Friday, February 18, 2005

Social Security - You're Both Wrong

There's been a mild debate brewing about whether Franklin Roosevelt intended Social Security to be replaced by self-supporting annuities. The idea appears to have reached popular discourse in a TechCentralStation article by Duane Freese, which was quickly followed by a Brit Hume piece on Fox News and a Wall Street Journal Political Diary posting by John Fund. On the other side, Keith Olberman, Media Matters, and Al Franken jumped in, accusing Hume of "misrepresenting FDR" and demanding that Hume resign. Since then, Megan McCardle, Kevin Drum, and others have jumped in as well.

The problem is, everyone is debating the public statement, but, as far as I can tell, no one has analyzed the actual bill that FDR was endorsing to see what FDR really had in mind. Let me break it down for you.

Al Franken is half-right

I hate to say this, but Al Franken is closer to correct on the issue of FDR's original intent than Hume and company.

The problem is that everyone is arguing solely about FDR's January 17, 1935 statement to Congress, in which FDR said:

In the important field of security for our old people, it seems necessary to adopt three principles: First, non-contributory old-age pensions for those who are now too old to build up their own insurance. It is, of course, clear that for perhaps thirty years to come funds will have to be provided by the States and the Federal Government to meet these pensions. Second, compulsory contributory annuities which in time will establish a self-supporting system for those now young and for future generations. Third, voluntary contributory annuities by which individual initiative can increase the annual amounts received in old age. It is proposed that the Federal Government assume one-half of the cost of the old-age pension plan, which ought ultimately to be supplanted by self-supporting annuity plans.

Understandably, Hume and others have interpreted "voluntary contribution" and "self-supporting annuity plans" to mean something more like Bush's proposal than the current system.

Unfortunately, Al Franken is basically right (on this one issue, mind you). If you look at the text of the actual bill that FDR had introduced on January 17, 1935, you'll see that FDR's plan was substantially similar to the system we have today. Specifically, the proposed bill included provisions that would have:
  • established an "Old Age Fund" to "hold" and "invest" money received through payroll taxes; (Section 404)
  • paid workers retirement annuities based on their contributions to the Old Age Fund; (Section 405) and
  • most crucially, would have invested the Old Age Fund in US government bonds. (See Section 404(a), which provides that the old age trust fund shall be managed and invested in the same manner as the "Unemployment Trust Fund" and Section 604(a), which provides that the Unemployment Trust Fund shall be invested in US government bonds or in other equities for which both principal and interest are guaranteed by the United States).

To be sure, there were important differences between FDR's initial proposal and the Social Security system we have today. For example, if a worker died before collecting his or her full annuity, the remaining value of the worker's contributions and interest was supposed to go to his or her heirs. (Section 405(c)).

However, on the essential point, Franken is closer to correct than his opponents. FDR's bill anticipated that old age benefits would be paid from public taxes while the Old Age Fund built up, and from the Old Age Fund as workers who had made contributions to the fund retired, (see Sections 1-4, 405). Therefore, because the Old Age Fund was almost certainly going to be invested in US treasury bonds, each current generation of workers was essentially going to be loaning the government the money to pay the previous generation's benefits. Under his actual bill, therefore, the shift from "public funding" to "self-supporting" was largely an accounting fiction - the fund was "self-supporting" on paper, but the government bonds in the fund would be paid off with money borrowed from current workers, and their bonds would be paid off with money borrowed from future workers. It was perfectly possible to allow workers to contribute more, but if those contributions went to the "Old Age Fund," as they certainly would have, then they too would have been a paper investment similar to the current Social Security Trust Fund.

Al Franken is also, of course, half-wrong

Although I think Al Franken is right on the facts, his accusation that Hume is a "lieing liar" and should resign is absurd. If anyone is a lieing liar, it's FDR, whose original statement dressed up his social security bill in a way that caused a bunch of people to read it the way Hume, Freese, Fund and others have. (This is why the "lieing liar" formulation isn't that helpful - you take every piece of spin your opponents state and convert it into an evil lie, then either ignore your own side's spin or argue that you were forced into it by those evil guys on the other side).

My suggestions:

  • Hume, Freese, and Fund should read the original bill, then either address it or issue a correction;

  • Al Franken and Media Matter should take up yoga or something and chill; and

  • We should all try to discuss social security and Bush's proposal (once we find out what it is) on their merits.

Update: For more on the controversy, see INDCJournal, Celluloid Wisdom, Confederate Yankee, Villainous Company, etc., etc., etc.

Thursday, February 17, 2005

Liberals Will Rue The Day, Part 1

It occurs to me that liberals are likely to rue the day they decided to start mocking the Bush administration for allowing a gay reporter to get a pass to the White House.

The most likely outcome is that the White House will tighten standards for reporters. I could easily see them deciding that only reporters who represent a certain number of paid subscribers can get passes, and that only news reporters can get in. If the WH doesn't do something, there's nothing to stop Media Matters from sending Oliver Willis to every press conference from now on, but thanks to Willis and others, I assume they will.

(Full linkage to follow).

Wednesday, February 16, 2005

The Pack Versus the Hive

Tom Maguire has an unusually good post today, which is saying something, because all of his posts are pretty good. His analysis of "pack-blogging" versus "hive-blogging" deserves to become as influential as linkers versus thinkers.

If I may add one self-referential item, I wonder where trackbacks fit on the pack<->hive continuum. My one Cornerlanche aside, I get most of my hits from trackbacks to other posts, which argues that they should be put in the "pack" column, but I'm sure that 100 times as many people read my trackbacks but never click on them, which argues for a "hive" classification. Maybe trackbacks split the difference, or burst the paradigm, or something.

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.