Monday, March 01, 2004

Very bad articles

There are many bad, economically illiterate articles out today. The first is in Slate, where the guy who ghost-wrote Kevin O'Neill's book is claiming that he unearthed some quasi-fraudulent Bush scheme to "reform" social security by
Larry Lindsey, Bush's tutor on economics during the campaign and later chairman of the White House's National Economic Council, devised a scheme based on creative accounting principles. Essentially, it proposed that the government would issue substantial new debt to sustain old-style benefits. This debt would be serviced and paid down by confiscating revenues from the higher returns from those opting for new-style personal accounts.
Firstly, Social Security is based and run on "creative accounting principles" where long term liabilities are ignored in a cash accounting system. As Milton Friedman, Arnold Kling, and many others who can do math have attested, Social Security is an unfunded mandate where retirees have been promised two or three times more than what the budget can afford at present tax rates.

Whether social security is reformed or not, this "gap" exists and will have to be paid by someone. It can be paid by current retirees (by cutting their benefits), or it can be paid by future retirees (by cutting their future benefits and/or increasing their current taxes), or it can be shared between them. Arnold has a nice 2x2 chart that lays it out clearly.

The second is this rather depressing Slashdot thread on outsourcing. Economists have understood how trade works for about 200 years, but the population at large remains oblivious. The notion of comparative advantage -- tricky at the best of times -- seems to become unfathomable if you aren't enjoying an economic boom.

Essentially, trade benefits society by making things cheaper, which means we all get richer, which means we spend more on stuff, which means those sectors grow. So, cheaper Indian programmers and Chinese DVD players means we have more money to spend on everything else, and having more money to spend on stuff means being richer. What we spend on will require more of it to be supplied, and any jobs lost to local programmers or DVD makers will be more than made up for by these new suppliers. It's hard to say what they will be, but even if parables about bulldozers and spoons don't make things clearer, surely 200 years of falling prices, automation, and incredible innovation and job creation (at least in the US) ought to be convincing.

We need an economist who can explain such matters well and is credible with the economically illiterate masses. We need -- Paul Krugman!


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