Friday, December 10, 2004

How to destroy Social Security

As what passes for the staff economist at Boring Diatribe, I've been asked to comment on the Social Security Destruction and Embezzlement proposal (AKA Privatization).

Now as it happens, Paul Krugman, a gifted economist and editorialist at the NY Times has already done so at the link provided in this posts title.

Once you realize that privatization really means government borrowing to speculate on stocks, it doesn't sound too responsible, does it? But the details make it considerably worse.

First, financial markets would, correctly, treat the reality of huge deficits today as a much more important indicator of the government's fiscal health than the mere promise that government could save money by cutting benefits in the distant future.

After all, a government bond is a legally binding promise to pay, while a benefits formula that supposedly cuts costs 40 years from now is nothing more than a suggestion to future Congresses. Social Security rules aren't immutable: in the past, Congress has changed things like the retirement age and the tax treatment of benefits. If a privatization plan passed in 2005 called for steep benefit cuts in 2045, what are the odds that those cuts would really happen?

Second, a system of personal accounts, even though it would mainly be an indirect way for the government to speculate in the stock market, would pay huge brokerage fees. Of course, from Wall Street's point of view that's a benefit, not a cost.

There is, by the way, a precedent for Bush-style privatization. One major reason for Argentina's rapid debt buildup in the 1990's was a pension reform involving a switch to individual accounts - a switch that President Carlos Menem, like President Bush, decided to finance with borrowing rather than taxes. So Mr. Bush intends to emulate a plan that helped set the stage for Argentina's economic crisis.

Ah yes, the Argentina plan. I have used this metaphor for the current administration in the past. They complain about Tax and Spend practitioners (what I like to call the Great Btritain model) but employ the BORROW AND SPEND model - patterned after the economic and political success of Argentina.

But just so we're clear here, the Social Security destruction plan involves incurring a stunning amount of debt, and then placing an irresponsibly large bet on the markets.

On the plus side it will be a windfall for well connected fund managers and investment advisors to whom Bush hands out the spoils of this victory over common sense and rational economics. Using retirements funds, and the lucrative management thereof, as a form of patronage is nothing new for Bush however, as it was one of the most successfull ways he robbed the citizens of Texas on behalf of his cronies. Now he can duplicate that important success at the federal level, where he has already developed other patronage tools, like war profiteering, and targeted tax breaks into a robber-baron-enriching art form.

Hopefully 4 more years of this sort of greedy, evil, misgovernance will cause a backlash among the electorate, and lead to the election of more enlightened officials.

If it does not, get used to living in North Argentina.


Anonymous Anonymous said...


How do you respond to this?

Tom Joad

3:43 PM  
Blogger Reductio said...

Well, off the top of my head, I'd say that, as usual, Brooks writes a light and breezy editorial, which entertainingly mocks unnamed (phantom) democrats for not being as savvy as he is. It is, again as usual, entertaining, but not enlightening.

As an economic analysis, the article must simply be disregarded, since most of the data are wrong and misleading, or at best unrelated to the topic. And most of the conclusions, while facile and entertaining, are also unsupported by fact.

Just by virtue of throwing around the $11 trillion deficit number like it is meaningful, the article identifies itself as valueless. If I recall correctly that 11 trillion number is the OMB estimate for social security AND Medicare, and it is the estimated shortfall over the next 100 years IF no action is taken, ever. So essentially it is fixable by less than a lousy 100 billion a year, or less than 1/3 of the fully phased in impact of the bush tax disaster. Put another way, the bush annual deficit is 5 times the magnitude of the annualized cost of fixing social security and Medicare for the next hundred years. For crying out loud, we’ve practically been overcharged enough by Halburton to fix social security.

As to the whole market lover vs market hater thing, let me once more affirm my love of efficient markets, which includes the US financial markets. As Antonius has heard me remark, efficient markets (as anyone who is remotely familiar with economics knows) require certain things, like symmetrical information access, limited concentration of power, low barriers to entry, etc. Therefore unregulated financial markets are almost never efficient in a micro-economic sense (small investors or those without good contacts will get crushed in an unregulated market - see Russia after the wall came down) though unregulated markets can still provide some macro-economic benefits they are sub-optimal in that regard as well.

But I digress. I am a big fan of the market, yet I still oppose the plan outlined by Bush. In no small part because Bush is an evil robber baron and crony capitalist who has used pension management in Texas to steal from the electorate in the past. This is not some fear of a mysterious cabal like Brooks suggests, it is simply not wanting to repeat history. Just like you don't let a convicted pedophile baby-sit your children, you should not let bush baby-sit your retirement funds.

Finally that “borrow at 2% invest at 4.6% to make it all work out OK” is somewhat misleading. You can borrow at 2% short term, but between now and 2045 that may well change. And stock markets can be somewhat unpredictable. If you’d invested in Japan in the early 80’s, you just about broke even this week, and buying RCA in 1929 you are pretty much still in the red.

Brooks does briefly mention one interesting point, the Clinton idea to invest some of the trust fund into stocks. This would likely increase the return (with increased volatility and risk as well) potentially helping to close the prospective funding gap, without transferring all the risk (and attendant likelihood of abject poverty) to the average working person. While this is arguably a defensible idea, it would be wrong to make such a change with a serial pension embezzler in office, so now would not be the best time.

In short, I’d respond that the article was entertaining, but somewhat misleading, and containing little or no economic insight.

11:04 PM  
Blogger amangler said...


Bravo for showing how simple, clear explanation can be so much more devastating than partisan ranting. Although I love sarcasm, snark, and, frankly, mean-spirited name calling, there are time to / all that and simply destroy a position by laying out the facts unadorned. I totally heart your response to Brooks. Thanks for that; I earned a lot.

9:15 PM  
Blogger amangler said...

Uh...of course I meant "there are timeS" and that I "Learned a lot."

Anyway. Carry on and whatnot.

9:18 PM  

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