Equity returns, economic growth and social security privatization

by on February 16, 2005 at 7:15 am in Economics | Permalink

The blogosphere has been involved in a huge debate over the Baker-Krugman position that high stock returns are inconsistent with a low growth rate of the economy (thus either social security privatization won’t work or, if economic growth is high, it’s unnecessary).

Brad DeLong offers a useful summary laying out the possible scenarios.  I think, however, that he and everyone else have missed one scenario which may be important  (see also Tom Maguire and Andrew Samwick).

Everyone has assumed that economic growth and social security privatization are independent variables but suppose that social security privatization raises economic growth then one can consistently assume that economic growth will be low under the current system but stock market returns will be high if we privatize.

Can social security privatization raise economic growth? Certainly the answer is yes.  It’s a big reform which (done right) can significantly increase savings and reduce labor market distortions.

Can the increase in economic growth be enough to solve the Baker-Krugman problem?  I think not in the long run but I am not so sure about short-run dynamics, even a small increase in growth rates can increase prices significantly.  I turn this one over to better macro-economists than I.

Comments on this entry are closed.

Previous post:

Next post: