Saturday, February 19, 2005

Paul Krugman "hacks" Alan Greenspan over Social Security every which way he can, except one.

As soon as Alan Greenspan endorsed private accounts in Social Security we all of course knew the attack column would not be long in coming. And here it is.

It doesn't disappoint. Krugman uses guilt by association, lies fibs, old fashioned bait-and switch rhetoric, and his always obligatory name calling (flavored by psychological projection) -- all in only 700 words. In fact, there's only one major rhetorical ploy he misses. Let's see if we can spot it!

In his labors Krugman mentions "Iraq" five times. Now, it's hard to see exactly what either Social Security reform or the Federal Reserve Chairman's recommendations regarding domestic economic policy has to do with Iraq -- except via an attempt to tar them by association with what Krugman must assume his readers take to be shameful American failure there (see: "democratic elections, recent"). And to associate two such unrelated concepts in mind does of course take repetition: "Social Security reform? Iraq! Iraq! Iraq! Iraq! Iraq!"

Still, that ploy costs the column about 140 words -- and aren't the Professor's fans always complaining about how he is handicapped by being limited to only 700 to write in?

Then, when in the remaining 560 words Krugman gets to reporting what Greenspan actually said ... hey, he missed it!

Krugman claims...
In 2001, Mr. Greenspan offered a convoluted, implausible justification for supporting everything the Bush administration wanted. This time, he offered no justification at all...

Mr. Greenspan offered no excuse for supporting privatization.
Hmmm... Krugman says Greenspan offered "no justification at all" for supporting privatization. None at all. How lame!

Yet that's very odd, as news reports elsewhere had Greenspan giving so many reasons for his favoring of private accounts...
The normally placid Greenspan rose almost to the threshold of passion as he made a class-based argument by contending that private accounts would allow low-income people to become mini-capitalists — in his view, a very good thing.

"When you have assets which you own, which you can bequeath to your children, (assets) which have your name on them, I think it is highly desirable thing, because you give wealth to people in lower- and middle-income groups who have not had it before".

The Fed chairman predicted private accounts would be "extraordinarily popular," and "if they are I think it is a very important addition to our society because, as you know, I’ve been concerned about concentration of income and wealth in this country ... This, in my judgment, is one way you can address that."

Greenspan said he prefers the private accounts structure because it allows the prefunding of future promised benefits [which allows them to be financed now, instead of when deficit will be much worse, later]

He argued that a system with accounts over the long-term has the potential to boost the national savings rate, which, in turn, can help spur economic growth.

"The central core of productivity increase is capital investment. And to have capital investment, you need to have savings," he said.

He also said he believes individual accounts offer future retirees a better chance of achieving the standard of living they will expect.

"We have been utterly unable in the pay-as-you-go system to create the necessary savings to finance the capital investment that we're going to need for the future to create the goods and services that retirees are going to need," he said.

et cetera and so on...
[msnbc] [Reuters] [CNN] [DowJones] [...]
All of which Krugman helpfully summarizes for his readers as: "Greenspan offered no excuse for privatization".

Gee, you know, if Krugman was honest he could have reported the excuses Greenspan actually gave for supporting private accounts, and then have tried to argue against them on the merits.

Instead of reporting that Greenspan didn't give any.

You know, in my mind that brings a three-letter word: "f - i - b". What do you think?

The Professor continues ...
Mr. Greenspan ... painted a dark (and seriously exaggerated) picture of the demographic problem, and said that what we need is a "fully funded" system. He then conceded that Bush-style privatization would do nothing to improve the system's funding.
Hello? When I read illiteracy like this I'm tempted to believe what an academic economist e-mailed me some while back: that the real pre-2000 Krugman is to be found bound and gagged in a basement somewhere in Princeton and these columns are being written by Robert Kuttner, if not by something that climbed out of a pod sent over to the Times by the Democratic National Committee.

One doesn't have to be a preeminent social scientist to know that "funding" a retirement plan means financing it with savings -- instead of just using transfers, as per the status quo. And of course, obviously, self-evidently, creating private accounts funded with savings increases the system's funding. Over time, one could move from a 0% funded plan to a 100% funded plan this way. (How else could you do it?)

Yet Krugman (or whoever!) says:
"privatization would do nothing to improve the system's funding."
Krugman here is intentionally trying to confuse the issue with something different. To wit: If at the time that you start funding a plan it already is underfinanced -- because Congress has promised far more in benefits through the plan than it has any way of paying -- that financing shortfall may remain totally unchanged by the introduction of funding. That's true enough, but it is an entirely different issue. And it does not mean you don't get the benefits from funding!

To see how the benefits that Greenspan talks of -- increased wealth for retirees, increased national savings, and the benefits of prefunding -- can be obtained through private accounts that increase funding while having no effect on the financing shortfall, here's an illustrative example.

Krugman in this column plays a bait-and-switch that he uses throughout his columns against private accounts. It goes like this: Advocates of private accounts say such accounts will provide numerous benefits. But private accounts won't close the financing gap that exists in the status quo -- which is the only thing that Krugman will admit counts. Therefore private accounts will provide no benefits!

He hopes you won't notice.

Krugman continues...
Mr. Greenspan went on to concede that the opponents of privatization are right to worry about the huge borrowing that Bush-style privatization would entail...
Or maybe not. For some reason Krugman doesn't report that Greenspan ...
... also suggested that in determining interest rates and bond yields, the financial markets may already have accounted for the $16 trillion in unfunded liabilities of the Social Security and Medicare programs ...
... in which case prefunding them would have no effect whatsoever on the financial markets.

After all, these liabilities for promised benefits already exist whether any bonds have been issued for them or not. The markets are not supposed to know they exist? If the markets do know they exist, and thus have already accounted for them, then why would the government's merely admitting they exist on its books change anything?

Moreover prefunding these liabilities, as we have seen from the above-mentioned example, changes their net current value by exactly $0. What's so huge about that? All this doesn't sound like such an outright "concession" as Krugman claims.

In fact, Greenspan said privatization could lead to a reduction in interst rates...
... if financial markets at least partially discount the transition costs for personal accounts with the reduction of future unfunded liabilities from the current system, then interest rates might fall as the debt outlook improves, he said.
How come Krugman didn't report Greenspan saying that?

(And is the actual number that Greenspan talks about -- a $100 billion annual swing in temporary borrowing, less than 1% of GDP -- really such a "huge" amount in Krugman's mind, after all the many much larger swings we've seen ever since the Reagan years?)

Krugman continues...
Privatizers claim that financial markets won't be disturbed by all that borrowing because the Bush plan prescribes offsetting cuts in guaranteed benefits for the workers who open private accounts
Because, as we've seen in the example mentioned above, moving to funding is a wash as far as the government's liabilities are concerned, increasing them at current value by exactly $0.

And it is an advantage of pre-funding that it operates by moving the cost of financing future Social Security benefits forward in time towards today -- because today it is as a whole lot easier to finance them than it will be in the future.

Remember, when today's 30-year-old workers retire around 2040 either annual deficits will be approaching 20% of GDP -- macthing the entire federal government's expenditures today! -- or income taxes will be increased by more than 80% from today's levels to cover the costs of Social Security and Medicare. Of that 80%, more than half, 46%, will be needed just to cover the operations of the trust funds, the Social Security actuaries say. (Those trust fund bonds aren't going to pay off themselves you know!)

Here's a graph that may help convey the meaning of these words.

Without pre-funding, Krugman wants all these boomer benefits to have to be financed then, as that graph line shoots straight up.

But if Krugman thinks privatizers would disrupt the financial markets by borrowing $100 billion a year to prefund benefits today when the borrowing is easy and rates are low, then just what does he think status-quoers propose to do by trying to finance the same $1 trillion in the financial markets around 2040 when both deficits and taxes will be at record levels and still shooting higher?

So once more we see Krugman indulging his favorite cardinal sin of logic -- not comparing alternatives.

Yes, Greenspan did say there is risk in increasing current debt to prefund Social Security -- but he went on to discuss something Krugman never, ever will: the risk in the status quo.
"It is risky," Greenspan said [of prefunding private accounts] But, he added, "It's risky doing nothing. It's risky doing any other solution. ... I know no way to resolve this without risk."
How come Krugman didn't report the second part of Greenspan's comment on risk? On the risks of the status quo?

Does Paul Krugman ever write about the status quo risk of hitting the financial markets for an extra trillion in 2030s? Or of the status quo risk that today's Social Security participants will be the first ones ever to get back less from it than they put into it -- being made poorer by Social Security on a lifetime basis? Or the status quo risk that, facing huge income tax hikes after 2020, taxpayers and Congress will vote to cut benefits?

Of course not. The uniform party line is that there is no risk in the status quo, it is perfectly safe. Ha! ha!
Yet the chairman managed to avoid admitting the obvious - that borrowing on the scale the Bush plan requires would substantially increase the risk of a financial crisis.
Perhaps because it's not so obvious in light of what's been mentioned above -- especially in comparison to risks of the status quo alternative, which Krugman will never discuss.

Yet did not Krugman himself write a short while back that he was taking out a fixed-rate mortgage -- and paying more up front to do so -- because he expects interest rates to go way up in the future?

Krugman on why he paid a higher cost now for that fixed rate mortgage:
"Think of the federal government as a gigantic insurance company (with a sideline business in national defense and homeland security), which does its accounting on a cash basis, only counting premiums and payouts as they go in and out the door. An insurance company with cash accounting . . . is an accident waiting to happen." So says the Treasury under secretary Peter Fisher

How will the train wreck play itself out? ... my prediction is that politicians will eventually be tempted to resolve the crisis the way irresponsible governments usually do: by printing money, both to pay current bills and to inflate away debt. And as that temptation becomes obvious, interest rates will soar.
So, to avoid exposuring himself to soaring interest rates in the future due to the the "train wreck" he forsees, Krugman thinks its smart to secure his own wealth by paying more up front.

But as far as your Social Security benefits are concerned, prefunding them when rates are low is a bad idea -- he wants you to depend on having them all financed for you after the train jumps the track and rates soar!

Go figure. ;-)
And the headlines didn't emphasize his concession that crucial critiques of the Bush plan are right. As he surely intended, the headlines emphasized his support for privatization.
Yes indeed, Greenspan got the headlines to carry the message he believes, and that he intended them to carry about his beliefs -- not Krugman's message. The treachery!
By repeatedly shilling for whatever the Bush administration wants, he has betrayed the trust placed in Fed chairmen, and deserves to be treated as just another partisan hack.
Ah, the obligatory closing name calling.

But speaking of a "shilling ... partisan hack" what would you call someone who, in a twice-weekly newspaper column, hasn't published even one significant criticism of the Democrats or of any name Democrat, nor even one approving column of any Republican or Republican proposal, in more than five years??

And now we see the single rhetorical technique Krugman failed to use in attempting to debunk Alan Greenspan's comments:

Giving an honest report of what Greenspan said, and trying to answer it on the merits.