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Saturday, October 22, 2005

Edward Prescott: Privatization of Social Security Should Happen and Will Happen

Nobel prize winner Edward Prescott says that cutting taxes, Medicare benefits, and Social Security benefits and forcing workers to invest in private accounts will boost the economy substantially. He also believes the eventual collapse of the Pension Benefit Guarantee Corp. will be the catalyst that changes the politics of Social Security and allows private accounts to emerge:

Cutting taxes, Social Security benefits may boost economy, Nobel Laureate says, by Dave Flessner, Chattanooga Times/Free Press: President Bush may still be struggling to sell ... the virtues of privatizing part of Social Security, but a Nobel-prize economist endorsed the idea... Dr. Edward C. Prescott, an Arizona State University professor who won the Nobel prize in economics last year, told a UTC audience that cutting taxes and Social Security benefits could boost U.S. economic growth by up to $1 trillion. "As the tax rate rises, GDP ... per capita falls," he said. "The evidence clearly indicates that labor supply is highly responsive to tax rates." To pay for the lower tax rates that would stimulate more economic growth, Dr. Prescott said Social Security and Medicare benefits should be cut. In their place, workers should be required to invest in their own savings accounts. Lowering taxes on income and reducing social security would boost economic growth and leave nearly all workers better off, Dr. Prescott said. ... Dr. Prescott conceded that "change is difficult" and "nothing is easy in politics." But Dr. Prescott predicted the eventual collapse of the Pension Benefit Guarantee Corp., the federal agency that insures defined benefit retirement plans. That will force many people to recognize the perils of relying upon plans that appear to guarantee certain benefits without adequate funding or incentives, he said. "It's just a matter of time before we recognize that,"... Dr. Prescott said his studies indicate that Europe's effective average tax rate of 60 percent cuts economic growth by an average 27 percent compared to the growth of the United States with an average 40 percent effective tax rate. Europeans retire earlier, work fewer hours and earn far less money, on average, than their U.S. counterparts, he said. "If the U.S. increases its taxes like Europe, then we'll be as poor as Europe," Dr. Prescott said. ... Despite the record high federal budget deficit this year, Dr. Prescott said debt as a share of the nation's output hasn't increased and shouldn't be a problem for the American economy.

I've made my position pretty clear on this. I am not in favor of privatization nor among the free lunch crowd. I believe substantial market failures exist in the provision of both retirement insurance and health insurance and that government intervention is required to overcome these market failures. I don't believe that further cuts in taxes and social programs are the solution to the deficit problem, I don't think the politics will change, and I don't believe all Europeans would agree with his welfare assessment of the U.S. and European economic systems. But since it's a bad idea to argue with a Nobel prize winner, I think I will just say I disagree and leave it at that.

    Posted by on Saturday, October 22, 2005 at 01:00 AM in Budget Deficit, Economics, Market Failure, Social Security | Permalink  TrackBack (0)  Comments (38)

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