Tuesday, January 04, 2005

Fantasy Versus Reality

Or, a Study of two op-eds. Today's New York Times conveniently has opinion pieces by Paul Krugman and David Brooks for perusal. Krugman additionally links to a .pdf that provides further detail--I guess we'll just have to take Brooks's piece on his word (cough).

To (cough again) start with Mr. Brooks's--appropriately titled "A TALE of Two Systems"--it becomes necessary to, well, suspend belief for just a moment and enter his world of fantasy.

After numbing us to sleep with baleful statistics about Old Europeans (i.e., "Old Europe"--I dunno, maybe David is eternally upset that he never was able to have a to-hell-with-tomorrow, "Last Tango in Paris" fling with a heartbreakingly beautiful Euro-ingeune)--he concludes, somewhat ominously:

The question is: Will we leave our children a system as flexible, dynamic and productive as the one that was, fortunately, left to us? Or, by doing nothing, will we succumb to the same ineluctable pressures that now afflict Europe, and find that we are immobilized at the exact moment China and India are passing us by?

Nothing like engaging in gratuitous scare mongering, eh? And, why not combine it with a bit of partisan swiping, as David does when he reminds us that our "flexible, dynamic, and productive" system was achieved by "not...taking [liberal]advice for the past 50 years."

Really? I guess all that Marshall Plan money was just a waste of time, not to mention the relatively high corporate and marginal tax rates of the 1950's and 60's (which happened to coincide with high rates of economic growth--go figure).

But enough fantasy--time to hit the Brooks, um, I mean the books.

I've linked to the Krugman .pdf article above--for the record, it's eleven pages, and won't slow your browser to a crawl, but still...anyway, to bring us back to at least a semblence of reality, let's look at both Krugman's analysis of the so-called "crisis" in Social Security AND his criticism of the various alternatives proposed by people like Brooks (well, to be fair, proposed by people ostensibly a lot smarter than David, who is paid to schill for them).

To begin, Professor Krugman outlines what he calls the three main points of confusion in the Social Security debate:

• The meaning of the trust fund: in order to create a sense of crisis, proponents of privatization consider the trust fund either real or fictional,depending on what is convenient

• The rate of return that can be expected on private accounts: privatizers claim that there is a huge free lunch from the creation of these accounts, a free lunch that is based on very dubious claims about future stock returns

• How to think about implicit liabilities in the far future: privatizers brush aside the huge negative fiscal consequences of their plans in the short run, claiming that reductions in promised payments many decades in the future are an adequate offset.

First bullet point, short version: unless there is a general fiscal and budetary meltdown, there is no problem with the trust fund. Additionally, if the rest of the government was managed as efficiently as Social Security, we'd have had the double benefit of both steady (if boring) growth in the trust fund (dividends and interest), plus an eventual transfer of Trust Funds to a different investment instrument (the government would gradually have less debt to sell)--accomplishing part of the privateers fantasy.

Privitization advocates, in contrast, either pretend there is no real trust fund (i.e., the one-pocket, another-pocket argument) when data indicates no problem with the fund, or firmly accept the concept of a fund (when adopting scare tactics a la "the fund will go insolvent in 2018/2042/2052--pick you year). By the way, all those crisis years assume rather pathetic growth rates, which makes me wonder why these so-called free market advocates seem to be so, well, Marxist, when it comes to estimating growth rates years into the future.

Second bullet point, short version: once you factor in the costs of privatization, you're left with--at best--the same, non-sexy growth factor--with the potential for HUGE downsides, like, say, Enron-style boondoggles down the road.

To counter this possibility, proponents say that initial outlays will be, well, heavily restricted. In fact, the restrictions will be extensive to the point that growth potential is negated by both limitations on commercial paper available AND by things like management fees that amount to a subsidy for Wall Street, at the expense of real benefits paid to retirees. In other words, it's a zero sum game at best, with the downside noted above.

Third bullet point: long term projections carry all the value of science fiction. You can speculate about warp drive, missions to the outer planets, etc. etc. in sci-fi novels/movies, but financial planning should be a bit more rooted in reality. And, in fact, it is: financial markets have tended to ignore long term projections--although, as Krugman points out, they will likely pay attention to "good old fashioned debt," like what might arise from the Bush prescription plan--or the Bush privatization plan for Social Security.

Krugman sums up by noting that privitization is a "solution in search of a problem." He goes on to note a dualistic trend--some privateers simply can't stand the concept of Social Security, while others seek to establish their social and political bona fides (and, as he puts it, take the "defensible position that a pay-as-you-go system is bad for savings and long-run growth. And they hope that a bad privatization plan may nonetheless be the start of a reform that eventually creates a better system). Krugman has words of warning for those folks--the Bushistas might let them sit at the table, but aren't likely to offer much more than scraps.

As for my own take, well, I look at Team Bush and see not just a closetful of lies, but a pervasive tendency to ignore the truth that is literally supersized. You simply can't trust serial prevariacators like this administration--where every public statement is through the looking glass. Trust them on Social Security? If you do, I've got some weapons of mass destruction I'd like to have you take--by force, if necessary.

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