Domino Theory
By Joseph C. Sternberg
Remember "dynamic scoring"?
It's OK if you don't--hardly anyone bothered to care about it when it was the subject of an esoteric debate in Washington a few years ago. But maybe it's time for a resurgence. It is the conceptual tool that will help the President argue down his opponents in the Great Social Security Debate.
Dynamic scoring, as you won't recall, is a method by which economists account for the fact that policy actually does matter in the real world. It surfaced most recently a few years ago in the debate over how much Bush's tax cuts would "cost." Proponents of dynamic scoring argued that tax cuts stimulate the economy, which in turn can boost tax revenues even in the face of a tax rate reduction. Fans of the Laffer Curve, this one's for you.
At first, accounting for economic change resulting from policy action seems so sensible that one could reasonably wonder why there was any debate about it at all. But this isn't mysterious. The cynic will jump on the fact that, by presupposing the benefits of tax cuts--or of many other "conservative" causes--dynamic scoring poses an ideological threat to left-leaning economists.
But one can also think of a fundamental aspect of the economics profession that would make practitioners wary. Economists are happiest living in a ceteris paribus world--a world in which you can hold everything else equal (the literal meaning of that Latin phrase) while you tinker with one variable at a time. It's a pleasant myth, and one that is incredibly useful for many types of economic analysis. But it doesn't fare so well in the face of tax cuts. And Social Security reform has the potential to put it on the rocks, too.
Consider the most sophisticated critique you are likely to find of Bush's personal-accounts proposal, as formulated by New York Times columnist Paul Krugman. The Bush plan rests on the assumption that stock market values will increase by about 6.5 percent annually from here to eternity, the historical rate. But Krugman argues that we shouldn't expect this growth to continue. As he correctly notes, there has to be some "there" there supporting those stock prices. That "there" is the underlying economy, which would have to grow at a terrific pace to support the administration's projections.
Yet the administration's claim that the current system is unsustainable is rooted in a much more pessimistic prediction of future economic growth. So, per Krugman, either the economy will grow fast enough to make personal accounts work, in which case the current system would work just fine anyway, or the economy will grow so slowly that the current system will collapse, in which case the market won't offer much of a salve.
What if, however, instead of being a Krugman-esque Catch-22, personal accounts were actually a self-fulfilling prophecy?
Economic growth is driven by productivity gains, and productivity is driven by capital savings--investment. That capital savings goes into machines that make workers more productive. Or, more precisely, it goes into new machines. Investing in a new punch-card-reading contraption isn't going to do much for my productivity, but a gleaming new desktop computer with all the latest software probably would (or at least that's what I keep trying to tell my employer). Yet 30 years ago, who saw the desktop computer coming?
The much-cliched point of this example is that we cannot in any meaningful way project tomorrow's economic growth today, because it is impossible for us to know what technologies will be driving that growth. If you doubt, just ask Thomas Malthus.
The genius of Social Security personal accounts is that they create a constant stream of funding for such productivity-enhancing investments. An account system converts payroll taxes from fuel for a government-sponsored Ponzi scheme into actual savings. This conversion will itself stimulate the economy. Note that the growth that sustains the new account system will only happen if the new account system is enacted.
For obvious reasons, it is much harder for the "dynamic scorers" of the Social Security debate to assign numbers to these phenomena. Skeptics need only project current technologies, complete with their diminishing returns in productivity, into the future--as unlikely as that seems given millennia of historical experience. And dynamic scoring invariably falls victim to the vagaries of a complex economy when examined in retrospect. How much of today's huge deficits are due to the tax cuts, and how much to a general economic slow-down caused by terrorism fears or the burst of the tech bubble? Gaggles of economists will remain gainfully employed for years bickering about the answer to that question.
At heart, this, like so many other economics debates, isn't about the numbers at all. Economists are people, too, and they are just as good as anyone else at crafting statistics that will bolster their claims. So maybe it's best to conclude by going back to first principles. The economics behind Social Security accounts is founded on a belief in the dynamism of the American economy, a belief born out by history. If you think that someone will always be able to build that better mouse trap, personal accounts are right up your alley. Adherents of the "Krugman school" are profoundly pessimistic in their apparent belief that we have caught as many mice as we ever will. Such skeptics have been with us for centuries, and they have yet to be right.
Joseph C. Sternberg is managing editor of The Public Interest in Washington, D.C.
