Monday, December 20, 2004

Answering Some Comments

From the comments on my last post, I see that I should not quit my day job (or this one) to work as a consultant to the Democratic party. In all fairness, I should point out that others in the blogosphere with views generally dissimilar to mine have made similar points. See this post at the American Prospect online:

The Democrats' best option here, it seems to me, begins with what Kerrey and Rudman laid out. The Dems need to come up with an alternative to Bush's plan that can be framed as change and as solving the Social Security problems that they too have been yammering about for more than a decade.
Brad DeLong also makes some useful points about how things have changed to the point where he is out of the crisis mode (i.e., his view that the uptick in productivity since 1995 looks to be here to stay and this is not reflected in the Trustees' projections). However, I think these comments are incomplete. In particular, leading demographers think the Trustees' assumptions about longevity understate the decline in mortality and thus program costs. (See this paper for a recent example.) I discussed these issues in more detail in an earlier post.

So I still think we are in crisis mode, or, more precisely, that we are in "impending crisis" mode. If we do nothing, we hand a growing stream of annual Social Security shortfalls to future generations of workers with little policy flexibility to deal with them. I am trying to avoid that outcome. In the whole set of posts that I have done on Social Security, I haven't asked the Democrats to do anything that is more difficult than what I have asked the Republicans to do. I acknowledge that the problems facing Medicare are larger than those facing Social Security. That doesn't mean that we shouldn't solve Social Security's problems.

One comment asked that I find an example of a policy that the Bush administration has implemented that it has not messed up. In the realm of economic policy:
  1. I was extremely disappointed to see the Medicare prescription drug benefit add an enormous unfunded obligation when we already face long-term shortfalls in our old-age entitlement programs.
  2. Looking forward, the persistent deficits in the budget forecast, even with above-potential economic growth and no particular fiscal challenges, are deeply worrying. The "cut the budget deficit in half in 5 years" approach is far too timid for my tastes.
  3. Looking backward, I think the tax cut packages in 2001 and 2003 were appropriately timed and of the appropriate magnitude. They averted what could have been a much deeper reduction in output. But they have clearly set us up for #2.
  4. The bright spot for me is international trade. With a few highly visible exceptions, the Administration has generally worked to lower trade barriers. This has occurred despite the stalled WTO, particularly through free-trade agreements in our hemisphere. I give the USTR's office appropriate credit.
But most of this is neither here nor there. The critical issue with Social Security reform is to restore solvency. As I watch this policy process unfolding, I get very nervous when I hear personal accounts discussed without a discussion of restoring solvency. All sugar and no medicine would equal very bad policy.

Other blogs commenting on this post


Patrick Sullivan said...

Whether it's a "crisis" is a matter of semantics. And those basing their arguments on that are ignoring the fundamental economics. Probably deliberately, in the maneuvering to avoid being the messenger who delivers the bad news.

Here's the pictorial of the economics:

Note that when the Medicare-Medicaid D-Day comes before the Social Security D-Day, it just makes it that much more difficult to find a way to redeem those trust fund bonds for Social Security recipients.

Anonymous said...

Professor Samwick: I read your blog because you are considered one of the grown-up Republicans by Professor Delong. These days I count you among the unicorns of the Republican ilk.

Although the timing and size of the tax cuts seem to meet your approval, what about the skew? Who got them and what did they do with them? Our jobs have not recovered. And there is growing evidence that some percentage of this tax cut for the wealthy has gone overseas and is not creating jobs here. Note yesterday's news on Yahoo to this effect. And there is duration: I have read that the stimulus of a tax cut is short lived. These tax cuts are essentially to perpetuity. This leaves us little to no room in the future for a future fiscal stimulus.

I find the standard Republican position on privatization deceptive and predatory. The Democrats are for the most part awol. Good governance, where are you?

The credo 'first do no harm' holds for economics and medicine. I think we can easily wait a few years on Social Security. Insolvency will be no closer. And the failure to address the Medicare issue specifically, and the entirety of health care financing in general might adversely affect the longevity issue you cite. And it directly affects one of the strategies in play at establishing solvency to 75 years: extending retirement age. I think it will be tough to solve the problem of the Trust Fund with a reasonable mix of changes not knowing what lies ahead in these other areas.

And at the bottom of all this is my profound mistrust of the motives of this administration. The idea that the government should not be in the social safety net business at all is just too fashionable to not take seriously.

As a future topic I would love for you and others like Professor Delong to examine the issue of reneging/not reneging on the repayment of the Trust Fund. I think this is really part of the agenda although I hope there are enough grown-ups around to head this off. Many of these blogosphere discussions devolve to what will happen in 2018 instead of what will happen in 2042.

While it might not be obvious, I very much appreciate your efforts in writing on this matter and look forward to reading more of this in the future.

Tom DC/VA said...

But if Medicare is a bigger problem, and if there is also a big short term general fund problem caused by the horribly structured tax cuts of 2001 and 2003 (hint: don't make structural changes in response to temporary problems), why waste all this time talking about a problem with Social Security old age insurance that may not even happen?

Talking about a potential SSOAI problem at this point, when there are so many other real problems facing this country in the short term, makes as much sense as planning one's next car purchase because you've only got 20,000 miles left on the tires. That problem can be fixed in a relatively low-cost manner, and a sleepy truck driver could render the decision moot at any time. The SSOAI problem is similar.

Now, if you can provide an argument as to why the President should spend his political capital on fixing a problem that isn't even close to happening yet, instead of on problems he himself has created and that are affecting us today, I would love to see it.

Anonymous said...

I have been wondering: is there a statistical breakdown of where stock market gains (or losses) go by investor decile?

If the market averages 6% per year (as I recall) over the long haul, some beat that number and some don't. Joe six-pack does not beat that number. I suspect the old money with 7 and 8 figure accounts at the big brokerages houses beat the number. Some will lose money in real terms, as would anyone who invested in Enron.

A very crucial question: what can the bottom 30% of investors (tens of millions of retirees) expect as a return on their investment in the ownership society? Or are all our investors going to be above average?

I think a truly honest analysis of privatization has to pose this question to America: do you feel lucky? And if you are not lucky, how will you get by?

By the way, the Medicare Trust Fund goes negative next year.

Patrick Sullivan said...

The best way to lose (or underperform) money investing, is to trade often in hopes of beating the average.

Long term, buy and hold is the best strategy. You can't get any more long term than investing a small percentage of each paycheck over a 50 year long working life, in index funds.