Paul Krugman’s columns are hardly perfect. But his critics cry wolf so often, and make such sloppy arguments, that they shouldn’t be surprised when they’re not taken seriously.
Most accusations of dishonesty against Krugman take the form of (1) starting from a different premise than him and then bashing him for (unsurprisingly) reaching a different conclusion or (2) citing evidence he doesn’t deal with and criticizing him for not including it. As a general rule, neither is particularly convincing to people who don’t share the critics’ ideological preconceptions, but they just keep cranking this stuff out.
A case in point is a Tom Maguire post about Krugman’s latest column that Glenn Reynolds approvingly linked to today. In it, Maguire criticizes this quote from Krugman:
[I]f we take into account realistic estimates of the fees that mutual funds will charge – remember, in Britain those fees reduce workers’ nest eggs by 20 to 30 percent – privatization turns into a lose-lose proposition.
Krugman’s statement is quite clear. He says he is discussing the fees that “mutual funds” will charge, and says that fees for similar funds in Britain “reduce workers’ nest eggs by 20 to 30 percent.” The assumption is clear: workers with private accounts will be able to choose from a relatively wide range of investment options, including actively managed mutual funds, some of which have high fees that reduce payouts quite dramatically over time. Moreover, the estimate from the UK appears to be accurate — see Peter Orszag’s 1999 analysis of the British private pension system, for instance, which found an average annual administration and management fee of 1.43% from 1989-1998. Over a 40 year career, that fee would reduce the account balance for a worker at retirement by 28%.
Maguire, however, proceeds from a different assumption than Krugman. This necessarily leads to a different conclusion, but he pretends Krugman is being dishonest instead. Using the 0.3% annual fee assumed by CBO in their July 2004 analysis of the President’s Commission to Strengthen Social Security’s Plan #2, he finds that the final account balance for private accounts would be reduced much less than 20-30% by administrative fees. This is, of course, true, which leads Maguire to celebratory snark:
But hold on! Didn’t Paul Krugman just ask for a “reasonable” estimate, and throw out 20% to 30% in Britain as a comparison? Based on the CBO number and some mental math, we came to 7%, which was quickly confirmed by a more elaborate calculation. Why, oh why is Prof. Krugman off by a factor of 300% to 400%? How can it be that he is misrepresenting the intelligence and hyping his case?
You’ve got me. Possible answers might include: (a) this was too complicated a calculation for a prospective Nobel Laureate; (b) this was an easy calculation but not a helpful result for polemical purposes; or (c) his beer was warm, and all the folks in Princeton speak English, so he thought he was in Britain.
Enjoy the weekend – pick (a), and put yourself up for a Nobel Prize.
However, the 0.3 percent cost figure assumes an extremely limited range of index funds are available. See table 1-1 of an earlier, more detailed CBO analysis of administrative costs for private accounts. Mutual funds do indeed reduce assets at retirement by 23 percent on average according to the CBO estimate in the table. The only retirement systems with administrative costs as low as CBO assumes are the current Social Security system and the Federal Thrift Savings Plan that Maguire cites as a model. And as CBO explains elsewhere in the same report, TSP allows workers to invest in only five index-type equity and bond funds, none of which are actively managed mutual funds of the type that Krugman was referring to.
Once again, different premise, different conclusion. Krugman should have been more clear that a TSP-type system could offer lower fees, and we can certainly debate his assumption that a wide range of investment options would be offered under private accounts (it seems inevitable to me). But those are different arguments altogether.
Update 1/24: Crazed socialist Irwin Seltzer uses a management fee estimate of one percent in the Weekly Standard, though he notes that former Bush economic adviser Larry Lindsey thinks this is much too high.