Barkley Rosser has done me the honor of responding to one my of my comments on Brad Setser’s post on Social security and I am repaying him with a snide blog post. I am a baaaaad man…..
For those who don’t already know, I should point out that Barkley Rosser is a well known economist. At least, he is well known amongst those people who read economic blogs. And I am not being sarcastic when I say that the fact that he responded to one of my posts is an honor. But being honored does not stop me from thinking that he is wrong.
Before I go any further, let me reprint what he wrote to me….
Apeman,
Yes, the size of the surplus will soon start declining, but the intermediate projection that says it will reach zero in 2017 is based on ridiculously pessimistic assumptions, notably that the economy will start growing at 1.8% per year rather than its historic rate of twice that, and that immigration will decline sharply very soon.
The Trustees for over a decade have also provided a low cost scenario, which has proven overly pessimistic as well. However, that forecast has the fund running a surplus forever, with no changes being made. There really is a serious question why anybody is going on about this, especially as I think most Dem voters think they elected a Congress to preserve social security.
There is more to this than meets the eye. On Saturday, Jan. 12, the Washington Post had a tiny story on page A6 that only appeared in a few hard copy editions. It reported that Sen. Kent Conrad of ND (Dem), Chairman of the Senate Budget Committee, is setting up a bipartisan commission to recommend changes to social security, but he would not answer questions because he did not want “the baby strangled in the crib.” You can read the story by going to maxspeak and looking at the posting by me that is labeled “Bipartisan Social Security Hit Squad Rides into Town under the Radar,” along with lots of comments.
Barkley Rosser
Now at first glance, Rosser seems to have a good point. Why should we assume that future economic growth will be half of the historical growth rate? Shouldn’t that be the high cost estimate instead of the mid cost estimate for Social Security’s future cost?
But as they say in the financial business, past returns are no guarantee of future results. And in the case of America’s future growth rate, there are some very good reasons to believe that future growth will be far lower than the historical norm.
The biggest reason for assuming that future growth will be lower than the historical norm is the baby boomers. As everyone who is reasonably well educated knows, the baby boomers are the big bulge going through the demographic pipeline. When they hit retirement age, there will be a far larger number of retirees to workers than the historical norm.
Now it stands to reason that a country with lots of retirees will not be able to grow GDP as fast as a nation with more people in the work force. To be sure, immigration is the big wild card here, but I don’t think that it will save our bacon.
For one thing, political pressure is mounting to clamp down on immigration. Also, our immigration laws are geared towards letting poorly educated people in and keeping highly educated people out. Thus, even if the politicians allow enough immigration to keep the retiree-to-worker ratio at historical levels, we still might not be able to keep up the historical rate of growth.
And demographics is only one of the reasons for thinking that the growth rate will be lower in the next decade or two. There is also the current account balance, the war in Iraq, global warming, and so on, and so on.
So I wonder why Rosser thinks that it is ridiculously pessimistic to believe that we will only see growth at the 1.8% level in the coming decades. I could understand if he was a Bush supporter…..
[…] _uacct = “UA-1202685-1”; urchinTracker(); Map of the Ethereal Land The Ethereal Voice Front Page – Politics – Money – Knowledge – Art – Food – Fun Masthead About Barkley Rosser’s Irving Fisher imitation. By Ape Man | January 17, 2007 – 7:14 pm Posted in Category: Unapproved Barkley Rosser has done me the honor of responding to one my of my comments on Brad Setser’s post on Social security and I am repaying him with a snide blog post. I am a baaaaad man….. For those who don’t already know, I should point out that Barkley Rosser is a well known economist. Click Here to continue reading. […]
Ape Man,
Well, first off I see no reason why having more retirees slows down economic growth, unless you raise taxes to pay for them. But that is exactly the issue. We have all these “reformers” calling for tax increases when they do not seem to be needed or warranted.
Second, the demographic ratios are not nearly as scary as these folks contend. By 2030 we’ll have a retiree to worker ratio in the US about what they have in most of Western Europe right now. Germany pays nearly twice as much in pensions as does our social security, but they are not in a fiscal crisis, they are not borrowing abroad like mad as we are doing.
Regarding the projections, it is not just that reality has done better than the past projections of the SSA Trustees, reality has done better even than the supposedly optimistic low cost projection. However, these people have not budged an inch. The projections today look almost identical to the ones used a decade ago. The “low cost” projection itself is below the historical growth rate, the one that gives a surplus forever. These numbers have really been seriously cooked, deep fried, or whatever, and most observers and commentators seem to be completely ignorant of the fact, just blindly repeating the scare scenarios of the intermediate range projection.
Indeed, one can go far down from current trends and still get that “surplus forever” outcome. Ceteris paribus, the cutoff is 2.2% per year growth, compared with the 1.8% of the intermediate projection and the ~3.6% historical rate. We are at this moment in an economy suffering from a slowdown due to major decline in our housing sector experiencing a 2.4%, still above that rate that gives a surplus forever.
So, of course, we might see a combination of a sufficient slowdown economically or demographically that we might some day run a deficit on the SS fund, but it looks to me to be way below a 50% probability.
OTOH, the medicare trust fund is currently already running a deficit, one that is rapidly rising. But somehow the “entitlement reforrmers” who walk in talking about social security, medicare, and medicaid suddenly end up only talking about (and plotting about, see the story on Conrad’s bipartisan commission) social security. This is just stupid, although I realize that because the youngsters who will take the hit on their benefits have already been convinced by the endless repetition of this propaganda that they are not going to get any soc sec bennies anyway, maybe they can be bamboozled into accepting unnecessary benefit cuts.
Mr. Rosser,
Let me start by saying that I think that Medicare and Medicaid are far worse problems then Social Security. I think that is one of the reasons that people prefer to talk about Social Security is that it seems easy to fix. It’s the old story of the drunk looking under the light and not where he lost his keys. But Setser’s post was about Social Security, not Medicare, so that was what I commented on.
Now as far as your response to me, let me say that I appreciate the fact that an economist of your caliber is taking the time to educate me. But I am a little dense so you are going to have work a little harder if you want to free me from the shackles of right wing propaganda.
For example, you say “Second, the demographic ratios are not nearly as scary as these folks contend. By 2030 we’ll have a retiree to worker ratio in the US about what they have in most of Western Europe right now. Germany pays nearly twice as much in pensions as does our social security, but they are not in a fiscal crisis, they are not borrowing abroad like mad as we are doing.”
That brings a strange question to my mind. What was the growth rate for Germany over the last 10 years? According to this, it was 1.23% (ending in 2004). That is a little below the 1.8 the social security administration is predicting for the US right?
Now I know you are going to say that is because of the reunification, not Germany’s demographics. Personally I don’t buy it. Most of the other countries that have been freed from communism have had higher then average growth rates. But let that dispute pass….
What is the growth rate of other countries with a high retiree-to-worker ratio?
How about Italy?
Strange, it was 1.3% (ending in 2003) …..
Now I admit that I have just googled those questions. That is why I have weird end points for my data. If you want a rigorously argued essay on the subject of the effect of demography on growth rates you are going to have to talk to the Chieftain of Seir.
Nonetheless, I read pretty widely and I can’t think of any country that has a high retiree-to-worker ratio with an average growth rate higher then 1.8%. Can you?
True, it will take us a while to get to Germany or Italy’s level of retirees to workers. But then, their growth rate has been a lot lower than 1.8% for a long time.
To my simple mind, the reason that a higher retiree-to-worker ratio leads to lower growth is obvious. The lower the percentage of population that is in the work force, the harder it is to grow GDP, all other things being equal. What is wrong with this reasoning?
To a certain extent, I think you are arguing against a straw man. I never said that it would be impossible for the US to keep all of its current commitments to the baby boomers. But I do think that it is going to come at high cost. We will have European levels of GDP growth and we will have to learn to get by on European levels of defense spending. We will also will have to get used to European levels of taxation.
Maybe you see that as a good thing. I can certainly see some people making an argument that the US should get its wings clipped.
But whatever the rights and wrongs of it are, I don’t look forward to it.
We continued this discussion on another one of Brad’s posts. I may make another post laying out my objections to Rosser’s position in more detail soon.
When considering demographic drag in the U.S., it may cut through some of the propaganda if we consider economic dependency ratios rather than simply retiree to worker ratios.
U.S. Bureau of Labor Statistics (BLS) defines ‘economic dependency ratio as: “the number of persons in the total population (including Armed Forces personnel overseas and children) who are not in the labor force per 100 of those who are in the labor force.”
For total population, this ratio was much higher during the 1950-70 period than projected from 2010 to 2050, approx. 130 for the earlier period, 100 for the latter. (See: A century of change: the U.S. labor force, 1950–2050; BLS; 2002)
Simply, if total dependents per worker determined economic growth rate, the U.S. economy should not have performed nearly so well during what has been called its post WWII golden age and, with a lower dependency ratio, be expected to do very well during the upcoming decades.
Arguing an SS problem on demographics is itself no more than another of the strawmen privatizers throw up to confuse and convince, and this is still more the case if we shift from a strictly national into a global perspective.
[…] So you have to raise the retirement age to keep the program solvent. Big deal. We are all living longer. Heck, we don’t even have to raise the retirement age. If we were willing to stop playing super cop and cut our military spending we could keep the current form of social security with only modest tax increases. As Barkley Rosser likes to point out, by 2030 we will have a retiree to worker ratio that much of Western Europe has right now. So if you keep the discussion focused on Social Security, reasonable people are going to feel that America’s demographic problems are no big deal. […]