Soc Sec XXIII: Low Cost, a Follow up on the Fairy Tale
Andrew Biggs was Deputy Commissioner of Social Security until February, previously he was a top analyst at Cato’s Project for Social Security Privatization, currently he is doing something quite similar at AEI. He has a blog called Notes on Social Security Reform which deserves more traffic, not just because Andrew is a nice guy and polite host, but because I believe he is dead wrong. Very well informed and educated on the numbers, perhaps nobody better. But still wrong.
He left the following in comments on Soc Sec XXII, and raises the issue of how naive do you have to believe to put any credence in Low Cost outcomes. Well lets see:
Sometimes when I talk to the Social Security actuaries about the problems with the low-cost projections, they reply that it’s not a big deal because no one actually believes there’s any real likelihood of them taking place. I’ll send them a link to this post to prove my point.
This topic came up at the AEI event on the tech panel report last Friday {edit to eliminate link not yet working-bcw} . Several members of the panel made the same point re the Low Cost Scenario, that’s it’s at such a low level of likelihood that it’s hard to interpret what it even means.
Which I can only interpret as ‘Bruce is a dummy’. Well lets try saying that in numbers.
If we look at the Bush years few of them stand out, particularly in contrast to the 90s but one of the best was 2004. And if we look at the projections for Low Cost they basically settle out by 2012 and stay pretty much at those levels through the remainder of the 75 year window. What happens if we look at the respective numbers for Productivity, Real Wage and Real GDP for 2004, 2012, and ultimate?
(all numbers are drawn from Tables V.B1 and V.B2 of the 2008 Report List of Tables)
Low Cost 2004/2012/ultimate
Productivity 2.4%/2.0%/2.0%
Real Wage 1.8%/1.2%/1.1%
GDP 3.6%/2.5%/2.1%
Naive number crunching below the fold.
Now 2004 was in retrospect not a bad year, but was it so over the top good so as never to be repeated, and indeed not even to be approached, ever?
If we take our first and second column we can contrast 2004 and 2012. In percentage terms what are we looking at:
Productivity 2.4% to 2.0% or 17% slowdown in growth rate
Real Wage 1.8% to 1.2% or 33% slowdown
GDP 3.6% to 2.5% or 31% slowdown
Now while these short term outcomes seem not unreasonable given the current housing/food/oil/credit crunch we are expected to accept that not only is this sharp slowdown permanent but that it is so over optimistic as to not even be worth discussing. Call me crazy but this seems outlandish to me, the argument that it will never, ever be economically better in America than it was in 2004, that in retrospect Bush economic policies in fact extracted the maximum possible growth out of the economy and then 25-30% more is absurd. Until or unless someone can make that case, preferedly using numbers.
Because it only gets worse when you look at Intermediate Cost, supposedly the median projection. Lets take our series 2004, 2012, ultimate and use the same three variables:
Productivity 2.4%/1.8%/1.7% or 25% slowdown by 2012
Real Wage 1.8%/1.2%/1.1% or 33% slowdown
GDP 3.6%/2.6%/2.1% or 28% slowdown
Keep in mind that per the actuaries we are to accept this as the 50/50 mark, the chances being even that long term economic performance will be even worse.
Which raises some questions in my head. What is it structurally about the U.S. economy that suggests this is a reasonable median projection for the medium to long term? Is it simply out of the question to believe that some year in the future might be as good as 2004 was? Because as recently as 1999 the numbers were Productivity 2.4%, Real Wage 2.7%, Real GDP 4.4%, run those percentages against 2012 Intermediate and I want to start crying.
One final shot. It may be that there are arguments why this astonishing and permanent crash in growth rates is in fact a reasonable median, but all of those arguments simply undercut any basis for the notion that tax cuts on capital automatically translated to increased investment and so productivity. Because if you look at the time series the degradation starts hitting right at Q4 2005 or right at the point where tax cutters tell us we can expect to see the effects (18 months from enactment). If this is the miracle of tax cuts at work, they can keep it.
In any event it’s going to take a lot better data and arguments than I am seeing to convince me that these numbers simply represent the best that America can do.