Marginal Utility

by Tom Bozzo

As is becoming clear, merely being unpopular and a bad idea isn't enough to kill off the Social Security "reform" effort, now in the guise of a "Senior Security Package." As Mark Thoma notes at Economist's View, vigilance is essential.

The story so far: the privatizers have three standard pitches: appeals to greed — you can't lose! — paeans to the economic freedom that supposedly flows from controlling in some ways at least a portion of the proceeds of one's Social Security taxes (whether one can eat freedom may be another matter), and finally fear-mongering.

1. The greed pitch involves assumptions on forward-looking investment returns that depend strongly on a return to the (stock) returns of the late 'bubble' era. My view — not to mention that of many economists who know a lot more about financial market macroeconomics than me — is that those are Pie in the Sky, with bond yields so low and stocks still expensive. But there are enough experts who will line up on the other side to give it plausible deniability. It also doesn't hurt, from a marketing perspective, that it tells people whose retirement income is tied to stock market performance something they want to hear.

2. The operability of the freedom pitch, in contrast, will be determined in large part by the sort of up-front policy decisions that Fearless Leader was wimpily refusing to discuss earlier in the year. While it has always been fairly clear that investment freedom would have to be carefully constrained to ensure high enough expected returns net of costs and guaranteed benefit offsets to avoid a future counter-reformation, some true believers of my acquaintance have, like Bart Simpson at Kamp Krusty, managed to sustain their faith in the flowering of investment-ownership liberty to come.

They are in for a rude surprise. An article sadly buried in the business section of the Washington Post a couple weeks ago (reproduced by Mark Thoma here) highlights an immutable feature of Bushite policy-making: friendly interest groups call the shots. In this case, it's small business lobbies at work. They strongly favor privatization, but are unwilling to see their membership bear the costs of 401(k)-style privatized accounts. The alternative is an annual accounting of contributions, and corresponding long lags between contribution withholding and credits to accounts. Since the contributions, under the would-be House plan, would initially be invested in government bonds which inherently could do no better, net of expenses, then the status quo of keeping the bonds in the Social Security trust fund, this is a guaranteed loser.

(See also PGL at Angry Bear here — the thing to note being that with administrative expenses, the proposal is more like taking a dollar out of one's left pocket and putting somewhat less than a dollar in one's right pocket.)

3. As for the fear-mongering, it's reached a new low with the latest stop on the bamboozlement tour, now joined by Barbara Bush. While Mark Thoma does a pretty good job of disparagement with "Bush Calls His Mommy For Help," what's just as interesting is the indication of how prevarication runs in the family. As the Times quoted her,

"I'm here because I'm worried about our 17 grandchildren, and so is my husband," Mrs. Bush said. "They will get no Social Security."

As everyone should know, this is the biggest coprolite in the bamboozlement playbook, and Mrs. Bush is happy to serve it up to the audience, "carefully screened" to devour it (which raises disturbing questions about the psychology of those who can actually get into these publicly funded events). This leads me to believe that Al Franken may have been too kind to her in Lies and the Lying Liars Who Tell Them.

Overall, though, I'm not unhappy that Bush is so drawn to the third rail, provided that he doesn't manage to shackle together enough of his legislative branch minions to make good on the threat to do something or else and thus really screw things up.