Privatizing Social Security and National Savings: DeLong v. Mankiw (v. Barro)

Would privatizing Social Security have any effects on national security? While Robert Barro has used his Ricardian Equivalence logic to say no, Brad DeLong objects when Greg Mankiw also claims there is no effect. Brad explains why he disagrees with Mankiw’s WSJ oped and documents why even Dr. Mankiw might disagree with Barro’s proposition. After all, the first edition of Mankiw’s Macroeconomics (OK, maybe I should purchase this fifth edition) suggested that the Reagan tax cuts did lower national savings.

But let’s understand what Barro has said over time with respect to Ricardian Equivalence as well as privatization of Social Security. While Barro as a libertarian is for privatization, he has consistently argued that privatization does not yield a free lunch. And during the debate over tax cuts during Bush’s first term, economists who accepted Mankiw’s view of consumption over Ricardian Equivalence were arguing it would raise consumption – which means it would lower national savings as long as government purchases were not cut. So how did some of the Bush cheerleaders claim permanent tax cuts would not raise interest rates? By an appeal to Ricardian Equivalence that contradicts their claim that the tax cuts would raise consumption.

But is there anything to this notion that Bush’s Social Security ideas might actually raise national savings? I think the old Neil Wallace-Thomas Sargent “game of chicken” concept may offer some clues. In some of Sargent’s writings, he suggested that the Reagan tax cut forces were hoping to make the tax cuts permanent by coercing the appropriators in Congress to slash spending. Of course, this never worked but perhaps the belief that it might work is one possible explanation of why consumption jumped in the 1980’s that is consistent with Barro-Ricardian logic. Fast-forward to the 2005 debate over Social Security and think about the 2018-just IOUs yahoos. They are hoping that Bush’s tax cuts for the rich can be made permanent by raiding the lockbox. Bush, on the other hand, is too chicken (or too dishonest) to tell workers the implications of what his 2018-just IOUs supporters are suggesting. So the free-lunch promises go on – and we spent expected future income that cannot be there for everyone. If we could just end this charade and tell the public the truth, maybe national savings would rise. But then Mankiw’s former boss and his supporters are the ones who are spreading this charade.

Update: I missed this part of Greenspan’s testimony on first read:

Diverting the payroll taxes into the Social Security trust fund, he said, had merely allowed the government to run larger budget deficits. Greenspan said that switching to the private accounts would be a way to bolster the nation’s low savings rate.

I cannot believe Greenspan said this. After all, he supported Bush’s tax cuts, which is why the deficit rose and the savings rate fell. I guess having a trust fund to raid allowed Greenspan to play the three card monte game with ease.