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March 11, 2005

How Stupid Does the Cato Institute Think We Are?

Matthew Yglesias directs us to the Cato Institute's attack on right-wing Republican Senator Lindsay Graham for anti-Social Security Privatization Left Deviationism.

I was more struck by passages later on the Cato Institute's "Daily Debunker" like this one:

Daily Debunker: As the Cato Institute's Mike Tanner wrote in a recent op-ed, titled 'The Point is Ownership':

While solvency is important, the goal of Social Security reform should be more than to just balance the books. We should be trying to provide workers with the best possible retirement options, and this involves giving them more control and ownership of their retirement funds.

Under the current dispensation, once a worker pays his or her Social Security taxes into the system, the worker no longer owns that money. This is a very paternalistic arrangement, in which the daddy government doesn't trust the kids to control their own money.

One of the most enduring myths of Social Security is that a worker has a legal right to his or her Social Security benefits. Most workers assume that because they pay Social Security taxes into the system their whole working lives, they have some sort of legal guarantee to its benefits.

They assume wrong. In two landmark cases, Flemming v. Nestor and Helvering v. Davis, the U.S. Supreme Court ruled that workers have no right to receive Social Security benefits. Congress and the president may change, reduce or even eliminate benefits at any time. Retirees must depend on the good will of 535 politicians to determine whether and how much they will receive in retirement. Where is the dignity in such a system?

In fact, Congress has already voted to reduce Social Security benefits. For example, in 1983, Congress raised the retirement age. Given the system's looming financial crisis, additional benefit cuts and/or tax increases are a mathematical certainty....

The first thing that struck me is that the Cato Institute does not speak of "moral hazard." If we believe--as we do--that in the long run we will not allow significant numbers of the elderly to live in dire poverty, then giving future beneficiaries "more control and ownership" of their retirement funds is a very dangerous thing to do, for it creates a situation in which future beneficiaries have powerful incentives to pursue high-risk investment strategy: if the coin comes up heads, they win big; if the coin comes up tails, the government pays. As we saw in the late 1990s with the S&L crisis, such incentives create very dangerous and very costly situations.

The Bush administration (well, at least some fractions in the Bush administration) realizes this: that's why one of their talking points is how extremely restricted private account investment options will be under their plan. But Cato does not.

The second thing that struck me was the implicit claim that private accounts will provide higher benefits. The argument is not a sophisticated one about the stock-market's failure to mobilize society's risk bearing capacity. It is a crude one: a claim that while workers own their private accounts "the U.S. Supreme Court ruled that workers have no right to recieve Social Security benfits. Congress... may... eliminate benefits at any time... additional benefit cuts and/or tax inceases are a mathematical certainty..." What Tanner doesn't say is the private accounts provide no way out of that mathematical certainty, and that Congress can impose special taxes on private accounts just as easily as it can cut conventional Social Security benefits: the value of the additional protection provided by "ownership" is low.

And, once again, I'm faced with the question I'm faced with so many times these days: Is Michael Tanner stupid? Does the concept of moral hazard elude him? Does he really not understand that calling an account "private" does not manufacture money? Is he ignorant of the extent of Congress's taxing power? The answer is no. He's not stupid: he just thinks that Cato's ultimate audience of journalists and others is stupid.

This is not to say that Michael Tanner lies, exactly. But the things he focuses on--the gain to individual autonomy from choosing one's own investment vehicles, the added protection provided by structuring a cash flow as a property right rather than a government benefit--are of third-order importance. The things he ignores--moral hazard in a world where voters want their government to stop elderly poverty, and the arithmetic that is the expected funding hole in Social Security--are of first-order importance. The fact that people from Cato over and over again assume that I am so dumb as no to notice the first-order considerations they are brushing aside is the reason that, at least as far as I am concerned, somebody I don't know is better off writing as or citing the work of someone writing as an individual than writing as an affiliate of or citing work from Cato. The institutional affiliation has become too strong a signal that this piece of writing is not in the analysis business. And those who want to use Cato as a platform from which to make substantive contributions to policy analysis need to take big steps to raise the quality of what comes out as fast as possible.

Posted by DeLong at March 11, 2005 11:51 AM