Chronicle of the Conspiracy
Saturday, December 18, 2004SPAM WE NEVER FINISHED READING This mail will definitely be coming to you as a surprise, but i must crave your indulgence to introduce myself to you. I am Miss Marah sadija, former mistress to the son (Qusay) of the Iraqi former leader, Saddam Hussein. I am an Ethiopian, by birth and i am presently in a refugee camp in Zimbabwe...
Posted by Donald L. Luskin at 3:06 PM | link
ONE ADVANTAGE OF ILLITERACY An anonymous reader responds to Jameson Campaigne's post about the link between corrupt textbook "adoption" and the failure of our schools:
I worked with adult illiterates for about 10 years in the 90's while living in Louisiana. The textbook angle is a new one to me. I had previously blamed it all on schools and grant money. Now I will blame it on "all of the above." I have moved on and the group I worked with, all volunteers, have moved up in the world -- but they are still teaching adult illiterates and the high schools are still graduating many who read at a third grade level. No wonder we have people who believe every thing they hear on TV. Thank goodness they can't read the newspapers -- it might be even worse.
Posted by Donald L. Luskin at 11:44 AM | link
Friday, December 17, 2004
The "Federal Reserve study" to which Krugman refers is "State Capacity and Pensions" by Stephen J. Kay of the research department of the Federal Reserve Bank of Atlanta. It is hardly a "Federal Reserve study," but rather a March 2003 symposium paper presented by Kay, about which Kay himself said "The ideas expressed in this paper are those of the author and do not necessarily reflect the views of the Federal Reserve Bank of Atlanta or the Federal Reserve System." Krugman not only exaggerated the provenance of the research -- he also misrepresented what it said. Here's the context from which Krugman's quotation comes:
So it's not that the Chilean system didn't reduce government spending -- in fact, we can see that government spending on Social Security has been falling decade by decade, representing an ever smaller percentage of an ever larger GDP. The fact that this improvement is not as good as originally forecasted is hardly a failure, and certainly not a failure to deliver on a "promise." Further, by saying that "government stepped back in to save" people from being "condemned...to dire poverty," he misrepresents that providing a minimum pension was all along an intentional feature of the system -- it's not that the system failed, and so the government had to "step back in." Government was "in" all along. Finally, nothing in Kay's paper explains why the government's obligation was triggered -- Krugman leaves us to assume that it's due to some systemic failure of privatization, but he really has no idea what's behind it.
Krugman goes on to suggest that the same thing is happening in Britain:
This is an utter misrepresentation of what the Pension Commission said. In its 2004 report, the "fool's paradise" it is talking about is the 1990's investment environment for corporate defined benefit pension plans. They are not issuing any "warning" or other opinion about "Mrs. Thatcher's privatization." Krugman simply made that all up.
Tim Worstall has a lot to say on his blog about other Krugman statements about Britain's system.
Update... [12/18/2004] Bruce Bartlett adds:
You should have mentioned that the Fed paper says right on the cover page that it is not to be cited without permission. You should check with the author to see if Krugman asked for permission. I assume not.
Posted by Donald L. Luskin at 2:46 PM | link
A TEXTBOOK CASE Reader Jameson Campaigne responds to my earlier post about the sleazy marketing of textbooks with this thoughtful missive on its role in America's public school crisis:
Not just college texts. At a meeting of the nuns who chose elementary reading texts for the diocese schools in Chicago some decades ago, the head honcho nun praised a look-say basal reading series that nearly destroyed American literacy, and a voice from the back of the room quipped, "C'mon Sister, we know they buy you a new car every year!"
Posted by Donald L. Luskin at 11:28 AM | link
HAIL CESAR Great column by former Cheney insider Cesar Conda on the political realities of Social Security (and he quotes me -- always got to love that).
To be sure, many Democrats will reflexively charge that price indexing will "cut" benefits for seniors. However, President Bush has explicitly pledged to protect benefits for both today’s retirees and near-retirees. Secondly, only in Washington would slowing the rate of increase in overall benefits from eighteen-fold to eight-fold be considered a "cut." Finally, the politics of Social Security have dramatically changed: Today’s young workers would gladly give up all of their future Social Security benefits for the chance to invest part of their payroll taxes in an account that they would own and control.
Posted by Donald L. Luskin at 11:13 AM | link
Thursday, December 16, 2004KRUGMAN SPIDER-HOLE WATCH 11 Consider the source, and the sourcer. Ralph Nader on Social Security:
...it's a solvent system until 2052, and with very minor variations can be good for another century, as Paul Krugman, Professor of Economics at Princeton, pointed out recently, writing in the New York Times.
Posted by Donald L. Luskin at 1:32 PM | link
Why would Sullivan think Kinsley is asking for discussion by bloggers or anyone else when he starts by saying "discussion is pointless" and positions his own view as "mathematically certain"?
Also, note Kinsley's use of the word "privatization" -- as though the proposal on the table were to eradicate any role for government in Social Security, and turn the whole thing over to Halliburton. The issue here is personalization -- individually owned and controlled personal investment accounts within the context of a government-mandated and government-operated program. Well, let's just write that off as the way liberals talk, and proceed anyway.
Sigh. When people say things like "The logic is not very complicated," they are saying "If you disagree with me, you are stupid." I guess when one is the editorial page editor of the Los Angeles Times, one feels he can speak so arrogantly. But let's set that aside and move on.
I'll grant these two premises.
I'll grant the premise in the first sentence, but not the conclusion in the second. I'll argue that personal accounts will start with smarter investment of the same amount of capital, and lead almost immediately to a larger economy in which there is more capital to invest.
This would be true on day one, when personal accounts are first established. But this would not be true over time. First, we cannot assume that "nothing else in the federal budget changes." Currently Social Security tax revenues in surplus above disbursements are accumulated in a so-called "trust fund" which, in turn, invests the money in Treasury debt -- whereupon the government spends it. It is not at all clear that "nothing else in the federal budget changes" if this source for funding government spending were to be reduced. Kent Smetters of Wharton and NBER has offered credible empirical evidence (Smetters, 2003) that, in fact, levels of federal spending are closely correlated with cumulative Social Security surpluses (indeed, Smetters shows that the pattern has been for spending to exceed the surpluses). This suggests that a dollar diverted into private accounts would, over time, be less than fully offset by a dollar in federal borrowing.
Second, for reasons that I will argue later, personal accounts will lead to faster economic growth and an increase in the pool of capital.
Setting aside how elitist this is, it's also just flat-out wrong. Personal accounts not only change who makes investment decisions -- they also expand the scope of the decisions that are possible to make, irrespective of who makes them. Right now the decision is to invest capital saved against future Social Security benefit payments entirely in Treasury securities. Personal accounts would free some of that capital to be invested in other ways. Yes, some of it -- perhaps a large fraction of it -- would be invested in Treasury securities, just as it is now. But surely some of it -- also perhaps a large fraction -- would be invested in equities -- securities with higher expected returns and higher expected risks. So there is every reason to think that personal accounts would, in fact, "increase the overall return on capital."
En passant, it should be noted that the "financial expertise" required of personal account holders is actually fairly minimal. I have no doubt that the Bush administration's eventual proposal for personal accounts will restrict them to investing in a small selection of professionally managed, highly diversified and low-cost index funds (the well established Thrift Savings Plan for federal employees works this way -- very successfully -- and will be the template). Pretty much all the personal account holder has to do is make a high-level decision between stocks and bonds. We cannot be sure that personal account holders will make the same decisions that professional pension fund managers do, to invest heavily in equities. But considering that the Social Security trust fund currently doesn't invest in equities at all -- thus going counter to the best practices of virtually all pension professionals -- even terribly mismanaged personal accounts would move the overall system toward a more fruitful allocation of assets, provided they made any move at all in the direction of greater allocation to equities.
When trillions of dollars invested to fund future retirement benefits are allocated more sensibly through personal accounts -- compared to their current misallocation entirely to Treasury debt and none to equities -- then the economy will produce more than it otherwise would. To believe otherwise is to believe that it doesn't matter how capital is invested as between riskless government securities and risky equity securities. Since I fundamentally dispute Kinsley's "if," there's almost no point in discussing his "then" -- but let's follow his reasoning anyway, and see where it leads.
No, it's not "in fact" or in any other way "the implicit assumption" -- it's Kinsley's straw-man assumption. The actual assumption in the minds of thoughtful advocates of personal accounts is that, when trillions of misallocated dollars become freed from legislatively imposed misallocation, the capital markets become more efficient and the entire economy becomes more productive, faster growing, and larger as a result. There is no need, therefore, to make zero-sum game arguments that any gains for personal accounts must be offset by opportunity costs suffered by those who sold their equities to personal account holders.
Shades of Al Gore and his characterization of personal accounts as a "risky scheme." Fortunately, though, no one is betting on this "theory" except Kinsley -- it's his straw-man.
We all take the Efficient Market Hypothesis seriously, but this is the Nihilistic Market Hypothesis. According to this logic, any time any investor makes a trade -- ever -- prices adjust to un-do any advantage for having made the trade. So if you hold cash, there is never any reason for investing it in stocks, because your buy order will move stock prices higher by an amount sufficient to make it not worth it to you. And, obversely, I suppose, if you want to sell stocks to raise cash, you will lower the stock price to a point where selling isn't worth it, either. In other words -- no investor should ever do anything, ever. The status quo is perfect -- or at least it's the best you can do -- by definition.
In Kinsley's zero-sum world of investment nihilism, anytime one investor is wise or lucky enough to earn superior returns, somewhere there is another "sap" who earned lower returns. Thus, from an economy wide or "social" point of view, making investment decisions is pointless at best, and (here's the subtext) anti-egalitarian. But Kinsley completely ignores the fact that dynamic markets, with their constantly changing prices and their constantly changing cast of characters -- winners and losers -- is what points capital toward its most productive uses. This process is of superb "social" value, and in an important sense makes everyone a winner -- even those who don't participate directly in equity markets
Sure, increased demand for equities will raise equity prices. Indeed, the long-term legislated misallocation of capital controlled by the Social Security system may have kept equity prices artificially low for many years. Higher stock prices arising from more efficient allocation would be a windfall for all existing holders of equities, representing an important increase in the value of the capital stock (and at the same time, encouraging innovation and growth by lowering the cost of capital). By the way, Kinsley's concern about rising prices flatly contradicts his earlier claim that "the total pool of capital available for private investment remains the same." His own assertion that equity prices will rise proves that capital will increase.
Yes, all else equal, higher equity prices mean that one shouldn't expect the same returns from equities as one would have if prices had not risen. But this does not prove -- and Kinsley says nothing else to prove it -- that this reduced return is not still well above the return one could expect from Treasury bonds, or that one still wouldn't be better off making the switch to equities. At the same time, others with different attitudes about risk and return might be better off making the shift in the other direction in light of the higher prices -- that doesn't make them "saps." And remember, all else is most assuredly not equal -- higher equity prices would be the result not of just sheer auction demand, but rather an equilibration at a higher level representing the new expected returns in a more rapidly growing economy now freed from legislated misallocation of capital.
There's no trickery involved. The core idea here is that the advent of personal accounts would end decades of legislated misallocation of capital, which would have a salutary effect on economic growth.
The "bonus" will come from growth. But there's that other matter I mentioned earlier, too, which Kinsley entirely ignores (and which I have no doubt he won't like). Personal accounts will deny politicians a captive buyer of federal government debt. When that captive buyer is freed, government spending will have to be reduced.
Oh, and there's another little matter that Kinsley ignores. It's a liberal blind-spot, I guess. Personal accounts are a good idea because we are a free people who ought to have a say over how our money is invested. And after all, it is our money. Isn't it?
Posted by Donald L. Luskin at 1:05 PM | link
Wednesday, December 15, 2004JOKE OF THE DAY
Posted by Donald L. Luskin at 11:31 PM | link
ASPIRING TO GREATNESS Rich white Republicans aren't the only ones talking about an "ownership society." Among Afro-American Democrats who claim to speak for the poor, Harold Ford has a better idea. Check out his proposed "ASPIRE Act." Thanks to reader Jason Nordwick for the link.
Posted by Donald L. Luskin at 11:25 PM | link
SUPPORT YOUR LOCAL LEFTIST INFLUENCE PEDDLER Here's that latest scam from the left: an appeal to consumers to buy the products of companies that give more bribes -- er, I mean political contributions -- to Democrats. As reader Jill Olson puts it, "so now they like the free market system..."
Posted by Donald L. Luskin at 11:14 PM | link
LIKE ONE OF THOSE JAPANESE SOLDIERS lost on islands in the Pacific after World War II, who never got the word the war was over. Earth to Chevy Chase -- the election was last month. Thanks to reader Jill Olson for the link.
Posted by Donald L. Luskin at 10:17 PM | link
ANOTHER GREAT TIMES PREDICTION Sylvain Galineau (who blogs at ChicagoBoyz) writes,
It took me a while to get to it but I finally read the Report of the 9/11 Commission cover to cover. Something I recommend to everyone. It is a fascinating document. You will learn much, and even on one occasion, smile. Chapter 11 -- "Foresight and Hindsight" -- recapitulates the different failures that contributed to the terrorists' success "in imagination, policy, capabilities and management". In the Imagination section, on page 343, we can read:It is hard now to recapture the conventional wisdom before 9/11. For example, a New York Times article in April 1999 sought to debunk claims that Bin Ladin was a terrorist leader, with the headline "U.S. Hard Put to Find Proof Bin Laden Directed Attacks."Since this short comment has made it even more difficult to take the economic, environmental and political predictions in Times articles and op-eds seriously, I figured it should be shared more widely.
Posted by Donald L. Luskin at 10:11 PM | link
Our friend Brian Wesbury -- an economist who actually knows what's going on -- tried to get a word in edgewise from time to time, but it was to no avail. When Matthews wasn't interrupting Wesbury, Krugman was interrupting Matthews, to fill the show with even more economic lies and personal slanders than one typically finds in one of his New York Times columns. For example, Krugman tried to catch Wesbury in an error about the magnitude of the Social Security system's unfunded liability.
Actually, Wesbury had just said it was $10 trillion, which is rounding down slightly from the correct figure (according to the Trustees of the Social Security Trust Fund) of $10.4 trillion, for the unfunded liability measured to perpetuity. Krugman's $3 trillion figure is an aggressive and duplicitous rounding down of the Trustees' estimate of $3.7 trillion -- but that's just an ad hoc estimate for the arbitrary period of the next 75 years. But who's counting?
And how about Krugman's affirmation of Matthew's repeated error that the federal budget deficit is $600 billion? Wesbury corrected Matthews, saying "The budget deficit is somewhere in the $300 billions right now." True -- according to the Congressional Budget Office, the 2005 unified deficit is $348 billion. But Krugman said,
Well, if that's so, then the CBO is counting it twice, too. But who's counting?
When Wesbury confronted Krugman -- perfectly accurately -- with his own past statements that the Social Security system is "a Ponzi game" (1996) and "I favor eventually investing part of the Social Security surplus in broad stock indexes" (2001), Krugman just barked back, "that's out of context." No it's not. Check the links for yourself.
Correction 12/16/2004... As originally posted, I said that Matthews stated the federal budget deficit was $600 million. It should have been "billion," not "million." This typographical error has been corrected in the text above.
Posted by Donald L. Luskin at 7:26 PM | link
SOCIAL SECURITY COCKTAIL PARTY INSURANCE Our old friend David Hogberg is back with a checklist of the easily-refuted talking points of the opponents of Social Security reform. Memorize this list -- and then go to holiday cocktail parties with liberals unafraid. And be sure to visit David's new blog, now that he's out of the cornfields and into the trenches.
Posted by Donald L. Luskin at 1:03 AM | link
AT LAST! Bob Kohn -- one of the strongest New York Times opponents out there -- finally has his own blog. Check it out right now!
Posted by Donald L. Luskin at 1:01 AM | link
Tuesday, December 14, 2004YOU HAVE QUESTIONS... Smart reader Neal Phenes takes on the New York Times in its headlong assault on Social Security reform.
In the Sunday Times "Week in Review" on 12/12/04, David E. Rosenbaum posed a number of questions regarding Social Security reform. Rosenbaum's attitude appears to be that, since there are so many unanswerable questions regarding the future of the program, Social Security should not be reformed. However, his critique falls short due to his ignorance or intentional omission of a number of key economic facts that destroy his assumptions. This is the New York Times remember.
Posted by Donald L. Luskin at 11:38 PM | link
LEST WE FORGET... Dave Nadig chimes in on Social Security reform. Turns out it's not entirely a Bush thing.
Just for those folks with short term memory problems, here's the report of Bill Clinton's council on the Social Security. Yes, my liberal friends, this effort was started not on Bush's watch, but on Clinton's. It included such prescient gems as:- Reducing forward expenditures by changing how initial benefits are calculated.As a refresher, Clinton's council presented three very different "fixes."
Posted by Donald L. Luskin at 3:21 PM | link
KRUGMAN SPIDERHOLE WATCH 9 Reader Bill Bazley says,
In case you weren’t aware of it, I thought you would get a kick out of this Paul Krugman prediction written back in 1996 (reprinted in The Accidental Theorist, page 102):"And building a computer that plays high-level chess turns out to be an easy problem – nowhere near as hard as, say, designing a robot that can vacuum your living room, an achievement that is still probably many decades away."Oops... http://www.irobot.com/consumer/
Posted by Donald L. Luskin at 3:18 PM | link
KRUGMAN SPIDERHOLE WATCH 8 My buddy Brian Wesbury is going to be on "Hardball" this evening with Paul Krugman and Peter Peterson. He's outnumbered in terms of mouths, but he's got 'em beat when it comes to brain cells. Plus I've armed him with the latest Krugman gotchas, so hopefully we'll have some fun tonight. In the process of researching it for him, I came up with a remarkable Krugman quote from a 2001 Times column, which stands in rather stark contradiction to his column last Friday in which he made it sound like investing Social Security money in the stock market was the height of speculative risk:
I favor eventually investing part of the Social Security surplus in broad stock indexes.He goes on to say,
Alternatively, claims on the private sector could take the form of private retirement accounts. That's a bad idea for other reasons, but it similarly has the effect of acquiring assets that will be used to provide benefits to future retirees.In other words, it's not that investing in the stock market is bad (as he said Friday). It's fine when the government does it. It's just bad when you do it.
Posted by Donald L. Luskin at 2:59 PM | link
AL GORE: ENVIRONMENTAL HOMECOMING QUEEN Al Gore's at Harvard, showing eager students PowerPoint slides of impending global catastrophe -- and they're loving it. From the Crimson:
The former vice president zipped through a succession of slides reviewing the threat of climate change and outlined several possible solutions. In one nightmare scenario, sea level would rise more than 18 feet, submerging large swaths of Florida, New Orleans and Manhattan.
Posted by Donald L. Luskin at 8:43 AM | link
Monday, December 13, 2004A FAITHLESS ELECTOR? OR JUST BRAINLESS? Was it a protest against John Kerry's incompetent campaign? Or did a Minnesota elector just not know the difference between the two Democratic Johns when he cast his ballot today for John Edwards? Either way, this is a fitting end to Kerry's presidential aspirations. Thanks to reader Jill Olson for the link.
Posted by Donald L. Luskin at 8:28 PM | link
OH, THAT STUPID PUBLIC I'm note sure what the Bush-bashing conclusion has to do with the material that preceded it, but for whatever reason, David Warsh cites some interesting studies about public perception of economic issues. Here's his quick gloss of a Brookings paper from Princeton's Alan Blinder and Alan Krueger:
The Princeton economists devised a complicated questionnaire to elicit information about how citizens formed their views about taxes, the federal budget deficit, the minimum wage, Social Security and health insurance. It took fifteen to seventeen minutes to administer over the phone; was given to 1002 respondents who were asked to describe themselves as being liberal, conservative, moderate or non-political; and produced a welter of cross-tabulations and regression analyses -- enough to take up 60 pages of the current Brookings Papers on Economic Activity.Sounds interesting -- I'll comment in full after I've read the actual paper. But I'm guessing that the two Alans will conclude that it's the public's fault for being so ignorant and ideologically biased (unlike economics professors who are well informed and ideologically biased).
Posted by Donald L. Luskin at 3:13 PM | link
THANKS FOR STRAIGHTENING ME OUT Here, verbatim, is one of the more intelligent comments I've gotten on my Friday posting on Social Security private accounts, "Ownership Has Its Privileges":
I very much disagree with your article and can hardly believe that you express your opinion in good faith.
Posted by Donald L. Luskin at 1:51 PM | link
ISN'T WARREN BUFFETT A WONDERFUL PERSON? Yes, the wise and kind billionaire-of-the-people. So eager to espouse the proper morality of business and economics. And such a vile hypocrite. Now his insurance subsidiary GEICO is suing Google for trademark infringement, objecting to the fact that when people type the word "geico" into Google, they get ads from other insurers (along with their search results). GEICO may own its name as a trademark for insurance services, but to prohibit Google from displaying ads when people search on it is tantamount to saying that trademark owners can block people from even speaking their trademarks out loud, and then carrying on conversations based on such speech. Buffett should be ashamed at this attack on freedom of speech -- and of wasting his shareholder's money pursuing it.
Thanks to reader Ashby Foote for the link.
Posted by Donald L. Luskin at 1:14 PM | link
PUNDIT REVIEW INTERVIEW I did an interview with the fine folks at Pundit Review Radio on Saturday morning -- you can hear a replay here!
Posted by Donald L. Luskin at 1:09 PM | link
Sunday, December 12, 2004STEER THOSE EYEBALLS TO THE LEFT Here's another one of those "errors" in the New York Times that just so happens, by sheer coincidence no doubt, to promote a leftist cause. A story Sunday is headlined, "New Spy Plan Said to Involve Satellite System." It states, "The idea that the disputed program might be a stealth satellite program was proposed in an interview on Thursday by John Pike, a satellite expert who heads Globalsecurity.com, a defense and intelligence database." The error is that Mr. Pike heads Globalsecurity.org not .com. If you go to http://www.globalsecurity.com you will discover it is a left-leaning website of the moonbat variety. Mr. Pike would no doubt be horrified to be associated with them. Mr. Pike and GlobalSecurity.org do not have any overt political bias one way or the other. They state their mission as "focused on innovative approaches to the emerging security challenges of the new millennium. The organization seeks to reduce reliance on nuclear weapons and the risk of their use." No doubt the .org/.com error will be admitted as a correction in a matter of days. An anonymous reader asks, "Do you think it was an 'oversight' as the Times will surely claim? I suggest it was no oversight, but another MSM attempt to steer people toward leftist rhetoric. Or maybe I'm just too cynical today."
Posted by Donald L. Luskin at 11:05 PM | link