11 March 2009

Social Security might have been.

Since I met Carmen decades ago (she was practically a child) while working briefly for Social Security I have always had a soft spot in my heart for the middle classes favorite Federal Agency. Which leads me to ask: do you remember the Bush plan to privatize Social Security so that your money would be invested in the stock market?

We don't hear so much talk of that anymore. I myself was always stunned by how many soi-disant conservatives wanted this program. They wanted the Federal government to become the biggest single investor in the market with all the resulting distortion, corruption, and old fashioned stupidity (of which we have seen much of late) that would go with it.

Here is one sane conservative's view on it, the Cunning Realist (thanks to Andrew Sullivan):
The stock market crash has shown how catastrophic private accounts would have been, and who would have really benefited from them. Would the government have allowed the Bear Stearns and Lehman outcomes had the Social Security system been chock full of those stocks? Remember, both were former blue chips, the sort of companies that proponents of private accounts insisted any new system would be limited to. The same for Citi, AIG, Fannie Mae, and others. How much pressure would the Fed and Treasury have felt -- and what more would have been done -- to keep those afloat and/or out of penny stock land?

Well, dodged that bullet.

thanks to the socialists, uh, I mean liberals. Oh well.

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At 21 March, 2009 00:10, Blogger jack perry said...

I must confess, I wouldn't have expected a historian to get so wrapped up in the moment as to forget history.

I stand by my assertion—which, as far as I can tell, only I and Warren Buffett seem to hold to—that this is a temporary dip in the market, just as we had on Black Monday in 1987, or as we had at the beginning of the decade with the dot-com bubble's popping. $5 trillion was lost in the dot-com burst alone: much of it was wealth that never really existed; the rest of it eventually returned, with interest. The same is true with the $11 trillion that has currently "disappeared": much of it never really existed; that which did is currently undervalued, and will return with interest.

If, in ten years, the stock market still hasn't risen to at least 10000 I'll gladly admit I'm wrong. In fact, I'm confident that it will return to that level before then.

There's something bizarre about people mourning how their 401(k)'s are now worth the same as they were in the mid-90s, as if the stock market is now permanently stuck at ~7000. The same changes that brought them up, down, then up again, then down again will bring them up again one day.

So I stand more than ever for the partial privatization of Social Security, especially looking at the mess the government is currently making of its own finances. My own 403(b) isn't very pretty, but it isn't very ugly either. My father, who has retired, has lost an enormous amount of "wealth", yet he is still earning far more from his 401(k) than Social Security is paying him—and he paid more in Social Security taxes than he ever put into his 401(k). Doesn't take a actuary to figure out which investment carried the better return.

(2) The privatization plans I read about, contrary to what you imply here, were partial, not complete: they would not have eliminated Social Security, but would have given some adventurous people (like me) the option of investing part of our taxes into private retirement accounts, subsequently foregoing some Social Security benefits. (Actually I'm not that adventurous; I would have put the money into a relatively safe account that pays decent interest, as I do with my Health Savings Account.) The reduction in benefits that I would have agreed to would help save a system that, demographically speaking, will need saving sooner rather than later: and saving it will require some tough choices that, so far, the current Congress and administration have shown themselves loathe to accept.

At 22 March, 2009 20:57, Blogger Clemens said...

What you call history I call current events. And in the immortal words of Chou-en-Lai when asked if the French Revolution had effected the Chinese revolution: Too soon to tell.

It seems that the particular capitalist regime we have been working under is only about 30 yrs old (if you start from the Reagan Revolution) or about 75 years if you want to go back to the new deal. My idea of keeping history in mind would include things like the fall of the Roman Empire, the French and Russian Revolutions, and the Great Depression. All the societies recovered - eventually. It was what went on in the meantime that was so interesting.

Yes, I believe like you do that this is probably a temporary 'dip' in the market, but 'dip' may be too mild a term. While I have not taken any money out of my 403(b) nor my 401(k) I am not as sanguine as you are about any of it.

So I don't mistake the last 30 (or 75) years as real history, nor do I think that it is only a question of the stock returns for Social Security. Public policy should not be based on so narrow an object.

I do admit that on the individual scale we deal in smaller time chucks - probably even smaller for most people that your 10 years for stock market recovery. If you were planning for retirement this year, you might be a little unnerved. I plan on retiring in 6, which is probably a lot sooner than you.

The criticism of the Social Security scheme - and you are quite right that it was only partial (but put together by people who are philosophically hostile to the very concept of Social Security) - that I linked to was not so much what it would do to the investor (you and me) but to gov't having a direct interested in the market that would have forced it into even more drastic and intrusive intervention in failed companies.

My question though would turn that around: do we want the government, susceptible to ill considered political pulls (e.g. populist fury at AIG bonuses) to be the single biggest investor in the stock market? This is frightening (to me at least) no matter who actually handles the management of the funds, gov't bureaucrats or private business.

I am at a loss to understand how a political movement that rails against having gov't bureaucrats managing health care seem to prefer them, or people like those who ran Lehmen Brothers, Bears Stearns, Aig, running government funds massive enough to run the stock market.

But then I prefer Medieval economics, where the biggest question was whether the monarchy could back a gold standard or a silver standard (that and the question of where you could find European slaves to sale to the Eastern and African world).

At 23 March, 2009 14:18, Blogger jack perry said...

You make a lot of good points, but I'll only focus on a couple if you don't mind.

I am at a loss to understand how a political movement that rails against having gov't bureaucrats managing health care seem to prefer them, or people like those who ran Lehmen Brothers, Bears Stearns, Aig, running government funds massive enough to run the stock market.

My particular understanding was that no single government bureaucrat or agency would have decision-making power (beyond a certain minimum); rather, I could make the decisions myself. IMHO it's unfortunate that I would have lacked the independence of Health Savings Accounts, IRAs, or 401(k)s (my property and my investments, not the government's), but the options outlined here strike me as reasonable: if it's good enough for government employees, why not for the people the government's employees serve? In that sense the government is not an investor in the stock market: the people become investors in the stock market. For me it resembles a move towards distributivism instead of capitalism, much like a credit union. Also like a credit union, I see the possibility that the stock market might well act more sanely when power is more distributed. I personally would love to see a move away from stocks as speculation and back to stocks as investment: i.e., the return comes dividends paid by companies that turn a profit, rather than from gambling on the price of a stock. Human nature being what it is, this is impossible to avoid, but diluting ownership could help.

It is certainly the case that I would not want the decision of where exactly my money goes left to a bureaucrat or an agency. On the other hand, I would want an agency to ensure transparency and enforce necessary regulation, and I do have enough confidence in government bureaucrats that I can live with several options. After all, I still have my after-FICA income to invest elsewhere.

(You might observe that this is an issue I have with what seems to be a predominant theme among conservatives: I believe in necessary regulation, vigorously enforced. I dislike the use of "regulation" as a bogeyman. I also dislike the use of "regulation" as a cure-all.)

[N]or do I think that it is only a question of the stock returns for Social Security. Public policy should not be based on so narrow an object.

Not sure what you mean; can you elaborate?

For some reason I thought I had some other quote of yours to reply to, but I can't find it, so I'll stick merely by observing that, in the time span I'm looking at, there may not be any Social Security unless there is a serious reform. Looking at the last couple of decades, and at the current president's grandiose "we buy it, our grandchildren pay for it" plans, I doubt there will be any such thing in the foreseeable future.


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