Rational Action

My new op-ed is in today’s Columbia Spectator. It is titled Trusting the Trust Fund.

For the past 20 years, the Social Security system has put away a portion of its yearly revenue into what has effectively become one of the world’s richest bank accounts. This account, called the trust fund, has over 1.5 trillion dollars in assets. The latest Social Security Administration report predicts that the trust fund will only get richer for the next 15 years, and will then have sufficient funds to finance all of Social Security’s promised benefits until roughly 2042. Yet in his State of the Union address, George Bush implied that Social Security’s crisis would begin when it started to spend its savings, not when it ran out of them. “In the year 2027,” he said, “the government will somehow have to come up with an extra 200 billion dollars to keep the system afloat.”
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Found a story that I read a long time ago. Goddamn.

The dog frothed at the mouth, lying at the door, sniffing, its eyes turned to fire. It ran wildly in circles, biting at its tail, spun in a frenzy, and died. It lay in the parlor for an hour.

Two o’clock sang a voice.
Delicately sensing decay at last, the regiments of mice hummed out as softly as blown gray leaves in an electrical wind.

Two-fifteen.
The dog was gone.
In the cellar, the incinerator glowed suddenly and a whirl of sparks leaped up the chimney.

There will come soft rains

Yes, my friends, today I finally admit that Paul Krugman does not read this blog. Still, I’m going to connect the dots and claim that he takes inspiration from this fine domain. His latest op-ed column, channeled by way of Brad DeLong, explains that the long-run rate of return from diverse stock investment cannot exceed GDP. Krugman explains that unless the aggregate Price-to-Earnings ratio of stocks continually rises, stock prices must reflect profit growth. And corporate profit growth cannot, over the long-run, be geater than GDP, since that would imply the corporate sector’s eventually becoming larger than the country’s economy itself.

This logic is, in some sense, an amplification of the now-classic Sacarny post, “Conversations with Father: Part 1.” Father was happy to hear that Krugman agrees with him.

Yet the privatizers continue their attack! Former CEA chief economist Andrew Samwick has responded to Krugman’s piece, outlining a defense to Krugman’s argument. I can’t say I understand it, which is a reflection of the complexity of this argument, and thus my understanding of it, not a reflection of Samwick.

Dean Baker, with whom Krugman claims to have worked out the math for his privatization attack, replies to Samwick via MaxSpeak. Again, I am confused.

The blogosphere seems to be advancing well-reasoned arguments along quite quickly, maybe a bit too quickly for my increasingly-economically-inclined mind. Hopefully Samwick will explain himself again, in more Krugmanesque terms. If only they all could!

Dad: Adam, if i told you you could buy either a bond that was risky but would yield more, or a bond that was more assured but would yield less, which would you choose?
Me: Well, in the aggregate, won’t the riskiness of the higher yielding bond mean that the ultimate return on it will equal that of the lower yielding bond?
Dad: Yes.
Me: So that’s why you don’t support privatization?
Dad: If what he was saying made sense, no one would buy treasury bills.
Me: Why?
Dad: Because that would mean interest rates were too low
Me: What? Oh. Because people would need to see a higher return on treasury bills in order to buy then, if other bonds weren’t risky.

Dad thinks people might see a slightly higher return, but he doesn’t buy Bush’s story. Or to quote N. Gregory Mankiw, outgoing chairman of the President’s Council on Economic Advisors, “there are no free lunches here.”