Cack and Gabble of Krugman
(was going to point out the blather of Deano Baker who wrote a book against this notion back in 1999)
Krugman used his figures in this mornings SeaPI edifib:
Thursday, February 3, 2005
Privatizers can't promise good returns
By PAUL KRUGMAN
SYNDICATED COLUMNIST
The fight over Social Security is, above all, about what kind of society we want to have. But it's also about numbers. And the numbers the privatizers use just don't add up.
Let me inflict some of those numbers on you. Sorry, but this is important.
Schemes for Social Security privatization, such as the one described in the 2004 Economic Report of the President, invariably assume that investing in stocks will yield a high annual rate of return, 6.5 percent or 7 percent after inflation, for at least the next 75 years. Without that assumption, these schemes can't deliver on their promises. Yet a rate of return that high is mathematically impossible unless the economy grows much faster than anyone is now expecting.
To explain why, I need to talk about stock returns. The yield on a stock comes from two components: cash that the company pays out in the form of dividends and stock buybacks, and capital gains. Right now, if dividends and buybacks were the whole story, the rate of return on stocks would be only 3 percent.
To get a 6.5 percent rate of return, you need capital gains: If dividends yield 3 percent, stock prices have to rise 3.5 percent per year after inflation. That doesn't sound too unreasonable if you're thinking only a few years ahead.
But privatizers need that high rate of return for 75 years or more. And the economic assumptions underlying most projections for Social Security make that impossible.
The Social Security projections that say the trust fund will be exhausted by 2042 assume that economic growth will slow as baby boomers leave the work force. The actuaries predict that economic growth, which averaged 3.4 percent per year over the past 75 years, will average only 1.9 percent over the next 75 years.
In the long run, profits grow at the same rate as the economy. So to get that 6.5 percent rate of return, stock prices would have to keep rising faster than profits, decade after decade.
The price-earnings ratio -- the value of a company's stock, divided by its profits -- is widely used to assess whether a stock is overvalued or undervalued. Historically, that ratio averaged about 14. Today it's about 20. Where would it have to go to yield a 6.5 percent rate of return?
I asked Dean Baker, of the Center for Economic and Policy Research, to help me out with that calculation (there are some technical details I won't get into). Here's what we found: By 2050, the price-earnings ratio would have to rise to about 70. By 2060, it would have to be more than 100.
In other words, to believe in a privatization-friendly rate of return, you have to believe that half a century from now, the average stock will be priced like technology stocks at the height of the Internet bubble -- and that stock prices will nonetheless keep on rising.
Social Security privatizers usually defend their bullishness by saying that stock investors earned high returns in the past. But stocks are much more expensive than they used to be, relative to corporate profits; that means lower dividends per dollar of share value. And economic growth is expected to be slower.
Which brings us to the privatizers' Catch-22.
They can rescue their happy vision for stock returns by claiming that the Social Security actuaries are vastly underestimating future economic growth. But in that case, we don't need to worry about Social Security's future: If the economy grows fast enough to generate a rate of return that makes privatization work, it will also yield a bonanza of payroll tax revenue that will keep the current system sound for generations to come.
Alternatively, privatizers can unhappily admit that future stock returns will be much lower than they have been claiming. But without those high returns, the arithmetic of their schemes collapses.
It really is that stark: Any growth projection that would permit the stock returns the privatizers need to make their schemes work would put Social Security solidly in the black.
And I suspect that at least some privatizers know that. Baker has devised a test he calls "no economist left behind": He challenges economists to make a projection of economic growth, dividends and capital gains that will yield a 6.5 percent rate of return over 75 years. Not one economist who supports privatization has been willing to take the test.
But the offer still stands. Ladies and gentlemen, would you care to explain your position?
Paul Krugman is a columnist for The New York Times. Copyright 2005 New York Times News Service. E-mail: krugman@nytimes.com.
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Dean Baker(from cepr.net) his crib.
Dean Baker received his Ph.D. in economics from the University of Michigan. He is co-author, with Mark Weisbrot, of "The Scorecard on Globalization: Twenty Years of Diminished Progress", which examines performance of countries on indicators of health and education outcomes during the era of globalization (For a printable PDF of the paper, click here. You will need Adobe Acrobat). He is also co-author, with Mark Weisbrot, of Social Security: The Phony Crisis (University of Chicago Press, 1999). Other work includes Getting Prices Right: The Battle Over the Consumer Price Index (M.E. Sharpe Press, 1997), which was selected for the 1998 Choice Outstanding Academic Book List, and Globalization and Progressive Economic Policy (Cambridge University Press, 1998), edited with Jerry Epstein and Bob Pollin. He is also author of the Economic Reporting Review, a weekly examination of the economic reporting in the New York Times and the Washington Post, and periodic analyses of the Federal Government's economic data on prices, employment, corporate profits, and the GDP.
He is currently Co-Director of the Center for Economic and Policy Research. Formerly he was Senior Research Fellow at the Preamble Center in Washington, D.C. and the Century Fund in New York; previous to that was a Senior Economist at the Economic Policy Institute in Washington. His writing has appeared in the Atlantic Monthly, Washington Post, American Prospect, and Challenge, among many other publications. He has also appeared on PBS' Lehrer Newshour, Fox News, NPR, Counterspin, and numerous other television and radio programs.
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Amazon review of Social Security : The Phony Crisis
1999
Editorial Reviews
Amazon.com
The sky isn't falling on Social Security, say economists Dean Baker and Mark Weisbrot in this readable but sophisticated defense of America's popular government-run retirement program. The public suspects Social Security won't be solvent in the 21st century, they continue, because of "an avalanche of misinformation, disinformation, and powerful political and financial interests." The authors are both liberal economists, and they believe that the privatization of Social Security favored by many libertarians and younger Americans would involve great risk and possibly destroy a system of entitlements that has rescued millions of retirees from spending their golden years in poverty. Although they admit the stock market has averaged a 7 percent rate of return over the last 75 years--much higher than anything Social Security can claim--there is no way to predict what will happen in the future; mandatory private investment programs favored by many free-market reformers therefore offer false promises. Only Social Security, say Baker and Weisbrot, provides a guarantee of income for the elderly. Along the way, Social Security: The Phony Crisis discusses the history of Social Security and evaluates several of the reform proposals now on the table in Washington. A constant drumbeat in favor of the status quo will guarantee this book's popularity among liberals. --John J. Miller
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(my comment:)
But why the cost is a whopping trillion bucks-- seems
unreal/giveaway -- maybe the refueling lease of social security? |
