Privatization’s Empty Hype
As I wrote last week, I’m convinced that Social Security privatization is not merely a bad idea but a certain failure, and I offered a logical proof, challenging supporters to find the flaw or give up.
My argument (the full version is at latimes.com/kinsleyproof) defined success as bringing in more money than the current system. More money is the essential ingredient for either of the benefits usually claimed for privatization: closing the gap between projected benefits and revenues, and/or providing a bonus to future retirees.
More money for Social Security must come from somewhere. If reform doesn’t somehow increase economic growth, the money must come somehow out of the pockets of other people.
Increased growth requires more private investment or smarter private investment. Privatization would deflect some money from the Social Security trust fund into private investment, but the government would have to borrow an equal amount to replace it. So the total pool of capital available for investing wouldn’t change. As for smarter investing, the only change caused by privatization would be a new role for millions of small, naive investors. There is no credible theory that this would improve the wisdom of capital investment decisions.
Many people believe that stocks pay better than bonds in the (risk-adjusted) long run. If so, letting people buy stocks with part of their Social Security tax payments would improve Social Security’s overall return. But the bonus would have to come from whoever was silly enough, in this scenario, to buy bonds.
Privatization, in other words, requires Americans to accept a theory (stocks are better than bonds) that can be true only as long as lots of people believe that it is false. And the White House is campaigning hard to convince everyone that the theory is true. If the campaign succeeds, the theory fails.
Where am I wrong here? Gregory Mankiw, outgoing chairman of the president’s Council of Economic Advisors, sent me a polite e-mail saying now was not the best time “to engage in an on-the-record debate ... on the validity of your economic theorems.” He also sent excerpts from a speech on the Social Security overhaul that may help explain why he is outgoing, because he declared that “there are no free lunches here.” For this bromide he was dissed by Republican apparatchiks, though his point -- partisan enough, you’d think -- was: Don’t let Democrats make unfair comparisons between our reform and current unsustainable arrangements.
Many responders made a related point, “Compared with what?” Whatever its flaws, is privatization inferior to the current system with its looming shortfalls? One problem with this question is that privatization itself doesn’t address this looming gap. Privatization requires borrowing a “transitional” gazillion dollars to close the gap. With a transition like that, any plan will work, including no plan at all.
Berkeley economist Brad DeLong and blogger Mickey Kaus, among others, challenged my argument that nothing about privatization promises to increase private investment. They cited research by economist Martin Feldstein showing that Social Security reduces personal savings. Big surprise: If you know you’ve got a nest egg coming from the government, you may not be as avid a saver. It follows that less social security should increase personal savings.
But privatization is supposed to enlarge your nest egg, not produce a net loss. By the Feldstein thesis, that would reduce private saving. So once again, privatization relies on a theory that is wrong if it’s right, and right only if it’s wrong.
Stephen Moore, president of the Club for Growth, is probably the leading non-administration voice in favor of privatization. His e-mail, direct from President Bush’s recent economic conference, made only two fresh points.
One was that the Social Security money that people keep and invest for themselves amounts to “a big supply-side tax cut.” If Moore envisions reducing what people owe the government in taxes without reducing what the government owes people in benefits, if he therefore plans to solve the problem of a huge deficit by making it bigger, and if he fantasizes that cutting Social Security taxes will increase Social Security revenue, we are indeed back in a supply-side dream world. But if he contemplates reducing Social Security payments in proportion to the reduction in taxes -- and counting on people to make up the difference with their new investments -- people will be, and feel, no richer than they were before, and there will be no supply-side incentives.
Moore also argues, as did others who wrote in, that a smaller Social Security trust fund to borrow from would lead the government to cut spending. Maybe. But justifying a policy on the grounds that it will indirectly create pressure to cut government spending has become a tired old game.
Republicans control the entire federal government. If they want to cut government spending, they should do it. They don’t need to trash Social Security along the way.
