Arnold Kling  

Comments on Science and Social Security

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Science vs. Social Security... Credit Bush for Recovery?...

Many interesting comments on my suggestion that science could bail out social security. First, Andrew writes,


Social Security pays retirees a benefit based on their pre-retirement wages, targeting a 'replacement rate' rather than a real benefit level. If GDP grows faster so do their wages, all other things equal. Higher wage growth raises payroll tax revenues but, with a slight delay, also raises the benefits SS must pay. As a result, Social Security's finances are remarkably insensitive to wage growth.

Quite right. Productivity gains lead to higher benefits for recipients as well as higher wages for workers. However, with really rapid productivity gains, workers might be able to stay ahead. For one thing, there could be strong "vintage effects" of human capital, so that as people get close to the retirement age, their wages level off, while wages of young workers rise.

Also, if productivity is high, then the standard of living for everyone can be high, even if the elderly's share of the pie is disproportionately large. Still, the case for indexing benefits to prices rather than to wages (thereby de-linking benefits from productivity) is very strong. This would be a subtle yet effective way to scale back Social Security benefits and improve the viability of the system.

Finally, the program that really blows up under conventional extrapolations is Medicare. Medicare costs are not linked to productivity growth by any mechanism. So greater productivity would reduce the burden of Medicare.

It was pointed out that if technology increases longevity, but we keep the retirement age constant, then this will increase the burden of entitlement programs. That, too, is quite right. I have argued that the failure to index the retirement age to longevity is a major reason that the entitlement programs threaten to blow up.

On his web log, Steve Verdon writes,


Suppose we could construct a technology index and set say, 1968=100. What would the current value of the index be? 200? 300? 600? Has human productivity increased by that much? No.

This is reminiscent of Robert Solow's famous comment that "We see computers everywhere but in the productivity statistics." That was in 1987. Now, we are starting to see them in the productivity statistics. The problem is that until recently, the technological component of the capital stock was small. Thus, even large increases in quality meant very little to the economy as a whole in 1987. They mean more now.

Go through an exercise in which one sector of the economy grows at one percent per year and another sector grows at 20 percent per year. Start with the fast-growing sector being really small--say 0.5 percent of the economy. At first, the the growth rate of the economy as a whole is pretty much the same as the slow-growth sector. But after a number of years, the fast-growth sector becomes more and more important, and it starts to influence the overall growth rate significantly. This is a highly nonlinear process. The influence of technology on productivity can be too small to detect for a while, then it becomes noticeable, and then a few years later it becomes tremendous. One could argue that today we are somewhere in between "noticeable" and "tremendous" today.

Returning to the comments on my post, several people mentioned the law of diminishing returns. Technology optimists reject that law. They argue the opposite--that innovation is a positive feedback process. Ray Kurzweil uses the expression "law of accelerating returns." Better computers enable us to design better computers. Powerful computers enable us to carry out nanotech and biotech research. Nanotech and biotech will have positive feedback on one another, etc.

Another comment is that humans may not adopt technology quickly or effectively. I think that could be a significant source of friction in the process of turning technological change into economic growth.

Since the original thread seems to have gotten a bit off the subject, continue the discussion here.


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CATEGORIES: Social Security



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The author at Deinonychus antirrhopus in a related article titled New Economy Redux? writes:
    This is an interesting article on Social Security over at the American Enterprise Institute. The thrust of the article is [Tracked on October 30, 2003 7:13 PM]
COMMENTS (9 to date)
Steve writes:

Arnold,

Thanks for the link. You're right early on an exponential process could be mistaken as a linear one as a linear approximation early would yeild a very good fit to the data. I've updated my post, including a spiffy graph showing the potential pitfall.

Anyhow, I was wondering where do you get the data on this? BLS?

Don Lloyd writes:

Arnold,

If high productivity growth is as significant as many claim, we should be able to discern its historical effects.

I don't have any idea of the actual numbers, but assume that real agricultural productivity has improved at an annual rate of 3% over the last 50 years. If we were to look at the percentage of after tax income spent on food for a U.S. family of four with a median income level, how would it have changed over the last 50 years?

Regards, Don

Arnold Kling writes:

Don,
I don't have the figures handy to answer your question exactly. But late last year Virginia Postrel noted that she had just bought a 5-pound bag of flour for 69 cents, and Brad DeLong responded by saying that 500 years ago it would have taken three or four days of labor to produce the calories in that bag of flour. If you take what an average worker earns in three or four days today and divide it by 69 cents, you get a feel for the long-term productivity change. Most of that change took place in the past 100 years.

See http://www.wired.com/wired/archive/11.03/view.html?pg=5

JorgXMcKie writes:

Haven't I read somewhere that the rate of inflation, based on food (I think) over the past 1000 years or so has been around 1.5-2% but that this has been offset by the rate of increase in knowledge (productivity)? Thus, when I disagreed with my Politics and the Economic Order professor back in the '60's I had something? (He stated that the Price Support for crops [corn, wheat] was good for farmers. I pointed out that my grandfather in 1914-15 [years on which the support prices were based] got $3/bu for wheat and $1/bu for corn. The support prices were basically the same, but he was producing 4 times as much [1964-65]on the same land. Thus, a professor making the same salary per course as in 1914-15 but teaching 4 times as many courses in 1964-65 should be as happy as farmers. I got a D.) ;->=

David Foster writes:

"The problem is that until recently, the technological component of the capital stock was small." This seems to me to be kind of a narrow view of "technology." Sailing ships, telegraph lines, steam engines, electric motors, jet aircraft are all "technology." It sounds like you are defining technology specifically in terms of computer technology...is this right? If so, what would be the advantage of this focus, from an analytical viewpoint?

Mcwop writes:

>>"This is reminiscent of Robert Solow's famous comment that "We see computers everywhere but in the productivity statistics." That was in 1987. Now, we are starting to see them in the productivity statistics. The problem is that until recently, the technological component of the capital stock was small. Thus, even large increases in quality meant very little to the economy as a whole in 1987. They mean more now."

Boonton writes:

"Returning to the comments on my post, several people mentioned the law of diminishing returns. Technology optimists reject that law. They argue the opposite--that innovation is a positive feedback process. Ray Kurzweil uses the expression "law of accelerating returns." Better computers enable us to design better computers. Powerful computers enable us to carry out nanotech and biotech research. Nanotech and biotech will have positive feedback on one another, etc."

I have little doubt that computing power will continue to grow at a rate much, much, much faster than 3% per year (or whatever our current productivity growth rate is at the moment). The question is how much will additional computing power add to our overall productivity. Computerized white colar jobs like mine utilize MS-Office, Outlook & for me a specialized database system. The shift from Windows 3.x to 98 and then NT represented a dramatic improvement in our ability to get stuff done. However, I can tell you from working with Windows XP & Office 2000 at home switching to that will have only a marginal improvement on my productivity here...even though that may be accompanied by a doubling of 'computing power'.

Computers may open up a new round of innovation in nanotech, that isn't a defeat of the law of diminishing returns. Railroads first added greatly to national productivity and then their contribution leveled off as investment generated negative returns in the various bubbles that hit the market. They did, though, open create the first system of corporate management with an organizational chart and responsibility divided up among various departments etc. This opened up another round of innovations as corporations became larger...but even then the returns from large organizations eventulally diminished as well.

Lawrance George Lux writes:

History tells Us new technology creates new industries, but once those industries are capitalized; they present only a standard component to Productivity, though their position in the Economy as a Sector may increase. Railroads were basically designed in the 1840s, capitalized through the 1860s-1880s, then technologically improved through the 1940s. Sector importance to the Economy did not materially increase from the 1880s, with the end of major capitalizations.

The Car industry was designed in pre-1920s, capitalized pre-1940, and reached it's Sector productivity by 1960. It did spur continual Reconstruction of the American road system; but it's total impact on Economic productivity to the total Economy was reacued by the mid-1960s, a decisive point of real capitalization of the entire industry.

Computer technology achieved it's fundamental technological format with the development of Windows, though this format is being continually improved. The introduction of technology capitalization came with CAD and computer-directed production, in the process of reaching full capitalization. Computers will continue to invade other sectors of the Economy, bringing Productivity gains for decades yet; but the great windfalls of Productivity gained by Computer technology have already been attained in the industries most benefited by such technology. The Economy must look elsewhere to find the Productivity gains necessary to maintain Our rate of Productivity increase. lgl

gerald garvey writes:

I think McWop has it dead right. Arnold, can you defend the use of productivity numbers for anything? Every time I see some research using productivity I can't help but think that they are trying to do economics without prices. Seriously. Productivity is basically "pyisical" output measured without prices (or with old prices) divided by some measure of physical input. Stupid concept, so ignore the number.

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