Now for something completely different. Do I (partly) agree with Martin Feldstein, Larry Lindsey and George W Bush ?

It seems that Bush was not dishonest when he suggested that private social security accounts could be part of a plan to save social security. He really believed something like that because Larry Lindsey told him and Lindsey got the idea form his old prof. Martin Feldstein (and a co-author). The idea was so crazy that it went no where in the Bush administration (and that is saying something). However, I am not sure I am totally convinced it is crazy.

Brad DeLong notes correctly that it doesn't really have anything to do with social security. The idea is that there is a multi trillion dollar sure thing for the US treasury -- issue treasury bonds and buy corporate bonds and stock. Some of the huge profits from this deal were to be used to save social security and others to give people who wanted private accounts to get higher returns.

One crude way to view this is that Bush and Lindsey bought into the bubble just as it was about to burst. The pressure for private accounts came from the idea that stock was a great buy, which, as usual became very strong at the peak of the bubble. The idea vanished as voters suddenly found stock scary again when the bubble burst.

However, the idea that stocks are, on average, underpriced has considerable support. The equity premium is a puzzle. The evidence is that, since WWII, Stocks have far out perform treasury bonds over every long period. Clearly most of the evidence is from some time ago. I think it is possible that investors just made a mistake and have since corrected it (so no more multi trillion dollar sure things). The mistake would not be simply hating stocks but rather failing to diversify and then correctly perceiving undiversified stock portfollios as highly risky.

I am perfectly willing to believe that Stock is still underpriced. I am also willing to believe that quality premia on bonds are too high. Now if I think people are making a mistake do I think the government should correct it by selling (safe) bonds and buying stock ? Sounds good to me.

One might argue that rational investors would shift their private portfollios from stock to treasury bonds to cancel the maneuver. I believe that rational investors are too few to matter.

So what would be the problem ? Well would someone at treasury decide which stocks to buy ? I don't trust any one team of people to be competent to do that and expect huge corruption. I think just about everyone agrees that it would be a bad idea. Actually I'm not sure about "just about everyone". For all I know all living human beings think that would be a bad idea.


OK so the plan has to be that the treasury buys say x% of all stock and corporate bonds. Here I see another problem. It is very nice to deal with someone who has to buy x% of your stuff no matter how much and how bad it is.

Let me put it this way. There are two cows. One belongs to Mr A and one to Ms B. A and B, who are very very rich,incorporate and issue shares in an IPO rating each cow as worth a billion dollars. They buy each other's shares. Treasury has to give each of them 100 million dollars for 10% of a cow.

Doesn't sound so good for the honest citizen. Still scams like this exist already, consider the case of Harkin energy or more recently Enron. There are semi sometimes enforceable rules about arms length transactions.

I personally think the treasury should issue even more t-bills and buy say 1% of stock and corporate bonds in the USA.