Paul Krugman's column in today's New York Times, Inventing a Crisis, continues Krugman's recent career as a lightning rod or bellwether (take your pick). Some reasonably well informed readers love him; others, even if skeptical or worse about the Bush Administration, find him way too partisan and biased. I ought to know, since I have been in both groups at different times. During the 2000 election, I thought he was too harsh on Bush (who I at that time misjudged) at least relative to his harshness on Gore, who was certainly being fiscally irresponsible as well, if on a smaller scale. Thus, if both candidates proposed to make Social Security's funding problems worse, he would point out that Bush's math could be expressed as "2 - 1 = 4," without, it seemed to me, applying the same standard to Gore.
In the last couple of years, I have come to feel that his view of the Bush Administration is largely correct, and that one need not share his politics or view of government economic policy to agree with him on this, since principled conservatives should be just as appalled by this Administration, and on the same grounds (apart from different views of progressivity) as liberals.
But I still find him too unthinkingly traditionalist on Social Security. He is eager to defend the system without sufficiently asking whether it is well designed - for example, in its so strongly favoring older generations and, to name another, less well-known redistributive quirk in the system, one-earner couples relative to two-earner couples and singles. Maybe there is a sound political judgment behind this, reflecting the view that, if you open things up, the political system will adopt more bad changes than good ones. But since he is not saying that, I discern an underlying lack of full candor with the reader, or else myopia on his part.
Today Krugman accuses the proponents of individual accounts of inconsistently, and therefore in his view dishonestly, saying both (1) that the current Social Security surplus is meaningless, and yet (2) that the approaching Social Security deficit is intolerable.
I think this is a bit unfair. The real problem is that the U.S. fiscal system as a whole is deeply in the red, as shown by its estimated $73 trillion fiscal gap (expected to become $85 trillion if the Bush tax cuts are made permanent and the alternative minimum tax scaled back). One significant contributor to this - although Medicare is the biggest problem - is rising Social Security benefits relative to the size of the economy, mainly due to increasing life expectancies. We're glad seniors are living longer, but it means they get the Social Security pension for more years, without any matching increase in funding.
There is a fiscal crisis, it is potentially very serious - think Weimar Germany for one possible playout - and the trend in Social Security benefits is a contributor. True, the questions of when Social Security goes into annual deficit, and when the Trust Fund is deemed to run out, are by themselves trivial. But the trend is the problem, and it does call for at least considering Social Security changes (although Krugman is right that making greater use of general revenues is one of the options to consider).
Final point on this: individual accounts are indeed irrelevant to the fiscal crisis, unless used as a benign political trick to facilitate greater financing (and they might be more likely to end up being used as a malignant political trick to shower more goodies on current voters).
What makes individual accounts irrelevant to the problem is that they really just shift funds around. Suppose you had to save more to send your kids to college. The individual accounts idea amounts to saying, "don't save more, just change how you are investing what you save." But in practice this might just mean that the same investments are reallocated a bit between people (or merely between bank accounts) in ways that don't really matter much at the end of the day. For example, even if stock market investment really offers a higher return than alternatives over the long run, adjusted properly for risk - and that is very much open to question (the last 100 years don't prove what we should expect over the next 100) - it's not clear that there would be more stock market investment in the society as a whole under individual accounts, rather than just a bunch of offsetting portfolio shifts in who directly holds which financial assets.
Final point: given what we know about the Bush Administration, one can't rule out the paranoid liberal idea (paranoids are sometimes right, after all) that this is a scheme to let the fund managers rip off investors. In different hands, it might be a plan to hand the fund managers a costly mandate, by pressuring them to accept lots of small accounts on which they weren't allowed to recover their administrative costs. But think Bush Administration + pharmaceutical industry + Medicare prescription drug benefit, and you will have to wonder what to expect. The proof will be in the lobbying - if the securities industry pushes for this, it will mean they expect a huge windfall. If they don't, the paranoid liberals can take a deep breath although the looting might still emerge later on. (In 1965, the American Medical Association feared Medicare as a camel's nose in the tent of government-run healthcare, but it ended up being a bonanza for doctors.)
One reason for expecting a rip-off, just as for expecting that individual accounts will end up increasing the fiscal gap, is that it might aid enactment. So even a relatively good or at least innocuous plan might change for the worse as it goes through Congress, leaving principled supporters with the question of whether at some point they should pull the plug on their support.