Editore"s Note
Tilting at Windmills

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March 14, 2005
By: Brad Plumer

SOCIAL SECURITY AND THE "NEW ECONOMY"....Even though I don't know a whole lot about international finance, I still try to check on Brad Setser's blog on a weekly basis, just so that I don't miss out on passages like this one:

[G]iven the Washington Post oped page's spirited championing of free trade, I am surprised that they have not noted that Social Security is designed in such a way that it allows lets the winners from trade to help out those who lose from trade. That should help make trade more politically palatable.

Social Security, unlike many traditional corporate pensions, vests immediately and is fully portable, so "job churn" doesn't reduce retirement benefits. Some people end up with slightly lower lifetime earnings as a result of the dislocations associated with trade, just as others end up with higher life-time earnings.

Suppose you happen to work in a plant that is shut when you are 55 or so. Lots of your human capital probably is tied up in a set of skills specific to that plant, or maybe that industry. And, given your age, you have relatively limited opportunities to earn back the costs of investing in your own "retraining." One of the risks Social Security insures against is the possibility that someone "who works hard and plays by the rules" but happens to end up in the wrong industry at the wrong time will end up with slightly lower than expected lifetime earnings.

Heh, indeed, etc. You could extend this point even further. It goes (er, almost) without saying that today isn't the 1950s. The U.S. no longer has rows and rows of manufacturing firms that lay off workers during downturns and then rehire those exact same workers a few months later. Blame globalization, or the decline in manufacturing, or whatever, but it seems likely that permanent, rather than temporary, layoffs will play an increasingly large role in future economic cycles.

If that's the price to pay for entering the new, shiny, 21st century economy, then okay. But let's not pretend there won't be a large political backlash here. In this month's Washington Monthly (no, I'm not obliged to plug these articles while I'm here, they're just plain interesting) Benjamin Wallace-Wells noted that America's losing its competitive edge around the world, and proposed more government spending on R&D and friendlier immigration policies. What he doesn't do, however, is talk about ways in which to make a globally competitive United States "politically palatable". It should be clear that a world in which workers pay a very high price for losing their jobs is a world in which protectionist and anti-immigration policies find a lot of support, and hence a world in which all the federally-funded R&D in the world won't do much good.

A privatized Social Security system, as Brad Setser says, would plunge us even deeper into that sort of world, since workers would pay a very high price indeed for being unemployedwithout the ability to continue adding to their private accounts, they'd be losing out on the magic of compound interest. (Note too, many workers would be unemployed when the economy, and hence the stock market, was doing poorly, which, ironically, is usually the best time to buy stocks for your private account.) Social Security, on the other hand, insures you against periods of unemployment, since retirement benefits depend only on your highest 35 years of work. I won't pretend to know how much this would actually bother workers, but I assume it's a big deal, and risks strengthening the anti-"New Economy" constituency.

(P.S. I'd also like to know if private accounts would give incentives to workersand, while we're at it, mothersto get back to work more quickly, and whether this would be a good thing [less lounging around] or a bad thing [getting a job you're not well-suited for]. But I'm not an economist, so...)

Brad Plumer 11:03 AM Permalink | Trackbacks

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