December 17, 2004

Jonathan Weisman Pulls His Punches

Jonathan Weisman pulls his punches as he says that Bush is engaged in a "delicate balancing act":

washingtonpost.com: Changing for the Better -- or Worse?:Throughout a two-day conference on the economy, President Bush and his allies extolled the virtues of his tax cuts and "pro-growth" policies, which they said have lifted the nation from recession and propelled it well above its international economic competitors. If Washington adheres to the path of fiscal restraint while following the president's tax prescriptions, it was suggested, policymakers could secure powerful economic growth far into the future.

Yet when the subject turned to the nation's legal or Social Security systems, the picture grew suddenly dark. Frivolous lawsuits have hobbled America's businesses and have put them at the mercy of their enlightened overseas competition, administration officials said. As for federal entitlements, a rising tide of retiring baby boomers will inevitably slow economic growth and bankrupt Social Security.

"The crisis is now," Bush warned in his closing speech.

Such contradictions emerged repeatedly, pointing up the delicate balancing act that Bush faces as he tries to sell his economic proposals....

"Lying through his teeth at least half the time" seems much more appropriate than "faces a delicate balancing act."

Posted by DeLong at 03:09 PM | Comments (2) | TrackBack

Matthew Yglesias Is Good Today...

Here he is on the Social Security "crisis":

TAPPED: December 2004 Archives: ...how overwhelmingly important it is to keep the "there is no crisis" message front and center in the Social Security debate. Most of the young people I know -- including myself until very recently -- have been taken in by a decades-long effort on behalf of privatizers into believing that Social Security is in "crisis," and that if we do nothing the system will "go bankrupt" before we retire, meaning that the system will somehow collapse and we won't get any benefits.

If you approach the issue from inside that frame, then no amount of cavailing about benefit cuts or "risky" stock market transactions is going to get you anywhere. A smaller benefits package and a stock portfolio that may or may not pay off looks like a really good deal compared to a bankrupt pension plan that gives you nothing. Once you understand that even if we do nothing whatsoever to fix Social Security and the Trustees' overly pessimistic predictions come true, the system will still have enough money to pay my generation more in real terms then current retirees get, everything looks different. Bush is offering us a guarantee of lower benefits and $2 trillion in debt to forestall the possibility that benefits will need to be lowered sometime in the 2040s. That's a terrible deal in a straightforward way. But only if you try and see the truth: There is no crisis. If you can't make people see that, everything else becomes pretty irrelevant.

Posted by DeLong at 03:05 PM | Comments (9) | TrackBack

Social Security Privatization Around the Globe

Paul Krugman looks at Social Security privatization around the globe:

The New York Times > Opinion > Op-Ed Columnist: Buying Into Failure: Information about other countries' experience with privatization isn't hard to find.... http://www.tcf.org.... Yet, aside from giving the Cato Institute and other organizations promoting Social Security privatization the space to present upbeat tales from Chile, the U.S. news media have provided their readers and viewers with little information about international experience. In particular, the public hasn't been let in on two open secrets: (1) Privatization dissipates a large fraction of workers' contributions on fees to investment companies. (2) It leaves many retirees in poverty....

More than 99 percent of Social Security's revenues go toward benefits, and less than 1 percent for overhead. In Chile's system, management fees are around 20 times as high. And that's a typical number for privatized systems.... If we introduce a system with British-level management fees, net returns to workers will be reduced by more than a quarter. Add in deep cuts in guaranteed benefits and a big increase in risk, and we're looking at a "reform" that hurts everyone except the investment industry....

It's true that costs will be low if investments are restricted to low-overhead index funds - that is, if government officials, not individuals, make the investment decisions. But if that's how the system works, the suggestions that workers will have control over their own money - two years ago, Cato renamed its Project on Social Security Privatization by replacing "privatization" with "choice" - are false advertising. And if there are rules restricting workers to low-expense investments, investment industry lobbyists will try to get those rules overturned....

Privatizers who laud the Chilean system never mention that... the government is still pouring in money. Why? Because... the Chilean government must "provide subsidies for workers failing to accumulate enough capital to provide a minimum pension."... [P]rivatization would have condemned many retirees to dire poverty, and the government stepped back in to save them.... [T[he Bush administration wants to scrap a retirement system that works, and can be made financially sound for generations to come with modest reforms. Instead, it wants to buy into failure...

Posted by DeLong at 11:05 AM | Comments (25) | TrackBack

December 16, 2004

Questions to Ask Social Security Planners

David Wessel has questions people should ask Social Security planners:

WSJ.com - Capital: Private accounts alone will not destroy Social Security as we know it, despite claims from some. But private accounts alone won't save Social Security either, despite claims from others.... [H]ere are four tests for judging Social Security fixes.

Does the plan for Social Security increase national saving? The American people, businesses and government don't save enough... the U.S. as a nation needs to save more. The surest way is for the government to "dis-save" less, as economists awkwardly put it. Translation: Shrink the budget deficit (Don't take my word: Alan Greenspan says so). A Social Security change that reduces American savings is a bad idea....

Does the plan plausibly match projected tax receipts to promised Social Security benefits over a long time? Underneath rhetoric about "modernizing" or "protecting" Social Security is a fact: Lengthening lifespans and the impending retirement of the big baby-boom generation require that more money be pumped into the program or less money be pumped out....

Who wins? Who loses? Each arithmetically sound plan to shore up Social Security is different....

Can the proposal for Social Security get through Congress? Fixing Social Security to make it sustainable is a lot easier than doing the same for Medicare. Lots of Social Security plans add up. But the point is to find one that gets broad enough political support to get enacted. Senate Republicans warn they're not walking the Social Security plank unless some Democrats walk with them. If Mr. Bush strives only to please true believers in private accounts and Democrats strive only to please those who find private accounts in all forms abhorrent, we'll have a great debate and no solution.

That would not be a good outcome

But there is a fifth question that David Wessel should have told people to ask: Daniel Davies's question:

Can anyone... give me one single example of something with the following three characteristics: (1) It is a policy initiative of the current Bush administration. (2) It was significant enough in scale that I'd have heard of it (at a pinch, that I should have heard of it). (3)It wasn't in some important way completely f***** up during the execution?

As one former CEA staffer said to me: "Think of the farm bill. Think of the Medicare drug benefit. Think of the steel tariff. Now expand that to the size of Social Security..."

Posted by DeLong at 03:16 PM | Comments (6) | TrackBack

Could Social Security Privatization Succeed?

Michael Kinsley writes:

Talking Points Memo: by Joshua Micah Marshall: December 12, 2004 - December 18, 2004 Archives: My contention: Social Security privatization is not just unlikely to succeed, for various reasons that are subject to discussion. It is mathematically certain to fail. Discussion is pointless.

The usual case against privatization is that (1) millions of inexperienced investors may end up worse off, and (2) stocks don't necessarily do better than bonds over the long-run, as proponents assume.But privatization won't work for a better reason: it can't possibly work, even in theory. The logic is not very complicated.

1. To "work," privatization must generate more money for retirees than current arrangements. This bonus is supposed to be extra money in retirees' pockets and/or it is supposed to make up for a reduction in promised benefits, thus helping to close the looming revenue gap.

2. Where does this bonus come from? There are only two possibilities: from greater economic growth, or from other people.

3. Greater economic growth requires either more capital to invest, or smarter investment of the same amount of capital. Privatization will not lead to either of these.

a) If nothing else in the federal budget changes, every dollar deflected from the federal treasury into private social security accounts must be replaced by a dollar that the government raises in private markets. So the total pool of capital available for private investment remains the same. b) The only change in decision-making about capital investment is that the decisions about some fraction of the capital stock will be made by people with little or no financial experience. Maybe this will not be the disaster that some critics predict. But there is no reason to think that it will actually increase the overall return on capital.

4. If the economy doesn't produce more than it otherwise would, the Social Security privatization bonus must come from other investors, in the form of a lower return.

a) This is in fact the implicit assumption behind the notion of putting Social Security money into stocks, instead of government bonds, because stocks have a better long-term return. The bonus will come from those saps who sell the stocks and buy the bonds.

b) In other words, privatization means betting the nation's most important social program on a theory that cannot be true unless many people are convinced that it's false.

c) Even if the theory is true, initially, privatization will make it false. The money newly available for private investment will bid up the price of (and thus lower the return on) stocks, while the government will need to raise the interest on bonds in order to attract replacement money.

d) In short, there is no way other investors can be tricked or induced into financing a higher return on Social Security.

5. If the privatization bonus cannot come from the existing economy, and cannot come from growth, it cannot exist. And therefore, privatization cannot work.

Q.E.D.

There are a bunch of possible responses to Kinsley.

Marty Feldstein and company might say that Kinsley's (4c) is false: the inflow of money will bid up the price and lower the return on stocks a bit, but not enough to make long-run stock market investments by private account holders a bad deal. And he would say that taking some of the high returns earned by today's stockholding rich and transferring them to Social Security beneficiaries is the point of the exercise.

Kent Smetters and company might say that Kinsley's (3a) is wrong: that once the privatized parts of Social Security are off the books, the Republican High Politicians will have no option but to propose serious spending cuts or tax increases in order to bring the Federal Government's General Fund into long-term balance. These changes in fiscal policy triggered by the fact that the government is no longer allowed to use the Social Security surplus to pretend that it has a plan for funding general spending will raise national saving, and boost economic growth.

Andrew Samwick and company might say that we dare not raise Social Security taxes without establishing private accounts because we do not dare have the Federal Government voting for CEOs and Directors. This line of thought is that Kinsley is not wrong but incomplete: private accounts then make the policy of raising Social Security contributions a good one.

Ned Gramlich and company might say that raising Social Security contributions becomes politically possible once you have private accounts--that it is the fear that people won't see any return for their contributions that blocks raising more resources for the system. This line of thought is that Kinsley is not wrong so much as incomplete: it's not a privatization bonus, it's the tax increases that privatization will make possible.

All these arguments have, I think, some force. None of them--not even all of them taken together--make a case for whatever monstrosity is about to emerge from the Bush administration.

Posted by DeLong at 03:04 PM | Comments (11) | TrackBack

December 15, 2004

Saving Social Security

Joshua Micah Marshall's view of Social Security:

Talking Points Memo: by Joshua Micah Marshall: December 12, 2004 - December 18, 2004 Archives: Focused as I've been on the Kerik meltdown, I've given little attention to what will certainly be the defining issue of the next two years, for Democrats as much as the president: Social Security.... [T]he entirety of the president's argument is based on a series of well-constructed lies. The president's advisors were never more truthful than they were when they compared the coming round of disinformation and fear-mongering to their public campaign in support of the Iraq war in 2002.

The Social Security "crisis" is manufactured.... To the extent there are long-term financing problems, the president's plan will gravely worsen them. The problem we face... [is] that our non-Social Security budget continues to run massive structural deficits. Or rather, it has returned to running massive structural deficits after getting into the black in the late 1990s.... I'm going to try to dive more deeply into the dishonesty of the president's plan and explanations of different aspects of the debate....

[T]he Democrats have to start seeing themselves as a true party of opposition in large part because of the way President Bush has reshaped the capital into something much more like a parliamentary system. There's no point in Democrats trying to improve legislation at the margins, because they won't be given any real opportunity to do so.... Making the elimination of Social Security a strictly Republican gambit raises the political stakes dramatically.... [S]uch unity should not be that hard to achieve -- for two reasons. First, very few Democrats support privatization. Second, those relatively few in the centrist wing of the party who are open to the idea in the abstract are scared off by the budget-busting debt the president wants to take on to pay for his plan....

Next, as we've discussed before, this isn't a debate about 'reform', 'privatization' or 'saving' Social Security. It's about phasing out the Social Security program....

Republicans want to make this an argument about people who believe in markets and people who don't.... The issue here isn't markets. Most Democrats favor plans that would make it easier for middle- and lower-income families to save and invest money for retirement.... The issue is balance and commonsense. A breadwinner with dependents who gets a lump sum salary at the beginning of the year and invests it all in a few hot start-ups doesn't believe in the market; he or she is just a fool. A wise investment portfolio is balanced between riskier and more conservative investments. The best way to make this argument (and the most valid one) is to make it clear that Democrats want people to be able to invest. That really is the path to wealth. But Social Security is different. It is, among other things, a baseline of guaranteed retirement security and income for everyone. You get it whether you retire in boom times or bust times, whether life has dealt you good cards or bad cards....

Posted by DeLong at 06:58 AM | Comments (20) | TrackBack

December 14, 2004

Why Oh Why Are We Ruled by These Liars? (Today's Social Security Edition)

Edmund Andrews does not quite surround Bush's words with big red exclamations of "LIAR! LIAR!", but he comes close. He does do a good job of pointing out that the private-accounts emperor has no clothes:

The New York Times > Washington > News Analysis: Most G.O.P. Plans to Remake Social Security Involve Deep Cuts to Tomorrow's Retirees: Bush... has focused almost all his rhetorical energy on the need to let people divert some of their taxes to private retirement accounts. But nearly every leading Republican... on Capitol Hill acknowledges that private accounts by themselves do little to solve the system's projected shortfall of at least $3.5 trillion. Instead, those proposals rely on deep cuts in benefits to future retirees... as Thomas Saving, a Republican-appointed trustee to the Social Security trust fund put it last week: "Fundamentally, if you don't reduce the benefits, you don't reduce the debt."

Some of the Republican proposals would raise the age when people can start to receive benefits. Others would reduce payments to beneficiaries to account for longer life expectancies. Still others would reduce payments to married couples and scale back the annual increases that are made to keep pace with inflation. But the biggest single idea is included in the plan the White House most often points to, abandoning the practice of setting benefits as a share of people's pre-retirement earnings... that one change could save more than $10 trillion over the next 75 years, more than enough to wipe out Social Security's projected shortfall....

Mr. Bush, who is likely to step up his call for private accounts when he acts as host of a two-day conference on the economy this week, has steadfastly avoided any reference to cutting future benefits.... But White House officials have begun to acknowledge what many conservatives take as a given; that is, with or without personal accounts, future Social Security benefits must be scaled back....

The simplest cut is the one developed by Mr. Bush's advisory commission on Social Security in 2001. That proposal, which White House officials often cite as a model for how the system could be changed, would change the way future benefits are calculated. Instead of setting benefits as a share of a person's pre-retirement wages... the government would link future benefits to inflation.... "If you just switched from wage-indexing to price-indexing, you would save so much money over that period you would actually wipe out the entire imbalance," said Kent Smetters, an associate professor at the Wharton School of Business who worked on entitlement issues in the Bush Treasury Department....

Under today's law, a middle-income worker who retires in 2065 would be entitled to an annual Social Security benefit of $26,400, or about 40 percent of the worker's wages. Under the proposed change, that same worker's benefit in 2065 would decrease by 40 percent to $14,600, about 22 percent....

"What people are forgetting is why the system is there in the first place," said John Goodman, director of the National Center for Policy Analysis, a conservative research group that strongly supports private accounts. "The reason is that people don't want to reach retirement age and have their standard of living cut in half...."

"They are using smoke and mirrors in the sense that they are cutting taxes in the here and now and making cuts way off in the future," said Laurence J. Kotlikoff, a professor of economics at Boston University who has written extensively on the long-term financial problems of Social Security and Medicare. "What I see them doing is very gradually wiping out the old system, and putting something very minor in its place."... Mr. Bush's own advisory commission in 2001 made it clear that personal accounts would make little dent in the underlying shortfall. If the government kept Social Security benefits as they are now, and let people set up private accounts as well, the government would still face a shortfall of more than $4 trillion over the next 75 years....

Posted by DeLong at 11:31 AM | Comments (21) | TrackBack

Social Security: Wait and See

Matthew Yglesias joins the "wait and see" crowd on Social Security:

Matthew Yglesias: The $11 trillion long-term Social Security deficit we've been hearing so much about lately -- and that pundits have been screaming about since, quite literally, I was one year old -- are based on a prediction that the economy will do significantly worse in the future than it has in the past. If this is right -- which it may be -- then the stock market will do worse, too, and solve nothing. Changing the underlying assumptions, which is what the privatizers are really doing, solves the problem on its own without any changes to policy.

Part of the Social Security Trustees' pessimism is warranted and based on the idea that population growth will slow down in the future. Demographic projections are never perfect, but demographers have gotten pretty good at making estimates, so this probably will happen.

Much less reasonable are the Trustees' assumptions about productivity growth. They say that after growing 3.8 percent in 2002, 3.4 percent in 2003, and 2.7 percent in 2004, productivity growth will crash to 1.8 percent in 2005 and then slowly decelerate to 1.6 percent by 2012. After that, growth will average 1.6 percent until the end of time. The historical table at the top of the Web page on which this prediction is to be found shows that productivity growth averaged 1.7625 percent from 1960 to 2000. Since 2000, annual productivity growth has averaged 2.75 percent. The postwar years up to 1960, not included on the chart, saw faster growth than did the 1960-2000 period.

The important thing to note is not that the Trustees are necessarily wrong but, simply, that it's silly to pretend to think a panel of government accountants can predict economic events in the year 2037, much less offer a full 75 projection of the future course of the American economy. The trustees might be right: An aging society might prove less innovative and less productive than the America we've come to know. If this is true, Social Security is going to have a problem. So will the stock market. So will the Defense Department. So will just about every aspect of the American government and economy. And if that happens, we'll have to figure out how to respond, ideally by coming up with policies that will boost productivity and get us out of the jam. If we can't do that, we're all going to need to tighten our collective belts -- not just on retirement security, but on all aspects of our lives -- compared with the rapid growth we've learned to expect.

In the meanwhile, we can focus on problems that we do have: a war on terrorism, a large general fund deficit, an inefficient health care system, and a decaying infrastructure. This is how we deal with other areas of public policy. We don't look at the growth in defense spending over the past few years, project it forward, compare it with the tax revenue we can expect under dubious economic assumption, and worry that we may go bankrupt in 2043. Instead, we ask if the size of our military is suited to our present defense needs, and we see if we can't mobilize the resources we need. If we can get by with spending less in the future, we'll spend less. If the economy is too weak to afford what we think we need, we'll have to revise our grand strategy to suit our means.

In the context of a media outcry for politicians to show "courage" about tackling entitlements, "wait and see" sounds cowardly and timid. But it works for everything else, and it's not as if we have no current problems to worry about in place of how to cope with a hypothetical decades-long economic slump that doesn't begin until 2012.

After all, it's not as though we don't have important real problems--many of them self-inflicted by the Bush administration.

Posted by DeLong at 08:13 AM | Comments (21) | TrackBack