"There are only two ways of telling the complete truth—anonymously and posthumously."Thomas Sowell

Friday, December 31, 2004

Mike Kinsley's Social Security Gaffe

L.A. Times editor Michael Kinsley recently wrote, with characteristic humility, that, “Social Security privatization is . . . mathematically certain to fail. Discussion is pointless. . . . It can't possibly work, even in theory.”

He made this same argument in a little-noticed July 27, 2001 article in Slate, where he said it was an analysis “for which I claim enthusiasm, not originality.” Now he claims originality, calling it “Kinsley’s Proof”:

"My argument . . . defines success as bringing in more money than the current system does. More money is necessary either to reduce the gap between projected benefits and revenue or to make retirees better off. . . . More money can come from only two places: increased economic growth and other people. Increased growth can come only from higher private investment or smarter private investment."

Privatization cannot result in higher private investment, in his view, because government borrowing to finance the transition would leave combined public and private savings unchanged (not reduced, incidentally, as others claim). “Privatization would deflect some money from the Social Security trust fund into private investment,” says Kinsley, “but the government would have to borrow an equal amount to replace it.” With total national savings unchanged, he imagines private investment must be unchanged too.

After adding some dubious comments about private investment being no more efficient or profitable than government bonds, Mr. Kinsley asked, “Where am I wrong here?” Several bloggers offered perceptive answers to that question, but he does not really want to listen. “When you're sure of something to a mathematical certainty,” he wrote, “it becomes supremely irritating that other people continue to debate the issue as if there were some doubt.”

Curiously, none of Mr. Kinsley’s critics noticed the fundamental flaw of his analysis – namely, that it totally ignores incentives to work or to accumulate potentially valuable skills (human capital). My own recent column, by contrast, cites Nobel Laureate Ed Prescott and concludes, “better work incentives are the biggest single benefit of privatization” http://www.townhall.com/columnists/alanreynolds/ar20041223.shtml

To assert as Mr. Kinsley does that “increased growth can come only from higher private investment or smarter private investment” is to advance a uniquely peculiar theory of economic growth. Specifically, Mr. Kinsley’s conclusion depends on a closed economy, static model with only one factor of production (private capital).

This is a closed economy static model because investment in new private capital can supposedly be financed only from current domestic flows of saving, never from the global stocks of assets. If that made any sense, then the U.S. could never have a deficit on current account, because it could never have a net inflow of foreign investment.

Kinsley's is a one-factor model because the behavior of workers, managers and entrepreneurs is alleged to make literally no difference whatsoever to the output or growth of any national economy.

If Michael Kinsley’s one-factor theory of economic growth made any sense, then the U.S. could replace every worker, manager and entrepreneur with a random selection of people from Somalia yet the U.S. economy would nonetheless remain equally productive.

The main point of making it easier for young people to build real nest eggs, rather than relying on the unlikely generosity of future taxpayers, has to do with microeconomic incentives not macroeconomic accounting categories such as "savings rates."

Privatization reduces the risk that the marginal tax on future workers may otherwise become so onerous that hours of work per year and years of work per liftime drop to the lazy levels of France, thus flattening economic growth and tax receipts in the process.

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