August 10, 2005
The New Republic: Straight Out of Boston
The last piece in the New Republic that came straight out of Boston was truly bizarre and rather thin:
Greg Mankiw | Personal Dispute (print): Harvard University is, by some measures, one of the most left-wing institutions on the face of the earth. So you may be surprised to hear that it has endorsed George W. Bush's proposal for Social Security reform.... Harvard's retirement plan is essentially the nonprofit sector's version of a 401(k).... I am perfectly happy with Harvard's retirement plan.... If the liberal Harvard faculty is content with the defined-contribution structure for their private retirement income, why are liberals... so appalled that Bush would propose moving the public retirement system in the same direction?... [T]here are three reasons... the president proposed it... they could destroy one of its favorite battle cries: the alleged conflict between evil capitalists and oppressed workers... [for] much of the left's rhetoric is a less elegant paraphrase of [Karl Marx's] worldview... [and] simple paternalism.... Democrats are more averse to an economic system in which people play a larger role in taking care of themselves.... [T]he nation should take this opportunity to give all Americans a retirement system as reliable as the one Harvard gives its faculty.
The key point Mankiw overlooks is, of course, that a good program to sit on top of the defined-benefit tranche of retirement income that is Social Security is not going to be a good program to replace Social Security. And there are many reasons besides simple paternalism and warmed-over Marxism to have opposed and to keep on opposing George W. Bush's Social Security proposals. Ferguson and Kotlikoff, neither of whom has an ounce of paternalism or warmed-over Marxism in their makeup, list some, for they have a new piece in the New Republic that also comes straight out of Boston. It begins very well:
The New New Deal: President Bush's Social Security proposal looks to be dead in the water--and a good thing, too. The plan was half-baked and fiscally irresponsible. The American public took one look and realized it provided neither personal nor national financial security. Even many Republican congressmen didn't buy it. So much for the president's post-election political capital....
There were four problems with [Bush's plan]... diverting money into individual accounts would have... push[ed] the system into deficit much sooner... individual accounts would have done away with one of the biggest advantages of a state pension system, namely economies of scale and reduced risk.... [T]he president's scheme would have made an already bad position even worse for younger Americans, making them reliant on a risky, costly, and inadequate private-account alternative. Finally... it would have done nothing to address the much deeper fiscal imbalance between all the projected revenues of our government and all its existing commitments... a whole raft of other nondiscretionary expenditures, of which the Medicare system is by far the biggest....
[W]e really do have a problem: a truly grave demographic, fiscal, and economic problem. It's a problem that Bush inherited, but one he has done nothing to make better and much to make worse. We refer here to the president's three major tax cuts, his major increase in discretionary spending, his major expansion of entitlement programs, and his massive deficits. And that was just the first term.
But after this nice beginning, Ferguson and Kotlikoff's piece flags and loses coherence. Ferguson and Kotlikoff propose:
...a new New Deal--a combination of fundamental Social Security reform, health care reform, and tax reform. A new New Deal could help Democrats win the voters they failed to persuade last November. It could also help a Democratic administration deal with our country's immense demographic and fiscal problems...
They call for replacing Social Security with a Personal Security System program, replacing the income taxes with a sales tax, and replacing our current health-care system with one of government-funded vouchers plus private insurance. The end state will be a federal government that taxes and spends some 21% of GDP--or maybe (counting the PSS program) 25% of GDP: it's not completely clear.
Their plan to replace the income, payroll, and gift and estate taxes with a national sales tax plus a set of rebate checks (to make the sales tax progressive) would reduce marginal tax rates on savings in the future while double-taxing those who have saved in the past: those who have already paid income taxes on the money that they have channeled into their savings would pay another round of taxes--sales taxes--whenever they spend what they had previously saved. Such a revamping of the tax system will create lots of winners and losers, which makes me anxious when I contemplate the Ways and Means Committee writing transition rules. Would the gains be worth the costs? Ferguson and Kotlikoff argue for the plan with two sentences: "[I]t will shift spending away from consumption goods and services to investment goods, which will help the economy grow through time. As today's China and yesterday's Japan show, economies that shift from consuming to saving and investment can achieve tremendous performance." And they don't tell readers why this is a Democratic plan, rather than a Republican one.
Their proposed Personal Security System--funded by a 7.15% of payroll tax--would be a prefunded Social Security system in which "neither Wall Street nor the insurance industry would get its hands on workers' money. There would be no loads, no commissions, no fees. Nor would there be all the risks associated with individual investing. This is because PSS would continue to take advantage of the overwhelming advantages enjoyed by all state systems of social insurance: economies of scale and reduction of risk through government guarantee." If their plan did achieve genuine prefunding, such a boost to national savings would be extremely valuable plus on its side. But once again the argumentation is too thin: I think that I can follow why they wish this transformation of Social Security, but almost no other readers of the New Republic will be able to do so.
Their proposal for national health vouchers to "pay for basic inpatient and outpatient medical care, prescription medications, and long-term care over the course of each year. If you ended up costing the insurance company more than the amount of your voucher, the insurance company would make up the difference. If you ended up costing the company less than the voucher, the company would pocket the difference" is an attempt to create managed competition: to "promote healthy competition in the insurance market, which would go a long way toward restraining health care costs." They see as an added benefit that "the government could limit its total voucher expenditure to what the nation could afford. Unlike the current fee-for-service system, under which the government has no control of the bills it receives, MSS would explicitly limit its liability": if Americans wanted a more comprehensive and generous national health program, they would have to vote for politicians who would raise the tax rate. But once again the discussion goes by too fast: those who have strong views and detailed knowledge of the debate about health care and its costs will understand why Ferguson and Kotlikoff are walking down this road, but others will not.
It is as if J. Peter Scoblic and the rest of the New Republic editorial staff simply did not do their job. After every paragraph, they should have asked Ferguson and Kotlikoff two questions: (1) Have you explained to our representative reader why this proposal is a good thing? (2) Have you explained to our representative reader why this proposal is a Democratic thing?
The fact that they don't answer the second question sufficiently comprehensively is, IMHO at least, very interesting. For the article sells Ferguson and Kotlikoff's proposal not as a Republican plan (which it strikes me that it is) or a bipartisan compromise plan (which it strikes me that it could become with a little more attention to progressivity) but a a Democratic plan. I suspect that they are doing this because they too are coming to the conclusion that, policy-wise, the Republican Party is a completely lose cause.
Posted by DeLong at August 10, 2005 04:47 PM