Sunday, February 13, 2005

Did Krugman forget Hazlitt's Lesson?

I was reading a recent column by the wonderful economist Paul Krugman on Social Security privitization and I think he might have forgotten something very important.

"Which brings us to the privatizers' Catch-22.

They can rescue their happy vision for stock returns by claiming that the Social Security actuaries are vastly underestimating future economic growth. But in that case, we don't need to worry about Social Security's future: if the economy grows fast enough to generate a rate of return that makes privatization work, it will also yield a bonanza of payroll tax revenue that will keep the current system sound for generations to come.

Alternatively, privatizers can unhappily admit that future stock returns will be much lower than they have been claiming. But without those high returns, the arithmetic of their schemes collapses."
I'm wondering, wouldn't the reduction of social security benifits have an effect on economic growth by affecting people's saving habitts? If people are consumption smoothing, then reducing future retirement benifits from Social Security will inspire them to save more. According to the traditional Solow model of economic growth, this increase in the rate of saving will increase the sustainable ammount of capital per worker. As businesses invest and build up the capital stock the economic growth rate will also increase until we start approaching our new stready-state.

IOW: We would EXPECT the growth rate to be higher under the "privatized" system than under the current one. It is NOT a contradiction.

Is Paul Krugman ignoring an unintended consequence of government policy action? Isn't that suppose to be the fundamental lesson of Henry Hazlitt's "Economics In One Lesson"? For Shame Krugman.