Archives: 06/2006

Sorry, We Can’t ‘Grow’ Our Way out of the Social Security Problem

Many economists and lawmakers — especially conservatives — argue against tax hikes as solutions to entitlement shortfalls, saying the hikes would be counterproductive. According to this argument, higher taxes would retard growth, reduce federal revenues, and worsen entitlement shortfalls. 

For example, Stephen Moore in his June 12 Wall Street Journal column “Don’t Know Much About History…” alludes to a presumed beneficial impact of faster (wage) growth on the financial problems of entitlement programs. Unfortunately, that presumption is incorrect, especially as regards Social Security.

The claim that faster wage growth would reduce Social Security’s financial shortfall is an artifact of the standard (but flawed) 75-year-ahead Social Security financial projections that count payroll taxes through that period but ignore benefit obligations those taxes would create beyond the 75th year. The projections make it look as though robust wage growth would shrink the gap between Social Security revenues and obligations. But the picture changes over a longer timeframe.

The Social Security trustees have in recent years begun publishing estimates of the present value of Social Security’s financial shortfall in perpetuity. This is the correct measure to use in assessing the impact of faster wage growth on Social Security’s financial status because it is comprehensive — it accounts for all future taxes and benefits. Unfortunately, the trustees do not provide any analysis of how sensitive the perpetuity measure is to changes in various underlying assumptions. 

Whether faster economic growth would improve or worsen Social Security’s actuarial deficit depends on the balance between two opposing forces: demographics and wage growth. 

Concerning demographics, as retirees grow more numerous relative to workers, Social Security’s finances would worsen — which is easy to see if benefits depend on current wages. 

Concerning wages, in each time period, benefits mostly depend on past wages. That’s because under current Social Security laws, once a person’s benefit level is determined at the time of retirement, its real value remains constant during the rest of the person’s retirement years because it is indexed to prices. (The real value of benefits would grow were post-retirement benefits indexed to wages instead.) Because current benefits depend mostly on past wages, faster growth in current wages won’t lead to a proportionate increase in current benefits. Benefits would begin to grow faster only after a considerable time lag. Hence, faster wage growth magnifies the financial advantage associated with this time lag and reduces Social Security’s actuarial deficit.

It has been shown that in the case of U.S. Social Security, the force of worsening demographics dominates: The system’s actuarial deficit (i.e., the ratio of the present value of the system’s financial shortfall to the present value of the payroll tax base when both are calculated in perpetuity) increases with faster wage growth — a result opposite to that obtained under 75-year-ahead calculations. 

Thus, based on a comprehensive measure, the view that faster wage growth would deliver us from our Social Security problem is misguided. But many have repeatedly cited it to argue against reforming the program, e.g., Sen. John Kerry during his 2004 presidential bid. 

The Social Security debate would be better served if we put this view in its rightful place: the trash bin.

Of course, the conclusion should not be that we should strive for slower wage growth to improve Social Security’s finances! Mr. Moore’s distaste for growth-retarding tax hikes is correct. But the negative implications of faster wage growth for Social Security’s finances do not provide any purchase for his argument. Indeed, the twin imperatives of maintaining high economic growth and resolving Social Security’s financial shortfall indicate — even more strongly — that reforms should be weighted more heavily toward future benefit cuts rather than tax hikes.

Frontline on the War

Readers may be interested in a well done PBS Frontline documentary on the birth of the war on terror and the war in Iraq. The entire documentary can be viewed online.

If you only have a bit of time, start with Part III, in case you held any doubts that the Bush administration took its eye off al Qaeda in Afghanistan as they refocused on invading Iraq. Several gravelly CIA types (some of whom were on the ground in Afghanistan) come forward to make clear that they feel they had al Qaeda hemmed in in the winter of 2001–2002, but they did not get the resources they needed—and asked for—to snap its neck.

There’s also a lengthy workup describing the mishandling of intelligence before the Iraq war. There’s not much new material on that topic, but the documentary is a good synopsis of what we now know. The whole documentary is riveting stuff, well worth a watch.

It’s Not Just About No-Knocks

Jacob Sullum writes:

Hudson v. Michigan, the recent decision in which the Supreme Court said evidence from a search in which police failed to follow the “knock and announce” rule is admissible in court, ostensibly hinged on how close the connection between a Fourth Amendment violation and the discovery of evidence must be to trigger the exclusionary rule. The dissenters argued that the failure of police to wait more than a few seconds for the suspect, Booker Hudson, to answer the door rendered the whole search invalid, making the evidence police obtained “fruit of the poisonous tree.” Writing for the five-justice majority, Antonin Scalia said the exclusionary rule did not apply in this case because the Fourth Amendment violation was not essential to the discovery of the evidence. Had police waited, say, 15 seconds and given Hudson the opportunity to answer the door, Scalia reasoned, they still would have found Hudson’s drugs and gun.

Yet as Scalia also noted, if the police believed that wasn’t the case, that waiting 15 seconds would have allowed Hudson to get rid of the evidence, the “knock and announce” rule would not have applied. So the nexus between barging in and finding the evidence does not really matter. Whether or not a knock-and-announce violation is necessary to preserve evidence, the evidence can be admitted an easy rule for police to remember but not one that is likely to encourage respect for the knock-and-announce requirement.

This is one of the inherent contradictions in the policy of no-knocks and the use of SWAT teams.

After Wilson v. Arkansas, in which the Court ruled that the Fourth Amendment generally but not always requires police to knock and announce themselves before entering a private home, several states passed laws requiring announcement, banning no-knock warrants issued from the bench. Since Hudson, there’s some talk that yet more states will pass similar laws (Indiana is considering it, for example). But these laws are meaningless, for a couple of reasons:

First, the “exigent circumstances” exceptions still allow police to decide at the scene to enter without announcement if they think the suspect will dispose of the drugs, or that he poses a threat to police. Before Hudson, whether or not the police made the right call was determined after the fact, at trial. (If they found nothing incriminating, the entire raid was chalked up to “oops,” except in the rare case where the person on the receiving end of the raid brought suit.) After Hudson, there’s little reason to make such an after-the-fact evaluation, given that the evidence will be admitted either way.

Second, defenders of SWAT teams and dynamic entry tactics say they’re necessary to take suspects by surprise. This, they say, prevents violence. I’d argue it encourages violence and confrontation, but for the sake of argument, let’s say they’re right.

But the same people say that Hudson won’t really change anything. Police will still observe the rule, and knock and announce before entry. But the purpose of the knock-and-announce rule is to give the suspect the opportunity to answer the door, and avoid the destruction of property and violence of a forced entry. You can’t have it both ways. You can’t say we need SWAT teams to take suspects by surprise, but that most SWAT teams are also observing the letter and spirit of the knock-and-announce requirement.

That requirement is to give notice and opportunity to answer. And that, of course, is incompatible with “surprise.”

This is illustrated by the fact that these raids are commonly conducted late at night, or very early in the morning. If you’re asleep — perhaps in an upstairs bedroom — and police knock and announce just seconds before breaking in, for all practical purposes the difference between “no-knock” and “knock-and-announce” is nil.

But don’t take my word for it. California has had a law against no-knock warrants for some time. After a 1999 dynamic entry raid in which El Monte police shot and killed Mario Paz — an innocent man — the assistant chief of police told the Los Angeles Times: “We do bang on the door and make an announcement — ‘It’s the police’ — but it kind of runs together. If you’re sitting on the couch, it would be difficult to get to the door before they knock it down.”

I’ve been outspoken on the Hudson case. But the truth is, it’s a peripheral issue. The main problem here is not no-knock raids, legal or otherwise. The main problem is the paramilitary tactics, and this relatively recent fervor to break down the doors and storm the homes of suspects who, even if guilty of what’s suggested in the warrant (generally drug crimes), aren’t an immediate threat to the public, the community, or anyone else.

Dick Cheney, Dove?

Rumors continue to swirl that North Korea is about to conduct a test of its long-range Taepodong 2 missile, which would be capable of reaching targets in the United States. The prospect of Pyongyang having not only a small nuclear arsenal but the means eventually to deliver such weapons at great distances has understandably generated agitated commentary in the United States and East Asia.

The latest entry is a Washington Post op-ed by former Clinton administration defense department officials Ashton B. Carter and William J. Perry. Carter and Perry suggest that if the North Koreans do not heed U.S. warnings to refrain from conducting the missile test, the Bush administration should launch preemptive air strikes to take out the missile while it is still on the launch pad. Surprisingly, Vice President Dick Cheney rejected their idea.

It is clear that extremist and reckless proposals have come to dominate a policy debate when Dick Cheney is the resident dove. The Carter-Perry article provides more evidence (as if we needed it) that foreign policy irresponsibility is not confined to neoconservatives in the Republican Party.

Those who propose attacking North Korea need to sit down and take a deep breath. First of all, the rumors about a missile test may or may not be true. On at least two occasions since Pyongyang announced a moratorium on testing in 1999, there have been reports that the test of a long-range missile was imminent. Those reports proved unfounded. This one may as well.

Even if North Korea does conduct a test of the Taepodong 2, it is not the end of the world. Granted, every sensible person would wish that the weird hermit kingdom did not have either nuclear weapons or long-range missiles. But the United States has thousands of nuclear weapons and the means to deliver them with pinpoint accuracy. We’ve deterred other weird regimes in the past, most notably Stalinist Russia and Maoist China. We should be able to deter the likes of Kim Jong-il. The North Korean regime, while bizarre and brutally repressive, has never shown signs of suicidal behavior. And attacking a nation that possesses thousands of nukes would definitely be suicidal.

The decision to launch preemptive air strikes would certainly be more dangerous than relying on deterrence. If the Bush administration follows the advice of Carter and Perry and attacks North Korea, it could easily trigger a general war on the Korean Peninsula. The last Korean war cost the lives of millions of Koreans and more than 50,000 Americans. We should spurn any proposal that risks a repetition. 

Dick Cheney is right to be a dove on this issue. One only wishes that the viewpoint becomes habit forming. 

Hillary and the Candlemakers: Not a Parody

One of the most famous documents in the history of free-trade literature is Bastiat’s famous “Candlemakers’ Petition.” In that parody, the French economist and parliamentarian imagined the makers of candles and street lamps petitioning the French Chamber of Deputies for protection from a most dastardly foreign competitor:

You are on the right track. You reject abstract theories and have little regard for abundance and low prices. You concern yourselves mainly with the fate of the producer. You wish to free him from foreign competition, that is, to reserve the domestic market for domestic industry.

We come to offer you a wonderful opportunity… . 

We are suffering from the ruinous competition of a rival who apparently works under conditions so far superior to our own for the production of light that he is flooding the domestic market with it at an incredibly low price; for the moment he appears, our sales cease, all the consumers turn to him, and a branch of French industry whose ramifications are innumerable is all at once reduced to complete stagnation. This rival …  is none other than the sun.

For after all, Bastiat’s petitioners noted, how can the makers of candles and lanterns compete with a light source that is totally free?

Thank goodness we wouldn’t fall for such nonsense today. Or would we?

Last month, Sen. Hillary Rodham Clinton and nine colleagues (ranging from Barbara Boxer to Tom Coburn) endorsed a petition from — you guessed it — the domestic candlemaking industry asking the secretary of commerce to impose a 108.3 percent tariff on Chinese candle producers.

After the Commerce Department approved the candlemakers’ petition, Clinton said in a statement:

This is a real victory for the Syracuse candle-making industry. Our manufacturers deserve a level playing field and we owe it to them to make sure that others do not unfairly circumvent our fair trade practices. Syracuse has a proud history of candle production but attempts by importers to undercut our producers have put that tradition at risk. I am pleased that the Department of Commerce heeded our call to take action against these unfair practices and recognized the importance of this decision to local producers, especially here in Syracuse. We will continue to make the case on behalf of Syracuse candle-makers as the Commerce Department considers its final determination.

But perhaps the comparison is unfair. After all, Clinton and the National Candle Association aren’t asking for protection from the sun, only from Chinese candle producers who are allegedly “dumping” candles in to the American market “at less than fair value.”

What’s the difference, though? Any source that supplies light to American consumers is a competitor of the American candle industry. And any source that can deliver the light cheaper than American candle companies is a tough competitor. Domestic producers will no doubt gain by imposing a 100 percent tariff on their Chinese competitors. But they could also sell more candles if the government required “the closing of all windows, dormers, skylights, inside and outside shutters, curtains, casements, bull’s-eyes, deadlights, and blinds — in short, all openings, holes, chinks, and fissures through which the light of the sun is wont to enter houses,” as Bastiat’s candlemakers requested.

In our modern world, the candlemakers might also propose that electric lights be banned. Think what that would do for the Syracuse candlemaking industry! Sales would soar, profits would soar, jobs would be created. And, no doubt, the owners and the employees would be immensely grateful to Senator Clinton. Of course, Senator Clinton is a centrist these days, so she would not support such sweeping legislation; perhaps she would propose only to ban electric lights from 10 p.m. to 6 a.m.

In either case, the benefits would not stop with the Syracuse candlemaking industry alone. As Bastiat’s candlemakers told the Chamber of Deputies:

If you shut off as much as possible all access to natural light, and thereby create a need for artificial light, what industry in France will not ultimately be encouraged?

If France consumes more tallow, there will have to be more cattle and sheep, and, consequently, we shall see an increase in cleared fields, meat, wool, leather, and especially manure, the basis of all agricultural wealth.

If France consumes more oil, we shall see an expansion in the cultivation of the poppy, the olive, and rapeseed. These rich yet soil-exhausting plants will come at just the right time to enable us to put to profitable use the increased fertility that the breeding of cattle will impart to the land… .

Thousands of vessels will engage in whaling, and in a short time we shall have a fleet capable of upholding the honour of France and of gratifying the patriotic aspirations of the undersigned petitioners, chandlers, etc.

No doubt, we can expect the same cascade of benefits to ensue from the government’s approval of the petition of the Syracuse candlemaking industry.

I Voted for What?

Rep. John McHugh (R-NY) is an important man in Congress. He serves on the House Armed Services Committee and chairs its Military Personnel Subcommittee which spends $85 billion annually.

Whether he knows how that money is spent is an open question. The Hill reported today that McHugh voted for a defense authorization bill that included a provision “he said he philosophically opposed.” (The provision overrode a federal court’s decision in a dispute between National Guard members and the government about who should pay for correspondence courses).

McHugh apparently had not read the defense authorization bill. Never mind, everyone does it, as The Hill reports, “It is no secret that some — if not most — lawmakers vote on bills that they do not read in their entirety.” McHugh notes that “hundreds and hundreds” of provisions come through, and he relies on his staff “for judgment on more routine matters.”

Members of Congress are elected to work on behalf of their constituents. How can they do that if they don’t read the bills they pass? It is true that the government is so large that supervising how well past laws are being implemented, much less reading bills, takes a lot of time and effort. Maybe more time and effort than even a hard-working member has.

Here’s a thought for members of Congress: maybe the fact that you don’t read the bills you vote for means the government has grown well beyond anyone’s control. Maybe — and this will be shocking to you — the government is too big.

Still Fighting the Last War

The right half of the blogosphere is abuzz with Senator Santorum’s revelation that since 2003 Coalition forces have recovered some 500 pre-1991 artillery shells and other munitions that contain “degraded mustard or sarin nerve agent.” (Not much of a revelation, given that in 2004 the Coalition’s Iraq Survey Group acknowledged the existence [.pdf, p. 18] of pre-Gulf-War shells).

It’s all a bit sad and embarrassing. Do the folks trumpeting this story really expect Americans to hear it and gasp: “My God: Saddam might have put some of those degraded mustard gas shells on his unmanned aerial vehicles, and dusted an American city. I’ve had my doubts about this war, but in the end, it was worth it after all!”

The WMD-based justification for the war never made much sense. As Gregg Easterbrook (among others) has pointed out, “WMD” is a misnomer, particularly when applied to chemical weapons: “Chemical weapons are dangerous, to be sure, but not ‘weapons of mass destruction’ in any meaningful sense. In actual use, chemical arms have proven less deadly than regular bombs, bullets, and artillery shells.” Sure, all of that stuff will kill you, if used properly. But none of it is worthy of the scare term “WMD”–certainly not the sort of decrepit ordnance Santorum’s talking about. Still less can it serve as post hoc justification for the war.