Did
they believe they would
be welcomed as
liberators?
Administration plans to
privatize Social
Security have clearly
run into unexpected
opposition. Even
Republicans are balking;
Representative Bill
Thomas says that the
initial Bush plan will
soon be a "dead
horse."
That
may be overstating it,
but for privatizers the
worst is yet to come. If
people are rightly
skeptical about claims
that Social Security
faces an imminent
crisis, just wait until
they start looking
closely at the supposed
solution.
President
Bush is like a financial
adviser who tells you
that at the rate you're
going, you won't be able
to afford retirement -
but that you shouldn't
do anything mundane like
trying to save more.
Instead, you should take
out a huge loan, put the
money in a mutual fund
run by his friends (with
management fees to be
determined later) and
place your faith in
capital gains.
That,
once you cut through all
the fine phrases about
an "ownership
society," is how
the Bush privatization
plan works. Payroll
taxes would be diverted
into private accounts,
forcing the government
to borrow to replace the
lost revenue. The
government would make up
for this borrowing by
reducing future
benefits; yet workers
would supposedly end up
better off, in spite of
reduced benefits,
through the returns on
their accounts.
The
whole scheme ignores the
most basic principle of
economics: there is no
free lunch.
There
are several ways to
explain why this
particular lunch isn't
free, but the clearest
comes from Michael
Kinsley, editorial and
opinion editor of The
Los Angeles Times. He
points out that the math
of Bush-style
privatization works only
if you assume both that
stocks are a much better
investment than
government bonds and
that somebody out there
in the private sector
will nonetheless sell
those private accounts
lots of stocks while
buying lots of
government bonds.
So
privatizers are in
effect asserting that
politicians are smart -
they know that stocks
are a much better
investment than bonds -
while private investors
are stupid, and will
swap their valuable
stocks for much less
valuable government
bonds. Isn't such an
assertion very peculiar
coming from people who
claim to trust markets?
When I
ask privatizers that
question, I get two
responses.
One is
that the diversion of
revenue into private
accounts doesn't have to
lead to government
borrowing, that the
money can come from, um,
someplace else. Of
course, many schemes
look good if you assume
that they will be
subsidized with large
sums shipped in from an
undisclosed location.
Alternatively,
they point out that
stocks on average were a
very good investment
over the last several
decades. But remember
the disclaimer that
mutual funds are obliged
to include in their ads:
"past performance
is no guarantee of
future results."
Fifty
years ago most people,
remembering 1929, were
afraid of the stock
market. As a result,
those who did buy stocks
got to buy them cheap:
on average, the value of
a company's stock was
only about 13 times that
company's profits.
Because stocks were
cheap, they yielded high
returns in dividends and
capital gains.
But
high returns always get
competed away, once
people know about them:
stocks are no longer
cheap. Today, the value
of a typical company's
stock is more than 20
times its profits. The
more you pay for an
asset, the lower the
rate of return you can
expect to earn. That's
why even Jeremy Siegel,
whose "Stocks for
the Long Run" is
often cited by those who
favor stocks over bonds,
has conceded that
"returns on stocks
over bonds won't be as
large as in the
past."
But a
very high return on
stocks over bonds is
essential in
privatization schemes;
otherwise private
accounts created with
borrowed money won't
earn enough to
compensate for their
risks. And if we take
into account realistic
estimates of the fees
that mutual funds will
charge - remember, in
Britain those fees
reduce workers' nest
eggs by 20 to 30 percent
- privatization turns
into a lose-lose
proposition.
Sometimes
I do find myself
puzzled: why don't
privatizers understand
that their schemes rest
on the peculiar belief
that there is a giant
free lunch there for the
taking? But then I
remember what Upton
Sinclair wrote: "It
is difficult to get a
man to understand
something when his
salary depends on his
not understanding
it."
E-mail:
krugman@nytimes.com