Bryan Caplan  

Kotlikoff Anecdote

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Arnold's post on Kotlikoff and Ferguson's proposals for Social Security and health care reform reminds me of a short exchange I had with Kotlikoff in grad school. (I was a Ph.D. student at Princeton, and he was our guest speaker).

After he went over some proposals similar to the ones he advocates today, I asked him why he favored Social Security at all. Why not just get rid of it? He didn't claim that people were too irrational to save for their own retirement. His only objection was one of credibility. There is no way to credibly commit to not help old people who failed to save for their retirement. So we either bail people out, or force them to save so we won't have to.

In response, I pointed out that the U.S. didn't have Social Security for most of its history, and it seemed perfectly credible. Furthermore, there is plenty of reason to think that without the Great Depression, we never would have adopted it. Roosevelt famously admitted that his goal was to lock Social Security in place during the golden opportunity of national emergency:

We put those payroll contributions there so as to give the contributors a moral, legal, and political right to collect their pensions and their unemployment benefits. With those taxes in there, no damn politican can ever scrap my social security program.

You could say that we would have adopted it eventually anyway, but I doubt it: The U.S. often enduringly deviates from the social democratic policies typical of Europe. Roosevelt sure didn't see it as inevitable.

If I recall correctly, the conversation ended there. Today, I would be tempted to add a flippant conclusion: "If you really think there's a credibility problem, I've got a perfect solution. Appoint me to be the Social Security czar. I assure you I won't bail out a soul." Think that's cheap talk? Try me.


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COMMENTS (18 to date)
monkyboy writes:

Dear Dr. Caplan,

The Flippant Liberal Society humbly requests that you resign your post at our government funded school, stop driving on our government funded roads, stop getting your power from our government funded power grid, etc. And, most importantly, please stop posting on the government invented and funded internet.

We will be happy to buy any crafts you create once you've relocated to your desert island, at market value, of course...

Thanks,
FLS

Robert writes:

For much of the history of the U.S., there was no Social Security, but for much of that same period of time, the currency was based on specie, and the economy thus inherently deflationary. In an economy based on credit, however, deflation appear to be a Bad Thing. (Or at least I know of no instances in which it has generally been perceived as a Good Thing.)

As I commented in a different thread, if everyone is responsible for providing for their own old age, since there is vast uncertainty in how much we should save for our old age, and the consequences of undersaving are dire, we will, on the whole, oversave, perhaps enough to produce a liquidity trap.

Thus, I hold that a safety net is necessary, to the extent that the safety net makes the public risk-neutral in making saving vs. consumption decisions.

christian writes:

monkeyboy, don't you mean:

We will pay you to destroy most of your output and then we will put price floors on it so everyone has to pay more than they should AND pay twice for it when they buy it, or atleast once if they don't buy it.

The welfare state is truely zero-sum. And it is no safety net, it's just a net. People I have talked to about it know very little of the problem, and most of the time, their arguement for it is an emotional one, and we all know that emotional arguements are for children.

monkyboy writes:

christian,

America seems to have done okay for the last 70 years with SS in place. The brightest spots in the economy today such as computers & the internet, biotech, commercial aircraft, etc. were all created with government funding. I think it is libertarians who have a rather childish view of the economy:Government bad, private sector good.

Bonus question:Why can the most strident libertarians be found suckling at the government teat?

Dan Landau writes:

It is a rather cheap shallow form of political argument to say, “If you can’t make a perfect world by cancelling government program number 1091, you have no right to cancel program 1091.”

To say the government should abolish one inefficient, high cost, redistributive program is not the same thing as saying government should not exist. We will need government for defense, law enforcement, etc. even when all the bad government programs are gone.

If the government sets up a program for 300,000,000 Americans, a single individual is not going to make a better world by refusing to take his tiny share of benefits. When it comes to federal government policy, an economist can do something by publicly pushing policy change. He can do nothing by turning down government cash available to all.

John Thacker writes:

Dr. Caplan,

While I agree that Social Security should be reformed, and I'd like to start by reducing it to a true safety net, I think it's quite a bit over the line to not give some sort of benefits to people who made their own savings decisions all their lives predicated on receiving certain Social Security benefits.

asg writes:


As for being SS czar, the problem is that since you're appointed you'd be fired for not bailing oldsters out. The credibility problem just moves up a level, to whoever appointed you.

Eric writes:

Even appointing Caplan as Social Security Czar isn't credible because government can't commit not to fire Caplan once public pressure hits. Appointing somebody with the right utility function just pushes the problem back a level -- sure, the appointed guy won't renege, but what keeps him in office?

Randy writes:

You all are right on about public pressure. We have a social security program because most people want it. It isn't a good deal for most - but still they want it. They like to feel safe and believe that the program makes them safe, even when they see the evidence to the contrary. The underlying cause of social security is cowardice.

monkyboy writes:

Why do libertarians attack Social Security, arguably the most popular government program? The federal budget is loaded with pork that libertarians could fight while winning political support and new recruits to their cause...

Bill Stepp writes:

America seems to have done okay for the last 70 years with SS in place. The brightest spots in the economy today such as computers & the internet, biotech, commercial aircraft, etc. were all created with government funding. I think it is libertarians who have a rather childish view of the economy:Government bad, private sector good.

Bonus question:Why can the most strident libertarians be found suckling at the government teat?

As a tax-paying member of the private sector, I can't speak for other libertarians, but I'm not sure the last comment holds.
America would have done a lot better the last 70 sans antiSocial inSecurity.

Although the development of computers, the internet, biotech, commercial aircraft, etc. were funded to varying degrees with tax loot, these innovations were commercialized almost exclusively by paying customers in the private sector (e.g., airline passengers, etc.) Without commercialization, these technologies would have been museum pieces. They would have been produced sooner or later without government subsidies.

monkyboy writes:

More likely Bill, they would have been commercialized by companies from Britain, Japan, France and any other country where government helped shoulder the development cost.

I see the first Nobel prize for work on nanotechnology will probably be going to a government supported researcher...from Japan.

Tom West writes:

Think that's cheap talk? Try me.

Indeed, we don't think it's cheap talk, and that's *exactly* why Bryan would never be appointed the "Social Security Czar". What sort of politician would want to be caught appointing someone who had already publicly committed to "letting old folks starve" or whatever his comment would be turned into?

As far as lack of credibility, while it's quite true that the US is willing to let a significant portion of its population (relatively) suffer in order to generate greater overall growth, in general as society becomes wealthier, it becomes harder and harder for citizens to justify letting portions of it suffer unduly. As the *ability* to help the less fortunate increases, it tends to increase the popular sentiment that it *should* do something. Often this sentiment is self preservation: a society without a well-defined underclass tends to be a safer one for all concerned. Plus, one doesn't have to shut off the empathy circuits or find a convenient reason why the unfortunate deserve their fate. (Having the government intervene means one doesn't feel obligated to do it oneself.)

Bill Stepp writes:

More likely Bill, they would have been commercialized by companies from Britain, Japan, France and any other country where government helped shoulder the development cost.

This doesn't necessarily follow, although it could be true. Americans have been at least as good as marketing and commercializing new innovations as foreigners.

I see the first Nobel prize for work on nanotechnology will probably be going to a government supported researcher...from Japan.

Maybe, maybe not; one Nobel prize in a discipline hardly makes a country the dominant economic power in the world. Remember the Japan as No. 1 bunk in the 1980s? What happened to Japan in the '90s?
Which market performed better--the American or the Japanese?

monkyboy writes:

Most of the hype about Japan was generated here, Bill.

I don't think the current economic "inning" is over yet. America's economic growth has largely been fueled by goverment and personal debt. Let's see how that turns out before we start crowing about beating a small, rocky, earthquake-prone island...

dsquared writes:

Asg is entirely right about the "cheap talk" problem and I hope that Bryan isn't teaching undergraduate students that cheap-talk problems in game theory can be solved by macho posturing.

Bill Stepp writes:

America's economic growth has largely been fueled by goverment and personal debt.

No, it was fueled mostly by private investment and increasing productivity. There was a big productivity boom the last decade in case you missed it.
As for the government debt, it declined during the Clinton years, and increased after 9/11, thanks to the criminal Iraq war.
Debts, both public and private, are self reversing. Private debt at least has to be paid off some day.
Btw, Tyler Cowen has a good discussion and link at www.marginalrevolution.com about the myth of the government-created internet.
As for computers, virtually all the intellectual heavy lifting was done in the private sector, at firms like Fairchild, Intel, IBM, Texas Instruments, etc.
You've got to get over your crack-cocaine-like government-is-the-solution habit.
Try freedom for once if you can stand it.

monkyboy writes:

Last year, while Americans debated whether the Social Security trust fund was real, Chinese workers saved the equivalent amount, or $1.5 trillion. Even though their housing is going up in value faster than ours, they will save even more this year.

You can't say that American economic growth isn't dependent on debt. If Americans saved at the same rate as the Chinese, we would have put close to $3 trillion in the bank last year, not blown it on crap. Sustained growth with a high savings rate is far more viable in the long run than growth fueled by rampant consumerism.

Libertarian economists have to downplay the role of government in innovation, but it doesn't make what they say true. Economics has become a branch of politics and it never was a real science to begin with. Partisan spin aside, no government investment, no internet.

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