Monday, August 21, 2006

Worst Malcolm Gladwell article ever?

I like most of what Malcolm Gladwell writes, but this latest piece in the New Yorker is awful -- he gets his economics just wrong.

In it, he talks about "the dependency ratio", which is the ratio of people who put money into a pay-go scheme compared to the number of people who take money out of a pay-go scheme. A "pay-go" scheme is one where current beneficiaries are paid out of the same pool of money that future beneficiaries pay into, and there are many public and private examples including social security, corporate pensions, etc. The alternative to a paygo system is a fully funded system, where an individual can withdraw what they contributed earlier, plus interest -- examples of this include private bank accounts and 401(k) plans.

In a paygo system, there is a gap the minute the program begins because early beneficiaries have not had time to contribute enough to the system to cover their withdrawals. This liability never really goes away, but it can be postponed way into the future so long as the system remains solvent from a cash flow perspective (each period, enough money goes in to cover expenses going out). This cash flow entity is determined by the number of people who take money out of the system vs those who put money into it -- Gladwell's "dependency ratio".

The workers of Toledo needed pensions. But, he said, the pension plan should be regional, spread across the many small auto-parts makers, electrical-appliance manufacturers, and plastics shops in the Toledo area. That way, if workers switched jobs they could take their pension credits with them, and if a company went bankrupt its workersÂ? retirement would be safe. Every company in the area, Gosser proposed, should pay ten cents an hour, per worker, into a centralized fund...

The labor movement believed that the safest and most efficient way to provide insurance against ill health or old age was to spread the costs and risks of benefits over the biggest and most diverse group possible. Walter Reuther, as Nelson Lichtenstein argues in his definitive biography, believed that risk ought to be broadly collectivized. Charlie Wilson, on the other hand, felt the way the business leaders of Toledo did: that collectivization was a threat to the free market and to the autonomy of business owners...

The United States, by contrast, has over the past fifty years followed the lead of Charlie Wilson and the bosses of Toledo and made individual companies responsible for the care of their retirees. It is this fact, as much as any other, that explains the current crisis. In 1950, Charlie Wilson was wrong, and Walter Reuther was right.
Is Gladwell on crack? It is true that old-time unionized companies made promises to their employees that they cannot keep and now someone is going to have to cover the difference -- but that is not a "dependency ratio" issue, it's a consequence of people making promises that they could not keep.

Gladwell goes on to argue that if, instead of corporate pensions, we had some sort of regional pensions system instead then everything would be OK is equally hallucinatory. We do have regional pensions -- most government workers in a state are covered by a pension in that state and last time I checked, those were deep in the red too. And how about the mother-of-all regional pensions, Social Security, which covers every man, woman, and child in the United States. Oh look -- it's deep in the red as well.

So, if company paygo plans underfund, and State paygo plans underfund, and National paygo plans underfund, you would think that paygo plans, simply underfund as part of their very nature. Unless you are Malcolm Gladwell, of course, where you would instead recommend State and National paygo plans.

Gloriously, he ends on something as mad as a box of mittens:
What happened to Bethlehem, of course, is what happened throughout American industry in the postwar period. Technology led to great advances in productivity, so that when the bulge of workers hired in the middle of the century retired and began drawing pensions, there was no one replacing them in the workforce. General Motors today makes more cars and trucks than it did in the early nineteen-sixties, but it does so with about a third of the employees. In 1962, G.M. had four hundred and sixty-four thousand U.S. employees and was paying benefits to forty thousand retirees and their spouses, for a dependency ratio of one pensioner to 11.6 employees. Last year, it had a hundred and forty-one thousand workers and paid benefits to four hundred and fifty-three thousand retirees, for a dependency ratio of 3.2 to 1.
The argument here is that increases in productivity have worsened the pension crises my making the dependency ratio even worse than it would have been otherwise. Malcolm, my friend, increases in productivity is all that's been keeping these companies in business and it's all that's going to have them (and us) be rich enough to pay that liability gap that the paygo systems created when they were first put in place.

As a matter of fact, I think that increased productivity, which is what makes us all richer, is the only reason to have a paygo system in the first place. When Social Security was first implemented, its immediate beneficiaries were old people, who were poor as a rule, and coming out of the Great Depression in the 1930s. All of us today are far wealthier than those initial beneficiaries -- thanks to improvements in productivity -- and if we need to pay higher taxes so those folks back then got some help, so be it.

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