The Last Gaffe?

The president's chief economic adviser has a problem with the truth

According to Jack Kemp, Gregory Mankiw committed a "gaffe" by declaring "there are no free lunches" when it comes to Social Security reform.

In Washington, as Michael Kinsley has pointed out, a "gaffe" is an inconvenient truth spoken at an inopportune time. Mankiw's propensity for gaffes is the main reason I'll miss him when he steps down as chairman of President Bush's Council of Economic Advisers.

"The [Social Security] benefits now scheduled for future generations under current law are not sustainable given the projected path of payroll tax revenue," Mankiw said at a recent tax policy conference. "They are empty promises."

It is indisputably true, though rarely acknowledged by politicians, that Social Security benefits are empty promises in the sense that the there is no "trust fund" in which money is saved for your retirement. The money you pay into the system is immediately spent, either on benefits for current retirees or on other government programs.

Worse, the Social Security Trustees estimate that by 2018 payroll tax revenue will no longer cover benefits. By 2042 even the fictitious trust fund, which consists of money the government owes itself, will be exhausted. The basic problem—a shrinking ratio of workers to retirees, coupled with longer life spans—is familiar.

Jack Kemp knows all this, of course. So why does he fault Mankiw for pointing it out?

Kemp thinks talking about it now will endanger the prospects for allowing Americans to divert some of their payroll taxes into private investment accounts. He writes that worrywarts like Mankiw, by suggesting the need for an increase in the retirement age (ridiculously low, given current life expectancy) and/or some sort of cut in promised benefits (e.g., by pegging them to inflation instead of wage increases), are "draining personal accounts of their vitality, jeopardizing Social Security reform, and ultimately endangering the Republican congressional majority."

Restoring to Americans the freedom and responsibility to save and invest for their own retirements is a fine idea, and over the long term it will permit better returns than are promised under current law. Total "benefits" will be higher, even if the portion paid by the government is reduced based on the amount diverted to personal accounts.

But privatization will not do much to address Social Security's insolvency over the short term; it's too late for the baby boomers. Indeed, privatization initially will exacerbate the system's cash shortage, since payroll taxes in private accounts won't be available to pay current retirees.

Asked how the transition would be funded during his third debate with John Kerry, President Bush hemmed and hawed for 264 words before acknowledging that "we're of course going to have to consider the costs." In other words, there are no free lunches.

By insisting on that point, Mankiw is trying to avoid unreasonable expectations that may lead a disappointed public to turn against reform. And by accurately describing Social Security's current condition, he is trying to avoid the impression that sticking with the status quo is an option.

"Be wary of comparisons between a new, reformed Social Security system and current law," Mankiw wisely warned. "Unless a listener is discerning, empty promises will always have a superficial appeal."

This is not the first time Mankiw has provoked criticism from Republicans by stating politically unpalatable facts. Last February he rightly noted that the "offshoring" of U.S. service jobs is "the latest manifestation of the gains from trade that economists have talked about" for hundreds of years.

"Outsourcing is just a new way of doing international trade," Mankiw said. "More things are tradable than were tradable in the past, and that's a good thing."

His remarks prompted House Speaker Dennis Hastert (R-Ill.) to issue a statement announcing that "Hastert Disagrees With President's Economic Advisor on Outsourcing." But neither Hastert nor Mankiw's other critics could explain why voluntary trade, which occurs precisely because it's mutually beneficial, is suddenly undesirable when it involves services purchased across national boundaries.

It would be a shame if Mankiw's expected departure had anything to do with his habit of telling the truth. As fellow Harvard economist David Laibson told The Harvard Crimson last month, Mankiw "has always stood up for economic principles even if they are unpopular."

Presumably that is the whole point of having economic advisers. Politicians are perfectly capable of telling people what they want to hear. Sometimes it takes an outsider to tell them what they need to hear.