May 19, 2003

Our Ancestors the [Fill in the Blank]

The MinuteMan (Just One Minute: Pension Reform in France) wonders what's going to happen to the social insurance state in western Europe if birth rates don't jump soon. At the moment western European populations look like they are shrinking at about 25% a generation.

I used to think that the answer was "North Africans": move across the Mediterranean and get a first-world standard of living and a real education for your children in exchange for having to pay high payroll taxes and having to listen to your children repeat their lessons about how "our ancestors the Gauls" had nearly defeated Julius Caesar at Alesia (or about how "our ancestors the Lombards" had kicked some Byzantine *** and conquered the Po Valley).

But now that the third millennium is almost 2 1/2 years old, it's no longer clear that this can happen...

Posted by DeLong at May 19, 2003 05:29 PM | TrackBack

Comments

I've always wondered:
Why can't the govt run surpluses for a really really long time, like, say, hundreds of years, buy assets with them, and build a large trust fund of assets. Then eventually, they can spend part of the the returns of the fund to pay for govt programs instead of tax revenues, while the rest of the returns are reinvested. And eventually, after a really really long time, they can get rid of all or most of the taxes that are distortionary.

Franco Modigliani once said about this idea that: "it would not be appropriate eve (sic) for
Social Security alone." Which I think means he thinks the entire thing is a bad idea.

But I think it would take care of the problem in Europe since it not only fully funds but goes way beyond that. . . .

Posted by: Bobby on May 19, 2003 05:54 PM

I suppose the other scheme would be for the French to encourage immigrants from Eastern Europe. Presumably, the cultural barriers to integration (starting with religious barriers) would be less.

Now, how that helps the overall Euro problem with demographics is left unanswered.

Posted by: Tom Maguire on May 19, 2003 05:54 PM

Clarification: Why can't the govt run surpluses for a really really long time, like, say, hundreds of years, buy assets with them, and build a large trust fund of assets. Then eventually, they can spend part of the the returns of the fund to pay for govt programs instead of tax revenues, while the rest of the returns are reinvested to maintain the fund and/or keep it growing. And eventually, after a really really long time, they can get rid of all or most of the taxes that are distortionary and pay for all govt spending programs with returns from this fund.

Posted by: Bobby on May 19, 2003 06:02 PM

I think it's Frantz Fanon who has a famous essay called "Nos ancetres les Gaulois", about exactly this. Fanon is from the Caribbean.

Posted by: John Isbell on May 19, 2003 07:03 PM

Given my own background, I hate to say this, but there is a limit to the rate at which any society can absorb immigration, particularly when the immigrants in question have values so different to those of the host nation.

Not being exactly another face in the crowd myself, I don't feel the slightest bit bothered by the ethnicity of immigrants as such, but there are some cultural differences that strike me as unbridgeable. To illustrate, I've known very many honest and decent muslims in my time, but having lived in a society where they constitute half of the population, I don't have some of the romantic illusions about Islam as a political force that a lot of westerners tend to possess.

A society in which Islam constituted a powerful enough force to be accomodoted to any great extent is one that I have no interest in living in, and this aversion is one I certainly wouldn't feel if it were, say, Shintoism or Buddhism that were at issue. There is a real clash of values between Islam and western liberalism that cannot be brushed aside, and it means that large scale immigration from North Africa, of all places, is not something I would ever be willing to endorse.

Then there is the whole issue of just what sort of immigrants one should take in; the educated ones, at the risk of being accused of initiating a brain drain, or the unskilled sort, who will likely prove far more unassimilable and resistant to the values of the host culture? To be honest, this issue doesn't worry me to such a great extent - America has shown that it is possible to successfully absorb large numbers of relatively unskilled immigrants, given the right framework.

However, amidst all this blather, one mustn't forget that this is EUROPE we're talking about, where 3rd generation non-white immigrants are still regarded as foreigners, despite never having known any cultures other than the ones they reside in. One of the strangest things I have ever experienced is that in America hardly anyone questioned the assumption that I was an American just like they were (though I wasn't), while in Europe hardly anyone accepts that I am a European (even though, on paper at least, I am). If people like myself can't find acceptance here, who can?

Frankly, I don't see any realistic escape for Europe from the demographic decline it is experiencing. The consequences of this are clear: EU expansion or no, there is absolutely no chance that Europe will be a serious military or economic challenge to American "hegemony" in the long run. It just doesn't have the (young) men, the ships or the money either.

Posted by: Abiola Lapite on May 19, 2003 07:12 PM

Abiola, you've no comments on your site, and your archives seem to be bloggered.

Anyway, suppose we put on a Simonesqe hat and observe that from a long clock perspective this is a challenge that those European societies will overcome, once they really have to.

Or are they doomed to Ehrlichian inevitability?

Posted by: Russell L. Carter on May 19, 2003 08:39 PM

This is really easy. Just cut out the permanent unlimited unemployment benefits and general assistance dole for folks who are not mothers (or married to mothers). Provide good quality state sponsored day care (and Saturday night care) paid for by a surtax on folks between the ages of 21 and 45 with no kids at home. Have the state pay for an extra month per year of vacation for parents with young kids. Tax birth control like New York taxes cigarettes.

Posted by: Newt on May 19, 2003 09:05 PM

Er... so the US budget is about 2 trillion minus 200 billion in interest payments, so say 1.8 trillion. If you could maintain a 4% return on your vested assets you'd need about 45 trillion to break even each year. (This is assuming a baseline spending scenario... ha ha!) Not very likely.

Posted by: Saam Barrager on May 19, 2003 10:12 PM

How about "build a massive pool of financial claims on the USA by running a huge current account surplus for ten years", which is what the French have actually done. The use of GDP-based measures to determine the sustainability of a pensions system without considering ownership of foreign assets, is one of the things that annoys me slightly more than many other things.

Of course, the fact that a big chunk of the actual *assets* built up by the French consist of the Vivendi Universal acquisition spree is somewhat less comforting, but who among us can say that our pension fund came through the 00- bust in great shape?

Posted by: dsquared on May 19, 2003 10:48 PM

"One of the strangest things I have ever experienced is that in America hardly anyone questioned the assumption that I was an American just like they were (though I wasn't)"

This is why America is the greatest nation in the history of the planet---and why we are envied and despised by the Old Europeans. We welcome and assimilate our immigrants. I know this for a fact because I live in Houston, Texas. We have an incredible mixture of differing races and ethnic groups. I can assure you that the sons and daughters of these immigrants quickly become Americanized.

Posted by: David Thomson on May 20, 2003 06:11 AM

Bobby -

And what sort of "assets" would those be? There is an annoying tendency on the part of even relatively sophistocated people to treat financial entities as having some kind of independent reality, as opposed to being the
"placeholders" they are.

The facts are this: current retirees will always have to be supported by the sweat of the brows of current workers. How it's financed, whether public or private, is really irrelevant. Perhaps some countries can, as D^2 suggests, accumulate enough claims on the sweat of other's countries workers to share the load, but there are at least two problems with this: when it comes time to collect, the other country might not cooperate, and if every country tries to do this, there aren't enough assets to go around.

Note that this also shows up Brad's obsession with "saving social security" by cutting deficits to be the absurdity it is. The government can no more "save" money today to pay tomorrows workers than it can do the repaving of I-95 needed in 2025 today...

Posted by: jimbo on May 20, 2003 06:12 AM

Um, for all you guys "sticking out your chest and sucking in your gut" *our* birthrate isn't so high and our population is aging too, so the difference between us (US) and Europe is just a matter of time.

Hey, but the Middle East is experiencing a population boom. I'm sure Red America is ready to embrace a flood of those immigrants, with Rush Limbaugh chairing the welcoming committee.

Posted by: a different chris on May 20, 2003 07:04 AM

Boosting the birth rate now would worsen Europe's woes - it would add a youth dependency problem to an age dependency one for the next 25 years. It would only start to help them after the worst of the transition problem was already over.

I appreciate your patriotism, David, but there are Canuck and Aussie readers on this site - both countries have a higher per capita rate of immigration than the US, and have for a long time. As I've said before, try and be a bit less insular.

Anyway if you crunch the numbers you'll find that immigration has to be massive and increasing to significantly stave off population aging. The US' relatively fortunate demographics is mainly a product of past higher birth rates in the 1970s and 1980s.

Posted by: derrida derider on May 20, 2003 07:07 AM

"Why can't the govt run surpluses for a really really long time, like, say, hundreds of years, buy assets with them, and build a large trust fund of assets"

Interest rates would be driven down as the surplus was built up and investment opportunities were used up, so the returns will never materialize. Returns on investment are only a reward for scarcity, and what would happen is private consumption would be increased and savings discouraged by the lower rates. For the most part it is not possible for everyone to save for the future, which is what Jimbo is saying, but to some degree we can build better machines and robots now so that less labor is required in the future, but we do this with diminishing returns as we try to substitute future production with current. Advancing technology over time makes it hard to do this as well, and it's not like we can advance it faster by throwing money at it either. The 45 Trillion @ 4% calculated by someone above is several times bigger than the US stock market. Actually I don't think the number is so far away from total US assets. If there was some blatant underinvestment which was reflected by high rates of return which for whatever reason didn't convince people to invest then perhaps some government investment could be justified.

Posted by: snsterling on May 20, 2003 07:33 AM

Bobby,

There are a number of problems with your idea, however superficially attractive. First, consider the start-up problems. The first working generation would need to provide for pensions for itself, but also pay pensions for its parents, who would presumably have to have some provision. So they would be hit twice. With pension costs in some European countries of 12-14% of GDP, this is a considerable problem. It's not such a problem if there are relatively few old people, as in the developing world today or the West a century ago, but is a huge one now.

Secondly, there is no guarantee that pension contributions made a generation ago will be adequate, because of the unpredictability of demographic trends. Of course, this is true of all pension systems, except pure pay-as-you-go, but contributing to a huge trust fund might lure people into a false sense of security.

Thirdly, the government being a major asset owner creates huge and glaring conflicts of interest, as the Japanese government is finding at the moment, with its purchases of equities to keep the stockmarket afloat. That is why governments in the West are so reluctant to invest even in relatively safe financial assets.

Fourth, imagine if this huge national pension fund sudden experienced a swing in the value of a class of its financial assets. You'd have to raise taxes to confiscatory levels for a few years to make up the shortfall. In which case, of course, you might end up with a pay-as-yo-go system anyway.

There's no simple solution to the pensions problems of the developed world. The root is that pensions are too generous because people are living longer. My guess is that most countries will eventually adopt some combination of higher retirement ages, reduced pensions and increased contributions. But systems created with fixed retirement ages greater than the average life expectancy are now failing to deal with pensions when the life expectancy exceeds the retirement age by 15-20 years.

Posted by: PJ on May 20, 2003 07:42 AM


North Africans? East Europeans?

It is beyond my imagination why nobody seems to consider Latin Americans as the solution for the population problem in countries like Spain or France.

Those are mostly Catholic, with a willingness to work at low wages, and a shared culture, history and ancestry with (Southern) Europe.

Posted by: economistaBrasileiro on May 20, 2003 08:40 AM

economistaBrasileiro,

In fact it is already happening, in Spain at least, with a lot of people from Argentina and other parts of SA. However Spain is still not seen as an immigration country by the people of richer countries, but in some parts the level of immigrants is already at the same value than the rest of the EU. I think it was in another part of Dr DeLong blog that I made an observation in rthe same line of thought. So Spain, with a better government (the PP has got quite inept since it has an absolute majority in the Cortes), together with Portugal and Italy --the other EU countries with a lot of Latino-americans who still have relatives in them, so an easier integration-- could drive an expansion well beyond their own potential.

For Barcelona, already a 10.7% is immigrant, even if some are from other EU countries. The latest published numbers give 26900 Equatorians, 12400 Colombians, 12000 Moroccans, 11000 Peruvians, 9900 Pakistanis, 9500 Argentinians, 7000 Italians, 5900 Dominicans, 5300 Chineses, 500 Philipinos, 4700 French, 3400 Chilian and 3200 Germans.

These numbers do not include irregular immigrants. And they are only for the *city* of Barcelona, not the whole province.

DSW

Posted by: Antoni Jaume on May 20, 2003 10:09 AM


Thanks Jaume, those are interesting numbers.

I also think the largest welfare gains would be generated by migration from poor Central American countries (or Ecuador), instead of middle income Argentineans or Chileans with an EU citizenship.

Posted by: economistaBrasileiro on May 20, 2003 10:50 AM

With Argentina's current whoes there has been something of a reverse diaspora out of the country. I was looking for the "Where are we immigrating to?" infographic on lanacion.com but couldn't find it... as per my recollection Spain and Italy were the primary destinations, followed by Israel. The US was 5th or 6th.

I have heard that Italy offered Uruguayos citizenship if they could show a single Italian grandparent, and that the program was popular. (A friend jokingly told me they got more applicants than there were Uruguayos.)

I also understand that Japan had some sort of labor immigration arrangement with South Americans, for which Japanese ancestry granted a temporary work visa. (Evidently a program rife with abuse.)

Posted by: Saam Barrager on May 20, 2003 10:55 AM

Not that I think Bobby's idea is right, or that that I accept the Harrod-Domar idea of capital accumulation boosting growth, but why can't Europeans build up assets in the developing world? Everyone is loooking at developing countries as a source of young labour--why not as a place of investment to pay those pensions? This idea, I know, is simplistic, and will only work in a minority of developing countries, but with the G-3 economies in the doldrums global growth has to come from somewhere, and I think that, outside of east Asia, the rest of the world is often overlooked.

Posted by: Damien Smith on May 20, 2003 11:19 AM

Not that I think Bobby's idea is right, or that that I accept the Harrod-Domar idea of capital accumulation boosting growth, but why can't Europeans build up assets in the developing world? Everyone is loooking at developing countries as a source of young labour--why not as a place of investment to pay those pensions? This idea, I know, is simplistic, and will only work in a minority of developing countries, but with the G-3 economies in the doldrums global growth has to come from somewhere, and I think that, outside of east Asia, the rest of the world is often overlooked.

Posted by: Damien Smith on May 20, 2003 11:20 AM

Not that I think Bobby's idea is right, or that that I accept the Harrod-Domar idea of capital accumulation boosting growth, but why can't Europeans build up assets in the developing world? Everyone is loooking at developing countries as a source of young labour--why not as a place of investment to pay those pensions? This idea, I know, is simplistic, and will only work in a minority of developing countries, but with the G-3 economies in the doldrums global growth has to come from somewhere, and I think that, outside of east Asia, the rest of the world is often overlooked.

Posted by: Damien Smith on May 20, 2003 11:24 AM

Jimbo. I mean private assets of the sort that are owned by, say, a state employee pension fund.

PJ. The point of this idea is to allow the public sector to do more with people paying less taxes. This fund should be built to a level designed to handle long-run means and their variances. For example, it should handle population, which is either growing at some long-run mean rate or is static. Of course it will deviate as greater than or less than mean. It should also realize that assets grow at some long-run mean rate. This too will deviate as greater than or less than this mean. There should be be a rainy day fund to handle variances from these means, which is drawn down during bad demographic times and built during good ones.

Let me go trough PJ's reasons

(1) Yes, I admitted to these huge transition costs. I said that you would have to run budget surpluses for hundreds of years. The cost would probably be well over $200 trillion.

(2) As you said, demographic problems are there anyway. Remember the rainy day fund idea.

(3) This conflict of interest thing is a canard. State pension funds have a very good record in the nineties of staying out of this sort of thing. And you can avoid it altogether by investing in index funds. This sort of thing has and would be easy to avoid.

(4) Yes there is risk that can't be avoided, which is why it should be large enough to withstand the huge swings. Also, if you invest in an index fund say that tracks the S&P 500, this problem will be less important. Again, there should be a rainy day fund in safer assets.

Posted by: Bobby on May 20, 2003 11:52 AM

“Why can't the govt run surpluses for a really really long time, like, say, hundreds of years, buy assets with them, and build a large trust fund of assets. Then eventually, they can spend part of the the returns of the fund to pay for govt programs instead of tax revenues”

Bobby, that’s not the real world. You had better learn a few more things about human nature if you plan on being an accredited economist. People worry about themselves, first, last, and foremost. The distant future essentially bores them to death. Individuals, and their governments, are greatly tempted to do some “party time” when they have a few bucks in their pockets. The great-great grandchildren can worry about their own affairs. Those who vote today are simply not going to live “like, say, hundreds of years.”

Alas, you are not likely going to thank me for sharing this bit of wisdom, but what the heck. I’m such a nice guy. You will never understand human nature until realizing that everybody is negatively impacted by the at least metaphorical reality of Original Sin. You need to put up a statue of John Calvin next to the one of Paul Krugman!

Posted by: David Thomson on May 20, 2003 12:04 PM

By the way, I think that the timing of how fast such a fund is built is most important but not being discussed here. I am sure that there exists some efficient path of capital accumulation for this plan which maximizes PV(benefits of this plan) - PV(costs of this plan).

I don't know what that efficient path is. For all I know, the efficient path could say that the fund is not completed for 700 years.

There probably also exists some efficient level of this fund for each year from when it is began until when it is finished being built. Again I don't know what it is.

Posted by: Bobby on May 20, 2003 12:19 PM

“I appreciate your patriotism, David, but there are Canuck and Aussie readers on this site - both countries have a higher per capita rate of immigration than the US, and have for a long time. As I've said before, try and be a bit less insular.”

What can I tell you? I’m just a chauvinist ugly American. You have a valid point about both Australia and Canada. Still, I noticed that you didn’t mention any nations comprising the Old Europeans! In the case of the latter, they usually fail miserably to assimilate their immigrants. And that’s the focus of this discussion group.

I guess that you feel an overwhelming need to say something nice concerning the bitter and envious Old Europeans. Sadly, you are placed in an awkward and thankless position. These folks are not deserving of our sympathy and would never hesitate to stab us in the back. Don’t I have anything pleasant to add? Yeah, the Old Europeans have a bunch of splendid old castles and statues. The French also export some darn good wine.

Posted by: David Thomson on May 20, 2003 12:24 PM

An efficient program could also say that it is a mistake for such a fund to replace all distortionary taxes. Maybe the costs to society of accumulating too much capital would be more than the benefits of getting rid of some of those taxes. In fact the efficient final level of capital might not even be that much. WHo knows?

I am proposing only that we choose level of capital in the fund for each year which solves:

max PV(benefits of this plan) - PV(costs of this plan)

that is the path that is efficient. I don't know what that path is

Posted by: Bobby on May 20, 2003 12:31 PM

So I think that by compromising the idea to the efficient level, which is what it should be and I should have said in the first place, it will likely pay for some of the government programs and decrease interest rates but it will be done at an efficient level so neither of these would be overdone. So I hope addresses snsterling's comment and Saam's calculation which was a good criticism. Whatever would be done would be our best guess as to what is efficient.

Posted by: Bobby on May 20, 2003 12:44 PM

The number of Brazilians that are eligible for Italian or German citizenship are probably in the low eight digits. Yet, Brazil is still a net importer of immigrants, despite the legal migration opportunities to Europe and the large (low 7 digits?), mostly illegal and invisible, contingent of Brazilians in the U.S. Northeast.

A good number of Japanese Brazilians (in the hundreds of thousands) also took temporary jobs in Japan, and they seem to overwhelmingly not stand staying in Japan more than a few years before returning to Sao Paulo.

Posted by: economistaBrasileiro on May 20, 2003 12:45 PM

My apologies for the accidental triple post above.

Posted by: Damien Smith on May 20, 2003 01:18 PM

"There is an annoying tendency on the part of even relatively sophistocated people to treat financial entities as having some kind of independent reality, as opposed to being the "placeholders" they are."

Jimbo, I couldn't agree more. Someone who wants to save up for a car and so makes a deposit in a bank pretty much feels as if they are depositing a car, except that if they put the purchase off into the future the money will have babies. That just shows how good our system of money and interest rates works, that people forget the difference between saving money and saving cars. Probably it should be turned into a thought experiment to start off a macro intro class.... what would happen if everyone decided they would save up enough become millionaires and retire.

You don't learn about stuff like this by watching CNBC because it is always assumed the economy balances at a certain level. Our president seems to be completely unaware of how this works as well.

"It should also realize that assets grow at some long-run mean rate"

Not true. Assets do not spontaneously reproduce. Investing such a large amount as you propose would probably cause rates of return to fall very low or even below the inflation rate. If you could demonstrate that this extra investment would speed up development of basic technologies (ie. speed up Moore's law) then perhaps there is a case to be made, but I doubt the connection exists. The reason I say basic technologies is that it helps not so much to build factories which will be obsolete by the time we need to use them. Do you think you could convince an investor to build an extra auto factory now because in 30 years some retiree will need a car?

"Everyone is loooking at developing countries as a source of young labour--why not as a place of investment to pay those pensions?"

While they won't be able to be personal assistants to old people, they might be able to help with some manufactured goods. But right now the labor scarcity does not exist. Once the pressure is on I'm sure there will be much incentive to find opportunities in such countries.

Posted by: snsterling on May 20, 2003 01:24 PM

snsterling
"Not true. Assets do not spontaneously reproduce. Investing such a large amount as you propose would probably cause rates of return to fall very low or even below the inflation rate."

Read my three immediately previous posts. The problems that result from this is addressed if we do the effcient path of building this fund.

Also, obviously projections of such a mean rate would take what you are saying into account. Isn't this obvious though?

Posted by: Bobby on May 20, 2003 01:35 PM

Why is it that middle class life in Western Europe seems so comfortable, comfortable relative to middle class life in America? I am more worried about our preparation for aging than preparations in the Netherlands or France or Germany.

Posted by: bill on May 20, 2003 01:51 PM

The trust fund would grow, and I'm suggesting that we have our best guess of what that growth path would look like (and for each year there would be a mean growth rate relative to the first year).

I am proposing only that we choose level of capital in the fund for each year which solves:

max PV(benefits of this plan) - PV(costs of this plan)

that is the path that is efficient.

Now maybe the confidence intervals for such would be way too wide to learn anything, but I don't think anyone on this message board knows that yet. Moreover, no one on this board knows the solution to the aforementioned problem.

Posted by: Bobby on May 20, 2003 01:53 PM

Maybe the efficiency gains of the effiicient solution are trivial or large. Maybe projections of costs and benefits or projections of the growth path are too fuzzy to mean anything or maybe not. Who knows? I think these are questions that should be answered.

Posted by: Bobby on May 20, 2003 01:57 PM

Let me rephrase the question this way:

What is the efficient level, in each year from now and until as far as we can project, at which the government owns and buys assets and pays for spending programs with the returns on those assets instead of with taxes?

Posted by: Bobby on May 20, 2003 02:19 PM

Instead of "taxes" it should say "revenues from distortionary taxes."

Posted by: Bobby on May 20, 2003 02:22 PM

Checkout Jean Raspail "Camp of the Saints":

Published for the first time in 1973, Camp of the Saints is a novel that anticipates a situation which seems plausible today and foresees a threat that no longer seems unbelievable to anyone: it describes the peaceful invasion of france, and then of the West, by a third world burgeoned into multitudes. At all levels -- global consciousness, governments, societies, and especially every person within himself -- the question is asked belatedly: what's to be done? ...

Our world was shaped within an extraordinary variety of cultures and races, that could only develop to their ultimate and singular perfection through a necessary segregation. The confrontations that flow (and have always flowed) from this, are not racist, nor even racial. They are simply part of the permanent flow of opposing forces that shape the history of the world. The weak fade and disappear, the strong multiply and triumph.

Posted by: Wally Whirled on May 20, 2003 02:30 PM

Um, actually France has historically been as big a country of immigration as any of the New World receiving countries:

English-language sources:

Harris, Nigel, _The New Untouchables_, Penguin, 1992.

Moch, Leslie Page, _Moving Europeans_, Indiana University Press, 1992.

Thompson, I.B. _Modern France: A Social and Economic Geography_. Butterworth's, London, 1970.

Veba, Eugene, _The Hollow Years: France in the 1930s_. Check out Chapter 5, "Foreigners."

Wright, Gordon, _France In Modern Times_, 1981.


French-language sources

Barreau, Jean-Claude, _De L'Immigration En General Et De La Nation Francaise En Particulier_.

_Cent Ans d'Immigration: Etrangers D'Hier, Francais D'Aujourdhui_, Institut National d'Etudes Demographiques.

Roze, Anne, _La France Arc-En-Ciel: Les Francais, Vers D'Ailleurs_, Julliard, 1995. "Rainbow France: the French Come From Everywhere".

Posted by: Randy McDonald on May 20, 2003 02:37 PM

Bobby. James Meade- a noted British economist and Nobel Laureate- offered a similar (though smaller scale, potentially) proposal to your some years ago. He referred to it as Topsy-Turvy Nationalisation. I think it appears in his Agathotopia paper, which should be on the internet (I'm on my way out of the office and don't feel like checking, sorry). Such a fund probably can't get so large as to obviate the need for current taxation, but it can lighten the load.
Another idea, along the same vein, are the Asian Provident Funds.

Posted by: Brendan on May 20, 2003 02:44 PM

Ah vindication!
Brendan. I revised my 1st statement, and, as my previous 5 posts say, I am not advocating an end to all or even most distortionary taxation (we must tax the rich to correct a worsening of income inequality for example). I was only asking about implementing this plan at an efficient level, which is possibly small as you said Meade's idea is.

Posted by: Bobby on May 20, 2003 03:05 PM

Sorry it should read:

Brendan. I revised my 1st statement, and, as my previous 5 posts say, I was only asking about implementing this plan at an efficient level, which is possibly small as you said Meade's idea is. I am not advocating an end to all or even most distortionary taxation (we must tax the rich to correct a worsening of income inequality for example).

Posted by: Bobby on May 20, 2003 03:10 PM

Here's a quick description, which sounds pretty much like what I'm proposing:

"(d) Community Fund ('Topsy Turvy Nationalization'). This proposal has recently been made by Gerald Holtham (Holtham, 1995, see also James Meade, 1991). Under this proposal, the state gradually acquires a share of the nation's productive assets and places these assets in a special fund (private sector institutions may be contracted to manage the fund). The returns on the assets can then be used to finance provision of goods like education and health-care. Initial capital for the fund could come from a revitalized inheritance tax or even, more radically, a one-off capital levy."
http://www.netnexus.org/library/papers/white2.htm

Posted by: Bobby on May 20, 2003 03:21 PM

The distinction between a government claim over productive assets managed by private companies and a corporation tax is one which might interest the medieval Schoolmen and possibly James Meade, but not me.

Bobby; what's happened in this proposal is that you've swapped your "distortionary tax" for a principal-agent problem between the government and the managers of the state enterprises, ignored the principal-agent problem because we're not doing micro right now, and called it an efficiency gain. Happens all the time ...

Posted by: dsquared on May 20, 2003 11:20 PM

Bobby

"(3) This conflict of interest thing is a canard. State pension funds have a very good record in the nineties of staying out of this sort of thing. And you can avoid it altogether by investing in index funds. This sort of thing has [been] and would be easy to avoid."

This is unrealistic to anybody who knows how government works. For the record, I'm a government economist. In the state-owned industry with which I deal, there is ample evidence of conflicts of interst between the government as shareholder and the government as regulator. It wants to have things both ways (although consistently ends up getting neither). When a sovereign government, with influence over fiscal, monetary and exchange rate policy, owns most of a stockmarket or a large chunk of the government bonds, the temptation to avoid considering its interests in the determination of those policies is close to irresistible.

Posted by: PJ on May 21, 2003 03:42 AM

I also note that if the government isn't interfering in management of companies, then it is taking the place of someone else who might have wanted to. To create a situation in which you take the companies who happened to be ranked 1-500 on some arbitrary day and give them the present of a large block shareholder that never votes against management, seems to me to be a course of action which is not obviously non-distortionary.

Posted by: dsquared on May 21, 2003 05:12 AM

Of course this principal-agent problem and costs of any of the conflicts of interest would be included in any cost benefit calculation like the one I described above. I also think that a goal should be to design and implement better rules and better committment devices to prevent these conflicts of interest and improve this principal agent problem. Again, by investing in index funds, I think this problems mentioned in the previous three posts are much less than if you pick stocks or some other asset.

Posted by: Bobby on May 21, 2003 06:14 AM

As D^2 alludes to, the governement has no need to accumulate claims on private income. Such claims are called "taxes", and accrue to the government by virtue of it's "men with guns" (to throw the Randites a bone...). If supporting the elderly is going to take a larger share of national income, then the government simply will have to adjust how much of the national pie it redistributes. There's no need to accumulate a lot of paperwork, and needlessly interfere with the allocation of capital in the private sector, in order to do it...

Posted by: jimbo on May 21, 2003 09:42 AM

Jimbo. The last post I wrote addresses everything you just said.

Posted by: Bobby on May 21, 2003 03:47 PM
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