January 11, 2005

#172: a bare-knuckles political brawl


Paul Krugman is like a guy with a recording of just one song. All he can do for variety is turn up the volume. In The Iceberg Cometh (01/11/05) he turns it up just about all the way. However, his message is the same: Bush is creating a massive problem by trying to solve a non-existent or minor problem. He's said this all before and we've responded to it all before, so we thought it might be interesting to discuss in this report why Krugman's position is going to lose politically.

Once again Krugman and the Democrats have "misunderestimated" the president. This is how we think Bush is going to win:

First, he's going to neutralize the older workers in their fifties and up by assuring them that absolutely nothing will change regarding their Social Security benefits. This may not mollify the AARP completely, but it will certainly make their opposition seem rather pointless.

Second, with the older folks off the table, Bush will turn to younger workers knowing two things:

A substantial majority do not believe SS will be there for them when they retire, and A substantial majority believe private accounts are a good idea.

To complete the deal about all Bush has to do is convince them that they trading away a benefit they don't believe they'll ever receive for a private account that they will actually own NOW. He will have to phrase this point delicately, but it seems like a no-brainer to us.

The financing piece may be a little more difficult to promote since some borrowing will be necessary to pay for the much discussed transition to private accounts, i.e., if payroll taxes are to be diverted from the Social Security income rate (pay in) to build private accounts, then government securities must be issued to maintain the cost rate (payout). See the chart in Squad Report # 171. This will give rise to no end of demagoguery by Krugman and the Democrats about Bush's fiscal irresponsibility.

What Bush has to do here is point out that if the government kept their books correctly there would be no de facto increase in total debt because of private accounts. That is, if the entire unfunded obligation of Social Security were recognized for what it is – debt – then the transition cost is a wash, i.e., zero, because the debt incurred to fund private accounts simply replaces dollar for dollar the implied debt of the total unfunded Social Security liability. Anyone who has refinanced a home recently to gain a lower mortgage rate should pick up on this reality rather easily.

Finally, and possibly most important, this is going to be a bare-knuckles political brawl.

The Democrats seem to have forgotten what a human battering-ram the president can turn into when he really wants something. When he hits the road and starts selling his reform ideas against an opposition, including Krugman and Co., whose biggest idea is to do nothing, we expect the tide will begin to turn. When it does turn, there are several red state Democratic Senators with elections coming up whose butts will be hanging out pretty far. What will they do to avoid the fate of Tom Daschle, the "great obstructer?" Probably cut a deal.

Anyway, it should be fun to watch and hear. And may take a dog whistle to measure Krugman's shrillness as defeat approaches.

[The Truth Squad is a group of economists who have long marveled at the writings of Paul Krugman. The Squad Reports are synopses of their discussions. ] Posted by John Weidner at January 11, 2005 9:57 PM

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