March 03, 2005
*Sigh* Greg Mankiw
UPDATE: One correspondent asks if Mankiw's:
WSJ.com - Free Advice for Democrats: Take your heads out of the sand.... [Y]ou look like idiots. President Clinton talked about the 'crisis' in Social Security long before President Bush did. Sure, you can make a plausible argument that Social Security's unfunded liabilities are not a 'crisis' but only a 'major problem.' But even if you win that argument, you lose. You look like you're more interested in word games than good policy...
is really directed against Alan Greenspan:
Latest News and Financial Information | Reuters.com: While embracing the concept of private accounts, Greenspan did not specifically endorse Bush's approach and steered clear of calling the funding problem a crisis, as Bush has done. 'I would not use the word crisis,' he said. 'Crisis to me usually refers to something which is going to happen tomorrow or is on the edge of going into a very serious change. That is not going to happen.'
SECOND UPDATE: Another correspondent, Paul Krugman, points out that Alan Greenspan has (rightly) major, major problems with Mankiw's claim that the transition deficits are just "an acknowledgment of promises that were made long ago":
Greenspan Likes Social Security Private Accounts, But Urges Caution : 'The issue with respect to the financing is a difficult one to answer, because there are things we don't know.... First, we don't know the extent to which the financial markets at this stage, specifically those trading in long-term bonds, are discounting the $10 trillion contingent liability that we have. Actually, it's more than $10 trillion now; it's $10 trillion awhile back.
'If indeed the financial markets do not distinguish through most of that $10-plus trillion, and say it is just as much of a debt as the $4-odd trillion that is a debt to the public, then, one would say, 'Well, if you wanted to go to a private system, you could go fully to a private system without any response in interest rates because, obviously, you're not changing the liabilities involved, you're just merely switching assets to the private sector. But we don't know that. And if we were to go forward in a large way and we were wrong, it would be creating more difficulties than I would imagine.
'So if you're going to move to private accounts, which I approve of, I think you have to do it in a cautious, gradual way, and recognize that there is yet another problem involved, which is this: Unlike almost all of the other programs with which we deal, moving to a forced-savings account technically does not materially affect net national savings. It merely moves savings from a government account to a private account.... I do say, as I said previously, that I would be very careful about very large increases in debt. But I do believe that relatively small increases are not something that would concern me.... I would say over a trillion is large...'
This morning Greg Mankiw writes (with Phil Swagel), giving free advice to Democrats like me:
Mankiw and Swagel: Stop railing about the budget impact [of the Bush Social Security plan]. The introduction of personal accounts will involve some transition financing, but this increase in the budget deficit won't place a new burden on future generations. These deficits are just an acknowledgment of promises that were made long ago. And if you think that complaining about budget deficits will advance your career, just ask President Mondale.
Back in 1998 he wrote:
...the most basic lesson about budget deficits follows directly from their effects on the supply and demand for loanable funds: When the government reduces national saving by running a budget deficit, the interest rate rises, and investment falls. Because investment is important for long-run economic growth, government budget deficits reduce the economy's growth rate. (N. Gregory Mankiw (1998), Principles of Economics (New York: The Dryden Press/Harcourt Brace), p. 557.
We worry about the budget impact and effect on national saving of the Bush Social Security plan because there is a chance that it will significantly diminish national saving and lower economic growth. If holders of defined-contribution private accounts regard them as close substitutes for their other assets in a way that promised defined-benefit standard Social Security was not, then the Bush plan will be yet another budget-busting shift of the tax burden that will slow economic growth.
Mankiw has no business making a claim that the Bush private-accounts carve-out won't reduce national saving. No business at all. He may hope, but he doesn't know that private account-holders won't regard their private accounts as closer substitutes for 401(k) wealth than Social Security wealth is: the claim that the transition financing will not reduce national saving might be true, but it might no be true. And Mankiw damned well does know the connection between national saving and economic growth.
When people are working for an administration--under message discipline--you try to cut them some slack. Their external positions are ways of gaining credibility in an internal policy debate, and whatever degradation of the quality of the external debate happens is, you hope, more than counterbalanced by the greater weight the voices of (relative) reason gain in internal policy debates.
But after people have left the administration--once they are identified as professors at Harvard (or resident fellows at AEI)--they have no business making claims that they don't know to be true or false.
As you can tell, I'm really cranky this morning.
The main reason that I'm really cranky is that I just got off the phone after spending an hour with a reporter who read Mankiw, Forbes, and Rosen (2005), "Three Questions About Social Security" (Washington: CEA), and took it seriously, particularly this paragraph:
Although short-run movements in growth can affect stock market returns, there is no necessary connection between stock returns and economic growth in the long run. Longrun economic growth is determined by productivity growth and labor force growth here in the United States, while stock market returns are determined by the overall cost of capital in the global economy and by the return investors require to bear the risk that comes with equity ownership. There is no reason to believe that slowing population growth in the United States would significantly lower the cost of capital, as set by increasingly globalized capital markets, or the premium required by stock investors...
So I had to walk him through the issue. I had to point out that the implied claim that there is no connection between economic growth and asset returns is true only for small open economies with fixed exchange rates whose products and assets are close substitutes for those of other countries--and that the U.S. economy is neither small, nor completely open, nor has a fixed exchange rate, nor makes goods and issues assets that are perfect substitutes for those of other countries.
I had to point out to the reporter that while Mankiw, Forbes, and Rosen imply that slower growth is unconnected with lower returns by stating that they are determined by different factors, total growth is made up of productivity growth and population growth, and that Mankiw, Forbes, and Rosen are--deliberately--silent on the issue of whether slower productivity growth is likely to bring with it lower asset returns (it is). All they dare say explicitly is that slower population growth does not bring with it lower asset returns. And I had to further point out that even that smaller claim is true only in a restricted class of growth models--representative agent models with perfect familial altruism, in which you treat other family members past and present as you would treat yourself.
I had to spend my time bringing the reporter's knowledge of the debate back up to the level it was at before Mankiw's misinformation had dragged it down. And I like my time. I have things to do with it. I don't like having to spend it in this particular way cleaning up after elephants--especially elephants who can no longer claim that they are doing lots of good in the "inside" debate within the White House.
I am cranky, and annoyed. And I am not asking for very much. All I want is:
- No more claims that we know that carving-out Social Security revenues to fund private accounts will have no damaging effect on national saving. It might work. It might not.
- No more claims that the U.S. is a small open economy. It isn't.
- No more claims that there is no reason to think that slower economic growth will carry lower asset returns with it. There are good reasons to fear this.
- No more claims that the household employment survey is as good a guide to short-term labor market trends as the establishment survey. It isn't.
- No more claims that an honest forecast of what George W. Bush's policies are sees the deficit cut in half by the end of this decade. It doesn't.
I want attempts to raise the level of the debate, not attempts to lower it still further.
Posted by DeLong at March 3, 2005 09:07 AM