Thursday, February 17, 2005

Social Security: The attrition war of all against all 

In economic policy circles there is an old paper by Alberto Alesina and Allan Drazen (Brad DeLong has stored a copy) that explains why countries might continue to follow infeasible or inefficient policies for quite some time. When there is a large cost to be paid for a stabilization (in their case, stabilizing a macroeconomy that has runaway government debt or high inflation) that affects different groups differently, the political parties that represent them will struggle over who has to pay the costs. There results a war of attrition between the parties, solved only when there is a political consolidation -- one party becomes a majority that can enforce the stabilization on the minority party -- or until the date of the crisis draws closer. Alesina and Drazen develop a model of a "concession function", a point in time at which the minority party gives up the war and agrees to the majority's decision of how to pay for the costs. They offer three insights into the history of stabilizations:
  1. There is usually agreement on what has to be done, but a political stalement over who pays for stabilization.
  2. Stabilization usually occurs after a political consolidation, since the burden of stabilization is often quite unequal. Consolidation means that a majority has gained power enough to put the costs of stabilization onto the minority.
  3. Successful stabilization plans are seldom the first one adopted. Failures usually occur before success.
Watching Senators Lindsay Graham and Chuck Schumer last night on Neil Cavuto's show convinced me that this model quite easily extends to Social Security. Both sides agree that there is a date, somewhere in the future, at which Social Security needs to be fixed. Schumer said, for all intents and purposes, that 2042 is too far away to worry about. Of course it will be harder to solve this later, because it will be more costly later. That does not matter to Schumer, because he figures to wait for a later date when Democrats might control Congress and the executive. Should that happen, the Democrats would want to force a solution then, imposing the costs (that trillion dollars or so that are called "transition costs" currently, and really what the fight is all about) onto a Republican minority.

Let me repeat that to be clear: The fight is over these "transition costs". If there was a way to have private accounts and no transition costs, I doubt this is much of a fight. You don't fight to the last foxhole over keeping the Social Security trust in the government's hands and away from households; Democrats in the early 1980s were all too happy to hand over tax cuts to kick off the Reagan Revolution. Giving personal accounts to millions of American families is a political winner. Democrats indeed say now they would be happy to take personal accounts as a supplement to Social Security, just not as a replacement of the current system. Why? The problem is on whom the taxes to pay the transition costs will fall. Raising the retirement age puts the cost on those in their 40s and maybe their 50s. Raising the cap on wages subject to Social Security taxes puts the cost on the upper middle class (not necessarily the same groups.) Reducing benefits puts the cost on current retirees -- something AARP is already lobbying to prevent.

So we have agreement broadly that something has to be done. We have a political consolidation in an expanding Republican majority in the House and a second-term presidency. And we've certainly had no shortage of failed attempts to save Social Security.

If Bush is to succeed -- and I've been more optimistic than most of my friends and colleagues on this -- the Alesina-Drazen approach suggests three things. First, any program has to be credible. The reason Bush is delaying, I would hope, is to be sure the plan passes not only a test of technical efficiency (that it actually solves the problem) but that it is salable to the public at large. So far, he hasn't done that, but there's yet time. Second, Bush needs to be seen as being fully committed to getting this passed, to use the political capital he said he had won in the election. On this Bush has a record of success in passing his legislation to fall back on. Last, he should be persistent. If the current Congress does not pass his plan, he will have an opportunity in 2007 to work with a new Congress, and while current betting is that the Republican majority will not expand then, it's simply too early to say. Plans that are unsuccessfully advanced at one time can pass later on.