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January 30, 2005
David Warsh, Proprietor


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Why the Hurry?

To understand the itch behind the Republican Party’s attempt to replace the Social Security Administration with an investment-based system, it is necessary to recognize that the single most powerful voice advocating the creation of “personal” accounts has not been George W. Bush channeling Barry Goldwater, or the PR battalions of the securities industry (though these are, of course, considerable forces in their own right), but rather a mild-mannered professor of economics at Harvard University named Martin Feldstein.

The notion that the Bush administration has only disdain for technical expertise in economics is a nettlesome myth. If anything, George W. Bush listens to economists too much.

The current enthusiasm for an overhaul of the system of social insurance that the United States adopted during the Great Depression has been building slowly in some precincts of the economic profession for more than thirty years – at least since Feldstein published in the Journal of Political Economy in 1974 his first study of the effects of the Social Security system on savings behavior.

That does not mean such expert opinion is anywhere near unanimous (it is not). Or that the division of opinion exists mainly along generational lines (closer, but still not really true). Or that the new thinking is likely to carry the day against the weight of 70 years’ experience any time soon.

It is, however, expert opinion. The impetus to the Bush administration’s proposals has arisen in recent years more from university departments than from any other quarter of opinion-manufacture in America.

Twice in the space of the past ten years, Feldstein has used a turn in the profession’s most bully pulpits to advocate that the current insurance system — in which retirement costs are handled in much the same way that the armed forces are financed, on a pay-as-you-go basis — be traded for a fully funded system, in which individual “contributions” would be invested through great funds in stocks and bonds.

 First in 1996, in a lecture to the annual meeting of the American Economic Association (just one economist is invited to address the entire membership; the outgoing president gives the only other plenary lecture), Feldstein described Social Security reform as “the missing piece” in policy analysis. In that year Steve Forbes was the only presidential candidate calling for privatization. Four years later George W. Bush actively campaigned on the proposal.

“The very adverse impact of the current system on a wide variety of groups, including two-earner couples, the young, and the poor, may embolden some politicians to go beyond patching up the solvency of the current system to propose more fundamental reforms than have been considered in the past.”

Then, earlier this month, in a presidential address to the same association, Feldstein recommended a combination of forced individual accounts and government insurance for all the major forms of social insurance – not just personal retirement accounts, but medical savings accounts and unemployment insurance as well. If ever there was an intellectual blueprint for the “ownership society,” this was it. Its outlines have been worked out by many hands over many years.

It is unmistakably clear by now that George W. Bush is, as was Harry Truman, an accidental president – a man with very little of the informal training for the job that is the by-product of a focused ambition. As the Truman example shows, such a lack of preparation is not necessarily a bad thing.

Looking at Bush, one sees an opportunist, a gambler, an improvisation artist who is, nevertheless, a firmly principled man. His considerable skills won him the Republican nomination and they got him into the White House when the election turned out to be a tie. It will take years to distinguish his successes from his failures while in office.

There is, however, absolutely nothing accidental about Marty Feldstein.

It is difficult to exaggerate the political centrality of Feldstein to his professional generation – the generation of the 1960s.  In many respects, he is Milton Friedman’s heir. But unlike Friedman, who gained influence with a rugged simplicity communicated to the public through books, magazine columns and a television series, Feldstein has instead built his reputation among his fellow economists with imaginative and careful empirical work. He has equally carefully built behind-the-scenes relationships with politicians as well.

Feldstein began his public policy career as a leading proponent of the rhetorically powerful capital gains tax cuts of 1978, which produced an avalanche of high-tech investment. It came as no surprise, then, when he was the man to whom the Reagan administration turned for legitimacy in 1982 when tax cuts got it in trouble. With him to the Council of Economic advisers he took a handful of post-docs who since have become household names, at least among families that follow political economy: New York Times columnist Paul Krugman, Harvard University President Lawrence Summers, best-selling textbook author (and former Council chairman himself) N. Gregory Mankiw. In the process, Feldstein became a regular adviser to then-Vice President George H.W. Bush.

Returning to Harvard in 1984, he took over teaching economics to a generation of college freshmen. He resumed the presidency of the non-partisan National Bureau of Economic Research as well, sculpting a style both of research and the funding of research that is now imitated around the world. But Feldstein’s specialty, as before he went to Washington, was training the next generation of public finance economists. Among the better known are Summers, who rose to prominence during the Clinton administration; Laurence Kotlikoff of Boston University and Alan Auerbach of the University of California at Berkeley, co-developers of a powerful framework of intergenerational accounts; Harvard’s David Cutler, designer of an elaborate system of national health accounts; Columbia’s Glenn Hubbard, chairman of the Council of Economic Advisers under George W. Bush; and MIT’s James Poterba, the lone economist to be appointed by Bush to his new Tax Reform Commission. And now Feldstein himself is among the leading candidates to replace Alan Greenspan.

Probably the only economist of comparable influence among of the previous generation, the World War II generation, is Robert Solow, of the Massachusetts Institute of Technology. He, too, has operated mainly behind the scenes, but with astonishing affect: setting much of the nation’s previous economic policy agenda, impressing a style of work on the profession, and training a generation of students who further shaped the public’s concerns. They include William Nordhaus of Yale, George Akerlof of the University of California at Berkeley, Peter Diamond of MIT, Joseph Stiglitz of Columbia,  Martin Baily of the Brookings Institution, Robert Gordon of Northwestern University, Robert Hall of Stanford and Olivier Blanchard of MIT.   But where Solow’s tradition exemplified nearly everything we meant by “liberal” in those years, Feldstein today represents the essence of what today we think of as being “neoconservative.” In influence, the men are similar; in core beliefs, they are each other’s opposites.

Feldstein was born in 1939 in New York and raised on suburban Long Island. As an undergraduate at Harvard College, he expected to become a physician. But a fellowship year at Oxford turned his interest to the intricacies of medical insurance, and he stayed on to become a lecturer in public finance.

At the 90th birthday party in 2002 for Milton Friedman at the University of Chicago, Feldstein recalled the copy of Friedman’s book, Capitalism and Freedom, which he had bought in England in 1964.  “I was then a very impressionable 24-year-old and the book had a major influence on me – probably more than I realized at the time.”

He recalled Friedman’s brief but vigorous argument in that book on strictly libertarian grounds against the Social Security program – that it was bad simply because it infringed on individual freedom. He recalled as well his own surprise as a young economist that Friedman had failed to mention the effect that a generous retirement insurance program might have on individual savings – and his own resolve to extend Friedman’s consumption function apparatus and empirical style to analyze what he soon dubbed “social security wealth” – the present value of future benefits – as a determinant of household savings.

That was the beginning of Feldstein’s long reconnaissance.  The concept of social security wealth is at the heart of today’s debates.  Friedman’s philosophical arguments – so reminiscent of Barry Goldwater’s – have become in Feldstein’s hands arguments about economic efficiency, couched in terms of “deadweight loss” and potential welfare gains. (The old joke has it that deadweight loss is what happens when a bus otherwise full of economists goes over a cliff — with two empty seats.)

The study of the various undesirable effects on incentives that inevitably arise has been extended to the other big social insurance programs against various kinds of risk -unemployment, healthcare and disability. No one doubts any longer that there are behavioral responses to taxes and benefits. Computers have made it possible to administer benefit plans that in the 1930s, when old age and disability insurance finally came to the United States, would have been unthinkable.

Feldstein has made his point – one point, anyway.  By the 1990s, even leading Democrats had begun to chime in on the virtue of adding a thin layer of personal investment accounts on top of the existing system, N.Y. Sen. Daniel Patrick Moynihan, and University of Michigan Edward “Ned” Gramlich (who chaired a Social Security panel ten years ago) among them. And President Bill Clinton himself tentatively embraced the idea of investing some social security taxes in the stock market, instead of parking them in government bonds. But no Democrat has expressed any willingness to alter the most salient underlying characteristic of the current system, which is the income transfer from the well-to-do to the poor implicit in its guarantee to provide all retirees with a certain reasonable level of benefits regardless of how little they have saved or how long they live.

Why the hurry today? The kinds of deep changes that Feldstein advocates ordinarily require decades to win popular acceptance. The Bushies are rushing because they know that, far from being the wave of the future, this is their last hurrah. The senior members of today’s administration got their first taste of real power in 1974, when they became part of the Ford administration, after the resignation of Richard Nixon. Out of office for four years while Jimmy Carter held the White House, they returned to positions of authority for twelve years, until Bill Clinton sent them packing again – until George W. Bush raised them to their current heights Thirty five years at or near the pinnacle of power is a long time.

But by 2008, the old lions will have left the stage: both Bushes, Vice President Dick Cheney, Secretary of Defense Donald Rumsfeld, Federal Reserve chairman Greenspan. Feldstein will remain. But he will have to find new candidates to advise. And, unless they are Democrats (as, conceivably, they might be), the chances are they won’t be living in the White House any time soon. The Republican Party is deeply divided and unlikely to find a candidate around whom its various factions can unite.

Marty Feldstein is not Paul Wolfowitz, the reckless architect of the war against Saddam Hussein. But George W. Bush is still the president. The haste with which Bush is trying to stampede his party to a vote with a phony Social Security “crisis” is strongly reminiscent of his ill-considered campaign in Iraq.  The administration’s “Hail Mary” tactics, if they are implemented, are as likely to backfire just as badly in the domestic arena as in its ill-conceived occupation of Iraq.

That doesn’t mean that thoughtful Democrats can afford to ignore Feldstein’s important ideas about what can be done to improve social insurance. They are more durable than the Bush administration. Many of them will stand the test of time. Indeed, probably it will be the Democrats who ultimately put them into practice.

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