TCS Daily

Economists and their Inquisitors

By Arnold Kling - March 4, 2004 12:00 AM

Bellarmine then compelled Galileo, "in the name of His Holiness the Pope and the whole Congregation of the Holy Office, to relinquish altogether the opinion that the sun is the center of the world and immovable, and that the earth moves, nor henceforth to hold, teach, or defend it in any way whatsoever, verbally or in writing."
-- Ronald Bruce Meyer, The War on Galileo

Galileo had it easy. He only had to face the Pope, Cardinal Bellarmine, and the Inquisition. They were reasonably receptive to objective truth -- at least if you compare them with our representatives in Congress.

Greg Mankiw and Alan Greenspan are not so lucky. Consider what happened when Mankiw, the Chairman of the Council of Economic Advisers to President Bush, attempted to describe outsourcing. '"Outsourcing is just a new way of doing international trade," he said. "More things are tradable than were tradable in the past and that's a good thing."'

Inquisitors' responses included these:

  • "I understand that Mr. Mankiw is a brilliant economic theorist, but his theory fails a basic test of real economics." -- House Speaker Dennis Hastert (R), Illinois
  • "he should resign immediately." -- letter signed by several Congressional Democrats
  • "He ought to walk away, and return to his ivy-covered office at Harvard." -- Donald Manzullo (R), Illinois
  • "I respectfully suggest that you replace him with someone who understands that job loss in America is not something to be celebrated" -- Representative Walter Jones (R), North Carolina
  • "If this is the administration's position, I think they owe an apology to every worker in America," -- Senate Minority Leader Tom Daschle (D), South Dakota
  • "What planet do they live on?" -- Senator John Edwards (D), North Carolina

In contrast, here are some comments from the economics profession:

  • "There is no historical example of a nation where overall employment or average incomes fell because of greater trade." -- Edward Lotterman
  • "The United States is one giant free trade zone...Rich and poor regions have converged to about the same standard of living. But the results haven't been anything like the "race to the bottom" of protectionist imaginations." -- Virginia Postrel
  • "of the 30 fastest growing jobs over the next decade, 13 pay in the top 25% of wage earners, and another 6 are in the 2nd quartile. In other words, almost two-thirds of the fastest growing occupations are those that pay well above the median." -- Bruce Bartlett
  • "In the long run, outsourcing is another form of trade that benefits the U.S. economy by giving us cheaper ways to do things." -- Janet Yellen
  • "Linking outsourcing to aggregate employment decline is a bit of demagoguery that will bite [Senator John Kerry] in the butt next February if he becomes president," -- Brad DeLong

Each year, tens of millions of Americans change employers, tens of millions more change jobs within a company, and tens of millions more take courses in order to further their careers. Now, in an election year, politicians are claiming that:

  • it is possible to identify a slice of the labor force that would have stable jobs if it were not for recent shifts in international trade; and
  • bureaucrats in Washington can come up with a way to protect that segment of the work force, so that they do not have to adapt to a dynamic economy.

And the Inquisitors want to say that it is the economics profession that is not being realistic!

Greenspan Touches the Third Rail

The other economist who provoked the Inquisitors recently was Federal Reserve Board Chairman Alan Greenspan. He argued, in terms that will be familiar to readers of my Social Security Primer and my proposal to Phase Out Medicare, that the ratio of the level of promised future benefits to the size of the future work force is untenable. He suggested cutting future benefits, while leaving current benefits alone.

Inquisitors' responses included these:

  • "If I'm president, we're simply not going to do it," -- Senator John Kerry (D), Massachusetts
  • "it is an outrage for him to suggest that we should extend George Bush's tax cuts on unearned wealth while cutting Social Security benefits that working people earn" -- Senator John Edwards (D), North Carolina
  • "outrageous, insipid, preposterous" and "the worst idea I ever heard of." -- Senator Arlen Specter (R), Pennsylvania
  • "I'm outraged" -- Representative Joe Hoeffel (D), Pennsylvania

While understanding the theory of international trade requires some analytical thinking, and perhaps even an aptitude for mathematics, the Budget is a matter of arithmetic and common sense. Politicians have no excuse for failing to grasp the outlook for entitlements.

The key point to realize about our entitlement programs is that they do not work the way that you would expect. What you expect is that when Joe pays taxes for Social Security or Medicare, then that money goes into an account until it is time for Joe to draw his benefits. Instead, Joe's taxes go to pay for current beneficiaries, and future taxpayers have to pay Joe when he starts to draw Social Security and Medicare.

Imagine that you were invited to a party held at a bar. You show up, and you give $5 to the host. The host welcomes you, slaps you on the back, and asks "What'll you have?" After you give him your order, he heads off in the direction of the bartender. You think that he's going to use your money to pay for your order. But in fact, he is using it to pay for a drink ordered by someone else, who already has been here for an hour. When he orders your drink, the host is going to tell the bartender to "put it on our tab."

And just how big a tab have we run up with Social Security and Medicare? What is the damage? Well, it turns out that the present value of the unfunded deficit in entitlements has been estimated by Jagadeesh Gokhale and Kent Smetters to be $45 trillion. Even if President Kerry or Edwards turned the rich people in the country upside down, emptying their pockets of all their financial assets, homes, cars, and everything else, that still could not cover the tab that Congress has run up on our behalf.

To close the deficit, economists talk about a "menu of pain." As Niall Ferguson and Laurence Kotlikoff put it, "We could either, starting today, raise income taxes (individual and corporate) by 69 percent; or we could raise payroll taxes by 95 percent; or we could cut Social Security and Medicare benefits by 56 percent; or we could cut federal discretionary spending by more than 100 percent (which, of course, is impossible)."

Raising taxes to cover the gap may also be impossible. That is because raising tax rates by a given percent does not raise tax revenues by an equivalent amount. For example, if you were to raise personal tax rates significantly, families with children would find it a losing proposition to have both parents work while paying for child care. Consequently, a large segment of the workforce would drop out, and the government would lose that revenue.

The structure of entitlements, in which contributions and benefits are not linked, is fundamentally unsound. It is inherently risky, because of the temptation of Congress to add benefits without finding the means to pay for them. The result is that we face a very large deficit, primarily in Medicare, over the next thirty years or more. The most important factor is increased longevity, which raises the ratio of recipients to taxpayers and puts particular strains on Medicare, since the elderly require more health care. The next most important factor is expensive new medical technology, which increases Medicare spending. The other factor is the Baby Boom phenomenon, which will create an unusually large retirement population starting in the next decade.

Like many economists, Chairman Greenspan believes that the retirement age ought to be indexed so that it rises along with longevity. That would increase the incentive for people to save more and work longer, and it would reduce the ratio of beneficiaries to workers. He also believes that other steps should be taken to reduce the growth of future benefits.

One way to re-connect entitlement contributions to benefits is privatization, as I explained in The Ultimate Lockbox. For an interesting proposal, honestly explained, see Michael Tanner's 6.2 percent solution.

What We Want to Hear

Why do the Inquisitors have it in for economists? Ultimately, politicians tell the people what we want to hear. They think that we want to hear that we are too feeble and victimized to cope with global competition. They think we want to hear that we are looking forward to years of dependency on government support for our health care and retirement needs.

The Inquisitors win lots of elections. So, when they tell us what they think we want to hear, I suppose they must be right. I bet that Galileo wouldn't get too far if he ran for Congress.

Arnold Kling recently wrote for TCS about The Problem with Dead White Males.


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