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December 27, 2004

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That is, most folks should be holding riskier investments than they currently are

Hilarious. The government has decided that the market isn't allocating resources the way the government would like it to, so the government is going to force more money to be invested the way the government wishes - i.e., in investments that are riskier than the people would choose on their own.

It would be hard to imagine an entity that more closely meets the requirements of market theory than the US equity markets. If you support massive and permanent government intervention in those markets due to this alleged "market failure", please agree to refrain from ever criticizing communist economies again, for that would be utter hypocrisy. If such intervention is warranted in markets as free as the equity markets (and I do not believe it is), there is almost no market in which massive and permanent government intervention is not justified due to market failures.

(see below, including comments)

Your link appears to be busted, von.

The link should be fixed. Thanks.

F-R-M: The government, having established and being responsible for policing the markets, already engages in "massive and permanent government intervention" into the markets. My suggestion is merely to allow individuals to reap the benefits.

The goal of privatizing Social Security is to replace the current generational transfer system with a national savings and investment system.

Nope. That's mindreading the man who will not negotiate with himself.

The goal of privatizing SS is twofold: reward a GOP constituency (financial services industry) and attempt to remove a constituency (senior citizens) from the Dem side of the ledger.

There are other objectives associated with killing SS but those are the primary two goals.

For whatever reason, folks tend to be more conservative in their investments than they should be.

How true is this, really. Any studies anyone know of?

(M)ost folks should be holding riskier investments than they currently are because, over time, they are likely to be rewarded by their risk taking.

Risk v. reward. Over time, you may be rewarded by risk-taking. Over time, you may not be. Just because an investment is higher-risk doesn't mean it will always appreciate. Going bust is not out of the question, either.

The suitability of an investment for a particular individual depends on so many factors, it's unwise to make any assumptions about how much risk someone should to be assuming, no matter what the age.

The goal of privatizing SS is twofold: reward a GOP constituency (financial services industry) and attempt to remove a constituency (senior citizens) from the Dem side of the ledger.

Whose goal? Certainly not von's. Why are you bringing up the supposed ulterior motives of the GOP leadership when that has nothing to do with the original post?

Oops, that was obviously me, still in secret ballot mode.

For the record, JadeGold:

George Bush could very well propose a privatization plan that I cannot support. For instance, he could propose substituting a long term debt (the current SS system) with a short term debt by funding his proposed changeover deficit spending. But I'd like to see SS reform -- because it'd be a good thing -- and I'm not going to "argue against" Bush's plan for reform (assuming that's even necessary) until I see it.

There are some principled folks on this side of the line.

I don't want to be forced into market investment by any one for any reason. I want my nice predictable check.
I also don't trust reform efforts from the party that created a 500 billion dollar debt and used medicare reform as a vehicle for subsidizing pharmacutical companies.
Maybe the reason Americans don't invest enough is simply that they can't afford it. I know the rationalization is that they could invest the money that now goes into Social Security. Fat chance. Lower middle class, working class, and middle income people with kids are much more likely to spend it on necessities like car repair, school clothes for their kids etc. Many many Americans can't afford to save any thing.
If the Bush Administration really wants to promote investment, how about this? Increase funding for Pell Grants and tell people they can get grants for their children provided the money they otherwise would have spent on collee goes into the stock market? I'm being facetious of course.
The whole social Security "reform" is based on an ideology, not on a real problem or an attempt to develop a functional real world practical plan. Why would people who, for ideological reasons, oppose a system's very existance be honestly committed to "reforming" it, especially when it is working fine now and will continue to do, so if left alone, for the foreseeable future?
I intend to be oppositional and obsructionist about this.
I hope you had a lovely holiday.

How true is this, really. Any studies anyone know of?

Delong and Cowen both cite it as a given, so I'll defer to them on the current empirical support. My assertion is based in part upon reliance on them, and in part upon my own B.A. in economics (which, admittedly, is about eight-and-a-half years old).

I hope you had a lovely holiday.

I did. Merry Christmas (or whatever holiday you celebrate) to you as well.

I intend to be oppositional and obsructionist about this.

Noted. Incidentally, I intend to push for SS reform until it occurs -- because it's the right thing to do.

"F-R-M: The government, having established and being responsible for policing the markets, already engages in "massive and permanent government intervention" into the markets. My suggestion is merely to allow individuals to reap the benefits."

Please explain how the government established the financial markets (especially the ones like the Philadelphia and New York stock exchanges which pre-date the American Revolution).

While I will agree that the government does police the markets, I think one would find few economists who do not believe that the individual investor is the one who has already benefitted by the securities regulations, as having such regulations increases investor confidence in the overall integrity of the markets, which encourages the ivestors to enter the markets.

But in any event this is qualitatively different than saying that investors are wrong in their approach to investing and that the government must alter their choices because it knows better, which was Felix's critique of your argument.

Dan --

You're right: "the government established," read literally, is too strong. Revise to "the government established all necessary preconditions for markets to develop, and then provided for and guided that development."

But in any event this is qualitatively different than saying that investors are wrong in their approach to investing and that the government must alter their choices because it knows better, which was Felix's critique of your argument.

Jeebus. I didn't address this particular aspect of Felix's argument because it makes no sense. No one is saying that investors are "wrong" in their approach. The government is not "altering" any investment choice (at least under my plan; under DeLong's, one could make a better argument for government alteration, which is why I don't favor it). Instead, the government is changing a tax -- the social security payroll tax -- into a savings and investment account.

"No one is saying that investors are "wrong" in their approach. The government is not "altering" any investment choice (at least under my plan; under DeLong's, one could make a better argument for government alteration, which is why I don't favor it)."

I think your post is saying exactly that. For example:

"For whatever reason, folks tend to be more conservative in their investments than they should be. That is, most folks should be holding riskier investments than they currently are because, over time, they are likely to be rewarded by their risk taking. (Or, to bastardize DeLong, forty-year olds are holding the portfolios of sixty-two year olds when they should be holding the portfolios of forty-year olds.)

Thus, one argument in favor of privatizing part of Social Security is that it will force more money into the market and capture the "equity premium" -- the money that is being lost because folks ain't investing the way that they should."

I know you are saying you do not believe it is the best argument for privitization, but it is still an argument you are making.

I know you are saying you do not believe it is the best argument for privitization, but it is still an argument you are making.

Ahh, now I understand your point. But what I'm saying is not "let's force people to make this-and-so investment." I'm saying, "let's turn this tax into a directed investment." Is coercion involved? Yes, to the same extent that the current system employs coercion. We're talking a government program in each case, after all. The difference is that, rather than coerce me to pay the current retirement benefits of current retiree X (the current transfer system), I'll be coerced to invest a certain sum in the market (the proposed investment system).

Now, understand one more thing: The government will not be coercing folks to make "risky" investments in their required savings accounts under any proposal. Rather, the argument is that the effect of money entering the market (in "safe" investments) will encourage riskier investments in other sectors, thereby altering and improving the overall risk allocations. (This is a difficult and not wholly intuitive point. See the linked Cowen piece for more.)

"Ahh, now I understand your point. But what I'm saying is not "let's force people to make this-and-so investment." I'm saying, "let's turn this tax into a directed investment.""

Nope. Still not getting it. The decision to invest in equities (as opposed to bank accounts, annuities, etc.) is a personal one. Your proposal takes that decision out of private hands by requiring the recipient to hold more equities (or, as you put it: "Thus, one argument in favor of privatizing part of Social Security is that it will force more money into the market and capture the "equity premium" -- the money that is being lost because folks ain't investing the way that they should.").

"Rather, the argument is that the effect of money entering the market (in "safe" investments) will encourage riskier investments in other sectors, thereby altering and improving the overall risk allocations. (This is a difficult and not wholly intuitive point. See the linked Cowen piece for more.)"

Well yes. By forcing more safe investment, you create lower rates of return (as the price goes up, the same stream of revenue being returned to the investor has a lower rate of return). Therefore, other investments look better, as their rate of return is higher.

For whatever reason, folks tend to be more conservative in their investments than they should be.

when the sub-efficient industry in question is the US health care system, any government intrusion at all is assumed to be the worst possible thing ever: "market distortion", "beureucracy", we'll all become "slaves" to the government, yadayadayada. nope, can't do that, it's practically communism!

but when the industry in question is the equity markets, then getting the government to force people into the markets and mandating massive cash injections is A.O.K. - better than that, it's a Damn Good Idea: one that's practically necessary to correct the people who aren't investing as they "should be".

un. be. lee. va. bull.

one argument in favor of privatizing part of Social Security is that it will force more money into the market and capture the "equity premium"
This isn't how it would work, I think. With an incredible influx of capital into the market, the "equity premium" would actually get bid down. The equity risk premium isn't a static thing--it's driven, in part, by how much capital there is lying around to invest. When there's a scarcity of capital, investors demand a higher return. When there's a bigger pool of capital, there are more lenders willing to take a smaller return and the equity premium gets bid down.

Also, the whole "risk isn't being allocated effectively by our markets" argument seems a bit silly to me. The better way to "fix" this perceived inefficiency would be to improve investor education, not by forcing the market to behave in certain ways.

"when the sub-efficient industry in question is the US health care system, any government intrusion at all is assumed to be the worst possible thing ever: "market distortion", "beureucracy", we'll all become "slaves" to the government, yadayadayada. nope, can't do that, it's practically communism!"

This is a fallacy based on the idea that 'sub-efficient' and 'government intrusion' are equivalent in both cases. The health care system would have to dramatically scale back its current levels of government intrusion to approach the the level of intrusion von is talking about at its maximum expansion.

"This is a fallacy based on the idea that 'sub-efficient' and 'government intrusion' are equivalent in both cases. There health care system would have to dramatically scale back its current levels of government intrusion to approach the the level of intrusion von is talking about at its maximum expansion."

And, as felixrayman pointed out in the very first comment, the health care system would need to dramatically change to be anywhere near as efficient as the securities markets. The comparison cuts both ways.

Why exactly are we talking about "forced-equity" plans? I don't believe that any privatization plan will or should force people to invest in equities. Surely there will be the option to be conservative - to invest in treasuries or high-grade corporate bonds or the like. So how will the benefits of "forced" equity investment be realized?

It is also strange to read that people are more risk-averse than they "should be." Who knows how risk-averse people should be? After all, risk-aversion is a preference. If someone prefers to avoid the stock market, accepting lower investment returns in exchange for greater peace of mind, it is unfair to characterize that as an irrational decision.

It is certainly true that individuals are often very risk-averse. Ask some people how much they would pay to participate in the following game: You flip a coin 1000 times and give them a dollar for every heads, nothing for a tails. The answers will astonish you. So it probably is the case that that many individuals do not realize exactly how risk-averse they really are, but I don't see Social Security privatization changing that.

Your proposal takes that decision out of private hands by requiring the recipient to hold more equities

Huh? I admit, I'm hoping to encourage particular (advantageous) behavior, but how the heck am I "requiring" anyone to hold "more" equities?

You've got a germ of an argument, DtM, but you're pressing it far far too hard.

No time for the rest. My apologies.

It is also strange to read that people are more risk-averse than they "should be." Who knows how risk-averse people should be? After all, risk-aversion is a preference. If someone prefers to avoid the stock market, accepting lower investment returns in exchange for greater peace of mind, it is unfair to characterize that as an irrational decision

Amen, brother. I'm in my early thirties, and all of the prospectuses and precii I read when I signed up for my 401K elections encouraged me to put my cash in the higher-risk, higher-possible-return funds. I didn't do it, because I, and every other person I know, just about, got badly burned by the 00-01 crash, and I just don't trust risk-taking in the equity markets. Does this make me a poor investor? Maybe. I don't give a f**k.

Von's argument that the new system would be just as coercive as the old system completely ignores the real coercion - I am being forced to lose a guaranteed benefit and accept a benefit keyed to an equity market I don't really trust.

If this argument is based on the "well, the guaranteed benefit isn't guaranteed because the current system is going to catastrophically detonate in fifteen minutes and destroy the economy...PONZI SCHEME! PONZI SCHEME! PONZI SCHEME!" school, well, okay, it makes sense. I don't agree with it, but it at least makes sense - better a risky system that works than one that the proponent believes is headed irretrievably for the crapper.

But von, quite sensibly, does not believe the system is headed irretrievably for the crapper - he knows the system can be fixed and preserved quite easily, but is advocating this change on ideological grounds - i.e., it's just better and cleaner to let the markets manage the money, and not to have the government shoving its greedy hands into this generation's pockets to pay for the last generation's viagra and zwieback.

Again, fine - but please, once we have acknowledged that the argument is based upon a preference for a market system over a government one, it is a red herring to say that both systems are equally coercive.

A forced equity savings plan makes a choice for the american people of what type of benefit program they get for their money. Von claims that:

The government will not be coercing folks to make "risky" investments in their required savings accounts under any proposal.

The hell it won't! This argument assumes that "safe" equity investments are indistinguishable from, and no more "risky" than, guaranteed federal entitlements. I just can't see how that equivalence can be supported by any rational use of the word "risk."

This argument assumes that "safe" equity investments are indistinguishable from, and no more "risky" than, guaranteed federal entitlements.

Actually, the argument is that, on balance, equity investments are more advantageous to all members of society (retirees, workers, children, etc.) than simple generational transfers. The present system is far from perfect, and the proposed system will also be far from perfect. There is no perfect. There is only better. And providing for partial investment of SS income will be better.

Now, ST and DtM are concerned about the increased risk. It's a legitimate concern, and one that has been expressed in the past by our own Sebastian Holsclaw (i.e., it crosses party lines). There are ways to mitigate or limit that risk, however: restricting the scope of investments, providing for welfare payments to the unlucky or needy, and including a guaranteed payment component.

Seems to me that the government will be forcibly diverting a portion of the funds now going to pay current retirements and putting them in the hands of brokers in the form of fees. This may not be exactly the redistribution von is looking for, but I don't see any reason to believe it's not a pretty important part of the plan that the people pushing the thing are looking for.

Privatization as we're going to get it with the current configuration in Washington will necessarily involve (a) huge short term debt for the transition and (b) huge diversions of tax money into private hands for fees. Sure there will be a fine little uptick on Wall Street as all that new money flows in. Not that this will do people under 40 any good -- their contributions will buy less than without the uptick and by the time they're looking to retire, that benefit will have long evaporated, under the pressure of boomer portfolio liquidation.

The basic post-boomer problem is pretty muchinsoluble: we boomers lay waste to everything we touch, and if you make us all, as a generation, put money in the stock market in this way, we'll mess that up too. It's especially so when we do things to our benefit (and yes, there's always an ideological explanation, and it usually doesn't stand up to any serious scrutiny) at the cost of those coming next -- as you all know, we're never as happy as when we can pass the costs of our own follies onto those born between 1960 and 1982.

(The only viable solution I've ever heard is from a younger colleague: legalize drugs for everyone born before 1960. He figures that'll get enough of us out of the way to allow a normal society again . . .)

It seems to me that von's and Sebastian's goals are perfectly well met by a SS reform that has as its two components (a) means tested benefits to keep all the elderly at least 150% above poverty (b) a payroll tax cut -- and we'll be able to afford one, as Sebastian points out, if we're only looking to fund retirements of people who are poor -- that leaves working people with a little extra that they can save however they choose. (You'd have to phase in the tax cut, because you don't want to borrow too much to fund the transition). Increase the annual limits on 401k contributions if you want, hell lift them altogether. This however does not have the key feature desired by the folks actually designing programs: a huge guaranteed government revenue stream to Wall Street.

Yeah, I'd also fund the transition by raising the caps on SS contributions.

If the markets become efficient, you only get as much equity premium as you take on risk. As I've mentioned before, there is lots of evidence that the equity premium is shrinking already, and any of these proposals would only serve to shrink it further. This becomes more true as von says that the risk will be limited by restricting investment options; the less risky the investment, the less premium you're going to get. I'd love to know where von draws the line, and what constitutes an acceptable amount of premium to force people to give up. Exactly what rationale do you use to insist that we should try to get people to invest more risky, but not *too* much more risky?

Also, if your plan is to produce more rational investors, and you think that you will succeed, be very wary of insuring minimum returns in the form of a welfare transfer to those who become the losers in this system. You create a moral hazard, and could end up seeing overly risky behavior from participants since you have given them a free put option on their investments.

The goal of privatizing SS is twofold: reward a GOP constituency (financial services industry) and attempt to remove a constituency (senior citizens) from the Dem side of the ledger.

Jadegold: How could the second be true, if Social Security reform is such a bad idea? Wouldn't it stand to reason that, by pissing off the elderly, Bush would be making of them an implaccable foe?

If you're referring to "seniors" in another three or four decades (someone like, well, me, who, being an old geezer by that time, would presumably have my private account in lieu of a portion of my guaranteed pension), at least you're being honest by acknowledging, however obliquely, the naked political calculus that supports the maintenance of the welfare state.

This is a fallacy based on the idea that 'sub-efficient' and 'government intrusion' are equivalent in both cases.

no it isn't. it's a clear example of conservatives having two standards when it comes to the power of the markets.

health care: "oh no, don't be ridiculous. we mustn't let the government get involved there. that will lead to massive inefficiency and beuraucracy, and market distortion from the massive amounts of money involved, and then we'll all be slaves to Uncle Sam. it's best to let the market sort things out - as it will, because markets are the best thing, you see. harrumph, old chap."

wall street welfare: "hmm, yes, that's a fine idea. the markets surely aren't working, as we can see by the fact that they ... uh... well, take our word for it, the markets just aren't working as well as they could be; there's massive inefficieny you see. and all it takes is a few trillion dollars of taxpayer money to fix it."

un. be. lee. va. bull.

From the point of view of an individual citizen, Social Security is insurance while forced privatization is an investment. You cannot directly compare these two financial instruments. They have fundamentally different purposes. I personally have a 401(K) and a fairly high savings, given my income. Social Security is a different "product" for me that I cannot get anywhere else and that is vastly superior in meeting my financial needs than a second 401(K)-type thing would be.

Also, von, one argument against the Iraq war was that, however wise it might be in general, the Bush Administration would surely screw it up. They screw everything up, since evidence and results are meaningless to them. Even if privatization is a good idea (which I obviously dispute), it can wait until there is an honest and competent Administration in charge. We can already see that these guys will not be honest -- they lie when they describe things as a 'crisis' and their accounting (like the off-budget Iraq war) will certainly be riduculous.

"Huh? I admit, I'm hoping to encourage particular (advantageous) behavior, but how the heck am I "requiring" anyone to hold "more" equities?"

von, either you can not mean what you wrote in this statement, or you do not understand what you are proposing. Please explain fully what you mean by: "Thus, one argument in favor of privatizing part of Social Security is that it will force more money into the market and capture the "equity premium" -- the money that is being lost because folks ain't investing the way that they should."

I am reading it the only way I can, that you are talking about requiring ("force" is generally only used when a person is being required to do something, not merely "encouraged") people to invest in equities the money which would otherwise be used to pay Social Security benefits. If you mean something else by the line, please say so.

"And, as felixrayman pointed out in the very first comment, the health care system would need to dramatically change to be anywhere near as efficient as the securities markets. The comparison cuts both ways."

That would be the comparison cutting my way in both instances. The health care system is not as efficient as the securities markets because of the perverse nature of the various governmental interventions in the health care system. See for example the rise of HMOs in the 1980s. They didn't come out of nowhere. The changes in rules which brought them to ascendance at the charge of the Democratic Congress were supposed to save the health care system last time.

Oops.

Von, nice post, might I make a recommendation, a clearer outline as to what SS reform entails (the optionality of the reform) and a little research on the Australian superannuation program (a more radical program than the SS reform). The conservation about SS reform always hits the same incorrect tangents.

A *partial carveout* of a self directed SS program, doesn't change the world but it just may save Social Security.

"That would be the comparison cutting my way in both instances. The health care system is not as efficient as the securities markets because of the perverse nature of the various governmental interventions in the health care system. See for example the rise of HMOs in the 1980s. They didn't come out of nowhere. The changes in rules which brought them to ascendance at the charge of the Democratic Congress were supposed to save the health care system last time.

Oops."

While an enlightening view of history, it most assuredly does not imply that the comparison cuts in your way in both directions. Let's go to the tape. My comment was in response to this comment of yours:

""when the sub-efficient industry in question is the US health care system, any government intrusion at all is assumed to be the worst possible thing ever: "market distortion", "beureucracy", we'll all become "slaves" to the government, yadayadayada. nope, can't do that, it's practically communism!"

This is a fallacy based on the idea that 'sub-efficient' and 'government intrusion' are equivalent in both cases. The health care system would have to dramatically scale back its current levels of government intrusion to approach the the level of intrusion von is talking about at its maximum expansion."

Assuredly the current level of government intrusion in health care is greater than the level of intrusion in the financial markets von is proposing. On the other hand, the financial markets are far more efficient than the health care ones. As felixrayman pointed out:

"It would be hard to imagine an entity that more closely meets the requirements of market theory than the US equity markets. If you support massive and permanent government intervention in those markets due to this alleged "market failure", please agree to refrain from ever criticizing communist economies again, for that would be utter hypocrisy. If such intervention is warranted in markets as free as the equity markets (and I do not believe it is), there is almost no market in which massive and permanent government intervention is not justified due to market failures."

Therefore, while the relative levels of intrusion into the markets suggests the harm here is less than in health care, the efficiency of the markets suggests there is far less need for intrusion here than in health care.

Revise to "the government established all necessary preconditions for markets to develop, and then provided for and guided that development."

Not even close, even in the revised edition. Early regulation of equity markets was self-regulation, for example the scandals in the 1860s resulted in the prominent exchanges enacting listing requirements - not in government regulation. The relevant government entities were too corrupt to have taken action at that time in any case. Before that time, the markets had been small enough that everyone knew everyone else - "perfect information" - and the maintenance of reputation alone had enforced some measure of discipline on the exchanges.

Regulation of the securities industry was mostly a result of the 1929 crash - THAT was considered a market failure.

Let's talk about the real market failures we have now. And no, I'm not talking about some academic deciding he thinks the risk premium is too low. The US has a high infant mortality rate compared to other industrialized countries because of its failed health care system. 12,000 infants die each year in the US that would live if the US could match the survival rates of Western countries with nationalized health care. THAT is a market failure. Let's fix that. Let's worry about saving the lives of those 12,000 kids before we start to worry that Brad DeLong thinks the risk premium in our equity markets is too high, OK? Not that I dislike DeLong, but come on.

Let's talk about some more market failures. Let's talk about air pollution. Air pollution from US power plants kills 30,000 people a year. That's a market failure. Not a made-up market failure used to try to justify a giveaway to the financial industry, that's a real externality - a real easily fixable market failure. Let's worry about the 30,000 people dying every year due to that before we start to worry about the risk premium in our equity markets, OK?

Somewhere between 100,000 and 300,000 people die in the US each year due to obesity. That's a market failure. Even though government was a major factor in producing the problem (agricultural subsidies, subsidizing roads leading to
suburban development, etc., etc., etc.), many conservatives would mock anyone who suggested that government play a part in the solution. Meanwhile, a few hundred thousand more people are going to die unnecessarily this year. Can you explain to me why the supposed "market failure" of a too-high risk premium should take precedence over a few hundred thousand deaths?

Please. What Cleek said - unbelievable. We're supposed to buy the line that in spite of ignoring externalities like pollution, ignoring the externalities of a failed health care system, ignoring the externalities of unemployment and offshoring, ignoring the market failures of monopoly and oligopoly, the conservatives' desire to begin the dismantlement of a spectacularly successful system that has ended poverty among the elderly is a product of their honest concern that the financial markets just can't make it on their own.

That's absurd and insulting.

Here is a pdf link to a comparison of the Australian and US SS programs.

Ah, back online, thanks to a hotel room with internet access at a hotel room. -- Von, there are several points about your views on this topic that I don't get yet. First, if you're concerned about the national savings rate (as I am), why not begin by trying to bring the federal budget deficit back under control before messing with a perfectly good program? Second, you say that you wouldn't support Bush's plan if he finances it with deficit spending. Me neither (I wouldn't support it in any case, but I can't even begin to imagine supporting it now, if we have to borrow money to finance the transition.) Since Bush has said that his tax proposals will be revenue neutral, that he does not propose hiking the payroll tax, and that he will not cut benefits, how exactly might he find the several trillion dollars he would need to come up with? And if the answer is 'deficit spending', then why on earth not just wait for a new administration before thinking about Social Security reform, especially given this administration's record of screwing up the implementation of everything?

Hotel room at a conference, I meant to say. My brain got fried on the plane.

A *partial carveout* of a self directed SS program, doesn't change the world but it just may save Social Security.

Save it from what?

at least you're being honest by acknowledging, however obliquely, the naked political calculus that supports the maintenance of the welfare state.

Until you've demonstrated that the welfare state has no value beyond its political worth, I don't think he's done any such thing. You might as well argue that the existence of the military is the result of a "naked political calculus" on the grounds that it palliates a particular constituency (military personnel, for example).

DtM --

Jeebus. Talk about missing the forest for the trees. As I've written, the present system is coercive. The proposed system is equally coercive in the sense that you are forced to give up a given amount of current earnings. The proposed system is less coercive, however, in the sense that you'll have a choice in how you invest a portion of your SS returns. If you'd like to invest it all in T-bills because you're concerned about fluctuations in the market, go right ahead.

If you're merely getting hung up on the use of the word "force" in my comment, above, then mentally replace it with the word "encourage."

W/r/t Hilzoy (and then I'm out for a few hours)

First, if you're concerned about the national savings rate (as I am), why not begin by trying to bring the federal budget deficit back under control before messing with a perfectly good program? Second, you say that you wouldn't support Bush's plan if he finances it with deficit spending.

I read these as both being different aspects of the same point, which is that Social Security reform does not make sense if we merely replace a medium-to-long term general funds deficit with a short term general funds deficit. One does not generally pay off a mortgage with an auto loan. Thus, any SS privatization plan that is not self financing should be dead on arrival. (I'll certainly not support it.)

Sorry, DtM, that was unfair. I used the word "force" and you merely applied its ordinary meaning. I'm responsible for the confusion. My bad.

And, now, I really am outta here.

Von,

While I appreciate the apology, I think permitting a person to have sufficient control over the investment to not be required to invest in equities removes this rationale entirely for a privitization program. If persons can choose not to invest in equities, then supporting privitization because it compels people to invest more in equities (as you and DeLong think they should) no longer is a justification.

I understand you believe this is the lesser reason for your support of the program (as discussed in the other thread). I don't find the reason persuasive (for reasons discussed in the other thread). My point was that either you are dictating the public's investment choices or this reason to support privitization just doesn't exist.

I think permitting a person to have sufficient control over the investment to not be required to invest in equities removes this rationale entirely for a privitization program.

DtM, I trust that the vast majority of SS investors will hold equities because it's the smart thing to do.

My brain got fried on the plane.

Must be the gamma flux. Call a doctor if you get too grumpy.

"DtM, I trust that the vast majority of SS investors will hold equities because it's the smart thing to do."

I am unconvinced that everyone will see the wisdom of such an approach (see st and Bernard Yomtov's comments), but I am certain that at least some people will choose to invest in equities. The question then becomes where the money which is being diverted to these accounts comes from. There is no such thing as a free lunch.

If it is from the surplus Social Security taxes, that creates a larger general funds deficit, so bond prices will rise accordingly, and the market will reach a new equilibrium, with potentially higher or lower levels of equity investment. If it is from new taxes, it reduces the money available for investment otherwise, and again we cannot say whether total equity investment will be higher or lower.

"Therefore, while the relative levels of intrusion into the markets suggests the harm here is less than in health care, the efficiency of the markets suggests there is far less need for intrusion here than in health care."

Your therefore doesn't follow from your argument. Your unstated presumption is that the massive government interventions in health care are not a part of the reason why the health care system is dramatically less efficient than the equity market system. Considering the transition from HMO as saviour to HMO as demon in government rhetoric, I can't agree with that presumption.

"Your unstated presumption is that the massive government interventions in health care are not a part of the reason why the health care system is dramatically less efficient than the equity market system."

No, it's not. What both felix and I have been saying is that since the equity market is so efficient (as opposed to the health care market which was not efficient at all prior to the regulation and remains not efficient after the regulation, although other goals were furthered by the regulation), there isn't a need to regulate it.

Or it could come from funding cuts, DtM (or some combination of funding cuts, SS redirections, or tax increases).

"Or it could come from funding cuts, DtM"

In this case, funding cuts means reducing current benefits. Is that what you are proposing to balance the costs of the privitization? If so, it puts you in a very small minority, and one I will absolutely oppose.

Until you've demonstrated that the welfare state has no value beyond its political worth, I don't think he's done any such thing. You might as well argue that the existence of the military is the result of a "naked political calculus" on the grounds that it palliates a particular constituency (military personnel, for example).

Anarch: I'm not arguing that the welfare state has no value beyond its political worth -- that's something you're incorrectly inferring about my views on the welfare state. I would argue, rather, that the welfare state is bigger than it should be because of political considerations -- because of the self-reinforcing vicious circle of larger welfare outlays (including Social Security) leading to a larger constituency for such spending, leading to larger outlays, etc...

While there may well be something called a "military constituency" it's not nearly so successful at expanding its piece of the pie. While there's been a blip upwards since 911, the overall, longterm glidepath of military spending as a percentage of GDP has been mostly downwards since the early sixties. I believe we were spending something near 10% of GDP on the Pentagon during the Kennedy years; this number had shrunk to something like 3% of GDP by the end of Clinton's term, and even today, is (I'm guesstimating) only about 4% of the economy. The same trend, by the bye, can be observed with regard to the number of personnel in our armed forces.

Social Security by contrast, seems to have found the knack for insuring its own steady growth, and enlisting the naked political calculus of politicians to do so.

Anarch: I'm not arguing that the welfare state has no value beyond its political worth -- that's something you're incorrectly inferring about my views on the welfare state.

And also, just to clarify, I'm obviously using the term "welfare state" to refer collectively to government transfer programs. Americans tend to shy away from this term, and are fond of eschewing its use when the intended recipients are not poor people. But Social Security is very much part of America's version of the "welfare state" by any reasonable definition.

I've been wanting to comment on this post at length, but have been unsure where to begin. So I guess I'll just dive in. My first point is to suggest to von that he reread the Tyler Cowen post he cites. It is hardly an enthusiastic endorsement of the idea that increased equity investment from SS privatization is going to be a huge financial boon.

With all respect to DeLong and Feldstein, I simply don't see the mechanism that will generate this supposed benefit. As I argued in a previous thread, it looks to me like the private system is just going to have retirees selling their portfolios to workers. Where is the increase?

Will the equity risk premium shrink substantially? I don't see why, even if there is an increase in private investment. The premium is a spread, a gap between two other numbers, not a single measure. It measures how much higher the expected return on equities has to be than that on treasuries in order for investors to accept the attendant risks. It tells us how much compensation investors want for accepting the risk of equities. What will make the underlying attitudes change? It's not as if we haven't been deluged with books and articles explaining the benefits of long-term equity investing in recent times. Dow 36,000, anyone?

Certainly, if savings increase, there might be a drop in the premium, or more accurately, I think, a drop in the cost of capital, which will be beneficial. But this doesn't seem to be the argument at hand. And, as hilzoy points out, if we want to do something about national savings we would do well to start with some deficit reduction.

What I'm really looking for is some sort of non-free lunch theory that explains where all the good things are going to come from. I am perfectly willing to admit that there could be ways to improve the Social Security system (though I do not think the current Administration and Congress can be trusted to do so). But so far I have not seen anything resembling a sound case for specific non-ideological changes. (By "ideological changes" I mean things like means-testing which change the basic nature of Social Security, as opposed to alternative ways of financing the current system).

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Whatnot


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