February 06, 2005
#175: Even when he makes a valid point, no one notices
KRUGMAN TRUTH SQUAD
It’s a testament to how much radioactivity Paul Krugman has picked up over the years from his excessive partisanship and nastiness that even when he makes a valid point, no one notices. His admirers assume he can do no wrong, and his critics consider him a political hack. We’ve always prided ourselves as acknowledging the few times (very few!) when Krugman has it right. Now is time to do so again. In Many Happy Returns (02/01/05) he makes a point so potentially devastating to the Bush Social Security reform initiative that we doubt it could survive if this point were exploited effectively.
Here’s the deal. All economic projections beyond a few years are very sensitive to assumptions about economic growth rates, i.e., the growth rate of the GDP. In many cases these assumptions are buried in footnotes, but they are always there if you look hard enough. In the case of the Social Security Administration, their projections of two crucial dates (2018 when the trust fund begins running a deficit and 2042 when the trust is depleted) are based on an assumed annual GDP growth rate of 1.8%. The SSA claims that rate is based on historical experience but, in fact, they used only the period from 1966 to 2000 to make the calculation. This period includes the episode from the late 60s to the mid 90s when productivity in the US “fell off a cliff.” Economists are still debating exactly why this happened but whatever the reason it is definitely over now. Growth in 2004 will be near 4% and since 1995 it has averaged about 3% including the 2001/2002 recession. The low growth episode of the 70s and 80s should be considered a historical aberration and not a basis for projections of the future.
Now what Krugman and the Democrats should be doing is jumping up and down and demanding that the SS Administration rerun their projections using what most economists would consider a reasonable growth rate. If this were done we have no doubt that for rates over 3% the current “problem” dates of 2018 and 2042 dates would be pushed out further by at least 20 or 30 years. Some doctrinaire Krugman critics have tried to argue that since future SS benefits are tied to wage indexes higher economic growth rates would have little effect, i.e., higher growth rates would mean higher wages and therefore higher benefits. Sorry guys! Nice try, but it won’t work. The wage indexing affects only the marginal cohorts, i.e., those who retire each year. Recipients already retired receive only a CPI boost. This means that wage indexing phases in slowly and the impact is pretty far out.
Make no mistake. If the SS Administration used a more reasonable growth rate, the SS “problem” would be much reduced if not eliminated. Economic growth works wonders.
So why don’t Krugman and the Democrats ride this horse to victory? We’re guessing but it’s probably because acknowledging the higher growth rate would mean acknowledging a great Bush economy. This may explain why Krugman simply accepted the lower growth rate and spent most of his column in an overly complicated attempt to show why such a low growth rate is inconsistent with the administration’s stock market returns assumptions.
He’s right about that too, by the way. The administration shouldn’t get away with using a low growth rate assumption to trash the SS outlook and then use a higher rate to tout a SS reform initiative.
Oh, I dunno. I’ve been hearing this point from a good many people for a good number of years. It isn’t usually the raw GDP growth that people trash Bush for, but rather the lack of job creation that people trash Bush for.
Posted by: Andrew Cory at February 6, 2005 09:46 PMI have to suspect Andrew, that you are allowing yourself to be USED by Democrat politicians who don't have your interests at heart. --it's you, a worker in your 20's that will benefit most from Private Accounts. This sort of thing really pays off when there is lots of time for growth to compound.
More importantly, a world where most people have a clear stake in the long-term strength of the economy will be a much beter world for you to to live in.
In the short term SS reform will hurt the Dem Party. But in the long run it will help them, because the present position of the Dems is a dead-end. They are stuck thinking that the country is like those old WPA murals, with toiling workers and farmers plus evil bankers in pinstripes lighting their cigars with dollar-bills.
It is the youngest Democrats, like you, who should be pushing the party to get out of that trap, not believing it.
(Ooops, this has nothing to do with what you wrote in your comment. Just a line of thought that came to mind.)
Hi, Andrew,
Yeah, yeah, I hear it all the time from my friends who are ardent Democrats: "But the current job situation SUCKS, man!"
http://www.bls.gov/webapps/legacy/cpsatab1.htm
Go play with the Web applet at the site above, and find out for yourself how total employment fell only slightly in the last year of the Clinton Admininstration and the first year of the Bush Administration, and how nearly FOUR MILLION jobs have been added to the nation's economy since the end of 2001.
Like John says, I'd think young people like you would get tired of being lied to by the leftizoids.
Furthermore, Jimmy Carter would have sold his soul to the Devil in 1980 to have had an unemployment rate of no more than 6.0% in the run-up to the election, instead of the TEN percent that it in fact was. And add to that an inflation rate of about 15% in '79-'80, and it's no wonder he got buried by Reagan.
Be thankful you don't remember the "good old days" of the '70s that your older Democrat friends so fondly recall, Andrew. They truly did suck. I know. I was there, a high-schooler whose parents were hurt badly (a one-third cut in income) during the Nixon-Ford-Carter-era malaise, and I wasn't sure if I was going to go to college or not.
Today is paradise. I'm glad it's 2005 and not 1975. (shudders at the memories)
Posted by: Hale Adams at February 7, 2005 01:01 PMJohn,
While I'm on a "I hate the Seventies" rant, do you remember the Mustang II, introduced about 1974 to much fanfare, including a declaration by that old charlatan, John Kenneth Galbraith, that it was "the car of the future"?
What a piece of junk it was. And it was supposed to be "the future", according to the wise old men like Galbraith? No wonder people despaired in those days.....
Thank God for the "Japanese invasion" that almost destroyed Detroit. If nothing else, it woke us up, and forced us to realize that not only was it possible to be better than merely mediocre in industry (and lots of other things as well), but that it was NECESSARY to be better than merely mediocre if we wanted to prosper.
And here we are today, the envy of the world.
Take that, Jimmy Carter, Mr. Energy-Crisis-is-the-Moral-Equivalent-of-War. Bah!
Posted by: Hale Adams at February 7, 2005 01:14 PMThat phrase "Bush (or any other president, actually) has failed to create jobs" has always puzzled me. I mean, I thought it was the market that "created" jobs -- an employer is not going to higher workers he does not need and/or can't afford, people aren't going to patronize a business whose products they don't need and/or want, and so on. And of course this situation fluctuates depending upon a number of things. But then is heard the cry "the president has to create jobs!" Where, pray tell, is he supposed to create them? In a vat in a laboratory? That would be an... interesting job.
Posted by: Andrea Harris at February 7, 2005 04:08 PMHale-
I had a friend who had one of the 70's Mustang II's. It was traffic-cone orange with an orange plaid interior. My friend was colorblind.
I used to kid him that the reason he chose that color was so that, in case he drove it off a bridge, the rescue folks could spot at the bottom of a muddy river in about two seconds. Even in January with ice and snow a foot thick.
