Social Security Fictions

Two of the most laughably overvalued words in Washington are “studies show” (right up there with “sources say”). In academia, a study is an occasion for thinking and discussion. In politics, a study means you can stop thinking and cut off discussion.

In recent years, ideological propaganda factories have sprung up posing as scholarly institutions. One of their functions is to supply studies that show whatever someone needs a study to show.

The granddaddy of this form of pseudo-academia is the conservative Heritage Foundation, which produces studies by the crate-load. No one would mistake Heritage for Swarthmore. Nevertheless, it is shocking how little pretense of scholarship and intellectual integrity a tax- exempt Washington operation like Heritage feels obliged to make.

Heritage has spent years beating the drums for Social Security privatization. Now President Bush’s backing has sent the organization into a frenzy of studies and briefing papers and special reports and so on. Earlier this month, Heritage devoted a short report to one of my own obsessive-compulsive writings on this subject.

My point, in brief, was that the Bush folks are having it both ways about how the economy will do over the next few decades. When they want to show that the Social Security trust fund is in crisis, they assume economic growth of 1.8% a year. When they want to promise riches from their private retirement accounts, they assume that stock market investments will grow 7% a year. Neither assumption is nuts. Both together are completely nuts.

According to Heritage, though, “Kinsley doesn’t understand finance.” Specifically, “a new study shows that stock market returns are actually higher on average in slower growing economies than they are in rapidly growing ones.” Heritage did not actually conduct this study. The author of its report, identified as “Research Fellow in Social Security and Financial Institutions in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation,” seems to have read about it in the Financial Times.

What the study, by three scholars at the London Business School, actually shows is that the ups and downs of the economy don’t coincide with the ups and downs of investments in stocks. This is provocative, but not impossible to explain. Stock prices are based on what people think is going to happen, not what is happening already. And widely held expectations about the economy are already reflected in stock prices by the time they come true.

The study does not show that stock market investments can grow more than three times as fast as the general economy over half a century or more. And Social Security privatization plans assume that this is not merely possible but the most likely economic scenario.

Please. The GDP these days is about $12 trillion. The total market value of publicly traded stocks is about $40 billion. If GDP grew at 1.8% a year for 60 years, it would be $35 trillion (in today’s dollars). If the market value of today’s public stocks rose 7% a year, after 60 years they would be worth $2,317 trillion. Then if stocks went up or down 1.5% in a day (as happens all the time), that swing would be the size of the entire U.S. economy.

Even if half of the vaunted 7% return on stocks each year was paid out in dividends and spent on wine and cigars, rather than retained by the company or reinvested in stocks, after 60 years stocks would be worth $315 trillion, or nine times GDP. By year 60 it would take a third of GDP just to pay the dividends.

This is not a policy disagreement. The case for Bush’s Social Security notions (he has yet to produce an actual proposal) is based on factual premises that are not just wrong, not just ridiculous, but obviously ridiculous.

As Jon Stewart has famously pointed out, our political culture is all too comfortable with disagreements of opinion. But it really doesn’t know what to do with disagreements of fact. That’s the only reason we’re even still talking about this tedious subject.