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December 26, 2004

The Andrew Samwick Fraction Grows with the Defection of the Renegade Froomkin

Writing from the historical origin point of the modern industrial bourgeoisie, my best-friend-since-second-grade Michael Froomkin turns renegade, denounces my tentative attraction to Equity-Premiumism-in-One-Country, and explains all the reasons that I am wrong and Andrew Samwick is right--that if we are going to prefund Social Security and invest a large hunk of the Trust Fund in stocks, we need to do it via the mechanism of private accounts to avoid massive government-failure problems. There is also a nice dig at the incapability of the liberal-economist mind to even begin to comprehend the potential scale and scope of how government intervention in the market can go wrong.

:-) :

Discourse.net: Government Invstment In Equities: It's Not As Simple As It Looks: Although attractive in the abstract, the idea that the government might try to invest in equities and thus directly enjoy some of the fruits of the very capitalism it creates a safe environment for (rather than just benefitting indirectly via taxes) is, I think, much more fraught than the economic mind instinctively recognizes. While I’d be happy if we could make it work, I don’t think we are up to it in practice (and I’m certain the Bush administration is not up to it!): the problems that need surmounting are much worse than Brad suspects, and are much worse then just “magnify[ing] our corporate oversight and control problems,” although who votes the government’s shares and according to what policy is no small problem.

No, the first-order problem isn’t that having the feds control a lot of equities will magnify existing corporate oversight and control problems. It’s that the way in which the feds choose what to hold and sell will create huge new problems.

Start with the buying end. Buying will either be mechanistic, delegated, or discretionary. If it is mechanistic, we have the wrangle over the formula, which then distorts markets unless the formula is to buy a basket consisting of the entire stock market (even this, arguably, has secondary effects on the bond market, but let’s not go there).

In fact, this is the only buy/sell formula that doesn’t create huge problems right off: have the feds buy a basket that represents all the shares in a multiplicity of exchanges (not just the big ones). But this isn’t easy to do, especially for small-cap stocks, without distorting markets. Even here, though, a mechanistic sell policy may have some undesirable depressive effects at inconvenient times driven by demography. And while it’s arguable that similar selling would be happening anyway if the funds had been in private pension funds, that may be the wrong comparison, since the funds might otherwise come out of general tax revenue, and thus spread the effects beyond the stock market.

If the feds use any formula other than whole-market, it becomes very distortionary given the sums involved. For example, if the feds just buy the S&P 500, or even just a NYSE basket, the effect of being listed in that group or that one among competing exchanges (or, worse, de-listed) is substantially magnified because it comes with an investor who can be relied upon not to sell based on market shifts, and whose buying and selling generally is predictable. Not to mention that the biggest equity gains may well be in the stocks that are not in the S&P 500 or the NYSE (think, for example, NASDAQ).

If buying is delegated to fund managers, they become incredibly powerful and lack the sort of checks on performance that would be needed since the government is highly unlikely to exit an under-performing fund. I suppose one could in theory create some performance-related pay for the managers that might substitute for market discipline, but there is no real chance that politics would allow the feds to create a performance pay scheme that would have the right sort of long-term incentives. (Again, imagine the Bush administration writing the rules here…)

If the feds themselves have any discretion as to what to buy, we’re in for even worse crony capitalism than we have now, with a dash of ‘lemon socialism’. Imagine if campaign contributions might, or even are thought to maybe, have a chance of turning the feds into a buyer of your shares. At this point, having the Bush administration in charge is just a nightmare. And imagine the pressure to have the government buy into ‘critical industries’ or key local employers to prop them up or protect them from foreign takeover. (It may be that the new TRIPS and GATT regimes protect against this somewhat; it’s been a very long time since I looked.) And try re-telling the Lockhead or Chrysler stories if the government has an equity buying scheme.

It’s even worse on the sell side. If the formula for selling shares is anything but mechanistic, then a government sell decision will be seen as a massive vote of no-confidence. [Side issue: can the government use its information about the economy to decide what to buy and sell? Or rather, what information is it allowed to use generally?]

Then there are the macro issues: just imagine the times when Congress and local pols will be pressing the feds to buy or sell as an aspect of counter-cyclical policy…

So while it makes sense in the abstract to have the government be a direct holder of equities, the details are just swarming with devils, demons, pitfalls, and mixed metaphors.

I think that Andrew and Michael are wrong. The government failure problems, while first order, are solvable. (Federal Reserve model, anyone?) And the consequences of individuals' churning the asset allocation of their private accounts, plus the management fees, plus the pressure on Congress to create loopholes to allow people to tap their accounts before retirement are, in my judgment, bigger than the government-failure problems.

In a better world than this one we would be debating this. But engaging in arguments about the substantive effects of different policies is not the Bush administration's forte: we are told that now is not the time to do so.

Posted by DeLong at December 26, 2004 06:03 PM

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from MaxSpeak, You Listen!
My two cents on this post by Mchael Froomkin, cited approvingly by DeLong, throwing cold water on the idea of the Federal government taking advantage of the "equity premium" by investing Social Security revenue in private sector assets. Froomkin's poin... [Read More]

Tracked on December 27, 2004 12:39 PM

» Max Speaks, and He Clarifies from Vox Baby
How should pre-funding occur--centrally via a Trust Fund or in a decentralized system of personal accounts. I favor the latter, and Brad would prefer the former. Some of the difference may be the scale of the investments that we are each envisioning.... [Read More]

Tracked on December 28, 2004 06:10 PM

Comments

"[Side issue: can the government use its information about the economy to decide what to buy and sell? Or rather, what information is it allowed to use generally?]"

Lot to think about, but if a core function of government is a monopoly of violence-- why not a monopoly of insider trading? If the President intends to proposes pharma price controls next week, what's to stop the Feds from buying puts on Merck this week? Or from playing the Forex market ahead of Treasury statements concerning the dollar?

I don't think using Social Security funds to create an index fund to be that big a deal. If people are worried about the Feds having too much market power, then let each state set up its own retirement fund, so there will be 50 big players instead of one megaplayer.

Posted by: beowulf at December 26, 2004 06:32 PM


Federal Reserve anyone?

Just consider Alan Greepspan and his demonstrated 'independence' in the period 2001-2004 (I am thinking of 'tax cuts').


Is this enough of an argument to kill off this line of debate?

The magnitude of the ways to screw things up is too huge to insulate via an 'independent' body. Federal Reserve can only move interest rates and only indirectly create winners and losers. Equities can move single companies.

I prefer the "taxation-cabability index fund" that the current Social Security scheme is investing in.

Posted by: Mike at December 26, 2004 07:09 PM


"the details are just swarming with devils, demons, pitfalls, and mixed metaphors."

Now think about it: policing. Nice idea to have goverment do it in theory. In practice - lots of devils, demons etc. in the details. Conflicts of interest, corruption, selective enforcement, abuse of personal information etc. Would it not be better to just give everyone shotgun - tax-deductible?

Posted by: a at December 26, 2004 09:19 PM


I think you do Michael Froomkin a disservice by implying that he supports individual private accounts.

[Yes. I do. That's the reason for the smiley]

("Michael Froomkin turns renegade, denounces my tentative attraction to Equity-Premiumism-in-One-Country, and explains all the reasons that I am wrong and Andrew Samwick is right--that if we are going to prefund Social Security and invest a large hunk of the Trust Fund in stocks, we need to do it via the mechanism of private accounts to avoid massive government-failure problems. ")

Nowhere did i see Froomkin come close to suggesting that private accounts were an acceptable alternative --- he was merely cataloguing a few of the reasons why the "one big fat account" alternative is an atrocious idea as well.

Does anyone else remember that only six years ago Greenspan and his ilk warned that paying off the national debt would be a really bad idea BECAUSE once the debt was paid off, the Federal government would have to use the surplus for investing in private securities?

Clinton had the right solution to any social security "crisis"---make sure that tax revenues will be sufficient to pay social security benefits in the future by paying off the non-trust fund debt today with structural annual surpluses. If/when the trust fund is exhausted, and payroll taxes are insufficient to pay full benefits, the surpluses that were being used to pay off the trust fund debt (and provide benefits) could be used to provide a direct subsidy to Social Security from general revenues.

Posted by: paul_lukasiak at December 26, 2004 11:37 PM


Hey - I don't vote proxy on my mutual funds. The funds do. So when the government is picking fund managers they are also, defacto, picking corporate policy makers. Is this really just a plan to give Calpers some conservative competition?

Posted by: benton at December 27, 2004 06:31 AM


Froomkin's argument is actually one of the best argument against private accounts yet presented.

If a government investment in a single index (e.g., S&P500)causes excess distortion for stocks (de)listed, then requiring private accounts to hold even a majority--ignore only--of Exchange-Traded Funds or Indices (e.g., GSPC) would, by definition, have the same effect.

Since the government requiring people to own individual stocks either (a) will cause distortions in the market, since most potential--what is that word I don't think means what Mr. Bush thinks it does--"owners" will buy the heavily-traded Usual Suspects or (b) will cause people to be forced to buy stocks in which they have neither interest nor knowledge (the Belgian dentist problem viewed as a problem--janitorial staff "having" to buy CIEN while mechanical engineers have to buy NATH, or anyone being required to buy KKD).

Neither of those stand tall as strategies to ensure either limited market distortions or a return that is anywhere near excessive of its risk premium--indeed, the overall risk of the market is clearly higher the less-informed the market participants are. And the requirements of privatization would mean that either there would be excess distortions or the median investor would be less informed, impairing market efficiency and raising risk.

Posted by: Ken Houghton at December 27, 2004 06:52 AM


Investing the Trust Fund into equities is equivalent to a tax on capital, and one with some desirable properties that the current tax system lacks (symmetric, taxes unrealized gains...)

So if we decide to go that way, we have a choice between doing it honestly - with a new tax on capital that does not exempt unrealized gains - or clandestinely - by investing government assets in the market.

The first approach is fairer and less distortionary, but requires changing the tax code, which may be politically impossible. The second approach is probably easier to implement, but suffers from problems described by Froomkin, and those problems should not be taken lightly.

Posted by: enfant terrible at December 27, 2004 06:58 AM


How are the fundamental problems any different if we institute private accounts? Unless the individual is allowed to make her own personal investment decisions on a fine level, don't we run into similar problems?

For instance, if we only allow a limited range of mutual fund-like options, say one invested in bonds and one invested in stocks, don't the secondary investment decisions of whoever manages those funds run into the same market making and market breaking possibilities, with the very same possibility of real or perceived political or personal corruption? After all, they will all be mini Alan Greenspans, won't they?

As for the alternative, letting me invest my funds however I want, please save me from myself!

Posted by: pblsh at December 27, 2004 06:59 AM


Not that I favor the federal government creating its own mutual fund, but I don't think it's being fairly described by Froomkin. We would undoubtedly create an independent investment committee to place the funds, not the Treasury Dept.

O Canada:

http://www.sdc.gc.ca/asp/gateway.asp?hr=en/isp/pub/factsheets/retire.shtml&hs=cpr#g

Posted by: Patrick R. Sullivan at December 27, 2004 07:12 AM


Actually, no, it doesn't follow that we should have individual accounts for other reasons well explained elsewhere, not least that the endgame is either destitute old people (whether spendthrift, unlucky, or unwise) and/or new aid programs to help them which end up with us paying twice, once now and once later.

The answer, rather, is that the social security program we have remains superior to any of the forms of private account alternatives. (If we want to supplement it, that might be a different story.)

[And you aren't impressed by the large apparent size of the equity premium?]

Posted by: Michael Froomkin at December 27, 2004 08:02 AM


Maybe this is a dumb question, but I work for the State of New York, and a large chunk of my pension fund is invested in stocks. I understand that California and other states have similar systems. Is the alleged problem of federal investment in stocks simply a matter of scale (and, if so, why would it be that much more of a problem than a large number of state pension funds?), or is there something else Obviously, there are all sorts of conceivable objections to various specific plans, but what is the general problem, if any?

Posted by: C.J.Colucci at December 27, 2004 08:32 AM


Every single one of his objections applies to both index funds and "privately account social security investment" into index funds. What's the difference?

Freeloading on the arbitagers and day traders is still that, whether it's done by the individual or the government collectively.

Posted by: Jason McCullough at December 27, 2004 10:20 AM


The oil revenues investment fund administered by the Norges Bank is largely indexed money, and did not have these serious adverse effects.

Posted by: dsquared at December 27, 2004 10:24 AM


This is simple, I guess, unless you're an academic.

The interests of the vast majority of social security recipients are antithetical to those of equity investors.

If these interests are conjoined, by more than the most basic of mechanisms, the interests of the more vulnerable will be exploited. It is so simple.

The interest of the weak, in this, and in this case only, is being protected. The interest of the strong is largely compromised in service of the weak. Otherwise, the weak will end up with nothing.

This is not un-American, unless you're a simpleton, a jackass, or a cretin.

Social Security is for many the most civilized aspect of American life. The only appropriate tone is ridicule for those who would imperil the world as we can know it, not to mention our hopes for the future.

Have a nice day.

Posted by: BastardScoundrels at December 27, 2004 10:32 AM


I have no doubt that the loopy 'holes in Congress will allow folks to tap their funds in the Very Next Recession, thereby, through consumer spending into corporate income, topping-up the coffers of the upper-quint; while debt spirals for the remainder. This would be a tenth type of active redistribution of money upwards.

Money is already being redistributed to the upper 20% or so, through several different mechanisms, including: (1) the 1983 increase in Payroll Taxes to cover the decrease in Income Taxes under Ronald deRegulation; (2) the more-polarized distribution, of both wealth and after-tax income, during the last twenty-five years of "freer" markets, via the regular concentration of capital ownership and technological production; (3) the Bush income tax cuts, two-thirds of which go to the upper 5%, wiping out the Social Security surplus that was paid disproportionately by the bottom 80%; (4) it appears likely that ONLY further payroll taxes will be used to pay back the Social Security surplus, i.e. the Republicans are planning to make the same people pay the same surplus TWICE; (5) the capital gains tax cuts, since the upper-quint accounts for 95% of all capital gains; (6) the corporate tax cuts; (7) the interest on the resulting federal debt due to the lack of tax revenue, which is paid out of future taxes back to those taxpayers who can afford to own bonds, and almost all of the bonds are owned by the upper 20%; (8) inflation, which increases the amount of money you pay for the same amount of goods and services; and (9) the increasing personal and household debt for consumption, as well as the increasing interest rates, which again benefit the upper-quint, who provide most of the funds.

I shall here restrain myself from wondering unduly why the dunderheads of economics (I do NOT include our noble host) have swallowed the malarky that such rampant concentration is necessary for economic growth and efficiency, when of course they can't recognize a circular concept when it comes up and bites them, because it bites them on head and ass simultaneously, and they become distracted.

But while it seems likely that the creative destruction which provides the material culture we all know and love will always tend to foreshorten the more expansive dreams of the poor stooges at the bottom end, through the necessity to spend assets in a linkage, --this degree is ridiculous, scandalous.

Posted by: Lee A. Arnold at December 27, 2004 10:59 AM


The most important question to ask about any decision is: What if it is wrong?

If we decide to continue to fund our old-age insurance system through uniform taxation of wages, the worst that can happen is that the return on investment will not be as good as if we "captured the equity premium."

If we decide to change to trying to fund it through equity investment accounts, whether government-directed or privately-directed, we put the system in great peril.

Froomkin sees only the most obvious problems, and states that, "If the feds use any formula other than whole-market, it becomes very distortionary..."

But even a whole-market formula will be "very distortionary." For one thing, if the government is going to buy stock in every corporation in the country, every two-bit crook and arrogant ding-a-ling in the country is going to start one (am I the only one who remembers the S&L debacle)?

More fundamental, however, is that even without formulaic government buying the stock market is rendered inherently unstable by the tendency of participants to buy more when prices rise and less when they fall, the exact opposite of what they would do in a properly functioning market. If government buying is then apportioned by market capitalization (how else would you implement a whole-market formula?), it will automatically reinforce this lunacy. Imagine how much more insane our recent market bubble would have become had the government been buying the whole market right along with the other suckers.

Nor is private management of equity accounts any kind of solution. The problem of people blindly buying what's going up and selling what's going down without regard to underlying value corrupts every market in which such accounts might invest.

Plainly put, the investment markets are lousy markets. If you build an electronic circuit with analogous positive and negative feedback loops, you get exactly the same kind of "limit oscillation". The output never settles to the electronic analog of the "market price" that would properly discount the income streams from the assets*.

How can it possibly be a good decision to set the populace adrift in these markets?
The downside dwarfs the upside.

The most important question to ask about any decision is: What if it is wrong?


* The failure of economics texts to teach this mystifies me. Do most economists not understand this? Do they think it not important?


Posted by: jm at December 27, 2004 11:44 AM


"Money is already being redistributed to the upper 20% or so, through several different mechanisms, including: (1) the 1983 increase in Payroll Taxes to cover the decrease in Income Taxes under Ronald deRegulation; ..."

Agree. So what is wrong with privatization which is essentially a payroll tax cut with some strings attached? Put it differently, by now many people posting in this blog appear to think that the 1983 payroll tax increase was a bad thing. So why these people do not consider reversing that increase a good thing? I say let's reduce the SS trust fund surplus NOW, which immediately makes all of Bush tax cuts harder to stay, and that is a good thing in the first order.

Posted by: pat at December 27, 2004 12:43 PM


" I say let's reduce the SS trust fund surplus NOW, which immediately makes all of Bush tax cuts harder to stay, and that is a good thing in the first order. "
.
.
Bushco, in case you haven't noticed, has no problem with massive deficits, and eliminating the SS Trust surplus won't make the slightest bit of difference to them.

Posted by: paul_lukasiak at December 27, 2004 01:07 PM


pat--I don't think the 1983 payroll tax increase was a bad thing. I think using it for general expenditures to cover an income tax cut that disproportionately favors the folks who disproportionately paid LESS into payroll tax,--is a bad thing. And a pox's cess upon them.

Posted by: Lee A. Arnold at December 27, 2004 01:54 PM


http://www.nytimes.com/2004/12/26/business/yourmoney/26view.html?ex=1105173330&ei=1&en=c13d315d20138ae8

Economic View: The Risky Assumption in Social Security Change

December 26, 2004
By DANIEL ALTMAN

THE familiar disclaimer in ads for investment vehicles and
money managers of all sorts is: "Past performance is no
guarantee of future returns." It probably sounds obvious to
anyone who has ever played the markets. So why, in
proposing changes to Social Security, has the White House
ignored that counsel?

When President Bush set up the Commission to Strengthen
Social Security, part of its mandate was to come up with a
plan that included individual portfolio accounts. The
commission's mathematical models assumed that such accounts
would always be split 50-50 between stocks and bonds. In
addition, the commission chose to assume that stocks would
offer an average annual return of 6.5 percent after
adjusting for inflation, and that bonds would pay about 3
percent.

The assumptions about returns came mainly from historical
averages. And to some experts, that seemed reasonable
enough. "I'm not sure what else one would do," said Robert
F. Stambaugh, a professor of finance at the Wharton School
of the University of Pennsylvania. "Over long periods of
decades, it seems like average returns and risk are fairly
stable."

Others begged to differ. "If you look back at what has
happened, especially in the last 20 to 25 years, we've had
two huge boosts to asset returns, both of which are now
spent," said Edward F. Keon Jr., chief investment
strategist at Prudential Equity Group.

The boosts that Mr. Keon referred to were the Federal
Reserve's successful war against inflation and an upward
trend in companies' profitability. "When profitability is
high, it tends to fall, when it's low, it tends to rise,"
he said. "Future profit growth is likely to be less than
the profit growth over the last 50 years."

Taking a longer view, Mr. Keon said, a third factor has
bolstered returns over the last century: the doubling of
the average valuations of companies, as measured by
price-to-earnings ratios. "Back in 1926, the price-earnings
ratio was roughly half what it is today," he said. "Putting
aside whether you think this change in valuation is
sustainable, I don't know anyone who thinks it's going to
double again."

Taking those factors together, Mr. Keon predicted that
returns from the stock market in the next 40 to 50 years
would be only about two-thirds as high as the estimates
used by the commission.

Richard Bernstein, chief quantitative strategist at Merrill
Lynch, offered another reason for pessimism on both stocks
and bonds. "Our view has been that the No. 1 rule of
investing is that returns on capital are highest where
capital is scarce," he wrote in an e-mail response to
questions. "Right now, courtesy of the Fed's liquidity and
their encouragement of investors to take more risk, there
is no asset class that is starved for capital. That's why
we think asset returns, across the board, will be muted
relative to current expectations for perhaps quite some
time."

Given that some of the most senior people who earn their
money predicting the stock market are so bearish, why have
historical returns received so much attention? ...

Posted by: anne at December 27, 2004 02:07 PM


If you're worried about government equity investment in a diversified, the obvious alternative is full public ownership of infrastructure enterprises. Since they are heavily regulated anyway, the standard arguments against public ownership are weak, and idiosyncratic risk is generally small since demand is closely tied to aggregate economic activity.

Posted by: John Quiggin at December 27, 2004 02:42 PM


Lee A. Arnold: I don't think the 1983 payroll tax increase was a bad thing. I think using it for general expenditures to cover an income tax cut that disproportionately favors the folks who disproportionately paid LESS into payroll tax,--is a bad thing.

Theoretically, the surplus of the trust fund has only been lent to the Treasury to cover general expenditure; Practically, that reduces the amount the Treaury needs to borrow in the open market and makes the unified budget deficit look smaller -- thus improves the odds for both Reagan and Bush tax cuts to stay (and initiated in Bush's case). With the help of hindsight, isn't this the only possible outcome with the surplus?

I wasn't famaliar with the debates in 1983 and don't know on what ground it was proposed and passed. If it was sold on solving SS financing problem, the logic is seriously flawed: a nation cannot really "save" the way an individual saves. In a closed economy, the only way a nation can save is to increase investment to increase future productivity (or to store a lot of goods, which is unlikely to be the main channel). In an open economy, a nation can also increase its savings by becoming a bigger net creditor to foreign economies. Because a surplus in SS trust fund does not directly lead to either of these two things, it has very little to do with solving the financing problem of SS, which should have been obvious from the start.

Posted by: pat at December 27, 2004 04:03 PM


Pat

Agreed till the close. The 1983 payroll tax increase has essentially left us with a fully viable Social Security system for another 38 to 48 years. Surely a nice fix to the generational bulge of the retiring baby boom generation.

Posted by: anne at December 27, 2004 05:23 PM


IF the money which was paid into the Social Security surplus account came from payroll taxes paid disproportionately by the bottom 80% of the population, is borrowed from the Social Security account to give income tax cuts, two-thirds of which go to the upper 20%, THEN: that upper 20% of the population can pay the entire Social Security surplus back with interest, before we even have to start a discussion, and that pretty much solves the "financing problem," --while the increased productivity's enlargement of payroll taxes will cure the rest of the debit. Hindsight obvious from the start.

Posted by: Lee A. Arnold at December 27, 2004 05:43 PM


Pat comments: "I wasn't famaliar with the debates in 1983 and don't know on what ground it was proposed and passed. If it was sold on solving SS financing problem, the logic is seriously flawed: a nation cannot really "save" the way an individual saves."

No, but a nation can "invest" today to reduce the need for future expenditures.

But as to the debates in 1983, all one needs to know is that was the era when "supply side economics" was being taken seriously by Reagan, and was the basis of his tax cut. In other words, trying to find some baseline of "logic" in the political debate over economic policy during the Reagan era is a hopeless task to begin with.

Posted by: paul_lukasiak at December 27, 2004 06:13 PM


Why should the fungibility of revenue be sufficient to defuse a complaint about the government's malpractice of distribution?

While this might be ranked as a "government failure," still it seems one to be remedied as many might--by the vote of an educated citizenry--and there is no need to turn to it over automatically to the realm of market failure.

For it was Coase who observed that the government is a large "super-firm," and like all Coasian institutions including all business firms, exists to organize some interactions outside the market, in order to do things better. In the government's case the redresses are of the market failures themselves, to wit, of Distribution, Info-Asymmetry, and Externality. While marketizing solutions can provide alleviation for some Externalities, Distribution always seems to get worse, (even in markets for externalities: there are reports for example, that by the markets for pollution permits, polluting industries become concentrated in poorer areas.)

Perhaps it is the cause of misdistribution which so confuses, because it is the rather natural result of all of the One-to-Many hierarchic steps whch pervade the economy yet tend to polarize along one axis, due to the mass-production results of modern technology, and the freedom to concentrate the ownership of private property. The fractal qualities of distribution are a telltale clue. Big deal. We want a little inequality to help provide a vibrant economy. But its unadulterated existence is neither necessary nor sufficient, and a little levelling can help things too.

Posted by: Lee A. Arnold at December 27, 2004 07:41 PM


shouldn't it be faction not fraction?

Posted by: big al at December 27, 2004 08:59 PM


paul_lukasiak:

The issue is what is the alternative? It takes two to tango -- democrats along will not be able to control the fiscal damage until the republicans are showing some willingness to do the same. As long as Bushco insist on tax cut for the rich regardless of budget consequence, democrats should insist on tax cut for the poor regardless of budget consequence as well. Not doing so has lead to, and will continue to lead to re-distribution from the poor to the rich.

Again, with the help of hindsight, if Clinton had put in a tax cut for the poor and the middleclass in 2000, not only bushco's tax cut were not likely to go through, we might not even have the chance to find out how awful bushco is.

Posted by: pat at December 27, 2004 10:36 PM


Pat...

I'm all for tax cuts for the poor and middle class. Just not at the expense of the elimination of Social Security.

A "tax cut for the poor" based on some kind of privatization scheme would not be a tax cut at all---the recipients would not see any more money in their paychecks. Such a scheme would also increase that which you seem to be concerned about---the transfer of greater wealth to those already wealthy.

Posted by: paul_lukasiak at December 28, 2004 05:15 AM


Froomkin and Stanwick are right to be deeply skeptical. Consider the regulatory issue: Bush's plan will create a large constituency that holds the administration directly responsible for the condition of its retirement benefits. What happens when federal regulators take action that threatens a widely held company? Do we really think that it's possible to insulate the regulatory agencies completely from a White House focused on the next election?

Posted by: J. W. Anderson at December 28, 2004 07:59 AM


Why not just use a model like the Federal Thrift savings program.

The government trusts would simply be another anonymous account in the thrift plan, managed by a private party contracted much like the current thrift savings plans.

If the accounts get too big, split the contract out so there are multiple independent private managers.

If the accounts were simply anonymous money managed with the same pool as Thrift accounts, there would be little chance congress would meddle with the management of the accounts.

Posted by: Charlie at December 28, 2004 08:16 AM


CORRECTION TO POMPOUS LIST OF WEALTH-UPWARD TRANSFERS: in my #3 above: of Bush's Tax Cuts, two-thirds of $5-trillion-total over the next ten years goes to the upper 20% of our population, (not the top 5%, as I wrote. ) However, fully one-third goes to the top 1%, which is everybody making over around $350,000 in 2004. And that's a fract! ...And I would scramble to inscribble, at (5b),: "To Respire the Billionaire's Croaking Tax"

Posted by: Lee A. Arnold at December 28, 2004 12:26 PM


Can any one explain what the likely effect of massive SS investment in the stock market will have on stock prices. What effect will the borrowing have on bond prices?

Posted by: Daniel at December 28, 2004 04:13 PM


Anne says: The 1983 payroll tax increase has essentially left us with a fully viable Social Security system for another 38 to 48 years. Surely a nice fix to the generational bulge of the retiring baby boom generation.

I agree with your first sentence: SS is viable accountingly. But I disagree with your second sentence. The generational bulge is an imbalance across time, which cannot be fixed by taxes which only shuffle things within the same time period, which is the point of my comments about a nation cannot "save" as an individual.

Put it differently, think everything in terms of real goods and services. The generational bulge is this: right now about every four workers support a retiree. In other words, on average, a working person gets to consume 80% of what they produce, and 20% of their output goes to the retiree. In 2030, maybe every two workers have to support a retiree: thus on average, every working person only get to consume 66% of what they produce. It does not matter whether SS trust fund has a surplus or deficit at that time, as long as retirees have similar living stardard as working people, one way or the other, working people then only get to consume 2/3 of what they produce.

Once you see things this way, it never made sense for the SS trust fund to build a surplus, because no amount of surplus will change the fact that in 2030, people in the working age then will only get to consume 2/3 of their output. 1/3 of their output will go to retirees.

Of course, the above analysis assumes that retirees on averge will have the same living standard as working people, and US cannot borrow from foreign countries to smooth our generational bulge. I am not saying these assumptions are realistic, but they make it easier to think the issue.

By the way, thanks for re-posting the article about historical average may not be a good guide to future performance. I feel strongly that these guys may be right.

Posted by: pat at December 28, 2004 07:59 PM


Sean Harrigan was just fired as president of CalPERS, probably for his activist agenda as an investor. Hire him to invest for Social Security.

Posted by: Lloyd at December 29, 2004 12:21 PM


They are pursuing the merger of corporate power with the state, more colloquially known as fascism.

Posted by: SD at December 30, 2004 01:12 AM


[another comment spam makes it through]

Posted by: at December 31, 2004 08:59 AM