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Mankiw on Privatization

The current issue of Reason, not yet online, undertakes the interesting exercise of hosting an intra-libertarian debate on the merits of Social Security privatization. Tyler Cowen writes for the opposition, and James Glassman in favor. As I was discussing with a libertarian friend last night, the choice of Glassman as the privatizer is a disaster. He simply isn't in Cowen's league, nor does he have any kind of credibility on the subject. It's not a fair fight. Why not find a serious, credible pro-privatization economist. Well, The New Republic did it. They came up with N. Gregory Mankiw and he came up with garbage. See Josh and Duncan. Near as I can tell, there's not even an argument in here, just a lot of armchair psychoanalysis. An alternative approach to offering random speculations on why liberals oppose privatization would have been to, say, read Jonathan Chait's piece in the same issue and address some of his arguments. Or read The American Prospect's exhaustive coverage of the subject and address some of our arguments. Or read Brad Delong's blog and address some of his arguments. He could even have tried to address Tyler Cowen's arguments.

Instead we get "Harvard professors like their 401 (k) plans so we should take away their Social Security and give them bigger 401 (k) plans and take away the Social Security from people who don't have 401 (k) plans and give them 401 (k) plans instead." But I like my PowerBook. Should the government eliminate Social Security and buy everybody laptops? Harvard professors (and most people) also like Social Security benefits. Should we take away everyone's 401 (k) and give them more Social Security benefits instead? Now when Gene Sperling observed that people who have them like 401 (k) plans but not everybody has one, he came up with the idea of a Universal 401 (k) so everyone would have one:

Here's how it would work: Middle-income and working poor families, who often fall through the cracks in our wealth creation and retirement savings systems, would be given the opportunity to open new tax-deferred retirement savings accounts. They would be eligible for up to $1,000 in matching funds for savings they contributed, provided through refundable tax credits. For low-income families, the government could provide a 2-1 match; for more moderate-income families, it could be a 1-1 match. Under this plan, a family eligible for a 2-1 match could accumulate a nest egg of $190,000 simply by contributing $500 a year for 40 years, assuming a 5 percent rate of return. . . .

One of the main reasons that so many Americans lack significant investments, beyond the fact that it takes nearly all of what many families earn to live, is that our system for encouraging savings and wealth creation is completely upside-down. Because the only tool our nation employs to encourage savings is tax deductibility, the more you earn, the easier we make it to save; the more you struggle to make ends meet, the more we tell you, you're on your own

And if Democratic opposition is to privatization is really driven wholly by paranoid fear that broader stock ownership will kill the Democratic Party, then why is Gene Sperling -- that would be Clinton White House National Economic Advisor Gene Sperling, John Kerry for President top economic advisor Gene Sperling -- trying to create Universal 401 (k) accounts?

March 12, 2005 | Permalink


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Well, at least Mankiw's bringing more glory to Harvard.

Posted by: Delicious Pundit | Mar 12, 2005 1:51:38 PM


Posted by: praktike | Mar 12, 2005 1:52:26 PM

George Will had the same argument a few weeks ago in Newsweek in relation to the government's Thrift Savings Plan. He said that Harry Reid is getting his but won't allow other people in. These guys must be reading from the same script.

Posted by: Carl | Mar 12, 2005 2:14:28 PM

Also see Brad Delong:

Posted by: quietpc3400 | Mar 12, 2005 2:52:47 PM

Brad DeLong blasts the details but check out Ezra Klein's take down of this phony higher expected return nonsense.

Posted by: pgl | Mar 12, 2005 2:54:59 PM

They would be eligible for up to $1,000 in matching funds for savings they contributed, provided through refundable tax credits. For low-income families, the government could provide a 2-1 match;

The idea of the federal government's directly funneling money into the stock market worries me a little. Would there be a danger that stock prices would reflect the expectation that this money would continue being funneled in indefinitely, so that if the program were ever ended, the whole market would take a hit?

Posted by: digamma | Mar 12, 2005 4:33:14 PM

Everyone seems to agree that Americans need to devote a higher precentage of the GNP to savings; however wouldn't this cause a economic slow down or recession, given that so much of current growth is consumer driven (indeed, where would the current economic situation be, without the massive amount of refinancing & draining of equity of homes)? The middle & working classes don't save because they don't have that much to save. Also, there is a backlog of needed governmental investment if we are to maintain our status as a first world nation. To pull a percentage of current governmental, middle class, & working class expenditures & put it into saving risk creating a nasty feedback cycle.

Posted by: EVS | Mar 12, 2005 5:22:44 PM

EVS: however wouldn't this cause a economic slow down or recession, given that so much of current growth is consumer driven.

To an extent, that would mostly depend on how much of the savings was via decreased purchasing of imports. It could be a local (US) boost with minimal short-term harm to non-local producers (except, of course, those who produce predominantly for the US market).

Posted by: rse | Mar 12, 2005 5:40:58 PM

Agreed, except a fair part of the domestic economy is generated by imports, & with the cost of oil going up- the precentage of GNP going for imports will be hard to control. & the method of decreasing imports will be the weaker dollar- which will lead to higher oil prices & foreign investment fleeing the US.

Posted by: EVS | Mar 12, 2005 6:32:21 PM

"George Will had the same argument a few weeks ago in Newsweek in relation to the government's Thrift Savings Plan."

Add ons vs carve outs. In large part Democrats are killing on the overall issue but are risking losing on the language. I have nothing bad to say about private accounts in general, open the Thrift Savings Plan to everyone, give tax incentives for saving whatever. Just keep your hands off of payroll tax.

In a matter of months it will have become clear that Social Security as currently constituted is fine. And then we can move on to a national debate about how to boost savings and get workers into the ownership society. But until we separate the issues of Social Security solvency and national savings we have to be vigilant indeed.

Fundamentally these two issues have nothing to do with each other though ironically they depend on the same force: a growing economy. I made up a slogan years ago: If Privatization will Work it won't be Necessary, if Privatization is Necessary it won't Work. People laugh but there is a powerful reality buried within this. A strong, broad based period of economic growth lifts all boats. We saw this in the nineties, income inequality actually grew and Congress showed no signs of actually showing spending restraint yet we turned deficits into surpluses, kept inflation low and still drove unemployment down to levels that economists insisted were impossible.

If the American economy grows at a sustained rate of 3-4% forever then sure private accounts would work, but then again that same growth rate would leave Social Security hugely overfunded if the system were left alone. The gaping contradiction at the heart of privatization remains, they predict shortfall and depletion based on one set of numbers, they propose solutions implicitly relying on a different much more optimistic set.

Growth is good, private savings is good, but the latter relies on the former and the numbers show that even moderate growth closes the entire projected gap in Social Security. Democrats are not opposed to ownership, we are just opposed to financing it at the cost of the most successful social program in history. Privatizers are still failing to pass the "no economist left behind" challenge: present your honest assessment of expected future growth in the economy, plug those numbers into the Trustees' economic models and then show us the results. Then we can use that as the baseline for discussion of your proposals. But they simply refuse to put economic numbers on the table.

No numbers, no deal.

Posted by: Bruce Webb | Mar 13, 2005 6:01:12 AM

"then why is Gene Sperling ... trying to create Universal 401 (k) accounts?"

Because he's Greenspan's tennis partner? (Cue spooky music...)

All kidding aside, I'd vote for a stuffed ferret for President if it ran on the Democratic line because its election would mean Hobrooke at State and Sperling at Treasury.

Read Woodward's The Agenda if you want to fall in love with Sperling.

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Posted by: vch | Aug 30, 2006 5:35:37 PM

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