Alan Auerbach points out that the U.S. government is already implicitly long the stock market to a honking huge amount--some $10 trillion or so. This has implications for the idea that the U.S. government ought to invest the Social Security Trust Fund in equities as well:
Posted by DeLong at April 13, 2004 11:20 AM | TrackBack | | Other weblogs commenting on this postAlan Auerbach (2004), "How Much Equity Does the Government Hold?" (Cambridge: NBER Working Paper No. w10291): A central point in the recent debate about Social Security in the United States has been the extent to which the federal government should take significant positions in the equity market. But, as this paper shows, the government already has a much more significant, if implicit position in the U.S. equity market through its claim to future tax revenues. Using estimates of the sensitivity of federal tax revenues to stock market returns, I calculate the implicit equity position of the federal government, defined as the equity position that would be as sensitive to the stock market as the present value of federal revenues. Although standard errors are large, point estimates indicate that the implicit federal equity position exceeds the size of the stock market itself, a result that is consistent with the fact that revenues from all sources, not just taxes on corporate source income, are responsive to stock market returns.
Can we securitize that and retire the debt now?
Posted by: Ugh on April 13, 2004 12:31 PMOf course, if the US government wants to reduce its long position on the stock market, it could always eliminate capital gains taxes.
Posted by: Keith on April 13, 2004 12:43 PMThis Administration just lowered the capital gains tax and wishes to lower it still.
Posted by: anne on April 13, 2004 12:45 PMIt makes sense to me. But I don't quite agree with the formulation that the government is long the stock market. The government is long America, and the stock market probably correlates reasonably well with America.
Posted by: Andrew Boucher on April 13, 2004 01:19 PMHmm, I'm not an expert on any of this stuff, but doesn't the Pension Benefit Guarantee Corporation extend this implicit "long" position even further than the mere claim on future taxes?
Posted by: Jonathan King on April 13, 2004 01:22 PMNice note Jonathan.
Posted by: anne on April 13, 2004 01:44 PMI know this is a pretty obvious question, but isn't "responsive to" the stock market misleading? Rather, both the stock market and future tax revenues are responsive to the overall health of the economy.
Or am I missing something?
Posted by: Kevin Drum on April 13, 2004 02:52 PM"Of course, if the US government wants to reduce its long position on the stock market, it could always eliminate capital gains taxes."
And I could reduce my exposure by giving away my stock portfolio.
Posted by: Bernard Yomtov on April 13, 2004 08:16 PMShould the government therefore hedge (some - want to avoid moral hazard issues)? How much would that hedging cost, and how much would it move markets?
Posted by: Michael Froomkin on April 13, 2004 09:12 PMNo, Kevin, you're not issing anything. Yes, Andre, this is as trivial as saying America is exposed to America.
The whole thing is bogonomics of the same order as "sleep deprivation costs business and government $98 zillion every year."
It would make equal sense to say that government is "implicitly" short the market because a market crash would do such wonderful things for the ambit of governmental power.
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