They have almost no understanding of how the economy actually works. Here’s an argument against any sort of incremental privatization of Social Security from Mike Kinsley, who according to Blog Maverick runs the editorial pages at the LA Times!
I’m going to fisk it, and I won’t be kind…however, as a bit of a disclaimer, I work on Wall Street for a mutual fund company so its possible that privatizing Social Security might help me professionally.
Mike Kinsley says:
My contention: Social Security privatization is not just unlikely to succeed, for various reasons that are subject to discussion. It is mathematically certain to fail. Discussion is pointless.
Discussion is never pointless, when the person is as wrong as you are.
The usual case against privatization is that (1) millions of inexperienced investors may end up worse off, and (2) stocks don’t necessarily do better than bonds over the long-run, as proponents assume.But privatization won’t work for a better reason: it can’t possibly work, even in theory. The logic is not very complicated.
Your logic is not complicated, that much is true, its just wrong.
\1. To “work,” privatization must generate more money for retirees than current arrangements. This bonus is supposed to be extra money in retirees’ pockets and/or it is supposed to make up for a reduction in promised benefits, thus helping to close the looming revenue gap.
Actually, it can “work” in a number of ways. It can provide people with more easy access to their SS-related retirement funds for instance. LA Times is a big company, so presumably, you have a 401K plan. I work for a small company, so I don’t, instead, I’m limited to this lame-ass IRA thing. Ever change jobs? Its a pain to move all that stuff. If President Bush just made 401K plans that were attached to the person instead the company, that would be a big win for millions of Americans, even if they never made a single dime more money.
An investment can also “work” if it provides other benefits. Some 401K plans let you borrow money against the plan, essentially paying yourself interest.
Imagine you want to finance $10,000 worth of car payment. If you get a bank loan, that $10K will cost you $15K. If you borrow against your 401K, that $10K will still cost you $15K, but you get the extra $5K for retirement.
“Working” could even mean as little as making Americans feel involved in the whole process and getting them to keep track of what is happening with Social Security.
So immediately, I challenge your assertion that it has to generate more money for it to work. But it doesn’t matter, because SS always invests in T-Bills by law (funding our National Debt), which is the least risky, but also least-returning form of investment. So its not hard to be.
\2. Where does this bonus come from? There are only two possibilities: from greater economic growth, or from other people.
No, it can come from more efficient use of the same money. There’s something I call “conservation of money” in that in general, money is neither created or destroyed.
When you spend $100 on a good or service, you now have that good or service, but the vendor now has $100, which they presumably spend on some other good or service. So that $100 is still there, moving around the economy.
The Federal Government, when they take $100 away from you, spends it on $40 worth of goods or services, sucking $60 out of the economy, because they are do mind-numbingly inefficient.
So its far better to have $100 free in the economy then $100 in taxes. Its important to understand that there’s not just money, there’s whether that money produces anything. If your employer pays you $100, then you probably produced $110 worth in goods and services. If the government pays a welfare recipient $100, whether that welfare recipient is on AFDC, a corporation getting subsidies, or foreign aid going to a corrupt leader, that $100 produced nothing, terminating the economic cycle.
The government, merely by existing is a drag on the economy.
\3. Greater economic growth requires either more capital to invest, or smarter investment of the same amount of capital. Privatization will not lead to either of these.
Or more efficient use of capital. The 1990’s saw a large amount of economic growth due to computerization leading to large efficiencies. Efficiencies that produced more profits, producing growth.
Its very important to realize that the economy is NOT a zero sum game, its a cycle. In private industry, $100 of capital is expected to produce $110 worth of good/services. All economic growth is based on that cycle…
So if the money can stay productive as long as it possibly can, it will lead to greater growth.
a) If nothing else in the federal budget changes, every dollar deflected from the federal treasury into private social security accounts must be replaced by a dollar that the government raises in private markets. So the total pool of capital available for private investment remains the same.
Well, at least you’re admitting that SS is basically a hidden tax of 15% on top of the existing income tax. In theory, ALL of the money in SS taxes was supposed to belong to the payee, that just never happened.
Anyways, its more complicated then that. If the government says: 1% of the 15% is yours to invest in something other then T-bills that’s not money the government is “losing”. Presumably the government would no longer have to pay out benefits attributable to that 1%, instead that would be a separate account that paid separate benefits.
b) The only change in decision-making about capital investment is that the decisions about some fraction of the capital stock will be made by people with little or no financial experience. Maybe this will not be the disaster that some critics predict. But there is no reason to think that it will actually increase the overall return on capital.
If you see the economy as a zero-sum game, no it wouldn’t. But the economy is NOT a zero-sum game, so it easily can. The key point you’re missing is that money in the government’s hands is nearly wasted, so by taking it (temporarily) out of the governments hands we increase the amount of productive money in circulation, increasing growth.
\4. If the economy doesn’t produce more than it otherwise would, the Social Security privatization bonus must come from other investors, in the form of a lower return.
Well, we have no way of telling what “it otherwise would”, but investing and the economy is NOT a zero sum game.
For heaven’s sakes, one of the main controls the Federal Reserve has is the M1, the money supply. How can you think its a zero sum game when the Government can adjust how much money exists in the economy at any point in time?
a) This is in fact the implicit assumption behind the notion of putting Social Security money into stocks, instead of government bonds, because stocks have a better long-term return. The bonus will come from those saps who sell the stocks and buy the bonds.
Actually, you could get a much larger return then SS just by buying something other then T-bills. There are other bonds besides T-Bills, but that’s all that SS invests in. SS privatization doesn’t have to be a big win, it can be a small win. If it just did a little bit better then inflation (which it doesn’t do now), that would help everyone.
b) In other words, privatization means betting the nation’s most important social program on a theory that cannot be true unless many people are convinced that it’s false.
c) Even if the theory is true, initially, privatization will make it false. The money newly available for private investment will bid up the price of (and thus lower the return on) stocks, while the government will need to raise the interest on bonds in order to attract replacement money.
Nope. More money in the stock market can also mean more new businesses, which means more new jobs, which means higher wages, which means a strong economy, which means more money in the stock market, which…
And which means more tax revenues. Were you asleep during the ’90s? Strong Stock market, Strong economy, strong tax base…
Plus there’s nothing that says the money would have to go into the stock market. It could go into bonds, thereby lowering interest rates, which would help relieve government debt…
d) In short, there is no way other investors can be tricked or induced into financing a higher return on Social Security.
If you were correct, which you’re not. You seem to think that we live on that mythical South Sea island that used large stones for money, so that the money supply was finite. Money is a lot more complicated in the modern world then that South Sea island. It moves in cycles, and the faster those cycles go, the more the economy grows.
Even on that South Sea Island, you had economic growth, because people could make new stones…
\5. If the privatization bonus cannot come from the existing economy, and cannot come from growth, it cannot exist. And therefore, privatization cannot work.
Q.E.D.
You seem to know very little about economics, and it stuns me that you are in any way affiliated with the editorial pages of the LA Times. The mind boggles.
Update: Original posting of Kinsleys email was here
Another update: This guy said it better Pie growing is more important then pie slicing.
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