Krugman watch
Lucas Sayre points me to Paul Krugman’s attempt on Tuesday to preempt the President’s State of the Union with his column arguing that the Social Security reform numbers “just don’t add up.” I’ve learned to be wary of Krugman’s selective facts, and this column didn’t disappoint. But I want to do something somewhat shocking and use Krugman’s own facts to answer a challenge he laid down:
Mr. Baker has devised a test he calls “no economist left behind”: he challenges economists to make a projection of economic growth, dividends and capital gains that will yield a 6.5 percent rate of return over 75 years. Not one economist who supports privatization has been willing to take the test.
But the offer still stands. Ladies and gentlemen, would you care to explain your position?
Krugman says the rate of return on stocks from dividends and share buybacks “would be only 3 percent.” For the sake of argument let’s grant this proposition. He then adds that “profits grow at the same rate as the economy,” and that economic growth “average 3.4 percent per year over the last 75 years.” If dividends grow at a rate of earnings growth, and earnings grow at the rate of GDP growth, then stock prices will have to rise each year by 3.4%. Therefore the total return is found simply by adding 3% plus 3.4%. That’s not the 6.5% Krugman wanted, but it’s close enough.
Even without this accounting, it’s not unusual that stocks could return 6.5% after inflation. Why? That’s exactly what the return has been over the last 75 years, and we have every reason to believe it will continue. Last week Krugman wrote, “even Jeremy Siegel, whose ‘Stocks for the Long Run‘ is often cited by those who favor stocks over bonds, has conceded that ‘returns on stocks over bonds won’t be as large as in the past.’” What Krugman didn’t want to tell you, though, was that right after that sentence Siegel had this to say: “I see a 5%-to-6% return on stocks, adjusted for inflation. I’m pessimistic about real bond returns.” (Hat tip to the Scrivener blog for the catch.) Compare that to the rate of return from OASDI.
Krugman’s empty rants are growing tiresome and they’re going unanswered on the New York Times. If Krugman has such little faith in the markets and wants to keep sending a large chunk of his NYT paycheck to the government, he’s free to do so. But his fears don’t grant him a right to hamstring the rest of us into a pitifully weak socialized system. The rest of us should have the freedom to personalize our retirement accounts, or at least 2% of it, as we see fit.
15 Responses to “Krugman watch”
The rest of us should have the freedom to personalize our retirement accounts, or at least 2% of it, as we see fit.
We already do.
greg
Yes, the part that’s left over after the government has forcibly taken a chunk for its scheme.
What “scheme” would that be?
greg, quivering in the abject nefariousness of it all
Social Security.
Your argument doesn’t really count as using Krugman to refute Krugman, since a significant part of the argument in that column is to suggest that you probably cannot use the rate of return from the last 75 years to project the next 75 years (that’s what that business with the PE ratio was about).
The main question is whether the following two propositions can both be true: (i) OASDI is in long-term trouble; and (ii) private accounts will significantly outperform OASDI. And your comments don’t go anywhere towards addressing that dilemma. If you want to restrict yourself to making the case for privatization independent of the OASDI solvency issue, that’s fine — but then Krugman’s column would simply be besides your point. He’s addressing his challenge the people who want to market privatization as a cure for long-term solvency issues, and his challenge still stands.
As you say, PK also alleges that the past is a bad indicator of the future. He bases this on the prediction that our past success most certainly can’t continue, but this is coming from the same man who adamently believed the past success would never occur before it actually did.
Krugman’s challenge doesn’t still stand though. Using his own predictions the market can yield 6.4%. The solvency is still the central issue, but one can’t address everything in a single post.
The bottom line is accoutability for promises. Right now, the conservatives are sqirming to get out of promises to America that have proven painful to keep (painful, that is, to people who want to give tax cuts to the successful). They want to squirm out of said promises by making other promises.
Believing such slimy new promises isn’t a good idea normally, so now they’re trying to scare us into accepting their new promises — “we can’t POSSIBLY keep these old promises, so it’s the new promises or NOTHING.”
Don’t buy it.
Aaron, just what promises are going to be unkept? Nothing about Social Security will change for those 55 and older today. Younger workers will have the opportunity to invest a portion of their OASDI payroll tax for a higher rate of return, and in exchange their traditional OASDI benefits will be cut by an amount proportional to the amount they diverted into their private accounts.
Thoughts on the SOTU
I want to put down some of my thoughts quickly this morning before I read a lot of other opinions. I thought it was a great speech, and I think the President, together with the recent Iraqi election, came out…
Using his own predictions the market can yield 6.4%.
I don’t see where you get this, since he quite explicitly uses this prediction: “The actuaries predict that economic growth, which averaged 3.4 percent per year over the last 75 years, will average only 1.9 percent over the next 75 years.” So, using his own predictions, you can’t get to 6.4, but only something like 4.9 (which is basically the low end of the Siegel prediction, which for some reason you thought showed something amiss in Krugman’s column).
He bases this on the prediction that our past success most certainly can’t continue, but this is coming from the same man who adamently believed the past success would never occur before it actually did. I’m not sure where you’re getting this — Krugman isn’t primarily a doom-and-gloom person on the economy in general, though he has argued that various rosy scenarios wouldn’t be as rosy as various people have hoped. Like, he argued back in the day that the “Dow 100,000″ types were crazy, but he’s turned out to be right about that. And if one of the most optimistic people on the planey about stock returns is only saying 5 – 6%, then it hardly seems wrong to say that it’ll probably fall short of 6.5%. (Though I must admit I don’t know where the 6.5% number comes from; I understand that he wouldn’t have room to go into it in the column, but if someone has a link to a defense of the number, I’d love to see it.)
Also, Krugman’s own predictive track record doesn’t even much matter here. He’s citing the OASDI actuarial predictions, because, as I noted, he’s working within the framework of the dilemma mentioned above, in which proponents of privatization cite those very predictions in order to argue that OASDI is in financial trouble down the road. If you think that a more accurate growth prediction would be way better than the 1.9%, then, fine — but then you also need to note that OASDI is in absolutely no danger of going belly-up. The only way to try to make any of the trouble for PK that you want here is to patently ignore the dialectical targets that he is aiming for.
I must say, knee-jerk anti-Krugmania is one of the weirder & less-attractive neuroses of the blogospheric right these days.
Yeah, I immediately saw the 1.9% future projection, too … but being bad at math I thought Paul knew something I didn’t. That’s the problem with numbers — I’m no good with them. But whenever somebody starts throwing them around really fast to prove why I should give them my money, I’m damn suspicious, that’s for sure.
Social security says “No matter what the numbers, you’ll get a payment of X.” That’s what people need. Certainty. Not somebody saying “based on this assumption and this assumption, you’re CERTAIN to get this rate of return if you take this risk — aw, come on, isn’t that WAY better than social security?”
Philospher,
I’ll try to make this as clear as possible. What PK’s in simplest terms is that the value of the stock market can’t grow substantially and continuously faster than the economy, which is true (and self-evident, since if it did its value would grow to exceed that of everything else in the economy). As you note, using the Social Security actuaries this yields abotu a 5% return. Let us remember this fundamentally important fact – a 5% return is much, much higher than the status quo scheme offers.
PK then oddly turns to Dean Baker for help, and for this we get no explanation. He limits growth in future investment by the 2% domestic GDP growth. But why? Domestic GDP growth does not limit the profit growth of companies Americans can invest in. Asia, South America and other reagios will almost surely experience growth rates far and away higher than 2%, and they will need the capital and investment to make it happen. In short, the investment opportunities from billions of people in economies growing at 5-8% annually will be able to lift future profit growth from 2% to 3%. It’s an interesting slight of hand for PK and Dean Baker to ignore international economic growth.
Besides, even if the returns don’t reach the magical 6.5% mark, they still beat the status quo.
What’s clear, JC, is that you have ended up running a completely different line than you started with, and that you have ended up nowhere near your original claims to use “Krugman’s own numbers” to refute Krugman’s “selective facts”.
Now, if we take the completely gratuitous Krugman-bashing out of your last comment (e.g., what’s wrong with the fact that he got some number-crunching help from another economist and actually had, like, the intellectual character to acknowledge it?), then there is a point in there that would be worth making & talking about. Namely, what about foreign stocks? If we think about them as possible vehicles for investments for the private accounts, does that change the math interestingly? I’m inclined to think not, but I do think it’s worth thinking & writing about. It’s not at all obvious that they do, or that the global stock market should be expected to grow radically faster than the US, or perhaps most importantly that all privatization systems under consideration would allow for much investment in them — I could totally see some legislator sticking a ‘buy U.S.A.’ clause in there. But most of all, bringing in stocks from the parts of the world that might grow at such a rate also and thereby brings in a lot more risk. Sure, some stocks will grow at 9% or more — and many others will tank entirely. Have the global mutual funds generally proven themselves immune to the problem of how much harder it is to pick winners in developing markets? (Note that the test of this is not to find one or two global funds that have done well, but to try to get a sense of those funds have done on the whole; or what the global equivalent of an index fund has done.) Even if the average return goes up, if it does so at the cost of significantly increasing the number of people who would basically lose that piece of their retirement package, then it’s not obvious to me (for reasons somewhat similar to Aaron’s above) that this is an option worth pursuing.
But, like I said, this is worth arguing about. But it should be done on its own terms, and not as a pretense to Krugman-bash when in fact no Krugman-bashing is in order.
1) His own numbers show a 6.4% return.
2) Using the Social Security numbers, he comes up with a 5% return, but ignores foreign investment.
3) Under every possible scenario, the averages beat the status quo hands down.
Perhaps that makes it clearer, and that he’s wrong twice, which is why there’s two “lines.”
1. is simply wrong, for reasons I stated earlier. You’re using numbers that aren’t his numbers; in fact, you’re using numbers that he explicitly disavows in his column.
I just addressed the foreign investment part of 2., and pointed out that it is speculative at best and certainly way, way beyond the realm of refuting Krugman with his own numbers; and indeed, because it is speculative at best, it’s way, way beyond the realm of refuting Krugman, period.
And 3. is simply besides the point: the terms of the debate aren’t whether we would adopt a partial privatization plan in some lovely dream world in which we have lots of money sitting around in the budget that we don’t know what to do with it (like, say, getting around to fully funding port security and the like) & we have an administration that is even minimally trustworthy & we could write up social security policy from scratch. The actual policy question that is on Krugman’s table is: the administration is trying to make a case that somehow social security is in some sort of danger, and that somehow partial privatization will keep it from that danger. And there’s just no coherent case to be made, along those lines. Until you come to realize that that’s what the entire left side of the blogosphere is focused on, you’re going to keep misunderstanding everything that Krugman, Yglesias, and everyone else are saying.
If you want to do a post disentangling yourself from the GOP powers-that-be and trying to make the honest case for privatization (i.e., without relying on the idea that it’s in any sort of crisis, etc.), then by all means do so — I like abstract policy discussions as much as the next guy — but keep in mind that that’s neither what the administration nor a huge chunk of the rest of the blogosphere is talking about. You’d have to give up playing the standard right-wing ‘ooh, look how nasty Paul Krugman is!’ game, but the resulting conversation will be tons better.