefits to raise the prospect of defaulting on government bonds more generally. After all, what can possibly be the rationale of only defaulting on the government bonds held by workers through the Social Security trust fund, but not defaulting on the government bonds held by the wealthy people who think this is such a good idea?

Department of "HUH!?!?"

Why oh why can't we have a better press corps? The innumeracy at the New York Times... The stupidity... It burns! IT BURNS!!

And Now, a Word From Chile ... - New York Times: [American] Social Security does need some changes to protect it over the long term.... [A] combination of modest benefit cuts and modest tax increases, which could be phased in gradually over decades and could guarantee a government benefit that replaces about 30 percent of preretirement income on average, compared with a replacement rate of about 35 percent today.... As long as tax increases are off the table, severe benefit cuts become unavoidable. If the gap in Social Security's finances were closed through benefit cuts only, the average worker's payout would equal only about 10 percent of preretirement earnings...

So the New York Times says that current Social Security taxes--roughly 10.5% of taxable payroll--would only allow for Social Security benefits to equal 10% of average preretirement earnings.

And the New York Times says that with "modest" tax increases Social Security benefits could equal 30% of average preretirement earnings.

There's this thing called arithmetic.

It says that 1+1+1=3.

If you want to get three times the benefit replacement rate, you need to have three times the taxes. Money that flows out equals money that flows in.

God knows where the New York Times got that 10% number, or what they think it is, or what it really is, or why nobody on the New York Times editorial page staff can add, or even perform a simple consistency check, or... or... or... IT BURNS!!!

Why Oh Why Can't We Have a Better Press Corps? (Sebastian Mallaby/Washington Post Edition)

A reason why I don't think the Washington Post will last a decade: the opening of Sebastian Mallaby's column:

Sebastian Mallaby - A Fix for Social Security? - washingtonpost.com: How Personal Accounts Could Please Both Sides: By Sebastian Mallaby: Monday, November 27, 2006; A19: The next six months could be a productive time for economic policy.... The [Bush] administration, now led by a practical Treasury secretary with the heft to sideline ideologues, may be willing to make concessions.... The most interesting debate will revolve around retirement.... Top administration officials... no longer regard "privatization" -- the diversion of payroll taxes into personal accounts -- as the starting point for negotiation. The solvency of Social Security, not a desire to promote an "ownership society," is their main concern...

The most important thing about Mallaby's opening is that he has no idea whether what he is saying is correct or not.

Sebastian Mallaby does not know whether or not the Bush administration's decision makers are more concerned with Social Security's solvency than with promoting an "ownership society": he does not know who the Bush administration's real decision makers are. Sebastian Mallaby does not know whether or not Treasury Secretary Henry Paulson has the "heft to sideline ideologues": Paulson will certainly try, but O'Neill and Snow tried before him and failed. Sebastian Mallaby does not know whether the Bush administration will be willing to "make concessions" on economic policy issues like Social Security reform: the Bush administration probably does not know itself, yet.

Mallaby hopes that all of these will be the case. And he hopes that by confidently asserting that they are the case, he increases the likelihood that they will become the case. So he confidently asserts that they are the case while still clueless about whether what he is writing is right or wrong.

Respect for your readers? Take care to inform your readers? Don't claim that things are true when you have no idea whether they are true or not?

That's not the business Mallaby is in.

Duncan Black Nominates Brad DeLong for the Stupidest Men Alive Contest

National Treasure Duncan Black writes:

Eschaton: No. Look, people who advocate adding "personal accounts" to Social Security are just stupid people. Really, just morons. There's no reason to do it. There's no reason to take any part of Social Security contributions and put them in a little fund account with my name on it.

If you think some Social Security contributions should be invested in the stock market (I don't) to raise returns overall, then it can be stuck into an index fund or managed by a fund manager or whatever. I still think that's a bad idea, but there's a rationale for it. There's no rationale for dividing that up into millions of individual accounts. There's no rationale for letting individuals "control their own money" by letting them choose across some finite number of managed funds. Social Security is a lovely program which works just fine and really needs no changes other than extraordinarily nonurgent tweaks to the tax formula at some point.

And, no, there's no need for modest benefit cuts. There's no need for means testing it. There's no need for any of these things The Serious People like Bob Kerrey want to do. There's no need to strike a "grand bargain" which combines some stupid things with some smart things because there's no need to do so. Leave it alone.

There is no problem with the Social Security system. People who continue to argue that there is - and that the problem can be "solved" with the magic private accounts fairy - either have broken brains or are attempting to push an agenda for ideological reasons or for personal enrichment for themselves and their kind.

I would, to defend myself, say:

First, there is a chance--a 40% chance by 2050, and an 80% chance by 2100--that the Social Security system as currently structured will be in a deep financial hole someday. It would be best to make small changes to guard against this first possibility and then probability now rather than waiting until the changes have to be big. So there is, I think, a powerful argument for raising taxes a little--i.e., uncapping FICA so that it hits all wage-and-salary income and a good deal of in-lieu-of-salary income. And there is a powerful argument for cutting benefits a little--i.e., indexing the retirement age to some function of life expectancy so that Social Security benefit years do not go up one-for-one as life expectancy increases. And there is a powerful argument setting up automatic non-political mechanisms to keep the system in whack whether things turn out to be better or worse than we currently expect.

Second, there is a chance--I think a 70% chance--that half or nearly half of Americans are drastically undersaving. A forced saving plan thus seems to me to be a good idea.

Third, the poorer half of Americans have essentially no investments in equities, a historically very high-return asset class. So tax an extra 2% of wages and salaries. Match it one-for-two with money raised from uncapping FICA. And invest it in the U.S. government's Thrift Savings Plan.

That seems to me to be good public policy and to be an attainable political bargain. Or simply sit Diamond-Orszag-Liebman-MacGuineas-Samwick in a room until they all come out (ideally, alive). I'll sign on to whatever emerges.

Social Security Reform

The Economist hopes for a grand bargain on Social Security reform:

Ingredients of a grand bargain? | Free exchange | Economist.com: So Washington is full of rumours that 2007 will bring a Grand Bargain on social security reform (see Mark Thoma's take here and Vox Baby here). The Bush team's plan is to sound sufficiently conciliatory and open-minded that it becomes impossible for the Democrats not to sit down and talk. That strategy just might succeed. Stonewalling is a plausible political tactic when you are in opposition (though still shamefully shortsighted). It doesn't work so well if you are actually in charge on Capitol Hill, particularly when you announce that retirement security is one of your top legislative priorities.

Nancy Pelosi and her friends may be loath to touch social security but they are worried that poorer Americans don't have enough of a retirement nest egg outside the government pension system. As part of their schtick on dealing with "middle class anxiety", Democratic wonks have all kinds of ideas for getting ordinary Americans to save more. Some stem from the insights of behavioural economics (such as automatically enrolling workers in 401(k) plans unless they explicitly choose to opt out). Others involve restructuring tax subsidies towards the less affluent by, for instance, replacing today's system of tax-deductions with a limited government match. A paper for the Brookings Institution's Hamilton Project by Bill Gale, Jonathan Gruber and Peter Orszag lays out the details.

If Mr Bush wants to sort out social security and the Democrats want to revamp the government's role in the rest of retirement security, there is clearly room for a compromise. One option: combine the Gale/Gruber/Orszag ideas for restructuring retirement tax subsidies with the Liebman/MacGuineas/Samwick social security reform plan. You can find all the details over at Vox Baby but it is probably the best bipartisan plan around and, importantly, includes a mandatory individual contribution to a personal retirement account. By restructuring tax subsidies for retirement saving so that poorer Americans got a hefty top up to their mandatory contributions from Uncle Sam and you might convince enough Democrats that a system which includes personal accounts makes sense.

Back in 1998, 1999, and 2000 there was a deal to be struck: bring the existing Social Security system back into balance with a combination of (small) tax increases and (moderate) future benefit cuts, and supercharge it with add-on private but regulated and insured personal accounts. But neither Gingrich, Hastert, Armey, Delay, or Lott were interested in such a deal--it would give another substantive public-policy victory to Bill Clinton, you see. After 2000 Bush was interested in--well, it was never clear what Bush was interested in, for different advisors said very different things, and Bush never proposed a plan.

But the deal that was there to be struck in 1998, 1999, and 2000 is still there to be struck, if program design and decision-making can be moved out of the White House to locations with credibility.

How Much Are Americans Saving for Retirement?

The keen-eyed Arnold Kling is skeptical of the claim that $63,000 1992 dollars is more than the "optimal" median life-cycle savings for an American in his or her 50s in 1992:

EconLog, Saving for Retirement, Arnold Kling: Library of Economics and Liberty: John Karl Scholz, Ananth Seshardi, and Surachai Khiatrakun write,

We find that over 80 percent of HRS households [a sample of households aged 51-62 in 1992] have accumulated more wealth than their optimal targets. These targets indicate the amounts of private saving households should have acquired at the time we observe them in the data, given their life cycle planning problem and social security and defined-benefit pension expectations and realizations. For those not meeting their targets, the magnitudes of the deficits are typically small.

This sounds like wonderful news, for it suggests that Americans are saving plenty for their retirements. But the median net worth in the data is $102,600, which does not impress me. The median "optimal" net worth as calculated by the authors is $63,116, which impresses me even less. Maybe there is a good case to be made that $63,116 is plenty of savings for the median household in their fifties...

Fourteen years of inflation and real income growth since 1992 means that $63000 then bears the same relation to GDP per worker that $110,000 does today. Consider that that median household has (blowing everything up by nominal income worker growth since 1992) has the equivalent of today's $188,000 in Social Security wealth and $66,000 in defined-benefit pension wealth. It's really not $63,000 that Arnold Kling should be thinking of as the SSK target: it's $364,000.

And the median American household in its fifties is not that rich, not living that well, and should be rapidly building its assets for retirement. My instinct is to share Arnold's skepticism about SSK's results. But I am not at all sure my instincts are correct here.

And the mean "optimal" numbers? As best as I can see, they are about $79K of defined-benefit pension wealth, $179K of Social Security wealth, and $280K of other wealth--a total accumulation for the mean household in its 50s of $538K in today's (2006) dollars at today's (2006) income levels.

Alicia Munnell and Company Find Defined-Benefit Pensions Outperforming 401(k)s

401(k)s are not the greatest idea in the world:

Angry Bear: Investment Returns: Defined Benefit vs. 401(k) Plans: The always excellent Alicia Munnell and her co-authors Mauricio Soto, Jerilyn Libby, and John Prinzivalli have just released an interesting analysis:

The bottom line is that over the period 1988-2004 defined benefit plans outperformed 401(k) plans by one percentage point. This outcome occurred despite the fact that 401(k) plans held a higher portion of their assets in equities during the bull market of the 1990s. Part of the explanation may rest with higher fees, which are deducted before returns are reported to participants. But the one percentage point shortfall understates the investment problem in 401(k) plans, since an aggregate number does not reflect the fact that more than half of participants in 401(k) plans do not follow the prudent investment strategy of diversifying their holdings. Finally, the available data suggest that IRAs produce even lower returns than 401(k) plans, which, if true, implies trouble ahead given the massive amount of money that is being rolled over into these accounts.

Dean Baker on the *Washington Post*

Via Angry Bear:

Angry Bear: Dean Baker continues to beat up on the Washington Post coverage of fiscal policy matters:

Yet again the Post reports on the threat posed by "entitlement" spending, referring to Social Security, Medicare, and Medicaid. To quickly repeat myself, this is dishonest. There are modest and manageable increases in projected Social Security spending due to the aging of the population. There are unmanageable projected increases in Medicare and Medicaid expenditures due to a projected explosion in health care costs. If the projected explosion in health care costs proves accurate, then it will devastate the economy, and cause serious budget problems. Honest people respond to these projections by examining ways to prevent the explosion in health care costs. Less honest people talk about the need to cut entitlement spending, including Social Security...

Public Sector Defined Benefit Pensions

Dean Baker tells us to add this to the pile:

Beat the Press: The Problems of Public Pensions: Mary Williams Walsh has a nice piece on the unbooked libailities of public sector pension funds in today's NYT. Supporters of defined benefit pensions and public sector provision of public services are not helping the cause when they ignore bad accounting.

http://www.nytimes.com/2006/08/08/business/08pension.html?ex=1312689600&en=f1304b3798aac659&ei=5090&partner=rssuserland&emc=rss

A Funeral for Private Defined-Benefit Pensions

David Wessel on the regulation of pensions:

WSJ.com - Capital: The Big Pension Bill: Is That All There Is? August 3, 2006; Page A2: The 907-page bill addresses a big problem: Employers have made pension promises to 44 million workers and retirees, but many haven't set aside enough money to cover them. At last tally, they were roughly $300 billion short.

If those pension funds or the sponsoring employers go bust, the government Pension Benefit Guaranty Corp. will pay retirees -- albeit often less than those workers had been promised. Its assets are about $23 billion short of the pensions it has promised to pay, and it's likely to get stuck with more pension plans in the next several years. So far, the PBGC has been able to get by with assets it inherits from failed plans and insurance premiums paid by operating pension plans. But if it ever runs out of money, taxpayers almost surely will get the bill.

Sound public policy would discourage, if not forbid, employers and unions from promising pensions to workers unless they set aside enough to pay them. That would protect workers as well as taxpayers, many of whom don't have any employer-sponsored retirement plans at all. (About 45% of all full-time private-sector workers aren't offered a retirement plan at work.)

But if congress makes offering defined-benefit pension plans too onerous, companies will abandon them. Many have already. Only one in five private-sector workers is covered by a defined-benefit pension, the sort that pays a set sum each month. That fraction is shrinking. About four in 10 have a 401(k) or other defined-contribution plan, where the worker owns the assets but takes the risk of sour markets or outliving one's saving. (Some workers have both kinds.)

So does this bill get the balance right? It's tough to get a smart answer -- partly because the bill is so sprawling, partly because the cognoscenti focus not on the all, but on the provisions they like or dislike.... Perhaps the pension bill is best viewed as a funeral service for defined-benefit pensions. Employers don't want to be in this business, preferring to pass the risk of financial markets and longevity to workers, many of whom would rather have a 401(k) anyhow. Private-sector defined-benefit plans had $1.9 trillion in assets at year-end 2005, while 401(k)-style plans had $2.9 trillion and individual retirement accounts had $3.7 trillion

In that light, the most important provisions may be rules set for defined-contribution plans. The bill would encourage employers to automatically enroll workers in such plans: you fill out a form to opt out, instead of filling out a form to sign up. That's wise in a nation where too many people save too little. And it would raise the ceiling on tax-favored contributions to such plans, a break that helps only the best-off Americans....

The quiet word from sober pension experts is that the bill does more good than ill for most workers and taxpayers, but is disappointing, given how much time Congress spent on it.

And, as House Majority Leader John Boehner said the other day, "This bill's going to be in effect for the next 20 to 25 years." Translation: If you think we're going near this issue again soon, you're crazy.

Raising the Retirement Age?

A little evidence on the potential for raising the retirement age:

Greg Mankiw's Blog: Is later retirement a plausible option?: A report by Alicia Munnell, Steven Sass, and Mauricio Soto of Boston College tells us about employer attitudes towards older workers. Their bottom line:

On balance, the survey paints a reasonably optimistic picture. The overwhelming majority of employers said older workers were at least as attractive as younger employees. It will not always be easy for older workers to extend their careers. But the survey suggests that the potential exists. Pushing back the average retirement age, from 63 to 65 or even 67, is thus an important and "reasonable" option for addressing the nation's retirement income challenge.

Of course, those who can't easily keep working through their sixties--and so would be hardest hit by any nationwide increase in expectations of the retirement age--are the poorest. This is a regressive fix.

Social Security Confusion from the American Spectator

Why oh why can't' we have a better press corps?

Andrew Samwick tries to chivy the right-wing in a constructive direction:

Vox Baby: LMS for Conservatives: Writing in the American Spectator this week, David Hogberg asks some good questions about how conservatives should react to the LMS plan and Social Security reform more broadly:

Since the LMS plan is a sincere effort at compromise, and since much of the left would still oppose it were Congress to seriously consider it, it would be worthwhile for those of us on the political right to contemplate just how much we would be willing to give up to achieve reform. Of most concern would be the increase in the earnings cap, a tax increase that would fall hard on small businessmen and women, some of conservatives' biggest supporters. Could we, say, accept a plan with only an add-on personal account in exchange for only a minimal rise in the earnings cap and the rest funded via debt? Or should we demand a carve-out in exchange for any increase in taxes?

I think the answer to the last two questions should be affirmative.

I'm not sure Andrew is right. You see, I don't think David Hogberg understands enough to know what questions he is asking.

An increase in contributions coupled with diverting some of those contributions to private accounts is indeed "a carve-out... [plus] an increase in taxes." But the short way of describing "a carve-out... [plus] an increase in taxes'" is "an add-on." Hogberg's second question is essentially "should we accept an add-on?" The answer is yes.

Conversely, an unfunded add-on--a "personal account... funded via debt" that doesn't raise the resources devoted to funding the Social Security system--the short way to describe that is as a "carve-out." Hogberg's first question is "should we demand a carve-out?" The answer to that is no.

But should I be surprised that writers for the American Spectator are hopelessly confused, and call a carve-out an add-on and an add-on a carve-out? I think not.

Given how confused they are, why don't we good guys reframe the debate. An increase in contributions to the Social Security system is to require that current workers accept some of the responsibility for funding their own Social Security benefits, and not push it off onto future generations. Taking responsibility is supposed to be something that responsibility-loving Republicans favor, isn't it?

The Tree of Tax Hikes and Social Security Privatization

Mark Thoma views Jagadeesh Gokhale as Adam viewed the Snake in that old garden--you know, the one that was the source of four rivers: the Pishon,the Gihon, the Tigris, and the Euphrates. Only Jagadeesh is offering Mark a pomegranate containing not knowledge of good and evil but instead a linked package of tax hikes and private Social Security accounts:

Economist's View: Everything Old is Still Old: This National Review Online commentary urges Republican leaders to reconsider their opposition to tax increases as part of the solution to growing entitlements. The idea is to trade concessions on taxes for the creation of personal Social Security accounts with the hope that, once the door has been opened slightly, salesmanship can open it further and allow conservatives to reach their goal of privatizing Social Security. Beware of compromise in sheep's clothing:

Entitlement-Reform Realities A little conservative compromise will go a long way as we attempt to revamp today's safety-net system, by Jagadeesh Gokhale, NRO: Some conservatives are apoplectic about the prospect of abandoning the "no-tax-hike" pledge as part of entitlement reforms.... Unfortunately, the political and economic arithmetic of entitlement shortfalls does not permit them much hope; remaining wedded to high principles and shunning compromise will only worsen their choices.... Liberals' programs have been in operation for decades and are now supported by a large bloc of voters, making it especially difficult for conservatives to challenge or modify them.... [L]iberals are viewed as having no new ideas... because most of their ideas are already in operation.

Liberals are in a peculiar bind. Entitlement shortfalls are growing larger and threatening to undo their legacy.... That presents an opportunity for conservatives to revamp today's safety-net system by introducing their own market-oriented framework, with personal Social Security accounts as the crown jewel. Unfortunately, worsening entitlement shortfalls also make adopting personal accounts more difficult each year. The closer baby boomers come to retirement age, the less likely they are to acquiesce....

Could conservatives do better by agreeing to accept some of the taxes in exchange for removing the cake earlier and replacing a part of future tax increases with personal accounts? The answer of the high priests is "no," which is puzzling given that their choices would only worsen over time.

What are the strategic tradeoffs? Three items seem relevant: First, resolving the entitlement shortfall by paring scheduled benefit growth is becoming less feasible.... [I]ntransigence on compromise will make higher taxes more, not less, likely.... Second... personal Social Security accounts do not yet exist and thus cannot compete with the existing system to demonstrate their superiority.... Third, if personal accounts were introduced and proved successful... they would carry strong momentum for expansion as more groups clamored for access to personal accounts. So any arguments that the advantages of introducing personal accounts are not worthy of a few early concessions on taxes appear far from credible....

Mark Thoma wants to turn down the pomegranate:

First, there is nothing that necessitates linking tax changes to personal accounts - no such linkage was made when taxes were cut. This is nothing more than a strategy for attaining personal accounts, it is not a solution to the entitlement problem...

True, but private accounts as an add-on would be a fine thing for Social Security. Americans need to save more, both individually and collectively. Hence greater "contributions" now and in the future are attractive. And where should those contributions go? The poorer half of Americans have no long position in the stock market. Given that the S&P currently carries a real earnings yield of 6%, that is a scandal and an outrage. Almost all of the richer half of Americans' long positions in the stock market yield them S&P - 2.5% per year, given their mutual fund fees, brokerage fund fees, and the price pressure the herd exerts against itself as it churns its portfolios. That is at least a semi-outrage.

My ex-student Konstantin Magin has long argued that the projected equity premium makes policies to boost investments by Americans in the stock market a winner, and has recently pointed out to me that the magnitude of long-run mean-reversion implied by current estimates of return predictability makes long-run passive investments in the stock market the closest to a sure thing of anything except running your own online poker site.

Now it is possible to make Social Security private accounts a bad deal for everyone. And it is surely the case that the Bush White House's track record is such that only an idiot would sign on to any proposal designed and implemented by the Bush White House.

But if we were offered a slightly different pomegranate. If, say, we were offered a pomegranate that consisted of: (a) contribution increases, (b) well-designed, low-fee private accounts, (c) Treasury Secretary-to-be Paulson with the baton to make the detailed decisions and set the tradeoffs, (d) advised by an Assistant Secretary for Social Security Reform named Jagadeesh Gokhale, who (e) promised to retain enough social insurance in the system to preserve a substantial defined benefit component--then yes, I would eat that pomegranate. And I would advise Mark Thoma to eat it too.

Social Security Private Accounts: Add-ons and Carveouts

Andrew Samwick points out that, in his (and Jeff Leibman's, and Maya MacGuineas's) centrist consensus Social Security reform plan, 5/6 of the funding for private accounts is an add-on to funding currently dedicated to the Social Security trust fund, and only 1/6 is a carve-out. That bringing of an extra 2.5% of taxable payroll to the funding table seems to me to be a huge win for the AARP side, and not something that should generate objections from the left.

Andrew writes:

Vox Baby: Carveouts: I would say that the most contentious issue at yesterday's AEI presentation was the issue of a "carveout," in which some of the revenues that would otherwise go into the Social Security trust fund are allocated instead to personal retirement accounts. You can hear this very clearly in David Certner's comments. It appears that this may be a "line in the sand" from AARP....

In the LMS plan, contributions of 3 percent of taxable payroll are made to PRAs, with 1.5 percentage points coming from an increase in the payroll tax and 1.5 percentage points coming from the Social Security system. The latter part is the so-called carveout. However, most (about 2/3 over the 75-year projection period) of that contribution is funded by raising the cap on the maximum taxable earnings level. The rest of it is funded by benefit reductions. We believe that we need PRAs of that size in order to get the right-of-center folks to support the plan. But it is worth emphasizing that we are making very minor changes to the projected path of the Trust Fund....

The reductions in the Trust Fund ratios over the next 25 years seem to be a small price to pay to come to a compromise on a plan that, taken as a whole, greatly enhances the retirement security of future generations.

Any Advocates of Estate Tax Repeal?

The Republican congressional leadership is trying to push permanent repeal of the estate tax through the Senate this week--without, of course, any offsetting spending cuts to neutralize the impact on the federal deficit. This is, as Bob Reich pointed out, a deficit-widening move of about the same order of magnitude as Social Security's long-run 75-year deficit.

I haven't found anybody serious willing to argue that this $5 trillion present value increase in the deficit and steeply regressive change in the tax code is good public policy, save for Ed Prescott:

Prescott, "Death and Taxes"

Is there any other serious economist arguing that this is a good deal? Any other half-serious economist? Quarter serious?

UPDATE: Jeff Miron and Greg Mankiw sign up. Both of them, however, make arguments for a deficit-neutral repeal of the estate tax--estate tax repeal coupled either with reductions in spending or increases in other taxes. But that's not what's on offer, is it?

A Cautionary Tale About Being Clear About Pronoun Antecedents...

Be careful with your pronoun antecedents, boys and girls!

Greg Mankiw writes:

Greg Mankiw's Blog: Reich on Taxes, Again: As I have noted before, former Labor Secretary Robert Reich has a way of expressing numbers that is so striking it makes me sit up and want to check the facts myself. Here is what he says at his blog now:

repeal [of the estate tax] would cost the U.S. Treasury $1 trillion in its first ten years. That's about equivalent to what's needed to save Social Security over the next 75 years.

Really? That is amazing.

Let's look a little harder at this and see if we can find some numbers that, at least approximately, back this up...

Now I hadn't noticed anything amazing when I read Bob Reich's weblog. So I went back to see why, and I thought as follows: In the late 1990s--before the Bush 2001 tax cut--estate tax collections were running at about 0.35% of GDP, with an expectation (by me at least) that under the then-current estate tax law that ratio would creep up to 0.4% of GDP because of the rising level of wealth inequality in America. If you go to Table 1-2 of the Congressional Budget Office's you will read that the CBO projects the 100-year Social Security deficit at a present value of 0.54% of the cumulative present value of GDP.

So Reich's statement that repealing the (pre-2001) estate tax will wind up costing us as much as the projected 75-year Social Security deficit did not seem amazing to me. The two money flows--estate tax collections under the pre-2001 law, and the Social Security deficit--do appear roughly equal in present value over the next three quarters of a century.

I, you see, had taken the antecedent of Reich's pronoun "that" to be "the cost of repeal of the estate tax."

But Mankiw takes the antecedent of Reich's pronoun "that" to be "the $1 trillion cost to the U.S. Treasury of the first ten years of estate tax repeal." So Mankiw goes on:

How much does repeal of the estate tax cost over its first 10 years? According to the Tax Policy Center, immediate repeal would cost about $300 billion over the first 10 years. That, however, appears to be an undiscounted number. The present value is probably around $250 billion. What does it cost to fill the social security shortfall over 75 years? This report from the Social Security Administration shows the present value of the 75-year shortfall for OASDI of about $5 trillion. Hmmm....Those two numbers don't seem "about equivalent" to me. In fact, the second one seems 20 times as big as the first.

Now I may have been unfair to Reich in the above calculations. Perhaps he means a different first ten years, rather than the ten years starting immediately. And maybe he prefers different Social Security projections than those I have cited. And maybe he prefers a different discounting convention (although I would insist that he treat the two numbers in a parallel fashion). I would not defend the factor of 20 to the death, or even to a brush burn. I can imagine whittling that number down to a factor of 10 or even 5. But can someone get these two numbers within the same ballpark? I doubt it.

Lastly, let me note that the comparison here is silly. Why compare a 75-year shortfall to a 10-year revenue loss? There is no reason to, other than for dramatic effect. But policy wonks are supposed to have less license in making up their drama than playwrights.

Funding Pensions...

Greg Mankiw praises Bob Reich, who praises the Bush administration's efforts to get Congress to stop giving companies permission to underfund their pension accounts:

Greg Mankiw's Blog: Reich on POTUS and the PBGC: Pigs fly! Hell freezes over! Actually, not, but an even more remarkable event did occur: Robert Reich found something nice to say about George Bush. He begins as follows:

The President's approval ratings are so low I thought I'd find something to compliment him on.... here it is. Congress is debating what to do about corporate pension plans. The President wants a law that forces companies to fully fund their pension obligations to their employees. He's right.

Corporate pension plans don't have nearly enough money to pay what the companies have promised their workers... a shortfall of over $450 billion. And if companies can't pay up, you know who's left holding the bag?... [T]here's a government agency called the Pension Benefit Guarantee Corporation that's supposed to insure most of these promises. But the PBGC itself is already deep in the red, to the tune of almost $30 billion...