Prescott on Rebuilding Social Security
It’s a shame that this Edward Prescott op-ed is behind the WSJ wall. Prescott (who won the economics Nobel this year)argues that mandatory investment accounts with limited investment options are necessary to solve the time inconsistency problem with savings.
Readers of this page will recall that I have made this proposal in a previous essay, but readers may also recall a letter that questioned an assumption I make about consumer behavior. In effect, the reader asked how, on the one hand, I consider people so irrational that they have to be forced to save, and, on the other hand, I consider people rational enough to manage their own retirement accounts.
But this question reveals a misunderstanding of the time inconsistency problem. The reason we need to have mandatory retirement accounts is not because people are irrational, but precisely because they are perfectly rational–they know exactly what they are doing. If, for example, somebody knows that they will be cared for in old age–even if they don’t save a nickel–then what is their incentive to save that nickel? Wouldn’t it be rational to spend that nickel instead.
Of course, a libertarian would prefer a system of neither mandatory investment nor wealth transfer. But if we’re going to get one or the other, I think the paternalism of mandatory investment is better on libertarian terms than expropriation and redistribution. Property rights are not unitary; they are a bundle. Mandatory investment restricts liberty over some sticks in the bundle, but the overall right to one’s earnings are preserved. In redistribution, one’s right is just straightforwardly violated–one loses the whole bundle. If we have the chance to implement a policy that involves a small violation of liberty but which will replace or prevent the implementation of a policy that would involve a larger violation of liberty, we should do it. Mandatory accounts help preseve an ethos of self-responsibility, which I think is crucial for a healthy society. And if the policy has overall superior economic consequences to the alternatives, as does mandatory investment, that is another strong reason to support it.
The rest of Prescott’s op-ed is full of plain good sense. He deflates worries about truck drivers runing themselves by “gambling” on the market, and Wall Street firms gouging the naive folk with gigantic fees. And he points out the ridiculousness of “Cassandra[s] screeching about evil policy makers and cranky politicians who are out to destroy Social Security.” As Prescott rightly notes, Social Security is simply bad policy. We have the opportunity to replace it with a better policy. So we should replace it.
December 29th, 2004 19:36
To me, the Republican desire to loot Social Security while at the same time ‘taking it away’ from the Democrats resembles nothing more than a group of skinheads getting drunk in a bar while eyeing the only black man in the place. They get more intoxicated while persuing the inevitable path from talk to action.
Why must today’s Libertarians settle for being the horse Repbulicans ride when they want to do true evil?
When there is so much waste that everyone agrees on in the federal budget, why support the destruction of a system that works and is popular?
Probably for the pure pleasure of debate…
December 30th, 2004 00:21
Monkyboy,
Libertarians were calling for Social Security privatization long before the Republicans became interested in reform.
The system only “works” in the sense that it gets old people to vote, gives the government another source of revenue to plunder, and moves us one step closer to the complete nannyfication of America.
December 30th, 2004 03:00
Hehe, complete nannyfication.
When I started reading this blog a couple weeks ago, I couldn’t quite figure out what it was. I have now boiled it down to two possiblilities:
A parody. A subtle skewering of the comedic brayings of psuedo-scientists everywhere.
or
That most rare and delicious bird, the unintentional parady.
Will’s post on Prescott makes me think it is the latter. He cites a paid hack writing in the paper read almost exclusivly by those who will profit most from the looting of Social Security as support for the looting.
That’s like pointing to a speech by Michael Jackson at a NAMBLA convention where he claims they really are molesting the children for their own good.
I’ve yet to hear a Libertarian explain why, when they can’t even get the most obvious fraud and pork cut from the Federal budget that we should believe them when they say the trillions of ‘liberated’ Social Security dollars won’t be squandered too.
December 30th, 2004 08:20
I’ve yet to hear a Libertarian explain why, when they can’t even get the most obvious fraud and pork cut from the Federal budget that we should believe them when they say the trillions of ‘liberated’ Social Security dollars won’t be squandered too.
The reason Libertarians (and libertarians) can’t get the most obvious fraud and pork cut from the Federal budget is because it is Democrats and Republicans who make the appropriations and sign the spending bills. The idea behind “liberating” those Social Security dollars is to remove it from the control of those who perpetrate the fraud and pork - the politicians in Washington. Other than engaging in a bunch of name-calling, I don’t understand what you’re trying to accomplsh here.
December 30th, 2004 11:46
Of course Prescott’s WSJ piece does not breathe a word about the enormous transition costs in moving to Libertaria. But then again, neither did Lenin’s.
December 30th, 2004 16:50
Well Krybo, I politely disagree. I think that in the name of removing these funds from the control of politicians, the current plans to ‘privatize’ Social Security will:
Increase the size of government by about $300 billion a year.
Create a massive new government bureaucracy.
Make these funds available for massive fraud and corruption.
In the long run, give the Federal government control of every corporation in America.
Federal debt ain’t a bad investment. Lots of foreign governments and individuals buy it now. Why fix what isn’t broke?
December 31st, 2004 12:52
Monkyboy’s parody (unintentional? Delicious!!) of someone who has never taken an economics or politcal science class at the undergraduate level is spot on. It brings me much joy.
December 31st, 2004 12:57
I think he takes the parody a little far by referring to a respected Nobel Prize winning economist as a “paid hack”, personally. But it’s not lack of education he’s feigning; it’s lack of honesty. Note his absolute unwillingness to engage arguments rather than motives. To him, the fact that an article appears in the WSJ is evidence that anything it says is false.
I hate trolls. It’s too bad no commenting software currently available supports killfiles.
December 31st, 2004 15:48
Hehe, brooke, I admit to a lack of political science notches in my educational belt. But I did spend many pleasant hours long ago studying the economics of ancient and modern China. Funny thing about China, every time they are poised to take a place on the world stage, they instead withdraw and cut their ties to the outside world. Those companies and individuals who invest in China today, still a communist country last I checked, are certainly braver than I am.
Of course, a solid background in the social sciences is needed to discuss investing. Everyone knows that every student and teacher of philosophy, psychology, sociology, etc. is fabulously wealthy from using their utopian theories to invest wisely in the stock market. In fact, the only reason they don’t extract the entire GNP of the world is out of some misguided sense of altruism.
asg, I am more than willing to debate the ‘facts’ of this latest attempt to loot Social Security.
Please tell me, where exactly, will the $300 billion needed to fund private investment accounts for workers will come from each year?
I’m sure the government will set up these controled accounts for 100+ million workers and then use the honor system to control them instead of hiring people to do the job.
As for the potential for corruption, let’s ignore Enron and other failures of the past and turn to this week’s news.
In California, the shareholders of Disney lost a petition to nominate their own board members when they learned the company paid Michael Ovitz $140 million for a years work. Imagine, shareholders wanting a say in how a company is run, how utopian is that?
In D.C., epicenter of the world of psuedo-science, government official were shocked!, shocked! to learn that, after booting the head of Fannie Mae for inventing $10 biliion in phony profits to meet performance goals and collect incentive pay, he will retire with a lifetime pension of $1.5 million a year. Not bad for a company that started as yet another fuzzy-headed effort to get the government involved in investing.
As for the federal government getting control of companies, yes, the Social Security monies that some politically appointed seers will guild can buy General Motors right now for the low low price of $22 billion. In 10 years or so, the Social Security funds will own outright almost every company in America…thank god we have cadres of social scientists standing byto take them over and run them properly!
Happy New Year!
December 31st, 2004 17:08
Calling Edward Prescott a paid hack may be slightly trollish, but in my research on him I came across this quote:
“This is the golden age of economics. Economic theory has become quantitative – a hard science.”
Hehe, why must every social scientist make this claim about their field? Why can’t they just be happy to work in a ’science’ where they can never be proven wrong?
Anyhoo, I stopped tracking the lesser Nobel prizes after they gave the Peace prize to Henry Kissinger for his ‘work’ on Vietnam.
January 3rd, 2005 12:54
monkyboy’s namecalling aside, he does have a point about theoretical vs. real control of funds. This is one of my two principal reasons for being skeptical of many forced-savings plans: I don’t trust the feds to respect investors’ ownership of these accounts the way that, for example, 401(k) accounts are respected. Indeed, if the plan simply proposed to require folks to invest a certain percentage of their income in a 401(k) or IRA, I’d be a lot more supportive; but the current Bush plan envisages a different sort of account entirely and that makes me nervous.
Moreover, if there are going to be strict limits on how the accounts can be invested, and those strict limits are going to be set by a political process, that process can easily be used to reward favored companies and punish disfavored ones.
So I’m not sure that the privatization plan on the table will result in either a decrease in the real size and scope of government or an increase in individual autonomy. Maybe some other version, like Cato’s, could do so; but the devil really is in the details here.
My other reason for skepticism is that a forced savings plan, by itself, will do nothing to address the insolvency problem or the fraudulence of the “trust fund”. For that, we need real, honest, politically-difficult benefit cuts, and I don’t see the current administration stepping up to the plate on that.
January 3rd, 2005 21:14
“Social Security is simply bad policy. We have the opportunity to replace it with a better policy. So we should replace it.”
The last part does not follow. We should only replace it, if we can replace it with a better policy. How likely is that?
January 17th, 2005 13:42
See some folks need to read the annual SS Trustees report to congress and need to understand that by law the SS surplus must be invested in federal bonds. Since this money is ultimately owed to us, the trillions of transition costs are already sitting there in the surplus account. All privatization will do is make this debt apparent so that politicans cannot pretend that we have a surplus.
July 5th, 2005 00:29
הכשרות ברמנים
This וודקה קייצית program has been funded for 120,000 procedures and so far 40,000 have been performed! This drastically helps to reduce our This וודקה קייצית program has been funded for 120,000 procedures and so far 40,000 have been performed! This drastically helps to reduce our
July 9th, 2005 17:25
בורג
Thank you for your interest in בורג. Testimony is no longer being taken for the 2002 budget. For more information on בורג click on a…
July 9th, 2005 17:36
משקה יבש
News stories about משקה יבש bring credibility that advertising cannot give. News stories about משקה…
July 9th, 2005 18:45
מועדון אלכוהול
Let us know about your מועדון אלכוהול website and network Let us know about your מועדון אלכוהול website and network
July 11th, 2005 16:37
Flash Games
Thank you for your interest in Flash Games. In order to serve you best, please fill out the Flash Games following information. A representative will contact you shortly. Thank you for your interest in Flash …
July 15th, 2005 09:59
חייל משוחרר
חייל משוחרר is an advanced Website חייל משוחרר service that ensures the reputation and uptime o…