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December 28, 2004

A Big Problem with Social Democracy

Max Sawicky writes:

MaxSpeak, You Listen!: PUBLIC OWNERSHIP
: Froomkin's points are well-taken, but he seems to gloss over the fact that we already have such accounts run under the auspices of state governments. Until recently, there have been no problems that I can recall in their management. State funds seemed to bear the blow-up of Enron much better than many individual investors.

The two recent instances of problems I can recall were in New Jersey and Florida. Republican Governor Christine Todd Whitman started underfunding one of the public employee pension funds to ease state budget problems. And stooges appointees of Republican Governor Jeb Bush proposed to use a state fund to bail out the Edison Project, the school privatization company. So the simple safeguard here is to keep political control of the funds out of the hands of Republicans, especially those with the surname "Bush."

But what if we can't keep political control of these funds out of the hands of people surnamed "Bush," "Whitman," and other Republicans? What then? What if the voters persist in electing such?

This is why I'm attracted to the Federal Reserve model. Technocracy seems worth a try...

Posted by DeLong at December 28, 2004 07:23 PM

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Doesn't anyone remember the small scale catastrophe in Orange County, CA? The county went bankrupt because of bad investments. It was a Republican, not one named Bush, but he was sold risky (as in derivatives risky) investments by a pushy salesman from a large investment company. As in Goldman-Sachs large investment firm (although I do not recall whether it was GS or not).

Posted by: John Sully at December 28, 2004 08:23 PM

I wish we had the fed or something like set the overall size of the budget (37% of gdp or something), and let congress decide how to spend it.

Posted by: c. at December 28, 2004 09:05 PM

Doesn't the Federal Reserve model work because the collective action problem makes it hard to corrupt it -- the benefits from different kinds of monetary policy are diffuse enough that no one party would want to bribe the Fed. But with an investment fund, it would be quite easy to gain from a bribe (buy or sell this stock), thus the technocracy would be far more subject to corruption.

Posted by: Isaac at December 28, 2004 09:47 PM

I'm not much of a 'gamer'...

I'm not a politician. And I'm not an economist. Sometimes I miss the 'wink, wink--nudge, nudge' moment. I suppose that's why I'm STILL trying to figure out HOW, WHEN and WHY this so-called debate got from:

"IS there REALLY a Social Security 'crisis'? And IF there really is a Social Security 'problem' of SOME kind, what's the most sensible and equitable way to address it?"


"WHO should control all those billions of ('trust funded') TAX DOLLARS all us free-market proselytizers and 'bi-partisan' politicians are about to bestow on OUR very best friends (AND PATRONS): The stock marketeers?"

Without even 'passing go'

...Who got the $200?

Posted by: Mike at December 29, 2004 01:00 AM

More on your comment, c, that public expenditure should be restricted to a %age of national income. Technocracy in action.

The FT is leading today with the news that tax advisors are warning international investors not to invest in the UK because "the UK isn't competitive in a whole range of areas. One thing that has changed is that people have more of a choice." http://news.ft.com/cms/s/4205e3f4-5915-11d9-89a5-00000e2511c8.html

Local politics is becoming unaffordable. What now?

Posted by: IJ at December 29, 2004 02:37 AM

Brad seems to think that the Federal Reserve is somehow above politics, and thus the "Federal Reserve Model" makes sense.

But a look at Greenspan's tenure will show that he is extremely political.

The budget austerity (and early tax increase) of the Clinton years was a direct result of Greenspan's insistence that Clinton reduce the federal budget deficit before he lowered interest rates. That tax increase played a major role in the major GOP mid-term election victory.....

But despite the crippling budget deficits brought on by Bushco, Greenspan has placed no pressure on Bush to do anything about it.

The last four years of Greenspan's tenure have been a disaster----his efforts to avoid a recession by cutting interest rates to the bone in early 2001 was just flat-out stupid.... inventories and productive capacity were far too high at the time for interest rate cuts to stimulate additional investment in "job creation". Greenspan's willingness to switch positions, and support Bush's fat cat tax cut also showed his willingness to act on political impulses rather than sound economics.

In short, Alan Greenspan is WHY a "Federal Reserve" model is ill advised. No federal agency (including the Social Security Trust) can ever be above politics because the heads of these agencies are appointed by politicians.

(two further examples:

the Civil Rights Commission, which is supposed to be apolitical board whose goal is to advance civil rights, has devolved into a group whose goal is to roll back civil rights protections for minorities;

and the CIA, now being run by a far-right wing Republican who is stripping the agency of most of its talent--and institutional memory--and replacing it with political cronies...)

Posted by: paul_lukasiak at December 29, 2004 04:48 AM

Mike asks "...Who got the $200?"

Good question....perhaps Brad can point out the blog entry where he lays out his reasoning that the social security system is in some sort of crisis that requires immediate resolution through "privatizing" it in some form..... (I'm not a consistent reader of this blog, so I may have missed it.)

Posted by: paul_lukasiak at December 29, 2004 04:52 AM

The Fed as a model of being apolitical might have passed. In Grant's Interest Rate Observer I read about a study where Greenspan visited the Clinton administration White House 1.5 times a week, but in the last year of W's administration it was up to 3.5 times. What happens? The politicians whistle and Greenspan comes running? Another point that was being batted around was Greenspan's comments in February, 2004, commending consumers on choosing variable rate mortgages to save some percentage of interest expense. Now he's raising interest rates batting anyone who has bought a variable rate mortgage. In the conservative press that I read Greenspan is famous for making the wrong call at the turning points.

Finally, I think Greenspan has been weasled. Another part of the government that has been weasled.

Posted by: christofay at December 29, 2004 06:14 AM

The greatest disappointment in the early parts of The Price of Loyalty--I haven't finished it yet, so there may be a point where he realises his old friend is playing politics with him, though I doubt it--is where Susskind takes O'Neill at his word about the Greenspan discussions and tries to paint the "Maestro" as trying to be pragmatic.

John Sully--yes, I remember Orange County. Sold them some (very few, in context of their portfolio) secondary-market bonds in 1993-94; kept asking why they were buying more.

Only later found out it was because the Treasurer didn't know what he was doing, but loved going out for golf games (a microcosm of CEO activity in the United States) and free lunches.

Posted by: Ken Houghton at December 29, 2004 06:21 AM

The Fed an apolitical technocracy?? Ha!

Fed Governors have proven themselves to be really nothing more than Republican political hacks. I know we all had our just suspicions when Greenspan wholeheartedly endorsed Bush's profligate tax-cutting escapade, but the latest news about Greenspan (sounded out to take over the Treasury) and Bernanke (Bush's future chief economic advisor?) has finally got the record set straight for all to see.

I trust the phrase "independent central bank" will now be excised from the English language and from all introductory economics textbooks forthwith.

Posted by: General Glut at December 29, 2004 07:34 AM

Last I knew, Greenspan was 100% invested in Treasuries. He did himself no favor by cutting rates.

Posted by: x at December 29, 2004 08:30 AM

If the voters persist in electing Bushies (want to bet Jeb is next?), they desrve everything that comes after. I am not a fan of Terry Goodkind but one thing he said resonates well - let them proove they desrve good leadership. What can you do in the meantime? Explain, teach, build the base of people that have eyes to see, ears to listen and brain to understand and make decisions.

Posted by: a at December 29, 2004 11:20 AM

We care to blame the present situation on anything other than ourselves.

The public is sinking in bilge. We must educate people about the full story of markets, institutions, and governing ameliorations, because that hasn't been done for decades, (if really it was ever!); and VOTING will always be the determining, ongoing corrective.

Over the last decades, a few details have added to the story, although not as much as one might think.

Some economists (although NOT our extraordinary host), as well as almost all "econo-journalists" (I grasp for the clankiest appellation--), now appear to presume the eternal reality of intellectual and political corruption, and to assume that the latter is necessary and sufficient proof of the existence of "government failure," an oceanic concept bruited by an overweening theory. THEN they are stranded all awash, because of the proven and inescapable forms of market failure.

This will provide a science of decreasing applicability.

When the intellectual history of this sad and foul period is written, assuming its auditors haven't devolved back into the apes, (though no doubt still chasing hard, shiny objects, as puppies still chase flashlights,) it will be seen that the atomisms of two-person exchanges were defined to mound-up into an evenly-reticulated web, with no undue protrusions of hierarchisms; and it was Believed by the high-flying Rubes that this could account for everything wholly and properly; and that this Superstition was buttressed by mental fuzziness as to the nature of information, thence re-enforced by an existence theorem which showed that prices could clear all at once, and finally elaborated into a breakwater campaign to reduce the remaining transactions costs.

But of course the market failures really remained eternal: markets can never cure macro-maldistribution; information asymmetries will always need laws; and externalities can roll the boats right over...

The market is a part of it, but only a part, and there is no evidence that Adam Smith was deluded and believed otherwise. Indeed there is plenty of evidence that he thought economics was to be a subdivision of a Moral Science, and that its discussion of motives was only one volume away.

If markets can sometimes succeed, then so can governments.

Posted by: Lee A. Arnold at December 29, 2004 12:52 PM

"If markets can succeed, then so can governments."

This reminds us of the observation that markets want to be cosmopolitan, but states don't.

But is the political ideal? Cosmopolitanism following WW2 was the aim of the signatories of the last set of rules - the UN Charter. Perhaps there should be a new aim for globalisation this time.

The S-G is concerned about the future of globalisation. "In his address to the General Assembly in September 2003, United Nations Secretary-General Kofi Annan warned Member States that the United Nations [cosmopolitanism?] had reached a fork in the road. It could rise to the challenge of meeting new threats or it could risk erosion in the face of mounting discord between States and unilateral action by them."

Posted by: IJ at December 30, 2004 03:00 AM

[another comment spam makes it through]

Posted by: at December 31, 2004 09:18 AM