Krugman Rides Again (We Deride Again)

Krugman continues his break from a break, warning us yet again about the perils of Social Securty privatization.  Most of the column amounts to a strawman exercise, where Krugman vigorously rebuts arguments that the Bush team is not making.  That is not wholly to his discredit, BTW - so far, Team Bush has not made a specific proposal, so what's a critic to do?  Let's pick a bit for flavor anyway:

... it is now apparent that the Bush administration's privatization proposal will amount to the same thing: borrow trillions, put the money in the stock market and hope.

...How, then, can privatizers claim that they could secure the future of Social Security without raising taxes or reducing the incomes of future retirees?

Bait and switch.  There may well be a privatizer somewhere claiming that privatization (and stock market returns) can eliminate the 10 trillion dollar actuarial shortfall of the current system.  But since Krugman's column starts and finishes by criticizing Bush, perhaps the Earnest Prof might do better to restrict his criticisms of Administration salesmanship to things they are actually selling.

Which does not leave a lot to work with.  Bush has ruled out new taxes, so mathematicians are confident that we are left with some combination of reduced benefits (perhaps through a hike in the retirement age) and increased risk (with returns to follow, we hope)  to "solve" the problem.

In the holiday spirit, let's give Krugman credit for these points:

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.

OK, I accept that, although its relevance is less than meet the eye.  This new borrowing by the government will be required will immediately be pitched back into the savings pool by the "recipients".  Consequently, the impact on national savings of this borrowing is very different from the impact of run of the mill annual budget deficits, as we belabored earlier.  And since the impact on savings is so different, the impact on interest rates and economic growth will be quite different.  Well, Krugman knows this, which is why he is emphasizing something else.

He also does OK here:

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.

I don't know if the transaction costs must be huge (and I say that as a Vanguard investor).  But the cost structure of the privatization component is certainly an issue.

For our next rabid denunciation we need some help with financial history.  Krugman is certainly an authority on Argentina and its problems, but I suspect he is re-writing history here:

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.

Hmm, a "major" reason?  If pension reform was so consequential, why has Krugman not mentioned it before?  I can not claim to have read his every word on Argentina, but here are his archives, and 1, 2, 3, 4, 5, 6, 7, 8 articles describing Argentina's problem.  The recurring theme is the deflation caused by an inflexible currency board; I find no mention at all of problems caused by pension reform.

My guess - this is "everything but the kitchen sink" polemics, rather than economic analysis.  Argentina privatized, and they had problems - oooh, scary!  Hey, Argentina has beef, too.  Which Krugman's column lacks.

MORE:  Brad DeLong, who is politically sympatico with Paul Krugman, reprised some of the arguements for privatization in yesterday's WSJ:

Remember that when people first started talking about private accounts, there were five reasons for them:

1. We're going to have to put more money into Social Security, and private accounts are a way of assuring contributors that they have a strong personal claim to the extra contributions needed to bring the system into expected actuarial balance (the Ned Gramlich reason).

2. We're going to have to put more money into Social Security because it's unfair to place the burden of funding the Baby Boomers' retirement on their children and grandchildren, and so we're going to build up very large positive balances over the next generation some of which will have to be put into stocks, and we really don't want the Secretary of the Treasury voting those stocks in corporate elections (the Andy Samwick reason11).

3. The financial markets do a lousy job of mobilizing the country's risk-bearing capacity, and there are $1,000 bills on the sidewalk to be picked up by investing the Trust Fund in equities (although this is an argument for investment the Trust Fund in equities, not for private accounts per se) (the Marty Feldstein reason12).

4. The poorest half of Americans have essentially none of their wealth committed to the stock market, and that can't be good -- private accounts are a way of getting them some stock market investments (the Peter Diamond reason13).

5. The fact that Congress views the Trust Fund balances as their money is setting us up for a fiscal disaster when the General Fund is supposed to pay back Social Security, and private accounts are a way of making Congress recognize now that the Trust Fund balances are not free money to be spent (the Kent Smetters reason14).

We tackled Point 5, the Smetters view, at this post.  And more broadly, not all of these arguments revolve around get-rich-quick schemes involving superior equity returns.

And I have thought that the secret Rep reason for privatization was that we want to use Social Security to convert everyone into capitalists.  This will induce them to vote for Big Business (or business, anyway), not Big Government.  Seriously, shareholders might have a different view on taxes, business regulation, environmental regulation, and so on - is this not a hidden agenda item for the Right?

OTOH, after the last election, where Dems whined that Red Staters didn't vote their pocketbooks, I wonder if anyone still takes the notion of a Nation of Capitalists seriously.

Comments

[A Tiny]

Krugman:

How, then, can privatizers claim that they could secure the future of Social Security without raising taxes or reducing the incomes of future retirees?

TM:

Bait and switch. There may well be a privatizer somewhere claiming that privatization (and stock market returns) can eliminate the 10 trillion dollar actuarial shortfall of the current system. But since Krugman's column starts and finishes by criticizing Bush, perhaps the Earnest Prof might do better to restrict his criticisms of Administration salesmanship to things they are actually selling.

That IS what the Bush administration is selling, as Krugman says in his next sentence. Krugman asks how privatizers (including Bush) can claim to secure the future of Social Security. He answers:

By assuming that workers would invest most of their accounts in stocks, that these investments would make a lot of money and that, in effect, the government, not the workers, would reap most of those gains, because as personal accounts grew, the government could cut benefits.

The "lot of money" Krugman references is the "returns to follow, we hope" to which you refer.

[TM]

Until Bush proposes a plan and starts promoting it, Krugman is simply projecting his own worst case onto how BushCo will try to sell it to us.

Since there are plausible reasons for privatization, I remain hopeful that Bush will invoke them. Time will tell.

[Pouncer]

I _HATE_ doing this, but I'm gonna anyway.

There were plausible reasons for going to war with Iraq, too. Shrub did invoke several of them, at different times to different audiences. Few were mutually exclusive of others. And yet, he was criticized for (a) not making a case (b) making too many various cases (c) making a false case (d) making a true but badly elucidated case (e) making a "deceptive" case by luring his opponents into uses phrases such as "imminent threat" while studiously and mendaciously avoiding the use of that phrase himself ...

It seems to me Shrub is doing the same thing with SS privatization. He's floated a trial balloon, and is waiting for the critics to reveal their anti-anticraft locations firing at this trivial target. Once the strength and positions of the opposition is known, then Shrub and Co. plot an actual course AROUND those objections.

[TM]

And directly into another disaster! Hah!

Actually, as evidence either of the proverb that great minds run in the same channel, or that fools think alike, I was thinking the same thing. We spent the summer of 2002 debating the case for war, and Bush did not even announce any particular decision or direction until his UN speech in September. Oh, people were pounding the table that Congress must be involved despite Bush's objections, but he never objected. And then he involved them. And then they were pounding the table that it was all to close to an election, and that Congress should be involved, but later.

Oh, well. One hopes this will work differently.

[A Tiny]

TM,

First, the commission Bush has appointed HAS proposed a plan. There's no indication whatsoever Bush's won't be similar. So it's perfectly legitimate to critique that as a stand-in for Bush's.

Second, there is no plan, anywhere, that closes the funding shortfall and doesn't involve tax hikes or guaranteed benefit cuts in some combination. That's not a worst case. Those are the ground rules of the debate.

Third, Bush likely will try to keep the actual costs of the plan under wraps for as long as possible. In this case -- since he's pledged no tax hike -- that means benefit cuts. There is literally no other option. So if the Bush plan is to close the shortfall, it will cut guaranteed benefits. Full stop.

And that's the reason he'll keep it under wraps -- it will be unpopular. It's much like the way the Bush administration resisted any estimate of the cost of invading Iraq. Except for the $1.7 billion one, of course. (I understand that's now inoperative.)

So criticizing Krugman in this case is much like, before the invasion of Iraq, criticizing him for drawing attention to the likely costs of the war. Arguing that the Bush administration hadn't made any projections didn't mean much then, and it doesn't mean much now.

[Jim Glass]

"First, the commission Bush has appointed HAS proposed a plan. There's no indication whatsoever Bush's won't be similar. So it's perfectly legitimate to critique that as a stand-in for Bush's."

Bah! Sen. Graham, the very conservative Repub who's leading the drive for private accounts in the Senate, is pushing for them to be new-tax financed as a political necessity.
http://www.townhall.com/columnists/robertnovak/rn20041206.shtml

Why not use him as your straw man to argue against? No mention of all that by Krugman? I wonder why not? ;-)

No Repub president can *start* bargaining by saying "Let's raise taxes!" even before negotiations begin. Even if that's where he fully expects and intends to end up, and even wants to, he has to act like he's being carried there kicking and screaming against his will -- like Graham has a gun to his head, forcing him into a big compromise. It's called "politics". No, actually it's called "negotiating".

I do it myself with the wife and kids all the time. And they sure do it with me.

[Jim Glass]

" '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 ...' "

'Hmm, a "major" reason? If pension reform was so consequential, why has Krugman not mentioned it before? '

Geeze, not only did he not mention it, he repeatedly mocked the notion that Argentina's problem was caused by debt -- saying it's debt level was normal for any modern country lower than a lot like in Europe.

Let's see...

"You might think, given all the talk of debt default, that [Argentina's ]problem was government profligacy.

"But Argentina's budget deficit has ranged between 1 and 3 percent of G.D.P., not bad for a depressed economy, and its government debt is only about half of G.D.P., better than many European countries ...

"Argentina isn't heavily in debt by normal standards..."

http://www.pkarchive.org/column/110701.html

Now, Argentina not only was done in by *debt*, but by Social Security private account debt!

This is the type of rigorous, honest analysis rising up to fight property rights in Social Security.

Hey, when the US adopts a currency board, let me know!

Private SS accounts have been adopted by Sweden: Swedish social insurance policy -- too right-wing for Krugman and US Democrats.

[A Tiny]

Jim,

A "straw man" is a position your opponent hasn't taken. Bush has said he won't raise taxes, whether he means it or not. Hence: no straw man.

I'm sure if Bush endorses Graham's plan Krugman will critique that too. But this was just one 700-word column. One thing Krugman would likely say: if we're going to raise taxes that much, why not just close the SS funding gap that way?

[Brandon]

One really easy starting point for thinking about what a rational privitization plan might look like is to examine the one Federal Employees use: The Thrift Savings Plan (http://www.tsp.gov). It's been in operation for about 15 years, and has done pretty well -- we weathered the bursting dotcom bubble and the recession, and have long-term good rates of return (especially in comparison to what Social Security's "returns" are. And the management fees, far from being "immense" are minimal.

Go check it out, because that's where the starting place ought to be.

[TM]

Uh, Tiny, try to stay within sight of the border of credible:

A "straw man" is a position your opponent hasn't taken. Bush has said he won't raise taxes, whether he means it or not. Hence: no straw man.

Has Bush said that privatization will close the funding shortfall and restore lost hair? Krugman certainly impies that he has, when he writes this:

...How, then, can privatizers claim that they could secure the future of Social Security without raising taxes or reducing the incomes of future retirees?

Well, I am recycling my post now. In fact, we don't know what Bush will claim or what he will offer (other than no tax hikes. And apparently, his spokesperson would not say whether raising the payroll cap to which the tax is applied is a tax increase.)

In an indication of the potential minefields ahead, Scott McClellan, the White House spokesman, repeatedly refused to answer reporters' questions about how ironclad Mr. Bush's no-tax statement was.

Asked whether the president's no-tax stance included a commitment not to lift the ceiling on payroll taxes for high-income people, Mr. McClellan refused to answer explicitly.

[A Tiny]

TM,

Forgive my being so dense, but could you spell out exactly what I said that isn't credible?