Economic Objectivity?

When Professor of Economics Martin S. Feldstein '61 finished his December coursewide lecture on social insurance in the popular Social Analysis 10. "Principles of Economics," few of the 1000 students in the class realized that Feldstein had presented material that has been the focus of more than a decade of heated debate in the academic community.

But several of Feldstein's section leaders were distressed enough with the lecture that they felt the need to qualify his comments during section.

Feldstein's argument was that individuals' expectations of receiving social security benefits cause them to reduce their personal savings by around 50 cents for each dollar of social security benefits they expect to receive.

Because social security benefits are paid directly from current tax receipts, future benefits do not represent money in the bank, he said. The idea is that while private savings and future social security benefits serve the same function for individuals, they have different effects on the economy.

Private savings accumulate in banks and provide funds, or capital, for investment and economic growth; future benefits do not. As a result, Feldstein has estimated--first in a 1974 paper--that social security had reduced the accumulated wealth of the nation by as much as 38 percent.

Feldstein told students in his December 14 lecture that future social security benefits act as a "clear and direct substitute for private saving" and that the magnitude of this substitution is an "empirical question."

Feldstein said of the 50 cent drop in personal savings supposedly caused by social security: "It is a number that I think is in line with the statistical evidence."

But a number of economists are not so sure, and Feldstein has spent more than a decade defending what critics have called an unjustified conclusion from faulty evidence.

"After that lecture I presented students with the range of evidence and showed Feldstein's estimates to be at the high end of the range," says section leader Perry G. Mehrling.

Hamish C. Stewart, a section leader, says Feldstein "presented a figure as a consensus view and as something that arose out of evidence. I told my class that different people had found different numbers and no hard conclusions could be made from that data."

However, Lawrence B. Lindsey, head of sections for the course, says Feldstein's presentation of his view on social security was not unusual. He notes that professors with a wide variety of views lecture to Soc Anal 10 and that much of the material they present is disputed to a lesser on greater extent.

Lindsey says, "All section leaders pre free to say in class what they think is right," adding, "Critical evaluation of material is a part of the sections."

Feldstein, who is teaching Social Analysis 10 for the first time this fall has already drawn fire from section leaders for his decision to eliminate the radical section, from Social Analysis 10.

Last week, an ad-hoc committee of section leaders--including Mehrling and Stewart--called for fundamental changes in the course's organization. Saying that the reinstatment of radical sections alone would, not ensure balanced presentation of course materials, the group proposed "that the course be governed by a committee of faculty members, representing the different viewpoints and areas as far as possible."

Feldstein has argued that an introductory course should concentrate on the mainstream view and that students can learn alternate economic models later. "I want students to learn what I call the consensus view, where the vast, vast majority of economists are," he said last fall.

However, in the case of Feldstein's social security findings, it is not clear that a consensus yet exists.

Says Professor of Economics Lawrence H. Summers, once a student of Feldstein, "I don't think the evidence either way [on the effects of social security on private savings] is absolutely conclusive."

But, says Feldstein, "There is controversy about any theory or empirical study that has policy significance...The closer you get to the frontier on any specific subject, the more likely you are to get controversy."

Social Security Report

Feldstein, who returned to Harvard last year after serving as the chairman of President Reagan's Council of Economic Advisors, has been criticized outside the University as well since he first published his social security findings in 1974.

Feldstein's conclusions had wide-ranging implications for national policy at a time when economists and public officials were worried about a major recession and widely perceived a need to restructure the aging social security system which was faced with serious financing problems.

Feldstein's paper prompted studies by several economists. While some of this work supported his conclusions, some did not, and none found as large an effect on private saving as Feldstein did, according to economist Henry J. Aaron of the Brookings Institute, a liberal Washington-based think-tank.

Most recently, in a January report by the Social Security Administration, economists Selig D. Lesnoy and Dean R. Leimer challenged Feldstein's choice of statistical model, his data, and the conclusions he draws from those data.

Feldstein says that Leimer and Lesnoy's criticisms of his data and model do not detract from his conclusions because his model works even without the contested data.

Feldstein insists, however, that he is not alone in his view. "The fact that a lot of different studies have come to similar conclusions from quite different kinds of data makes them all more convincing," he says.

Feldstein says he has statistical backing for his position based on several econometric studies he has made since 1974. The studies in dispute use computer analyses of historical data on private saving to make predictions about the effect of anticipated social security benefits on savings from the "life-cycle" model.

But, says Brookings economist Aaron, "The jury is definitely out on how social security effects saving."

The life-cycle model assumes that individuals make a financial plan for their whole lives based on their estimated present and future wealth and that they save according to this plan and consume all their savings during their lifetimes. Studies by several economists have generated erratic results using the model. According to Aaron, these studies "indicate that the life-cycle model does not correctly describe the behavior of many or most savers."

Lesnoy and Leimer challenge both the statistical soundness of Feldstein's computer analysis and his choice of evidence, and a number of economists seem to share their concern.

Says MIT Professor of Economics Edwin Kuh, "When you have a reasonable theory and strong data it is practical to test hypotheses with time series analysis [the type of computer study Feldstein used], but in the case of the Feldstein controversy these conditions were not met."

In his 1982 book, Economic Effects of Social Security, Aaron called the results of the controversy surrounding Feldstein's work a "statistical cacophony." Refering to work by several economists in addition to Lesnoy and Leimer, Aaron wrote that, "almost all participants have concluded that essentially nothing can be learned about the effects of social security on saving from time series analysis."

Feldstein's critics argue that time series studies cannot prove a relationship between savings data and projections of social security wealth.

Aaron concludes, "It is clear that Feldstein's theoretical analysis has been vigorously challenged by scholars engaged in research on social security, and his empirical findings have been discredited."

Several Twists

The debate over Feldstein's work has taken several twists over the last decade. The most notable one was in 1980 when Leimer and Lesnoy discovered an error in Feldstein's computer program that had overestimated by 37 percent the value of future social security benefits to which people are entitled.

Feldstein responded by reworking his data and including new changes in social security benefit payments which were enacted in 1972--a 20 percent increase in benefits and automatic indexing of benefits to inflation. Based on these changes, which according to Lesnoy and Leimer did not consider all of the effects to future benefits in the 1972 legislation, Feldstein's corrected data supported his original view that social security benefits reduce private savings.

Feldstein's 1980 defense of his original conclusions prompted new criticisms by Lesnoy, Leimer, and others. Articles by economists from such diverse groups as the liberal Brookings Institution and the conservative American Enterprise Institute questioned several of the assumptions in Feldstein's model. While some criticisms were based on theoretical disagreements and challenges to the life-cycle model, others were based simply on Feldstein's choice of data.

Lesnoy and Leimer released a series of papers criticizing Feldstein's conclusions after they discovered the programming error in his original work.

Feldstein used data from 1930 to 1971 in his corrected estimates of the reductions in savings due to social security. Lesnoy and Leimer claim, however, that if only data from 1947 to 1971 are used, Feldstein would have concluded that social security payments actually cause a huge increase in private saving and that savings would actually have decreased were it not for social security.

Lesnoy and Leimer also argue that the data from before World War II are of questionable relevance to Feldstein's model to begin with. The first social security taxes were not collected until 1937, and the first benefits were not paid out until 1940.

They note that most saving during the decade before the war was not done with the expectation of receiving benefits upon retirement. These expectations of retirement benefits are a fundamental assumption of Feldstein's "life cycle" model. Moreover, they say, the Great Depression and the war represent abnormal periods for private saving in this country.

Lesnoy and Leimer also argue that minor revisions in Feldstein's equations--made to take account of differences in the way individuals plan their retirement savings--lead to radically different conclusions about the effect of social security on private saving. These modified assumptions lead to contradictory conclusions, they say.

Feldstein, however, stands by his original conclusion that social security decreases private saving and insists that his original statistical estimates of a 50 percent decrease in savings are on target.

He argues that the statistical reliability of his model can be measured in different ways and argues that Lesnoy and Leimer have not shown his results to be questionable.

Regarding Lesnoy and Leimer's assertion that his data sample is inadequate to make strong statistical inferences, Feldstein says, "All data sets have problems," adding, "Leaving out the early years and the pre-social security world you throw away sample points and throw away variability and just make the standard error larger."

Beyond the squabbles over the use and alleged misuse of data, there is one thing on which all economists agree: there is little in economics that cannot be viewed and used in a number of different ways. Says MIT's Edwin Kuh, "While the ostensible rules of the game are different, an economist is much like a lawyer filing a brief."