Brad DeLong's Semi-Daily Journal: A Weblog

So, if Krugman knows this, why didn't Greenspan? He's got stats up the wazoo and one of the world's best research staffs. The only conclusion is that he knew, and that he acted totally irresponsibly. We should not forget that at heart he's a rabid conservative, and like many rabid conservatives he wants to see Soc Sec destroyed. He deserves the vilification that will be heaped on his pyre.

This is precisely the reason I expect double-digit inflation through a lot of the 2010s. It's the only way to simultaneously service our debt and get by with less of a SS surplus.

Brad,

Krugman makes some very good points about how it appears that the Social Security crisis has been invented. I have been saying the same thing for years.

I think he is too partisan when he implies the privatizers are dishonest. Even though I cannot agree with them, you and I know some of the people on the last commission and while they were all picked for their privatization bias, they did try to come up with different options that they thought would be best for a long-run solution.

The discussion of changes in benefit formulas, retirement age, etc. should be separated from the privatization arguments.

When we just look at the arguments for privatization by itself, we need to think in macroeconomic terms. I wonder what has happened to the old “crowding out” verses Ricardian Equivalence discussions? They would seem to be relevant here.

Monday’s Washington Post had an editorial titled “The Cost of Reform.” It states “ … These concerns miss the fact that the increased government bond issuance would be countered by the new pool of capital accumulating in private retirement accounts. Government borrowing would increase, but private saving would increase equally. Net national saving would not be altered, so interest rates and the U.S. dependence on foreign savers would not change either.”

What was not pointed out was that if there is no change in national saving, then there will be no change in future output and workers are not going to be any better off. Even if these personal retirement accounts pay a higher return, this return net of the additional taxes to service the larger government debt will be no more than it would have been without out privatization. The “nest egg” that workers with private accounts might be able to pass on to their families will be nice, however, they will also be passing on a share of the larger debt.

Of course, if the privatization proposal includes reducing benefits, raising retirement age, or raising other taxes to reduce the debt, these measures by themselves will alleviate the alleged future problems. The argument for the urgency of privatization is gone.

I say alleged, as I cannot think of anything else where we trust projections ten to thirty years in the future to make choices today, but that is another discussion.

I know that many of the economists who are pro privatization believe that the funds that go into the Social Security Trust fund end up subsidizing other government spending more than they contributing to national savings. The underlying argument for them is that privatization will discipline Congress to spend less. My own thought is that this Congress does not see much connection between revenues and expenditures.

Sam Williamson

Sam- We can look just at privatization by itself and it sucks. There are lots of people that have 401Ks with less money in them than they have invested. Isn't that a dirty secret! What will we do for the privatization losers? Put them on welfare? The American public is made up of soap opera and TV sports fans who gamble in Vegas, not investment geniuses. If everyone was an investment genius, privatization might be a good idea. Until then, someone else will have to manage the funds and get paid to do so. At that point, all the potential benefits of private accounts will get sucked up as fees for Wall Street. Of course, that is the whole point of privatization isn't it? Privatization is a way of cutting Wall Street in on the action of all that SS trust fund money.

SS is not gambling money or money that the poor can afford to lose. It must be placed in safe investments that will be there when they retire. Upper middle class with their 401Ks that will not be relying on SS might be able to afford a SS loss, but the poor will not. This means that the rate of return cannot be too much better than government treasury bonds where that SS trust fund money is parked today. Anything with much higher return has a higher return because it is too risky. If you think privatization is such a great idea, may your mother-in-law be one of those losers and move in with you when you retire.

Just one simple observation and one grand generalizaton:

In Canada we get the best of all possible worlds.
We get the "benefits" of privatization via the Canadian Pension Plan investing part of what you call social security payments directly into the equity market. So the fund gets the higher return that the Bush advocates claim can only be realized through privatization. On the other hand, the program remains government run and universal so that we do not get the unintended side effect twenty years down the road when those who make ridiculously risky investments have their retirement funds bankrupted and need to dip into a "special fund" provided by the government to cover these "special" cases.

I confess that I don't understand all the subtleties of the American debate, but it does appear to me that your learned commission on Social Security reform has missed an obvious fix. Moreover, I must say, I do enjoy watching American political debates. I find it immensely entertaining to see grown men batting at policy ghosts through the fog of rabid ideology.

Is this really true?

"I know that many of the economists who are pro privatization believe that the funds that go into the Social Security Trust fund end up subsidizing other government spending more than they contributing to national savings."

There was no deficit spending problem before the trust fund? No low national savings rate issue? The trust fund is the source of all evil?

Do any econoists really believe that? I think that it is nonsense.

Brad-

I believe Krugman talks about 2052 as the projected crossover point, a 48 year projection, more like two generations than one.

The administration and its supporters conversation about Social Security is all too much like the conversation about Iraq. Next we will hear that SS creats WMD and has been in constant contact with Al Queada.

Should fixing something like Social Security that is not broken, isn't likely to be for almost 50 years and may never be come before addressing the runaway cost of medical care and the need to find a way for everyone to be insured? How about farm policy? How about the current General Fund shortfall?

I view this as nothing but a distraction. It may be faith based, but any rational national government would have this on the bottom of its list of concerns.

Net savings is zero or perhaps a bit less than zero, if we issue junk bonds and hand out subsidized private accounts. But it seems worth following through what happens ( I don't know where this goes ).

A couple $Trillion of debt should push treasury debt closer to junk status, raising interest rates both because of crowding out (the US already consumes 80% of capital generated worldwide) and because of increased risk. Because treasury debt is widely used as a benchmark for a "riskless yield", increasing treasury bond interest rates would push all interest rates up - probably globabally - and that would have a corresponding impact on P/E ratios offered for alternative investments.

The privatized capital would presumably create something of a bubble in whatever assets are qualified for those accounts. If the money has minimal regulation, presumably, we'd see a lot of rediculous price runups in speculative issues, followed by busts when the speculation reverses, and then lots of the capital would just evaporate. If the money is regulated and put into a global indexed fund, like Kotlikoff and others suggest, and then switched to annuities, outcomes would be different - probably better, on average, for the population; probably less volatile in the markets; but perhaps a bit too uniform for the capital to do any real inspired creative destruction.

On the bond selling side, maybe it is just the ticket to keep selling bonds to China and Japan while interest rates are low, and intend to inflate our way out of repaying the debt. Of course, if the rest of the world figures out that's what we're doing, the devaluation, inflation, and interest rate turbulence could be abrupt. And, even if not, I think we still should question whether we should set up a dynamic where the US can continue to borrow six percent of GDP for the next 20 years to pay for our excess consumption, even if we get a subsidy to leverage our treasury debt against private capital. Enron couldn't financially engineer its way out of a negative savings rate, and neither can we expect to. It was OK for Enron to fail, but not OK for the US economy to fail.

Conservatives seem willing to go down the inflationary route, as long as assets inflate and wage inflation is minimized. Rising interest rates would help assure wages lag, as occured durign the 1980s. We'd probably get unemployment up near double digits again. With pressure like that, who needs outsourcing to keep wages down!

Now, here's some information progressives need: what is the distribution of investment returns for IRAs, 401Ks, and the like. I think the curve has a few big winners, with a lot of sub-par accounts, and more big losers than big winners. Has there been any serious academic study of distribution of returns among mutual fund holders?

fatbear wrote, "So, if Krugman knows this, why didn't Greenspan? He's got stats up the wazoo and one of the world's best research staffs. The only conclusion is that he knew, and that he acted totally irresponsibly."

Krugman's already written to that effect, a while ago.

Charlie- Most of the statistics and studies are closely guarded by a banking and investment industry with a vested interest in marketing IRAs that does not want to advertise the losers. However, if you look at TIAA CREF you can note that the 5 year performance for CREF Stock, Growth, Global are all negative. This may mean that the last 3 years have been a good time to buy in after the collapse. But we may be in for a long flat performance curve. If a fund is down 10%, there are likely to be net losers.

One can argue that the US government owes itself $3 Trillion so the minimum debt would have to be $3 Trillion and in that way the SS Trust fund contributes to government deficit. But, we havae another $4+ Trillion in public debt. So, holding SS Trust fund money is not what is driving the deficit. Although, it does mean that less of the debt has to be held by the public and probably saves the Treasury a good deal of money in interest payments.

"The government will be stuck with a surplus" was the stupid argument that Greenspan made during his 2001 support for unaffordable tax cuts That was not going to happen even without the unaffordable tax cuts.

Maybe Brad's question should be why didn't Greenspan know what many of us could clearly see in the numbers including Gale, Orzag, Sperling, Krugman and a host of others? 2001 Tax cuts were unaffordable. There was zero possibility of the governmetn being in net surplus.

Brad

Like the new look, took some getting used to though.

The arguement that privitizing accounts would be positive relies on an individuals ability to grow their respective investments. Senator Frisk announced the other day that his election fund lost $500,000 over the last few years. If that was his retirement savings, and he didn't have that sweet senatorial retirement plan, then would he really be for privitization? I doubt it. As one of the commentors states TIAA/CREF's returns on their plans have been negative and these are people who are paid professional money managers. The others amongst us who work, raise kids and try and keep our lives in order have their hands full as is. In addition when do individuals have the information to avoid the Enrons, MCI/Worldcoms/Healthsouth/Global Crossings/etc of the world? They don't because even the pro's didn't have it. Would these companies have allowed me to participate on an investor conference call? I doubt it.

All of this is really a red herring for the Neocon's real effort to de-nannify America. Social Security is considered the Big Nanny by these people. Also look at what they want to do with health Insurance. Instead of really trying to fix it they argue that individuals must get more involved in purchasing health care. The theory is that I would be able to negotiate with my doctor/hospital or other care provider. This is pure silliness. If I am sick or seriously injured I have an immediate need for care. If this care is rationed to the highest bidder or if I am unable to negotiate due to an illness how can I reduce health costs?

dan Froomkin today (Dec 10)

Bush's Big Problem
Friday, Dec 10, 2004; 11:53 AM

The word of the day at the White House yesterday was "problem" -- as in, the Social Security problem.

If you only heard a sound bite or two from President Bush's brief comments after a meeting with the Social Security Trustees yesterday, you really missed the bruising lack of subtlety with which he -- and then his spokesman -- pounded away at this one message.

"We had a good discussion about the problems that face the Social Security system," Bush told the press, "and there is a recognition among the experts that we have a problem. And the problem is America is getting older and that there are fewer people to pay into the system to support a baby boomer generation which is about to retire.

"Therefore, the question is, does this country have the will to address the problem. I think it must. I think we have a responsibility to solve problems before they become acute. . . . [W]e must be willing to address this problem. . . . [T]he time is ready for us to solve this problem. . . . I think what's really important in the discussions is to understand the size of the problem. . . . What's important, Steve, is before we begin any discussion is to understand the scope of the problem. And that's why these trustees are vital in helping educate the American people, and Congress, as to the size of the problem. And I will not prejudge any solution. I think it's very important for the first step to be a common understanding of the size of the problem. . . .

"We have got a member of what was called the Moynihan Commission with us. They studied this problem in detail. They made some suggestions about how to move forward in solving the problem. Much of my thinking has been colored by the work of the late Senator Moynihan and the other members of the commission who took a lot of time to take a look at this problem, and who came up with some creative suggestions."

And, Bush said in closing: "We will not raise payroll taxes to solve this problem."

A couple hours later, press secretary Scott McClellan took to the podium for his press briefing. And in case anyone missed it: "We all need to agree that this is a real problem," he said. Over and over again.

It's like I wrote in my Tuesday column: An essential part of the Bush campaign to add private accounts to Social Security is getting the public to believe that there is in fact an imminent crisis.

That's step one; step two is to getting people to believe private accounts will help; step three is to getting people to believe that borrowing another $2 trillion or so right now to pay for them is a good idea.

And in pretty much all of today's coverage, as the White House surely hoped, the existence of some sort of amorphous, alarming Social Security problem was taken as a given. Step one seemingly accomplished.

But some liberals argue, like New York Times op-ed columnist Paul Krugman did in a much-quoted piece earlier this week, that the crisis is mostly hype -- and certainly not imminent. Economist and blogger Brad DeLong recently wrote that it's the general fund -- not the Social Security trust fund -- that's in crisis, on account of the massive deficit. So borrowing more is precisely what not to do.

So is there a Social Security problem? Do 39 public White House assertions in one day make it so? How big is the problem, how imminent is it, and what are the precipitating factors?