For the life of me, I don’t understand why a smart and honest conservative economist like David Altig would defend the Cato Institute’s claims as to the alleged benefits of privatization. To be fair, David is not saying there is some free lunch. Rather, he objects to this post from Mark Thoma by asserting that the Cato crowd is not pushing the free lunch argument.
John Geanakoplos, Olivia S. Mitchell, Stephen P. Zeldes noted five years ago in Would a Privatized Social Security System Really Pay a Higher Rate of Return? that Steve Forbes, the Heritage Foundation (see William Beach and Gareth Davis. “Social Security’s Rate of Return”), and the Cato Institute were pushing this free lunch claim and then proceeded to explain why the claim is misleading.
I guess one can argue that Stephen Moore has left Cato but peruse the Rate of Return Issues section of the Cato Social Security web page and you will find many similar claims. Also note that their Social Security calculator assumes an “inflation adjusted return of 4.95 percent on a 60/20/20 stock/corporate bond/inflation indexed Treasury bond portfolio after subtracting 0.25 percentage points for transactions costs” In fact the calculator is based on the same “analysis” of the proposal that Mark Thoma rightfully criticized.
We have noted that conservative economist Robert Barro rejected this free lunch claim in July 2000, and that Gary Becker rejected it in February 2005. It was the Cato Institute that convinced George W. Bush of the alleged benefits of privatization back in the late 1990’s and President Bush is campaigning for privatization (or is it now modernization) using the same claims, which continue to be made by the Cato crowd. We Democrats would welcome an honest debate over the genuine Social Security reform issues. Let me suggest that we more honest dialogue from honest conservatives such as David – who does not need to tarnish his own credibility by trying to deny that the Cato crowd is trying to sell us snake oil.