Skidmore’s Weak Defense of Social Security

University of Missouri-Kansas City political scientist Max Skidmore recently criticized as “add[ing] nothing” Cal-Berkeley economist Konstantin Magin’s arguments in support of Social Security personal accounts. Let’s examine some of Skidmore’s arguments in favor of the current system:

Magin seems almost to promise guaranteed, risk free returns. Even if this were correct, it is irrelevant. Social Security is not an investment scheme; it offers more than retirement benefits, and its low administrative expenses make it more efficient than any private scheme.

Skidmore’s focus on just administrative costs misrepresents the program’s true costs, which includes distortions in saving and work effort in the economy. The payroll taxes that fund Social Security — to the extent that they are perceived as unrelated to future benefits — reduce worker incentives and, at the same time, Social Security retirement benefits induce workers to exit earlier from the work force. Those effects are well-documented by economists David Wise (Harvard) and Jonathan Gruber (MIT). Tax-financed benefits reduce personal saving (as demonstrated by Harvard’s Martin Feldstein), and the program’s institutional structure — the Trust Fund’s investment restrictions — means the program’s surpluses are not truly saved and invested (as argued by Penn’s Kent Smetters and Stanford’s John Shoven). Thus, overall the program reduces national saving. Those resource costs should be added to obtain a true picture of how costly Social Security is.

It has a mildly redistributive effect: workers who earn less receive a greater portion of their earnings in benefits than do those who earn more.

The redistributive effect is not mild at all when you consider its redistribution from younger and future generations toward older ones. There are any number of measures developed by well-respected economists — such as Alan Auerbach (Berkeley) and Larry Kotlikoff’s (Boston University) generational accounting measures — that document the massive intergenerational redistribution that the program imposes. That redistribution remains hidden because of the cash-flow budget accounting adopted by official scoring agencies. As the program’s shortfalls compel policy adjustments in the future, the true scope of the program’s redistributive force will become obvious — but it will be too late to avoid the negative economic effects of forced higher taxes and smaller benefits for future generations.

[I]nsurance against long life is very valuable, and private annuity markets appear to be quite costly[.]

But annuity markets are costly because we already live in a world with Social Security, which forcibly annuitizes retirement resources. And there is evidence that private insurance purchases do not fully unwind the forced annuitization via Social Security (Auerbach et al.). This is increasingly so as the intensity of desires to bequeath assets to children has eroded over time, as Kotlikoff and I have shown using data from the Federal Reserve’s Survey of Consumer Finances.

Social Security effectively monopolizes the annuity market and any residual purchasers on private markets are the high-risk ones — those likely to live longer than average. That explains the high cost of private annuities. If Social Security were altered by the introduction of personal accounts, private annuity sales would increase and broader risk pooling would lead to lower costs.

Nearly one third of all Social Security checks go to children, and to others younger than retirement age.

Children’s Social Security benefits as survivors and dependents could be replaced easily by independent insurance programs under a Social Security reform that establishes personal accounts.

Because of the independence it gives to seniors, young couples now rarely are required to support their elderly relatives, as documented by Kathleen Mcgarry and Robert Schoeni.

Again, this is an extremely shortsighted view. By encouraging independence among the elderly from their children, Social Security is destroying family cohesion and extended family links that are crucial for transferring human capital to the next generation. By increasing the costs for younger workers through the program’s excessively costly payroll taxes, it is also promoting lower fertility — thereby weakening a key growth-promoting factor in developing countries. Studies by Washington University’s Michele Boldrin indicate that, in countries with generous public pensions, fertility rates have declined.

Russell Roberts: A Novel Approach

Russell Roberts, of NPR, Cafe Hayek, and EconTalk fame, will talk about his new book The Price of Everything: A Parable of Possibility and Prosperity at a Cato Book Forum at noon on Monday, December 1.

Earlier this fall, George Will wrote of Roberts’ book in Newsweek

Improbable as it might seem, perhaps the most important fact for a voter or politician to know is: No one can make a pencil. That truth is the essence of a novella that is, remarkably, both didactic and romantic. Even more remarkable, its author is an economist. If you read Russell Roberts’s The Price of Everything: A Parable of Possibility and Prosperity, you will see the world afresh — unless you already understand Friedrich Hayek’s idea of spontaneous order. Roberts sets his story in the Bay Area, where some Stanford students are indignant because a Big Box store doubled its prices after an earthquake. A student leader plans to protest Stanford’s acceptance of a large gift from Big Box. The student’s economics professor, Ruth, rather than attempting to dissuade him, begins leading him and his classmates to an understanding of prices, markets and the marvel of social cooperation.

See for yourself on December 1, the Monday after Thanksgiving, with comments by reformed literature Ph.D. Nick Gillespie.

Topics:

Dynastic Politics in Alaska

A year ago it looked like we might replace the son of a president in the White House with the wife of a president, while some Republicans grumbled that it was too bad the president’s brother couldn’t succeed him. I wrote then that Americans fought a rebellion to replace a monarchy with a republic, “in which men (and later women) would be chosen to lead the republic on the basis of their own accomplishments, not their family ties.” But

In a country formed in rebellion against dynastic government, some 18 members of the US Senate in 2005 had gained office at least in part through family ties, along with dozens of House members.

And the trend continues. Now Alaska, the Last Frontier, the state of rugged individualism, is going to be represented in the U.S. Senate by the daughter of a former governor and senator and the son of a former congressman. In a bit of a War of the Roses twist, Sen. Mark Begich’s father won his first congressional election by defeating Sen. Lisa Murkowski’s father.

Gun Control on Trial

Monday afternoon, the Cato Institute will be hosting Brian Doherty, Senior Editor of Reason magazine.  The topic will be his book, Gun Control on Trial: Inside the Supreme Court Battle Over the Second Amendment.  Christopher Rhee, partner at Arnold & Porter, will be on hand for comments as well.  Tim Lynch, the Director of Cato’s Project on Criminal Justice, will be moderating.

Brian’s book tells the inside story of the litigation that overturned the D.C. gun ban, D.C. v. HellerLibertarian and Second Amendment bloggers have already expressed their excitement, and his previous writings have been discussed at the law blog The Volokh Conspiracy.  As a preview to the event, check out Reason TV’s videos of Brian discussing this historic legal battle, both before and after the decision came down. 

For more information on attending or watching the Cato book forum live, click here.

Balko: Three for TSA

Radley Balko has nominated me to head the Transportation Security Agency. It’s a kind compliment. His column this week has some good ideas in it, too.

Fellow nominee Bruce Schneier doesn’t want the job. Of Bruce’s refusal, Radley says:

[I]t sorta’ reminds me of what a retired police chief once told me about how he staffed his SWAT team. He said he’d ask for volunteers, then disqualify every officer who raised his hand. He added, “The guys who want the job are the last ones who should have it.”

That leaves John Mueller, whose excellent 2004 Regulation magazine article “A False Sense of Insecurity?” has stood the test of time. His insight into the strategic logic of terrorism will eventually turn around our country’s maladjusted approach to securing against terrorism.

Libertarians Can’t Win

I was pleased to read Ezra Klein’s reaction to this month’s installment of Cato Unbound, in which he defended libertarians’ honor. Well, sort of:

This also gets at the weird nexus between libertarianism and corporate interests. Anti-state is not the same as pro-corporation, and insofar as a lot of liberals understand libertarians to be simple corporate stooges, they’re not quite right. In certain places – notably tech and patent issues, which is one of those spots where government policy and corporate interests converge – there’s nearly unanimous opposition to the position that’s most closely associated with corporate profits. And so Cato doesn’t get a lot of contributions from the recording industry.

But there are plenty of spaces where corporations or other wealthy economic actors see profit in avoiding or repealing certain regulations and laws – energy is notable here, as is the estate tax – and so libertarians find themselves rather well-funded. And then there are spaces where corporations want to profit from a service the government currently controls – like Social Security – and libertarians are quite happy to create an ideological argument for corporate self-interest. Crucially, it’s not that libertarians are always and everywhere in favor of corporate profits, but that they often are, and corporations find that useful, and so you have frequent marriages of convenience that also end up ensuring that the priorities of professional libertarians priorities are those that most effectively support corporate profits, as those are the projects that get funded.

It sounds to me like what Ezra is saying here, in an extremely back-handed fashion, is that libertarians aren’t corporate stooges at all. When the interests of corporations happen to align with what we regard as good public policy, then corporate interests tend to be our allies. Otherwise, they tend not to be. Which, as far as I can tell, is exactly how it should be.

It’s interesting that this discussion is coming up at a time when the biggest issue on the economic policy agenda is how many more hundreds of billions of dollars the American taxpayer will be forced to give to large corporate interests in Detroit, Manhattan, and elsewhere. Strangely enough, you’ll find people on the left-hand side of the political spectrum cautiously endorsing government handouts to some of the nation’s largest and most dysfunctional corporations, while scholars here at the Cato Institute have been sharply critical of welfare for large corporations.

Now, I don’t doubt for a minute that liberals’ support for government handouts to giant corporations is based on their sober assessment of the policy merits, rather than a dedication to “corporate profits” as such. But it is a little bit frustrating that when libertarians take a firm stance against the interests of large corporations, we don’t get praised for our independence so much as getting attacked for our ideological rigidity. These charges can’t both be right: we can’t both be solicitous corporate shills and inflexible ideologues. If people are going to question our motives, I wish they’d at least get their story straight on exactly which kind of intellectual dishonesty they think we’re engaging in.

Measuring “Success” in the War on Drugs in Mexico

The Economist had a story a few weeks ago on the recent developments of Mexico’s war on drugs. According to the magazine:

“At least 4,000 people have been murdered in violence involving traffickers so far this year. Officials say that is a sign that government pressure [on drug gangs] is having an effect.”

Their measurement of success is quite macabre; more people are dying in Mexico, including innocent bystanders who happen to be in the wrong place at the wrong time. This would be a tragedy in any other scenario, except for the twisted logic behind the war on drugs.

In related news, the head of Interpol in Mexico was arrested today for alleged collaboration with organized crime. I can’t wait to see how the drug warriors present this development as a “success.”