To privatize or not to privatize — that′s the question of the hour in Washington as the Senate Finance Committee grapples over the issue, even as opinion polls show the idea is losing public support. Two articles in the latest edition of The Milken Institute Review step back from the rough and tumble of partisan politics to ask what the country has to gain — or lose — from privatization.
On one side is Sylvester Schieber, director of research at Watson Wyatt Worldwide and a former member of the Social Security Advisory Board. He argues that the current system, no matter how much tinkering is done to it, will never overcome the fundamental problem of getting individuals to take more responsibility for their own retirement.
"Individual accounts may not be the only way to get today′s workers to finance their own retirement, but they are probably the most effective way we have," Schieber writes.
Peter Diamond of MIT and Peter Orszag of the Brookings Institution demur. They argue that there are plenty of practical options for bringing Social Security into fiscal balance, and that partial privatization is at best a distraction of the key issues.
"While there may be room for ideological and pragmatic disagreement on the merits of partial privatization of Social Security, there is no doubt that the approach would increase — not decrease — the strain on Social Security′s long-term finances," they write.
Also in this issue of the Milken Institute′s quarterly journal, Nicholas Eberstadt, a demographer and political analyst at the American Enterprise Institute, looks at Europe′s declining birth rate and its long-term consequences for the continent.
"Demography has by no means consigned the European Union to a Spenglerian twilight," he writes. Yet, he adds, "Population aging is changing the realm of the possible for Europe. And unless these changes are appreciated, Europeans will not be able to capitalize on the opportunities and minimize the risks they pose."
Other highlights from the new Review:
- Diana Farrell, director of the McKinsey Global Institute, thinks the jeremiads over America′s massive foreign deficits are way overblown. "Roughly one-third of the U.S. current account deficit results from trade with U.S.-owned subsidiaries. Think automakers importing cars made in Mexico, or banks using call centers in India. These activities create significant value for U.S. customers and shareholders, even if they add to the nation′s trade imbalance."
- Daniel Kasper, a managing director at the economic consulting firm LECG, sees some hints of a smile returning to the airlines′ unfriendly skies. "Although not a sure thing, it now seems likely that at least some legacy carriers will be able to narrow the cost gap with low-cost carriers while retaining an advantage in the fares passengers will bear. Thus, the worst may soon be over for those whose markets have experienced very high levels on entry by the upstarts."
- Alan Patricof, a co-founder of Apax Partners, and Julie Sunderland, a business consultant, argue that helping small and medium-sized companies succeed in developing countries offers the best hope for improving the standard of living for these populations. "Helping to build indigenous companies that are both capable of competing globally and committed to establishing the institutions of capitalism will create the conditions for growth, stability and equality."
- Hilton Root, a senior fellow at the Milken Institute, offers a scathing analysis of why Pakistan is mired in poverty and anti-Western religious fundamentalism. "Is Pakistan part of the solution? Or is it part of the problem — a state that provides sanctuary to terrorists and breeds new ones from the disaffected poor? Pakistan teeters on the brink, in large part because its government and economy are so ill-managed."
- Thomas Lenard, vice president for research at the Progress & Freedom Foundation in Washington, and Stephen McGonegal, president of Independent Analysis Inc., see proposals to tax online interstate sales as a major threat to booming Internet businesses. "Recent studies have confirmed that added costs, such as sales taxes and shipping charges, significantly affect online buying decisions."
This issue also includes an excerpt from Pay Without Performance: The Unfulfilled Promise of Executive Compensation, by law professors Lucien Bebchuk of Harvard University and Jesse Fried of the University of California, Berkeley, and a Charticle by Institute Senior Fellow William Frey that shows how second-generation Americans appear well on their way to achieving the American dream.
The Milken Institute Review is sent quarterly to the world′s leading business and financial executives, senior policy makers and journalists. Its editor is Peter Passell, former economics columnist for The New York Times.