Covering the Front and Back Pages of the Newspaper
February 8, 2005
POLITICS: The Simpleton
The Minute Man continues his dissection of Paul Krugman's broadsides against Social Security reform, and argues that Krugman gets three points wrong in the macroeconomic case against private accounts helping to close the funding gap. As I understand Maguire's argument, on #1, Krugman contends that it "is mathematically impossible" to have growth in returns on stocks in the neighborhood of 6.5-7% without very high levels of growth in the economy as a whole, higher than any reasonable current estimate. Maguire contends that it is possible, and that this can occur if corporations hold down wage growth and thus pass on to investors much or all of the benefits of economic growth. (You would think that liberal/Democratic pundits, of all people, would grasp this zero-sum-game workers vs. capital dynamic as at least a possibility.) As Maguire has noted before, this scenario becomes more plausible when you consider the possibility of capital invested in low-wage foreign markets.
If Maguire is right, not only is this a possible outcome, but it is one in which it becomes uniquely desirable for laborers to become capitalists to offset their vulnerability to stagnant wages. Which explains why #3 is wrong too: since private accounts are an investment in the international stock and bond markets while the current pay-as-you-go means (on a macro level) an investment in domestic payrolls, any scenario in which (a) wages don't keep up with profits or (b) jobs go offshore is likely to throw off the 1:1 relationship of returns on capital:payrolls, and thus defeat Krugman's tidy syllogism.
#2, I'm not sure I understood, however. I think Krugman is saying that corporate profits (before, or after payment of interest to bondholders?) determine the return on capital to the corporation's owners. I get that Maguire says this is not necessarily so, but I'm not sure I followed why.
Anyway, go check the comments, where Don Luskin actually says he thinks Krugman is sort of right on these points (but wrong overall, by Luskin's projections).