David R. Henderson  

Henderson on Shiller

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My review [scroll down] of Robert Shiller's Finance and the Good Society is out in the latest issue of Regulation. A highlight about the finance portion:

On the issue of crises, the main financial crisis in our future is likely to be paying the huge commitments governments have made to government workers, Social Security recipients, and people on Medicare. Shiller does not challenge the idea that these people have a right to some level of support in their old age. But he does suggest having the government give the support in a way that takes account of the burden imposed on those who pay. He writes, "The right to a standard of living in old age is framed in an absolute manner, and so the provision of pension benefits becomes stuck in an ancient system." His solution? "Government pensions," writes Shiller, "should instead be indexed to some indicator of taxpayer ability to pay, such as GDP." So, for example--I'm building on what Shiller suggests--the government could allocate x percent of the budget to Social Security and y percent to Medicare and then adjust payments and benefits annually based on those percentages.

An excerpt in which Shiller minimizes the evil of communism:
Where Shiller's book is most dissatisfying is in his treatment of government. First, he often understates the evil of government. Second, and related to the first, he treats government as if it is mainly a group of people working for the common good.

Consider his discussion of one of the main atrocities of government in the 20th century: Soviet collectivization of agriculture. Millions of farmers starved because of Stalin's actions, a fact that Shiller's Yale colleague, historian Timothy Snyder, recently documented in the blood-curdling book Bloodlands. It's not that Shiller minimizes the harm. He writes that 11 million people died in the famine of 1932-1933, which, if anything, is probably somewhat of an overestimate, and that the famine was due to collectivization. So what's the problem? Shiller minimizes the evil intent behind the harm. The deaths, he writes, "reflect government error." In other words, he sees the deaths as a policy mistake instead of intentional malevolence. In fact, what happened was that Stalin forcibly took grain from millions of Ukrainian farmers, knowing full well that the result would be starvation. Snyder highlights a Soviet government poster that read, "We will destroy the kulaks [Ukrainian farmers] as a class." The word "error" doesn't quite describe what happened.


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COMMENTS (7 to date)
John Roccia writes:

Do you think it would be a good idea to make ALL government expenditures a percentage of budget, and make budget itself a percentage of GDP? By framing these outlays as percentages rather than absolute numbers, politicians could never create a deficit (unless they went over 100%, I suppose - not out of the realm of political possibility), and they would be incentivized to increase GDP overall. What are your thoughts on this?

John T. Kennedy writes:

"Shiller does not challenge the idea that these people have a right to some level of support in their old age."

A right at whose expense? They are owed this because they democratically agreed that someone else would pick up that tab for them? Because they accepted the benefits that their elected representatives bought for them with the incoming revenues for these programs, so now there's nothing left? They've had the entire history of these programs to know that this was an unsustainable scam and to plan accordingly. They are owed nothing.

David R. Henderson writes:

@John Roccia,
I’m not sure.
@John T. Kennedy,
In case you misunderstood, I’m not saying I think they have a right.

John Roccia writes:

@David: Always a wise answer. :)

It might have the advantage of some transparency, as well. Saying that the federal budget has XX Billion dollars for whatever is lost on many in the public that can't grasp the reality of what thsoe numbers even mean. But having to say, "The defense budget is already 36% of the federal budget, and now the House is voting to increase it to 40%" lets people know what's really going on. Not to mention if the federal budget was, say, always 18% of GDP, it'd be pretty clear what was going on if Congress tried to increase it to 20%, wouldn't you say?

John Roccia writes:

Additionally - you couldn't increase your budget for one project by 3 percentage points without figuring out what other project was going to LOSE 3 points. A huge benefit.

Cyberike writes:

@John T. Kennedy: I suppose you are deliberately trying to make people angry by being so ignorant, but I will try to enlighten you. I left Halliburton to get into teaching for 2 reasons: the first is that I thought high school kids really needed to know more about what kind of knowledge it takes to live and work in the real world, and second because my 401k account was pitifully small and subject to irrational market fluxuations (meaning I was losing money).

I made a decision to take less money to teach your kids because my doing so could improve society and because of the state pension. A pension I contributed six and a half percent of my salary to, by the way.

Don't you dare try to tell me I am owed nothing.

John Roccia writes:

@Cyberike: I don't think John T Kennedy was trying to anger you. :) But you've expressed a certain philosophical problem in your own way:

Let's say Tom is a thief. He steals a bicycle from Susan. Later, you meet Tom, and you have no prior idea that he's a thief, nor reason to suspect he stole his bicycle. He offers to trade you the bike for a pizza. You get him the pizza, he gives you the bike. Later, after he's eaten the pizza, police manage to track down Tom and discover that he gave the bike to you.

So here's the problem - what's the just course of action? That bike belongs to Susan. It was stolen from her. But it wasn't stolen by YOU - it was stolen by Tom. You very much like the bike, and you obtained it legally as far as you were aware; certainly you shouldn't be punished, but if the bike is taken from you and given to Susan, you're out one pizza. If Tom has already eaten the Pizza and is now broke, he can't pay you back. What should happen?

That's similar to your story. You contributed to your pension - and the amount you contributed should certainly be yours. Your employer promised you a certain amount more, which you worked for. But the money they promised you was either stolen or they just didn't have it and they made promises they couldn't keep. You worked in good faith - and you certainly can't take your years of work back. But at the same time, the only way to make good on the promise to pay you is to steal the money from someone else. If you were teaching for (just picking a random number) 30 years, then the people who made the decision to promise you that pension, and those that voted for it, etc. aren't even around any more. The ones that will have to foot the bill had no say in the decision to promise it to you.

So we reach the same philosophical problem. You traded service for a promise of pay, and did so in good faith. But the person who promised you did not. The promise can't be kept without hurting someone else. What's the moral course of action?

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