Wednesday, May 25, 2005

Getting Back to Bibamus

In some comments on a post last month, Bibamus makes the following observation about the Social Security reform debate:


Part of the problem with this whole debate is that so many different people are in it for so many different reasons. While there are a thousand different bad arguments for privatization (more than a few with Luskin's name to them), it seems to me that there are at least three good ones, where by 'good' I mean intellectually consistent - not necessarily convincing (to me):

(1) Arguments related to pay-as-you-go Social Security's depressing effect on saving.

(2) Arguments related to the inability of the government to pre-fund its Social Security liabilities.

(3) Arguments related to 'freedom to chose' type beliefs, such as the one that Mankiw makes in his response to BDK.

There may be more but these are the ones that occur to me at the moment.

Stepping back from the details of the present debate, #3 is the most compelling argument. If you believe in limited government, as I do, then you would support a Social Security system that is no bigger than it has to be in order to keep seniors out of poverty induced by chance events. That means that the system would pay a flat benefit as an annuity at the poverty level--and no more. Individuals would then be free to choose how they wanted to prepare for their old age (or not), in accordance with their own preferences. But, as Bibamus noted, the current debate really isn't taking place along these broader themes, and so Mankiw's remark may have seemed out of place.

I first got into research on this subject based on a combination of #1 and #3, where #1 would be augmented to include distortions to the labor market as well as the capital market. In the current debate, a review of the archives would suggest that I am pre-occupied by the projected insolvency and that most of my arguments are motivated by #2. I don't think there is any way to suggest that the government could pre-fund future obligations through running surpluses inside the Social Security system over any sustained period. Whatever lockbox there is has 536 keys, but more importantly no lid.

For me, the debate is becoming less and less about philosophy or efficiency, and more about the inequity of passing such large burdens off to future generations of taxpayers. I freely acknowledge that this burden is coming not just from Social Security, but the growth of Medicare and the inability of the government to balance its budget. A sensible fiscal policy would have the on-budget deficit sum to zero over the business cycle and all long-term entitlement programs to have zero projected long-term actuarial deficits.

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3 comments:

Bibamus said...

Thanks for getting back to this, as I am personally fascinated by this (side) issue. It occurred to me after reading the Mankiw article that the influence of argument #3 among economists (and probably non-economists as well) was more substantial than I had previously thought, and so I was interested in your take as well.

I find this so interesting because it supports a growing suspicion of mine that the fundamental divide on this issue is not necessarily an economic one, but a philosophical one. And yet both sides, each for its own reasons I suppose, seem to have decided to conduct the public debate on primarily economic terms.

One such reason is that, as you surely understand, #3 "is the most compelling argument" only if you already believe it. That is, it may be compelling, but it is not persuasive. To those who do not already believe that limited government is an end in itself, or who dismiss "free to choose" type arguments on philosophical grounds, such arguments are unconvincing.

It isn't just that 'arguments from Friedman' (such as Mankiw's) seem out of place; rather, something like the opposite: these arguments seem more honest and more direct than the public debate. What Mankiw articulated, and you seem to confirm, is that these are the fundamental reasons why people are so passionate, both in their support and their opposition, about personal accounts. I'm not saying that the economic arguments aren't serious and good and all that. But it would seem to me unfortunate if, for purely rhetorical purposes, we decided to refrain from having a debate on the terms and about the issues that really divide us.

JG said...

“I don't think there is any way to suggest that the government could pre-fund future obligations through running surpluses inside the Social Security system over any sustained period. Whatever lockbox there is has 536 keys, but more importantly no lid.”

So you don’t think taxes should be upped to 28% of GDP today, with a surplus of 7.5% of GDP going into the lockbox for the future, as per Krugman?

Let’s see, that’d be a 129% income tax increase across the board (or the equivalent) today. Then when the time came to pay off those bonds, think how high taxes could go. ;-)

“For me, the debate is becoming less and less about philosophy or efficiency, and more about the inequity of passing such large burdens off to future generations of taxpayers.”

Yes ... I started to put some thoughts about that here, but when logorrhea strikes one doesn't know when to stop ... so rather than waste your bandwidth I've put them here to waste my own. FWIW.

PGL said...

#3 was Barro's 7/3/2000 (Business Week) reason as well as Becker's 2/25/2005 (WSJ) reason. As you may notice, I have a ton of respect for both of these op-eds - even if I politically am not a big fan of carve-out privatization for reasons that Mark Thoma is so ably expresses.