Mike the Mad Biologist

Over at Corrente, Joe Firestone provides details about one of the many false arguments about the Social Security ‘crisis’–the claim that Social Security is DOOOMMMEEEEDDD!!! is based on incredibly pessimistic and historically unwarranted assumptions about GDP growth (italics mine):

Second, the deficit terrorist projections of GDP growth are way out of line with historical averages, and that is why they think we cannot grow our way out of hard times. In effect, they are projections from the Bush and recent Obama Presidencies. If one computes 10 year growth ratios of GDP unadjusted for inflation, the historical growth ratio norm (average) is roughly 2.0. In contrast, the very conservative CBO projection from 2010 – 2020, is 1.54, just a bit higher than the 1.50 of the decade now ending. If the Government were to forget neo-liberalism, and follow continuously aggressive stimulative policies of the kind opposed by the deficit hawks, and proposed by Modern Monetary Theory, the growth ratio is very likely to return to the historical norm, since other than in the 1930 – 40 decade, the only time it dipped below 1.69 was during the current decade. Since deficits depend on tax revenue, and tax revenue, in turn, is closely related to GDP, the conservative GDP projections of the CBO and the deficit terrorists, more generally drive up the deficit numbers, and by depressing the GDP numbers also drive up the public-debt-to-GDP ratio – a double whammy supporting their fantasy that there’s s deficit/debt/debt-to-GDP ratio “problem.”

This is why the Social Security Trustees always claim that Social Security will be ‘bankrupt’ (a ludicrous concept itself) 30-38 years from the time of the estimate–a unit of time known as the Samuelson unit. In fairness, the Trustees are obligated by law to release pessimistic estimates (actually, they typically release three estimates*, ranging from kinda bad to “Oh God, Oh God, we’re all gonna die!”), but the rest of us need to use our brains in interpreting this.

Put another way, for Social Security to become ‘bankrupt’, we need to have the same dismal economy we’ve had for the last two years for three more decades. And if that happens a slight absolute increase in the payroll tax will cover things (of course, if we were to remove the cap on the payroll tax–a highly regressive tax–even the highly pessimistic assumptions predict no Social Security shortfall).

What I’ve never understood about these predictions and assumptions is that were the economy to perform this poorly for so long, this would be a social and economic disaster (if Jewish history is any guide, I might possibly be dead). Does any politician or Fed Reserve chairman ever stand up and pronounce, “If elected (or appointed), I promise thirty years of economic performance as bad as the Great Depression”?

So why do we use these estimates to predict future growth, especially when it has never happened?

Maybe someone’s not being forthright about their motives? (Just saying).

*Usually, the middle ground is the one discussed in news reports.

Comments

  1. #1 Min
    July 4, 2010

    These long term projections bother me for two reasons. First, as pointed out here, they are never (or hardly ever) accompanied by the assumptions used to make them. Second, there are never any error estimates. Does anybody think that any economic projection 75 years into the future would not be swamped by the error term? GIGO.

  2. #2 llewelly
    July 4, 2010

    Joe Firestone:

    Second, the deficit terrorist projections of GDP growth are way out of line with historical averages, and that is why they think we cannot grow our way out of hard times. In effect, they are projections from the Bush and recent Obama Presidencies. If one computes 10 year growth ratios of GDP unadjusted for inflation, the historical growth ratio norm (average) is roughly 2.0. In contrast, the very conservative CBO projection from 2010 – 2020, is 1.54, just a bit higher than the 1.50 of the decade now ending.

    Sounds pretty good up to this point. But then:

    If the Government were to forget neo-liberalism, and follow continuously aggressive stimulative policies of the kind opposed by the deficit hawks, and proposed by Modern Monetary Theory, the growth ratio is very likely to return to the historical norm, since other than in the 1930 – 40 decade, the only time it dipped below 1.69 was during the current decade.

    Which is as good as a frank admission that in fact the deficit terrorist projections of GDP are not pessimistic; without a radical teleportation of the Overton window, Obama is the closest we can get to someone who will “follow continuously aggressive stimulative policies of the kind opposed by the deficit hawks, and proposed by Modern Monetary Theory” – and as Joe Firestone has explained, Obama isn’t doing nearly enough in that direction. Self-fulfilling prophecy? Certainly. But nearly everyone with significant political or economic power is making every effort to fulfill it.

    Your only argument against it is a claim that historically, such a prophecy would have been unable to fulfill itself, despite the best efforts of its advocates. However – America has been agressively neglecting its industries, infrastructure, and most importantly, educational systems for at least 3 decades. Combine that with the fact that natural disasters have been increasing in frequency and severity (in part due to global warming, and in part due to criminally foolish decisions about were to build infrastructure, especially housing), and are likely to continue to do so, and the future is revealed as potentially very ugly.

    And since I brought up global warming, I’ll point out a striking similarity: in both cases, there is no good excuse for the failure of our politicians to take strong corrective measures, but then, they have no good excuse for the last several decades of their failure to strong preventive actions. The only difference is that climate is far better understood than economics. Simonism – the patently idiotic belief that exponential resource consumption can continue forever without consequences is at fault in both cases.

  3. #3 Tyler DiPietro
    July 4, 2010

    Even standard neoclassical economics teaches that the marginal utility of saving is constantly decreasing. Even if we didn’t use fiscal policy and instead let the economy correct itself through deflation, we’d still be back to normal levels of GDP growth given enough time. There’s no way an economic downturn would last three decades.

  4. #4 NancyNew
    July 5, 2010

    Whatever the current state of SS…WHAT would have happened if Shrub had had his way with it?

  5. #5 Jim90096
    July 5, 2010

    Please, please let’s stop the use of the term “Overton window” as if there were such a thing. Don’t even get me started with the “lying Mormon,” Glenn Beck. I’m surprised the LDS church hasn’t told him to “just shut the fuck up.” He’s an embarrassment.

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