POST HOC BULLSHIT….Tom Maguire has been pestering me for several days to comment on his theory that ? contra Paul Krugman and others ? it’s quite possible to have both a low-growth economy (meaning that Social Security finances are in bad shape) and high stock market returns (meaning private accounts would be great). I’m not an economist and therefore couldn’t offer him a detailed response, but my approximate answer was, sure, it’s possible for that to be true (up to a point, anyway), but hardly probable.
Yesterday, though, Brad DeLong, who is an economist, took a look at the question and concluded that….it’s possible for the low growth/high return scenario to be true, but it’s not very probable. So I think I’m going to stick with that.
However, there’s an aspect to this whole thing that bothers me, and Matt Yglesias devoted a considerable amount of philosophical brainpower to it yesterday. If I can summarize for the lay audience, it’s this: the problem with Tom’s argument is that it’s just a random post-hoc effort to explain away a problem the privatizers hadn’t thought of before (or had been able to ignore). In other words, it’s part of the genus bullshit.
For the last 75 years, real stock market returns have closely followed GDP growth. GDP growth is projected to decline in the future, and common sense dictates that lower growth leads to lower corporate profits which in turn leads to lower stock market growth. When someone finally pointed this out, it meant that privatizers could no longer rely on their usual lazy (but credible sounding!) explanation that stock returns for the past 75 years had been around 7% and it was therefore reasonable to use those same returns going forward. They had to make up something new.
What resulted was a bizarre series of Rube Goldberg inventions designed to figure out something ? anything ? that might change in the next 75 years to make the low growth/high return scenario plausible. Maybe corporations will suddenly become far more profitable than they have been. Maybe they’ll start paying out enormous dividends. Maybe overseas investment will skyrocket. In other words, toss every possible piece of mud on the wall you can think of and hope that something sticks. None of these things have to make sense, after all, they just have to sound plausible enough to create a cloud of FUD ? fear, uncertainty, and doubt.
Frankly, the privatizers would be better off just telling the truth: stock market returns aren’t going to be 7% in the future, but there’s a pretty good case to be made that they’ll be higher than the 3% you get from treasury bonds. Brad buys that argument, for example, and so does Dean Baker. Stock market returns of, say, 4% or 4.5% don’t provide quite the sizzle of 7%, but they still make a perfectly reasonable story. Why not stick with it?