Monday, February 14, 2005

A Very Odd Kevin Drum Temper Tantrum

The normally thoughtful Kevin Drum throws a surprising amount of heat and zero light on social security privatization with this post, which Tom Maguire takes apart here. Some background:

1) Two weeks ago, NYT Op Ed columnist, Paul Krugman, who I understand claims to have some kind of expertise in economics, wrote that social security "schemes" have been assuming a long-term growth rate of 6.5-7 percent over inflation for the next 75 years. He assured his readers that this rate of return was "mathematically impossible" unless the US GDP growth rate was much higher than is now predicted, and then asserted that if the US GDP growth rate is higher than predicted, there will be no social security shortfall.

2) A few people, of whom Tom Maguire is the most fun to read, pointed out that this statement sounded, well, not true. In posts such as this one, various kibbitzers pointed out that Krugman's "mathematically impossible" statement wasn't correct. Not only have stock returns grown faster than the economy for the last thirty years, they could theoretically continue growing faster than the economy if (i) the share of GDP going to capital increases relative to the share earned by labor; (ii) US stock returns reflect foreign investments and profits made by companies traded on the US stock exchanges; (iii) the investments in the stock privatization accounts are diversified into international stocks; or (iv) there's a significant cash-out from the system by retiring baby boomers. (There's also another quibble about whether Krugman was right about the effect of increasing GDP growth on social security financing, which depends on whether the growth is a result of an increasing number of workers or increasing productivity per worker, but that's not material to Drum's tantrum).

3) That debate is now over, and Maguire won. Brad DeLong has weighed in, saying that Maguire is at least technically right that it is mathematically possible for stock return growth to exceed GDP growth. Professor Delong is a respected economist and blogger, and I think most of the blogosphere will recognize him as offering the final word on whether Maguire is technically right and Krugman technically wrong.

4) Rather than moving the debate to whether the various economic assumptions are reasonable and what those assumptions mean for social security privatization, Drum and fellow usually-reasonable blogger Matthew Yglesias have decided to move the debate to whether, despite being correct, the people who disagree with Krugman nevertheless suck.

I'm really astounded. If Yglesias and Drum can't have a reasonable discussion with Maguire, who is not provacative at all, and was apparently just trying to work out the economics, who can they have a fair debate with? It wasn't like Maguire was jumping up and down calling Krugman a "lieing liar," although by Al Franken standards, I think Maguire would be entitled. Drum and Yglesias appear to be arguing that Macguire is wrong because he didn't personally write about this issue before Krugman brought it up, but that's silly - the argument about whether it's plausible to predict increasing stock growth relative to gdp growth has been going on for years - here's a piece hashing out these same arguments at the time of the 2000 election.

Seriously, I think the dialectic has actually revealed some good questions:

1) Including the question of whether the privatization estimates of stock growth and economic growth can be reconciled, are each of the each of the estimates reasonable? Why or why not?

2) Is Drum right that over the past 75 years, the return on stocks has matched the increase in GDP growth? I had thought that for the past 30 years, stock returns have significantly exceeded GDP growth. Does that mean that returns were low for the 45 years before that or is one of us wrong?

3) If stock returns are lower than 6% over inflation, what does that imply for the privatization program? Krugman and Drum must expect there to be some risk premium for equity holders - how much do they expect and why?

These are all interesting questions - I look forward to a time when Drum has calmed down enough to address them.