Government

Time to Privatize? The Economics of Social Security

by Alex Schibuola on November 16, 2010 · 3 comments

in Economy

Government spending reform is not an option. It’s a necessity. Reforming Social Security goes a long way here. The most sensible reform would be to privatize it. To see why, one needs to understand the economics of Social Security.

First: What is saving? When we buy stocks, bonds, and CDs with our money, we call it “saving.” In the economics sense, when we save, we abstain from consuming resources today. Businesses use the saved resources to produce more for tomorrow.

Suppose an economy produces a stock of corn. We can either consume it or save it. The saved corn is planted and makes more corn next year. This is saving and investment, in the economics sense. Here’s the link between “saving” and saving: I decide not to spend all my money consuming corn. Rather, I buy a bond from a farmer. I am “saving.” In doing so, I also leave corn on the shelf of the supermarket. This is saving.

The farmer buys the leftover corn using the money from the bond I bought. He invests by planting the corn. In a year, it becomes more corn. He sells it to the supermarket for money which he uses to repay me for the bond, with interest. Now I have the money, and I can consume more corn or save again.

This corny story is an analogy for gross domestic product (GDP), the measure of all final goods and services produced within a nation in a year. It includes all the corn, cars, soda, etc. produced by a nation. The saved portion of GDP becomes investment. Investment creates more GDP in the future.

So is Social Security saving? No. Those paying in today don’t consume it or save it. The government receives the money, but they don’t leave it in a personal account; they transfer it someone else who uses it to consume resources. In other words, the government takes corn from you and gives it to your grandma. Now she can consume it. There’s no real saving because no corn gets planted to make more corn tomorrow.

If there’s extra money in Social Security, government takes it and buys corn to consume itself, e.g., to build corny missiles. It gets replaced with a government IOU, Treasury bonds (aka higher future taxes). Not only is this not saving, but the corn missiles mean there is even less corn for individuals and businesses to consume and invest too.

Identically, imagine you “save” $1,000 of your income, but buy a new TV instead of depositing it with a bank. Since you’re “saving” and not a scheming politician, you write an IOU to yourself, promising to repay yourself $1,000 with interest. Is this “saving” plan stupid? It is. This is Social Security.

If Social Security were privatized, people would deposit their income with a bank. People actually save resources that businesses can invest. We, as true savers, get more resources in the future.

“Lockbox” proposals are equally flawed. In this instance, government doesn’t reach its hand into the cookie jar. It keeps the extra cash stowed aside. This is like putting money under your mattress. Once it’s out of circulation, it serves no purpose. Less money in circulation relative to real GDP means the average price level goes down (deflation). The Federal Reserve would just print more money to offset this.

Remember, the purpose of actual saving is to allow you to consume more in the future — not today. Social Security retards this process whereas privatized Social Security means actual saving. If people defer consuming some corn (GDP) today with a bank that lends it to someone to invest, then there will be more corn (GDP) tomorrow. This is the economics of Social Security.

The Problem With Public-Private Partnerships

by Fred Smith on November 5, 2010

in Economy, Odds & Ends, Politics as Usual

In our half-political, half-private world, there are a growing number of public-private partnerships.  Almost nothing in the current world can be done without implicit or explicit permission by local, state, federal or (increasingly) global regulators.  But the term, public-private is normally used to denote the joint funding and, sometimes, joint management of some “public” facility — streets, water systems, and so forth.

The rationale for “public” investments is that they are “public” goods, whose benefits are not adequately captured by the provider.  There are many problems with this concept – in practice, it means that someone wants something and nobody seems to be providing it.  Note, from a Coasian/Schumpeterian free market perspective, these are exactly the “lures” that lead mankind to pursue the unexplored entrepreneurial paths to the future.  Rushing in with government assistance distorts and preempts those creative forces.

Sometimes, public-private partnerships can be a transitional step toward privatization.  The concept of “corporatization” that is, reorganizing an activity now performed by some political agency so that its inherent economic realities become more understandable and transparent, may be a useful step in privatizing the activity.

In most cases, however, public-private partnerships are simply a means of using tax breaks, regulatory easing, taxpayer support and so forth to subsidize some private activity: stadia, light and heavy rail — mass transit generally, sometimes (for God’s sake) hotels and malls, downtown development districts.  Where I live in Washington, D.C., businesses are allowed to add a “special tax” to pay for services the city supposedly pays for with normal tax revenues.  Such public-private partnerships suffer from the full array of government failures:

  • Log-rolling and pork-barrel politics: I’ll vote for your PPP if you vote for my PPP.
  • Weakened market tests: resources are devoted to a project not because it benefits the citizenry but rather because it benefits a powerful interest group and/or because a creative referendum entices a majority of voters to support their special interests.
  • Weaker Management: Absent market tests, managers are less motivated to find that mix of services and creative array of financing tools to ensure that it proves “profitable” (that is, a rational allocation of capital). Roads, even charter schools, etc all have suffered here immensely.
  • Lack of innovation: No institution in the private world can allow itself to stagnate – the creative forces of destruction will soon make it obsolete. PPP managers face much weaker innovative forces – if things go wrong, they can always appeal to their “public” nature for taxpayer bailouts.
  • Corruption: Crony capitalism abounds in the PPP world.
  • Faddism: Markets sometimes go on kicks – the tech boom, for example – but these soon collapse. Governments go on kicks for many decades – “renewable energy” and “mass transit” being perhaps the best examples but “magnet” investments in downtown malls, stadia and convention centers are perhaps even more persistent ones. Before Walmart became a PPP, it did more for consumers than all the PPP malls in the world.
  • Crowding Out: Capitalism plays a critical role in allocating capital – planting the seeds for our future. That is a very difficult task, one made much more difficult by the existence of PPPs. Government already seizes a disproportionate amount of our wealth and the PPP concept allows it to further distort the allocation by market forces. I’ve argued that the genius of the Progressives in the late 19th century was to preempt or push large sectors of the emerging future (the environment, schools, electromagnetic spectrum, infrastructure, welfare, the medical world) into the political world. The PPP concept simply exacerbates this tendency.

Our challenge is to find ways to expand the private sector and only very rarely does the PPP concept do that.  It allows people to be sloppy — “That would never pay for itself but it obviously has value, thus, we need some government help.  Let’s not make it an honest government function, let’s make it a Public-Private partnership and get the best of all possible outcomes!!”

This Mixed Economy model is less honest than true socialism (government acting directly) for many reasons.  If as is often the case, things go wrong, it will be capitalism — not government — that will be blamed.  PPP activities are less subject to consumer sovereignty (look at airports or schools).  The true costs of the activity don’t appear on government budgets — making it appear that PPP arrangements are “bargains.”

Dear Mr. Biden: Vice Presidents Were Meant to Be Seen, Not Heard

by Alex Schibuola on October 27, 2010 · 1 comment

in Culture, Politics as Usual, Zeitgeist

Vice President Joe Biden claims: “Every single great idea that has marked the 21st century, the 20th century and the 19th century has required government vision and government incentive.”

I believe that Adam Smith wrote a very accurate description of Mr. Biden in the 18th century (before government vision and incentives too!):

The man of system…is apt to be very wise in his own conceit; and is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it. He goes on to establish it completely and in all its parts, without any regard either to the great interests, or to the strong prejudices which may oppose it.

He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them…

…in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might choose to impress upon it. If those two principles coincide and act in the same direction, the game of human society will go on easily and harmoniously, and is very likely to be happy and successful. If they are opposite or different, the game will go on miserably, and the society must be at all times in the highest degree of disorder.

(Adam Smith, Theory of Moral Sentiments, 1759)

Would Mr. Biden like to also step up and claim credit for the following government achievements too?

Roosevelt’s Japanese internment camps, legitimacy of slavery in the world, inflation, war after war after war, Jim Crow laws, nuclear weapons, biological weapons, corporate welfare and bailouts, Fannie Mae, Freddie Mac, Hitler’s Holocaust (12 million dead), Stalin’s Soviet Union (20 million dead), Mao’s Communist China (40 million dead), Kim Jong Il’s North Korea (body count still in progress), Chavez’s Venezuela (a.k.a. Titanic), Mugabe’s Zimbabwe, the suppression of liberty. I could go on and on…

Mr. Biden, I find your vanity and conceit to be overwhelming.

The Rahn Curve

by Ryan Young on July 1, 2010

in Economy, Personal Liberty, Regulation

A little government can do a lot of good. A lot of government can do little good.

Rules protecting life, liberty, and property can create the stable conditions that entrepreneurs need to flourish. It works best when these rules are simple, clear, and few. But problems emerge when government takes on other missions.

Rules that are complicated, opaque, and numerous create instability. Entrepreneurs are less likely to invest or innovate if they fear the rules of the game might change tomorrow on a whim. Complying with regulations takes up time and effort that could be spent creating wealth. When governments get involved in business, businesses will involve themselves with government. This is an invitation to corruption, rent-seeking, and regulatory capture. Many backs get scratched, but economic growth suffers.

Dan Mitchell‘s latest video introduces the Rahn Curve, named after top-notch economist Richard Rahn, to illustrate that concept visually. Most academic studies on the subject estimate that governments that take up 15 to 25 percent of GDP is about the right size. The U.S. government consumes roughly 40 percent of GDP. That wide range is because different government policies have different effects, and because the complexity of even the smallest economies makes any macro-level study uncertain.

The academics might be guessing too high, though. Historical data from the 19th century show that the best-performing economies had governments around 10 percent of GDP. That includes the U.S. and most of Europe.

Returning to that size government wouldn’t even be particularly austere. the U.S. government would have a $1.4 trillion budget. Roughly what we had during the Clinton years.

I hope you’ll take a few minutes to watch. The Rahn curve contains valuable insights.

The Two Americas

by Ryan Young on May 25, 2010

in Economy, Personal Liberty

Maybe there is something to John Edwards’ “Two Americas” conceit after all. Except the warring factions aren’t the haves and have-nots. They are what Steven Malanga calls tax eaters and tax payers. And the two see the world very differently. See this revealing excerpt from today’s WSJ Political Diary (subscription required).

Pollster Scott Rasmussen uses several questions to break down voters demographically, but one of his most original tweaks is to differentiate between those voters he calls the “Political Class” and those he calls “Mainstream Americans.” The “Political Class,” representing about 14% of the electorate, tend to express “trust” in political leaders while rejecting suggestions that government is its own special interest and often works with big business against consumers. In contrast, “Mainstream Americans” represent about 75% of the voting public and identify with or lean toward a more populist skepticism about the intentions and actions of political leaders.

Striking is how the two groups divide on the question of repealing ObamaCare. “Mainstream Americans” support repeal by an overwhelming 73%, while the numbers are almost exactly reversed among the “Political Class,” 72% of whom oppose repeal.

Sometimes I Think They’re Just Messing with Us

by Ryan Young on May 16, 2010 · 1 comment

in Politics as Usual, Regulation, Zeitgeist

Here’s an excerpt from an early 1980s Office of Management and Budget report:

An agency subject to the provisions of the Federal Reports Act may enter into an arrangement with an organization not subject to the Act whereby the organization not subject to the Act collects information on behalf of the agency subject to the Act. The reverse also occurs.

Regulation of the Day 136: Off the Record

by Ryan Young on April 30, 2010

in Regulation of the Day

If you work for the Department of Energy’s Federal Energy Regulatory Commission, a regulation requires you to keep records of your off-the-record communications.

Which means off-the-record communications aren’t really off the record.

In fact, 18 CFR 385.2201(b) requires FERC to post a notice in the Federal Register whenever this happens. There was one today, for example. It’s public!

Which brings up the following conundrum: if FERC policy is that off-the-record communications are actually on the record, then there are no off-the-record communications. Therefore, regulations applying to off-the-record communications are at best redundant , because there are no off-the-record comments.

Oh, never mind.

For Profit, Not-for-Profit and Government – The Metric Problem

by Fred Smith on April 19, 2010

in Deregulate to Stimulate, Economy, Regulation

Americans tend to forget the value of institutional specialization. A private for-profit firm has a straightforward metric – maximizing shareholder profit-a complex goal, requiring managers to balance short and long term objectives, weigh the tradeoff between making a risky investment vs. losing out to more innovative competitors. They must also decide how to share gains with other economic partners – dividends vs. equity growth for shareholders, salaries, benefits and other incentives for employees, quality vs. price for consumers, offering price and terms for suppliers, even measures to ensure cordial relationships with neighboring facilities. But, though complex, there is a pole star guiding management decisions.

Non-profits have a mission statement – help the poor, preserve the environment, improve education – but a more difficult assessment challenge. Determining to what extent (if at all) a given activity achieves its desired goal (are smaller classrooms effective at improving education, are biofuels better for the environment) and then creating a ready metric to compare the results (in education, for example, should we focus on percent of students who graduate or the median or range of academic test scores). The subjective element is much higher in non-profit management.

Government faces the greatest metric challenge. Government as a whole has no clear mission, but rather the vague task of “doing good” or “advancing human happiness.” Is that best achieved by reducing the burden of government in some area or expanding its role in that area? How can one decide between an additional expenditure in education or the environment? Resources are finite and government cannot do everything. How can it decide? In practice, government seeks to address the concerns of the more powerful organized interests but that often leads to opposition. Too often, the non-specialized nature of government results in a series of initiatives that are rarely funded adequately. Merely proposing an initiative is often enough to appease the interest group, allowing government to turn to other concerns.

Specialization, like blinders on a horse, has problems but is a very effective way of mobilizing the genius and energy of individuals. Before rushing into the non-profit and political arenas, we should evaluate carefully whether the framework of profit-directed firms has been overlooked. All sectors whether education, health care or the environment have unrealized potential- yet we continue to rush down the less measurable path to the future and get ourselves hopelessly lost.

Voltaire on Government

by Ryan Young on March 1, 2010 · 1 comment

in Economy, Stimulus to Nowhere

Voltaire defined government as “a device for taking money out of one set of pockets and putting it into another.”*

It appears Keynesian stimulus was debunked two and a half centuries before Keynes even came up with the idea. Economic growth comes from the creation of new wealth. The best government can do is shuffle around wealth created by others.

(*cf. Albert Jay Nock, Our Enemy, the State, p. 128)

Better than Nothing or another Feint?

by Fred Smith on January 26, 2010

in Agenda for Congress, Bailout Watch, CEI Projects, Deregulate to Stimulate, Economy, Politics as Usual, Regulation

Seeking to recast himself as a fiscal conservative, Obama is projected to propose a freeze on discretionary spending – NPR, NEA, “green” jobs, “disaster” relief, foreign aid?  Well, perhaps, but before awarding him the 2010 “Wastrel Recovery” prize, consider the various ways government burdens the economy.  Limiting spending and government growth requires a systemic approach.  Consider the rich array of political means: taxes, regulation, guarantees, entitlements, inflation, monetary misallocation, and “discretionary” spending.  Tax cuts have been a conservative nostrum for many years and taxes can be costly but, too often, they’re paid for with debt or inflation.  The costs of inflation, regulation, guarantees are largely off-budget.  There are no “accounting” gains for cutting back on these interventions.   Entitlements such as social security and medicare (especially after the massive expansion of Bush and the Republican Congress) dwarf discretionary spending but Obama seems unlikely to challenge these sacred cows.

Still, better than nothing?  Perhaps, if Obama would cease campaigning for ever more costly regulations, halting the onslaught of financial, environmental and medical rules, or abolish Freddie, Fannie and the other TBTF faux capitalist GSEs cluttering the economic landscape, we’d have more confidence.  Why not get ahead of the game-do a “Nixon in China” and seek to privatize retirement and medicare?  Monetary policy is nominally the Fed’s but why not allow a “Taxpayer Choice of Currency” with each citizen designating their own tax metric, thus disciplining inflationary policies?

Yes, if NEA and NIH and NASA and the army of acronymic pigs at the public trough can be curbed, it would be good.  But, a starved program merely encourages the relevant interest groups to push back toward the trough.  Only abolishing programs can yield any significant results.  So let’s hope that Obama reaches for his roots and becomes an Abolitionist.  Till then, expect lots of rhetoric but not much hopeful change!

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