Loan Bull
More tortured logic from Paul Krugman on Social Security personal accounts.


Donald L. Luskin

Can it really be that leftist economists don’t know the difference between a margin account and an opportunity cost? It’s basic economics. But for Paul Krugman, and his acolytes and fellow travelers, it’s all about partisan politics.

According to Krugman’s New York Times column Friday, when you divert some of your Social Security payroll-tax dollars into a personal account of the kind that President Bush is proposing, the government is effectively making a loan to you so that you can buy stocks on margin — “speculation that no financial adviser would recommend.”

Huh? Excuse me Professor Krugman, but that’s my money we’re talking about — my payroll tax dollars. My personal account. Nobody’s loaning me anything.

Here’s Krugman’s tortured and deceptive logic that gets him to his “loan” characterization. He quotes a White House press briefing that explains how workers who opt for personal accounts would have to forgo some of their regular Social Security benefits:

“In return for the opportunity to get the benefits from the personal account, the person forgoes a certain amount of benefits from the traditional system. Now, the way that election is structured, the person comes out ahead if their personal account exceeds a 3 percent rate of return” — after inflation — “which is the rate of return that the trust fund bonds receive. So, basically, the net effect on an individual’s benefits would be zero if his personal account earned a 3 percent rate of return.”

That’s perfectly fair — it’s a simple trade-off. If it didn’t work that way, then workers who elected personal accounts would be double dipping. But here’s the way Krugman twists it:

Translation: If you put part of your payroll taxes into a personal account, your future benefits will be reduced by an amount equivalent to the amount you would have had to repay if you had borrowed the money at a real interest rate of 3 percent.

Peter Orszag of the Brookings Institution got it exactly right: “It’s not a nest egg. It’s a loan.”

Wrong, wrong, wrong. If it’s a loan at all, it’s a loan you make to yourself. And that’s no loan at all. Real economists — as opposed to Democratic apparatchiks like Krugman and Orszag — call such a thing not a loan, but an “opportunity cost.”

Here’s an example. Suppose you have $1,000 in a money market fund earning 3 percent, and you are considering investing that money in the stock market. The opportunity cost of that investment will be 3 percent, because you give up the 3 percent yield of the money market fund. That means you’ll only come out net ahead on the stock investment if it returns more than 3 percent. That’s just how it would be for the proposed Social Security personal accounts. But there’s no loan involved here. None.

In this case, your future benefits are analogous to the money market fund. In order to invest in stocks in your personal accounts, you have to give up the future benefits. A simple trade-off. An opportunity cost. Not a loan.

Here’s what a real loan would look like: You have that $1,000 in the money market fund, but you want to invest $2,000 in the stock market. So you borrow an additional $1,000 from your stockbroker.

Or, in the case of Social Security, suppose you are a young African American making the minimum wage. You urgently want to own stocks so you can start building a nest egg for your family. But you have no money to invest, because Social Security taxes have sucked up anything you could have set aside from your small earnings. So you manage to borrow some money, and you invest it in stocks. That’s a loan. That’s speculation. And that’s what the opponents of personal accounts would prefer for America.

As a side note, that quote from Peter Orszag comes from a Washington Post story on Thursday by liberal reporter Jonathon Weisman. His story, based on the same press briefing that Krugman quoted, completely misstated the way Social Security benefits would be offset for personal-account holders. He called it a “clawback,” by which the government would confiscate earnings in your personal account below 3 percent. An array of spokesmen both liberal and conservative — no doubt caught by surprise by Weisman’s revelation of the “clawback,” which does not in reality exist — were quoted about how shocked and dismayed they were by all this. Weisman loves to quote conservatives criticizing Bush; it’s his specialty.

But, of course, this was all simply wrong. After the White House issued a statement noting the error, the Post published a substantially corrected version of the story on its website — removing the quotation from Orszag cited by Krugman in America’s “newspaper of record”! The New York Times’s new motto: all the news the others find unfit to print.

To give you some idea of how the Left respects the truth in these matters, visit the blog of U. C. Berkeley professor Brad DeLong — a Krugman acolyte and former Clinton administration official who once described himself as “more inclined toward ‘Marxism’ than anybody else on the Berkeley campus,” which is saying quite a bit. When the Post story first came out, he applauded Weisman and delightedly dilated on the notion of the benefit trade-off as a loan. When the correction was issued, DeLong amended his posting to say “the Post has buckled … Glad to see such spine.” You’d think he’d be glad to see the truth. But no.

– Donald Luskin is chief investment officer of Trend Macrolytics LLC, an independent economics and investment-research firm. He welcomes your visit to his blog and your comments at [email protected].