Some interesting thoughts on the difficulty of organizing a conspiracy:

Every time [a possible conspiracy] comes up in a class I ask the students if they’ve ever tried to order a pizza for 3 people, and if yes whether it was difficult to agree about what to get on it and how to divide it up. Occassionally a light bulb goes on over one of their heads when they make the connection that if pizza is this hard than conspiracy must be damn near impossible.

Completely unrelated: has anyone noticed that the recommended serving size of virtually any frozen pizza (so far tested with DiGiorno, Tombstone, and Kroger-brand Tombstone clone) is one-fifth of a pizza? However, dividing a pizza—particularly the “thin crust” DiGiorno, which is square—into fifths is left as an exercise for the consumer. (þ: Cold Spring Shops)

Steve Verdon has a good post on power supply problems in Texas. I added a few comments, taken from memory after being out of the power industry for several years. Take them for what they’re worth. The blog is free, isn’t it?:

I’ve been out of the power industry for six years now, but, based on what I knew then, Texas has even more problems. Every time I heard about Texas during the deregulation of generation during the 90s, it was always followed with a comment about them not being hooked into the national grid. If still accurate, they have prevented themselves from benefiting from surplus capacity in other states. Extraordinarily dumb, not unlike California limiting their grid operators to the day ahead market and making long-term purchasing agreements illegal.

Alex Tabarrok notes recent research suggesting that Georgia’s expensive HOPE scholarship program has done little to improve access for disadvantaged students to the state’s higher ed system, at the expense of producing rampant high school grade inflation and encouraging students to avoid challenging courses in college so they can keep their scholarships.

The best that can be said for the program is that it keeps talented students in-state, which may reduce the mobility of smart people away from Georgia; whether that’s sufficient to justify a massive middle class entitlement program (financed off the stupidity of the poor, in the form of lottery ticket sales) I leave as an exercise for the reader.

Today’s WaPo carries an interesting op-ed on social security from one of the paper’s junior writers, Laura Thomas. Here’s the meat of her discussion:

It seemed as though my family (a mixture of partisan extremes, from Rush Limbaugh fans to passionate antiwar protesters) saw Social Security’s troubles as a small matter—contrary to the president’s description last week. Whether the impending collapse of Social Security is a myth or not, I shouldn’t be relying on Social Security to take care of me when I retire anyway, they said. I was taken aback by their mistaken impression that I had a sense of entitlement to Social Security, just as I was amused during the State of the Union speech to hear that Bush thought I was expecting to receive it.

I didn’t want to stir up a Christmas Eve brawl, but I nonetheless felt compelled to explain that never in my life had I assumed that Social Security was coming to me. Every time I see that somewhat shocking Social Security dollar figure subtracted on my pay stub, I choose to look at it as giving back to my older family members who’ve been known to drop random checks in the mail to their poor, desperate niece or granddaughter.

By the time we finished the antipasto, we decided that we were all more or less on the same side: Start saving now, because Social Security, if it still exists when you’re older, will only be for people on welfare or those who didn’t have the foresight or willpower to save (which will not be you, Laura).

Todd Zywicki at the Volokh Conspiracy (who gets the hat-tip for the link) says none of his students “are counting on a dime from Social Security when they retire.” I haven’t polled my students on this question, but I suspect he’s right.

Meanwhile, all Kevin Drum can do is mock her stupidity for buying into Republican propaganda, although the truth—the fundamental truth—is that social security is—even today, while still “fully solvent” according to the government’s bogus accounting principles (which would land a company’s CFO and CEO in prison)—at best a safety net; anyone not on welfare who thinks they’re going to retire at the standard of living they’re accustomed to on social security alone is the “insane” one. Every penny that Drum has in his IRA, 401(k), and/or other retirement accounts puts the lie to his politically-expedient defense of the current system.

The beauty of social security is that the public was conned into having a welfare system for seniors the only way a pluralistic society can—by turning it into a handout for everyone. That social security, and its related pal Medicare (which is universal healthcare for poor seniors, packaged as a handout for everyone), are both in serious fiscal trouble is no unforseeable accident; it’s the unavoidable consequence of a system established by Democrats to ensure these two welfare schemes wouldn’t be taken away at the ballot box, like “welfare as we know it” was and Medicaid is almost certain to be.

Chris’s earlier entry on nuclear power got me thinking. I spent a few years in the industry and got to witness it change from a horribly inefficient industry to one that is quite competitive—after deregulation of generation, of course. The time is certainly ripe for new plants, since the existing fleet’s licenses begin to expire in the next few years.

My guess is that with a simplified design and a simple licensing process, new plants would be built in short order. Deregulation is something that worked amazingly well. Indeed, far better than this capitalist oppressor ever imagined. When I started in the industry, fresh out of college, I had pretty much taken it for granted that power generation—just like the power lines themselves—was a natural monopoly.

Once deregulation was in place, though, peoples’ thinking seemed to change. Before deregulation, the nuclear plants seemed to compete to see who could stay offline the longest. The plant operators were quick to take a plant offline to demonstrate their commitment to safety. Somewhere during the transition to a competitive generating environment, both the regulators and the plant operators figured out that the best run plants were also the ones that were the safest. In other words, the NRC and operators started asking why a shutdown was required. Why didn’t we know that the conditions requiring a shutdown were emerging, and how can we claim to know how to run the plant if we can’t see these things? In short, incentives matter.

As long as they can be run safely and economically, I would love to see some new plants come online. The issue of dealing with spent fuel is another problem—it’s a huge unrecognized liability and it’s unclear to this day whether Yucca Mountain will ever be available as a permanent repository for spent fuel. Even so, having nuclear power as a continuing alternative for energy needs is a great idea as I see it.

Hmm. It seems that the German feudal system that suppressed Carl Menger’s work is only now dying (link may require subscription):

PUT five economists in a room, on Winston Churchill’s arithmetic, and you get five opinions—unless one is Keynes, when you get six. In Germany the sums have usually been simpler: you get just two opinions, with four economists sharing one point of view, and the fifth a token Keynesian, sent by the trade unions. Yet German economists are becoming more like their peers abroad. The typical specimen is becoming more empirical, pragmatic and ready for controversy, after a period when he was usually long on theory and reluctant to criticise colleagues.

This change has now reached the pinnacle of Germany’s “five wise men”, the country’s council of economic experts. Earlier this month, a public dispute erupted among the five (actually they are four men and one woman). What is more, they are likely to pick as their next chairman Bert Rürup, a hands-on, down-to-earth academic. This could have an influence on policy, for the underlying row among the five wise men was really about how to get the economy growing again. One of them, Peter Bofinger, even called for wage increases in line with productivity growth.

German economists have long had the knack of going their own way. Until the second world war, they hailed mostly from the “historical school”, which held that there was no such thing as economic rationality. In contrast, most are now wedded to neoclassicism, declaring that macroeconomic policy is ineffective and preferring to focus on supply-side issues. Labels such as “Keynesian” or even “pragmatist” have been insults. This partly reflects Germany’s cultural fondness for consensus, not a competition of ideas. Michael Burda, an American economist at Berlin’s Humboldt University, argues that German economics is only just escaping the middle ages.

Their escape is long overdue, it would seem.

People really need to get their terminology straight. Apparently these LaRouchies think that privatizing part of Social Security is both fascist and anti-capitalist:

No organization is more responsible for the forced-march drive to privatize Social Security—stealing trillions of dollars of its funds for Wall Street accounts—than the Cato Institute, a multi-million dollar Washington, D.C. think tank. During the past 20 years, Cato has had more than a quarter of a billion dollars lavished on it in contributions by the most powerful Wall Street banks, and largest right-wing think tanks—led by the ultra-right-wing Koch group of foundations. Cato has spent this money on a host of projects intended to destroy the sovereign nation-state and implement fascist economic austerity. But the lion’s share has gone into the privatization of Social Security.

The title of the post: Cato Institute: Anti-Capitalist Clique Leads the Attack on Social Security.

With all of the partial information and misinformation out there, it’s tough to get a handle on the scope of the problem, and what should be done. Lately I’ve been opposed to the idea of private accounts, and remain so. They will have to be funded and will not reduce the unfunded liability.

Still, the case for reform is a good one and consider this from an earlier post about a NYT story (excerpt from original story):

Seniors now get an initial benefit that is tied to a fixed portion of their pre-retirement wages. If the index was changed, their pensions would be pegged to a fixed portion of a previous generation’s income. If this standard had been in force since the beginning, retirees today would be living like those in the 1940’s—like Ida Fuller, which would mean $300 a month in today’s dollars, as opposed to roughly $1,200 a month.

This raises a good normative question: how fair is it to expect workers to fund standard-of-living increases—and pay increasingly higher taxes—for each succeeding generation, especially with the baby boomers set to retire, when seniors are already a very wealthy demographic? One solution would be to just begin increasing benefits to keep up with the cost of living; another solution would be to give them half of the increase in real wages, instead of the whole as they get now. The second idea would reduce the amount of the unfunded liability while still raising the standard of living for retirees; just not at the pace of wage increases. It would lighten the burden on the economy as a whole.

Of course, any attempt at reform—including reductions in the automatic increases will be fiercely opposed by the AARP. Yet another reason I won’t be joining that organization when I hit fifty.

This issue is now all the rage. It’s quite amazing how your understanding of an issue this big has to be pieced together. Take a look at the following:

The 1970s were a time of social turmoil, rampant inflation, and falling real wages. Gerald Ford was president in 1976 and Alan Greenspan was his chairman of economic advisors. To this day Mr. Greenspan no doubt has painful memories of those wacky “Whip Inflation Now” (WIN) buttons that came to symbolize economic policy disarray. Inflation in 1974 and 1975 had been running at about 10% per annum. Many voters were extremely distressed about the impact that inflation might have on the value of their Social Security and other pension benefits.

There was strong bipartisan support at that time for indexing initial benefits to inflation, but a great deal of confusion about how to do it. Should the government use indexes of wages or of consumer prices to adjust future initial benefits? If so, what specific index should be used? It was a given among economists then—and still is—that wages are likely to rise faster than consumer prices over the long run based on the long-term trend toward higher labor productivity.

Be sure to read that again and then consider: if Congress and President Ford had chosen to index Social Security to inflation in 1976, there would be no problem today. They chose wage indexing because real wages were falling at the time, so they saved some money in the short term and screwed us in the longer term, with little or no discussion at the time:

Whatever one’s opinion on that monumental policy shift may be, the remarkable thing is that it occurred with virtually no public discussion. A search on Lexis-Nexis of major U.S. newspapers during the 1975 to 1977 period turns up few editorials or news analysis of any substance dealing with the massive shift in policy. The mainstream media clearly seemed to be missing in action on the entire story. If there was a substantive debate on wage indexation in 1976 it seems to have been entirely an inside-the-beltway affair.

Read the whole thing, and weep.

Though the author’s sympathies lean heavily towards doing nothing about SS, there’s an excellent history of the program at the NYT.

The article also makes clear that each generation receives more benefits than the previous generation, due to the link to inflation-adjusted wage growth. Seeing the program lift the elderly out of poverty is well enough, but at some point it would make sense to simply link it to inflation to minimize the burden to younger generations. The elderly would keep their current purchasing power and taxes could be reduced (or would be less than they otherwise might). In fact, this whole controversey could probably be done away with—and private accounts ignored—with this one simple change. Here’s the relevant graf:

Since wages generally rise faster than inflation, retirees in each generation get more in real dollars than those in previous ones. Contemporary critics, like Kasich and the Bush council, would slow the rate of future increases by linking benefits only to inflation. Though this would save a lot of money, its effect on retirees should be understood.

Seniors now get an initial benefit that is tied to a fixed portion of their pre-retirement wages. If the index was changed, their pensions would be pegged to a fixed portion of a previous generation’s income. If this standard had been in force since the beginning, retirees today would be living like those in the 1940’s—like Ida Fuller, which would mean $300 a month in today’s dollars, as opposed to roughly $1,200 a month.

As a means of lifting the elderly out of poverty, SS has succeeded quite nicely. Not increasing the burden on future generations of workers would be a big improvement over the current situation.

Alex Tabarrok suggests that critiques of the social security tax as “regressive” miss the point:

The payroll tax is regressive but benefits are progressive and on net the social security system is progressive—a 45 year old male with an income twice the national average, for example, will in present value pay into the system $243,700 more than he will receive in benefits. (Part of this net loss comes from progressivity and a larger part from the fact that all currently young workers will pay more in present value taxes than they will receive in benefits). [citation omitted]

I’d say that the system is generally progressive, but there are subpopulations for whom I’d question that conclusion—according to the CDC, the average African-American male born in 1975 or earlier can expect to collect virtually no social security benefits, because he will have died before becoming eligible to collect benefits at age 62.

This week’s Economist looks at the public introduction of Airbus’ new A380 super-jumbo and the efforts of rival Boeing to come up with a different strategy based on its 7E7 Dreamliner. My gut feeling is that Airbus is banking on the continued success of legacy-style long-haul “hub-and-spoke” travel, which makes sense in developing markets, while Boeing is expecting the 7E7 to succeed in the transatlantic market between smaller destinations.

Meanwhile, the European Union and United States have agreed to keep the subsidies dispute outside the WTO process, at least for the time being. And, in other Boeing news, the airline is ending production of the Boeing 717, the latest (and last) incarnation of the DC-9/MD-80 series of aircraft; Stephen Karlson has some brief thoughts on the matter.

Update (from RKP):A quick expansion on Chris's point: if you want to read about the emergence of air taxis and point-to-point air travel, I highly recommend Free Flight by James Fallows. I'm not an aviation enthusiast, but just a guy that spent WAY too many hours on airplanes for a few years. The possibility of being able to fly out of an airport near the house with minimal fuss, and in an Eclipse 500 jet, has a lot of appeal.

There’s an interesting article in The Economist (should be a free link) about neuroeconomics. They don’t mention it explicitly, but much of what they discuss is considered part of experimental economics as well. Here’s an excerpt:

ALTHOUGH Plato compared the human soul to a chariot pulled by the two horses of reason and emotion, modern economics has mostly been a one-horse show. It has been obsessed with reason. In decisions from how much to produce to whether to save and invest, humans have been assumed to be coolly rational calculators of their own self-interest. Over the past few years, however, evidence from psychology has persuaded many economists that reason does not always have its way. Now, judging from a series of presentations at the American Economic Association meetings in Philadelphia last weekend, a burgeoning new field dubbed “neuroeconomics” seems poised to provide fresh insights on how the two horses together produce economic behaviour.

The current bout of research is made possible by the arrival of new technologies such as functional magnetic-resonance imaging, which allows second-by-second observation of brain activity. At several American universities, economists and their collaborators in the neurosciences have been placing human subjects in such brain scanners and asking them to perform a variety of economic tasks and games.

(þ: OTB)

Steven Taylor has a link to a story from Iceland about the use of hydrogen fuel cells, similar to what I mentioned earlier. If my earlier post is correct, though it is very optimistic, the US could be well ahead of other countries in adopting hydrogen, at least in cars.

Of course, “Reuters” couldn’t avoid a gratuitous swipe at President Bush, though they did mention the emmission of water and the problems it might cause in Iceland:

Washington says new technologies like hydrogen are a better long-term way to cut pollution and combat global warming than the U.N.‘s 128-nation Kyoto protocol.

Bush dismayed even U.S. allies by pulling out of Kyoto in 2001. Kyoto seeks to rein in emissions of heat-trapping gases, mainly released by burning oil and gas in factories, cars and power plants.

[....]

Among other problems, some scientists say the atmosphere might simply become too cloudy in a hydrogen economy, emitting vast amounts of water vapor, perhaps reflecting sunlight back to space or trapping it and warming the globe.

Richard Epstein has a detailed book review in Legal Affairs that addresses attacks on current drug industry practices. I haven’t read the whole thing—one of the nice things about having a blog (or partnering with someone who does) is that you can capture links and such for later reading—but here’s an excerpt of what appears to be a couple of compelling paragraphs:

Kassirer argues that drug marketing corrupts the companies that do the pushing and the doctors who yield to their blandishments. A doctor with undivided loyalty to his patients cannot resist temptation when a zealous sales force pushes overpriced and often dangerous products onto the market. Angell echoes these concerns and offers a more extended indictment. Pharmaceutical firms have been the beneficiaries of government largesse. They grievously overstate the costs of bringing new drugs to market in hopes of wringing extortionate payments from desperate patients. They adopt foolish strategies for research and development, producing “me-too” or copycat products with little medical benefit while falsely taking credit for scientific innovations underwritten by the National Science Foundation and the Institute of Medicine. The pharmaceutical companies benefit from a patent system that they can game and from a lax FDA process for drug approval. And they use devilish advertising campaigns to promote their wares.

In response to these perceived failings, Angell favors a stiff dose of price controls, tougher FDA approval procedures, restrictions on advertisements, and sharp limitations on drug patent protections. She would undo both the Hatch-Waxman Act of 1984, which extends the patent life of all drugs in order to partially offset the lost sales from those that have been patented but await FDA approval, and the reforms that allow drug companies to help finance the costs of the FDA‘s new drug applications. Drugs are a complex business, and each of Angell’s proposed reforms would produce a myriad of unintended and often destructive side effects. Remove industry payments to expedite FDA review, for example, and desired new drugs will take longer to reach the market. That in turn will truncate the life of a patent and reduce innovation. Experts in the field ponder the trade-offs. Angell and Kassirer write as if the trade-offs do not exist.

Of course, SS reform has been a big topic lately. Alex Tabarrok has a great post on the argument about the fairness of the current SS system. I likewise agree with his endosement of Tyler’s solution—make it, explicitly, a poverty program for the elderly.

The gist of Alex’s post is that, as long as we are pretending SS is a pension system, rather than a welfare program, the argument against a regressive payroll tax falls flat. However, if we admit that it’s a welfare program, we should treat it as such. This, of course, would open it to things such as means testing, eliminating the automatic increases and the like.

In the mean time, as long as we are calling it a pension (or retirement) system, arguments about the fairness of regressive taxes should be ignored.*

An excellent write-up in the NYT on the passing of Robert Heilbroner:

Dr. Heilbroner’s first book, “The Worldly Philosophers: The Lives, Times and Ideas of the Great Economic Thinkers,” written before he received his doctorate, is one of the most widely read economics books of all time. He was also a prominent lecturer as well as the author of 19 other books, which sold more than 10 million copies and, in many cases, became standard college textbooks.

A witty writer, he called himself a “radical conservative,” an oxymoron suggesting that, like Don Quixote, he wanted to rush rapidly forward, break the mold – and end up right where he was. But in that he was only half joking. He did indeed want to conserve the basic separation of the national economy from the national government, as suggested by Adam Smith in the 18th century. But he believed, too, that when the economy was hit with severe recessions or high unemployment or yawning income gaps, for example, government had to intervene with public spending that stimulated economic activity and generated jobs and the construction of public works that contributed to higher living standards.

Although popular with students and the general reader, he was regarded by mainstream economists as a popularizer and historian whose insights made no great contribution to the study of the field. He, in turn, saw their reliance on mathematics and computer modeling as narrow in vision and as losing sight of the very purpose of economics – to help improve the well-being of people at work and of the society they work in.

“The worldly philosophers,” Dr. Heilbroner said in a 1999 interview, “thought their task was to model all the complexities of an economic system – the political, the sociological, the psychological, the moral, the historical. And modern economists, au contraire, do not want so complex a vision. They favor two-dimensional models that in trying to be scientific leave out too much and leave modern economists without a true understanding of how the system works.”

The article goes on to mention, quite prominently, that Heilbroner criticized capitalism, and the neoclassical model, for its failure to address negative externalities (mainly pollution). I don’t know the full extent of his comments on this issue, but I believe the issue has actually been addressed. Few economists disagree with notion of forcing the full cost of externalities on producers, thus embedding them in prices. That argument was settled at least as far back as 1990, with the amendments to the Clean Air Act. Economists just favor market mechanisms that allow the producers to determine the best way to eliminate pollution, rather than, say, requiring them to install scrubbers—a solution that was favored by coal interests in West Virginia, IIRC.

Heilbroner's other criticisms of economics these days are a matter of ongoing debate, particularly by New Institutionalists. Great piece. RTWT.

Eugene Volokh has a good post on IJ's relentless attempt to overturn the Slaughterhouse Cases. I don't know enough about the constitutional issues to say if it's right or not, though I'm certainly sympathetic to the ends. In any case, I agree with Volokh that it's a bad idea to legislate economic rents for private interests.

Or, that perennial battle between the French and the British.

A couple of weeks ago, a person from Legal Affairs actually emailed us to let us know about this article on the apparent prosperity of countries that follow the British common law versus the French civil law. Chris handed the article off to me and I promptly forgot about it.

Today’s Boston Globe has a brief version of the article here, which reminded me of it. The argument in favor of the LLSV research seems pretty persuasive to me—indeed, the French have begun looking into it themselves, according to the Globe—but I suspect it will be argued about for some time to come before a real conclusion is reached. In the mean time it appears to me that the British common law is winning.

They use Malaysia (common law) and Indonesia (civil law) as examples; the former is prospering, the latter is not. The LLSV authors attribute the difference to the British common law and its protection of shareholder rights, among other things. The key graf, to me, is this one from the Globe:

Yet for all its mathematical sophistication, LLSV‘s research has not gone unchallenged by their fellow number-crunchers. According to Luigi Zingales of the University of Chicago, the economic differences among countries may not come from something intrinsic to common law or civil law, but rather from some other correlated factor. Common law countries, for example, tend to speak English, tend to be Protestant, and tend not to have been decimated by World War II. The English, furthermore, may have done a better job than the French of finding economically viable locations to set up colonies.

As with most statistical studies, there’s the rub: show causality, rather than just correlation. The LLSV authors claim to have addressed these factors:

The LLSV scholars counter that their regression models try to take all of these variables into account, showing for example that civil law origin has much more of an impact on markets than religion does. They also note that at least they’ve found something that can be reformed. Legal origin may not explain everything, but changing laws is much easier than converting a country from Catholicism to Protestantism.

In the end, what LLSV has done is provide a giant statistical brief in support of the ideas of John Locke, James Madison, and Adam Smith, and they’ve updated those ideas for a world that’s as interested in economic success as in liberty. Creating a judicial branch that can check the executive and the legislature doesn’t just protect individual rights and prevent political persecution. It also improves your stock market and can transform your future. At least, that’s the theory.

I know where my sympathies lie—with the Brits, Adam Smith and John Locke, of course—but I’ll wait and see how the LLSV guys do at defending their research in the future. If I get time, I might even look the stuff up myself. I have some of the same questions as the LLSV guys when it comes to Haiti and the Dominican Republic: how can two countries that share the same spit of land be so dramatically different? In this case I imagine it has to do with more than just legal codes (DR is French, Haiti is unknown to me).

BTW, hell school resumes tomorrow and the impact on my own blogging can only be negative. Tough semester in front of me, with qualifying exams to come in May.

The last time I saw anything about purely hydrogen-driven cars, it required a flame-retardent vest when filling the tank. They say in this article that the problem of explosion has been dealt with, though they don’t address the “filling the tank” issue specifically. The guy quoted below seems awfully optimistic, but they do have a fully-functioning prototype, though it sounds like it would cost $1 million or more if you wanted one now:

GM, which has been slow to roll out hybrid products, is using the Sequel to try to win some of the attention for hydrogen, Brooke said."We're reaching out to show that this is truly doable," GM technology chief Lawrence D. Burns said. "We're talking about a real car. It's not affordable yet, but I can assure you it's doable."

In 2002, GM showed a fuel-cell concept car called the Hy-Wire that consisted of an 11-inch thick “skateboard” chassis that contained all the working parts—one-tenth as many as in a conventional car—with a body simply bolted on top. But the Hy-Wire was rickety to drive and could never have met federal highway standards, let alone satisfied demanding buyers.

The Sequel's biggest single advance, Burns said, is a compressed-hydrogen storage tank that can hold enough fuel to give the car a range of 300 miles. That is twice as far as the range of older versions of fuel-cell cars, and is considered the threshold distance to be marketable. With liquid hydrogen, the range could extend to 450 miles, Burns said. The Sequel also has a more powerful stack of fuel cells than previously possible, cutting 0-to-60 mph acceleration time to fewer than 10 seconds, comparable to most conventional cars.

GM is also working on the technology to produce and assemble the Sequel, hoping to be able to build 1 million a year by 2010, Burns said.

The hybrids have always seemed like a transitional technology and if it’s possible to get us to a fuel that doesn’t have any emissions (other than water) and that eliminates our need for oil altogether, so much the better.

Apparently Norm Mineta can’t figure out why the legacy airlines are in such big trouble. (þ Brian J. Noggle)

He could save us taxpayers a bit of money by just reading Virginia Postrel’s weblog. More succinctly: U.S. Airways sucks monkey balls, and they’re tightwad scum too.

Once again I find myself in agreement with Joe Lieberman:

A rejoinder to this rejoinder is now being beta-tested by Sen. Byron Dorgan: Republicans exaggerate the “crisis” of Social Security, which can be fixed with a few modest tax hikes. Uh huh, in the sense that a bankrupt man might still be able to manage his car payments . . . if you ignore the fact that he owes house payments too.

House payments, in this case, are the unfunded liabilities of Medicare, which vastly outstrip even the unfunded liabilities of Social Security, by a margin of $62 trillion to $10 trillion. For several years, the nonpartisan board of Social Security and Medicare Trustees has flagged these figures, which everyone ignored. Joe Lieberman last year introduced a Senate bill to recognize these obligations in the federal budget. He was ignored.

Yet since Mr. Bush introduced the subject of Social Security reform at his party’s September jamboree, public debate has surged ahead of the White House and its Democratic sparring partners. USA Today, to give the underrated McPaper its due, produced a report in October forcing Medicare into the picture, noting it would take $53 trillion invested today to cover the $200 trillion in shortfalls the program is expected to generate just over the lifetimes of today’s youngest workers. By Monday night, even Peter Jennings of ABC News had decided there’s a story here.

Adding the unfunded liabilities of entitlements to the federal budget would be a great idea and would go a long way towards getting rid of the notion that there’s a trust fund, or that these benefits are “free”. It’s a good idea, so it naturally get’s dumped.

Professor Bainbridge has a lengthy post where he dissects the EU triumphalists. I went into this at some length the other day and won’t do so again.

What I will do is note that I agree with Professor Bainbridge—we referenced the same Economist article for Europe’s median age problem—though I don’t find the EU quite as bothersome as he seems to. The EU is a declining power for the time being and will continue that way just due to demographics. Even if they were economically ascendant, I wouldn’t find it all that troublesome since economics isn’t zero-sum (they would have to undo their labor market rigidities and limit their fiscal burdensand would still have a hard time growing as fast as the U.S. in the coming decades). On foreign policy, they won’t spend what’s necessary to build a military so there’s no threat there. The only problem I’m aware of is their recent decision to start selling weapons to China. More than a little troubling ($).

You know that the EU ascendancy meme has jumped the shark—along with that phrase—though when Jeremy Rifkin and others start getting worked up over it ($):

Eurocrats are understandably flattered by this unusual American praise for the grand European project; Mr Rifkin’s book has gone down well in Brussels. But the mood of real “builders of Europe” is often decidedly more pessimistic. This week European leaders are likely to take a big step towards admitting Turkey to the EU, a decision about which many of them have deep misgivings. Mr Reid’s argument that there is an inexorable historical logic driving forward European unity is often made by Brussels federalists too. But these same people are also well aware of the fragility of a process of political integration that has very shallow popular support.

Then there is the economy. Europe’s economic growth continues to lag that of the United States, let alone China and India. And Europe’s population is ageing and shrinking. Two-thirds of the way into his book, Mr Rifkin interrupts his dream to note that “the sad truth is that without a massive increase in non-EU immigration in the next several decades, Europe is likely to wither and die.” This looks like a fairly big qualification to the book’s general mood of sunny optimism. But no matter: within a few pages we are back to the “politics of empathy”.

Awareness of the depth of the political and economic challenges that lie ahead accounts for the fact that many European officials are more inclined to troubled pessimism than to Rifkinesque optimism. This European willingness to be self-critical is, as it happens, a genuine strength. Unfortunately, there is a lot to be self-critical about.

When Rifkin starts pimping an idea, you know it’s time to write it off.

(þ: The Professor)

Brad DeLong has a great entry on Adam Smith. One of the many interesting points is when he mentions “market fundamentalism”. It reminded me of this Cannan edition of Wealth that is annotated, just like a Bible. You can quote it chapter and verse.

What still strikes me about Smith is how broadly he saw things: he didn’t just write a book on economics, he drew a very broad picture that encompassed both the morality and the funtionality of the marketplace. Contrary to one of the commenters, I think Smith would be quite pleased with what he would see today. Is it perfect? No, but it’s a far shout from where he was in his day and much of the progress since then is due to him (and Cantillon).

(þ: Marginal Revolution)

Apparently, in Arianna’s world, a guy that creates a company from scratch in his dorm room—enriching millions in the process—is a demon when it becomes economical to offshore 3000 jobs to India:

MICHAEL “DUDE, YOU GOT OUTSOURCED!” DELL

Name: Michael S. Dell
Company: Dell Computers
Title: Chairman and Former CEO (Chairman and CEO until July, 2004)
Crime Against America: Dell’s Bangalore and Hyderabad, India, facilities employ close to 3,000 people.
Partner in Crime: Dell has contributed $3,000 to the Bush campaign in 2003 and 2004, plus an additional $25,000 the Republican National Committee, and $10,000 to the National Republican Congressional Committee. Dell CFO James M. Schneider is a $25,000 contributor to the RNC.

Even more unpardonable: he donated to Republicans. Arianna supposedly has an economics degree, though it appears that anything she learned has long since disappeared. She still has mastery of the Populism 101 material, though.

Tyler Cowen has been beating the drum against social security privatization for a good while, and it has finally sunken in with me. After thinking about it enough, it appears that he is right: we will end up with two programs if we transition to private accounts and it won’t reduce the unfunded liability, which is the central problem. Presumably, when the actuaries refer to an unfunded liability they are referring to an excess in the present value of all cash outflows versus the present value of all inflows. If the first number exceeds the second, you have a liability. We’ve promised to pay too much and benefits will have to be reduced, or taxes raised, to bring the system into balance.

Private accounts alone won’t change the unfunded liability. However, Tyler offers an intriguing solution to part of that problem: auction off the right to leave the system. An auction provides a great mechanism to separate those that are risk averse from those that are not; those with financial savvy from those with none. It also creates a logical break point to show where they have left the system and have acknowledged that the system owes them nothing, though they have paid into it. They should similarly understand that they will need to save enough for their own retirement and will have to keep working without enough savings.

There would be an initial inflow of money that could be used to retire debt—thereby enabling future borrowing for the government to cover shortfalls—and presumably an increase in savings from those that leave the system; no more payroll taxes, higher disposable income. The system could then transform into a poverty program for the elderly, which should be far [Ed.: got a little carried away.] smaller than in its current setup.

I’m sure the details would need to be hammered out by actuaries—how many people would pay to leave the system, how much would they pay (meaning how much current debt could we retire) and how much would the unfunded liability would be reduced. Even with these questions, it seems like a sounder suggestion than getting people into a forced savings program where the government still implicitly takes responsibility for everyone’s retirement and the unfunded liability is unchanged.

Cass has more here.