Bobo is Such an Idiot (Redux)

Thanks to Attaturk for establishing a good theme for the day, so here's my two pennies.

This is how Bobo starts off:

Before we get lost in the policy details, let's be clear about what this Social Security reform debate is really about. It's about the market. People who instinctively trust the markets support the Bush reform ideas, and people who are suspicious oppose them.

You know, from my perspective, it isn't that I don't trust markets. I trust them so far. I just don't have blind faith in them and know that the stock market can lose money as well as it can make money, or as Krugman said yesterday:

For it is now apparent that the Bush administration's privatization proposal will amount to the same thing: borrow trillions, put the money in the stock market and hope.

BoBo makes me want to scream when he adds that people who disfavor Bush's prescription as "Popul[ist]", "Antibusiness", and "Michael Moore-ism" which will leave liberals deeper in the hole. In other words, we have to debate not whether to have private accounts but only to what extent, otherwise we doom ourselves to be further marginalized in the process.

Lets remind Bobo, with teeth tightly clenched, instead of calling him names, what his colleague said yesterday:

Even so, if personal investment accounts were invested in Treasury bonds, this whole process would accomplish precisely nothing. The interest workers would receive on their accounts would exactly match the interest the government would have to pay on its additional debt. To compensate for the initial borrowing, the government would have to cut future benefits so much that workers would gain nothing at all.

Now dueling experts:

BoBo:

The White House is heading toward a reform plan that would tie the benefit levels to prices rather than wages, which is a serious benefit cut. It would then use the power of the markets to compensate retirees for those cuts and to create a reserve fund to make the system solvent.

The government would essentially borrow at 2 percent in real terms, invest that money through regulated private accounts in the market and get a return, based on conservative historical averages, of about 4.6 percent. Those returns would, over time, cover the $11 trillion in liabilities that threaten to bring down the system.

The right-honorable Professor:

How, then, can privatizers claim that they could secure the future of Social Security without raising taxes or reducing the incomes of future retirees? By assuming that workers would invest most of their accounts in stocks, that these investments would make a lot of money and that, in effect, the government, not the workers, would reap most of those gains, because as personal accounts grew, the government could cut benefits.

We can argue at length about whether the high stock returns such schemes assume are realistic (they aren't), but let's cut to the chase: in essence, such schemes involve having the government borrow heavily and put the money in the stock market. That's because the government would, in effect, confiscate workers' gains in their personal accounts by cutting those workers' benefits.

Bobo:

People who think the markets are a rigged game, or who think financial profits are just paper profits, won't like this approach. But the fact is that over the next decade - whether we are talking about pensions, health care or even schools - the central argument is not going to be over whether to apply market competition to these problems. It's going to be over how to structure competition to produce the most dynamic results.

And finally, the very good economist from Princeton:

First, financial markets would, correctly, treat the reality of huge deficits today as a much more important indicator of the government's fiscal health than the mere promise that government could save money by cutting benefits in the distant future.

After all, a government bond is a legally binding promise to pay, while a benefits formula that supposedly cuts costs 40 years from now is nothing more than a suggestion to future Congresses. Social Security rules aren't immutable: in the past, Congress has changed things like the retirement age and the tax treatment of benefits. If a privatization plan passed in 2005 called for steep benefit cuts in 2045, what are the odds that those cuts would really happen?

Second, a system of personal accounts, even though it would mainly be an indirect way for the government to speculate in the stock market, would pay huge brokerage fees. Of course, from Wall Street's point of view that's a benefit, not a cost.

There is, by the way, a precedent for Bush-style privatization. One major reason for Argentina's rapid debt buildup in the 1990's was a pension reform involving a switch to individual accounts - a switch that President Carlos Menem, like President Bush, decided to finance with borrowing rather than taxes. So Mr. Bush intends to emulate a plan that helped set the stage for Argentina's economic crisis.

If Mr. Bush were to say in plain English that his plan to solve our fiscal problems is to borrow trillions, put the money into stocks and hope for the best, everyone would denounce that plan as the height of irresponsibility. The fact that this plan has an elaborate disguise, one that would add considerably to its costs, makes it worse.

So we're right back where we started, the pasty faced putz BoBo, sorry I slipped on the name-calling, wringing his hands about how the Republicans have it right and the Democrats better get in the game or get left behind. It seems the first real battle is being joined. Let's hope that our leadership in Congress adheres to the professor's view rather than BoBo's or we're in real trouble.