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March 12, 2005

I'll Stop Calling This Crew "Orwellian" When They Stop Using 1984 as an Operations Manual

From 1984:

The orders already issuing from the telescreens, recalling them to their posts posts, were hardly necessary. Oceania was at war with Eastasia: Oceania had always been at war with Eastasia.... [W]ithin one week no reference to the war with Eurasia, or the alliance with Eastasia, should remain in existence anywhere. The work was overwhelming...

Matthew Yglesias has caught a genuinely Orwellian moment. James Glassman and Kevin Hassett--who wrote in _Dow 36,000 that you should invest in stocks now because there were big profits to be gained in the next 3-5 years as stock prices rose and returns fell--are now singing the praises of Bush's Social Security plan, even though it relies on high stock returns over the indefinite future to make sense.

Matthew Yglesias writes:

Matthew Yglesias: The current issue of Reason, not yet online, undertakes the interesting exercise of hosting an intra-libertarian debate on the merits of Social Security privatization. Tyler Cowen writes for the opposition, and James Glassman in favor...

James Glassman? Back in 1998, 1999, and 2000--as the dot-com bubble approached, reached, and receded from its peak--James Glassman and Kevin Hassett were telling the investors of America to buy, buy, buy more, more, more stocks in their book Dow 36,000: The New Strategy for Profiting From the Coming Rise in the Stock Market:

How much will stocks have to rise? Until they reach our PRP, or perfectly reasonable price.... If the Dow, representing the entire market, were to triple... than dividend yields would decline to their "perfectly reasonable" level...

What is Glassman and Hassett's "perfectly reasonable" level? It's the level at which stock returns are the same 2.9% above inflation as Treasury bond returns.

That forecast of stock returns all by itself makes it impossible for Glassman to support Bush's plan for Social Security privatization. Glassman and Hassett forecast real stock returns at 2.9% per year. They forecast real bond returns at 2.9% per year. And the Bush administration says that under its plan you only win from private accounts if the stocks and bonds in your private account make more than 3% per year:

SENIOR ADMINISTRATION OFFICIAL: [I]n return for the opportunity to get the benefits from the personal account, the person foregoes a certain amount of benefits from the traditional system.... [T]he person comes out ahead if their personal account exceeds a 3 percent real rate of return... the net effect on an individual's benefits would be zero if his personal account earned a 3 percent real rate of return...

Glassman has no business on the "pro" side of the Bush Social Security plan.

The same goes for Hassett. Yet I find Hassett writing in National Review that:

Kevin A. Hassett & Maya MacGuineas: If optional personal accounts are available, they present choices and possibilities to citizens. How will these be conveyed? What will workers see? What will guide their decision making?....

It would be useful to present a representative expectation.... [A] worker would see a form that tells them the following for each of the choices that they might make: (We base the numbers in this example on the benefit-adjustment proposal that has been floated by the administration, our own back-of-the-envelope calculations, and historical returns.)

If you’re an average wage worker entering the workforce today, you could retire at age 65 with a promised annual benefit of $19,600 (in today’s dollars). If you put one-third of your payroll taxes into a personal retirement account, your government payment would be reduced to around $12,600. However, your projected account balance at retirement would be $165,000....

The purpose of the Social Security statement should be to lay out the likely retirement benefit for a worker while reminding them there are no guarantees. Viewed in this manner, it is almost difficult to see what all the fuss is about. Currently workers have no choices. Reform adds choices, including the possibility of sticking with the old system. If the old Social Security statement were compared to the proposed one in a focus group, it is our bet that a very large number of individuals of all ages and political persuasions would prefer the new statement.

Why is the estimated account balance so large--large enough to yield $9,931 if annuitized at 6%, thus providing the beneficiary with enough to make up the $7,000 cut in his or her Social Security benefit and significantly more? The account balance is so large because of the phrase "historical returns": that portion of the example's private account that is invested in stocks returns not the 2.9% of Hassett in Dow 36,000, but the 6.5% which is the long-run historical average. Make the example consistent with Dow 36,000, and the private account has only $115,000 in it, not enough to make up for the cut in Social Security--and a bad deal for the beneficiary who not only has a lower expected return but bears the risk that things might be significantly worse as well. And why is he using "historical returns" rather than return estimates consistent with his own Dow 36,000? Because if your job is to write a pro-Bush Social Security piece for National Review, you can't use numbers in your example that make the Bush Social plan an obvious loser.*

One of two things can be going on. Glassman and Hassett could simply be betting that the press corps is too naive to even notice that they must repudiate Dow 36,000 in order to support Social Security private accounts. Or the number of people willing to carry the White House's water on this is so small that they have been pressed into service even though it requires an Orwellian change of position on their part.


*Hassett is aware that he is in trouble here. The very following paragraph contains the admission that:

the base calculation might not be best based on historical returns, since most financial observers now agree that the equity premium has been declining over time. Our intent here is not to nail the best possible estimate of the numbers, but rather, to sketch what the typical worker might see.

To translate: Hassett is saying that even though he is putting these numbers out here as a "representative expectation... [of what] a worker might see," the numbers are not "the best possible estimate," which would be significantly less favorable for private accounts.

Posted by DeLong at March 12, 2005 10:21 PM