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Tuesday, September 04, 2012

Beat "Beat the Press"

Dean Baker writes

When people thought the stock market would just keep rising (an assumption that was explicit in all the privatization proposals put forward in the 90s, including Clinton's plan to put Social Security money in the stock market),

I flip out in comments.

Just here, note that Baker describes public ownership of capital as "privatization".  Clinton proposed partial nationalization of US firms.

Your assertion is not true.  For it to be a good idea to put social security money in the stock market it is not at all necessary for the market to go up and up.  The SSA has a very long planning horizon.  What should matter to it is the long run.  Even if the stock market crashes from time to time, it remains true that it has beaten T-bonds over every 30 year period (including the one that started just before the crash in 1929).

One way to understand how massively wrong your criticism of Clinton is is to beat the Press -- the WaPo editorial board in particular.  They decided to claim that state and local public pension funds were grossly underfunded.  They must have noted that they have smaller balances of trust funds compared to future liabilities than the SSA.

They claim that this plain fact was hidden, because the liars claimed they could get 7% real over the long term investing in stock.  They noted that over the period they chose the market was up at an annual rate of 4% real.  Someone had to point out that stocks may dividends.

Notably the dividend yield is vastly higher than the return the SSA is getting on its portfolio of treasuries.  They would gain by shifting to stock if the stock market didn't go up at all (nominal).

The SSA investing in stock is very different from you or I investing in stock.  We won't live forever and will want to cash in when we retire.  THe SSA will live forever and won't have to cash in.

Now it is true that if the SSA invested in stock then the stock market boom of the 90s and the boom compared to reality of the 00s would not have caused such an increase in consumption (as it would have been hidden from Ricardian not at all equivalant real world people).  Nor would the crash have caused such a drop.  The risk born (really hidden) by the Federal Government is an automatic stabilizer.  It is better for the country for the Federal Government to bear (really hide) that risk than to get the same expected return without risk.

Of course there just must be some reason the SSA shouldn't invest in stock.  The problem is that no one has come up with the shadow of a hint of a possible simulacrum of an argument to that effect.

Your plainly false assertion is utter nonsense and par for the course.


foosion said...

it has beaten T-bonds over every 30 year period

Reliable stock market data goes back about 100 years. We have three and a fraction independent 30 year periods. That's not much.

Stocks are expected to return more than bonds due to higher risk. If stocks are guaranteed to outperform bonds over any time frame, then they are not riskier and aren't entitled to a risk premium.

The second major issue is a variant on the fallacy of composition. The US will produce some level of output whatever the relative amount of capital in stocks and bonds. SS putting more into stocks won't change GDP. SS captures GDP through taxation, not financial engineering.

chrismealy said...

I remember the Clinton plan. It was a weird bank shot idea. It sounds like privatization but it's not. The privatization people would be against it because it doesn't let Wall St collect their free money, and the anti-privatization people don't like it because it's weird and it makes SS payouts contingent on market returns. Besides, if you're the government, you don't need to buy a claim on the output, you can just tax it. What would they do with their proxy voting power anyway?

Anyway, going after Dean Baker? I thought everybody loved Dean Baker!

Robert said...

foosion. Yes there are not many independent 30 year periods. However stocks beat bonds over all 10 years periods which don't overlap with George W Bush's presidency.

The excess return on stock is mysteriously high for a risk premium. This is a long noted puzzle which hasn't been explained (the Mehra Prescott equity premium puzzle which is the strongest case for socialism). Importantly, the appropriate risk adjustment is different for different agents. The SSA is a deep pocketed immortal (I hope) entity which should not fear risk.

You suddenly shifted from "GDP" to "taxes". Surely you recognise that GDP and taxes are not the same thing ? Even if you were right that the Clinton proposal would not cause higher GDP it could improve SSA finances (at the expense of private investors who foolishly sell it stock too cheap).

But finance can affect GDP (note 2008). In particular, the most standard models in economic theory imply that the Clinton proposal would cause higher investment and GDP (OK that's bullshit as I don't believe in standard economic models at all but it is what they imply).

Chris. I love Dean Baker, but nationalization isn't privatization. I say something is false because I think it is false and not because of how I feel about the person who wrote it. I have vigorously criticized Brad DeLong and I really do love him and am vastly in his debt. By the way, on this issue he disagrees with Baker and agrees with me (or rather I followed his thought as he followed John Quiggin's).