20.10.04

DEBUNKING THOSE CANARDS. Arnold at Econ Log invites readers to identify the myth about Social Security that poses "the largest barrier to a reasonable discussion of policy." That's a difficult question to answer, as I have two. The first is the paternalistic canard that individuals will mismanage or tap into their private accounts. Brad DeLong is among the recent purveyors of this canard.
There is a bigger, unmentioned reason to be against private accounts. Ten years down the road or so, there will be pressure on Congress to allow people to borrow against their private accounts, or to withdraw them to buy a house, or to use them to meet unexpected medical expenses. Congress will bow to that pressure--it's their money, after all. And in the end a lot of people will hit 70 having drained their Social Security private account dry. The rest of us will then have to decide whether to let them starve on the street, or tax ourselves a second time to give them Social Security benefits. As Dick Schmalensee says, "You have to ask yourself not just, 'Is this good policy?' but 'Will this still be good policy after Congress does its worst to it?'" The Medicare drug benefit and the corporate tax boondoggle are powerful evidence that the Bush administration holds no leashes to use to control what this Congress does to policy proposals, while lobbyists can make this Congress roll over and beg.
The problem, Professor DeLong, is that a lot of people are going to hit 70 only to discover that multiple Congresses have drained the so-called trust fund dry. (For years, the excess of Social Security tax revenues over current expenditures have masked the total operating deficit of the national government. And to invest those excess revenues in government bonds does nothing to change the story. There have to be sufficient general tax revenues coming in to redeem the bonds to provide the transfer payments to the retirees who put their trust in the house that Franklin built.) Tyler at Marginal Revolution has thought through the laws of conservation at work in changing the retirement plan.

But the canard that does more to poison debate than any other, now that I think about it, is the canard that Social Security and its later cousin Medicare have alleviated poverty among the old. A colleague sent an email around to several people asking them to comment on his defense of several of the New Deal - Great Society programs.
I've been harping on the need to be specific in political debates so we can test our assertions and learn from each other. As one might guess, I've been challenged (off-line) to put-up-or-shut-up; specifically, to specify some "liberal" government programs that have worked rather than simply react to others' perceived vagaries about the ineffectiveness of government. I will do so citing three programs: the G.I. Bill, development and dissemination of the Salk vaccine, and Medicare.

[I have cut out the material on the G.I. Bill and the polio vaccines to conserve space. These are different canards. The problem with a lot of policy analysis is the existence of things people believe to be true that after further review turn out not to be quite that true]

MEDICARE: Enacted in the 1960s, Medicare has been credited with changing the demographics of poverty in America. In the 1950s, the segment of the population most disproportionately poor were older Americans, much of their lack of resources being due to the impact of hospital and other medical expenses. Today that segment of the population is among the disproportionately richest, having been replaced in poverty by children.

Where is the equivalent program today that would ameliorate childhood poverty to a similar extent? Or, is there evidence to the contrary that "there is no need for such a program; the private sector will produce those same results without government interference" as conservatives claim?
Perhaps there is yet another answer: there is more childhood poverty today because Social Security and Medicare have reduced economic growth compared to what it would have been with a different tax regime. Martin Feldstein has worked on this topic for years. There is also a paper by Alan J. Auerbach, Jagadeesh Gokhale, and Laurence J. Kotlikoff called "Generational Accounting: A Meaningful Way to Evaluate Fiscal Policy" (requires J-STOR privileges) in the Winter 1994 Journal of Economic Perspectives that illustrates the extent to which the current crop of elders are stealing from future generations. (I am being a bit polemical but it's late and Blogger hasn't been working well, so I have to take out my wrath on something.

Here is a table of net tax rates by their reckoning, broken out by year of birth, from page 86 of the article.
1900.....21.5
1910.....24.7
1920.....26.3
1930.....28.1
1940.....29.3
1950.....30.6
1960.....32.1
1970.....33.2
1980.....33.8
1990.....33.6
Their estimates suggest future generations will face a net tax rate of 71.1 percent.

A companion article, by Robert Haveman, argues that identifying only taxes and transfers, without allocating the benefits of other government services (does that include liberating Iraq, or edgy National Endowment projects?) is incomplete accounting. True enough, but the evidence with respect to taxes and transfers alone suggests that the retirement safety net has been a massive transfer from future young people to current old people, and it has reduced economic growth compared to what it might have been.

RUNNING EXTRA. More, much more, around the Internet this morning. Start with Alex at Marginal Revolution, looking at the microeconomics of Social Security privatization. Consider this:
Social security privatization has a little-discussed benefit, done properly it is equivalent to a cut in marginal tax rates. A problem with the current system is that there is little relationship on the margin between taxes paid and benefits received.
That's what makes Social Security so popular with the current crop of elders. They've made out like bandits starting with that Vermont pensioner who received the first check. But I use the term "banditry" deliberately: they have stolen their grandchildrens' futures. There will eventually be no more future to steal. We can do better:
To see why this is important consider the difference between social security and an IRA. If a worker works an additional hour, earns $10 and puts $1 into the IRA he knows the $1 will produce a benefit 30 years down the line when he retires. The $1 contribution to the IRA is not a tax, it's consumption, a benefit of working extra hours. On the other hand if a worker earns $10 and $1 is taken and paid into social security there is no clear connection to retirement benefits. Social security payments, therefore, are taxes - and like other taxes they deter work effort and create a dead weight loss.

Privatizing social security, or in some other way creating personal accounts, would reestablish a link between marginal payments and marginal benefits and thus would be equivalent to a cut in tax rates.
Efficiency with prosperity. I like the idea. Victor at the Dead Parrot Society has an observation that is neither deceased nor defunct.
By funding the transition costs with debt today, you are working the time-consistency problem in reverse; you are acknowledging that future, implicit, debt obligations are real, today. That is a good thing that helps to work toward fiscal sanity rather than away from it. The time-consistency problem arises from fear that such an acknowledgment would *not* ever take place. Lastly, the spending record from FY1999-2002 was reasonably terrible, and it is no coincidence that budget surpluses were on the books for those years. PAYGO was born in a period of massive deficits; it was essentially eviscerated when those deficits went away (and explicitly dropped without substantial concern just when surpluses were falling into deficits). Now that large and explicit current deficits are being incurred again, there is considerable movement in the Congress to reinstate PAYGO or other similarly tight spending caps and arrangements.
To repeat, there is no more effective "lockbox" than a real trust fund account with a real name on it, not something that Congress might deal with or not. And there is time to work on the problem, particularly with generous immigration policies to expand the pool of workers, producing both more income and lowered per capita transition costs. Note this observation from Factcheck.org (via Charlie Sykes.)
There are a host of unanswered questions about Bush's intentions regarding Social Security, and the campaign so far hasn't shed much light on any of them. Bush has said he wouldn't increase payroll taxes, but maintaining benefits for current retirees while allowing some portion of current payroll taxes to go into privately owned accounts will cost at least $1 trillion and perhaps much more, depending on what estimates are used. Bush hasn't said where the money would come from.

Kerry, on the other hand, hasn't said how he would preserve the current system. Social Security's finances are unstable, and its trustees stated in the most recent annual report that by the year 2078 it will require a payroll tax increase of nearly 50% to maintain the currently scheduled rise in benefit levels. If taxes are not increased and no other changes are made, benefits would have to be cut 32% that year.
Perhaps there are other economies for the national government to consider (where is that Pig Book when you need it?) And now might be the time to contemplate that. Michael Barone has laid out the options in the upcoming election.
Bush can be justly criticized for not laying out his plans with much specificity. As on Medicare-prescription drugs, he seems content to raise the issue and let Congress -- especially House Ways and Means Committee Chairman Bill Thomas -- work out the details. Nor is it clear that any significant number of Democrats would support Bush on health savings accounts or Social Security. A re-elected George W. Bush may or may not be able to deliver on his promises.

But he has at least set out a vision of an "ownership society" that is a vivid contrast to what John Kerry proposes. Kerry, like most Democrats since the 1970s, aims to move this country some distance toward a Western European style welfare state. (His proposals would result in government spending an ever larger percentage of gross domestic product far into the future. Leave aside the question of whether his tax increase on the highest incomes would pay for this.)

The (larger) question is whether the United States wants to become a society with the problems of Western European welfare states -- zero job growth, stagnant economies, ever-increasing shares of GDP spent by government.

Industrial economies, with their huge firms and masses of low-skill workers, had a natural tendency toward centralization and government redistribution of income: hence the New Deal, the Great Society, the Western European welfare states. Post-industrial economies, with their burgeoning small firms and churning technological innovation, have a natural tendency toward decentralization and market distribution of resources.

The vision Kerry presented in the second and third debates, of further centralization and growing government, seems more in line with the industrial era. The vision Bush presented, more effectively than he has before, is more in line with our post-industrial times.
Perhaps so. But perhaps Daniel Henninger is correct: not everybody is ready to go there yet.

No comments: