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February 11, 2005

Shame on the Washington Post (Why Oh Why Can't We Have a Better Press Corps? Department)

What seemed to me to be the two most egregious passages in a very misleading and shameful editorial:

washingtonpost.com: Mr. Bush's Personal Accounts: [C]ritics... argue that mass Social Security purchases of equities will drive their prices up.... But Social Security purchases of equities would not be big enough to trigger serious price moves in the nation's extremely deep and liquid capital markets. Goldman Sachs researchers recently noted that annual equity accumulation by personal account holders would peak at 0.6 percent of the value of the market. That modest spike in demand for equities would be swamped by potential swings in the supply. In some years over the past two decades, firms have issued new equity worth as much as 2.5 percent of the value of the market. In other years, share buybacks have reduced the supply of equity by as much as 4 percent.

But new issues and buybacks oscillate back and forth from year-to-year, while private account balances grow. And the Goldman-Sachs number of 0.6% of the market per year is low. Figure on personal account holdings amounting to 20-40% of the domestic stock market--that's enough to plausibly have a big impact on prices. The 0.6% per year number is not the relevant one. I'm not certain whether the Post editorial writers are too clueless to know that it is not the relevant number, or are too mendacious to care.

The Post continues:

In short, the equity premium is real even though its precise size is unknowable; it amounts to a strong argument in favor of personal accounts. But reform would also carry risks. It would transfer investment uncertainty to individuals, the poorest of whom may arguably be ill-placed to shoulder it.

"Arguably"? I've never heard anyone argue that the poorest of Social Security beneficiaries are not ill-placed to shoulder additional equity risk.

The equity premium is an argument not for private accounts for individuals, but for the government to invest part of prefunded Trust Fund balances in equities. This is a risk that the government--not guys living on $1,000 a month Social Security checks--is best-placed to bear.

Posted by DeLong at February 11, 2005 11:46 AM