Mound City

I have to take the time to point out a post by Kevin Drum over at Political Animal. He runs down the basic fallacy of the argument for privatization of social security put forward by the administration.

"This growth is lower than we're used to, but that's because GDP growth = population growth + productivity growth. Since population growth is slowing down, so will GDP growth.

Still, what if you assume that things will be a little more robust than this? If you project GDP growth of around 2.6% per year, you end up with Estimate I, and in that scenario Social Security never runs out of money. In fact, if you project GDP growth just a few tenths higher than 1.8%, Social Security stays solvent for the next century.

In other words, if GDP growth averages, say, 2.2% over the next 75 years, Social Security is in fine shape and we don't have to do anything. We only need to "fix" it with private accounts if GDP growth is less than that.

So here's the puzzler: for private accounts to be worthwhile, they need to have long-term annual returns of at least 5%, and 6-7% is the number most advocates use. But are there any plausible scenarios in which long-term real GDP growth is less than 2% but long-term real returns (capital gains plus dividends) on stock portfolios are well over 5%?"

I recommend checking out the whole post as well as going through some of the comments on Kevin's post. This is an extension of a point he has been trying to make for awhile, that Social Security is not in danger of imminent collapse and that small, rational changes can keep the program running for a good long time. Drum is not the only one who makes this argument of course, Berkley Economist Brad DeLong and Princeton Economist and New York Times columnist Paul Krugman have been poking holes in the administration and GOP's bad economic policy for years.

If you want an excellent explanation of modern economics and a helpful guide to avoiding the pitfalls of public statements of economic "facts" (often cited by the GOP and Bush administration to lure people to back their haphazard programs), Krugman's book, Accidental Theorist is something you have to pick up.