George Orwell might say returns

I had a short lived unviewed blog entitled George Orwell might say. The idea is that, in spite of the disadvantage of having been dead for 54 years, George Orwell could probably make more of a contribution to current debate than living pundits. In the post above George debates Eugene Volokh.

Orwell's experience is of interest to me because I believe two contradictory things some of the time. I am both sympathetic with swinish Benthamite utilitarianism (maximise pleasure minus pain and forget about being true to our better natures) and absolutely opposed to using the criminal justice system for revenge. Yet if I accept all pleasures as valuable, why do I reject the pleasure of revenge.

Maybe, deep down, I don't believe revenge is sweet. Personally, I rarely want revenge for anything (this reflects the fact that the world has been very very indulgent with me). I am fairly sure that if I ever had reason to avenge something any brief pleasure would be outweighed by a permanent sense of guilt.

Of course it is more likely that I have semi convinced myself that I believe two contradictory things.

Do I disagree with Brad DeLong and Michael Froomkin about pre-funding social security too ?


This is getting ridiculous.

On social security, Brad does advocate eliminating the $ 90,00 ceiling and more boldly advocates taxing all income. Still he doesn't explain what he wants to do with all the money. He says benefits are bsically OK so it must be that he wants to cut the Social Security tax rate.

I agree that this would be good, but I think pre-funding would be better. I have two reasons. First, the US national saving rate is too low. Other things equal pre funding would help that. Pre funding has made Singapore one of the richest countries in the world.

Now other things are not equal. The strength of this argument for pre-funding depends on how one thinks pre-fuding would affect the general fund surplus/deficit. I am confident that, the indirect effects of a social security administration surplus on the general fund deficit are less than one for one. Believing in one for one (or more) offset would lead one to imagine that any tax increase is useless, because it will just lead to tax cuts elsewhere.

Second, in steady state, prefunding offers a better deal to workers than pay as you go if the rate of growth of economy is less than the rate of return on capital. This is clearly true in the us In as noted by Abel Mankiw Summers and Zeckhauser some time ago, since capital is a source of funds not a sink. The only way to make the social security administration earn a rate of return less than the growth rate of the wage bill (so prefunding is costly to beneficiaries) is to force it to invest badly. This is the current approach, but it doesn't have to be that way. Like Ronald Reagan and Bill Clinton, I think the SSA should buy stock and corporate bonds as well as t-bills.

One might argue that this would give the SSA too much power over firms. However, there is no need for the SSA to be allowed to vote its shares (actually it should be required to vote them proportionally to how other shareholders vote theirs). There would have to be a rule for which shares the SSA would buy. That means I have to address the concerns of the renegade Froomkin.

Froomkin wrote

"Start with the buying end. Buying will either be mechanistic, delegated, or discretionary. If it is mechanistic, we have the wrangle over the formula, which then distorts markets unless the formula is to buy a basket consisting of the entire stock market (even this, arguably, has secondary effects on the bond market, but let’s not go there).

In fact, this is the only buy/sell formula that doesn’t create huge problems right off: have the feds buy a basket that represents all the shares in a multiplicity of exchanges (not just the big ones). But this isn’t easy to do, especially for small-cap stocks, without distorting markets."

The rest of the post argues that any rule other than buy a basket consisting of the entire stock market would create distortions. I consider the rest of the post to consist of setting up straw men and knocking them down. I argue that the SSA should buy the market. Froomkin's argument against is that "this isn’t easy to do, especially for small-cap stocks, without distorting markets." Now the SSA is not agile and congress is anything but agile. There will not be a problem with a sudden huge order for stock. Rather purchases will be highly predictable. In theory this should not affect relative prices of different shares (note that for me theory is a pejorative term). In practice, it will, as suggested by Froomkin drive up the price of low cap stocks compared to high cap stocks. Curiously there is strong evidence that this price is currently too low. Since I don't think the market is efficient, I don't think that a public intervention which changes stock prices necessarily moves the market away from efficiency. Indeed the guess that stock is still underpriced compared to its value to the US Treasury (which has extra special risk bearing capacity) is the reason I think the SSA should buy stock.

Now I think there are risks (Froomkin hints at them). If SSA bureaucrats are required to buy stock they are required to ignore their suspicions about market manipulation. There could be two forms. One is driving up the price of a stock by other than arms length purchases. The other is cornering the market for a stock. Both are illegal, but both are not always easy to detect. In both cases, the markets ability to survive such tricks might depend on private agents deciding not to buy stock even if it can't be proven beyond reasonable doubt that its price is manipulated. A legal requirement to buy unless manipulation is proven will make such frauds more profitable. I don't know enough to estimate so I just guess that this is a tolerable cost.

American Taliban critic

Oliver Willis ably defends his claim that the religious right are the American Taliban.

but he neglected to mention one point of similarity between Mullah Omar and, say, Ralph Reed
They are crooked hypocrites.

Omar had an air conditioned stable for his cattle: no sinful luxury (like music) for people, but can't let those cows sweat. An Omar banned alcohol but decided to look the other way and not notice opium shipments (provided the growers tithed).

Reed is similarly consistent

see E.J. Dionne citing Susan Schmidt

"Perhaps the most bizarre example of this contradiction was detailed by Washington Post reporter Susan Schmidt. When one Louisiana tribe, the Jena Band of Choctaws, won initial approval of a casino three years ago, another tribe, the Louisiana Coushetta, hired Abramoff to block the potential competition. Abramoff and an associate, in turn, paid $4 million to Ralph Reed, a Republican consultant and evangelical leader, to organize local anti- gambling sentiment against the Jenas. To get the job done, Reed worked with his fellow evangelical James Dobson."

Just as pure as Mullah Omar.

Dionne and Schmidt were scooped by indianz.com citing Mother Jones

Can you believe thiis ?

Ethics Seeks Big Budget Increase
By Jennifer Yachnin
Roll Call Staff
March 17, 2005

House ethics Chairman Doc Hastings (R-Wash.) announced Wednesday that his panel will seek to create an “ethical culture” in the chamber through increased education and outreach for both Members and staff.

This is the committee which is currently not able to function because the Democrats are not willing to vote for a rules change which would make it necessary for at least one Republican to agree before a congressman cough Delay cough can be investigated. Aside from that how can the chairman of a committee which is not, at the moment, technically functioning ask for a budget, let alone a budget increase.

I guess the idea is that, in the last congress, the ethics committee was grossly biased in favor of ethics and now, just for balance, they have to do something against all ethics and decency.

Death Wish

This time death penalty wish. I am very glad that the supreme court has finally ruled that killing people for crimes committed when they were children is unconstitutional. In the article in the New York time reporting this (redundant link) I read something which suprised me into saying "come on. Your totally full of ... error"

Professor Blecker said that analysis was based on faulty premises.

"The problem is that when you look at the opposition of other nations," he said, "they're looking at governments and not people. Every European government which abolished the death penalty did it in the face of overwhelming political support."

I knew of only two relevant number 50% the fraction of Italians advocating death for Mafia bosses in a poll taken immediately after the murder of Paolo Borsellino (2nd investigating magistrate blown up in a month). The conclusion drawn by all Italian journalists is that polls taken immediately after dramatic events are unreliable because, of course, they know Italians are against the death penalty because they and all of their friends are opposed. the other is 48% support in Tuscany, which is one of the most left wing parts of Italy not to mention the region with the most catholic communists (who are definitely opposed for each reason). Also, of course, I know support for killing people is very high in the UK.

I assumed, however, that Blecker's claim was so wrong that a bit of google would show it to be nonsense. Well I know it is hard to look up what people thought when the death penalty was being abolished (1946 in Italy) but I am going to interpret it as making a claim about then now and all time in between (otherwise it would be technically true but deliberately misleading).
I still think that claims including "every" are likely to be false, but my googling amazed me.

I got "Up to 77 percent of Britons support the reintroduction of capital punishment, and close to 50 percent think the same way in France and Italy. Even in peace-loving Sweden, a 1997 poll found that 49 percent of Swedes wanted the return of capital punishment"


(ok AEI is reliable like I work for Columbia University but hey).

I have long believed that, at least for Italy, the huge difference is that US democracy is more majoritarian, I mean not just populist but effectively democratic, and that the air of intellectual and moral superiority typical of Italians talking about the death penalty in the USA is a result of comparing the Italian elite to regular people in the USA.

But I mean Sweden ?!? you have got to be kidding me right ?


update: Morten (last name withheld on his request) explains in an e-mail

"Yes, in a way they are kidding.

That poll (as I remember it) was formulated as "do you believe there are some crime that should be punished by capital punishment" or something to that effect. That means if you go "hm, well I wouldn´t condem executing Hitler" you should answer "yes". As well as a debate on capital punishment it also caused a debate on polling-phraseology, and I think the tabloid (or was it a radio station?) that ordered the polling apologized.

If you mention this on your blog (which btw looks nice and I found it via fistfulofeuros) please withhold my last name and emailadress. Thanks."

I am sure the responses would have been different if the question was more abstract "do you support capital punishment". To me one's answer to the briefer question should logically be yes if one's answer to the actual question is yes, but I'm sure that many many people would answer yes to the actual question and no to the briefer question. Also one can ask a specific question as in "do you think that someone who killed 12 strangers should be put to death if convicted in a fair trial" or "do you think a hitman who kills for pay should be put to death if convicted in a fair trial". by the way, I think there are very very few countries left who use death as the normal punishment for murder or even for pre meditated murder (U.S. certainly not among them). In any case, it is not clear how many Swedes support capital punishment for crimes other than genocide, but it is certainly less than 49%

As in the Italian case mentioned in my original post, I suspect that the focus on polling methodology reflects a gap between elite Swedish opinion and popular Swedish opinion.

Comments are working on blogger

Click on the orange 3:15 AM below to read an actual comment on this blog and my reply.

To comment click on the hour under the post on which you want to comment.

update: now it says permalink and comments and the hour.
Thanks to David Weman for, among other things, the suggestion that I make the link to comments explain that it is the link to comments.

hmmm not another stolen election.
Hitchens via Gary Farber via Mark Kleiman

Something Brad DeLong explained to me which is not totally obvious

In standard general equilibrium theory, the market outcome is Pareto efficient. One of the standard assumptions is that people are totally selfish and care only about their own pleasure minus pain due to consumption. One might wonder if the result can be generalised to the case of people who care twice as much about their own pleasure minus pain due to consumption as that of others. I think that, decades ago, I guessed that assuming that people could give to others would imply the result that free trade and free giving would lead to a Pareto efficient outcome. If I did, I was wrong. The assumption of total selfishness is required for the conclusion that Laissez Faire is Pareto efficient.

If people are altruistic but not 100% selfless then coercion in helping the poor is Pareto improving (Brad explained this to me by the way). Let's say we care about strangers one half as much as I care about people in my family. This is an immense degree of atlruism (my poor kids would be living at lower third world levels if I did). However, at the point when I am indifferent about giving more, you would want me to give more to the poor. The reason is that you don't care any more about me than a poor person.

This is true even if one of the reasons I want to give to the poor is that I know it will make you feel better (and I care about you too).

This means that we would both be happier if we were both coerced to give more than we want. The poor, needless to say, would be much happier.

If people are altruistic, then there is an externality from giving (you give to the poor so I feel better because the poor are less poor). This means that the amount of giving optimal for the rich is more than we would choose acting as individuals.

Charity with no is Pareto efficient only if people are totally selfish or if they are totally selfless caring no more about their flesh and blood than total strangers.

I disagree with Matt Yglesias too.

Yglesias argues that Democrats should not propose a plan to save social security

I think the Democrats should propose a reform which consists entirely of eliminating the cap on the payroll tax. There is overwhelming support for such a proposal in every poll on the issue. It would cover the social security shortfall for, at least, the next 75 years.

Yeglesias' argument is that prefunding is a fraud, so an increase in FICA is just like an increase in an other tax. Then he concludes arguing that Democrats should instead propose reducing the general fund deficit by increasing some other tax. That is two things are the same and therefore one is better than the other.

I accept the general rule of political strategy that one should avoid specific proposals about spending cuts, one should not take strategy advice from ones adversaries and one should not distract attention from Bush while he is trying to defend a terrible and unpopular proposal.

Every rule has an exception. The elimination the cap is such excellent policy and such excellent politics that it is an exception.

There is no law of nature which implies that FICA must be regressive. There is overwhelming support for making it, at least, a flat tax on payrolls. Furthermore, the Democrats have the advantage of flexibility since they are in opposition. On social security, no decent compromise with the Republicans is possible, so There is no reason for them to try to come up with a proposal which is acceptable to Republicans. Instead they should make a simple effective wildly popular proposal which is absolutely unacceptable to the Republicans.

Paul Glastris points to, praises warmly and criticises mildly David Cutler and an article about his ideas on health care reform written by Roger Lowenstein in the New York Times Magazine

Cutler's points are that, currently health care providers are not rewarded based on health outcomes. There is strong evidence that such incentives work and that they would actually reduce health care spending, since preventive medicine is highly cost effective.

In the late 90's, HealthPartners, a not-for-profit health plan in Minneapolis with 630,000 members, instituted a bonus system to providers. It paid doctors extra if their diabetic patients got blood sugar and cholesterol below certain levels, ceased smoking and took aspirin daily. [snip] Cutler and a team of colleagues analyzed the economic payoff. They found that the program reaped huge rewards. It cost $330 a patient and was expected to save roughly $30,000 over each patient's life.

The problem, as pointed out by Cutler, is that HealthPartners did not capture most of the benefits. Instead Medicare will get most of them. Now for starters, I think there is a very strong case that Medicare should reward doctors for convincing their patients to take care of themselves. Starting preventive medicine at 65 is not ideal, but better late than never. Also, I wouldn't be surprised if medicare could save money by paying for efforts to help uninsured people younger than 65 quit smoking, lose weight and diagnose and control diabetes and high blood preassure. I don't mean residential fat farms. I mean you can go to a doctor's office to get nagged.

Glastris is very impressed. His mild criticism is that Cutler is too politically pragmatic to note that the best way to implement this approach is to socialize medicine (as is shown by the experience of the Veteran's Administration). The point is that if people move from one provider to another, the benefits of preventive medicine do not acrue to the group that provided it. If people are all forced to use a single providor (or pay out of pocket) this problem would be resolved. Needless to say, Cutler must know that such a proposal is political poison.

I post just to add that rewarding HMOs and insurance customers because their clients are healthy would make the cherry picking problem worse. There is a big problem that everyone wants to provide health care to healthy people. Rewarding outcomes would almost certainly make this worse. In particular it would be almost impossible to distinguish between efforts to help people drop unhealthy habits and efforts to drive away people with unhealthy habits. Preventive care involves a lot of tough love and it is hard to distinguish that from just being nasty. Even if one rewarded changes in obesity or smoking one would reward efforts to find smokers who really want to quit and fat people who really want to lose weight. You could make a killing with a plan open to everyone, in which participants get health care but have to run a mile a day or pay.

The cherry picking problem, the benefits spill over problem and the interaction of cherry picking and rewards for outcomes all suggest the same solution which is to give people fewer not more choices about health care providers.

Personal Accounts and aggregate saving.

I am going to attempt a medium serious analysis of the effects of personal accounts on aggregate private saving. I think it is clear that, other things equal, they would cause a reduction in private saving making it more not less difficult to finance both the retirement of baby boomers and capital formation.

tIt is agreed that the plan will require the government to increase borrowing to pay current benefits. It is claimed that this is no problem, because it is like pre-paying a mortgage. This argument is silly, because pre-paying a mortgage can be a very costly mistake. In particular, if the mortgage interest rate were as low as the return on social security contributions, it would be a very bad idea to pre-pay a mortgage.

Now to discuss personal accounts, one needs to know what exactly the Bush plan is. Bush is keeping it secret so I will make two guesses.

The first is that for every dollar put into personal accounts the guaranteed benefit will be reduced by an amount such that the expected loss in guaranteed benefit discounted at a real interest rate of 3% has a present value of $1. I will call this plan 1.

Under plan two the guarnateed benefit will be multiplied by the fraction of contributions not put into personal accounts. I assume that if this fraction varies over time, then the amounts are made current to the date of retirement using the rate of growth of average wages as an interest rate (that is dollars at t1 are converted to dollars at t2 by dividing by the average wage at t1 and multiplying by the average wage at t2).

Plan two is more generous than plan 1. The effective return on contributions to social security is, on average, 2%. I read in Brad DeLong's
excellent critique of Greg Mankiw's TNR article that it is "the upper middle class and the rich...effectively borrow from their defined-benefit Social Security account at 1.5% or 2% above inflation to invest their money... poorer Americans ... borrow[ing] from their defined-benefit Social Security accounts at 3% plus inflation?" Thanks Brad.

Also note plan 1 does not offer a better deal to the rich. They get a lower return on contributions to social security but would get the the benefits cut as if they were as generous compared to contributions as they are for the poor.

Personally, I guess plan 1 is more likely, since even Republicans have noticed that they have already given the farm to the rich and they don't want to give them the farm house too. Still I will talk about both. Also Brad assumes that plan 2 will be implemented and *still* seems to think that there is an 80% chance that the effect on national savings will be small. I don't get it.

OK finally the analysis

First I will assume a standard neoclassical growth model with Ricardian equivalence. This is a standard benchmark model. Non-economists will assume that I must be joking. I will assume that aggregates like GNP, interest rates and average wages are perfectly forecastable and that everyone forecasts them perfectly. I will assume that the present value of future tax revenues is equal to the present value of government spending plus the current debt (this isn't really an assumption if I just call a default on debt a tax). Importantly I assume that people belong to infinitely lived dynasties and that each generation leaves a positive bequest to the next. That is, I assume that each person has one parent and 1+n children with 1
In this case, social security reform does not affect aggregate saving. In fact, social security does not affect aggregate saving. Now one might assume that back when social security was introduced it had to cause an increase in the consumption of the first generation of beneficiaries who got something for nothing. It did, but it wouldn't have if they were all giving bequests to their 1+n children and were totally rational. They would have understood that their children were paying for their pensions, saved all the money and given it back when they died if not sooner. Social security is a system which redistributes money from one generation to the other. If everyone is giving bequests, the currently oldest generation is choosing exactly how it wants money distributed among generations, so giving them more money has no effect on the distribution. Clearly this model is not realistic or useful when discussing the effects on savings of social security and its reform.

The model which is generally used is the Diamond OLG model with capital. Same as above except the old give nothing to their children. In this case taking from the young and giving to the old makes the old richer. The first generation of social security beneficiaries definitely spends more. That was, I think, a large part of the point. Remember there was a depression going on and safe nominal interest rates were almost exactly zero making monetary policy ineffective (not to mention the FED was clueless).

In this case an elimination of social security would cause reduced private consumption, since retirees would consume less (in some cases they would consume 0 and starve). However, if currently earned benefits are paid, but no future payroll taxes are collected or benefits earned (elimination with promises kept during the transition) then consumption would increase. The burden of the benefits owed by the currently young to the currently old would be shifted to the public debt. This would eventually have to be repaid generations in the future, but the current young wouldn't care about that and would consume more.

The argument works equally well for plan 2 which would amount to a one third elimination of social security. Because the social security administration has obligations to the old, it must, on average be a bad place to invest compared to the private sector. This is obvious, well known and noted by, among many others, Johnathan Chait in the TNR. Plan 2 would effectively be a huge transfer from the unborn to the currently young, since the unborn would have to pay for promises to the currently old by repaying the huge public debt. Under plan 2, personal accounts are like repaying a mortgage when the bank is currently charging you an interest rate far below the market rate.

Another way of putting this is that, since the return offered by the social security administration is (and must be) below market rates, the present value of the reduction of benefits due to personal accounts must be less than the present value of money diverted into personal accounts. Thus even if one counts the social security shortfall as part of the debt, total public indebtedness would increase if plan 2 were implemented.

Now one might wonder if the Diamond model is a bit hard on the heartless parents. Maybe the model with Ricardian equivalence isn't so far from reality. If so, the increase in public debt due to plan 2 personal accounts would not reduce aggregate saving. Also, if so, budget deficits do not reduce national saving (as is welll known). The argument that plan 2 would not add to the deficit is identical to the argument that deficits don't matter. No one who is concerned by the budget deficit should accept the argument that plan 2 would not reduce aggregate savings.


So what about plan 1 ? I will, for the moment, stick to the assumption that people are rational.
This implies that stock is not underpriced. Plan 1 is much less generous than plan 2, so many people will not set up personal accounts. However, those who do will get a better deal as a result (they are rational). This means that they will be able to afford higher consumption both now and in the future. If they put only treasury bills in their accounts there would be no increase in supply of treasury bills to other buyers. Nor would there be any decline in stock available to other buyers. This means that interest rates and stock prices wouldn't change if there were no other changes in demand. In particular it means that consumption would increase if interest rates did not go up or stock prices go down. The negative effect on aggregate saving would be partially eliminated by an increase in interest rates (as would any negative shock on aggregate saving).

If people put bought other assets with their personal accounts there would be a shift in returns on various assets. the price of t-bills would go down, the price of other assets would go up. This would have no clear effect on aggregate consumption. The consumption of people who sold stock to be put in the personal accounts would not go down as a result. They are rational, they would not sell stock if doing so made them poorer. They will not sell stock if doing so makes them consume less.

If people are rational plan 1 would cause reduced aggregate saving. The effect would be smaller than under plan 2 but it would still be huge if a significant fraction of the population obtained significant advantages from the personal accounts..

Now what if people aren't rational ? If people aren't rational some might set up personal accounts even if social security offers them a better deal. Also people might get excellent returns by buying underpriced stocks from irrational people. The short run effect of private accounts on consumption would be the same. If people irrational think they are richer because they have set up a private account, they should consume more. If people irrationally think they are no poorer after selling underpriced stock, they should not consume less.

Evenutally when people learn they have made a mistake, they will consume less.

This is actually similar to the effect of deficit spending. First higher consumption when the public debt is run up then lower consumption when it is reduced. People who think deficits are a bad idea should think that Plan 1 will have bad effects on aggregate saving, even if they are confident that people who set up personal accounts will eventually rue the day they did.

Like many people I like Jonathan Chait's article on social security.

Much of it will be familiar to readers of bloggers like Atrios and Josh Marshall.

I think I disagree with Chait on what the Democrats should do, although he doesn't make his views totally clear. He says they must not compromise. I agree. He writes "The key point Democrats should understand is that, while it may be tactically useful to favor an alternative to privatization, no decent alternative is going to be signed into law under this president." and I certainly agree, except for the word "may". However he also writes

Also, acting now to "save" Social Security would consume scarce resources that may be needed to solve larger problems. Some moderates have suggested cutting a Social Security deal that includes a tax hike. But balancing the general operating budget and saving Medicare and Medicaid will probably require tax hikes, too. These twin problems--the deficit and health care--dwarf Social Security's future insolvency. Pouring resources into saving Social Security now is like driving a fire truck past the blazing inferno to fireproof the house across town.

Chait presents this as an argument against cutting a social security deal (and I agree with him that this would be a mistake) but his subsequent argument would also apply under the highly counterfactual hypothesis that Jonathan Chait could write the bill to save social security. I would jump at a chance to save social security by eliminating the $90,000 cap and making no other changes. If valid Chait's argument would imply that this is a bad idea because it would "consume scarce resources". This is just silly. an increase in social security taxes consumes no resources. Paying social security benefits consumes resources (we both advocate exactly no change).

It has been, to put it mildly, thoroughly demonstrated that the social security surplus can be used to finance the general fund deficit. Money put in the trust fund can be spent on medicaid, medicare, or the general budget. the economic costs of the deficit are the effect of the unified deficit. The only difference between money earmarked for social security and general revenues is the ghost of the lock box which is feeble but, if anything, pushes in the deficit hawkish direction.

I repeat one more time for my few but patient readers that I think the democrats should advocate a reform which consists entirely of elimination the ceiling on the payroll tax.

I was actually less impressed than Matthew Yglesias with the evidence that self proclaimed social security reformers wrote fairly recently that their aim was to eliminate social security. The case was much clearer that the advocates of invading Iraq had been determined to get Saddam Hussein long before 9/11. I think that even Bush is a bit cautious about the third rail and did not appoint Cato privatizers to top positions. Chait . Like Yglesias, I think the problem with journalists on this issue is the general problem pointed out by Chait in this great article where he politely hints that reporters are ignorant because they don't value looking things up in the public record. If it is in Lexis-Nexis it is not news and so even reporters don't know it. Reviewing, I find that this was not the post in which someone pointed out that you can find peoples hidden agenda out in the open in things they wrote back when they were at the AEI or the Cato institute, so I have to quote Yglesias "You just need to go back and look at who's getting appointed to what jobs and what those people used to write and say before they were in government."

In the case of personal accounts however, Chait didn't nail appointees. He quotes Peter Farrara, Ferrara and Michael Tanner, and a 1983 paper in the Cato Journal none of them are Bush political appointees. The last, by the way, is a new one quoting anonymous sources is standard, citing an article but not naming the author is rare. I'm sure Chait is right. Personal accounts make no sense unless one wishes to undermine social security, but there is much less evidence hidden in plain view than in the case of Iraq.

Bush himself did slip recently as noted by Chait, (but only on further cuts in defined benefits not on making contributions voluntary). Here I think Bush can count on journalists misunderestimating him and assuming he was just babbling.

I think I disagree with Chait on what the Democrats should do, although he doesn't make his views totally clear. He says they must not compromise. I agree. He writes "The key point Democrats should understand is that, while it may be tactically useful to favor an alternative to privatization, no decent alternative is going to be signed into law under this president." and I certainly agree, except for the word "may". However he also writes

Also, acting now to "save" Social Security would consume scarce resources that may be needed to solve larger problems. Some moderates have suggested cutting a Social Security deal that includes a tax hike. But balancing the general operating budget and saving Medicare and Medicaid will probably require tax hikes, too. These twin problems--the deficit and health care--dwarf Social Security's future insolvency. Pouring resources into saving Social Security now is like driving a fire truck past the blazing inferno to fireproof the house across town.

Chait presents this as an argument against cutting a social security deal (and I agree with him that this would be a mistake) but his subsequent argument would also apply under the highly counterfactual hypothesis that Jonathan Chait could write the bill to save social security. I would jump at a chance to save social security by eliminating the $90,000 cap and making no other changes. If valid Chait's argument would imply that this is a bad idea because it would "consume scarce resources". This is just silly. an increase in social security taxes consumes no resources. Paying social security benefits consumes resources (we both advocate exactly no change).

It has been, to put it mildly, thoroughly demonstrated that the social security surplus can be used to finance the general fund deficit. Money put in the trust fund can be spent on medicaid, medicare, or the general budget. the economic costs of the deficit are the effect of the unified deficit. The only difference between money earmarked for social security and general revenues is the ghost of the lock box which is feeble but, if anything, pushes in the direction Chait and I like by making the target unified surplus larger.

The Poor and Stupid Fund

Max Sawicky links to a brilliant post by The Cunning Realist

NEW YORK (CNNfn) -- MetaMarkets.com[snip] 's board of trustees approved the liquidation of the $9.9 million OpenFund and the $1.4 million IPO & New Era Fund
[snip] Donald Luskin, the chief executive of MetaMarkets [snip]

The OpenFund, launched in August 1999, has fallen 26 percent so far this year after dropping 42 percent in 2000, according to fund tracker Morningstar Inc. The IPO & New Era portfolio has fallen 57 percent since its September 2000 inception, according to data on the company's Web site.

It is always fun, and easy, to criticize Daniel Luskin, "the case of the rapidly disappearing campaign fund of Senate Majority Leader Bill Frist (R-Tenn). Judging by the staggering losses Senator Frist's fund has incurred in its stock market investments, one might think he had the misfortune of investing in Don Luskin's funds." is more important. I guess the one remaining rule of comity in the Senate is that Senators do not mention other senators campaign funds.

Still, someone has to bring this up if the bill reaches the stage of filibuster (they might just drop it) and Frist becomes a central public figure.

Do Dead Parrots Read ?

I should have known that the answer is no. I might even have guessed that, were a dead parrot to blog, the dead parrot would repeat things without thinking. Now I know.


Victor , an actuary in Arkansas, stubbornly insists on misconstruing this post of mine. His version of my claim is clearly inconsistent with what I wrote. This has been pointed out very clearly both by me and by PGL, another commenter.

I should point out that I wrote this angry post, in part, because I thought that Victor had repeated his silly claim in a new post at 01:27 PM on Mar 8 about what I claimed, after his error had been pointed out by me at 05:14 PM on Mar 8 and another commenter. PGL at 03:43 PM on Mar 9. After careful checking I note that 01:27 PM Mar 8 comes before and not after
05:14 PM Mar 8 and 03:43 PM Mar 9. Still Victor has not retracted his mistaken claim.

Now, I admit, that I overlooked the same error apparently briefly made by PGL at Angry bear (who, as noted above, has since corrected Victor and, perhaps, himself) . But I mean, really, if you had to choose between challenging a dead parrot and challenging an angry bear, what would you do ?

Victor's version

DeLong also refers to this post by Robert Waldmann that papers over the important distinction between stocks and flows.

In sum, Waldmann's argument is that the interest rate is the inverse of the price of tomorrow's consumption; as with any price change, there is the possibility that there will be offsetting income and substitution effects. Therefore, if privatization boosts the rate of return on your wealth, tomorrow's consumption is now cheaper.

A sentence in my original post

In the case of social security reform, there is no substitution effect.

Now I think it is clear to anyone who can read that "there will be offsetting income and substitution effects. " is not consistent with "there is no substitution effect."

Once the error is pointed out, there is no need for discussion. I think a correction is in order.

I wrote an over long comment on Victor's post which began
"

Robert Waldmann writes ...

You clearly did not read my post. I did not say that the effects of personal accounts is ambiguous because of income and substitution effects. I said the effect is an unambiguous reduction in national savings.

I quote myself [OK here I am quoting myself quoting myself clearly falling into a metadox]

"In the case of social security reform, there is no substitution effect. The proposal is to replace one form of forced savings with another. Contributions are FICA which is fixed by law and not voluntary. However if, as claimed by Bush and the Cs, private accounts are a better deal, then there should be an income effect causing increased consumption."

See isn't that simple. I did not write that the sign was ambiguous. I did not write that the income effect *might* be larger than the substitution effect. I argued that, in this case, the substitution effect is exactly zero. I actually thought the point was too obvious to labor." [long snip]
Posted by Robert Waldmann at 05:14 PM Mar 8

PGL put it better

pgl writes ...

Victor - Robert repeats NO substitution effect. And where did Barro and Becker say people will delude themselves? They did not. What they said is that people's opportunity sets do not change at all. Same thing Robert said. And a FAR cry from what you are suggesting. Please READ more carefully.

Posted by pgl at 03:43 PM Mar 9




In a later post Victor writes at some length about me, but does not correct his totally incorrect summary of my post.

"

To clarify: my position is that there isn't any expected benefit vis a vis future consumption. That's what I said in my original post on this subject, although we can hope for better. Waldmann, however, WAS arguing that there would be an improved rate of return (indeed, without a change in the rate of return, there is no income/substitution effect to analyze). I therefore challenged Waldmann's argument on his own turf, and this apparently confused PGL. Therefore, PGL should be criticizing Waldmann, not me.

Sometimes when you see a bad argument (Waldmann's), there are a lot of ways to break it down. Maybe I should have tried PGL's defense (that Waldmann's premise was misguided), but instead I showed that he was either (a) arguing in favor of privatization or (b) arguing for a virtual impossibility. My approach was more robust to optimism with private accounts, PGL's was more succinct."

PGL's in an intellectual box on this issue, since he had previously sourced that exact same Waldmann argument with apparent approval.

In fact this later post adds another gross error. In my original post, I did not say that private accounts would provide better returns than guaranteec benefits. This is why PGL did not recognise any inconsistency between my position and his. To quote my post below

"Now I think that Brad may be right that private accounts are likely to be a wash as far as national savings go, but you should point out that you only think that because you assume that Bush, the Cato institute and the CEA are full of it.

They all claim that private savings accounts are a better deal than traditional social security. They even claim that young people will be better off with the reform in spite of price indexing and the 3% offset rate. That is, they claim that the reform will reduce national savings."

Notice the pronoun "They". I wrote that "they" make this claim. I did not make that claim. Third person plural not first person singular. Victor uses the name "Waldmann" to refer to the entity that made a claim. I used the phrase "Bush, the Cato institute and the CEA". They are not equivalent.

Still quoting myself

"This is simple. If the reform means that people are better off, then the reform should make people consume more and save less. [snip] However if, as claimed by Bush and the Cs, private accounts are a better deal, then there should be an income effect causing increased consumption.

[paragraph on other components of national savings deleted]

To argue that social security reform will increase national savings one must argue that it will make participants poorer or will make the accumulation of national debt more terrifying. The President is effectively saying -- trust me don't worry, I'm obviously lying."

The references to higher returns are both proceded by the word "if". I did not claim that there would be higher returns, I discussed what would happen if there were. The qualification "as claimed by Bush and the Cs" makes it clear to any functionally literate person that I do not consider the claim my own.

Notice that Victor has neglected the obvious fact that I was very careful not to claim that private accounts would offer better returns when writing "a bad argument (Waldmann's)," and claiming that PGL had misunderstood me when PGL gave the impression that he and I agree (as we clearly do).

Still I find some of Victor's prose good enough to steal in a manner which I freely concede is not a quotation, summary or accurate paraphrase

"Sometimes when you see a bad argument" (Victor's), "there are a lot of ways to break it down. Maybe I should have tried PGL's defense" My approach was boring "PGL's was more succinct."

I still love the Dead Parrot's Society Slogan

"four out of six of us agree:a mighty slogan will go up here"

Update: I have found a more incoherant summary of my post here. Hat to to the General.

My daughter Kathy updating her web page

My brother in law Johnny Carrera has a nice web page
He has a link to this blog, so I thought that I would reciprocate.

Sweet Wine from Sour Grapes
(might have to change the title of that blog if this keeps up)

In his opinion, Judge Floyd sharply criticized the administration's use of the enemy combatant designation in Mr. Padilla's case.

"The court finds that the president has no power, neither express nor implied, neither constitutional nor statutory, to hold petitioner as an enemy combatant," Judge Floyd wrote.... "To do otherwise would not only offend the rule of law and violate this country's constitutional tradition,... but it would also be a betrayal of this nation's commitment to the separation of powers that safeguards our democratic values and individual liberties."

Blogbyte of the Day from Marshall

"the young tend to have a difficult time really getting their heads around the idea that they too will one day grow old and die. That doesn't mean we're moving toward an immortality society; it means they're young."

From the same post "The one question for which the Times has regular data going back to 1981 was: "Do you think the Social Security system will have the money available to provide the benefits you expect for your retirement?"

Last month it was 34% yes and 49% no. In 1981 it was 30% yes and 54%."

I wonder if the Times also asked "are you capable of holding two contradictory opinions at the same time" 68 % yes 40 % no 20 % don't know (yes I know it doesn't add up but I assume that 28% of my fellow citizens would answer both yes and no).

That is, I wonder if the Times tried asking ""Do you [expect that] the Social Security system will have the money available to provide the benefits you [think you will get when you retire].

I mean how do people manage to expect to get one thing and think they will get another ?

I don't think that I can do that (although I expect to read comments pointing out that I do it all the time)

I mentioned someone I know who "has no respect for anything but natural sciences and maybe maybe economics."


My little sister Carol Waldmann MD replied "That hurts the cause of science in a way b/c you loose your audience. I mean I believe in science, but I dont think its an excuse to do nothing about the things where we "dont have good data" as a doctor you have to try to help ease suffering even when there is no science that can help."

good point sis.

fistful of excuses

OK some people are coming here from a fist full of euros which, by the way, is the very best blog title in Europe. I promised these three somewhat irritated physicists that I would explain here how I wasn't totally clueless when I posted about spin. Now it might not be clear that I have done so, but look below. Two posts on the gaggle. If that's not spin what is ? I mean take Scott Mclellan, rotate something he says 360 degrees and it turns into the opposite of itself. What a fermion.

Update: I repaid fistfulofeuros for hosting me as a guest blogger by missspeling fistful. Sorry