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March 18, 2006


Patrick R. Sullivan

' This is an interesting example of compartmentalization by Krugman specifically, or by the left more broadly.'

Patrick Fitzgerald also likes the tactic.

Ari Tai

wrt rising inequality. I prefer to measure the quality of life of our poor v. the same in any other equally diverse community in the world. The gap is striking and growing, esp. in terms of any measure of consumption (and health outcomes to a medical crisis). Sowell nails these issues in his Quest for Cosmic Justice.

Someday I'd like to see a study with the statistical discipline of a drug double-blind trial that tallies and compares all measures of income/wealth derived by personal interviews and investigation (where they tally all costs of regulation and "entitlements" as a (presumed) benefit to the poors' quality of life).

There's also a prevalent belief that equality is measured between individuals rather than the distribution of all off community's wealth. The assumption that a government's wealth is a commons shared by all is provably false. Government is little more than another special interest with a power to compel unmatched by any private individual or their enterprise. Wealthy individuals (especially those who made their money by enriching others' lives) are better seen as spreading equality away from governments and their apparatchiks.

It's amazing to find how those states that are most focused on social justice are actually the least equal. The fact that we pay very large salaries means there's less use of class and position, the winked-at corruption that benefits those in power and in control. Japan Inc. used to be held up as an example. But the supposed egality in their pay was belied by their actual lifestyle, perks, and occasional stench of corruption.

Call it another example of why free-enterprise as practiced by free citizens in a civil society is the most moral of all systems. Those who think they know better than individuals acting in their own self interest have caused far more suffering than the most heinous tyrants. Arguably they will be directly responsible for our extinction (if they haven't sealed our fate already). (reflecting on our last brush with extinction about 150,000 years ago)

Foo Bar

OK, I agree that you showed that Krugman's and Delong's criticisms are overstated, i.e., that the assumption made by the administration of healthy stock market growth coupled with slower GDP growth is not mathematically impossible and maybe not even wildly implausible, but within the range of plausible outcomes.

Are you also arguing that the administration's assumptions are not just somewhat plausible, but the most reasonable set of intellectually honest assumptions that would be made by a neutral evaluator of the SS personal accounts proposal, someone neither philosophically inclined nor opposed to the proposal? In other words, if we don't know how the stock market is going to grow relative to the economy in the future, suppose we represent our uncertainty by assuming there's a bell curve distribution on the future ratio of growth rate, or of labor's share of GDP or whatever. A fair minded evaluator ought to pick the peak of the bell curve (the most likely point) when doing projections. I think what you've shown is that the administration picked a point somewhat off to one side from the peak- maybe not way, way far away from the peak, but still significantly off from the peak in a direction that favors private accounts. Maybe not that's not the cardinal sin Krugman and Delong are alleging, but it still seems like a sin to me.

I mean, maybe labor's share of GDP will go to 62% in the future. Don't you realize that once this administration is gone we'll enter a golden era of populism and labor rights where all corporate tax loopholes will be closed and workers will get a much bigger cut of the pie ? Er... probably not, but seems to me that you have to allow for the possibility of things moving in that direction. Implicit in the Krugman quotes lamenting stagnant wages despite good GDP growth is the idea that this need not be so and could be changed at least partly through governmental policy. To really bust Krugman for being inconsistent you'd have to show that he thinks the trend of labor getting a smaller share of the pie will necessarily continue for many decades to come, but I don't see him making that kind of claim. Or, maybe you yourself (or the administration) think that there are permanent, structural changes that mean a higher percentage of GDP will continue go to capital (i.e. that the 58% labor share really is the peak in the bell curve in your forecast), but if so, that argument needs to be made.


To really bust Krugman for being inconsistent you'd have to show that he thinks will necessarily continue for many decades to come,

A quick quibble for clarity - a one time shift of a few percent in favor of capital will do it. The labor share will be constant at a new and lower level, not ever-shrinking. Your phrase, "the trend of labor getting a smaller share of the pie" strikes me as ambiguous.

As to the larger issue - Mankiw is pretty fervent that even the reduced Krugman claim is overstated.

And as to the "right" Soc Sec projections - who knows? My official editorial position was that the US equity risk premium would fall, but for other reasons - basically, the US is not as risky a proposition now as it was in 1880, 1920, or even 1970.

Barney Frank

The premise that GDP growth is linked to the age of the population seems fairly easy to test since the age of our population has been increasing quite steadily for our nations entire history.
China has seen its economy boom even as it has put a noose around its birthrate and seen its population age commensurately.
I suspect this is one of those shibboleths taken as the gospel with little or no data to back it up. It just seems true so it must be.


The SS kerfuffle last year was scandalous. The left was content to lie egregiously and now is undertaking to correct the record for the sake of posterity?

If the dems take control in '08, the problem will be with us still and even more obvious. Will they have the stomach to take it on? I doubt it since their '05 rhetoric will come back to haunt them. They will have to offer a naked plan of benefit reductions and tax increases.

Can't really comment on all of these technical arguments...Bush was attempting to sell SS reform by adding VOLUNTARY private accounts. It was a good try and deserved to succeed. If it had I am sure that the good citizens involved would have made the right decisions about whether to participate.


The reality is that SS will be privatized to stop the stock market from melting down. Big egos and hot money is going to cause a crash more sooner than later. About March of 2012.
Privitazing SS will cause the stock market to zooom.

richard mcenroe

Ari Tai — Keep in mind we're talking about a country whose biggest health crisis is the obesity of its poor people...

Foo Bar

A quick quibble for clarity - a one time shift of a few percent in favor of capital will do it

Agreed, sorry for the ambiguous language. The point is that nothing Krugman wrote suggested that our best forecast is that such a one-time shift will occur and then persist for decades (rather than being wiped out later by a reversion, i.e., a shift in the other direction).

And as to the "right" Soc Sec projections - who knows? My official editorial position was that the US equity risk premium would fall

It was the administration went through the exercise of crunching the numbers to try to show that personal accounts would be a better deal. If the future is unforecastable, they shouldn't have gone through that exercise. If they were going to crunch the numbers, then they needed to use, in a consistent way, forecasting assumptions that came from neutral, nonpartisan organizations. Was there a forecast coming from somewhere like CBO that this one-time but long-term persisting downward shift in labor's % of GDP would occur, thereby justifying good stock market growth with simultaneous mediocre GDP growth as not merely something that could conceivably occur, but as our best guess for the future? Maybe there was and I'm not aware of it, but unless there was, I'm going to continue to believe there was some shadiness in the administration's number-crunching.

As to the larger issue - Mankiw is pretty fervent that even the reduced Krugman claim is overstated

Well, if it's expert vs. expert, forgive me if I don't automatically defer to a Harvard prof who advised an administration whose overall jobs and deficits record is quite poor (recent upticks notwithstanding) over a Berkeley prof (DeLong) who advised an administration whose jobs and deficits record was excellent.

Barney Frank

Foo Bar,

Are you talking about Krugman's paid consultancy for the Enron Administration? Their deficit and jobs record seemed none too sterling under his tutelage.


The point is that nothing Krugman wrote suggested that our best forecast is that such a one-time shift will occur and then persist for decades.

Well, your right of course - just becasue it is happening now does not mean it is irrevocable.

And I'm hoping Krugman is wrong about better public education *not* being the answer to rising income inequality. And he might be - when he was belaboring this issue a few years back, his long NY Times magazine article completely ignored the effect of immigration on inequality.

Foo Bar


Shouldn't you be hard at work representing your Massachussetts constituents?

Anyway, I invite you to read over what exactly it was (one two-day seminar meeting on world affairs) that Krugman did for Enron and let me know if you really think he contributed to their downfall. I'd say that idea has about as much plausibility as the notion that William Kristol bears responsibility for the Enron fiasco.

Foo Bar

Well, your right of course - just becasue it is happening now does not mean it is irrevocable.

Indeed, historically it seems to bounce up and down (see Figure 2-5, which is labor's % of gross domestic income, almost the same thing). It was going up as recently as '98 to '01.

his long NY Times magazine article completely ignored the effect of immigration on inequality.

Well, income inequality and labor's share of GDP are not exactly the same thing, but (while I'm no expert on the subject) as a general criticism of Krugman that does seem like a fair point.

Jim Glass

"Assume ... Social Security is a fully-funded pay-as-you-go pension plan."

Assume legless caterpillars.


It's Ponzi and the sooner broken up, the lesser the damaages.

Charter schools are the solution to better public education, which is always the solution to all other problems.


Better public education is even more critical now in the face of a foundering media. I realize I'm confounding education of the young and education of the general public, but that distinction is getting blurred anyway.

Paul Zrimsek

In keeping with the theme of rehashing arguments from last year, I'll rehash one of my own: that the very demographic fact driving the predictions of lower growth is the increasing proportion of people who will no longer be contributing their labor to the economy, only the continued use of their capital. A greater share of national income going to capital is exactly what we'd expect under these circumstances, other things being equal.

Hey, Jim's back!


I think that people are coming to exactly the wrong conclusion with respect to return on capital vs return on labor. As the demographics change and we have the population shift out of employed laborers to retired possessors of capital, the law of supply and demand says that as the supply of labor goes down the price of labor (wages) goes up, while as the supply of capital goes up the price of capital (returns) goes down. If you need concrete examples... In the future, when a huge part of the adult population is retired and living off of their investment income, there are going to be lots of good jobs begging for people. So restaurants and grocery stores will have to pay high wages to compete. Which means that it'll cost a lot of money to eat, and if you are a retired person interesting in continuing to eat, your savings will burn much more quickly. So if you want to keep eating, you'll go back to work if you can. On the investment side, what will happen is that an abundence of investment capital will exhaust the most profitable investment opportunities, and so you'll be left bidding down the stock of good companies, and sticking your money in stupid ideas (anybody remember online pet-food sales?) Companies will be forced to pay more and more of their profits to compete for scarce labor, and less and less to get the vast sea of capital with nowhere productive to go.

Up until a few years ago I had always been the libertarian sneering about pay-as-you-go ponzi schemes. But some further reflection leads me to conclude that in a macroeconomic sense all economic systems are pay-as-you-go. In order for you to consume more than you produce this year, somebody has to produce more than they consume this year. Whether this comes from taxing the young people and giving the money to the old people, or having the young people pay investment returns to the old people, it's still pay-as-you-go.

Ok, what's my social security plan?

1) Means test social security.

1) a) Eliminate all social security payments tomorrow.

1) b) Vastly increase supplemental security income payments to make up for the lost social security in low-income and medium-income elderly.

2) Social security tax withholding is a completely flat tax, with the same 15.2% on the first dollar earned as the billionth dollar earned.

2) a) The social security withholding up to the first $90,000 of income goes into a private account owned by the worker.

2) b) The social security withholding on income above $90,000 is a tax, which goes to pay the means-tested supplemental security program for poor people.

The people talking about reforming social security with private accounts are always the same ones as advocating a flat tax for the "income" tax. Of course with the "flat" tax they are really advocating a regressive tax. We already have a tax which is flat for some incomes, progressive for some incomes and regressive for other incomes, because the tax that gets withheld from your paychack and sent into the IRS is the SUM of a progressive tax (the "income" tax) and a regressive tax (the "social security" tax") and a flat tax (the "medicare" tax). But as everybody knows, a dollar is a dollar is a dollar, and especially with our government, all the money goes into a single pot without even the accounting fiction of separate accounts. So, yeah, that's what I say for all you flat-taxers out there: put up, or shut up. ALL THREE payroll taxes go flat simultaneously, not just the one that benefits rich people. You can argue about how much progressivity there should be in the tax code, but no serious person thinks that regressive taxes are a good idea.

cathy :-)


I thought we sorted this out a year ago:

1) The "transition problem" is the *entire* problem of Social Security; it is the same thing as the unfunded liability.

2) Under reasonable assumptions, the "transition problem" is easily soluble.

3) Therefore under reasonable assumptions, the "unfunded liability" problem is also easily soluble.

[you can change the order of 2 and 3 depending on your preferences]

If you switch 2% of GDP from workers to capital-owners through the profit system, you can get equity returns where you need them to be. Alternatively, if you switch 2% of GDP from workers to retired people through the tax and benefits system, you can get Social Security payments where you need them to be (Jim Glass, rather hilariously, always calls this a "66% tax increase"; I am not aware of anyone referring to Tom's profit/labour assumption as a "40% profits increase" but I daresay they are out there).

The "pensions timebomb" is a red herring, always has been, always will be. If you want or don't want to privatise pensions, go ahead and make the argument but this ought not to be part of it.

By the way, in case anyone was wondering "hmmm, how is it that 'administration costs' are so much lower in the government system, it is not usually the case that the government administrates things much more efficiently than the private sector", the answer is that "administration costs" is a euphemism; the majority of the figure for private sector pension providers is the sales commission paid to the guy who sold the policy.

Bob Smith

If I were a democrat pandering to my base, I could simultaneously leverage the politics of envy and proclaim a solution to the problem by proposing to apply the SS tax to capital.

Dean Baker

As the person who originated the inconsistency argument, let me just add one important dimension that everyone seems to want to ignore. I'm using capital letters, just so no one misses that I do think this is important.


okay, in the real world could there be a redistribution? Absolutely, anything can happen, if and if our projection is that a large and continuous redistribution from labor to capital will take place, then we have a real big problem on our hands (vastly more important than the projected long-term shortfall for SS) and we should be examining its implications right away. But, the SS projections do not assume this redistribution, nor do any other economic projections with which I am familiar. So, being that crazy radical that I am, I will continue that we use the same numbers everywhere.

Aren't we progressives cruel to the right?


Er, rather than taxing capital more, might we guarantee the contribution of labor more by taxing it less?


Well, means-testing social security payments is fungible with "taxing" the accumulated capital (savings) of rich retirees.

cathy :-)


Is it no longer progressive to consider the gains of the stock market as reflecting the contribution cumulatively of labor?

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