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.
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