A Forum for Grinches and Ho-Ho-Hoes

[Sidd Finch]

Originally posted by sgtclub
I was thinking about this more in terms of individual wealth, rather than company wealth. Dumping more cash into the markets should increase stock prices, meaning that those that currently hold the stock will see their investments appreciate. Although there may be an increase in new issues resulting from the higher stock prices (i.e., cheaper capital), I don't see this as being the same model as in the 90s, where the increase in capital was spurred by demand for new issues by companies. In other words, I believe that the primary effect will be creation of individual wealth, rather than capital investment in companies, and that an increase in individual weatlh would have some benefit to the economy as a whole.

Perhaps -- but if that wealth is cashed on any significant scale, share prices will fall. This is exactly the "run-up" scenario I was talking about. This "wealth creation" would benefit those who already have substantial investment assets, at the expense of those who depend on SS.

[sgtclub]

Originally posted by Sidd Finch
Perhaps -- but if that wealth is cashed on any significant scale, share prices will fall. This is exactly the "run-up" scenario I was talking about. This "wealth creation" would benefit those who already have substantial investment assets, at the expense of those who depend on SS.

I'm think I understand what you are trying to say, but I'm not sure I agree. What does the supply/demand equation look like in your model?

[Sidd Finch]

Originally posted by Adder
Well, those folks had a few different choices. They could put off there retirement for a year or two - unfortunate but hardly a tragedy. Or they could risk it and retire, hoping that their nest egg will grow sufficiently to cover their needs.

Sure, and they could hope the market would bounce back in a year. And if it didn't, well, they would always have social security to fall ba..... oh, wait a second....

And, of course, if they were 75 years old and already retired, well, they could just go back to work.

Do you really believe that the most vulnerable in our society -- the people who did not have the skills or capacity to build private savings -- are going to make consistently wise investment decisions? Or do you just have faith in the magic of the market, and believe that the average gain over the past 40 years equals the minimum gain that anyone can expdct in the next 40 years?

[Sidd Finch]

Originally posted by sgtclub
I'm think I understand what you are trying to say, but I'm not sure I agree. What does the supply/demand equation look like in your model?

I have no idea what you are asking me. I know that as the supply of cummerbunds goes up, the demand for zabaglione comes down. Or something like that -- Microeconomics was a long, long time ago.

What I'm saying is this: The net effect will be that the people who benefit most from the "wealth creation" effect are the people who are already wealthy. I.e., the people who have money in the market now, before we start pumping in a $30 billion a month of formerly-SS money. Meanwhile, that new money will have less purchasing power in an inflated stock market, making the investments less valuable and, ultimately, more risky.

So, we are putting the safety net at risk, and putting the government another few trillion into debt, and risking a significant rise in interest rates.... in order to benefit most the people who need it least. Can you say "wealth transfer"?

And yes, I think the White House understands this. And yes, I think that making wealthy people wealthier is one reason for the push -- but not the main reason. The main reason behind the push to fundamentally change Social Security is ideological; it's the "ownership society" theory, with a spice of distaste for a New Deal program that has worked so effectively for so long.

[Adder]

Originally posted by Sidd Finch
Sure, and they could hope the market would bounce back in a year. And if it didn't, well, they would always have social security to fall ba..... oh, wait a second....

As I keep saying, it need not bounce back in a year.

Do you really believe that the most vulnerable in our society -- the people who did not have the skills or capacity to build private savings -- are going to make consistently wise investment decisions?

I believe that nearly everyone, given no choice but to save, will be able to do so without losing it all. Why? Becaues nearly everyone who has enough money to be able to save does so. The bigger risk is that most people will not take enough risk and therefore not get the full benefit of their freedom. I think you strongly underestimate people's level of discomfort with investment risk - most people will opt for gauranteed (miniscule)returns.

For the few who can't, I have no problem with a taxpayer funded saftety net.

Or do you just have faith in the magic of the market, and believe that the average gain over the past 40 years equals the minimum gain that anyone can expdct in the next 40 years?

Yes, I have faith in the magic of the market. I believe that average returns over the next 40 years will be roughly similar (plus or minus a few points) to what they were over the last 100 years. Do you have some apocolyptic knowledge that the rest of us don't have?

Ad(Bush invented that)der

[Sidd Finch]

Originally posted by Adder
As I keep saying, it need not bounce back in a year.

Spoken like a true 25-year old. You'd be a lot less sanguine if you were 70 and lost 30% of the money you depended on to provide a bare minimum of support.

I believe that nearly everyone, given no choice but to save, will be able to do so without losing it all. Why? Becaues nearly everyone who has enough money to be able to save does so.

Cite, please. Most people in this country perform miserably in saving money, and most have no experience in managing their own money. Why else is the US savings rate so low, and personal debt rate so high? Why have personal BKs increased even in times of prosperity? How many people lost their life savings in company 401ks when the company went bust, after ignoring the most basic advice about diversification?

The bigger risk is that most people will not take enough risk and therefore not get the full benefit of their freedom. I think you strongly underestimate people's level of discomfort with investment risk - most people will opt for gauranteed (miniscule)returns.

In which case, what's the point? The point of this change is not to give a bunch of lawyers another $4000 to invest each year. It's supposed to be a systemic change that will bring about vastly higher returns.

Yes, I have faith in the magic of the market. I believe that average returns over the next 40 years will be roughly similar (plus or minus a few points) to what they were over the last 100 years. Do you have some apocolyptic knowledge that the rest of us don't have?

Interesting -- you agree with me that this is a fundamentally different situation, yet you assume that past performance guarantees future results.

Over time the market has performed well. It has not been a good guarantor of a safety net, though. And average returns over time are just that -- average returns over time. Your faith in the market assumes that everyone will perform at average. Maybe in Lake Wobegon....

[sgtclub]

Originally posted by Sidd Finch
I have no idea what you are asking me. I know that as the supply of cummerbunds goes up, the demand for zabaglione comes down. Or something like that -- Microeconomics was a long, long time ago.

Here's the way I look at it. On day 1, additional amounts will come into the market, and this should cause holdings to appreciate, because we have more dollars chasing proportionately less investment options. As you correctly point out, that benefits those that hold investments prior to the inflow, which, by the way, is roughtly 60% of the country. It is not just the rich that are invested.

You posit that those who are invested pre-inflow will sell to capture gains, and that may be the case, but I'm not convinced. Assuming that they do, the result is that stock prices should fall, because there is more available inventory. OK, fine. But there is also another inflow coming in the next month (or other period), which means that the new money should be able to take advantage of the lower (i.e., lower than the initial spike) prices. So where is the harm?

What I'm saying is this: The net effect will be that the people who benefit most from the "wealth creation" effect are the people who are already wealthy. I.e., the people who have money in the market now, before we start pumping in a $30 billion a month of formerly-SS money. Meanwhile, that new money will have less purchasing power in an inflated stock market, making the investments less valuable and, ultimately, more risky.

So, we are putting the safety net at risk, and putting the government another few trillion into debt, and risking a significant rise in interest rates.... in order to benefit most the people who need it least. Can you say "wealth transfer"?

60% of the country is already invested in the market, so it is not just the wealthy who benefit. And why do you believe the risk profile is increased?

And yes, I think the White House understands this. And yes, I think that making wealthy people wealthier is one reason for the push -- but not the main reason. The main reason behind the push to fundamentally change Social Security is ideological; it's the "ownership society" theory, with a spice of distaste for a New Deal program that has worked so effectively for so long.

I don't agree that the WH wants to undue SS, but I do agree that they want a phiolosphical shift to less reliance on the government.

efs/eft

[Tyrone Slothrop]

Originally posted by Adder
Yes, I have faith in the magic of the market. I believe that average returns over the next 40 years will be roughly similar (plus or minus a few points) to what they were over the last 100 years.

If so, then there's no need to reform SS at all. The projection that the system will go "bankrupt" in 2052 or so is based on part on a slowing of economic growth for demographic reasons. If the economy just goes rip-roaring along at historical rates, there's no SS crisis. Tellingly, the people who propose privatization are using projections about SS's doom that do not jibe with the projections about how wonderful private accounts will be.

[Adder]

Originally posted by Sidd Finch
Interesting -- you agree with me that this is a fundamentally different situation, yet you assume that past performance guarantees future results.

I don't think I every said anything about "guarantees."

Over time the market has performed well. It has not been a good guarantor of a safety net, though. And average returns over time are just that -- average returns over time. Your faith in the market assumes that everyone will perform at average. Maybe in Lake Wobegon....

My ongoing point that is the chicken-little concerns over everyone losing their shirt in the market are just that. It is the weakest argument against privatization because you either have vastly overstate the risks involved (most of which can be fairly easily controlled) or assume a radical change in future market performance.

Stick to arguing that the transition would be too costly or that we would still need to maintain a safety net anyway so it's not worth it. Either is a much stronger argument and makes the protectors of traditional SS sound much more grounded in reality.

And note, in your world, only those with disposable income to invest get to take advantage of market returns. The rest of America gets stuck with the government paying them whatever it can afford when they happen to retire.

[Adder]

Originally posted by Tyrone Slothrop
If so, then there's no need to reform SS at all. The projection that the system will go "bankrupt" in 2052 or so is based on part on a slowing of economic growth for demographic reasons. If the economy just goes rip-roaring along at historical rates, there's no SS crisis. Tellingly, the people who propose privatization are using projections about SS's doom that do not jibe with the projections about how wonderful private accounts will be.

We have been over this before, but you know that I have never argued that SS should be privatized because of an impending crisis. If all we want to do is "fix" the current system, there are easier ways to do it.

But it is nice how you reliable bring back this straw man.

[Say_hello_for_me]

http://www.chicagotribune.com/news/c...epagenews2-utl

Column basically saying the Dems need new ideas, and shouting that Social Security is working out just-fine thank you makes them sound like something other than Democrats.


Hello

I'll still take credit for pushing to bring conservative blacks, particularly inner-city leaders, in to hear them out if not to bring them into the party.

[Greedy,Greedy,Greedy]

Originally posted by Adder

My ongoing point that is the chicken-little concerns over everyone losing their shirt in the market are just that. It is the weakest argument against privatization because you either have vastly overstate the risks involved (most of which can be fairly easily controlled) or assume a radical change in future market performance.

The problem I focus on is not "everyone" losing their shirt, but some people losing their shirt. There are winners and losers in every market, and markets are sufficiently volatile so that there are periods when markets radically underperform. The 19th century was a period of relatively flat markets with great volatility, but with some huge winners (the railroads that survived) and losers (canals; the railroads that didn't make it). The 20th century, especially post 1939, was a period of fairly consistent and large gains. We could realistically have a world where 40% of investors in the market have an inadequate return after 30 years or a world where 4% of investors in the market have an inadequate return after 30 years. Whatever the percentage is, that percentage will likely need some form of welfare in retirement if the social security entitlement is inadequate, even if it is inadequate because of their poor investment performance.

The market's also going to be heavily impacted by any new inflow of capital - a point Burger has been making. More capital shoud equal lower returns, all else being equal. It may be that there is some elasticity in the model, but I suspect that elasticity will be quickly absorbed by the amount of capital we're talking about.

Bottom line for me -- social security represents the portion of someone's retirement that ought to be invested as conservatively as possible; I might put a little of it in stocks, but I don't think I'd want that return varying amount social security recipients/investors the way private accounts would, because it almost inevitably means an increase in welfare costs somewhere else (absent a willingness to feed old folks dog food).

[taxwonk]

Originally posted by sgtclub
My assumption would be the former [increased stock prices as a result of more dollars chasing a static number of shares], although the availability of new capital and cheaper equity financing would increase new issues from today's rate.

The problem with "wealth" created by a surp;us of dollars chasing a fixed amount of capital, is that it creates a bubble. The bubble is inevitably followed by a vacuum. Witness the tech bubble.

[Greedy,Greedy,Greedy]

Originally posted by taxwonk
The problem with "wealth" created by a surp;us of dollars chasing a fixed amount of capital, is that it creates a bubble. The bubble is inevitably followed by a vacuum. Witness the tech bubble.

Another analogy is the real estate bust of the late 80s. What's especially interesting about that one is that the run up in investment was caused, in part, by government policies (especially the availability of real-estate syndications that functioned as tax shelters) and the bust was triggered to a great extent by those policies being reversed (in the 1986 Tax Act).

[sgtclub]

Originally posted by Adder
My ongoing point that is the chicken-little concerns over everyone losing their shirt in the market are just that. It is the weakest argument against privatization because you either have vastly overstate the risks involved (most of which can be fairly easily controlled) or assume a radical change in future market performance.

Stick to arguing that the transition would be too costly or that we would still need to maintain a safety net anyway so it's not worth it. Either is a much stronger argument and makes the protectors of traditional SS sound much more grounded in reality.

And note, in your world, only those with disposable income to invest get to take advantage of market returns. The rest of America gets stuck with the government paying them whatever it can afford when they happen to retire.

I never thought I'd see the day that I would agree with Adder. Maybe the second term IS ushering in a new wave of bipartisanship.