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January 11, 2005

Why Oh Why Can't We Have a Better Press Corps? (Why Haven't National Review's Funders Pulled the Plug? Edition)

Ramesh Ponnuru writes:

The Corner on National Review Online: I don't read [DeLong's] blog very much because he's so gratuitously nasty and so obviously convinced of his own brilliance--and while he does seem to be a genuinely intelligent person, there's just not enough good stuff there to outweigh the mindless snottiness. I know this style of writing has won him some fans, but I think it has also detracted from his reputation among people who would otherwise be inclined to listen to him. Anyway, DeLong says that my latest article is "idiocy" and that I have a "strange economic mind." He makes three claims to back up this charge. First, he claims that I deny that higher growth will solve Social Security's fiscal problem whereas, in truth, higher growth has pushed back the exhaustion date for the program's trust fund. My point was, however, precisely that higher growth cannot solve the problem even if the day of reckoning can be pushed back. DeLong can't really be arguing that Stelzer was right to ignore the way that higher growth increases Social Security benefits?...

*Sigh.* Yes, Ramesh Ponnuru, Irwin Stelzer knows what he is talking about. He is a real economist. He is correct when he says that faster economic growth has a powerful positive effect on the finances of the current Social Security system over any horizon, and that with sufficiently faster growth it might prove capable of meeting all of its obligations.

Consider a person who retires at 62 under the current system and lives to age 84. Her initial benefit payment is tied to the general trend in wages in the economy. Thereafter, under the current system, her benefit payment is indexed by the growth in prices.

Let's think about the resources available to the Social Security system to pay these price-indexed post-retirement benefits. The Social Security system has at its disposal pay-as-you-go taxes which rise with wages. And the difference between the growth of wages and the growth of prices is the growth of productivity.

Now let's consider 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 current price indexation of benefits after retirement 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. Elementary. Obvious to everyone who has even a surface knowledge of how our current system works. 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.

Now it would take more to wipe out the infinite-horizon deficit. And I think that the SSA is making other offsetting errors--underestimating life expectancy, for example. And while I think SSA is lowballing future wage and productivity growth, I don't think we'll get 3.0% real wage growth over the next century. I think that the long-run finances of Social Security are likely to be in deficit and are a long-run problem--as I've said before, they are about fourth in seriousness on our list of federal fiscal problems.

However, when Irwin Stelzer--who is, whatever my political and policy disagreements with him, a real economist--writes that "if the economy grows more rapidly and efficiently than some predictions suggest, the current system might well prove capable of meeting all of its obligations," he is not being stupid. It would take not just faster growth and higher immigration but a couple of other lucky financial breaks for the system as well, but yes, the current system might well be able to meet its obligations.

Ramesh Ponnuru is no doubt going to think that I am being gratuitously nasty when I say that Irwin Stelzer, however mighty his sins, misrepresentations, and evasions, deserves better than to be pecked at around the ankles by ignorant ducks. And he is no doubt going to think that Max Sawicky is being gratuitously nasty when he writes that "smart conservative economic commentary... [can be found at] Andrew Samwick, Dan Drezner, Arnold Kling, Marginal Revolution, Kevin Brancato, Dead Parrot Society, Steve Verdon, Steve Antler, Jim Glass, and David Altig, among others. You can get all the Bruce Bartlett you want at Townhall.com. Tom McGuire shows you don't even have to have credentials to write intelligently about economics.... So why would you want to read... The Corner?... [T]hey have no idea what they are talking about when it comes to economics. Maybe they should stick to television criticism. Find a topic you can handle, fellas."

And he will no doubt think that I am being gratuitously nasty when I say that it would be a mitzvah for everyone--liberals, conservatives, and moderates alike--if he and the other commentators on economics at National Review were to fall completely silent tomorrow, and simply redirect everyone to one of Max Sawicky's list of right-wing economics weblogs.

But that he thinks it is gratuitously nasty doesn't keep it from being true.

Posted by DeLong at January 11, 2005 09:52 PM

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To get the SSA's opinion about effect of growth on solvency, you need look no further than Table VI.F9 of the 2004 OASDI Trustees Report, which shows the projected trust fund balance for various scenarios.

Under the "Low Cost" scenario, the trust is projected to grow to $68 TRILLION by 2080.

Hopefully, before then, we will have set SS up under an independent trustee and will have put a good portion of the assets into something other than US Treasury bonds.



Posted by: Charlie at January 11, 2005 10:27 PM

Wow, Brad, sometimes you're just nasty, and sometimes you really outdo yourself.

Posted by: Nougaro at January 11, 2005 10:39 PM

Stelzer is a real economist? I seem to remember you expressing disguist at one of his pieces last year. But if he's worth a look, I'll definitely give him one.

Posted by: Brian at January 11, 2005 11:46 PM

Didn't Ponnuru in his earlier post equate Treasury bonds with Enron stock? He may be more prescient than we think.

Posted by: peBird at January 11, 2005 11:49 PM

If you are snotty, then what does that make Krugman?

Posted by: Cal at January 12, 2005 12:06 AM

To paraphrase: "I'll stop calling them economic illiterate morons when they stop using Dow 36,000 as a standard economic textbook."

Posted by: weco at January 12, 2005 03:35 AM

Haha. You tell 'em, Brad. You must have really hurt his feelings :(.

Posted by: Unstable Isotope at January 12, 2005 03:46 AM

>If you are snotty, then what does that make Krugman?

I dunno, but it doesn't matter anyway: He has a posse:

Posted by: Felix Deutsch at January 12, 2005 04:00 AM

"But that he thinks it is gratuitously nasty doesn't keep it from being true."

this line made it worth reading through the detailed explanation of why Ponnuru is wrong. just the other day i was watching that episode of west wing with the debate against gov ritchie (the bush stand-in) when they are being mamby-pamby and concerned that the prez will come off as an arrogant smarty pants in the debate.

Posted by: i like it nasty at January 12, 2005 06:00 AM

There's a big difference between being an actual economist with whom you have disagreements and the "commentators" down at the Corner, who simply don't know what they're talking about. These are people who literally make numerous obvious errors in every article. When I'm talking errors, these are basic errors any bright undergraduate past her sophomore year in a good economics program wouldn't make (or, at least, not make as emphatically and repeatedly as the Cornerites do).

Posted by: burritoboy at January 12, 2005 06:28 AM

Brad, you are out of step with the Bush administration anti-intellectualism. Much of the GOP appeal is in giving as much or more value to the gut reactions of the uninformed and uneducated than to "so-called experts" who have spent a good part of their life studying and actually learning. Why should people listen to whiny experts like yourself when they can listen to the feel-good pronouncements of ideologs who are not bound by silly facts?

How dare you slam Ponnuru and his feel-good ideology. Just because it is not based on facts, knowledge and years of study does not mean that his feel-good pronouncements have no merit. These are post-modernist times. The Bush administration and his supporters are a grand experiment to test the idea that facts and knowledge do not matter as long as one has motivation, faith and the religiously correct conservative ideology. Experts like yourself who demand standards of facts knowledge and accountability are turds in the ideological punch bowl.

Posted by: bakho at January 12, 2005 06:31 AM

It's bizarre to see the spinners suddenly worried about where the SS program will be at the infinite horizon. These are the same people who leaped in to support Dubya's manned mission to Mars on the grounds that "according to the law of averages", Earth will surely be struck by an asteroid over some long horizon and we'll all have to move to Mars anyway. Perhaps in the planning for life on Mars, it is assumed that the SS program would be moved there fully intact, infinite horizon liabilities and all.

Posted by: P O'Neill at January 12, 2005 06:39 AM

May God bless you Brad, and make His face to shine upon you, and hold you and keep you all the days of your life. Let us all pray that the Corner rats grow thicker skin (for their own sakes) since it is apparently to late for them to acquire greater cognitive function.

Posted by: Pudentilla at January 12, 2005 07:48 AM


Oh, thanks! Thanks a bunch! I was having a pretty productive day till you showed up. You went and put some of my long-standing, vague feelings into concise prose and now I have to go and rock myself in a corner for a long time.

Posted by: kharris at January 12, 2005 07:49 AM

Maybe we should start from the other end and instead of fretting about Social Security and what it can and can't do, instead we should think about what we want it to do and go from there. Now, since corporate America is doing away with pensions and sticking us with 401k's that don't amount to much, and since workers are being laid off in their 50s rather than retired in their 60s (a far more relevant figure than the commonly cited and pointless fact that people are living longer), maybe Social Security should become our new, nationalized pension plan that begins paying out at, say, age 55. And, of course, the payouts should be quite generous, perhaps indexed to corporate profits or CEO compensation. In other words, golden--or at least tin--parachutes for all, as it should be. Sounds silly, but really, from the perspective of a middle-aged worker who could never possibly retrain for a decent job and who has a mortgage, car payments and a kid headed to college, it's only minimally decent.

Posted by: g borg at January 12, 2005 07:53 AM

The first post noting that under SSA's "low cost" assumptions the program remains solvent for 75 years is mistaken, since the low cost assumptions are for ALL variables not simply wage growth. The effect of wage growth alone (taken as a proxy for productivity growth) can be found in the Trustees sensitivity analysis. They find that that actuarial balance improves roughly proportionately with wage growth, so an increase in the wage growth rate of 1.9 percent would roughly erase the 1.9 percent 75-year deficit. Since the baseline growth rate is 1.1 percent, the necessery wage growth rate would be around 3 percent. Solvency in perpetuity would demand higher rates of growth. Note that from 1960-2003 real wage growth averaged only 1 percent, and from 1990-2000 was only 1.7 percent.

Which raises whether Brad's point against Ramesh is really fair. It is technically correct that a sufficiently high growth rate could keep social security solvent in perpetuity, but is such a sustained rate anywhere near plausible? If not, is it responsible to focus on that possibility rather than on other changes that might need to be made?

Posted by: Anonymous at January 12, 2005 08:34 AM

If benefits are tied to wages, which in turn depend on productivity growth, wouldn't productivity growth have to continuously increase to keep the system solvent forever?

[Yes. Productivity would have to continue to increase at a relatively rapid rate. But the productivity growth rate could be constant--it wouldn't have to accelerate...]

Posted by: walons at January 12, 2005 08:46 AM

Now, the only problem is that Ponnoru had the better of the argument with Steltzer, who clearly was "assuming a can opener" in regards the 'trust fund'.

And forgetting to ask himself, "Compared to what?" in calculating a 2.5% real return on a 50-50 portfolio in a private retirement account.

Posted by: Patrick R. Sullivan at January 12, 2005 08:50 AM

Please don't suggest a shutdown of National Review Online. I have found it a great learning tool. I direct all of my economics and finance students there. Dissecting why an argument is wrong - and heaven knows, virtually every NRO writer fits that bill in fact-gathering and/or logical reasoning - is an excellent intellectual exercise. Figuring out why someone is wrong cements the concepts far better than simply reading someone who is right. Please do not advocate the end of this educational resource.

Posted by: Thorstein Veblen at January 12, 2005 09:21 AM


Do us all a favor and write this column.

"If productivity growth is only 1.1% over the next 75 years, social security will be the least of our problems"

Make it short and sweet, cause this is the turf we need to fight this battle over. Use your talking points.

Posted by: Mickslam at January 12, 2005 09:53 AM

To Ramesh, I would say -

What could be more gratuitously nasty than trying to rob me of thousands of dollars worth of future Social Security benefits that I've been promised?

Posted by: praktike at January 12, 2005 10:11 AM

I agree with kharris that bakho hits the nail on the head.

"The Bush administration and his supporters are a grand experiment to test the idea that facts and knowledge do not matter as long as one has motivation, faith and the religiously correct conservative ideology."

It's worth noting that this is not an experiment from the Bushie frame of reference, since experiments only make sense if you assume there is such a thing as empirical reality. From the perspective of what I will take the liberty of calling a rational person, such an experiment is guaranteed to fail in the long run. Should we take some solace in this? Of course, it's possible to do a lot of damage during the run of the experiment.

It's also likely, and more problematic, that the Bushies do have empirical thinkers; they are the ones that handle the politics and insure the continuation of the experiment.

Posted by: Paul Callahan at January 12, 2005 10:32 AM

I'm not sure I understand (the model; I'm not talking about the politics of it). If, say, 3% productivity growth helps close the gap for the next generation of beneficiaries, the generation after that will have been promised a compounded 3% more, so won't productivity have to rise to close their gap?

Posted by: walons at January 12, 2005 11:19 AM

"The Bush administration and his supporters are a grand experiment to test the idea that facts and knowledge do not matter as long as one has motivation, faith and the religiously correct conservative ideology."

This has been tried before. Japan, 1941-1945.

Read "A Diary of Darkness" Kiyosawa Hiyoshi, translation by Sloviak and Tamie. And other books on Japan in WWII.

The Bush adminsistration is highly similar to the Hirohito regime.

Posted by: jjm at January 12, 2005 11:45 AM

What is wrong with Brad? Mindless snottiness? Gratuitous nastiness? He was supposed to be shrill!

My personal impression was that snottiness was thoughtful and nastiness purposeful, but reasonable people may differ.

Posted by: piotr at January 12, 2005 12:46 PM

You say that "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." What's going to happen to Europe? A lot of EU countries have even lower growth rates than the US and their population is ageing even rapidly. Not to mention that social security payments are far more luxurious than in the States. When will the collapse actually come? Are there any good articles you can suggest on this subject?

Posted by: EsmeV at January 13, 2005 04:09 AM

If it helps, I'm obviously convinced of your brilliance too. :)

Posted by: Jim D at January 13, 2005 06:24 PM

Brad assumes that the wage growth rate equals the productivity growth rate, but lately wages have not grown at anywhere near that rate. Instead, wages have grown at about the rate of inflation (ie constant real wage), implying that all else equal Soc Sec costs and revenues will rise at same rate. In other words, no help for SS from productivity growth if it does not in fact raise wages. How about we just tax all earnings instead of only those below 90K?

Posted by: Tom H at January 14, 2005 11:56 AM

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