Saturday, January 22, 2005

Social (In)Security

(letter to Kevin)
The thing I don't understand about this whole proposal is based on the following: Isn't the central argument for why smaller government is better is that markets are more efficient when left unregulated? Don’t we want people to be able to make the decisions over their own money so that they can be freest to pursue their own happiness? Isn’t it supposed to be axiomatic that the intervention of the government can only distort the process of rational utility maximization and make less well off? (Of course people aren't perfectly rational, and neither are markets perfectly efficient, but that’s a different topic. The point is that these two assumptions are usually the best approximation)

So my question is, 'Why then do we all of a sudden need government to force us to invest? Why not just give a tax cut and let people save, spend, or do whatever they want? I guess to this people who support the administration’s reform package would say, ‘this is your money that you are paying into social security. Don't you want to invest it in the stock market?' To that I would say, ‘Sure! If that weren't a load of bullshit!'

It is bullshit to say that what I pay into social security is essentially like a savings account – that was never the way it was set up. Social Security is basically a 'rob the young and give to the old' scheme which I'm perfectly fine with. I deeply appreciate this country and the foundation that has been laid by the people that came before me. It is because of them that I'll be richer and enjoy a higher standard of living then they did (on average). Thus I have no problem supporting and providing security for people in their old age. Plus I just think it is the right thing to do – who wants to live in a society where old people are forced to think: 'well if I die before I turn 80 things will be fine, but if I live to 85 those last few years will be tight.'
Thus, what this social security reform plan is essentially an effort to take the money back away from the old and give it to the young to invest. But wait! They say. 'THATS bullshit. We would never cut benefits for the old people!' 'Oh how are you going to pay for them then?'
'Issue bonds.'
Issue bonds? What are you stupid? Do you know who owns bonds? Japan and China. Do you know why they buy bonds? Because, otherwise their currency would become like crazy expensive because of the huge trade imbalance. But it’s not really an imbalance -- they ship over TV's and Cars and we ship over bonds. I'm no expert here but I seen the dollar depreciate like crazy over the last few years, and Buffet says it’s probably going to come down more. I just think trusting on East Asia to keep on gobbling up good old Treasuries at rock bottom interest rates, is just foolish. Betting big on last year's best performer isn't the best strategy.
I mean this whole social security scheme only works if stocks continue to vastly outperform bonds. I just seriously doubt if this program is set up they will. The whole thing sounds great but if stocks are such a great deal why then wouldn't china just take its money and directly invest in stocks? Why would they buy bonds and then leave us with their money to make the real profit in the stock market? Oh right... it’s because they don't want the risk, but America will take on the risk. Right... sell China security; then gamble the money on the stock market, which is already about 30% overvalued. (20 PE ratio, compared to 15 historically) Sounds like the perfect plan for a program called social SECURITY.
Don't get me wrong. The ownership society is a great vision. I don't care if everyone becomes fiscal republicans (the good kind that like to balance the budget that is). I want to work to make it happen. But this idea just sounds bad.
The good news is I don't think it will happen. But shit, Bush has a tendency to surprise me.
PS. look for a limited strike on Iran's Nuclear Sites. First the talks with the Europeans are going to breakdown. Then the UN is going to not act. Then the US or Israel will do something stupid. I mean who is going to stop the neocons? Rice? Give me a break. You think Rumsfeld is chastened by Iraq? Forget it, he'll just say 'well the fire is already burning; lets throw in all the dead wood.' I give it about 0.5-1.5 years to play out.

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