Linda Lutton on Bush tax cut

Great Debates
241

About PK’s politics ,like I said, he is centre-left ie. a little left of centre. He strongly supports free trade for instance which is IMO the defining economic issue which separates the left from the centre in the US. His criticisms of Bush are for the most part rooted in solid economics though he does get a bit emotional sometimes. But he was exactly the same when he was lambasting Reich et al. Read some his older columns on his web-site. Like I said some time ago many of his criticisms about the Bush tax cut have been repeated by the Economist magazine which endorsed Bush.

And for crying out loud the NYT isn’t far-left by any stretch of the imagination. Far-left would be people like the Socialist Party. Somewhere between left and far-left is someone like Nader. Left would be Ted Kennedy. The NYT editorial page and say Clinton would be centre-left.

Surely you understand that there are more gradations in American politics than conservative and “far-left”.

242

Kimstu, you may recall that I gave a list of 4 quotes showing that PK was twisting facts to promote his POV. It was part way down on this page: http://boards.straightdope.com/sdmb/showthread.php?threadid=82400&pagenumber=3 Above I gave two, not one, indications of his bias, which overlapped with one of the 4 earlier points. You never responded to any of these points, except to claim that the misleading 30% figure was literally true as a high end possibility. Actually 30% wasn’t even literally true as a high end, unless you assumed that he was discussing lifetime costs rather than annual costs. CP at least mentioned that PK ought to have included the entire range.

Rather than respond to my points, you used the words, “rather prejudiced and obsessive.” Maybe I am excessively concerned about truth. I belong to CSICOP. I’ve taught ethics courses for my actuarial society. I take pains to see that my writings fairly represent the situation, which may be one reason why several of them are required readings. If these things deserve criticism, then I plead guilty.

Can obsessive concern for truth really be a bad thing on the Staight Dope? :rolleyes:

243

december: * […] you may recall that I gave a list of 4 quotes showing that PK was twisting facts to promote his POV. […] Above I gave two, not one, indications of his bias, which overlapped with one of the 4 earlier points. You never responded to any of these points […]*

Because they too were trivial nitpicks that Tejota and CyberPundit, among others, answered very well.

  • […] except to claim that the misleading 30% figure was literally true as a high end possibility. Actually 30% wasn’t even literally true as a high end, unless you assumed that he was discussing lifetime costs rather than annual costs.*

Why yes, considering that I have never seen or heard of a retirement fund in the history of planet Earth whose administrative costs used up 30% of funds per annum (!!!), I did make so bold as to assume that Krugman had to be discussing lifetime costs. How audacious of me.

*CP at least mentioned that PK ought to have included the entire range. *

CyberPundit also stated very clearly that Krugman’s statement “is quite accurate as far as it goes” and agreed with me that you have no defensible basis for attacking his credibility.

*Maybe I am excessively concerned about truth. *

I think you can stop worrying about that: an excessive concern for truth does not seem to be a predominant feature of most of your posts.

244

Looks like PK has his head planted firmly in his posterior.

The fact is that the federal government already operates large indexes for the Federal Employee Thrift program, and has historical expenses for several of its funds listed on this website.

http://www.tsp.gov/features/chapter05.html

Current offerings include a Common Stock fund ©, a Gov’t Securities fund (G) the (I) Fund, for International stocks, and the (S) fund.
Actually, the government contracts with Barclays’ Bank to run the funds. Individual accounts are maintained.

Expenses on the C fund run a miniscule 6 basis points. The cheapest index fund out there, the Vanguard 500, charges 3 times that. The G fund even less. Government employees get a great deal.

There’s no reason we need expect a similar, index-based SS plan to cost any more. 30% of fund returns is insanely high, and no intellectually honest observer would pick that figure out of the air and call that representative of SS privatization in ANY way when we already have a precedent in practice and in operation since 1988- so it has a 13 year track record of steadily decreasing costs. Surely PK is aware of this. Why did he choose to leave it out?

Indeed, the C fund trailed its index by only 3 basis points, or 0.03%, over the last decade…which over a 30 year career will add up to only a fraction of 1% of total balance at retirement.

So the “administrative costs” argument has been pretty much thoroughly debunked, if you go with a system I’ve advocated, which restricts investors to a few major indexes.

245

By the way, according to the SEC’s fund costs calculator, if the C fund can match its record on expenses over the last decade, relative to the index (net 0.3%, or 3 basis points) and assuming a 9% annual return on a 10,000 investment over a 30 year career, expenses will total 0.9% of a pure theoretical index with no trading costs.

If you discount the arbitrage advantages, and just count expenses, it looks like you get 1.8% net expenses over a 30 year time horizon. Still a great friggin’ deal.

In contrast, the same investment in the Vanguard 500 Index fund, the low-cost leader in the mutual fund world, would cost 5.56% of the total after 30 years.

A typical mutual fund with about a 1% expense ratio would cost about 35%. But why be typical when there are so many good indexes around to choose from?

No, PK got caught with his hand in the rhetorical cookie jar. Any assumptions of 30% costs are simply red herring straw men scare tactics. What we’re really looking at is between 0.9 and 1.8% of total portfolio costs after 30 years.

246

panzerman,

Sounds great but what I read suggests there are a few catches in there:

(1) These charges are not the only source of revenue to pay the expenses of the fund…Rather, they also use the monies of employees in the fund (from automatic government contributions) who leave the government before they are vested. The wording in fact suggests that this forfeiture of unvested money is the prime source of revenues. Here’s the relevant passage:

(2) Your claim that the Fund C had expense ratio of only 0.06% is true for year 2000. However, if you look over the history of the fund, the ratios have been as high as 0.29%, so using this figure is a bit deceiving. Admittedly, the expense ratio has been dropping over the years but this may have everything to do with my first point…i.e., that these charges are not the main source of revenue.

(3) Although you claim that the funds are managed privately by Barclays, where did you see this? The information I saw didn’t mention this and made it sound as if only expenses had to be paid…and not any profits to the fund managers. This would also explain why 0.06% expense ratio is, by your own admission, 3 times lower than any private fund around.

In conclusion, I really don’t see how this proves much of anything, at least without further info, like what portion of expenses are paid by forfeiture vs. the expense ratio.

247

<<Rather, they also use the monies of employees in the fund (from automatic government contributions) who leave the government before they are vested.>>

No problem. Same deal can extend to SS system investors. We know from actuarial tables what percentage of contributors will die before retiring. It would be a fairly simple matter to appropriate a certain percentage of deceased contributors’ accumulated savings before passing the rest on to heirs. Maybe that’s similar to the capital gains rate investors have to pay anyway. What percentage that would be I would leave to actuaries to decide.

Heirs would still get a better deal than they do now, and contributors would get better returns. The government gets a capital gains windfall (or an income tax windfall) which is in either case far, far greater than they could possibly get by taxing SS benefits. Everybody wins.

In any case, the expenses are still well under 1%.

1% is much, much smaller than the spread between SS benefits today and the historical return of the S&P 500 (12%).

Worst case is going to be about 10 basis points in expenses total. My own employer manages to do this in an S&P 500 index fund within my 401k. AND run a help line everyday–something the SS administration wouldn’t neccessarily have to do. Even in the most outlandishly worst case–10 basis points, Paul Krugman’s argument is pretty much discredited.

<<<(3) Although you claim that the funds are managed privately by Barclays, where did you see this? The information I saw didn’t mention this and made it sound as if only expenses had to be paid…and not any profits to the fund managers. This would also explain why 0.06% expense ratio is, by your own admission, 3 times lower than any private fund around. >>>
See this press release: http://www.tsp.gov/curinfo/press-release_investment-mgr.html

<<(2) Your claim that the Fund C had expense ratio of only 0.06% is true for year 2000. However, if you look over the history of the fund, the ratios have been as high as 0.29%>>

Yep. That’s because there are certain fixed costs to running a fund. As assets under management increase, expenses can drop. Obviously the stock market has been appreciating over the life of the fund. And obviously people have been contributing. So the size of the fund of course has grown exponentially over its life.

If the program is expanded to include SS contributors, then it follows that expenses can be lowered even more, until management costs become insignificant, and all you have is trading costs. At that point, things begin to level off.

<<<In conclusion, I really don’t see how this proves much of anything, at least without further info, like what portion of expenses are paid by forfeiture vs. the expense ratio.>>>

It pretty much proves that Paul Krugman is distorting the picture. His 30% expense figure is simply not realistic.

My own employer, contracts with Fidelity to run an S&P 500 index fund (Called the US Equity Fund) for 10 basis points. There’s no forfeiture issue there…company matches don’t go into the fund. The whole kit & kaboodle can be run for 10.

THAT’S the expense ratio we should be looking at.

248

So, let me get this straight…We are blasting PK because he didn’t say in his column: “If we come up with some bizarre scheme to use some of the money of people who die before reaching 65 to pay funds’ expenses and if we restrict investments to indices rather than any sort of managed funds, then we should be able to lower this 30% figure quite a bit.” Okey-dokey. Boy, that lying SOB!

By the way, I still think you are paying fast-and-loose here. Right now, SS benefits transfer to a spouse when the one getting the benefits dies doesn’t it? But, even more to the point, it seems that you are doing some sort of counting here where you put things into one column and not another. As others have pointed out, the best way to look at the net results is to consider what money is actually being taken out of the “pie”…Fancy shufflings and changing the tax code could make it look like expenses are lower but doesn’t mean they really will be. The money has to come from somewhere.

Again, SS is not an investment plan. What people pay in today is being used to pay benefits for people today. If you want to change that, then you are going to have to figure out how to pay today’s benefits or what benefit cuts you will make.

Well, after looking at the 401K fund for my employer, I will tend to agree with you that for the case of an index fund, it does look like expense ratios on this order can be obtained. For my 401K, the expenses are 0.11% for the S&P index fund, 0.17% for the Lehman Brothers Bond Index Fund, 0.13% for the Russell 2000 Small Stock Index Fund, and 0.23% for the Non-U.S. Stock Index Fund. So, over a 30 year span, we seem to be talking about roughly 3.3%–7% rather than 30%.

Once you move up to managed funds, expense ratios in the 401k go to 0.5–2.2% and in fact PK’s estimate seems pretty mid-range for these.

So, yes, I think PK’s estimate of “as much as 30%” probably should be taken to read that it would be on the order of 30% (could be even higher!) if one used managed funds but probably more on the order of 5% if one used only index funds. [This alll of course assumes that the management is done in a way that allows us to take advantage of the economies of scale that come from managing funds for, say, 60,000 employees in the case of my company…which hopefully it would be. I think expense ratios for funds I invest in myself tend to run a bit higher.]

249

We’re blasting PK for mis-representing a CBO report, which gave a range a 1% to 30% lifetime admin cost. We’re also blasting him because he knew that 1% was probably close to correct, but he mentioned only the 30% figure.

jshore, suppose a used car salesman told you that he had an unpublished report showing that a car would get up to 30 miles per gallon. Suppose you later found out that:

– the report’s actual estimate was 1 to 30 mpg, and
– the salesman knew that this car’s milage was actually close to 1.

Wouldn’t you feel misled?

250

But, to say that he knows it is more like 1% isn’t accurate either. I haven’t seen any persuasive argument here yet that it could be that low. I am willing to give you roughly 3-7% but that’s only if we restrict to index funds.

251

<<<I am willing to give you roughly 3-7% but that’s only if we restrict to index funds.>>>

Ok. So we’ve established that Paul Krugman f*cked up by a factor of 10. <rolling eyes> And y’all are still trying to defend him???

At any rate, I think we absolutely should restrict SS contributions to established index funds with low costs. I don’t have a study at my fingertips, but I will posit that vast majority of returns over the long haul are explained more by asset allocation than by stock selection.

I believe we should enact privatization legislation as soon as practicable, and use the Federal Thrift Savings plan as a model. We already know it’s workable, we know what the expenses will be, we know it’s cheap, and the system is already in place.

By not acknowledging that we have a system already set up, Krugman is either ignorant or intellectually dishonest.

<<<Right now, SS benefits transfer to a spouse when the one getting the benefits dies doesn’t it?>>>

Nope.

After the death of a spouse, a widow(er) will recieve a check which is only about one half to two-thirds of the combined benefit. Since women tend to live longer, and have shorter work histories, they end up bearing the brunt of yet another flaw in Social Security.

<<<Again, SS is not an investment plan. What people pay in today is being used to pay benefits for people today.>>>

Which is precisely the problem.

252

Make that 4 to 10! And just because you would like to restrict things to index funds, that means that this should set the parameters of the debate…I.e., no one is allowed to note that the costs could be a lot higher if we don’t stick to index funds?

Well, the real problem is that, if you now decide you want to convert it to an investment plan, what you are going to do to pay the benefits today and in the near term! [Another question is what you are going to do about those folks who make poor or unlucky investments…although admittedly sticking to index funds may make things somewhat safer in this regard.]

253

pman2: So we’ve established that Paul Krugman fcked up by a factor of 10.*

Like hell. We’ve established that he said that the CBO report suggested that admin costs of SS privatized accounts could be as much as 30%, which is perfectly true. What you are complaining about is that he did not also state that certain other types of accounts (whose importance in the privatization plans that are actually being proposed for SS is, AFAIK, still completely undetermined) have admin costs that could be as low as 1%. Describing that omission as “f*cking up by a factor of 10%” is like your previous description of the quote “reduce employment by 1%” as implying a raise in overall unemployment levels from 4% to 5%. In both cases, you have simply ripped an isolated statement entirely out of all reasonable context and continued to insist that it means what you want it to mean, which is something completely different from what the context implies. And you’re accusing Krugman of playing fast and loose with the facts in order to make a point?! It is to laugh.

254

jshore: Right now, SS benefits transfer to a spouse when the one getting the benefits dies doesn’t it?

Actually, I don’t think that “transfer” is quite the right way of putting it: as I understand it, once you depart this life, your account with SS is closed, whether you were receiving benefits or still making contributions at the time of your decease. Your surviving spouse and/or other dependents are then eligible for “survivor’s benefits”, whose amount depends partly on your contribution level, but which don’t really constitute a “transfer” of assets somehow belonging to you. As you point out, SS is not a savings plan, it is a social insurance plan: you pay in premiums when you’re working and then get benefits when you’re not. No matter what stage of the process you happen to be in when you die, from that point on you don’t owe anybody and nobody owes you.

255

<<In both cases, you have simply ripped an isolated statement entirely out of all reasonable context>>
Nah. Krugman did, by flatly ignoring that the CBO study came out with a range of returns, and choosing only to deal with the worst case scenario. I was simply pointing it out. You have a problem with someone taking things out of context? Take it up with Krugman.

<<<And you’re accusing Krugman of playing fast and loose with the facts in order to make a point?!>>>

Sorry. The facts are on my side. We already have a private investment program for government employees which we run on expenses which are a fraction of what Krugman suggests. Krugman decided to omit that fact, and the fact that the CBO came up with a range of returns.

<<pman2: So we’ve established that Paul Krugman f*cked up by a factor of 10.

Like hell. We’ve established that he said that the CBO report suggested that admin costs of SS privatized accounts could be as much as 30%, which is perfectly true.<<<

…Which is perfectly deceptive.

And what so-called “journalists” at the NY Times have called him on it?

256

kimstu and jshore: If a saleman told you that a car would get “up to 30” miles per gallon and you bought it, wouldn’t you feel misled if the car actually got only 3 mpg city and 7 mpg highway? Wouldn’t you feel even worse if you learned that the salesman knew that the car might get as little as 1 mpg?

Would you ever buy another used car from that dealer? You’d never go back to him. Admit it.

And, we should never assume that a Krugman column is fair, should we?

257

[quote]

Wow, this is got to be the most dishonest argument you’ve made so far.

Let see, you’ve established that there exists a fund whose costs come mostly from taking the gains of people who quit before they vest. And that even with that, in some years it still costs .03% for vested members. (more in other years). That’s your absolute best case.

You’ve also established that for index funds, the costs are in the range of 3-7%.

But you haven’t established that only index funds are being considered by the SS commission, and thus you havn’t established that 30% is an unreasonable upper bound.

And I would absolutely agree that index funds would be the best choice for privatization. But since privatization is itself a bad idea, this would only be making the best of a bad idea.

In any case, you haven’t established that the decision to use only index funds has already been made, so you criticism of PK is unjustified.

But SS is not a savings plan, and turning it into one would destroy many of its benefits to society.

No he is not, But you certainly are.

(Bolding mine). This is not a flaw. SS was designed in a era when women didn’t work at all. There was no notion of combined benefits and thus no reduction in benefits. If the surviving spouse has his/her own income, then he/she is not a dependant, and thus is not entitled to survivors benefits. My understanding is that on the death of a spouse you get the larger of either your own benefits or survivors benefits. This is as it should be.

Bzzt! Wrong answer. Thank you for playing! There are real problems with SS that need fixing, but the fact that it isn’t an investment plan is not one of them.

tj

258

<<And that even with that, in some years it still costs .03% for vested members. (more in other years).>>

Given historical returns of stocks vs. SS, that works out to a much, much better deal for contributors.

<<<But you haven’t established that only index funds are being considered by the SS commission>>>

Don’t have to. I’ve established that only index funds are available with the federal TSB. Since my position is that we should use the TSB as a model, I needn’t concern myself with Krugman’s Red Herring.

<<But since privatization is itself a bad idea>>

That’s quite an assumption. I disagree. I believe that being afraid to privatize is a bad idea.

<<But SS is not a savings plan, and turning it into one would destroy many of its benefits to society. >>

Again, I don’t buy your unfounded assumption.

me: quote:

By not acknowledging that we have a system already set up, Krugman is either ignorant or intellectually dishonest.

Tejota: No he is not, But you certainly are.

Thanks for the ad homineim.
You won’t find me engaging in that tactic here. I invite you to follow suit.
<<There was no notion of combined benefits and thus no reduction in benefits.>>>

Well, Geez. If you’re going to seriously tell me that when a family’s check is cut abruptly cut by a third upon the death of a spouse, that isn’t a cut in benefits, I can’t help you.

259

december,

Your analogy is a really poor one. A slightly better but still imperfect analogy would be if I went to a new car dealer to ask him about a new hybrid car that that particular company had on the drawing board. Say that he (who knew as little as I about the actual final car that would be produced) then told me that he believed the car might get “as much as 30 mpg”, basing this on the fact that other companies had produced hybrid vehicles that got 30 mpg…In fact some had produced hybrid vehicles that got more like 60 mpg, while others had admittedly been producing cars that only got say 3-7 mpg.

That is a slightly better analogy.

I don’t see how someone can be calling PK dishonest because he doesn’t like the rather reasonable assumptions PK has used to come up with a high end figure on the costs of these private accounts and yet that same person persists in the intellectual dishonesty of comparing historical returns of stocks to the SS system when he knows perfectly well that that is not an appropriate comparison.

At the very least, you have the obligation to tell us how you plan to pay the additional costs of providing all the benefits to SS beneficiaries that would have been paid out of these contributions that are not coming in! Geez. You folks make “voodoo economics” look good by comparison!

260

According to this site: http://www.ici.org/newsroom/industry_issues_fees.html

  1. Equity mutual funds had an average expense ratio of 1.35% per year in 1998.

  2. The expense ratio comes down as the size of the fund grows.

From another source, Americans invest something on the order of $5 trillion in equity funds. They’ve chosen to put their own money into those funds despite the given expense ratios.

If SS offers similar funds, their costs will be lower, due to economies of scale.

There are many middle and lower-middle class Americans whose only opportunity to invest in stocks would be as a part of their Social Security.

Yet, some people say, “No, equity investing is only for the rich. You poor people can’t have that opportunity. And, you should thank us; we’re restricting your investment opportunities for your own good.”