If you seek his monument, look around. I learned yesterday that Manny Klausner died recently at age 85. I remember Murray Rothbard referring to H.L. Mencken as the “joyous libertarian.” For me, Manny was the joyous libertarian. My late friend Harry Watson and I came down from Canada in September 1972 to start in the Ph.D. economics program at UCLA. We had been reading Reason magazine regularly and following the libertarian movement that way and through other publications. We were charmed by much of what we read. So we arrived somewhat familiar with the American libertarian landscape. We knew enough to know that Los Angeles was one of the hotbeds of libertarianism. Naturally, we started looking around for libertarian events and we found out about the Libertarian Supper Club that met once a week (or was it once a month?) to discuss issues and developments. It met at a restaurant called the Eaters’ Digest. There was a very positive vibe at the time and so people would stand up and briefly share something that they had read or heard in the mainstream press or on talk radio that was somewhere between vaguely libertarian and actually libertarian. I think it was there that I first met Manny. I remember that he handed out a pamphlet he had produced because he was running as a write-in candidate for Congress in the 1972 election. That makes him the first candidate for Congress I ever met. I don’t remember all the policy positions in his pamphlet, but I do remember that they weren’t hard-core libertarian but, rather, something I found more sensible: laying out policies that would take us closer to freedom. I got a kick out of one particular position he took and I thought it made sense. He proposed ending the federal civil service system and returning to a 19th century-style spoils system. I think he told me, or maybe it was in the pamphlet, that the advantage of such a system is that it would be cheaper: instead of funding new programs to pay off supporters, successful politicians could fire the current employees and replace them with their supporters. I’m not positive any more that it’s a good idea but I think it is. I was talking to my friend Eric Garris this morning about Manny. Eric worked in the Reason office in 1974-75 and got to know Manny that way. Manny was part of a group that had bought Reason from its founder, Lanny Friedlander, in 1970. It was a very small publication at the time. But Eric tells me that Manny was hugely important in growing Reason as a business. British architect Sir Christopher Wren’s famous epitaph was “Lector, si monumentum requiris, circumspice.” Translation: Reader, if you seek his monument, look around. It is inscribed on his tomb in St. Paul’s Cathedral, one of 56 churches he was instrumental in building, including St. Paul’s Cathedral itself, after London’s massive fire of 1666. Similarly, if you seek Manny’s monument, look at Reason and the Reason Foundation. Note: Both Brian Doherty and Bob Poole have done excellent remembrances of Manny. P.S. Later today, I will post a more personal remembrance of Manny on my Substack. I’ll update here when that is done. (0 COMMENTS)

Everyone knows Social Security is broke and broken. According to the latest OASDI Trustees Report, Social Security has been paying out more than its total revenue (payroll taxes and trust fund) since 2021, and the latest projections have the Social Security trust fund depleted by 2033. After that date, it will only pay 79% of scheduled benefits if significant changes aren’t made. Reform, however, is well-nigh politically impossible. Old people are the most reliable voting bloc. No sane politician dares tamper with their precious entitlements, lest he invite the wrath of the AARP—just ask Paul Ryan or George W. Bush. Raising payroll taxes also won’t fly. Unlike the personal income tax, which is strictly progressive, lower earners pay proportionately higher shares of their income to Social Security—as of 2025, the only the first $176,000 of payroll income is taxed. While many proposals to fix Social Security include simply eliminating this “wage base” and taxing all payroll income, it’s likely that stabilizing the program would require payroll tax hikes on everyone—a political non-starter.  To fix Social Security, we need to think outside the box. Tweaking the retirement age, tax rates, and/or benefits won’t do. We don’t need “reform” so much as an escape hatch. If we can wean a relatively small number of people off of Social Security, we can preserve the substance of the program for those who truly need or desire it. What we need is a buyout.  Companies have used buyouts for decades to resolve unfunded pension liabilities. In a buyout, the company lets workers out of the retirement plan in exchange for some kind of payment. The pension plan member who opts out typically receives a lump-sum, which he/she gets to invest and manage; sometimes a more reliable annuity contract from a reputable financial company is offered. Buyouts are voluntary and therefore by nature win-win propositions: the company fixes its finances by offloading its pension obligations; workers who accept buyouts gain greater security, control, and freedom with their entitled funds. Here’s my idea for a Social Security buyout: I renounce the benefits that I’m entitled to when I reach retirement age. In return, the government will give me a modest, gradual reduction of my portion of the payroll tax. I crunched the numbers for a 10-year phased-in reduction of the employee’s share of the Old Age tax, from 5.3% to zero. Both Social Security and I come out ahead, easily. This is because Social Security does not invest tax “contributions.” Instead, it pays them directly over to retirees, in true Ponzi scheme fashion. Its rate of return ranges from pathetically small to negative for all but the oldest and lowest-earning participants—well below the returns available with stock market index funds. The buyout is calibrated to offer a significantly higher rate of return and gain in net wealth. To address concerns of paternalistic ninnies who fear that buyout accepters will spend and not invest, the legislation can require buyout takers to invest, within an IRA or similar tax-qualified plan, the amount of the payroll tax reduction. Because I still have decades to invest before retirement, I will come out ahead compared to what Social Security would have provided. There are many like me, probably millions, who similarly aren’t counting on Social Security and are self-funding retirement. They too will voluntarily leave, as long as the value of the buyout exceeds the net present value of their scheduled Social Security benefits.  According to my initial calculations, a Social Security buyout should be a clear win for workers ages 45 and under in the top half of the income distribution. For the government, the benefits of this kind of buyout are back-loaded—they don’t really start saving money or approach fiscal balance until 15 or 20 years down the road, when benefit checks zero out for the first cohort to opt out. Cash flow would also be somewhat negative for that first 15-20 years, as the payroll tax is phased out for the buyout accepters. Social Security’s “trust fund” assets and continuing payroll taxes can cover the initially negative cash flows; once the buyout-takers reach retirement age, Social Security can again become a surplus-generating program. In the meantime, taxpayers and the general public stand to benefit immensely, with increased personal wealth and increasing real investment into the US economy. It’s very difficult to predict the cash flows that this kind of voluntary buyout, operating under a truly massive government spending program, might entail. It is straightforward, however, to calculate investment performance for both potential buyout-taking taxpayers and the Social Security system. The policy paper includes spreadsheet models with internal rate of return and present value calculations for both individuals and the Social Security system. These simple models demonstrate the significant gains available for millions of participants. If enough people take carefully crafted buyouts, Social Security could eventually be made solvent, and here’s the best part, politically speaking: this requires ZERO changes to benefits, retirement age, or tax schedules for those who choose to stick with the program.  I’ve never liked Social Security, and I’ve long been on the record with harsh critiques. Libertarians and conservatives will probably latch on to the moralistic and/or financial critiques of Social Security, but the program remains both popular and a hot-button issue with the wider public, with HUGE vested interests and fiercely defensive political reflexes. Any proposal to fix Social Security, or even just slightly improve its fiscal stance, is going to have to involve political deal making that acknowledges sunk costs, avoids massive changes, and presents clear mutual benefits. With the ascent of Trump, the coming of DOGE, and an inkling of fiscal responsibility in the air in Washington, maybe the time is ripe for this kind of outside of the box proposal.    Find the entire policy paper here: https://inpolicy.org/2024/12/white-paper-the-art-of-the-deal-a-win-win-proposal-to-save-social-security/ Comments, suggestions, and questions welcome: tylerwatts@ferris.edu   (1 COMMENTS)

The Department of Government Efficiency (DOGE), the quasi-official advisory board led by Elon Musk to recommend workforce reductions and cost-savings in the Federal Government, has a laudable goal.  There certainly is a lot of waste in the government.  Fraud, too.  There are probably many tasks that the Feds currently do that states or private entities could do better.  Furthermore, without substantial changes, the Federal budget deficit is unsustainable.  There is a lot of fat that must be trimmed from the Federal government budget.  However, there is a right way and a wrong way to reduce budgets.  When facing cuts, one wants to right the ship in the least painful manner.  Indiscriminately cutting can make the situation worse.  In my years as a consultant before graduate school, I saw many firms turn a budget problem into a budget crisis (and, in one extreme case, turn a minor issue into bankruptcy) simply because they did poor budget cuts.   The wrong way to do cuts is what DOGE is now: slash and burn.  It’s hard to tell what criteria they are using to recommend cuts.  As best as I can tell, the reasoning is “I don’t understand this, so it must be waste or fraud.”  They’ve had to walk back several recommendations upon discovering they were recommending firing key personnel .  Cuts like these reduce the productivity of the organization and eliminate institutional knowledge, undermining the purpose of the cuts (to right the ship and get the organization running more efficiently).  Not only that, but seemingly arbitrary cuts undermine morale, which in turn reduces productivity further.  Budgetary problems persist, more cuts are needed, and the organization continues to become weaker.  This can lead to a vicious cycle of cuts and cuts, the ship never quite righting. This vicious cycle is not always maliciously intended.  It’s probable that Musk and Trump are doing what they believe through their experience businessmen is the right action.  I’ve seen the exact same mistakes made by many firms: bosses seek to “share the burden” of the cuts, asking various departments to all cut by an equal amount.  Or, also like DOGE, they lay off probationary employees (who tend to be easier to fire), thus cutting off the firm from young, maturing talent.  They target parts of the firm they do not understand, rather than relying on managers to help them make informed decisions. What’s the right way to make cuts?  Fortunately, economics can help us.  The optimal way to make cuts is to find the least marginally productive workers and target them for cuts.  Who, on the margin, is contributing least to the firm’s output?  Are there certain departments not advancing the goal?  These are questions that need to be answered.   Of course, just because this method is right doesn’t mean it is easy.  Measuring marginal productivity is no easy task, especially when one has an organization like a government where there are no products being willingly sold.  Furthermore, someone may appear unproductive, but actually has a wealth of institutional knowledge that would disappear with them. Righting a sinking corporate ship is no easy feat.  There’s a reason so many businesses fail, even those helmed by great leaders.  Nevertheless, it is a task that must be done from time to time.  And if one is to do it at all, one must do it well.  Trump and Musk would be wise to slow down and make reasoned, deliberate cuts, rather than flashy, often misunderstood, cuts for the camera. (0 COMMENTS)

The Federal Reserve has begun a review of its monetary policy framework. The previous review was conducted in 2020, and led to the “Flexible Average Inflation Targeting” framework. The FAIT approach would have been effective, if it had been tried. Unfortunately, the Fed forget the meaning of “average”.In a recent podcast with David Beckworth, Evan Koenig explained what went wrong with monetary policy in 2021: Right now, I think another example which addresses the question you raised is an article I wrote along with Tyler Atkinson and Ezra Max. This was a Dallas Fed Economics blog piece that came out in January of 2022, but we wrote it in the fall or, yes, the late fall of 2021, where the latest GDP data were for the third quarter of 2021. The reason we wrote it was because if you looked at an extrapolation of nominal GDP growth from before the COVID crisis, given the Fed’s 2% inflation target, given that most estimates of long-run potential growth in the economy at the time were 2%, and given that the economy before COVID was roughly at full employment, the natural target path for nominal GDP would have been a 4% growth path extended out from late 2019. We did that; we extrapolated a 4% growth path out, and we plotted nominal GDP since the beginning of the COVID recession. As it happened, in the third quarter of 2021, we just got back to that hypothetical target path, which is great. That’s what you want to do. The problem was that if you looked at the projections of private forecasters, and though we couldn’t talk about it at the time, if you looked at internal Fed projections, the projection was that nominal GDP was going to overshoot, substantially overshoot, that path and not come back to it. Our argument was, “hey, great so far, but trouble ahead unless the Fed starts removing accommodation. We should be in a neutral policy stance now, neutral in the sense of stabilized nominal GDP growth at 4%. The recovery in nominal GDP has been completed. We should be at neutral, and we’re not at neutral. We’ve got our foot all the way down to the floor on the accelerator pedal, interest rates at zero, and we’re doing asset purchases.” In their Dallas Fed paper, they clearly indicated that current Fed policy (in late 2021) was too expansionary: But will NGDP stay on that path? Professional forecasters think not. Blue Chip forecasters see NGDP growth exceeding 4.0 percent from now through 2025. Thereafter, growth stabilizes, leaving the level of NGDP 4.2 percent above trend, as depicted in the right panel of Chart 1. If the pandemic has no lasting effect on real output, that upward shift in NGDP would imply a price path 4.2 percent higher than before the pandemic. If the pandemic leaves a lasting negative mark on output, the upward shift in the price path will be even larger. The expectations of Fed policymakers, as documented in the latest Summary of Economic Projections, are broadly consistent with this outlook. An NGDP-targeting strategy would prescribe removing policy accommodation more rapidly than currently expected in order to keep incomes nearer their prepandemic trends and reduce the long-run price-level impact of the pandemic. They provide a chart showing the outcome they feared.      The actual NGDP overshoot was even worse than anticipated, but at least the Dallas Fed economists understood that policy was too expansionary.  I hope that the people revising the Fed’s policy framework will take into consideration which parts of the Fed correctly warned that policy was off course in 2021.  When policy mistakes are made, it makes sense to ask for advice from those who opposed those mistakes.   PS.  David Beckworth has a new Substack blog. (0 COMMENTS)

In his essay “Of the Independency of Parliament” (first published c. 1741), David Hume defends the Enlightenment idea that constitutions should assume that individuals, including politicians, are self-interested and that rulers will try to abuse their power. A famous passage reads: In constraining any system of government and fixing the several checks and controuls of the constitution, each man ought to be supposed a knave, and to have no other end, in all of his actions, than private interest. Consequently, a constitution must be knavish, that is, establish checks and balances in a way that the self-interest of some (Hume mentions the executive) will constrain the self-interest of others (in the legislature). Contemporary public choice theory further emphasizes that political analysis must assume that politicians are as self-interested as ordinary individuals. (The reader interested in a defense of “knavish constitutions” may consult Brian Kogelmann, “In Defense of Knavish Constitutions,” Public Choice, 196 [2023], pp. 141-156.) Pehaps Hume underestimated the potential threat from the chief executive, especially in today’s context of an inordinately powerful state. The chief executive could be more dangerous than a knave if he happens to have character defects or cognitive deficits. If Hume came back to life, I would respectfully suggest that he might be more explicit about politicians at the helm of the state and add something like: It is not impossible that a ruler, elected or not, be an ignorant idiot. Hume must have known the danger. Caligula (emperor from 37 to 41 AD) pretended to be a god. A “mad and unpredictable tyrant,” he was assassinated by a member of his Praetorian Guard. Nero (reigned 54-68 AD), brought to the supreme magistrature by the Praetorian Guard (“the Senate thus had to accept a fait accompli,” writes Britannica), had his own mother and his first wife assassinated. He gave public performances as a poet and lyre player. After a revolt on the frontier, he reportedly said, “I have only to appear and sing to have peace once more in Gaul.” Hume might reject my proposed amendment as too polemical for his scholarly demeanor. I would point out that “knave” was a very strong and pejorative word at the time he was writing, and that he emphasized it in his essay; and that my proposed addendum simply highlights the danger of personal power. ****************************** Statue of David Hume in Edinburgh (2 COMMENTS)

Recently, the YouTuber and bodybuilder Jeff Nippard released a video where he ran an interesting experiment. He did two days of training, each with a different budget. On the first day, he would have only $10 to cover all of his training related costs. This included four meals, gym and equipment costs, app based food tracking subscription costs (fair warning, he take the opportunity to plug his own app!), and supplement costs. He ultimately comes out under budget, needing just under nine dollars to cover everything. For the second day, he ups his budget slightly, to $10,000. (Okay, maybe more than slightly!) With that kind of budget, he has custom, healthy meals prepared by a world-record holding, $500 per hour personal chef, trains at an elite gym under the guidance of a $700 per hour personal trainer, and avails himself of high-end recovery treatments like sensory depravation float chambers and luxury spa sessions. Even with all this, he actually only manages to spend about $6,000 in the effort. (Only?) But that’s still an increase by a factor of about six hundred. So what were the differences between the two training days, in terms of actual training quality and results? Not very much, it turns out. For example, while having a personal chef saved Nippard the effort of preparing the food himself, and the meals were certainly much fancier and tastier, the food on the ultra high-budget day wasn’t actually any better in terms of macronutrients, health, or nutrition than what Nippard put together on his ultra low-budget day. And while the fancy training coach was able to help him dial in his technique on various exercises, it ultimately turned out to be very incremental over just applying the proverbial basics. Nippard doesn’t put specific numbers on it, but my sense based on his summary was that spending 600 times more on his training probably constituted a 10% improvement, at most. Economics stresses the importance of thinking on the margin. What are some of the margins we can derive from this? One of them is pretty encouraging. The marginal cost of a nutrient rich diet that’s both healthy and robust enough to support the demands of a bodybuilding lifestyle is actually very low. Spending very little money can get you a lot of bang for your buck regarding health and fitness. And above that minimal level, increasing your budget hundreds of times over makes only a very small additional difference. That is, you reach the point of diminishing marginal returns very quickly. So, does that mean that it’s inherently a waste of money to go big in a case like this? If you can get 90% of the benefit for 1/600th of the cost, why would anyone ever go for the high-budget option? Isn’t that just a waste? Not necessarily. It would be wasteful if the increased marginal cost exceeds the additional marginal benefit. And for most people, in most scenarios, an extra 10% performance isn’t anywhere close to crossing that threshold. But in some cases, it very well might be. If you’re an athlete or a competitive bodybuilder performing at an elite level, 10% better results is an enormous difference. At that echelon of competition, 10% may very well be the gap between the person who wins the competition and someone who didn’t even qualify to compete. In those cases, the benefit of that extra 10% can be worth paying a very high marginal cost. One event I’ve participated in a few times is a 10k race called the Cooper River Bridge Run, in Charleston, South Carolina. When going, I’ve made an effort to try to prep for the run, to try to beat my time from the previous run. (Most recent result, for the 2021 race, was 41:25, better than any of my previous attempts. Hurray!) If someone showed me a massive and time-consuming training program that would improve my run time by 10%, it wouldn’t be worth it to me to take up. My goals about beating my previous times were about little more than flattering my personal vanity – and while I’m willing to pay some price to do that, the margin closes pretty quickly. But the person who comes first place in the run also wins a cash prize of $10,000. For a runner skilled enough to have a shot at that, it would absolutely be worth going through a complicated or demanding training program for a 10% improvement. Their marginal payoff is much, much higher. (Or maybe I just value vanity too little?) The more general upshot – be careful before you think someone is “wasting” their time, effort, or money on a pursuit of theirs. It’s very easy to think that the effort they’re putting into their personal passion project “isn’t worth it,” but you can’t know that without knowing that it’s worth to them. It doesn’t have to be about winning major accolades in an athletic competition – people can derive all manner of major joys from things that might seem tiny and trivial from the outside. And that’s a beautiful thing. (1 COMMENTS)

Gerard Comeau beer. Photo by the author CBC Radio has a great report on what we can learn from the Supreme Court of Canada case R. v. Comeau, popularly known up here as the “Free the Beer” case.  In 2012, Gerard Comeau loaded his car with beer (and whiskey and liquor) in Quebec and headed home to New Brunswick, where the booze costs more. Five years later, he was at the Supreme Court. The reason is that he’d brought back more beer than was allowed under provincial liquor laws, unwittingly running afoul of interprovincial trade barriers.  Compared to tariffs, interprovincial trade barriers might seem like small fry. But as developed countries look to diversify trade relationships, non-tariff barriers such as those affecting Canadian provinces will loom large. It sounds crazy that Canada has interprovincial trade barriers, but it’s not as dramatic as it sounds. There are not customs checkpoints between provinces and tariffs between provinces are prohibited by the Canadian constitution. Article 121 states: “All articles of the growth, produce, or manufacture of any one of the provinces shall, from and after the union, be admitted free into each of the other provinces.”   Rather, the IMF classifies barriers to internal trade in Canada into four categories: natural (including geographic), prohibitive (as with alcohol sales), technical (weight and dimension standards), and regulatory and administrative barriers (permits/licensing, safety certification).  The report states (p.4) that “labor mobility, business regulation, transportation, markets for drugs, agricultural products, food and alcohol products, and until recently, government procurement, have been cited as areas mostly affected by trade barriers.” These are all provincial responsibilities. The Supreme Court’s decision found that while Comeau had run afoul of the New Brunswick Liquor Control Act, which “makes it an offence to ‘have or keep liquor’ in an amount that exceeds a prescribed threshold purchased from any Canadian source other than the New Brunswick Liquor Corporation”, that Act does not count as a ban on interprovincial trade. Instead, a constitutional provincial power (regulating and controlling alcohol) has unavoidable secondary effects on trade that could only be precluded by unconstitutionally centralizing power.  New Brunswick only allows alcohol to be brought into the province through the New Brunswick Liquor Corporation. There is a small personal exemption to this rule, and Gerard Comeau had brought back more than his exemption allowed. Because the legislation under which Comeau was charged had to do with regulating alcohol within the province and not preventing interprovincial trade, Comeau lost.  The Supreme Court agreed that trade barriers as trade barriers within Canada are unconstitutional. No province can impose tariffs or blanket bans on goods from within Canada to encourage buying local. But the Court wasn’t willing to interfere with provincial jurisdiction. The court’s ruling says that the incidental cost to interprovincial trade of provincial control of importing and regulating alcohol is the cost of protecting the powers granted exclusively to provincial legislatures. It might be a bad idea for New Brunswick to manage alcohol sales through a monopoly, but doing so is a provincial decision and the province has to decide to give up the monopoly. Provinces have the right to set their own safety or technical standards based on their perceived needs, and this prevents some goods and services from moving seamlessly between provinces. They are allowed to set regulations around alcohol, nicotine, and cannabis, which have the same effect. To eliminate technical and regulatory barriers despite the provinces’ wishes, a single standard would have to be imposed. To eliminate prohibitive standards, the provinces would have to lose their power to strictly control goods like alcohol, nicotine, and cannabis.  Interprovincial trade barriers aren’t special in this. The arguments about interprovincial non-tariff trade barriers mirror international arguments about harmonizing regulation to allow or encourage trade between sovereign states that want to set their own rules. Regardless of the driving force behind technical, regulatory, and administrative regulations—whether or not they are good regulations worth the economic cost—they also restrict the free movement of goods and services between jurisdictions. This creates the right dynamics for bootlegger-baptist coalitions that can further entrench barriers. This is true even if we accept that the standards are good standards worth the cost.  Tariffs have a dramatic effect, but they’re easy to remove. The issues affecting interprovincial trade in Canada are thornier. This is on full display in premiers’ renewed commitment to eliminate interprovincial barriers by 1 June 2025: except in Quebec (linguistic concerns); excluding food; most First Ministers commit to direct-to-consumer Canadian alcohol sales. No one will move on to eliminate a supply management system (alas) that has delivered stable egg prices while the U.S. market has been so volatile—even though it affects interprovincial trade.   Canada’s difficulty freeing trade even within its own borders illustrates the tension between the desire for free trade and commitment to decentralization. It isn’t enough that the economic benefits would be substantial—though it may become enough if a full trade war erupts. All of these policies have reasons behind them that provincial voters support that have nothing to do with protectionism. There are similar issues facing all jurisdictions pursuing freer trade.  Freeing trade means negotiating between the competing liberal values of free trade and decentralized power. Those committed to freer trade have to keep that in mind and be clear-eyed about real trade-offs to free trade. We have to show why it’s worth it anyway. (0 COMMENTS)

I’ve run two installments from the Social Security chapter of my book The Joy of Freedom: An Economist’s Odyssey. Installment one was “Social Security is a Ponzi Scheme,” March 11, 2025. Installment two was “Flawed from the Start and Ponzi versus Stocks,” March 14, 2025..   Here’s the final installment. Of course, all the numbers are dated. I wrote this in late 2000 or early 2001. Also, reform is much harder now than it would have been when I wrote this chapter.   The Injustice of Social Security Imagine that someone takes a certain percent of your income every year and promises to give it back with some accumulated interest when you reach 65. There’s only one problem: You don’t think you’re going to reach age 65 because you’re now 29 and you have AIDS. You desperately need that money now to pay for medical bills, rent, and meals, but that person won’t let you have it. I have just described how the Social Security system works. No matter how desperately you need that money now, the government won’t let you have it. If you applied to a Social Security office for a form to exempt you, the employees there would refuse to give it to you because no such form exists. There is no exit. You are locked in, and as far as the federal government is concerned, your desires, needs, and interests literally do not matter. The AIDS example is extreme. There are millions of less extreme cases, cases of people with bad health who are unlikely to live to collect much in benefits. One such group is cigarette smokers, whose life expectancy is years less than the life expectancy of nonsmokers. Though smokers can expect to collect fewer years of Social Security benefits than nonsmokers will, they don’t pay a lower tax rate on their earnings. Another large group of people who can expect to live substantially shorter lives is black men. In 1996, according to the insurance Web page www.insure.com, a 40-year-old black man could expect to live until age 71, compared to 76 for a white 40-year-old man. In other words, the black man could expect to collect Social Security for about 5 years (the age for receipt of full benefits will be 66 by the time he retires) versus 10 years for the white man. Another injustice arises from the way the Social Security system treats workers in state and local government, who are the only people left who can be exempt from Social Security. When retired state or local government employees spend 10 or more years in jobs covered by Social Security, they still qualify for Social Security benefits. I do not advocate that Social Security be extended to them at the start of their working lives—the solution, when you have a deep hole, is not to throw people in it. I simply point out that state and local government workers have an unfair advantage over the rest of us. Social Security is Not Guaranteed No Matter How Much You’ve Paid In July 1956, Ephram Nestor, a Bulgarian immigrant who had lived in the United States since 1913, was deported from the United States for having been a Communist 17 years earlier. Between December 1936 and January 1955, Nestor and his employers had paid Social Security taxes. In 1954, Congress passed a law providing that any person deported because of past Communist membership would be cut off from Social Security benefits. Nestor sued—ironically, given his Communist past—on the grounds that his rights were being denied. (Communist governments regularly trampled on people’s rights and murdered millions of innocent people.) The Supreme Court, in Nestor v. Flemming, found, equally ironically given their presumed anti-Communism, that Congress could do what it wished, and if that meant cutting off people who had paid into a fund that they had mistakenly thought guaranteed them a pension, that was just too bad. Of course, the Supreme Court dressed it up in fancier language than I’m using, but the tone was remarkably similar. Here’s one of the Court’s key sentences: To engraft upon the Social Security system a concept of “accrued property rights” would deprive it of the flexibility and boldness in adjustment to ever-changing conditions which it demands and which Congress probably had in mind when it expressly reserved the right to alter, amend or repeal any provision of the act. In other words, too bad. Abolish Social Security in Slow Motion The first step is to recognize that we have been lied to. There is no trust fund, Social Security is a Ponzi scheme, and it’s a lousy deal for almost everyone. Therefore, the best solution to these problems is to abolish Social Security. That way, we could be free to decide when, how much, and in what form to save. We don’t have that freedom now. Those of us who decide to invest in stocks linked to such broad indexes as the Standard & Poors’ 500 or the Russell 2000 are likely, over time, to accumulate a multiple of what we would get from Social Security. Those who want to invest in bonds because they fear the ups and downs of the stock market could do so. Those who want to invest by buying a rental property could do so. Those who wish to save only a little for retirement and to work through their sixties and seventies could do so. The great virtue of freedom is that it would allow each of us to make decisions about how we want to spend our money. It’s true that the vast majority of us aren’t experts on how to invest our money. But we can hire experts, which is what we do when we invest in mutual funds. Moreover, there is one issue on which each of us has incredible expertise that no one else shares: Each of us knows what we want. Absent Social Security, would people save for their own retirement? Many people are skeptical because those on the verge of retirement save so little: In 1991, for example, the median financial assets of households with heads aged 55 to 64 were only $8,300, and the median net worth, including the value of the home, for all households headed by someone under age 65 was only $28,000.[1] What these skeptics don’t realize, though, is that Social Security is one of the main reasons why so many people don’t save. As Martin Feldstein has pointed out, someone with average earnings over his whole lifetime who retires at age 65 with a “dependent” spouse receives benefits equal to 63 percent of his earnings the year before retirement.[2] Since such a person’s Social Security benefits are not taxed, this is equivalent to about 80 percent of pre-retirement net-of-tax income. If you think Social Security will provide for your retirement, why bother saving? Most Americans alive today would be better off if we didn’t have Social Security. But how do we get from here to there? There are many possible transitions that could benefit almost everyone. Here’s a rough sketch of one such transition. It is in two parts. The first part consists of steps that should be taken even if the goal is just to preserve Social Security and avoid steep tax increases on younger generations. The second part is composed of measures to abolish Social Security in slow motion. First, simply to preserve Social Security without increasing taxes, the three steps needed are to (1) increase the retirement age, (2) change the benefits formula, and (3) change the indexing of benefits. The current age for receiving full Social Security benefits is 65, but that number was set in the 1930s. Back then, 65-year-old men could expect to live an extra 12 years, and 65-year-old women could expect to live 13 more years. Today those numbers are 15 and 19 respectively, and work for virtually everyone is much less physically demanding than it was then. The age for full receipt of Social Security benefits is already slated to rise to 66 in 2009 and 67 in 2027. But this could be raised in stages to 70 by, say, 2017, giving people ample time to adjust their plans. Along with this increase, the early retirement age for partial benefits could be raised from 62 to, say, 66. Raising the retirement age, of course, further hurts smokers, black men, and other people who tend to die earlier. Therefore, a related reform should be an option under which anyone who wants it can receive the equivalent of, say, six years of benefits as a lump sum. That way, those who expect to die early would not be left high and dry, as the government leaves them today if they have no dependents. The benefit formula could also be altered. Built into the benefit formula are steady increases in real benefits as long as real wages rise. The average annual benefit per retiree in 1995, for example, was $7,510. According to Feldstein and Samwick, if there were no change in the system, the average annual benefit (in 1995 dollars) will be $8,790 in 2016 and $9,290 in 2023.[3] Instead, benefits could be frozen in real terms so that the average benefit in 2023 is no higher than it is today. Finally, Social Security benefits are indexed to the Consumer Price Index. The Boskin Commission, appointed by the federal government to study the CPI,[4] found that the CPI overstated inflation by about one percentage point a year. Reforms implemented in response to the Boskin Commission’s report have cut this overstatement to about half a percent a year. The government could start now to index to the CPI minus this half percentage point. If it did so, then this reform, combined with the reform to CPI calculations that has already taken place, would cause benefits to grow less quickly. These changes taken together—raising the retirement age to 70, indexing benefits to a truer measure of inflation, and freezing real benefits—would eliminate the funding crisis and would probably allow some modest decreases in the Social Security tax rate today. Then people should be allowed—allowed, not forced—to save the difference between the old payroll tax and the new lower payroll tax in an Individual Retirement Account. Even with all those changes, though, we would still be left with a government-run compulsory Ponzi scheme. But government is not our parent; it simply has no business telling us how much we must save for our old age. It has even less business pooling our “savings” (taxes) with other people’s taxes and then deciding how much we get back, based loosely on how much we paid in (don’t earn too much), our income when retired (don’t save too much), our marital status (marry someone who didn’t pay Social Security taxes), and our age (live long). Therefore, we should end Social Security gradually. Why end it gradually rather than immediately? Because Social Security is a chain letter that makes many current and future retirees depend on being able to tax younger generations in order to get something back for their taxes. That, as Franklin Roosevelt rightly figured, is what makes the transition problem so tough. The only way to end the program is to start sometime. The government could start by telling everyone under a certain age, say 30, that he or she will not collect Social Security. Then cut the payroll tax rates of people under 30 to, say, 5 percent (split between employer and employee) of their incomes. Allow these younger people to save the 5.6-percentage-point difference (between the old 10.6 percent tax and the new 5 percent tax) in an Individual Retirement Account. If polling data are to be believed, 70 percent of Generation X thinks that Social Security will not be there when they retire. That means that 70 percent already think they’re paying taxes for nothing in return. The bad news is that my proposal merely confirms their suspicion; the good news is that it cuts their tax rate as a bonus. Social Security would then be virtually abolished in about 60 years. Such a transition is not ideal for young workers, who would do better if they could invest the whole 10.6 percent. So, if I had been advising Franklin Roosevelt in 1935, I would have said, “Franklin, don’t do this.” Unfortunately, in 2001, we’re trying to plan our way out of the mess that this Machiavellian man created. Under this transition, people under 30 would continue to pay into a system from which they would get nothing. It sounds unfair that people under age 30 would be paying for nothing—and it is unfair. But it’s not worse in principle than making them continue to pay a higher payroll tax into a system from which they can earn a very low—or even negative—rate of return. Moreover, those who took the amount by which their payroll tax was cut and invested in stock-index funds would likely end up better off than if the current system went on unchecked. Consider, for example, a worker who decides, at age 20, to invest all of his or her 5.6 percent in stocks, does so until age 67, and reinvests dividends along the way. Then, if the stock fund yielded a real return of 7 percent, he or she would end up with annual retirement income equal to 122 percent of his or her pre-retirement income, versus the much smaller 42 percent that is promised under current law, and the even smaller 29 percent that is payable with the current Social Security tax rate.[5] That same worker, if he or she invested in a 50/50 mix of stocks and bonds yielding a return of 5 percent, would end up with retirement income equal to 56 percent of pre-retirement income, which is still well above what he or she can get from Social Security.[6] I would add one other reform. I would allow anyone who is at least 45 years old and who has paid Social Security taxes for at least 10 years to immediately leave the Social Security system. A person who left would never be allowed back in and would give up all claim to past taxes paid and future benefits; but he or she would no longer pay Social Security taxes. I haven’t actuarially costed out this proposal. I don’t even know how it would affect me. But here’s one thing I do know: If this choice were offered to me, I would take it in a New York minute. I wouldn’t bother to compute the amount I would lose from no longer qualifying for Social Security and the amount I stand to gain from never again paying Social Security taxes. Why would I, a rational, numerate, analytic economist, not make these calculations? Because I value freedom highly, and I would give up a lot not to have the federal government treat me like a helpless, irresponsible waif. (But if you wait and give me the choice when I’m say, 55 or older, I’ll do a much more careful calculation.) I might be extreme in this respect, but I’d bet a few million other people are like me. With us out of the system, the federal government loses our tax revenues for the next 20 years—but it doesn’t need them as much during this period because it will collect payroll taxes in excess of benefit payouts. Then, when the government faces a financial crunch during the 2020s and 2030s, it will not have to pay us benefits. One Possibly Bad, and Two Definitely Bad, Proposals for Social Security Reform Some economists and politicians who have studied the long-run problems with Social Security have advocated two other ways to change the system. One change is privatization, whereby the government lets people out of a substantial portion of the payroll taxes they pay and forces them to save the difference in a personal savings account. There are two differences between privatization and my proposal for abolition. First, under virtually all of the privatization proposals, people would be forced to save. So such proposals do little for those who wish to spend their money through their lifetime and to work beyond normal retirement, or for those who are ill now and want to use their money for health care. The government is still left dictating to people how much, and when, they should save. If a 40-year-old would rather spend that money on a trip to California or to Europe, for example, he or she cannot. The government says he or she must save and is willing to enforce that at gunpoint. The second problem is that most such proposals would cut the payroll tax by a larger amount than under my proposal, and because they don’t change the retirement age or adjust the benefits formula or the over-indexing of Social Security, they would leave the system with a large shortfall between payroll taxes collected and benefits paid out to current recipients. Some people have suggested that the federal government sell its land and other assets as a way of making up the shortfall. Asset sales are an excellent idea, but their power should not be overstated. Pete Peterson, chairman of the Blackstone Group, a private investment bank, estimated that the federal government’s assets, as of September 1995, were worth $2.3 trillion, compared to unfunded liabilities for Medicare and Social Security totaling $15.3 trillion.[7] Other privatization advocates, especially economists, have considered the huge shortfalls in the future and have detailed how the transition would be handled. Here’s where privatization gets nasty because, in all these proposals, taxes would increase dramatically and very soon. Take, for example, Kotlikoff’s proposed Personal Security System. He would end the portion of the current payroll tax that is used to fund old-age benefits.[8] This is not a bad idea, but to finance the transition, Kotlikoff would impose a national sales tax at a rate of close to 10 percent. The rate would fall to about 2 percent, claim Kotlikoff and Harvard economist Jeffrey Sachs, within 40 years.[9] When’s the last time you’ve heard of a sales tax rate falling that much? In U.S. history, sales tax rates have almost always gone in one direction, and that direction is up. Five pro-privatization members of President Clinton’s advisory council on Social Security voted for a plan formulated by Carolyn Weaver of the American Enterprise Institute and Sylvester Schieber of Watson Wyatt Worldwide that would increase taxes. They would divert 10 percentage points of the payroll tax, half of which would finance a flat benefit paid to all retiring workers and half of which would go into a personal security account. To make up the shortfall, Weaver and Schieber advocate an additional payroll tax of 1.5 percentage points that would last 70 years, and additional federal debt of $1.2 trillion.[10] Privatization advocates worry that if nothing is done now, taxes will rise even more in the future. But if nothing is done now, then benefits will be cut later because there is simply no way that the U.S. government can get away with imposing payroll tax rates of 18 percent. In fact, one of the main supporters of the current system, former Social Security Commissioner Robert Ball, has said that he fears a taxpayer revolt against current payroll tax rates.[11] The irony is that many believers in freedom who would otherwise lead that revolt are instead advocating their own tax increase. They would replace the possibility of a major tax increase later with the certainty of a tax increase today. Would-be privatizers should instead draw a line in the sand and say, “No more tax increases.” Then those who want the current system would have to deal. Social Security is a mess. But as Martin Feldstein has said, when you’re in a hole, at least quit digging. The second bad proposal, which many people have advocated recently, is to have the government invest in stocks. The problem is that the government’s Social Security tax revenues are so huge that within 10 years or so, the federal government would own a substantial fraction of U.S. stocks. What government controls it has great difficulty leaving alone. The federal government would almost certainly use its power to dictate business policy for many of the firms in which it held substantial ownership. Also, the government could use its funds to make bad investments. This is what Pennsylvania’s government employees’ pension plan did in the 1970s when it financed a Volkswagen plant that closed just a decade later. The third bad proposal, made by Pete Peterson and others, is to impose an “affluence test” for receipt of Social Security, Medicare, and other benefits. If your income exceeds $40,000, according to Peterson’s proposal, you would lose 10 percent of your federal benefits for every additional $10,000 of income you make.[12] So, a family making $50,000 and receiving $12,000 in federal benefits would lose $1,200. A family making $100,000 and receiving $12,000 in benefits would lose 60 percent of that $12,000, or $7,200. Aside from the difficulty of enforcing such a plan (“Mr. Smith, we just learned that your income last year was $10,000 higher than the previous year; please send us a check for $1,500, which is 10 percent of the cost of your hip replacement.”), there is a fundamental moral objection. The affluence test would penalize people who make the same income as others their whole life, but who save more and earn a return on these savings. Someone who never saved, but instead spent money on restaurant meals, nice cars, or trips to Europe would benefit more than someone who gave up some of life’s luxuries to build a nest egg. The tax system—with taxes on dividends, interest, and capital gains—already discriminates against savers. An “affluence” test would increase this discrimination. You might argue that events outside people’s control, such as high medical bills or large inheritances, are the cause of much of the disparity in wealth of people nearing retirement. But according to economists Steven Venti and David Wise, such uncontrollable life events have little impact on people’s wealth at retirement. Instead, most of the differences in people’s wealth in their later years are due to one simple factor: the percentage of their income that they chose to save.[13] The affluence test is also economically objectionable: It would deter retirement saving, which is, after all, one of the main ways that people save. Conclusion The government cannot be trusted with our pensions. Government officials have little incentive to care for us as well as we would care for ourselves. They are particularly bad when it comes to long-term planning because they rarely look beyond the next election. And when they do look far ahead, as Roosevelt did, it can be more for mischief than for good. Johnson and Nixon increased Social Security benefits dramatically, even though this meant that taxes would have to increase dramatically in the 1970s and 1980s. They didn’t seem to care a whit about that. Because the Social Security system is unsustainable in its current form, simply to keep the system in existence without further tax increases requires that the government gradually raise the retirement age to about 70, apply more accurate inflation indexing to benefits, and reduce the real growth in benefits that is currently scheduled to occur. But that would still leave us with an expensive Ponzi scheme that is always threatening to get worse. It would also leave us with a system that arbitrarily and unjustly takes wealth from black men, smokers, high-income people, people with AIDS, and single people, and gives to white men, nonsmokers, low-income people, and married couples with one partner not working. It also would keep the government in the position of making our pension choices for us. Therefore, the Social Security system should be abolished. This can be done so as to allow retirees and those within 30 years of retirement still to get benefits, while freeing younger people to save for their own retirement and be better off than they would have been under the current system. Our pensions should not be based on a scheme that, when carried out by private parties, causes them to be sent to jail. [1] Martin Feldstein, “The Missing Piece in Policy Analysis: Social Security Reform,” National Bureau of Economic Research, Working Paper #5413, January 1996, p. 13. [2] Feldstein, “Missing Piece,” p. 13. [3] Feldstein and Samwick, “Transition Path,” p. 22, Table 2. [4] “Toward a More Accurate Measure of the Cost of Living,” Final Report to the Senate Finance Committee from the Advisory Commission To Study The Consumer Price Index, December 4, 1996, p. ii. [5] Derived from Stephen J. Entin, “Private Saving vs. Social Security: Many Happier Returns,” IRET Congressional Advisory, September 4, 1996, No. 56, Institute for Research on the Economics of Taxation. [6] Entin, p. 4. [7] Peterson, Will America Grow Up?, p. 18. [8] Laurence J. Kotlikoff, “Privatizing Social Security at Home and Abroad,” American Economic Review, May 1996, Vol. 86, No. 2, p. 368. [9] Kotlikoff and Sachs, “It’s High Time to Privatize,” Brookings Review, Summer 1997, p. 22. [10] Bob Davis, “Senior Project,” Wall Street Journal, July 9, 1996, p. A14. [11] Bob Davis, “Senior Project,” p. 1. [12] Peterson, Will America Grow Up?, p. 167. [13] Steven Venti and David Wise, “Choice, Chance, and Wealth Dispersion at Retirement,” National Bureau of Economic Research, Working Paper No. 7521, February 2000. (0 COMMENTS)

Feedback on exams and papers–grades and comments–should be more than an assessment. It should point the way to improvement. So argues educational consultant Daisy Christodoulou, emphasizing that actionable feedback has to be more than comments scribbled in the margins of a paper or at its end. Listen as she speaks with EconTalk’s Russ Roberts about […] The post How Better Feedback Can Revolutionize Education (with Daisy Christodoulou) appeared first on Econlib.

I see two problems with the term “correction”. Yes, there is a sense in which any change in market prices is a “correction”, as with new information the previous price becomes inappropriate. But that’s equally true of an increase or a decrease in market prices. In contrast, the term market correction tends to be used asymmetrically, for price declines but not price increases.The second problem is that market corrections are often viewed as a healthy change, like correcting a mistake that you made on an exam.  In fact, the vast majority of stock market declines reflect unfavorable developments.  Only in rare cases where price declines reflect events that are good for the country but bad for business can we say that a stock market decline is a sign of health.  And stock price declines that are due to trade wars are certainly not in that category. Here’s Bloomberg: Treasury Secretary Scott Bessent, a former hedge fund manager, said he’s not worried about the recent downturn that’s wiped trillions of dollars from the equities market as the US seeks to reshape its economic policies. “I’ve been in the investment business for 35 years, and I can tell you that corrections are healthy, they are normal,” Bessent said Sunday on NBC’s Meet The Press. “I‘m not worried about the markets. Over the long term, if we put good tax policy in place, deregulation and energy security, the markets will do great.” Market prices tend to roughly follow a random walk.  That means a decline in the current price of stocks also represents a decline in the future expected value of stocks.  The stock market is forward looking, and already incorporates any expected futures gains from trade wars.  If we are not now seeing those gains reflected in the stock market it is probably because they do not exist. Back in 1930, President Hoover agonized over whether to sign the Smoot-Hawley tariff bill.  On a Sunday in late June, he decided to sign the bill, despite receiving a letter signed by over 1000 economists opposing the tariffs.  The next day, the US stock market suffered its largest one-day decline of 1930.  Those waiting for a rebound in the market–the Scott Bessents of 1930–had a long wait.  Stocks didn’t regain June 1930 levels until mid-1955, a quarter century later.   To be clear, I’m not making any predictions about the market, as President Trump has a habit of advocating trade wars and then backing away at the last minute.  In addition, many other factors beyond tariffs affect the stock market.  I still own stocks and it wouldn’t surprise me if they bounced back.  Nonetheless, it is dangerous to assume that your policies are beneficial in the long run, when the markets suggest exactly the opposite. (0 COMMENTS)