Topic: Social Security

Personal Accounts for Social Security: Still the Best Deal

With the stock market in turmoil, opponents of personal accounts for Social Security have once again raised the specter of Social Security “privatization” in political campaigns across the country. “Imagine if your Social Security taxes were invested in the stock market today,” they suggest ominously. The implication is that if we had allowed today’s seniors to privately invest a portion of their Social Security taxes when they were young, those seniors would be destitute today.

But let’s look at what would really have happened. Someone retiring today, who started paying Social Security taxes when they were, say, 22, would have begun investing 43 years ago, in 1965. As Figure 1 below shows, at that time, the Dow was at 969.26. Even adjusting for inflation, as shown in Figure 2, the Dow was at 43.25.

To show just how much better a deal private investment would have been, look at Figure 3. Assume you had invested a hypothetical $100 in 1965. The redline shows what would have happened if that money had annually earned Social Security’s imputed rate of return (about 2.2 percent for someone retiring today). The blue line represents what would have happened if you earned the actual market return. If you invested $100 in 1965 at Social Security’s rate of return, today you would have $254.91. But if you invested that $100 in the market, today, even with the current down market, you would have $4,135.92.

Any way you look at it, personal accounts are still a better deal.

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Obama’s Non-Plan for Social Security

In the closing days of the presidential campaign, Barack Obama has had relatively little to say about Social Security — other than attacking John McCain for his (tepid) support for personal accounts. There may be a good reason for his reticence. 

Senator Obama has explicitly rejected any proposal to allow younger workers to privately invest part of their payroll taxes through personal accounts. He has also ruled out any reduction in Social Security benefits. Instead, he has proposed a 4 percentage point payroll tax hike, beginning in 2019, for individuals earning more than $250,000 per year in wages. While this fits in well with Sen. Obama’s “tax the rich” philosophy, it does very little for Social Security. 

As we know, Social Security will begin running a deficit — paying out more in benefits than it takes in through taxes — in just nine years, by 2017. Of course, in theory, Social Security is supposed to continue paying benefits after 2017 by drawing on the Social Security Trust Fund until 2040, after which the Trust Fund will be exhausted. In reality, the Social Security Trust Fund is not an asset that can be used to pay benefits. Any Social Security surpluses accumulated to date have been spent, leaving a Trust Fund that consists only of government bonds (IOUs) that will eventually have to be repaid by taxpayers. Therefore, in looking at Social Security’s looming crisis, what really counts is the program’s cash-flow solvency, which turns negative in 2017.

Senator Obama’s proposal would do very little to change this. Most people earning more than $250,000 per year receive the vast majority of their income in forms other than wages or salary. In fact, according to the IRS, only a little more than $1 billion in wages were earned by people with more than $250,000 in wage income. Assuming standard wage growth in the future, Senator Obama’s tax would generate barely $50 million per year. That would not even push back Social Security’s cash-flow insolvency by an additional year.

On one hand, compared to Senator Obama’s other proposed tax hikes, this one offers relatively little pain. On the other hand, it offers even less gain.

If you want to see a Social Security plan that actually works, check out Cato’s 6.2% solution.

Choosing What to Worry About

Paul Krugman’s column in today’s NYT laments the lack of a national policy to combat global warming. He writes:

It’s true that scientists don’t know exactly how much world temperatures will rise if we persist with business as usual. But that uncertainty is actually what makes action so urgent. While there’s a chance that we’ll act against global warming only to find that the danger was overstated, there’s also a chance that we’ll fail to act only to find that the results of inaction were catastrophic. Which risk would you rather run?

He then cites the work of Harvard economist Martin Weitzman, who surveyed the results of a number of recent climate models and found that (in Krugman’s words) “they suggest about a 5 percent chance that world temperatures will eventually rise by more than 10 degrees Celsius (that is, world temperatures will rise by 18 degrees Fahrenheit). As Mr. Weitzman points out, that’s enough to ‘effectively destroy planet Earth as we know it.’”

Krugman concludes, “It’s sheer irresponsibility not to do whatever we can to eliminate that threat” and he calls for opprobrium against those who might impede global warming legislation: “The only way we’re going to get action, I’d suggest, is if those who stand in the way of action come to be perceived as not just wrong but immoral.”

There is merit to the argument that society should consider a policy response to the threat of global warming. A small chance of an enormous calamity equals a risk that may deserve mitigation. That’s why people buy insurance, after all.

However, Krugman doesn’t accept that argument — at least, not when applied to other worrisome risks that trouble people whose politics are different than his. Less than two months ago, he wrote this about another future crisis:

[O]n Friday Mr. Obama declared that he would “extend the promise” of Social Security by imposing a payroll-tax surcharge on people making more than $250,000 a year. The Tax Policy Center estimates that this would raise an additional $629 billion over the next decade. But if the revenue from this tax hike really would be reserved for the Social Security trust fund, it wouldn’t be available for current initiatives. Again, one wonders about priorities. Whatever would-be privatizers may say, Social Security isn’t in crisis: the Congressional Budget Office says that the trust fund is good until 2046, and a number of analysts think that even this estimate is overly pessimistic. So is adding to the trust fund the best use a progressive can find for scarce additional revenue?

In Krugman’s view, policies to address Weitzman’s 5 percent risk of ecological disaster by the early 23rd century (Weitzman’s time frame, which Krugman didn’t specify) are responsible and moral, but policies to address the economic crisis of Social Security’s insolvency in less than four decades’ time are unnecessary and overly pessimistic. And Krugman clobbers anyone who suggests otherwise .

Make sense to you? Me neither.

Krugman’s double-standard on risk is not confined to Social Security. He has (rightly, IMO) blasted the Bush administration for going to war in Iraq. But couldn’t the war be justified as mitigating a small risk of a great catastrophe? Was there, perhaps, a one-in-20 risk that Hussein’s Iraq would develop weapons of mass destruction and direct them at the United States (in the next 200 years)?

I write this not to argue that the United States should be unconcerned about global warming, or about rogue states’ possession of super-weapons, or about Social Security’s (and Medicare’s) unsustainability. All are risks, and it is right for us to consider policy responses for each of them. My point is that it makes little sense to say one risk must be addressed while we should dismiss another risk with an expected value that’s probably the same order of magnitude.

Moreover, if this dichotomy is simply the product of Krugman’s political allegiances (“Red team fears are stupid, Blue team fears are heroic”), isn’t he being irresponsible, wrong and immoral?

Retirement and Fuel Prices: A Match Made In Heaven?

Get ready for Washington D.C.’s Mall to be filled with seniors in the not-too-distant future.

About 25 percent of seniors depend entirely on Social Security for their consumption. And for two-thirds of them, Social Security makes up the majority of their monthly income. With soaring fuel and food prices, they are beginning to complain about being unable to make ends meet — as in, having to cut down on leisure and travel activities.

The rise in gas, food, and commodity prices is unlikely to be a bubble and won’t ”burst” anytime soon. Furthermore, the Fed’s recent interest rate–cutting binge has promoted a weaker dollar and risks higher future inflation and inflation expectations. That means our itinerant seniors will soon demand a larger inflation adjustment on their monthly checks than allowed by Social Security’s post-retirement benefit formula.

No prizes for guessing whether Congress will capitulate!

Shiny, Happy SSA Employees

I recently had the opportunity to conduct a pair of briefings for congressional staff regarding electronic employment eligibility verification. A pair of bills are vying for the attention of Congress these days. I suggested in my recent paper, “Electronic Employment Eligibility Verification: Franz Kafka’s Solution to Illegal Immigration,” that Congress should ignore both. Indeed, it should eliminate “internal enforcement” of immigration law entirely.

One of my co-briefers provided staffers with some interesting information pertaining to the idea of building a regulatory contraption for automatic nationwide verification of workers’ identity and immigration status. He was a representative of SSA workers from the American Federation of Government Employees, National Council of SSA Field Operations Locals.

The programs slated to go national under these proposals would compare data about new workers (and in some cases, existing workers) with databases at the Social Security Administration and the Department of Homeland Security. When the data didn’t match, workers would receive what is called a “tentative nonconformation.” With the 4.1% error rate in SSA files (as found by its Inspector General), that’s a lot of tentative nonconfirmations going even to law-abiding American citizens. A higher percentage of the time, naturalized citizens would get them, too, as government data about them is even more error-prone. Bad government data is just one source of error.

Anyway, when a tentative nonconfirmation is issued, employers are supposed to communicate this to the employee (not all do) and the worker is supposed to report to a Social Security Administration office or the Department of Homeland Security to clear the problem up. This is where the interesting new information comes in.

What would the process be like? Well, try calling your local SSA field office to find out. The SSA worker rep reported that 50% of those calls aren’t answered because field offices are too busy. Calls to the SSA’s national 800-number don’t go through 25% of the time.

It’s not just a phone problem. The agency currently has a backlog of 752,000 on disability rulings. That’s three quarters of a million people who aren’t getting an answer from SSA. It takes 530 days – a little under a year and a half – to get a disability ruling out of SSA.

In my paper, I wrote about the experience American workers would get at the Social Security offices when they went to clear up their tentative nonconfirmations:

Disputes of tentative nonconfirmations would not happen in lushly carpeted offices with marble columns, hot coffee, and friendly, attentive staff. The experience of American workers when they sought permission to work would be much more like their trips to the nation’s departments of motor vehicles, post offices, and dentists—long lines, unfriendly service, and painful procedures.

The SSA union rep assures me that SSA workers are friendly. Any perception of unfriendliness is due to overwork. Fair enough; I may have been slapdash in my writing about SSA employees. But a national electronic employment eligibility verification system would result in 3.6 million new visits to these folks, overworking them and eroding their courtesy even more. These visits, and administering tentative nonconfirmations at SSA, would cost $1 billion, according to the union rep.

Of course, an SSA employee union rep would happily take the money and add workforce to do whatever Congress wants. My preference is to save the money. Enforcement of our abnormally restrictive immigration law causes us to spend taxpayer money on undermining the productive economy. That shouldn’t make sense to anyone.

The Truth about Milton Friedman

Peter Goodman writes in the New York Times that we live in a laissez-faire world created by Milton Friedman and that that wild, unfettered market has led to our current economic problems.  David Henderson, the first editor of Cato Policy Report, begs to differ. David R. Henderson is a research fellow with the Hoover Institution, an economics professor in the Graduate School of Business and Public Policy at the Naval Postgraduate School, and the editor of The Concise Encyclopedia of Economics (Liberty Fund, 2008). Here’s his critique of the Times article:

In the April 13 New York Times, economics reporter Peter S. Goodman takes “A Fresh Look at the Apostle of Free Markets,” the late Milton Friedman.  Goodman’s goal seems to be to persuade the reader that we’re emerging from an era of laissez-faire that Ronald Reagan and Milton Friedman implemented together, that laissez-faire didn’t work, and that now we need to reregulate.  No, really.  I’m not kidding.  That seems to be what he’s saying.

Now, Peter is a nice guy.  He’s interviewed me a few times and we had a nice hour-long talk at the Hoover Institution earlier this year.  But his article is full of confusions and misstatements and is crying out for an answer.  Here’s mine.  The quotes from Peter’s article are indented and my answers follow.

Joblessness is growing. Millions of homes are sliding into foreclosure. The financial system continues to choke on the toxic leftovers of the mortgage crisis. The downward spiral of the economy is challenging a notion that has underpinned American economic policy for a quarter-century — the idea that prosperity springs from markets left free of government interference. 

The first two sentences are probably correct.  The third might be correct.  The fourth, the most important in the paragraph, is badly wrong.  Markets haven’t been seriously free of regulation since before the Great Depression.  There were some major deregulatory victories—in airlines, railroads, and trucking—but interestingly, these victories preceded the last quarter century—they happened in the late 1970s and 1980, under President Jimmy Carter.  And they led to good results—cheaper air travel and shipping and more accountability for truckers and railroads, to name two.  It’s true that people give lip service to economic freedom.  But the current president nationalized prescription drugs for the elderly, nationalized airport security except in five cities, and dramatically expanded federal intervention in education.  The previous Congress banned Internet gambling and the current Congress has banned certain kinds of light bulbs.  The government is now pushing people into more-expensive sources of energy.  State and local governments have passed laws that prevent owners of bars and restaurants from allowing smoking.  Congress in the 1990s started to dictate that insurance policies cover certain medical procedures. And notably, federal regulations from mortgage subsidies to the Community Reinvestment Act encouraged ill-advised investments. Those are some of the increases in government regulation.  There have been few decreases. 

The modern-day godfather of that credo was Milton Friedman, who attributed the worst economic unraveling in American history to regulators, declaring in a 1976 essay that “the Great Depression was produced by government mismanagement.” 

True.  And, by the way, Friedman got this one right as even that superregulator, Ben Bernanke admitted.  At Friedman’s 90th birthday party, Bernanke said, “I would like to say to Milton and Anna [Schwartz]: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.” 

Five years later, Ronald Reagan entered the White House, elevating Mr. Friedman’s laissez-faire ideals into a veritable set of commandments. 

Oh, really?  Within a few months, Reagan had persuaded the Japanese government to forcibly limit the number of cars the Japanese auto companies could sell to the United States. And Reagan left almost all federal regulations in place. 

Taxes were cut, regulations slashed and public industries sold into private hands, all in the name of clearing government from the path to riches. 

Reagan did cut taxes in 1981–and then raised them in 1982, 1983, 1984, 1985, 1986, and 1987

As the economy expanded and inflation abated, Mr. Friedman played the role of chief evangelist in the mission to let loose the animal instincts of the market. 

This certainly is a “fresh” look at Milton Friedman.  It’s also wrong.  I don’t think Friedman ever thought that in advocating that humans be freer, he was advocating letting loose “animal instincts.”  Animals act far more like governments—that is, they use force against their competitors—than like peaceful market participants. 

But with market forces now seemingly gone feral, disenchantment with regulation has given way to demands for fresh oversight, placing Mr. Friedman’s intellectual legacy under fresh scrutiny. 

Unfortunately, Goodman doesn’t say how market forces have gone feral.  Government remains feral and government seems poised to use more force against more victims, but how markets do that is beyond me.  As for Friedman’s intellectual legacy, or anyone else’s, fresh scrutiny is always good.  You won’t find any of it in Goodman’s article, though. 

Just as the Depression remade government’s role in economic life, bringing jobs programs and an expanded welfare system, the current downturn has altered the balance. 

But wait a minute.  The Depression did alter the balance, increasing government power at the expense of people’s freedom dramatically.  Very few Depression-era programs were ended.  We’re still stuck with the SEC, agricultural subsidies, welfare, and Social Security.  Moreover, every president after Franklin Roosevelt increased government power, often, as with LBJ (Great Society), Nixon (price controls, OSHA, and EPA), and Bush Jr. (No Child Left Behind, nationalization of two industries), substantially.  So how can the current downturn alter the balance?  We’ve been moving away from economic freedom for 80 years.  (Herbert Hoover began what really should be called a mini-New Deal.)  How can more government programs alter the balance? 

As Wall Street, Main Street and Pennsylvania Avenue seethe with recriminations, a bipartisan chorus has decided that unfettered markets are in need of fettering. Bailouts, stimulus spending and regulations dominate the conversation. 

It would be more accurate to say, “a bipartisan chorus has decided that fettered markets need to be fettered more.”  But that doesn’t have the same ring, does it? 

In short, the nation steeped in the thinking of a man who blamed government for the Depression now beseeches government to lift it to safety. 

So if the nation is “steeped in the thinking of a man who blamed government for the Depression,” wouldn’t you expect most people to have, until recently, “blamed government for the Depression”?  Is that really what Goodman perceives?  It’s not what my students think when they start out in my class.  Nor is it what their parents think.  Where is Goodman getting his information? 

If Mr. Friedman, who died in 2006, were still among us, he would surely be unhappy with this turn. 

Amen, brother.  Goodman finally got one right. 

“What Milton Friedman said was that government should not interfere,” said Allen Sinai, chief global economist for Decision Economics Inc., a consulting group. “It didn’t work. We now are looking at one of the greatest real estate busts of all time. The free market is not geared to take care of the casualties, because there’s no profit motive. There’s no market incentive to deal with the unemployed or those who have lost their homes.” 

Where do I begin?  Sinai’s first statement is true.  But his second statement?  How could he say that not having government interfere didn’t work when through the whole era being discussed, government interfered?  Even if you were a dyed-in-the-wool advocate of government interference, you couldn’t make Sinai’s statement because throughout that era we had massive government interference.  And what are we to make of Sinai’s statement that the “free market is not geared to take care of casualties”?  Has he heard of insurance?  It’s a free-market way of taking care of casualties.  And there’s no profit motive?  Huh?  People don’t want to make profits?  And there certainly is a “market incentive to deal with the unemployed or those who have lost their homes.”  Employers deal with the unemployed through markets all the time—by hiring them.  And people who have lost their homes still want a place to live and so property owners want to deal with them by renting to them. 

To Mr. Friedman, such sentiments, when turned into policy, deprived the economy of the vibrancy of market forces. 

Somewhat true, but overstated.  One of Milton’s favorite lines was one from Adam Smith: “There is much ruin in a nation.”  He once explained to me that that meant that a whole lot of things can go wrong, and government can mess things up in many ways, but the desire to better ourselves can still make markets work. 

Born in Brooklyn in 1912 to immigrant parents who worked briefly in sweatshops, Mr. Friedman retained a sense that America was a land of opportunity with ample rewards for the hard-working. 

True. 

His intellectual bent was forged as a graduate student at the University of Chicago, a base for those who saw themselves as guardians of classical economics in a world then under the spell of woolly-headed revisionists. 

Not exactly.  The marginal revolution of 1870 had upset the classical school.  The Chicago School economists of the 1930s believed in the marginal revolution.  And many of them advocated, at the same time, a great deal of government intervention.  Read Henry Simons’s work of that era and see if you would ever dream of calling him an advocate of laissez-faire. 

The chief object of their scorn was John Maynard Keynes, and his message that government had to juice the economy with spending during times of duress. 

Not even close.  Milton Friedman was a Keynesian at least into his late thirties.  The shift in his thinking was gradual, so much so that he could never identify—we talked about this—when he became a non-Keynesian.   

That notion dominated policy in the years after the Depression. Mr. Friedman would spend much of his career assailing it: He argued that government should simply manage the supply of money — to keep it growing with the economy — then step aside and let the market do its magic. 

True.  But I don’t recall Friedman ever using the word “magic.”  The way markets work is a completely understandable result of private property and freedom. 

So firm was his regard for market forces, so deep his disdain for government, that Mr. Friedman once said: “If you put the federal government in charge of the Sahara Desert, in five years there would be a shortage of sand.” 

I didn’t know that was his line, but it’s a good one. 

This antagonism toward bureaucracy seemed to spring from Mr. Friedman’s conception of his country as a bastion of rugged individualism. During an interview on PBS in 2000, he noted that Adam Smith, the father of classical economics, published his canonical work, “The Wealth of Nations,” in 1776, “the same year as the American Revolution.” 

Basically correct.  But his antagonism toward bureaucracy also sprang from his empiricism.  He saw how badly bureaucracy worked and how well economic freedom works. 

He spoke in the interview of his concern at the end of World War II that socialism was gaining adherents because countries had been forced to organize collectively to produce armaments. 

“You came out of the war with the widespread belief that the war had demonstrated that central planning would work,” Mr. Friedman said. “The left, in particular, … interpreted Russia as a successful experiment in central planning.” 

True. 

Mr. Friedman’s brand of libertarianism rested on the assumption that economic and political freedom were one and the same. It meshed with and fed the cold war thinking of his time, as the United States offered up capitalism as liberty itself in contrast to the authoritarian Soviet Union. 

The first sentence is absolutely false.  Friedman argued, in one of the classic passages in Capitalism and Freedom, that a great deal of economic freedom is required if we are to have political freedom.  He always distinguished clearly between them. 

Among professional economists, Mr. Friedman’s analytical mastery was near-universally admired. 

True. 

His first breakthrough came in the 1950s with his idea that people’s savings and spending were not a function of psychological factors, but based on rational estimations of wealth. 

That’s actually a nice statement of Friedman’s “permanent income theory of the consumption function.” 

His greatest contribution came the following decade, when Mr. Friedman dismantled the consensus view that inflation was a tolerable byproduct of high employment.  

No.  Friedman’s biggest contribution was his book, co-authored with Anna Schwartz, A Monetary History of the United States, 1867-1960, their analytical contribution to, among other things, the view that Federal Reserve monetary policy was the major contributor to the Great Depression.  It was this work that led, four decades later, to Bernanke’s aforementioned apology.   

He demonstrated that high inflation would eventually cost jobs, as businesses were discouraged to invest by the higher wages they had to pay. 

Not even close.  Probably what Goodman is referring to is Friedman’s insight, in his 1967 Presidential address to the American Economics Association, that there is no long-run tradeoff between inflation and unemployment.  Friedman made an argument that Friedrich Hayek had made years earlier.  Friedman argued that an unanticipated spurt in inflation could reduce unemployment because unemployed workers would be “fooled” into accepting jobs at high nominal wages that were really low real wages.  Once workers figured this out, Friedman argued, unemployment would creep up to the “natural rate.” 

“This triumph, more than anything else, confirmed Milton Friedman’s status as a great economist’s economist, whatever one may think of his other roles,” Paul Krugman, an economist (and a New York Times columnist) wrote last year in The New York Review of Books. 

Overstated.  Friedman made steady headway all through the 1960s.   

Mr. Friedman captured the era with a new formulation known as monetarism: that the government should gradually and predictably inject cash into the financial system, and then let the market figure out where it should go. 

That’s one of the worst statements of monetarism I’ve seen.  Monetarism is the theory that monetary policy matters more than fiscal policy in its ability to affect nominal GDP, and that changes in the velocity of money are slow and predictable.  Actually, for the best succinct statement of monetarism, see Ben McCallum’s article, “Monetarism,” in David R. Henderson, ed., The Concise Encyclopedia of Economics, Liberty Fund, 2008. 

“Any honest Democrat will admit that we are now all Friedmanites,” Lawrence H. Summers, the Harvard economist and former Clinton administration Treasury secretary, wrote in an appreciation published in this newspaper when Mr. Friedman died. “He has had more influence on economic policy as it is practiced around the world today than any other modern figure.” 

Actually, I think Larry overstated the case.  I think you could be honest and not be a Friedmanite. 

But the reviews for Mr. Friedman’s work grow mixed when the subject moves to his role as chief proselytizer in the drive to reduce the role of government in public life. 

Too vague to evaluate.  Whose reviews?  He doesn’t say.  The reviews of Friedman’s work as proselytizer have always been mixed. 

He laid out a blueprint in his 1962 book, “Capitalism and Freedom,” calling for the end of the military draft, the abolition of the licensing of doctors and the creation of “education vouchers” that parents could use to send children to private schools, injecting competition into public education. 

True. 

Two years later, Mr. Friedman put those principles to work as an economic adviser to the presidential campaign of Senator Barry Goldwater, a Republican from Arizona. The campaign called for the abolition of government oversight of the energy, telephone and airline industries and the dismantling of the Social Security system and national parks. 

That would have been nice, but I’m virtually positive that it’s untrue.  Goldwater said nothing about the energy, telephone, or airline industries: at least in all the books I’ve read about his campaign, I don’t recall a thing ever said about those issues.  He also did not call for dismantling national parks, whatever that means.  As for Social Security, Goldwater did say a few times that it should be voluntary but that thought did not rise to the level of campaign promise.   

Mr. Goldwater took a drubbing at the hands of Lyndon Johnson. Mr. Friedman would remain in the policy wilderness until the rise of President Reagan. Then, his notions about rolling back government took on the force of dogma. 

The first sentence is true.  The second is wildly inaccurate.  Friedman was active in the push to eliminate the draft, serving as a key member of the President’s Commission on the All-Volunteer Force in 1969, which agreed 14-0 with one abstention, to recommend ending the draft.  Call me crazy, but I think that removing the government’s gun from the heads of two million men every year is a little bit of an accomplishment.  Friedman was also active in various state tax limitation campaigns, which he always had more confidence in than any presidential candidate.  The statement about dogma is typically overdone; more’s the pity. 

This was so not only in the United States, but also throughout much of the world. As former Iron Curtain countries embraced free markets, they did so with Mr. Friedman’s books in hand. The International Monetary Fund and the World Bank leaned heavily on his ideas in prescribing policies for countries from Asia to Latin America. 

The first sentence is correct.  The third is not.  They talked a good game but the IMF and World Bank still handed out taxpayers’ money to ruthless governments.   

“Among the cognoscenti, he became the figure that represented the war against the overwhelming welfare state,” said Hernando de Soto, a prominent Peruvian economist. “The idea that people are responsible for progress far more than government. One should reserve most of the action for the private sector. From Brazil to Mexico, that idea is still in place.” 

Even Mr. De Soto overstates.  That idea is in place in Mexico?  Where does it show up in Mexico’s policies? 

But Mr. De Soto faulted Mr. Friedman for failing to temper his admonitions with an understanding of poverty and income inequality. 

“The problem with Milton Friedman and his fellow libertarians is they never took into consideration the importance of class,” Mr. De Soto said. “They ignored the way elites were able to distort the policies they prescribed for their own benefit.” 

Well, I guess De Soto said it, but that doesn’t represent Friedman’s views.  Friedman has always been outspoken about well-heeled businesses seeking tariffs, import quotas, and regulation of their competitors.  Maybe De Soto has as much of a tin ear as Peter Goodman. 

In much of Latin America, economic growth never reached the poor, laying ground for the socialist backlash now led by Venezuela’s president, Hugo Chávez. 

True.  But this is hardly a comment on Friedman’s beliefs in markets. Venezuela has had a combination of socialism and fascism for decades. 

In the United States, the reconsideration of the Friedman doctrine came via the global financial crisis that has resulted from the collapse of American real estate. Many economists blame regulators for ignoring warning signs that banks and investors were growing reckless. One Friedman acolyte has taken the brunt of such criticisms — Alan Greenspan, the former chairman of the Federal Reserve. 

If many economists blame regulators, couldn’t this reporter name three?  And what is their case?  And does he even consider the tremendous moral hazard that results precisely because of regulation via deposit insurance and implicit government guarantees?  Nope. 

But as America reaches for regulation to tame the markets, the keepers of the Friedman flame remain resolute that government is no solution. 

True.  We do. 

“Friedman taught some fundamental long-run truths and he was adept and skilled and almost brilliant at getting them into the public domain,” said Allan H. Meltzer, an economist at Carnegie Mellon. “Now we’ve come into a crisis that has dampened enthusiasm for those policies, and we’re headed back into a period of more regulations that will do the same bad things as in the past.” 

Almost?  Well, here my objection is to Allan Meltzer, not Goodman.  Everything else Meltzer said, though, is spot on.   

The Folly of Dismissing the Effects of Entitlements on Fertility

Steve Entin recently wrote in the Wall Street Journal (“The Folly of ‘Family Friendly’ Tax Policy,” April 9, 2008; Page A15): “…proponents of greater family tax credits also claim that society owes families a big child credit because the children will face huge payroll taxes to support childless retirees who never paid to rear the next generation. Another claim is that payroll taxes make it hard for families to afford children, and we need families to have more children to pay for Social Security and Medicare. These arguments don’t wash. Most people have children because they want them, not because the state needs future taxpayers to fund social programs.”

On the 1st claim of the child tax credit proponents: Higher child tax credits today would strengthen the defense against cuts in future benefits by everyone, and especially by childless retirees.  But that goes in the wrong direction relative to what’s required–cutting future benefits because they’re not payable, even under today’s high payroll taxes.

On their 2nd claim: If payroll taxes are a hurdle to procreation by young adults, the correct remedy should be to lower them rather than introduce yet another entitlement for young adults in their children’s names – which they would use to extract resources from those children in the future by way of retirement benefits. But today’s high payroll taxes on parents are not for saving and investing for their own future retirements.  Those taxes are for paying benefits to today’s retirees under our pay-as-you-go Social Security system.  Cutting payroll taxes, therefore, would require today’s retirees, in turn, to accept smaller benefits—which is, of course, a big no-no for proponents of child-tax credits.

According to Mr. Entin, however, both of these claims don’t wash because of the rather tepid idea that people have kids because they want them, not because they (or the state) wants more future taxpayers.

However, according to studies on the potential links between fertility and entitlement spending, (for example, Michele Boldrin’s) it appears that fertility rates correlate negatively with generous government entitlement expenditures across countries.  They also correlate negatively with better access to financial markets which enables people to securely transfer purchasing power to old age. So positive fertility seems to reflect, however indirectly, a desire to “save/invest” for the future in the absence of other public and private vehicles of achieving economic security during old age.

The bottom line: Along with its well-established negative impacts on saving/investing and labor supply, unfunded entitlement promises potentially erode yet another pro-growth factor–fertility.  An estimate of net benefit promises to current adults under current entitlement policies – compiled from various tables of the latest Social Security and Medicare Trustees’ reports – shows that such underfunding amounts to $44 trillion in present discounted value!  That’s a promise of almost $200,000 in today’s dollars of future Social Security and Medicare benefits for each person aged 15 and older today.  Why would you, then, work, save, and have children to safeguard your future?