We just got another lesson of how a Chicago economist can argue anything, as long as it fits the ideology. Never mind reality. The fantasy world of perfectly informed agents is so much more appealing.

Brad DeLong's hunch about taxation and property rights is correct. The Bush Social Security accounts are only "owned" in a very technical sense-- you can't sell them, you can't withdraw from them, you can't hypothecate them, and you can't choose to invest them in anything other than a limited number of investment vehicles. Further, already, the Bush proposal envisions that the account holder will have to take an "offset" from their guaranteed benefits for the expected return (3 percent) on the private account.

So what's to stop the government from requiring larger and larger offsets, with the result that more and more people have less money than they would have had under a system with no property right? What's to stop the government from taxing the capital gains and interest and dividends earned in the private accounts, or charging administration fees? What's to stop the government from taxing withdrawals?

Bush cleverly conflates "owning" something with "the government can never take it away". In fact, while perhaps entirely confiscatory taxation would be unconstitutional under the Due Process or Takings clauses of the Constitution, the government can take away your property, and does so all the time. And the same future Congresses who might cut your Social Security benefits under the current system might also confiscate some of the money in your private account under Bush's proposal.

Brad,

There's an aspect of private accounts that I think conservatives should be more worried about than they seem to be. Let's suppose the thing gets enacted pretty much as Bush proposes and then let's fast forward a couple of decades by which time working Americans will have large amounts of money in their retirement accounts. Suppose the stock market has done quite well up to that point, so that people in their 40s and 50s are happily anticipating a plush retirement.

Then, as is likely at some point, suppose there's a run of bad years in the stock market, by the end of which values are down, say, 50% from their previous peak. At that point the performance of the equities market will be a huge political issue and, presumably, there will be lots of pressure for the government to "do something" about stock prices. Pressure could become overwhelming, especially if the downturn in the market is accompanied, as is frequently the case, by charges of financial chicanery in the corporate sector. I'd rather not imagine the kinds of proposals for managing stock prices that might emerge at that point. Restrictions on short sales? Direct intervention with more borrowed money? Nationalization of selected companies?

The point is, that advocates of laissez faire should think twice about privatization proposals. More likely than not this will open the way for unprecedented politicization of financial markets in the not-to-distant future.

Aaron Gurwitz

"private accounts are more consistent... with... the principle that we ought to honor consumer sovereignty."

It's striking how willing full/partial privatization advocates are to put the pursuit of this elusive "principle" ahead of the very tangible benefits of the current system -- not least the enormous cost efficiencies of having one big government-operated fund instead of millions of itty bitty private accounts.

fetish: n. 1. An object that is believed to have magical or spiritual powers, especially such an object associated with animistic or shamanistic religious practices. 2. An object of unreasonably excessive attention or reverence.

Dilan Esper wrote, "What's to stop the government from taxing the capital gains and interest and dividends earned in the private accounts, or charging administration fees?"

Fees, I'm not sure, but if account holders actually have a *property interest* in the account---and this is something I haven't seen anyone actually establish as a true aspect of Bush's proposal---then I don't see how levying a special capital gain/income (dividend) tax on the SS private accounts would be permissible, unless the same tax(es) fell on instruments held privately outside the accounts.

Eddie Lazear wrote, "John Cogan has shown that for every dollar of unanticipated increase in government funds through the payroll tax, there is a corresponding increase of one dollar in government expenditures..."

Uh huh. And why should we trust Cogan's econometrics?

Brad DeLong wrote, "But I cannot help snarking that an easier solution than reorganizing the whole system is simply to elect Democratic presidents like Bill Clinton, who understand and care about the long run national savings issue."

If you look at graphs of the budget deficit, it's clear that the big culprits are Reagan and Bush 43.

Bush 41 wasn't all that bad---he (and Congress) had to dig out of the hole Reagan had put the nation into, and most importantly he and Congressional Democrats compromised, resulting in the Budget Enforcement Act, which improved the budget process over the years (as far as living within our means is concerned).

The BEA expired in 2001 or 2002. Doesn't look like the Republcans want to renew it, as it would drastically limit tax cuts (probably even would limit un-sunsetting them).

Some conservatives are already starting to say that one of the drawbacks of Social Security is that people cannot borrow from it, which by implicit assumption means that with private accounts that you can borrow from it, which is one of the points that Kevin Hassett is talking about in the WSJ today. I say Dr. Delong is correct- be afraid... be vewy vewy afwaid.

The real political fight is not over private accounts. Private accounts are only the bait. The real fight will be over the drastic cuts in benefits that Bush is proposing.

Has anyone noticed that the returns of most CREF funds over the last 5 years have been negative?

Right now, would a contract to sell the future income from your SS be enforceable in the courts?

[No. You could declare bankruptcy and discharge the debt.]

If so, it's already possible to use this income flow to buy a house.

"while legislated benefits are the beneficiaries' only by Grace of Congress"

An example of this will be the 2018 decision not to honor the Trust Fund I.O.U.s in favor of keeping upper bracket income tax rates low.

Liberal:

I don't see why Congress would not have the power to levy a special tax on Social Security accounts. After all, they have full power to grant special tax treatment in the opposite direction-- 401k's and IRA's are treated differently than other savings and investment accounts, after all.

So long as Congress had an asserted "rational" basis for its action (the weakest standard for constitutional review) and the action was not wholly confiscatory (such that it would be considered a "taking" of private property for public use without just compensation), I would assume that Congress has broad power to impose special rules of taxation-- that cut in EITHER direction-- on individual Social Security accounts.

It means the return of elderly relative poverty over the next century--not old ladies eating cat food, but old ladies with incomes that are grossly disproportionate to those of the broader society.

Not sure there is much difference between grossly disproportionate and eating cat food.

Eating cat food is just today's idea of grossly disproportionate income. If tomorrow's idea of grossly disproportionate income is eating spam sandwiches, and the elderly are eating spam sandwiches then translating tomorrow's english to today's: spam sandwiches = cat food.

But overall, a good illustration of why, among other things, initial benefits that keep up with contemporary wages is a good thing.

http://www.pkarchive.org/

February 4, 2005

Paul Krugman:

Suppose you invested $1000 a year (constant dollars) in a fund that pays 3 percent real interest. Then after 40 years you would have about $77,000. Suppose that your life expectancy is 20 years at retirement, and that you can buy an annuity with present value equal to that lump sum. Then you would get about $5,000 annually.

The Bush plan, as far as we can tell, is that if you elect to take the private account, your conventional benefits are cut by $5,000 per year. So investing in bonds gets you right back where you started.

If you buy risky assets, and do better than 3 percent, you may end up with, say, $7,000 per year; in that case you have a net gain of $2,000.

But if you do worse, and end up with a lump sum only large enough to buy, say, a $3,000 annuity, your benefits are still cut by $5,000, and you're $2,000 a year worse off.

So what's really happening with the private accounts is that people will be encouraged to take a mortgage on their Social Security benefits, and to speculate in the stock market.

And, of course, all of this has zero bearing, at best, on long-term government finances. In practice, whoever is running America in 2050 will probably end up bailing out the unlucky, so it's a major net negative.

"But I cannot help snarking that an easier solution than reorganizing the whole system is simply to elect Democratic presidents like Bill Clinton, who understand and care about the long run national savings issue."

I realize you are being facetious here, but in what sense is this easier? Much more effort was put into getting a Democrat in to the White House in 2004, effort in terms of money spent, phones dialed, letters sent, getting voters to the polls to vote with their brains instead of their fear, greed, anger or hate, than ever before in history, and it wasn't enough. If the public appreciated fiscal rectitude, we'd be in the early days of the second Gore term. It is most definitely not easier, on a regular basis, to elect good fiscal shepherds than to create good retirement systems. You know that. The sets of people who vote for against their own interest and people who cannot successfully manage their own retirement portfolios may not be identical, but the problem in both sets is an intellectual deficit. That deficit is wired in, and isn't gonna go away.

But would we be forced to fund private accounts by diverting revenues away from Social Security as it exists today? If so, why do it at all, unless we uncap the contributions number?

I like the idea of private accounts, but it seems more reasonable to do them on top of Social Security.

liberal:

"I don't see how levying a special capital gain/income (dividend) tax on the SS private accounts would be permissible, unless the same tax(es) fell on instruments held privately outside the accounts."

So make them equal. That still means you need well over 3% return to break even.

But here is how to make taxes on SS accounts higher than on regular investments: keep taxing them like SS benefits, and do away with the earnings test so that taxation applies to every beneficiary. If capital gains taxes stay lower than 85% of regular income taxes, SS investments would be taxed at a higher rate than other investments.

I don't trust anyone who is dishonest from the get-go:
its redistribution can lack rhyme or reason: Do we really intend low income African Americans who die young to redistribute income to affluent whites who live long lives?

Lezear must well know that the shorter life expectancy for African Americans is due mostly to higher infant mortality due to poorer health care and cuts in WIC and food stamps, and to a lesser extent to young people killed by criminal violence. Both causes are tragic, but neither group pays much if any payroll taxes before their untimely deaths.

Next Republican lie, please.

(Moreover, the "inheritable ownership" argument for Bush's proposal is also bull, as retirees would be forced to buy an annuity with any returns on their piratized accounts not clawed back. And while the private account may be inheritable if the worker dies prior to retirement, it's unlikely to be higher-yielding on average than SS Survivor benefits. What exactly is going to be inherited from an annuitant?)

The preposition "in" when denoting location in place requires the ablative case. So it seems to me that Cicero probably wrote "in republica ..." and "in cloaca.."

enfant terrible wrote, "So make them equal. That still means you need well over 3% return to break even."

I wasn't addressing whether or not there are ways to screw people holding private accounts, but rather the narrower issue of whether the returns from these accounts could be treated much differently from those of similar assets held outside SS.

"...keep taxing them like SS benefits..."

But can that happen if you really have a property interest in the account?

The following link provides a supporting fact to kharris:

http://online.wsj.com/documents/info-presjobs05.html?printVersion=true

kharris, I think a more accurate and precise way for Brad to have put it would be that electing Democratic Presidents would be a simpler solution. Definitely not an easier one, facetious or not.

I thought the requirement to buy an annunity only comes into play if the benefit level plus individual account falls below a certain level. At least in theory, you wouldn't have to purchase one, although it's probably most people would, I imagine.

Dilan Esper wrote, "So long as Congress had an asserted 'rational' basis for its action (the weakest standard for constitutional review) and the action was not wholly confiscatory ..."

That's not clear to me, but it's certainly arguable.

The infuriating thing is that the people pushing for at least a _nominal_ property interest attribute to reform are the same people who make it attractive by threatening an effective (if not nominal) default on the SS surplus. In their hearts of hearts, you get the impression they want to completely cancel SS benefits as of today, keep collecting the taxes and using them to replace (progressive) income tax revenues.

I am tired of hearing forced private accounts or SS increasing savings. What savings? Check out Bill Gross at

http://www.pimco.com/LeftNav/Late+Breaking+Commentary/IO/2005/IO_Feb_2005.htm

And here is an excerpt:

Rob Arnott of Research Affiliates LLC, ... has advanced what I consider to be the most realistic take on Social Security and Medicare trust funds. Pre-funding these systems, he argues, "is basically irrelevant." And (in my own words) it matters little whether the system is pre-funded with Treasury bonds or privately held stocks. The fact is that both of these financial assets represent a call on future production. If that production could possibly be saved, like squirrels ferreting away nuts for a long winter, then Treasury IOUs or corporate stocks might make some sense. But they can’t. Future healthcare for boomer seniors can only be provided by today’s teenagers, twenty-somethings, and even the yet to be born. We cannot store their energy today for some future rainy day. Nor can we save food, transportation, or entertainment for anything more than a few years forward. Each must be provided by the existing generation of workers for those who have retired and are presumably incapable of working.

And, ... the ratio of retirees to workers - the dependency ratio - soars from 0.2 retirees for every worker to 0.35 over the next 20 years or so. There’s your problem, and neither privatization nor any goodly number of government bonds deposited in the Social Security trust fund can solve it.

At the end of the day, President Shrub's track record remains.

He gives you a stone, and calls it bread.
He gives you a snake, and calls it fish.

In static equilibrium, disciplined private savings are exactly what each generation MUST do to provide for their futures. Successive generations of Americans have shown no proclivity to that, which is why Social Security exists and why some form of mandatory retirement plan has to kick in every now and then. Call it a savings market correction/intervention.

But we don't live in static equilibrium. We live in dynamic equilibrium where the market will eventually adjust to the new situation and of course, stop saving money again. What's the Shrub plan for that?

The current system of transfer payments isn't perfect and it needs improvement. No. 43 just happens to be the last man I would expect to competently address the issue.

bakho wrote, "The real political fight is not over private accounts. Private accounts are only the bait. The real fight will be over the drastic cuts in benefits that Bush is proposing."

I agree---in a way.

That's what the fight *should* be about. I've posted to many 'blogs that the most important anti-Republican-plan-to-raid-SS line should be very simple:
"Bush wants to cut SS benefits for everyone under 55."

Arguing about future returns of the stock market, whether or not people have true ownership, whether account balances will be heritable, etc, is just a distraction from the central issue of Robinhood-in-reverse. (It's fine for us to debate them here, but...) And while discussions about effective defaults on the SS Trust Fund are fine for policy wonks, it's too complicated to use as the main ammunition in the propaganda war.

Strictly speaking, though, you might be wrong, because you made a descriptive statement about how the fight *will* be, not about how it *should* be. And my faith in the Democrats cunning and spine is lacking.

Pat wrote, " 'The fact is that both of these financial assets represent a call on future production.' "

I agree, but the right-wingers' counterclaim is that SS revenue encourages higher government spending. (Not that I agree with that.)

The problems with the Administration proposal for phasing away Social Security are many, but benefit cuts and borrowing to actually phase away Social Security are the saddest of problems.

The Japanese have aged far more quickly than have we, and despite far slower economic growth Japan's saving in providing a fine support base for retirees. Of course we can and should save and invest more for retirement both individually and collectively.

First of all, Social Security is not a forced savings program. There are no savings to speak of at any point in the program. It is a social insurance and redistribution program. As for unintended consequences of blacks dying young and redistributing their income to older white individuals, I would challenge the said economist to demonstrate that the total amount redistributed to whites is greater once you take into account income disparity. Does the not so esteemed economist really argue that the income distribution from blacks to whites dying prematurely is greater than that paid in return? The median income in this country is still $40k or less, much less than the payroll tax cap of $90k. African Americans are still considered to be economically behind on top of that.

This entire article was simply someone attempting to justify a premade decision to privatize social security.

Personally if it were done right, I would personally prefer Social Security privatization - simply because my lifetime savigns would benefit enormously. However in good conscience I cannot support it for the public weal. The reasons being that we cannot afford to finance the transition cost of such a system and secondly that in any real world scenario we can expect it to be horribly botched.

So while I support private accounts in theory, the resulting actuality of what is politically possible would be something I could not support.

To cast Social Security in terms of forced savings is to predispose the argument toward privatization, especially because Social Security is not a savings program!

Yet Brad ignores these various points to indulge himself in whimsical wishful thinking about privatization. It is like saying that Brad would like to buy a great family car, so we should therefore go to the sleaziest car dealer that puts Crazy Al's used car sales on commercial advertising.

There is significant evidence that the equity premium in the United States has been significantly inflated by non-market forces. These forces are coming to an end. Currently many economists indulge in a form of superstition, of blaming the victim, by saying that the United States continues to enjoy a premium on capital flows principally because of a lack of attractive alternatives.

This cracked falsetto argument neglects the historical, political, and commercial legacy issues resulting from world war II's aftermath. Currently the system as structured, favors overwhelming the American equity market by simply dint of inertia and infrastructure investment of sunk costs in transactional exchanges.

Yet at the very moment, historical forces are moving in economic and political terms to undermine that market premium which must suffer a sharp correction because of a lack of political will. There will be a general decline in attractiveness in the next five to ten years that will be more or less permanent from hence on. A privatization effort in the face of such a decline would be like sailing the family sailboat out in the middle of the Perfect Storm.

Indeed the privatization costs would exacerbate and hasten such a correction.

I would prefer to think that M. Delong has been engaging in some otherwise wishful thinking rather than selling out, but from an economic point of view his advice on such an issue has been terrible.

WHY DOES J. BRADFORD DELONG LOVE GEORGE W. BUSH (when it comes to privatization)? Privatization, as offerred by GWB is about one thing and one thing only: the movement of large sums of money from the not so well off to the well off. It may be that the exact methodology has not yet been worked out but if privatization succeeds in any form then the horse is out of the barn. All nuanced discussions about privatization only serve to distract from Bush's real intentions and such distractions serve Bush very well. Bush smiles every time another nuanced discussion about privatization is initiated. (Not that we don't enjoy them.)

It's 1984 all over again. They increase your taxes and cut your benefits.
The sell last time was that since taxes on middle class people were so high that they had stopped having as many children and had them later, we had to start saving up for when there weren't enough people to pay enough payroll taxes for a pay as you go system, increase full retirement age to 67 instead of 65, and eliminate the subsidy for 18 to 21 year old orphans in college. All of which we did.
Now they have kept interest rates artificially low and used that to argue that the social security trust fund might run out of money in thirty years if we don't allow equity purchases with their presumed higher rates of return. There will be a higher payroll tax hidden in their somewheres, so they can put off the day of increasing taxes on rich people.
Maybe they will let you invest your retirement money as a second (not a first) mortgage on your house. That keeps housing equity prices up just like stock market equity prices.
They also could let you use your retirement money as nursing home care, or medical care. Then they could use that as a wedge issue against socialized medecine.

Dubblblind wrote, "All nuanced discussions about privatization only serve to distract from Bush's real intentions and such distractions serve Bush very well."

Damn straight.

The rightist thugs can stay on message; why can't those of us opposing them? "Bush wants to cut Social Security benefits for everyone under 55."

Liberal wrote:

"Pat wrote, " 'The fact is that both of these financial assets represent a call on future production.' "

I agree, but the right-wingers' counterclaim is that SS revenue encourages higher government spending. (Not that I agree with that.)"

1) I didn't write that, it was an excerpt from Bill Gross' article.

2) I don't believe the claim that SS revenue encourages higher goverment spending is a "rigth-wingers" claim -- I think there is a lot of truth in it. Just look at all newspaper articles today: how many of them point out the Bush budget has a deficit close to $600B? I haven't seen any. Most are using the ~$400B number, which nets out the ~$200B from SS surplus. I think SS security trust fund is one of the biggest con games ever -- it raises progressive payroll taxes to fund Reagan and Bush's tax cuts for the rich.

3) Don't get me wrong -- I don't believe anything proposed by Bush is intended for the benefits of average Americans or anything he does can be good for Americans. My point is we need to understand the problem to be able to form good strategies. Things like "private accounts are good, but private accounts that are funded by SS taxes are bad" are one of the worst strategies for working Americans if one understands Bill Gross' point: collectively, our holdings of bonds or stocks on domestic entities are NOT savings.

You probally wouldn't be able to sell your entitlement to SS even if you could contract it; there would be a massive adverse selection problem, as those who know they will die young (and generate less SS payments) would prefer to sell their entilement at any given market price. That's one of the big arguments for SS in its current form: it's the only way to provide annuities efficiently to the mass public. There's an adverse selection market failure at play.

This is an outstanding thread. Great comments.

"The sets of people who vote for against their own interest and people who cannot successfully manage their own retirement portfolios may not be identical, but the problem in both sets is an intellectual deficit. That deficit is wired in, and isn't gonna go away."

Gosh, a remark like that makes me think there's something to that evolution thing. Baboons put their old and young and low status in the outer circles of their evening/night resting places. Could it be that people actually participate in doing themselves in when they are outside elite circles? Why that almost makes me think that Christlicans are secret Darwinians!

"not old ladies eating cat food"

I'm not so sure about that. At low incomes food represents the largest discretionary expenditure (the only large discretionary expenditure apart from healthcare). Rent, utilities, carfare have to be paid. You can't pay half your rent without getting evicted anyway. If you don't pay the electricity in full, they'll turn it off. You can't get on the bus if you try to pay half the fare. But you can spend half as much on food if things get tight. Or go without your prescriptions.

From Lazear's pices:
"The first solution is... to provide a base level of benefits from government run pension programs, namely Social Security..."

Gee, that sounds a lot like the staus quo, which would be destroyed by pulling payroll-tax contirbutions out into the "private" accounts.

Can we put Lazear down as another supporter of Social Security PLUS private accounts?

"pices"?

I could swear I typed pices, I mean piece.

"pices"?

I could swear I typed pices, I mean piece.

Here is the quotation from Cicero:

nam Catonem nostrum non tu amas plus quam ego; sed tamen ille optimo animo utens et summa fide nocet interdum rei publicae; dicit enim tamquam in Platonis *politeiai*, non tamquam in Romuli faece sententiam.

Cicero wrote the word *politeiai* in Greek, in the dative case, since Greek has no ablative.

You say: "There is one point where I have no quarrel with Lazear: his pointing out that private accounts are the beneficiaries by Right of property, which will be enforced by the courts, while legislated benefits are the beneficiaries' only by Grace of Congress. I'm not certain how much of a difference this is (for Congress has unlimited powers to tax incomes and to distinguish among different income streams as it taxes them), but it is a real difference."

I say: Actually, it's not quite that simple. There is some merit on both sides. For example, your vested "property" right is subject to attachment in bankruptcy proceedings. Your social security benefit is not. Ditto divorces. (Not to mention Nigerian scams.) Making it 'property' increases, perhaps vastly, the ways in which the owner can lose it. That's freedom, yes, but do we want lots of destitute people around -- even if they include the "undeserving poor" as Alfred P. Doolittle put it.

Furthermore, until such a time as Congress changes a program -- which it can do -- your due process rights in a government benefit stream ("New Property") are about as good as for the traditional sort.

So the major risk is political, only, but that is balanced out by the spendthrift and safety net aspects.

I hate to break it to you, but there are little old ladies having to eat cat food today.

Some of the saddest are people who thought they were adequately set (safely invested in AT&T), only to have their money churned to nothing by their brokers and then lost when the high-lying stocks they put them into turned to dust.

WML:

"You probally wouldn't be able to sell your entitlement to SS even if you could contract it; there would be a massive adverse selection problem..."

Well, there would be an adverse selection problem but that would just reduce the amount you could expect to sell it for. IIRC People with AIDS sold their life insurance entitlements in return for income in the here-and-now. Selling future SS income stream would still be worth something, despite some adverse selection, indeed the expected value could be quite high. The question is: Is selling your future SS income legal? Would such a contract be enforced?

Let's do the addition one more time. People under 55 to take cuts. 55 + 10 = 65: 2005 + 10 = 2015; date when SS will start paying more than it takes in (requiring cashing in some of those Treasury IOU's) 2017. Purpose of exercise, to pay off IOU's by cutting benefits rather than meeting the IOU out of fiscal surplus.

It's not a shell game. It's plain robbery.

Pat wrote, "1) I didn't write that, it was an excerpt from Bill Gross' article."

Of course you wrote that. You're saying you didn't actually *claim* that. But I didn't say you claimed it, and marked it as such with nested quotes.

"I don't believe the claim that SS revenue encourages higher goverment spending is a 'rigth-wingers' claim -- I think there is a lot of truth in it. Just look at all newspaper articles today: how many of them point out the Bush budget has a deficit close to $600B? I haven't seen any."

Your thoughts there aren't unreasonable. Of course, it's been this way since (IIRC) the unified budget concept was put into action in the late 1960s. (Difference is that SS is running a huge surplus now.)

While it's true that SS surpluses allow politicians to hide behind lower deficit numbers, it's not at all clear that they allow or encourage greater government spending.

I claim there's currently a much bigger factor: Asian central bank purchases of T-notes. Without that, there'd be a visible price to the budget deficit: soaring interest rates.

People might, on the margin, be politically motivated by deficit numbers that they hear, but I think the political impact of a large increase in interest rates would be two orders of magnitude higher.

So, in order to keep the government from cutting social security benefits, we need to have private accounts and cut benefits now? Cut benefits to avoid benefit cuts... thats the Bush magic.

Its amazing how conservatives feel that government is incompetent in everything, except when implementing complex, long-term, government mandated investments into private stocks and bonds.

Has Eddie Lazear forgotten about his public choice literature?

Everyone likes to say the "trust fund is only worthless IOU's", in fifty years everyone might have a new catch phrase "private accounts are really a fiction; the government actually owns all the stocks and bonds."

[troll]

There's are signficant differences between a savings account and an insurance policy, and Lazear is at pains to gloss over them. "Personal accounts" can either earn good returns and forgo insurance protection (the Bush desiderata), or they can forgo good returns and provide insurance. That's fundamental. Turning to personal accounts necessarily means reducing insurance, reducing the "security" in Social Security.

The only reason one might want to reduce insurance is that one wants to redistribute income to the very rich. Depriving the bulk of the people of access to insurance is a way to redistribute income to the very rich. This is the object of the Chicago School, of Hayek, etc.

Cogan predicted, in 2001, that if the economy grew by more than 2.5% over this decade, Bush's tax cuts would still leave the budget balanced, accounting for "one deep and one mild recession".

http://secure.cwchost.com/archive/01/01-04cogan-speech.html

I have no doubt that econometrics can prove that excess payroll tax revenues, either anticipated or otherwise, lead to more government spending.

Surely, the big Kahuna of anticipated payroll tax surplusses since 1983 has been gamed by the GOP.

But by and large, "unanticipated" swings in payroll taxes are pretty small, compared with comparatively huge "unanticipated" swings elsewere in tax revenue.

So, maybe instead of diverting one-third of revenue away from Social Security, by this logic, the Treasury should simply issue about $50 Trillion of new debt. We'll invest it in the private sector. Use the revenues generated to fund all of government.

Problem solved!

Oh, except for the transition cost. But the $50 T debt will shrink as a fraction of GDP pretty quickly, since the economy will grow by 500% the first year!

Garbage in, garbage out.

My question about Lazear's article is: How did it get published?

On page 5, he writes that the difference between Social Security and a treasury bond is that the former has a higher political risk (because Congress is more likely to alter the Social Security benefit rules than to default on the Federal debt). It seems that he really believes that Social Security pays a fixed dollar amount, providing no protection from inflation or the risk of outliving your money. Isn't one of the jobs of a journal editor to catch this type of nonsense before it makes it into print?

[No he doesn't. He believes that Treasury bond interest rates vary in order to provide a lot of protection against inflation as long as your Treasury bond portfolio is of relatively short duration]

Question... does the US Government invest in the private sector? Other than to buy things from them? I can't imagine the government actually buying securities, but I don't know, don't have the experience. I am a conservative, and while I don't agree with all of Bush's policies, I like the sound of this one. I think that people are so scared of changing the status quo that they automatically resist changing the system. Calling Social Security an 'insurance' program is ridiculous.. Insurance companies INVEST the premiums you pay in order to afford to pay you when you need the money back, desperately hoping that they never have to pay you anything. Social Security doesn't invest in anything; on the contrary, the government 'borrows' from the 'trust fund' to finance federal government operations. So the government owes itself money. There is just no way that the system can continue to be solvent this way, and deep down everybody knows it including the hardcore lefties.

I think that we have to eventually reach a point where it stops being ok for the government to increase taxes while in the same breath lowering benefits in order to fix this system. If it were up to me, I would get rid of the system altogether and mandate that everyone invest 10 percent of their income in an untouchable tax free account for as long as they are able to earn money and want to contribute. The only problem left by that is disability, and how it gets funded. And I do think that disability insurance is important.

Also, I think that private accounts could create a huge windfall for our economy by recirculating money instead of it sitting in a trust fund or being wasted by Congress. I know that libs don't like the idea of corporate America, but remember that corporate America provides goods and services, and the most important thing of all, JOBS. I believe that higher investment rates could help to lower prices while at the same time increasing wages. Increased wages lead to increased investment under this system, right? Anything wrong with that vicious cycle?