I often here right-of-center people express admiration for Singapore’s pension system and who wonder why liberals can’t get on board for changing Social Security into something like that. I think you can raise various question about the Singaporean system, but the biggest thing that this kind of remark often seems to miss is the issue of transition costs. Among other things, Sinagpore has a pre-funded system. Money actually went into the Central Provident Fund before it came out, and the quantity of payouts is related to the amount of money in the Fund.

US Social Security kinda sorta has this structure in theory, but in practice outlays are financed by current tax revenue. Card-carrying rightwing Social Security hater Andrew Biggs has a good column at the American laying out the way that this constrains present-day policy options:

As I noted in a recent National Review column on why Social Security reform has proved so difficult, shifting from a pay-as-you-go program to a funded system entails significant “transition costs,” which are borne by the very citizens who would decide to make the change. Since today’s Social Security, Medicare, and Medicaid benefits are paid from today’s taxes, if we decide to pre-fund these programs then the current generation must pay twice: first for current beneficiaries, and second for their own benefits. Put simply, to shift from an unfunded program to a funded program, someone must contribute extra funds.

Conservatives and libertarians are free to complain about this set-up if they don’t like it or think it shows midcentury American liberals were foolish. But it can’t be simply wished away.

But if I may complain about conservatives and libertarians for a moment, this is precisely what was so horribly destructive about George W Bush’s tax and budget policies in 2001-2008.

Flash back to the salad days of 1999-2000 and the US government was running budget surpluses. Members of the Clinton administration argued that this was advisable because the country was also facing a predictable one-time demographic transition that would raise Social Security costs. It was prudent, under the circumstances, to save for the future by continuing to run surpluses. At this point, George W Bush and most Republicans began making the argument that “it’s your money” and the existence of surpluses showed the desirability of gigantic regressive tax cuts. Alan Greenspan himself stepped into the breach with a highbrow version of the argument, warning darkly that absent gigantic regressive tax cuts the government might pay off the entire national debt and then start accumulating financial assets.

Conservatives carried the day, rich people got their tax cuts, the short-term surplus was eliminated and the clear and the “danger” of national debt elimination was avoided. Somehow nobody noticed that this nightmare scenario was prefunding of future US pension obligations. We could have had a debate about whether to disburse that prefunding in the form of “private accounts” or a centrally administered fund or what exactly a private account would mean in that context. But instead we had a debate about the desirability of bringing back budget deficits and rescuing the national debt.

Ezra Klein has a column in the Post explaining to ink-on-newsprint readers what blog readers already know, namely that economic performance matters and deficits don’t in terms of determining election outcomes. Indeed, I would add that Larry Bartels’ paper “It Feels Like We’re Thinking” (PDF) offers some provocative evidence that opinions about the deficit (including views as to whether it’s getting bigger or smaller) are determined by views of the president rather than the other way around.

It seems to me that this is one reason why it’s extremely dangerous for Bill Clinton and Barack Obama to have appointed conservative Republicans to run the Federal Reserve. The person holding that job has more influence over short-term economic performance than any other single individual, and the institution he heads has an overwhelming level of influence over the economy. An incumbent running for re-election amidst loose monetary conditions, like George W Bush in 2004, has a giant gust of wind at his back. A quasi-incumbent running for re-election amidst tightening monetary conditions, like Al Gore in 2000, is likely to develop an undeserved reputation as an inept campaigner. A president and a congress who want to try to stimulate the economy through fiscal policy can easily find themselves overruled by a Fed chair who says he’ll respond with higher rates, and a Fed chair who wants to constrain economic policy outcomes can do what Alan Greenspan did in 1993 and offer easy money if and only if elected officials act to curb deficits.

You don’t need to suspect anyone of having corrupt motives or acting on narrow partisan concerns to see that economically literate adherents of different political parties tend to have large and genuine disagreements about what kind of policymaking is most conducive to long-term economic growth. If I were president, I would be extremely eager to ensure that my Fed chair shared my basic worldview. It’s considered common sense that of course a president wants to appoint Supreme Court justices who share his ideas about the constitution, but presidents—or I should say Democratic presidents—don’t seem to see that the same considerations apply to the Fed.

Alan Greenspan wrote an absurd anti-deficit piece in the WSJ today, advancing the argument that it’s a bad thing that we’re not suffering adverse consequences from the deficit:

Despite the surge in federal debt to the public during the past 18 months—to $8.6 trillion from $5.5 trillion—inflation and long-term interest rates, the typical symptoms of fiscal excess, have remained remarkably subdued. This is regrettable, because it is fostering a sense of complacency that can have dire consequences.

Tim Fernholz bats this around a bit, but he neglects what in my view is the key episode here, the time when as Federal Reserve Chairman in 2001 Alan Greenspan warned the country against the prospect of budget surpluses and debt reduction and argued that only large regressive tax cuts could save the country from this specter.

Greenspan did, I think, a good job as a setter of interest rates. But he also consistently abused his prestige to try to manipulate the country into a low-tax, bad-services, high-inequality equilibrium. Out of office he doesn’t set interest rates at all, so all we get is the abuse of his prestige to wage a relentless war against revenue and public services.

The Fed releases the minutes of its monetary policy meetings on a six-year delay so as to avoid accountability ensure its independence. And boy oh boy should the participants in this 2004 discussion of whether there’s a housing bubble be glad that there’s no way to hold them accountable. It all started when someone showed up with this somewhat unusual chart trying to highlight the divergence between rental costs and ownership costs for housing:

There are a number of qualms one can raise with this chart, including the scaling of the y-axes, the fact that I don’t know why they think the Treasury yield is relevant to this, and the fact that you normally express the ratio the other way ’round. Like Annie Lowrey, I prefer this chart from Calculated Risk:

Either way, though, the charts are showing the same thing—the cost of buying a home is rising relative to the cost of renting a home. Which is to say that the value of owning a home was growing faster than the income you could generate by renting the home out. Which is to say that a speculative bubble was under way.

But instead of focusing in on that fact, the discussion winds up involving a huge degree of irrelevant nitpicking. There are complaints about the chart. Someone raises the issue that the data on buy prices and rent prices come from different sources, so they’re allegedly not comparable (a standard that would make it hard to compare anything). Donald Kohn, wildly overoptimistic, says “[e]ggs will get broken when rates begin to rise, but the capital in most intermediaries is high, and the system is resilient” which makes him one of the least overoptimistic people in the room.

Calculated Risk highlights this curious June2004 comment from Stephen Oliner, the Associate Director of Research:

I don’t want to leave the impression that we think there’s a huge housing bubble. We believe a lot of the rise in house prices is rooted in fundamentals. But even after you account for the fundamentals, there’s a part of the increase that is hard to explain.

What would a bubble be if not an increase that is hard to explain after you account for the fundamentals? Now recall that this all went down only a few months after Alan Greenspan—who at the time was the most highly respected figure in American economic policy, treated with extreme deference by the press and by politicians—told people ARMs were a great deal and people should be getting more of them.

Alan Greenspan’s defense of his own conduct, as reported by Sewell Chan and Eric Dash, is very oddly second-order. Should he have cracked down on abusive lending practices? Well, he doesn’t quite say:

In his testimony, an unflinching Alan Greenspan, the former fed chief, fended off a barrage of questions about the Fed’s failure to crack down on subprime mortgages and other abusive lending practices during his lengthy tenure, pointing out that the Fed warned about subprime lending and low-down-payment mortgages in 1999, and again in 2001. He argued that if the Fed had tried to rein in the housing market amid a “fairly broad consensus” about encouraging homeownership, “the Congress would have clamped down on us.”

I don’t think the claim there is crazy, and it is one reason why I think some people are wrong to place blame so heavily on Greenspan personally. That said, a better smarter Fed Chair would have seen the problem and tried to stop it. It’s true that a better smarter Fed Chair might have been clamped down on by Congress, but that still leaves us with the fact that Greenspan was a worse dumber Fed Chair. I also have some real doubts about Greenspan’s analysis—he was probably the most prestigious policymaker in the country and very plausibly could have gotten his way, had his way been the right way.

And then this:

And under sharp questioning other members of the panel about the Fed’s staffing levels, he insisted that a lack of resources or funds was not to blame for any regulatory missteps. “It is not an issue of people,” Mr. Greenspan testified. “It is rather an inherently difficult job.”

Sure, it’s a difficult job. But that’s why Greenspan became such a prestigious figure when people thought he was doing a good job. Now that it turns out to have been a not-so-good job, you can’t just turn around and say “it’s hard!” Lots of things are hard.

The arrival of review copies of Dean Baker’s new book False Profits: Recovering from the Bubble Economy has sparked some interesting discussion. Daniel Davies is enthusiastic. Brad DeLong less so:

I think that its story of the linkages between our current crisis and Federal Reserve policy is significantly overstated. Its argument about how excessively-low interest rates caused the housing bubble is exaggerated. I think that its belief that the Federal Reserve could have taken much more action to curb the housing bubble while is underway is also exaggerated, and does not recognize the very real constraints that the Federal Reserve works under and all but ignores the costs of austerity. And it overstates the strength of the links between the housing bubble and the housing crash on the one hand and our current situation of macroeconomic despair on the other.

I have no opinion on how much monetary policy influenced the bubble or could have counteracted it. I know economists don’t like to talk about this sort of thing, but if you ask me the biggest influence policymakers had on the bubble wasn’t so much what they did as to an extent what they said. If you think back to 2003-2006, then media coverage of the housing market was largely dominated by a go-go narrative that fit the advertising sales agenda of the real estate sections of newspapers. People also like a feel-good story.

But it’s not just that some people “got it right” about the housing bubble, the debate about the housing bubble wasn’t really languishing in obscurity. There were newspaper articles about the issue, there were blog posts about it, the idea of a bubble was covered in prominent magazines, etc. Throughout this period, Alan Greenspan and Ben Bernanke were extremely famous, very well-known public officials charged with economic policy. If Greenspan had said something like “seems to me that price:rent ratios are totally out-of-whack and bubbly, so even though I’m not convinced there’s anything the Fed can do to pop a bubble in the housing market, I’m going to put my house on the market and start renting while the going is good” I think that would have made a big difference in the common understanding of what was going on.

Instead, he essentially spent this period egging the bubble on, touting ARMs, downplaying the possibility of a national bust, etc. Similarly, Ben Bernanke’s 2006 Economic Report of the President specifically considered and rejected the possibility of a housing bubble.

The point, to my mind, isn’t merely that these guys were wrong. Nor is it that their wrong analysis led to bad policy. It’s that their wrong statements and absence of accurate ones themselves helped egg the bubble on. How many home sales might have gone differently if moderately informed middle class families had said things like “well, Alan Greenspan says you shouldn’t count on your home appreciating in value on a sustained basis?” My guess is that a modicum of leadership would have made a big difference.