Arnold Kling  

Robert Fogel Interview

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An Excerpt:


ultimately, what the government can pay [in future Social Security benefits] depends on how the economy performs. If we continue to grow as we have in the neighborhood of 2 percent per annum per capita over the past 50 years, we won't have any difficulty paying for it either, as a governmental program or in private accounts. If the economy goes into long-term stagnation, then the government is not going to be able to sustain it because the tax base for it won't be there. So you need to have a successful and rapidly growing economy in order for standards of living for the elderly to improve.

I think the odds that we will are very high. I think we're already actually underestimating. I mean, when I gave you the figure of 2 percent per annum, that figure does not take into account improvements in the quality of health care or in the quality of education, or in the quality of many manufactured goods. So, if you take these quality improvements into account as I've tried to do roughly in one paper, the real rate of growth is 3.1 percent, not 2 percent.


How fast is the economy growing? According to Fogel, faster than Congress can give away money to the elderly. That's fast!


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CATEGORIES: Growth: Consequences



COMMENTS (38 to date)
dearieme writes:

Fear not, Congress will rise to the challenge.

scottynx writes:

Here is a businessweek article that rains on the parade. Also, see my comment in Bryan's blog entry right below this one.

http://www.businessweek.com/print/magazine/content/05_47/b3960108.htm?chan=mz

[America The Uneducated (NOVEMBER 21, 2005)
A new study warns of a slide for the U.S. as the share of lower achievers grows

How did the U.S. become the world's largest economy? A key part of the answer is education. Some 85% of adult Americans have at least a high school degree today, up from just 25% in 1940. Similarly, 28% have a college degree, a fivefold gain over this period. Today's U.S. workforce is the most educated in the world.

But now, for the first time ever, America's educational gains are poised to stall because of growing demographic trends. If these trends continue, the share of the U.S. workforce with high school and college degrees may not only fail to keep rising over the next 15 years but could actually decline slightly, warns a report released on Nov. 9 by the National Center for Public Policy & Higher Education, a nonprofit group based in San Jose, Calif. The key reason: As highly educated baby boomers retire, they'll be replaced by mounting numbers of young Hispanics and African Americans, who are far less likely to earn degrees.

Because workers with fewer years of education earn so much less, U.S. living standards could take a dive unless something is done, the report argues. It calculates that lower educational levels could slice inflation-adjusted per capita incomes in the U.S. by 2% by 2020. They surged over 40% from 1980 to 2000.

Not everyone is so pessimistic. Education Secretary Margaret Spelling argues that President Bush's 2001 education reform law, the No Child Left Behind Act, is working to lift minority education levels. "It makes me bristle when I hear people say, 'There's no way in hell we can have our children reach grade-level proficiency,"' she says.

Still, the Center's projections are especially alarming in light of the startling educational gains so many other countries are achieving. U.S. high school math and reading scores already rank below those of most of the advanced economies in Europe and Asia. Now education is exploding in countries such as China and India. There are nearly as many college students in China as in the U.S. Within a decade, the Conference Board projects, students in such countries will be just as likely as those in the U.S. and Europe to get a high school education. Given their much larger populations, that should enable them to churn out far more college graduates as well. More U.S. white-collar jobs will then be likely to move offshore, warns National Center President Patrick M. Callan. "For the U.S. economy, the implication of these trends is really stark," he says.

Callan's projections are based on the growing diversity of the U.S. population. As recently as 1980, the U.S. workforce was 82% white. By 2020, it will be just 63% white. Over this 40-year span, the share of minorities will double, to 37%, as that of Hispanic workers nearly triples, to 17%. The problem is, both Hispanics and African Americans are far less likely to earn degrees than their white counterparts. If those gaps persist, the number of Americans age 26 to 64 who don't even have a high school degree could soar by 7 million, to 31 million, by 2020. Meanwhile, although the actual number of adults with at least a college degree would grow, their share of the workforce could fall by a percentage point, to 25.5%.......]

There is more. Follow the link at the top.

Dan Landau writes:

The first rule of winning in the economics race is, never bet against Robert Fogel. Some of the best have tried and always lost.

Projecting negative trends assuming nothing will change in the US, projecting positive trends in other countries assuming there are no problems, and assuming their prosperity is our stagnation are all silly.

US education is going to change, already we have for profit higher education like the University of Phoenix. More and more after school and week end supplements to the public schools are available. Then there is the huge potential of education over the internet. The odds are pretty good the positive changes will balance out current negative trends.

If you read the article in Business Week about Indian infra-structure you wouldn’t project their positive trends to the stars. China’s bankrupt banking system, lack of intellectual property protection, and huge government industrial dinosaurs also suggest China’s GDP won’t always grow at 9%.

Finally, if a Chinese scientist invents a new technology, does that slow US economic growth?

Victor writes:

In the excerpt quoted, why did Fogel throw in quality improvements? I thought the success or failure of Social Security would hinge upon the size of the tax base (which is required to engage in the requisite forced wealth transfers). An improvement in quality of tomatos may be wonderful for society, but doesn't make it easier to tax tomato purchasers or sellers.

I guess my perspective is that the Social Security problem has two facets. First, there is the physical resource constraint that threatens our future way of life if a large portion of our populace is retired. He's arguing that this constraint may not be terribly meaningful. Fine, wonderful. Secondly, however, there is the political constraint that revolves around forced transfers of income. If workers become 100 times more productive, this doesn't lessen the fervor of the war over how much of that richness they get to keep. Further, standards of living are often defined relatively, and so Fogel's perspectives that tend to deal with absolutes are neatly sidestepped by those who would have the government force others to give more to themselves. If workers are 100 times more productive, there are those who argue that *retired* persons should receive 100 times more lest they become "second class citizens".

The Social Security problem is only partly about the net quantity of resources available in an economic sense. It is also about the efficacy of Socialism, and how it can be used for group gain. The ugliness of the former may not be nearly as significant as the ugliness of the latter.

If the "difficulty" of paying for Social Security was based on absolute standards of living, we wouldn't perceive a problem today. Unfortunately this is not the case, and therefore we will have "difficulty" paying for Social Security in the future, no matter how rich we become.

Boonton writes:
In the excerpt quoted, why did Fogel throw in quality improvements? I thought the success or failure of Social Security would hinge upon the size of the tax base (which is required to engage in the requisite forced wealth transfers). An improvement in quality of tomatos may be wonderful for society, but doesn't make it easier to tax tomato purchasers or sellers.

Let's say today you can grow one tomato. Tomorrow you can still only grow one tomato but it is so much larger, so much tastier that it's as good as two of today's tomatoes. That's a growth in productivity.

The Social Security problem is only partly about the net quantity of resources available in an economic sense. It is also about the efficacy of Socialism, and how it can be used for group gain. The ugliness of the former may not be nearly as significant as the ugliness of the latter.

Socialism is government ownership of the means of production. A classic socialist policy is not Social Security but to, say, nationalize the coal mines. Social Security is redistribution of consumption which is a very different animal than socialism.


If the "difficulty" of paying for Social Security was based on absolute standards of living, we wouldn't perceive a problem today. Unfortunately this is not the case, and therefore we will have "difficulty" paying for Social Security in the future, no matter how rich we become.

False, Social Security's starting benefit is tied to the prevailing wage rates but after that benefit increases are tied to inflation only. So in a society enjoying rapid growth the cost of social security benefits will be growing slower than the rest of the economy.

spencer writes:

Arnold is completely right, Social Secutiry is not a problem and will not be a problem.

The real problem is that Washington has been using the SS surplus to finance the rest of government and this source of financing will go away over the next decade. Consequently, the federal defict is set to expand massively over the next decade and this is going to a massive problem for our society.

Victor writes:

So in a society enjoying rapid growth the cost of social security benefits will be growing slower than the rest of the economy. For most practical ranges, it is better to view the relationship as a lagged one. As you note, first-year benefits are wage-indexed. The effect of the COLA adjustment versus real-growth is of secondary importance. Keeping a reasonable range for the replacement ratio is a critical goal; as long as that remains an objective, massive productivity or quality improvements will simply result in demand for corresponding higher Social Security payments.

To encapsulate my entire point via a thought experiment: if the quality of all our goods were to suddenly double, would the Social Security problem be any less severe?

I would argue that the problem would be virtually identical. Everyone would be twice as well off (including retirees). But would it be any easier to reduce scheduled benefits? I think not. Raise taxes? Hardly. This is why three generations of citizens have faced the same Social Security dilemma, and why an infinite number into the future will face the same problem. It's not about the level of benefit. It's about your relative position in society.

Ugandans look at our poorest citizens and think they are crazy for not being eternally grateful for how wealthy they are. What they (Ugandans) don't fully appreciate is that your perspective changes with opportunity. Greater quality is one such opportunity that people can use to justify the "need" for further redistribution.

To sum up: Social Security ultimately is about the portion of production that non-working citizens have claim to. It is a *proportion* of production, and not some absolute minimal level. Therefore, you can't grow yourself out of the problem. If growth results in the relative impoverishment of seniors, the AARP will rise up and demand their fair share.

The Country Kitchen Buffet cannot be denied. I am not saying that this is wise. But I am saying that this is the predominant approach taken in this country. The issue is one of relative political power, and not economic wealth.

Paul N writes:

So which is it, AK: the economy will boom like the Kurzweilian fantasy, or we'll have to fret to get 2% growth? I don't think you can extol the Kurzweil model and then complain about social security imbalances 30 years hence.

Boonton writes:

For most practical ranges, it is better to view the relationship as a lagged one. As you note, first-year benefits are wage-indexed. The effect of the COLA adjustment versus real-growth is of secondary importance. Keeping a reasonable range for the replacement ratio is a critical goal; as long as that remains an objective, massive productivity or quality improvements will simply result in demand for corresponding higher Social Security payments.


You're missing the point. Yes if all economic growth happened in one shot then Social Security would see its cost rise as instantly as its revenue leaving it in the exact same position except with more zeros after its balances. This is not how economic growth happens.

Take an individual who retires in year 1. His starting benefits are indexed for wages for that year only, afterwards it is just inflation. Imagine inflation is zero but wages/growth are 3% per year. Ten years later his benefit is exactly the same while national income (out of which his beneifts are one of millions of bills that have to be paid) has increased by 34%.

Obviously the retiree is happy his benefit is safe but society is also happy too since the benefit is getting easier to pay due to economic growth.

Of course if growth becomes flat and inflation high you will have the opposite problem. If ten years of zero growth induce the Fed to put the economy through high inflation then the retirees benefits will remain the same in real terms due to the COLA increases. If, however, growth is negative and inflation positive then the retiree's benefits will stay the same but the bill will become more difficult to pay as income declines.

spencer writes:

Overlooked in this is that Fogel also implied that if we do not get economic growth the retired will not be able to depend on a strong stock market to finance their retirement --
one of the bigest arguments against the SS plan advanced by Bush that assumed that you could get historic stock returns despite not having historic economic growth.

David Foster writes:

Re one of the comments: The idea that productivity growth is dependent on the number of people with college degrees is silly. To a substantial extent, college degrees serve as a *marker* for certain abilities, not as a *creator* of those abilities.

Productivity may improve when someone gets, say, a degree in electrical engineering with a concentration in mechatronics. But does anyone seriously think it improves when someone gets a degree in parroting back the political opinions of "humanities" professors? Because that's what an awful lot of today's higher education seems to consist of.

daveg writes:

Wasn't Fogel the guy who recommended deregulating the power industry in California?

Now there was a great example of free markets in action, no?

scottynx writes:

David Foster:
[To a substantial extent, college degrees serve as a *marker* for certain abilities, not as a *creator* of those abilities.]

I agree with that statement whole-heartedly. Now why not take it further. What does the rarity of the *marker* of hispanic post-secondary degrees into the 4th generation tell you (it's 9.6% in 1990, see Samuel Huntington's article in foriegn affairs: Source:http://www.foreignpolicy.com/story/cms.php?story_id=2495&page=9?). I'm not arrogant enough to say I know the answer, but let me add that with the existence of affirmative action, this is even more distressing.

Even disregarding what I wrote above, how will the market use people's abilities to the utmost when they don't aquire the markers telling about thier abilities?

chen writes:

Can anyone tell me how is the growing rate calculated? Does the 2 percent rate contains those spending on education or elders? I am puzzled by this.

Lauren writes:

Hi, chen.

You asked:

Can anyone tell me how is the growing rate calculated?

The growth rate of the economy is calculated using real GDP (Gross Domestic Product, adjusted for inflation). It is calculated using the increase in the value of goods produced by a country (in all possible ways) rather than the increase in the value of spending by a country (in all possible ways, including on the elderly, education, and savings).

If we could measure both correctly, the growth rates would have to be equal! Production is used rather than overall spending because production is easier to measure.

Think of it this way: Your income--what you are paid for producing things--is always used for something. Either you spend it on food, clothing, education, gifts (to your children, parents, charities, friends, political candidates, etc.), your savings (such as buying stock, putting your money in a bank account), paying loans, holding cash, paying taxes, or some use you can't remember any more. At the end of the week, month, or year, you distributed all your income to something! If your income and spending on all those things are not equal, you've probably forgotten something you've used or spent your money on. It's easy to forget or not be able to keep track of how you used your money!

Even though you know your income and your uses of your money have to be equal, it is a lot quicker to calculate how fast your income has grown than how fast your spending has grown. Even if you have two or three jobs, a bank loan, plus other sources of income, it's easier to calculate your personal income growth than to add up all your grocery receipts, cash, kids' allowances, bank deposits, loans to your family, taxes, school payments, health care payments, etc., just to calculate your personal spending growth! By calculating the growth in your income, everything is included.

Does the 2 percent rate contains those spending on education or elders?

Yes. By arithmetic, the total of what is spent (in every possible way: for education, food, care for the elderly, savings, net loans, net gifts) has to equal the total of what is produced.

But beware: The word "spending" has come to mean several different things in economics. In the meaning above, it included all possible uses of your income, on everything from goods and services, to savings and lending, etc. Because economists already understand that total spending in that broad sense has to equal total income or production, they instead often reserve the word "spending" or "consumption" to mean only what people buy in goods and services (food, clothing, education, health care).

In that usage, your income has to equal your spending plus your savings.

In that narrower sense of the word "spending", you know you can only afford to use a portion of your income each year to buy or "spend" on current goods and services. You know you also reserve something as savings--for your retirement and for your future health care, which will surely increase when you are elderly, or for your children's future college education, or maybe caring for your parents when they are elderly, or any other future uses, including even a vacation now and then.

If the government does some of that "savings" for you by taxing you and promising to give you money during your future retirement or necessary health care when you are elderly, the government also understands that people only can afford to save a portion of their incomes. If the government promises to give you more money in the future than they will take in based on how taxes increase, the government cannot keep its promises to you in the future. The taxes the government takes in are mostly proportional to your income--the production of the economy.

So, if the economy doesn't grow as quickly as the government's promises to make payments, the arithmetic doesn't work. Either taxpayers will have to pay more of their income in taxes in the future, or those to whom the government has made promises will have to accept that the promises cannot be kept in full.

It's easy to find this puzzling based on the vocabulary words. You asked an excellent question about the ideas!

Boonton writes:

"I'm not arrogant enough to say I know the answer, but let me add that with the existence of affirmative action, this is even more distressing."

Affirmative action's influence in the real world is next to zero. Yes in some situations affirmative action may help you get into a particular graduate school but that's about it. You have to graduate yourself and if you can't you don't. Likewise in the job world it is even harder to get a job with affirmative action but once you do keeping a job depends much more on your ability to get along with the organization than affirmative action.


"Even disregarding what I wrote above, how will the market use people's abilities to the utmost when they don't aquire the markers telling about thier abilities?"

From my observation of human nature money is a huge motivator. If hispanics have a lower rate of college degrees than other 4th generation immigrant groups then I'd look at what types of monetary incentives they face to see why this happens. I find it hard to believe that people would forgo money in any large way for irrational desires. Perhaps the market has developed other markers that flag ability? Considering how many people I know who are getting college degrees just for the sake of having them on their resume (and colleges collecting thousands per student in employeer paid tuition) perhaps the market is moving away from using degrees as the only marker of ability?

James writes:

daveg,

Here's a question for you:

A policy is referred to as deregulation by its advocates in the political sphere. Subsequent to its implementation, there is a serious negative event. What is the appropriate conclusion?

a. Free markets result in horrible problems and shouldn't be trusted to deliver vital goods and services.

b. Politicians use free market rhetoric to justify whatever it is that they want to do if they believe it will convince enough people to support them.

c. Nothing. The sample size of one creates a degrees of freedom problem eliminating the possibility of a sound empirical analysis.

James writes:

Why are people using statistical projections to analyze Social Security? Isn't it possible to figure out the future of SS using algebra? Maybe my math is off, but perhaps someone can help me figure this out.

Let IN denote the total number of real dollars that are, ever have been or ever will be paid in to Social Security. Let OUT denote the total number of real dollars that are, ever have been or ever will be given to Social Security recipients. Assume that both are finite.

This implies that the total net return to all system participants is equal to (OUT - IN). The average (per individual participant) total net return is then (OUT - IN) / #_of_participants. The number of participants has a positive sign, so the average total net return takes the same sign as total net return.

Since Social Security's only source of money to pay participants is the participants themselves, OUT can never be greater than IN. Therefore, the total net return is less than or equal to zero. The average total net return of SS participants up to the present has been greater than zero. Since the average total net return of all SS participants is less than or equal to zero, the average total net return of all future participants must be less than zero.

All that statistical growth projections can show is that SS may have some time before it starts to cost participants more than they get for participating. But in the zero sum game of wealth redistribution, the fact that there have been some winners already necessarily implies that there will be be losers as well.

Mark Bahner writes:

Arnold Kling writes, "If we continue to grow as we have in the neighborhood of 2 percent per annum per capita over the past 50 years, we won't have any difficulty paying for it either, as a governmental program or in private accounts."

By my calculations (based on Ray Kurzweil's asssessment of the current and future capabilities of computers), the world's personal computers in 2005 will add the equivalent of (only!) 900 human brains.

By 2025, according to my calculations, the world's personal computers will add the equivalent of 1 BILLION human brains. And by 2035, the number of human brain equivalents added will be 10 TRILLION.

http://markbahner.typepad.com/random_thoughts/2005/11/why_economic_gr.html

Think the U.S. (and the world's) economic growth is fast, now! You ain't seen nothin' yet!

:-)

Mark Bahner writes:

Dan Landau writes, "Finally, if a Chinese scientist invents a new technology, does that slow US economic growth?"

It really bugs me how so many people seem to think the rest of the world's gains mean U.S. losses. The world economy is just like the U.S. national economy. It's not a zero-sum game. The Chinese and Indians win, we win. Japan wins, we win. The EU wins, we win.

My retirement funds are pretty heavily tilted towards Asia. One of the mutual funds (a Pacific Growth Fund) has returned ~25% over the last 12 months.

I hope Chinese scientists come up lots of new inventions. Good for them. (And good for me.)

Mark Bahner writes:

"one of the biggest arguments against the SS plan advanced by Bush that assumed that you could get historic stock returns despite not having historic economic growth."

That's why growth in other countries is such a wonderful thing. Twenty years ago, would you have invested in the stock market in the People's Republic of China? (Answer: No, because they didn't even have a stock market!) But today, or 20 years from now, would you invest in the stock market in the People's Republic of China? Well, today it's a risky investment, but with a potentially very high return. And 20 years from now, it's likely to be a safer investment, but still with pretty good returns (assuming diversified investment...and assuming the don't get into any nuclear wars).

Randall Parker writes:

The bigger problem is Medicare, not Social Security. Why is so much of the retirement funding commentary about Social Security?

As for demographics: How can the economy continue to grow per capita when the most rapidly growing ethnic group has an average IQ that is about 10 points below the white average? Who is going to do the higher skilled, higher productivity, and higher paying jobs?

Boonton writes:

"Since Social Security's only source of money to pay participants is the participants themselves, OUT can never be greater than IN. Therefore, the total net return is less than or equal to zero. The average total net return of SS participants up to the present has been greater than zero. Since the average total net return of all SS participants is less than or equal to zero, the average total net return of all future participants must be less than zero."

Here's a simplier way to analyze it. Imagine a very simple society with a simple social security system. It starts with two people, worker and retired. The taxes paid by worker in the first period are:

Tax = Tax Rate * Income

The benefits in this system are the taxes collected in the second period. Since in the long run the economy is growing income will be a bit higher next period.

Tax2=benefit = Tax Rate * Income * (1+growth rate)

Return is benefit divided by tax:

[Tax Rate * Income * (1+growth rate)] / (tax Rate * Income)

which reduces to (1+growth rate).

Using your reasoning all returns have to be zero percent. I buy a share of ATT for $100 and ten years later sell it for $110. Well Total money IN to ATT stock equals total money OUT in both periods (when I buy the stock for $100 someone is selling for $100, likeise for when I sell for $110).


That's why growth in other countries is such a wonderful thing. Twenty years ago, would you have invested in the stock market in the People's Republic of China? (Answer: No, because they didn't even have a stock market!) But today, or 20 years from now, would you invest in the stock market in the People's Republic of China? Well, today it's a risky investment, but with a potentially very high return. And 20 years from now, it's likely to be a safer investment, but still with pretty good returns (assuming diversified investment...and assuming the don't get into any nuclear wars).

Indeed but it doesn't resolve Bush's problem. Let's say that China's growth prospects are fantastic but the US will remain flat for the far future. Yes you may shift your 401K to China based stocks but the poor growth in the US will mean you will have less to invest in China than someone in a country with a good growth rate. 30 years later you'll find your 401K less ample than the guy who enjoyed living in the alternate high growth America. You can't assume that America will have poor growth but great stock returns at the same time.

As for demographics: How can the economy continue to grow per capita when the most rapidly growing ethnic group has an average IQ that is about 10 points below the white average? Who is going to do the higher skilled, higher productivity, and higher paying jobs?

Charles Murry's argument has long since been discredited. No worry though, supporters of Murry are not an ethnic group and they aren't growing so they are unlikely to hurt economic growth in any serious way.

Mark Bahner writes:

Randall Parker, "As for demographics: How can the economy continue to grow per capita when the most rapidly growing ethnic group has an average IQ that is about 10 points below the white average? Who is going to do the higher skilled, higher productivity, and higher paying jobs?"

In 20-30 years, Randall, all of homo sapiens sapiens are going to have IQs that are off-the-chart lower than than the new cat in town...homo-silicus-maximum-sapiens.

So it's pretty silly to worry about a few IQ points here or there.

Mark Bahner writes:

"That's why growth in other countries is such a wonderful thing. Twenty years ago, would you have invested in the stock market in the People's Republic of China? (Answer: No, because they didn't even have a stock market!) But today, or 20 years from now, would you invest in the stock market in the People's Republic of China? Well, today it's a risky investment, but with a potentially very high return. And 20 years from now, it's likely to be a safer investment, but still with pretty good returns (assuming diversified investment...and assuming the don't get into any nuclear wars)."

Boonton responded, "Indeed but it doesn't resolve Bush's problem."

It DOES resolve "Bush's problem"...because it resolves my problem. Right now, I expect SS to provide about 40 percent of my retirement income.

But if my privately invested retirement accounts generate sufficiently large returns, I'll only need to rely on SS for, say 20 percent of my income.

"Let's say that China's growth prospects are fantastic but the US will remain flat for the far future. Yes you may shift your 401K to China based stocks but the poor growth in the US will mean you will have less to invest in China than someone in a country with a good growth rate."

Yes, this is the mentality of people who judge how their life is going by how others' lives are going. I don't understand that. Let's say everyone in every country but the U.S. becomes a billionaire. Am I worse off, because people in other countries are doing spectacularly well? I say, "Definitely not." Most people seem to think the answer is "Yes."

"You can't assume that America will have poor growth but great stock returns at the same time."

I say I CAN assume that America will have poor growth, but that my stock returns can still be great, if I'm invested in areas of the world where the stock markets are booming. How is that assumption wrong?

Boonton writes:

Yes, this is the mentality of people who judge how their life is going by how others' lives are going. I don't understand that. Let's say everyone in every country but the U.S. becomes a billionaire. Am I worse off, because people in other countries are doing spectacularly well? I say, "Definitely not." Most people seem to think the answer is "Yes."

I'm sorry, I didn't realize this was a forum just to discuss your financially successful situation. Yes yes it's alll very nice that you're doing very well for yourself. Nevertheless, economic growth is not some type of abstract score. Small or no economic growth means that low or even negative income growth for the average person. As a whole even if people tried to shift their 401K's into high growth areas like China the low income that low growth will produce will harm their retirement.

Of course if everyone in China becomes a billionaire it's pretty hard to see how the US wouldn't experience economic growth. Wouldn't such an event cause purchases of US goods and services to surge?

I say I CAN assume that America will have poor growth, but that my stock returns can still be great, if I'm invested in areas of the world where the stock markets are booming. How is that assumption wrong?

Yea for you then. I shall assume that my returns will equal yours but will be one penny higher. Now what credibility do you have now that you're second place!

James writes:

Boonton writes "Using your reasoning all returns have to be zero percent." He must have missed where my earlier comment included the statement "Since Social Security's only source of money to pay participants is the participants themselves, OUT can never be greater than IN."

Since the antecendent doesn't apply universally, it's a mistake to assume that my argument implies that the conclusion applies universally. Successful publicly traded companies produce things that people actually want to buy, so they have another source of money to pay their shareholders besides funds from their shareholders and creditors. Duh!

Boonton's tax rate example seems to suppose that the total number of participants in any period will always be greater than in the prior period. Since I believe that the number of particiapnts in any government program is finite, I can't go along with such an assumption.

Boonton writes:

On the contrary James, my simple model assumes no population growth at all. The problem with the Out/In analysis is that logically Outs always have to equal In. When companies make products that people want to buy that every dollar that comes In is a dollar that comes Out of consumers pockets.

The error you are making in your analysis is that you are trying to equate gov'ts taxation power to a corporation making a product. A better analogy is that the gov't's power of taxation makes it more like a super'd up preferred shareholder of every company in the nation. When the economy grows the gov't's revenues automatically go up. As a portfolio holder you can see it has achieved more diversification than the broadest of market funds can ever do.

Like a stockholder demanding dividends, though, taking too much will kill the goose & prevent the economy from growing into the future.

Mark Bahner writes:

"I'm sorry, I didn't realize this was a forum just to discuss your financially successful situation."

That wasn't my point. My point is that even if the United States doesn't do well, in 2005 and later, people IN the United States can still do well, by investing in other countries.

This is something that wasn't really possible even 50 years ago. For one thing, the People's Republic of China and all of the USSR and Eastern Bloc didn't even have stock markets; India was a terrible investment...the Korean War had just finished, etc.

In fact, even 10-20 years ago, brokerage fees were incredibly high, compared to today.

"As a whole even if people tried to shift their 401K's into high growth areas like China the low income that low growth will produce will harm their retirement."

Yes, compared to some abstact perfect world. I'm not saying that slow U.S. growth is good, or even meaningless. I'm just saying:

1) There are options available today, and which will be even MORE available in the future, that will allow people to get decent returns on their investment, even if they have no such options within the U.S., and

2) I really don't like Robert Fogel's comment that, "But watch out for China. China, if its current growth rate continues and if we take Western European and U.S. growth rates and assume they will continue, China will be bigger than the United States and Western Europe put together by about 2030 or 2040."

Why do we need to "watch out" for that? The only problem I can see would be if China was still a dictatorship by 2030 or 2040 (since it would then possibly be considered a military threat). I don't think that's very likely...and even if it WAS still a dictatorship, I think it's extremely unlikely their government would be foolish enough to get involved in a military conflict with the U.S. (Unless they had a 100-percent-effective anti-missile defense system.)

"I shall assume that my returns will equal yours but will be one penny higher. Now what credibility do you have now that you're second place!"

This is exactly the anything-less-than-perfect-isn't-good-enough mentality that I don't understand.

You seem to have the opinion that my returns are not "great" if YOUR returns are "one penny higher." I can't understand that mentality (even though I recognize that many people seem to have it).

dcpi writes:

Boonton:

You forget that companies produce goods and services in exchange for their money. That means the managers of those companies are shooting for a little thing called ROI. You know, that thing that is a return on your money. There is now ROI on Social Security because there is no investment.

dcpi writes:

Second point. There can be a positive return for all those collecting Social Security. Remember that the dead receive no benefits. A very significant proportion of people die before they hit 65 (or 62 or 66 or 67). Those people all get a -100% return. So the algebra looks more like:

x = .8y

Where X is all payments in and .8 is the proportion of people who survive to collect. That would guarantee a positive return (Y) for those lucky enough to collect.

James writes:

dcpi,

I agree with your general analysis although I think it appropriate to treat even those who pay and die before retirement as participants.

Boonton,

Look at what you wrote: "The problem with the Out/In analysis is that logically Outs always have to equal In."

I don't assume this to be true except in zero sum activities. It is certainly untrue in positive sum activities such as voluntary exchange.

However, I do find interesting your analogy between Social Security and a really great financial instrument. At present, if any private firm operated like Social Security, they would be in violation of laws intended to protect investors. If SS's way of operating is such an effective way of generating investor returns, why do you suppose that the SEC won't allow private firms to operate in the same way?

Boonton writes:

You forget that companies produce goods and services in exchange for their money. That means the managers of those companies are shooting for a little thing called ROI. You know, that thing that is a return on your money. There is now ROI on Social Security because there is no investment.

Yet how can you explain the curious fact that SS revenues grow when the economy grows? What mysterious power causes this to happen?

However, I do find interesting your analogy between Social Security and a really great financial instrument. At present, if any private firm operated like Social Security, they would be in violation of laws intended to protect investors. If SS's way of operating is such an effective way of generating investor returns, why do you suppose that the SEC won't allow private firms to operate in the same way?

1. Show me one private pension plan that has legal right to about 14% of all income produced in the US from today until forever? Are you seriously asserted that if GM had some type of 'super perferred stock' that entitled it to this sitting in its pension plan it wouldn't be considered one of the most rock solid plans in the country?

2. You're latest argument here is based on the apples to oranges fallacy. Since businesses can only have legal right to the product of their assets they must service all their liabilities with only their assets. Gov't's generally do not have assets. YOu can argue that gov't should have assets, that would be called socialism. Like in the UK where the gov't literally owned the coal mines for a long time before Thatcher started massive privitization. I don't think that is what you want to advocate.

3. As was illustrated by my simple model, the generator of the returns is not the gov't but the economy itself. Since tomorrow's benefits must be paid by tomorrows workers any increase in benefits must automatically be generated by tomorrow's economy. A similar thing happens with private accounts but it is less obvious.

Boonton writes:

dcpi,

There's a difference between the returns of the entire system (which is basically the growth rate of the entire economy) and an individual's return. Social Security basically takes the 'return' and divides up between retirees in rough proportion to their contribution but with other differences.

For example, they will give additional money to low wage workers, widows, the disabled etc. As you pointed out, even without these welfare provisions long lived workers will get higher returns than shorter lived ones etc.

But the fact that returns are diverted for welfare reasons on an individual basis doesn't change the fact that they exist overall. Note in my simple example the returns are there even though my model implicitly assumes that no one dies early.

James writes:

Boonton,

You missed the point of my last question. I realize that if you equate is to ought you might see an apples and oranges fallacy. The constraint set on government is different from the constraint set on firms. But my question was about how you think things ought to be.

It's illegal for securities firms to demand involuntary payments, to use money from present investors to pay off previous investors, to advertise a zero sum system as though it were beneficial to all participants, etc. Perhaps these rules are arbitrary, but I would imagine that there are reasons for them. For example, these activities have *bad* consequences. Your position seems to be that these same activites actually have *good* consequences when the doer is a government.

Boonton writes:

It's illegal for securities firms to demand involuntary payments, to use money from present investors to pay off previous investors, to advertise a zero sum system as though it were beneficial to all participants, etc.

1. True, SSI taxes are indeed involuntary. Do you find it interesting, though, that many reforms proposed would leave SSI payments involuntary but have individuals put them into securities firms?

2. Insurance companies do this all the time. They use current premiums to pay off claims that arose from older policy holders. There's nothing inherently wrong with it as long as you are clear what you are doing.

3. "a zero sum system as though it were beneficial to all participants"

I'm not sure how SSI advertises itself or what the point would be if the system is involuntary. As for zero sum, I refer you back to my mathematical model. Each generation's return is equal to economic growth which may be 0 but is much more likely to be more than 0.


Your position seems to be that these same activites actually have *good* consequences when the doer is a government.

The fact that the gov't is the player here alters the dynamics because, quite simply, there's a huge difference between a gov't and a business. Businesses have to base their plans on income generated from assets because quite frankly that is all they have. Gov'ts should plan based on the cash flow from their taxing power. As I pointed out before while it is a good thing for a business to own a lot of productive assets there are very good reasons to be deeply worried about a gov't owning many productive assets. If you want a rock solid example look at oil rich nations where the gov't owns all the oil wells and uses revenue from them instead of taxes. Such gov'ts are often much more corrupt than ones that do not own such assets. On top of that they usually do a pretty bad job correctly maintaining and expanding those assets.

James writes:

Boonton,

At best your mathematical model shows that aggregate wealth will grow over time when there is a private sector generating economic growth. This is uncontroversial. What your model fails to show, or even address, is any additional benefit in having SS redistribute this new wealth.

For some reason you seem to assume that I advocate government ownership of assets. I don't. I'm not sure what comment of mine gave you the idea that I do.

Re: insurance, so long as the insurance company isn't hiding what it does and people can opt out of participating in an insurance program I don't mind this very much.

You seem to think that if the government takes money from working people under 65 and gives it to seniors, the results will be positive. Would the results be positive if anyone else did so? (Note the conditional. Responses to the effect of "But no one else is presently allowed to..." don't answer the question.)

Finally, you write, "Do you find it interesting, though, that many reforms proposed would leave SSI payments involuntary but have individuals put them into securities firms?" Interesting isn't the word. Inconsistent seems like a better fit to me. Given the choice between involuntary savings that I have to entrust to the state and getting to choose where to put my involuntary savings from a short list of options, I prefer the latter but not by much.

Boonton writes:

At best your mathematical model shows that aggregate wealth will grow over time when there is a private sector generating economic growth. This is uncontroversial. What your model fails to show, or even address, is any additional benefit in having SS redistribute this new wealth.

True, nor does my model show any cost to this wealth redistribution. Models, especially in economics, are not simulations but hypotheticals meant to illustrate a basic point. The basic point of the model was to demonstrate that there is no fundamental reason Social Security must be unstable or that it is a Ponzi scheme. I'm surprised to hear you state this is uncontraversial. We've had many people telling us that Social Security must be on the verge of collapsing despite the curious fact that it has remained remarkably stable for over 70 years.

For some reason you seem to assume that I advocate government ownership of assets. I don't....

Fair enough but you have a curious habit of judging a gov't program as if it was a corporation. Governments are not companies and they are fundamentally different. It is fair for me to point out that one of the implications of demanding that gov't abide by corporate standards is for gov't to do things that corporations do such as own productive assets.

Re: insurance, so long as the insurance company isn't hiding what it does and people can opt out of participating in an insurance program I don't mind this very much.

1. The gov't isn't hiding what it does. Show me one serious criticism of the social security program that is 'hidden'? Almost every time the issue of Social Security comes up its critics start citing reports & analysis that comes right off of Social Security's websites.

2. How about mandatory insurance that exists in some places? For example most states require insurance to operate a vehicle. Most require it in some form to practice law, banking etc.?

You seem to think that if the government takes money from working people under 65 and gives it to seniors, the results will be positive. Would the results be positive if anyone else did so? (Note the conditional. Responses to the effect of "But no one else is presently allowed to..." don't answer the question.)

Is this just the standard libertarian argument against any and all general welfare programs run by gov't? The US exists as a social contract where the citizens have given the gov't taxing power within the bounds of a democratic republican Constitution. Are you asking whether it could, in theory, be beneficial if say invisible angels took money out of some people's wallets and put it in others? Of course it could in theory. Are you asking whether it would be within the social contract for some other group, say modern day Robin Hoods to do it? No it wouldn't.

Finally, you write, "Do you find it interesting, though, that many reforms proposed would leave SSI payments involuntary but have individuals put them into securities firms?" Interesting isn't the word. Inconsistent seems like a better fit to me. Given the choice between involuntary savings that I have to entrust to the state and getting to choose where to put my involuntary savings from a short list of options, I prefer the latter but not by much.

I give you credit for consistency. I do think that Social Security has an all or nothing quality to it. As it stands right now Social Security is a form of insurance in the sense that it is there when all other options fail (either because of bad luck or because of our flawed human nature to properly plan long term). When other options do work (private savings, pensions, 401k's etc.) then Social Security is like icing on the cake. Even there, though, it serves as a long term insurance because most private savings is built around reaching retirement with a large lump sum. Social Security ensures that if you happen to live a long time you are never going to run out of retirement at a point when it would be impossible for you to return to work.

If you're going to do it, it makes sense to do it as a collective program. Doing it as some sort of mandatory public/private mix would be like instead of having a police force to require everyone to purchase private body guards from their own income with a complicated set of subsidies for those whose income is too low to purchase private guards. If you're going that route it is probably just more efficient to try anarchy rather than mixing the two. If you're going to have a collective program to ensure what society deems an acceptable retirement for just about everyone SS's model is probably more efficient than some type of private forced savings model.

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