Friday, April 01, 2005

The Titanic Battle Over Funding Social Security Rages

On the left blogsphere, a rearguard action spearheaded by our hero at the NYT, no, not Bobo Brooks---economist Krugman and his cohorts, Brad DeLong and Dean Baker carries forward the fight for sanity in figuring out the fuzzy numbers spat out by the Bush leaguers who want to "privatize" Social Security.

This effort is laudable and good, I am all for rational calculations. At the ever wonderful cyberhome of the Three Angry Bears, Friday, April 01, 2005--Mankiw on the Baker-DeLong-Krugman Paper debate rages over whether the Social Security porridge is too hot or too cold or just tepid. Actually, we all agree much of the numbers debate is wretched since the right wingers refuse to refer to anything real or sensible, they pull numbers out of their hats at random, it seems.

The quality of the debate at the liberal economic forums is awesome. I banged into this, for example, at

More precisely, recall that P0/E1 = D1/(k-g) is a constant dividend growth model, where P0 is the current price, E1 earnings at the end of the period, D1 is dividends at the end of the current period, g is the growth rate, and k is the market capitalization rate. For P/E to be constant, the growth rates of the numerator and denominator must be equal, a special case.

This can be rewritten as P0/E1 = (1-b)/[k-ROE*b] where b is the plowback ratio (i.e. 1-b is the dividend payout). One way for this to be constant is if k=ROE, but in general P/E will vary with the growth rate.

In fact, the P/E ratio is thought to (with qualifications and cautions) reflect the present value of future growth opportunities.
Mark Thoma | Email | Homepage | 04.01.05 - 2:29 pm | #

Well, plug in the numbers and let the computer spit out the answer. Of course, plg and the other posters immediately get down to the dirty work of trying to figure out what numbers to plug in and this is a crucial element. What goes in determines what goes out.

The Bush people plug in numbers hoping to fool people. They admit, if you corner them, their formulas will cause real economic pain...for the working class. They won't admit that this will be a Fatted Goose for the rich executives! This entire enterprise is basically a looting expedition. Frantic attempts at fooling workers into thinking they will get a four trillion dollar free lunch is saddening. There is no four trillion dollars. Or rather, if this money must materialize, it must first pass through Chinese and Japanese banks and then we pay them back on top of trying to live off of the investments after paying Peter, Paul and Mary.

Looming over this debate is the price of fuel. Tonight, it shot up nearly four percent. Nearly sixty dollars a barrel and going, going, gone. We have several urgent crisises occuring simultaneously. There is the budget crisis which is self created when Bush cut taxes on everyone especially the very rich, there is the trade deficit, we are running up a historic amount of personal debt so we can buy overseas, and there is the oil crisis/oil war. All these were aggravated by Bush choices that proved disasterous.

Fixing all of this is much more urgent than fixing Social Security. As we keep noting, the Titanic is taking on water. This is not time to talk about washing bed sheets and planning tomorrow's dinner menu.

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