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February 15, 2005

The Economist Praises George Bush? (Department of "Huh?")

It starts off on the wrong foot, enthusiastic about Bush and having drunk the koolaid:

Economist.com | America's pensions : HE IS on the march again—this time, at home.... George Bush has tirelessly promoted his plan to reform... Social Security.... Meanwhile, just when you might have expected him to continue his first-term habit of enticing politicians to his side with generous hand-outs, he is proposing a budget that is tough on spending....

The only problem with this first paragraph is that the budget is not "tough on spending"--it's tough on a few small and quantitatively minor components of spending. The Economist's intellectual capital depreciates a little more.

It goes on:

Mr Bush says Social Security must be fixed now or else it will go bust—-a good sales pitch, though the pension system is currently in surplus and will not even go into deficit till 2018.... Social Security looks sound compared with Medicare, the public health-care system for the elderly, whose long-term deficit is several times bigger...

But never explains why it is a good thing to spend time and energy now on what ranks fourth in both size and urgency among America's fiscal problems. Why not tackle the bigger and more urgent problems?

It turns out that the Economist doesn't think that Social Security deserves such special attention:

...in his focus on Social Security [Bush] must not lose sight of the overall fiscal challenge—and the role his own policies have played in it. The long-term burden of Mr Bush's first-term tax cuts and spending increases is three times bigger than the looming Social Security shortfall. Pension reform is desirable; but it will not solve America's long-term fiscal problems, and if its political price is an out-of-control budget, that would be a serious mistake...

And then it goes on to say that everything about the Bush Social Security reform plan is wonderful except for, well, pretty much everything about the plan. Bush's ruling out of payroll tax increases is a mistake:

He has ruled out raising payroll taxes.... A good idea would be to combine the carve-out with additional contributions, or ‘add-ons’, as some Democrats advocate. Mr Bush should find a compromise whereby individuals could divert some share of payroll taxes into their retirement accounts in return for paying higher overall contributions...

Bush's plans will not raise national savings:

And it will do nothing to raise America's low savings rate, because the increase in private saving will be offset by higher public borrowing.... [Better] arrangements would make a rise in national saving far more likely...

And that's not all. Other parts of the Bush plan also, well, suck:

Other changes are needed too, and should be politically possible for a president who says that everything is on the table.... [Price indexation] would hurt many poor pensioners and arouse an eventual backlash (as in Britain).... Partial add-on accounts plus a financing strategy that does not rely exclusively on lower benefits...

But the article concludes with a paean to private accounts:

[D]elaying the retirement age, raising the payroll cap, and so on... stop Social Security going bust.... Mr Bush's new retirement accounts are no help. Yet this misses the point. Giving people greater control of their savings is desirable in itself: that is why private accounts deserve their place in this reform. It is wrong that in the world's most advanced economy so many retirees should rely so heavily on the state. That idea is at the heart of Mr Bush's “ownership society”—and it is worth supporting.

This makes me think the Economist's writers have broken into the stupid-pill locker again. Social Security is the basic, minimum tranche of retirement income. If you give people control over their savings, some who have few other resources will do badly with it. They will then either eat cat food and shiver in the cold in their old age, or their private accounts will be topped off to keep them from penury. But if we choose the second option, then we are creating grave moral hazard: people can speculate with their private accounts, playing the game of heads-I-win-tails-the-government-pays. To head off this moral hazard meltdown, a plan should--and the Bush plan appears to--very tightly constrain where the investments can go. In which case "control of their savings... [not] rely so heavily on the state" means nothing: a shell of rhetoric and talking points attempting to misdirect, to divert attention from the government's decisive continuing role.

The Economist needs to do a much better job than this.

Posted by DeLong at February 15, 2005 07:49 PM