Bloodless Coup: Social Security III: The Rumble of the Nerds

February 01, 2005

Social Security III: The Rumble of the Nerds

Alright, sorry about that last bit, but it's starting to have that feel to it, no? Laugh over? Good, because now I'm going to talk about economics. Oh no, not in that much detail, but I have a two part thought this morning.

The first part is a thought about Krugman, and that this column of his effectively calls out economists in favor of social security privatization. Krugman the economist (as opposed to Krugman the pundit) makes an appearance today, and does a little math for us on social security. I know not everyone likes Krugman, but I find his presentation of data to be mostly direct, easily understandable, and measured in terms of its reliability. Maybe it's some teacher thing. The important point about reliability here is that Krugman, like any good academic writer, not only acknowledges the flaws in others' reasoning, but addresses the underlying issues and assumptions behind the logic. Today's piece examines the assumptions necessary to believe social security privatization will return as predicted:

Which brings us to the privatizers' Catch-22.

They can rescue their happy vision for stock returns by claiming that the Social Security actuaries are vastly underestimating future economic growth. But in that case, we don't need to worry about Social Security's future: if the economy grows fast enough to generate a rate of return that makes privatization work, it will also yield a bonanza of payroll tax revenue that will keep the current system sound for generations to come.

Alternatively, privatizers can unhappily admit that future stock returns will be much lower than they have been claiming. But without those high returns, the arithmetic of their schemes collapses.

It really is that stark: any growth projection that would permit the stock returns the privatizers need to make their schemes work would put Social Security solidly in the black.

And I suspect that at least some privatizers know that. Mr. Baker has devised a test he calls "no economist left behind": he challenges economists to make a projection of economic growth, dividends and capital gains that will yield a 6.5 percent rate of return over 75 years. Not one economist who supports privatization has been willing to take the test.

But the offer still stands. Ladies and gentlemen, would you care to explain your position?

This brings me to my second point about economics, which is a beef shared by others of my profession and is nothing all that new, but is shockingly absent from many public discussions of economic policy and specifically social security reform. This is a beef that unfailingly conjures up my mother's voice in my head:

"You know what happens when you assume....

Come on, your mother told you that one too, didn't she? I'm not suggesting that "u and me" are asses. Rather, I'd like to twist the phrase:

You know what happens when you don't acknowledge your assumptions...

Missing from much of this discussion, on both sides, is precisely that recognition that in order to crank these numbers through, we all are making assumptions. And here comes the final resolution about social security (and yes I am dusting off my worst case scenario yet again) when we're talking about keeping Granny from having to eat catfood because our poverty safety net failed, I want my government to make a conservative assumption. Heck, if we could afford it, it would be nice to assume the worst, and then when things came out somewhere in the middle, we could take the extra money and build some new bombs - oops, I meant schools - or something. Assuming the best case scenario (and if you believe Krugman's numbers, you'd have to be hanging with the Oompa Loompas to think we'd get over 100 on the price-earnings ratio) when planning for the future of social security, well, you know what my mother says. Except that instead of just "u and me" it makes asses out of all of us.