June 21, 2002
From the desk of Jane Galt:KrugmanWatch Summary The Bush Administration
KrugmanWatch
Summary
The Bush Administration wants to privatise social security. This is a bad idea. Their report is bad. The people in the Bush Administration are bad. Someone deserves a good spanking, but we're not saying who.
Highlights
-- He's perfectly right that privatisation will play havoc with the government's accounting. Krugman correctly points out that establishing a private system means paying double: paying for current retirees as the same time as we are paying into private accounts.
Social Security as we know it is a system in which each generation's payroll taxes are mainly used to support the previous generation's retirement. If contributions from younger workers go into personal accounts instead, the problem should be obvious: who will pay benefits to today's retirees and older workers? It's just arithmetic: 2-1=1. So privatization creates a financial hole that must be filled by slashing benefits, providing large financial transfers from the rest of the government or both.
-- The weakest part of the argument for privatisation, and unfortunately about the only part that makes it into the media, is the argument that investors will suddenly become rich off their investments. The 90's are over, 'kay? Private accounts are not going to turn the nation's graybeards into itinerant millionaires anytime soon. Krugman hits on this every single time he writes about SS, and he's right -- those pushing private accounts are usually using inflated or unreliable numbers to exaggerate the potential returns.
Lowlights
-- Who cares what happens to the government's accounting? Government accounting makes Enron look like a model of financial probity.
Social Security is essentially a Ponzi scheme; the ones who get in early get a good payoff, and the later suckers get stuck trying to pay their rent with Amway crap. The government has covered this up by using those fake bonds in the "trust fund" to pretend that we aren't going to have to raise taxes, cut other spending, lower benefits, or borrow more money, soon. Even most people who are educated about the issue do not understand how soon the deficits will start affecting the taxpayers. Given this, who cares if the private accounts play havoc with the system?
Any money paid into it now comes out of taxes; any money paid to retirees later will come out of taxes. The trust fund is a myth. In ten years (sigh, people who want to rant at me can go to the SSA and read the numbers for themselves, 'kay? My numbers are right. I'm not arguing with you about this. You can read the numbers or not. I've read them, I know what they say, I know how they derived the projections, and I know the margin for error. Sshhhh! Zip it! You're wrong, and I have no interest in debating the matter. If you are merely ignorant rather than ornery, and you want an explanation rather than an argument, you can email me after you read what the Social Security Administration has to say.) or so, the tax revenues into the system from FICA will be less than the benefits going out of the system under the current regime. At that point, we will need to raise taxes, cut spending on other programs, lower benefits, or borrow money.
But the bonds! I hear you cry. Where do you think the money comes from to pay the bonds, my sweet? Say it with me: raising taxes, cutting spending on other programs, or borrowing more money. It's very nice that the Social Security Administration has equal standing with other bondholders (except it doesn't, because, among other things, the instruments are non-negotiable and don't count against the government's bond rating if it defaults) but it is irrelevant to the question of how much we, as taxpayers, are going to have to pay in taxes to cover retirees.
Note that exactly what Krugman complains we will have to do now to cover privatisation is exactly what we'd have to do in the future to cover non-privatisation.
So why do it now?
Because if privatisation is to work, the earlier the better; the money needs time to work. And that leverage works in the other direction as well; the longer we wait to do something about Social Security (whether or not that something is privatisation), the bigger the problem becomes. No, I'm not being alarmist. People make their retirement plans 10 or 20 years out based on current benefits. The longer we wait, the larger the pool of retirees and near-retirees who have not planned to live on lower benefits, and the smaller the percentage of workers who have not planned to pay another 5% of their income to the government every year.
-- Ultimately the point that establishing private accounts will mean paying more now is exactly the indictment of the sytem that Krugman is trying to avoid. Because, my little lefty buddies, ask yourself this: if we don't have the money to establish private accounts, then where is all the money from the "trust fund"?
It's in the farm bill and the prison system and the military and the Robert Byrd Memorial Parking Lot (formerly known as the State of West Virginia). It's gone. In other words, the reason we can't privatise is that this would reveal the fact that our politicians have been raiding the pension funds to cover operating expenses -- behavior that would put private executives in jail.
-- Then there's this:
A sample of [Bush administration man railing about a new report on SS]'s tactics is his insistence that private accounts don't weaken Social Security, because diverting money from the trust fund into those accounts doesn't reduce the total sum of money available — if you still count private accounts as part of the total. As they say in the technical literature, "Well, duh." Of course the money doesn't disappear — but it is no longer available to pay benefits to older Americans, whose own Social Security contributions were used to pay benefits to previous generations.
You know, I'd be sympathetic to this argument. I really would. If he weren't neatly reversing this chap's argument and using it himself.
This yahoo from teh administration is pulling some fast accounting to argue that there's no current cash deficit in the system if you include the private accounts in the system. In other words, he's looking at the asset base, rather than the cash flows, and arguing that we won't have to (One more time! Everybody sing it now!) raise taxes, cut other spending, shrink benefits, or borrow more money, because the money being diverted into private accounts will still be there, in the system. This is not true. It will be in the system, but it will not be available to pay current retirees.
Problem is, Krugman's doing the same thing at the other end. He's pretending that the mythical trust fund actually exists and that we will therefore not have to (Final chorus!) raise taxes, cut other spending, shrink benefits, or borrow more money, because the "Trust Fund" has the bonds -- without mentioning that in order to make the payments on the bonds, we are going to have to do exactly the same things to make the pension payments as we would if the bonds were not there.
But the issue is not, as he tries to paint it, whether we have to do these things; only when. The Bush administration has no monopoly on wishful numbers.
-- So why is the Bush Administration doing this? Yes, Pete, sit down; I know that you want to tell me it's because Bush and His Evil Capitalist Cronies are Trying to Take Us All for A Ride. Thank you for your opinion, now please SIT THE HELL DOWN.
No, the Bush administration is putting out these wacky numbers because it wants to sell its program.
And why does it want to sell its program? Yes, thank you, will someone please escort Pete to the men's room? His brain appears to be leaking out his nostrils, and it's ruining the carpet.
It wants to sell privatisation because the Administration believes (no, really!) that it's the right thing to do; just as Clinton, whether or not you agreed with him, believed about NAFTA and Universal Health Care.
So is it?
Well, here's my take on it; it seems to be shared by most of the economists I know.
The benefit of privatisation is not that it will provide outrageously amazing returns; if the economy is growing at 3%, stocks are not going to return 8% year after year. The risk premium isn't that big.
The benefit of privatisation is that it diverts resources into productive investments that the government can't make.
It is black-letter, I'm-not-going-to-argue-about-this-because-it's-proven-beyond-a-reasonable-doubt economics that the government utilizes resources less efficiently than private enterprise for a number of reasons, most of which are some variation on the agency problem, the free rider problem, or the tragedy of the commons. This is not to say that private enterprise utilizes resources perfectly efficiently; only that it is more efficient than the government.
The most basic reduction of the social security crisis is this: currently, each retiree collecting social security is supported by more than three workers. By 2050, that number will be less than 2. If we want to have more people supported by fewer workers without an overall decline in the standard of living, we are going to have to increase the productivity of workers. This is true whether they are taking their living out of the economy through government payments, or payments from private industry. It is the (correct) opinion of the privatizers that investing in private companies now is vastly more likely to produce the productivity increases we need in the future than spending the money (now) on the Trent Lott Memorial University of Mississippi Hogback Research Center and such.
Because money spent by the government almost never increases productivity. The farm bill isn't going to increase productivity, except of things we already have in excess. The military doesn't increase productivity. The many, many "social investment" programs have (look up the numbers yourself!) a dismal productivity record. Of course, that isn't the only reason we have those programs -- but the privatizers (rightly, I think) conclude that making sure that the workers of the future can support all their societal dependants in some modicum of comfort is more important than making sure that every underprivileged green-haired lesbian mother is being the absolute best that she can be.
By taking money out of the tax system and plugging it into private investments, the privatizers hope that productivity increasing investments will plug the demographic gap. They want to get the money out now in order to give the money time to work; investments take time to pay off.
The cheerleaders, like all cheerleaders, play down the problems. For one thing, there's no guarantee that the investments will increase productivity by the amount needed. For another, there's the possibility of distortionary effects on the market and the economy that can't be ignored. And then there's the Keynsian excess savings argument, which I find somewhat convincing, at least to the extent that investors generally overestimate probable returns. Privatizers are not unaware of this; they simply think that the alternative is worse. Leaving the money in the government's hands means lower productivity. And while other changes that have been proposed to fix the current system are certainly necessary and good, there's no reason to think that they will be sufficient; to take just one example, is it really reasonable to think that people are going to work until they are 75? Some people are healthy at that age, but a lot of people aren't -- and the ones the most in need of government support are also the ones most likely to be in jobs that are too physically demanding for a senior citizen.
Howlers
"It is difficult to get a man to understand something," wrote Upton Sinclair, "when his salary depends upon his not understanding it." To make sense of what passes for debate over Social Security reform, one must realize that advocates of privatization — of replacing the current system, at least in part, with a system of personal accounts — are determined not to understand basic arithmetic. Otherwise they would have to admit that such accounts would weaken, not strengthen, the system's finances."
Those wacky economics professors of mine -- poor sods didn't understand arithmetic! That's why they ended up at Chicago, famous refuge for Economists Who Can't Do Math.
Predictive Validity
Singles out the Bush administration. I'm tempted to take off points because he's right; but after accusing the other side of what he himself is doing, not that tempted. PV stands at 9 out of 11, or 82%.
Posted by Jane Galt at June 21, 2002 6:34 AM | TrackBack | Technorati inbound links"); ?>