The Meathead Proposition

[acroyear]

The Meathead Proposition
Another Irrefutable Argument Against Privatizing Social Security

By Michael Kinsley

Sunday, February 13, 2005; Page B07

Try to forgive my obsession, but here is another proof that President Bush's designs for Social Security cannot work. This one's not mine. I first heard it from the actor and liberal activist Rob Reiner. Like the argument I have been hawking (see www.latimes.com/proof), this one doesn't merely suggest that Bush is making bad policy. It demonstrates with near-mathematical certainty that the idea he endorses can't work. Period.

Bush might as well be proposing legislation that two plus two is five. And if that happened, there would be no shortage of Republicans prepared to endorse this view, experts on arithmetic to declare that it is a very difficult question, research to indicate that the answer may lie anywhere between 2.3 and 7.09, moderate Washington sages to urge caution, media to report both sides of the question, and media critics to accuse the media of a subtle bias in favor of two plus two is four.

The Meathead Proposition (in honor of Reiner's most famous role) is this. The case that there is a Social Security crisis and the proposal to address it through "personal retirement accounts" both depend on assumptions about the course of the economy over the next few decades. These assumptions are highly speculative, but that's okay. What's not okay is to assume one thing when you claim there is a problem and something different when you claim that you've got the solution.

Actually, Bush abruptly gave up his claim that privatization will solve the problem of a looming shortfall in Social Security funds. The truth is that privatization schemes assume that the shortfall will be addressed -- by borrowing trillions of dollars -- as part of the "transition" to privatization. But Bush still claims that letting people keep and invest for themselves part of what they now pay into Social Security during their working years will leave them better off than if they get the benefits they are now entitled to.

How much better off depends on how much your government benefits will be reduced for every dollar you choose to keep and invest for yourself. That is one of the little details the White House hasn't yet enlightened us about. But this new system as a whole -- Social Security plus the private accounts -- must somehow produce more money than Social Security alone, or there is no point.

My previous argument, in a nutshell, was that even if these private investments do better than the government bonds in which the current Social Security surplus is invested, this won't change the total amount being invested in the private economy, or increase the economic growth that comes from private investment, because the government will just have to go out and borrow elsewhere to replace the dollars it isn't able to borrow from Social Security. And that means that every time someone puts a Social Security dollar into a private account, someone else must be persuaded to take a dollar currently invested in the private economy and put it in government bonds.

To get the scheme enacted, Bush must convince Americans of the exact opposite: that private-sector investment will make them better off than fuddy-duddy old government bonds. Basically, privatization schemes assume that the alleged inferiority of government bonds can be our little secret for the next few decades -- just us folks in the Social Security system. And so we can just unload a few trillion in government bonds on all those two or three Americans who aren't in Social Security, plus maybe some hapless foreigners.

Privatization schemes assume that this will have no effect on how much interest the government will have to pay, or what kind of long-term return you can expect on investments in the private economy. For example the right-wing Heritage Foundation, a major thumper for privatization, assumes that private accounts can earn a long-term, risk-free return of 4.7 percent after inflation, which they say is based on history.

But if free markets work the way they are supposed to -- and I would like to hear the Heritage Foundation say that they do not -- the effect of the government's announcing that government bonds are a bad investment and officially pushing people to put their money elsewhere will be to make it more expensive for the government to borrow money. So even if private stocks and bonds are a better long-term investment than government bonds (after factoring in risk and so on), they won't stay that way for long. Meanwhile, in their latest report, the Social Security trustees assume that growth in the nation's gross domestic product will slow from 4.4 percent to 1.8 percent in 2015 and will stay there for the next six decades. They predict productivity growth of 1.6 percent and average unemployment of 5.5 percent. From this and other data, the trustees predict that the trust fund will earn 3 percent a year (5.8 percent interest minus 2.8 percent inflation). This is their "intermediate" assumption, from which Bush concludes that the shortfall will hit the fan in 2042.

These assumptions about the unknowable are not unreasonable. Nor are the assumptions of the Heritage Foundation. What is unreasonable is using both sets of assumptions at the same time. Can a conservative investment in stocks and bonds grow by 4.7 percent a year, for decades, while productivity is growing by 1.6 percent and the economy by 1.8 percent? Theoretically possible, perhaps. But likely? On average?

If you start by assuming that one investment pays better than another, it's not very surprising (or persuasive) if this is also your conclusion. A dollar a year invested for 37 years (now until 2042) at 3 percent interest produces $66. At 4.7 percent, it's $95. If the Heritage Foundation is right, there is no crisis to fix. And if the Social Security trustees are right, the Heritage fix won't work.

If Meathead can figure this out, why can't W?

Comments

[rsteachout.livejournal.com]

Good Lord, Joe. Do these idiots ever actually read the tripe they print? I've heard better reasoning from plastered drunks who've been singing with pink elephants. Please go back and read the several posts I've made about the main problems with the SS system (both in my journal and on Dawnie's and whereever else). The main point these meatheads (and I don't mean just because Reiner played that role) are missing is restated constantly in those posts. This would almost be entertaining if it weren't for just how big a hole in the premises and reasoning there is. If this were a movie, the critics would be ripping it to shreds for the plot holes.

[acroyear70.livejournal.com]

never said i believed any of this one. I do agree that both sides are making assumptions about the future economy that may not pan out.

I do think there's a hidden scare tactic being built into it, strictly for political reasons: the assumption is that there is an ideal growth rate, both possible and productive, for the economy of america and that with the conservative SS system being based on that growth rate, there is pressure on them to actually maintain it. Thus, the counter: elect us and you know what the growth rate in the economy will be; elect the democrats who don't care about your personal accounts and who knows what will happen to *your* money. Where before that argument only worked on the investment community, with the new plan, everyone is an investor and thus subject to being scared into electing Republicans perpetually. Electing for "certainty", even though conceptually that's an impossible thing to reach. In 2004 it worked: I knew exactly what Bush was going to do (I just didn't like it); I didn't really know what Kerry was going to do (its hard for a Liberal to try to mount a partially centrist campaign and not sound vaccuous). For myself, for the sake of checks and balances, I was willing to risk the unknown. Obviously, a lot of the country felt otherwise.

When this passes (and I give no credence to the idea that the dems can mount a counter argument successfully given their house numbers) the dems will HAVE to climb on board 110% or they simply won't win another election EVER. Of course, until this year, the Republicans were in the same boat over the original SS plan since FDR. In spite of the fact that the war on terror was a key in 2004, the economy from the *stock market* perspective will become the ABSOLUTE ruler of every election for the next 40 years. Nobody will do anything to risk their retirement now that its in the hands of the economy and not safely protected by guarenteed bonds (or again, that's the *perception* of it, but keep reading...)

In the same day's Post is another editorial that actually talks about the safety-nets in the Bush proposal, including how the stock ownership will switch to the (generally) safer bonds when the worker gets closer to retirement age (probably around age 50), unless they choose otherwise. That way, if there IS a massive stock drop ala 1987 or 2001, just before their retirement, they don't get burned the way the British did.

I also note that the argument in *this* article is predisposed towards the world (or at least, the U.S.) having a "fixed" dollar amount. Money that doesn't go one place has to go somewhere else. Now there is some validity to this as seen in the 2001 crash. One major reason for the bubble burst was the fact that people could, and in 2000 a lot of newly rich geeks did, temporarilly withdraw (well, "borrow") from their 401K without penalty, provided it went to real estate for their first house. Sounds good on paper, but the reality is that it caused a significant drop in the bottom line as it dropped the cash flow in wall street.

on the other hand, the whole idea of investments is that of generating value which can generate "money" even without a "raw material" to work from. information management can be the most valuable commodity around yet that requires no raw material except food and shelter for the geeks that write the programs and the managers that design them.

also, the U.S. is hardly a fixed or "closed" economy, given entire world and our trade with them in many areas.

its comparable to those anti-evolutionists who argue that God must have created life because the 2nd Law of Thermodynamics implies that the universe should be falling apart, not getting more complex as life does -- it ignores the fact that the law only applies to closed systems, and Earth is not one of those.