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Index to Krugman posts

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Friday, June 21, 2002

P. Krugman

In "Fear of All Sums" (06/21/02) Paul Krugman picks an easy target, Social Security reform, and scores heavily on a few technical details. But in doing so he misses the bigger picture about developments in American retirement financing that are occurring outside the Social Security system, and it is this bigger picture that will return to haunt him in the future.

First, some basics. Our current system works on intergenerational transfers. Current working generations agree to finance the retirement of previous generations under a social contract in which future working generations agree to finance the current generation when it retires. Paul Samuelson once referred to this arrangement as the ultimate Ponzi scheme that only works in a growing economy with stable demographics. Based on these and other concerns, reformers of Social Security want to change the system to one in which each generation provides its own retirement. Most debate and political hyperbole over Social Security reform result from issues of transition, i.e., moving from one system to the other.

Obviously, Krugman is correct when he says that allowing current workers to direct some of their Social Security payments to personal accounts will reduce the payments that would otherwise go into the trust fund from which current benefits are paid. As if this were not perfectly clear, Krugman gives us some arithmetic examples to show just how simple it is–and, of course, how duplicitous the Bush White House is in spreading ignorance and confusion.

Now as Krugman knows full well, there are thorough answers to these apparent transition difficulties. Martin Feldstein, for example, has worked out a total transition plan in great detail. But such plans are somewhat complex and difficult to explain and apparently beyond the competence of Republicans, particularly House Republicans, to articulate politically. So this leaves Krugman and the Democrats in a position to scare seniors with such loaded terms as "slash benefits", "severe cuts", "leave a financial hole", etc., and with visions of poor Aunt Milly left destitute by privatization schemes. In response, House Republicans curl up into a fetal position and bleat that they love Aunt Milly too. That is about how matters stand currently with Social Security reform.

Fortunately, the big picture concerning retirement in America is quite a bit different. The only cohort of Americans who are heavily dependent of Social Security for retirement income is the one born before 1930. Later cohorts have a much larger portion of their projected wealth at age 65 in private assets. A thorough study of this subject was completed recently for the cohort born from 1931 to 1941 by Alan Gustman and Thomas Steinmeier in Working Paper 6681 of the National Bureau of Economic Research ( This study was done using 1992 data (when the cohort was 51 to 61 years old) from the Health and Retirement Study (HRS).

The principal findings are:
1) Median households in this cohort are projected to have enough total wealth (expressed as annuitized asset values) to replace over 80% their final annual career earnings. And Social Security represents only a quarter of this amount. The rest is from private pensions, housing and other savings. Compared with concerns voiced in the financial press, this cohort is surprisingly well prepared for retirement.
2) It was always understood that the rate of return on pay-as-you-go-systems would decline as they mature. But even for this early cohort, the decline seems to have already begun. Comparing benefits and tax payments, the present value of benefits falls below the present value of tax payments by about 10 percent. As Gustman and Steinmeier put it "social security will not just be a poor financial investment on average for those reaching retirement after the turn of the century, the bad news is already here".

An easy conjecture from these conclusions is that future cohorts of Americans are likely to be in even better shape overall, despite declining returns on Social Security. In effect, current generations, in particular the baby boomers, seem to be taking care of themselves and retirement in America is already being privatized to a substantial extent. Moreover, the population in the cohort born before 1930, the people Krugman and the Democrats love to scare, is getting smaller, i.e., they're running out of scarees.
So, once again, Krugman is holding a losing hand. Scare tactics might work for another election or two, but after that the sledding is all up hill..

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I found a different slant on the Saudis in the Federalist Newsletter:

...All the media ranting about the Saudis "refusal to cooperate" notwithstanding, one may accurately conclude three things about this case. First, the Saudis have much more effective interrogation "techniques" than we are -- "legally" -- allowed to implement. Second, every bit of intelligence that is useful to the U.S. will be provided to the U.S. through back channels. And third, it is nescient to view and criticize the Saudi government's actions in isolation from the dynamics in the region. The current regime, however corrupt, is far better than any alternatives on the horizon. (You may recall that Shaw Mohammad Reza Pahlavi of Iran was dethroned by the Ayatollah Khomeini.).
I have no way to judge how true this is, but it is at least possible that we are staying pals with the House of Saud because they are helping us under the table. We probably won't know until people start publishing their memoirs years from now ... anyway, nescient is a good word; I'll have to add it to my vocabulary..

Thursday, June 20, 2002

Local weblogger Dave Trowbridge stopped by yesterday, and we had a fine time yakking for hours. Such a pleasure to be able to bring up any subject that pops into your head and know that the conversation will not sputter and die.

Dave is a science-fiction author, and he loaned us a set of his Exordium series of novels, written with Sherwood Smith, which, alas, is so out-of-print as to be almost out-of-existence. (I did find and enjoyed the first book, Phoenix in Flight.) One hopes that when the next book is completed the whole series will be reprinted.

I imagine the series is a bit of a hard-sell for the publishers. It has a certain resemblance to generic space operas; there is a galactical empire, and various evil Lords Such-and-Such who swagger about destroying planets. But those people who buy Sci-Fi pot-boilers may be confused and disappointed, because this is not predictable fare. They won't, for instance, expect stark tragedy to veer suddenly into pie-throwing slapstick comedy. (Dave says real life is like this. Sadly, it's true. A good justification for escape fiction.)

And the real audience for Exordium, people who hope science fiction will take them somewhere unusual and thought-provoking, will assume that any books with space pirates are going to be banal.

Wednesday, June 19, 2002

I'm playing around with a new picture for my blog-title.

These are some ferns from our garden. Ferns are a bit of a hobby of mine, and these are some odd ducks -- they are xerophytes, which means dry loving. They grow in hot arid places. They are usually found where their roots can hide in the cool earth under rocks.

They often have charming desert colors; soft fuzzy grey-greens and blue-greys. They are mostly placed in the genus Cheilanthes.
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The only hope of a short war is to prepare for a long one.
--Calvin Coolidge

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P. Krugman

In “Politicians on Drugs”, (06/18/02) Paul Krugman returns to a familiar refrain. If it costs more, it must be better. If it requires higher taxes on upper incomes, better still. And if it means restoring the Estate Tax–priceless! In this case he is choosing between two absurd congressional plans for financing prescription drugs under Medicare. And guess what? The Democrats’ plan costs more and may require rescinding some tax cuts. Heaven!

The fact is that drugs and Medicare cannot be separated from health care financing in general. As we pointed out in Squad Report #2 some sort of rationing system ultimately will be required for any health related program. Otherwise, because a subsidized third-party payer is involved, over-consumption, waste and bureaucratic red tape result. Anyone who has been to a doctor recently would have to blind not to see it.

The only ray of hope we see on the horizon is the growth of the fee for-service medical industry. A good example is one in Seattle described by C. F. Meier. Initially, such medical practices will be pioneered by higher income folks (we can hear Krugman screaming already), but eventually the lower costs and better service may allow them to compete with subsidized programs, even among lower income people.

For a penetrating analysis of health care financing in general see an article by none other than Milton Friedman in “The Public Interest” Winter 2001. Milton says it all, as no one else can!

*For another possible 'ray of hope,' this Random Jottings post fom May 18 talks about health care plans that act like Medical Savings Accounts, with plan members given discretionary sums to either spend, or save for future needs.

Tuesday, June 18, 2002

Natalie Solent has scribbled a counterblaste to some left-of-blogger's criticisms.

I suspect that we isolated right-wing webloggers can use it as a diagnostic tool, that if anyone says: you're only talking to each other, it means they are hearing us all too clearly ... Also, reading her exchange, I kept thinking of the old saw: If someone tells you that something's HERE TO STAY, it's probably on the way out.

And I LOVE her simile: It's like being a sheepdog on a sensitivity training course these days... Thank you, m'dear, you've described our life in San Francisco perfectly. I feel like I'm ruffling the social harmony of the neighborhood when I put up our flag in the morning.

Monday, June 17, 2002

Craig Schamp writes:

...And by the way, I still marvel at flying across the country. Maybe it started when, in college, I was flying from San Diego to Ohio, reading Mark Twain's *Roughing It*, in which he commented on the wonders of traveling across the same country at 60 miles an hour in a train.
Flying is still a wonder to me also. Perhaps it's because I love history, and in many respects am living in about 1910. The Wright brothers are very real to me, and Frank Luke, and Eddie Rickenbacker... (Also, of course, I don't have to fly, unlike my poor spouse who is always hopping on commuter planes.)

Also, our son Rob, 16, is utterly dedicated to aviation, and his flying lessons. So, though I'm not a pilot myself, I'm learning to fly vicariously! Last year he announced that he didn't need to go to college, because he would soon be a pilot. We explained at great length why this wasn't really a good plan. Now brochures are starting to arrive in the mail from colleges with aviation programs...
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P. Krugman

The essential Paul Krugman is a very pessimist guy. Pessimism underlies most of the views expressed in his columns and over the years it has become bitter, ingrained, pervasive and held almost without exception. His books and writings reflect this general malaise in thinking with such cheerless titles as, "Return of Depression Economics", "The Age of Diminished Expectations", Dispatches From The Dismal Science", "Even Worse than You Think" and "A Bridge to Nowhere?". He's definitely a "glass is half empty" type and not someone to invite to a holiday celebration!

Now one might argue that since Krugman's formative years as an economist were in the 1970s, and since stagnating economies around the world were replete during this decade, that it was the milieu rather than pessimism per se, that shaped his worldview. We do not think this explains it. No doubt economic stagnation of the 70s played a role, but other economists in his cohort faced similar conditions, and they managed to move on and not become stuck in the past. Our favorite theory is that Krugman's affliction is a syndrome psychologists call "arrested development." There is no known cure.

The point here is that the economic vision of a pessimistic economist with his head stuck in the 1970s is likely to be dominated by a vision of an income pie that doesn't grow. Indeed, his book "Peddling Prosperity" was largely on this subject. If the pie's not growing, then at least one implication is pretty clear. The only way lower income groups can improve is by dividing the pie more equally. Actually, it’s even worse than that. According to Krugman, even if the pie were to grow, the rich would just take all the growth for themselves. Thus, in “Krugy's World” it is the forces for inequality that are the villains-in-chief.

Consistent with this mindset, income and wealth inequality are constant themes of Krugman columns. In his view, the rich do not deserve to be rich (possibly because they are not growing the pie; he never really says) and they get richer by screwing the poor and the Bush administration is simply a bought-off political instrument through which the rich do the screwing, e.g., tax cuts on high incomes, looser regulations on industry, refusal to provide free health care to everyone, elimination estate taxes, etc., etc., etc.

A summary of Krugman's pessimism is reflected in a short piece he wrote a few years ago for the web-based magazine, Mother Jones.Com, a publication of the National Foundation for Progress founded in 1976. The topic was the 20 biggest changes in the world since the founding of the magazine. Krugman was one of 30 or 40 contributors and this is what he said:

By the early 1970s, throughout Western Europe and to a large extent in the United States, we had managed to produce societies with relatively equal income, relatively little poverty, and all sorts of opportunities for upward financial mobility. While we were a long way from Utopia, you could look around the Western world and say, "These are the most decent societies the world has ever seen." There are no longer any societies that fit that description.
The current best story for this decline is that technological progress threw us a curve ball. Technology continues to make us richer, but very much devalues the work of people who are not exceptionally talented, and greatly increases the income of a very few. The United States is responding with a flat hostility to the welfare state.
At some point, people will realize just how well-off the well-off actually are, and I don't think they can continue to blame our decline on government programs. I'm not saying we should instead blame the rich; I'm just saying we should soak them.

Notice how the 70s were not bad because of economic stagnation and declining real wages, instead they were "good" because of greater equality. Again and again in his writings Krugman returns to the 70s as an idyllic era. He would rather everyone be poorer and more equal, than richer at the expense of equality. Furthermore, he does not see capitalism as an engine of growth. BUT, even if it were, he would argue that all the benefits accrue only to the already well-off. An East German Kommissar in the old GDR could not have put it any better!
But that’s nothing! Consider this portion of a transcript of an interview given in the late 90s. We have mislaid the citation (it's here.) but we're 100% sure this is what he said:

Question: A few years ago, you predicted the coming age of inequality will give way to a golden age of equality. How so?
Answer: Right now, the kind of technologies we have are still in their infancy, which means that they are still fairly hard to use, so a lot of people are engaged in the business of actually putting the technologies to work. But if you ask what sorts of jobs are computers and networks going to be able to take over as they become more mature, and what sorts of jobs are they not able to take over, you realize that the answer is: They won't be able to do the kind of things that involve basic human abilities, things like plumbing and gardening and anything that involves contact with the physical world. If you look some distance ahead, you can argue that the long-term impact of information technology is going to devalue abstract symbolic work.

Question: So the wages of a plumber will rise to the level of today's knowledge worker? Answer: That's right. The premium people get for a lot of extra education will decline sharply. It will be a much more egalitarian society.

This a little creepy. Is it any wonder that Krugman's classes at Princeton are not very popular with undergraduates? This scenario seems be his version of a "workers' Marxist paradise." Humans either man the oilcans and wrenches to keep the machines running and the toilets flushing, or they tend their vegetable gardens and grow flowers. And he completely ignores the fact that productivity and the economic pie are growing rapidly again.

Frankly, he's beginning to scare us a little as we continue to uncover this stuff.
We plan to make this report, (#19B), a work in progress to which we will add other documents pertaining to Krugman's psyche and Weltanschuung as we discover them.
Meanwhile, back to the facts concerning the Krugman column last Friday on plutocrats. Are the rich getting richer and the poor poorer as Krugman would have us believe?
Two economists at the World Bank, David Dollar and Aart Kraay did the most comprehensive and exhaustive study we know about in this area recently. In "Growth Is Good For The Poor" they looked at income data from 80 countries over 40 years (starting in 1960) and compared the percentage five-year changes in average income with the corresponding change in income of the lowest income quintile.
Since one picture is worth a thousand words, in this case, literally, we show Figure 1 from their study. Each point in the graph represents a percentage change in average income in a particular country over a particular 5-year period (bottom axis) with the corresponding change in the income of the lowest 20% of the population (vertical axis). There is a one-to-one positive relationship. When the average goes up, the bottom goes up equally. Hence the title of this paper
We have a query into Dollar to see how the upper 20% was doing in case anyone cares, other than Krugman.

growth chart
Growth is Good for the Poor
David Dollar and Aart Kraay World Bank March 2000
Download at

In honor of the recent idiocy in New York, I'm reprinting this 11/15/01 post:

One thing is clear: hijacking is dead. Right? Anybody tries it and the passengers will yank off his arms to beat him over the head with. Right? In fact, this huge problem has been solved.

SO, what other problems might be solved just by changing the way we react?

Imagine the next time someone comes into a crowded room and starts shooting. People don't panic and scream and crawl under tables. Instead, they throw things. Anything. Chairs and tables. Computers and cell phones. Keys and coins and books and purses and shoes. The pictures on the wall.

Imagine the torrent of stuff that 20 people in a frenzy could throw. Enough to overwhelm one guy with a gun, that's for sure. Some people would get shot, but not many.

But this only works if everybody knows what to do. And is willing. Maybe now we may be willing. Airline passengers certainly are. Suppose everyone who reads this passes it on to a few friends. Soon, everyone will know what to do. . .
40 people let one crazy gunman rule them! If they had started throwing chairs and bottles, they could have fixed the problem in 10 seconds. (And probably saved the city the cost of trial and incarceration.)

Alas, my readers probably number in the hundreds, rather than millions, so I have little power to spread this notion.
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...In short, if youth is not quite right in its opinions, there is a strong probability that age is not much more so. Undying hope is co-ruler of the human bosom with infallible credulity. A man finds he has been wrong at every preceding stage of his career, only to deduce the astonishing conclusion that he is at last entirely right. Mankind, after centuries of failure, are still upon the eve of a thoroughly constitutional millennium. Since we have explored the maze so long without result, it follows, for poor human reason, that we cannot have to explore much longer; close by must be the centre, with a champagne luncheon and a piece of ornamental water. How if there were no centre at all, but just one alley after another, and the whole world a labyrinth without end or issue?

--from the essay CRABBED AGE AND YOUTH, by Robert Louis Stevenson

Sunday, June 16, 2002

What is the first thing to be done in order to promote a renewal in disastrous circumstances? Words must be set aright. What inheres in words should be brought out. But language is constantly misused, words are employed for meanings that do not befit them. A separation arises between being and language ... If words are not right, judgments are not clear; works do not prosper; punishments do not strike the right man, and the people do not know where to set hand and foot.


I lifted this quote from Patrick Nielsen Hayden's Electrolite