Tuesday, February 01, 2005

Krugman: A Challenge Issued

From today's NY Times:

"Schemes for Social Security privatization, like the one described in the 2004 Economic Report of the President, invariably assume that investing in stocks will yield a high annual rate of return, 6.5 or 7 percent after inflation, for at least the next 75 years. Without that assumption, these schemes can't deliver on their promises. Yet a rate of return that high is mathematically impossible unless the economy grows much faster than anyone is now expecting.
...
They can rescue their happy vision for stock returns by claiming that the Social Security actuaries are vastly underestimating future economic growth. But in that case, we don't need to worry about Social Security's future: if the economy grows fast enough to generate a rate of return that makes privatization work, it will also yield a bonanza of payroll tax revenue that will keep the current system sound for generations to come.

Alternatively, privatizers can unhappily admit that future stock returns will be much lower than they have been claiming. But without those high returns, the arithmetic of their schemes collapses.

It really is that stark: any growth projection that would permit the stock returns the privatizers need to make their schemes work would put Social Security solidly in the black."


He closes with this:

"...make a projection of economic growth, dividends and capital gains that will yield a 6.5 percent rate of return over 75 years"


I'd be very interested to see a reasoned response to this, not just "Krugman the liberal crack-pot".

The guy is a professor of economics. I know that for a lot of conservatives, the fact that he has a faculty position status just makes him ignorant in the face of their intellect. Sorry, but I have to defer to a John Bates Clark1 medal winner over some lawyer, policy analyst, or talk-show host.

If he's right and it's possible, I'd like to see it. If he's wrong, I'd like to see why. If he's right, what effect does this have for a privatization of the fund, not just private accounts.




1For the record, economic hero of the Right, Milton Friedman also won this award.

1 Comments:

Blogger Big Red said...

The lack of real debate and Krugman's analysis are related: part of the problem for Republican's is that their ideology qua ideology frame and their fact v. opinion ideology don't square with each other. Get them to agree as to what constitutes facts, and, at least with respect to these matters, the facts don't support them. You must argue pure ideology when your own definition of evidence does not support your position.

1:53 PM  

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