5/16/00 4:40 p.m.
This Ain’t the Free Market
A contrarian view of the Bush Social Security plan.

By Gene Callahan

RO’s commentary on George W. Bush’s new Social Security plan has been almost entirely positive. I’d like to sound a cautionary note.

Lawrence Kudlow may be correct when he says that Bush’s plan is good politics. However, there are many reasons that those who believe in liberty and the free market should be wary of the plan. Most importantly, we must insist that it is not, as Peter Ferrara implies, a "free-market policy." It is at best, as Derrick A. Max terms it, "a critical first step." At worst, it could backfire, to the detriment of free-market ideas.

What are the various difficulties the plan presents, from a free- market perspective? The first and most obvious is, of course, that there’s nothing "free" about it. Although there will be some choice as to where to put Social Security money, there is no choice as to whether one wants to participate or not. The government has decided we must save 15% a year for our retirement, and it knows best. There might be a myriad of quite sensible reasons we feel this isn’t the best choice for us. Perhaps we have a great idea for a business start-up, and could use every penny we make to put into that. Perhaps we’ve just learned we have terminal cancer, have no need to worry about retirement, and would like to have a really great party before we go. In any case, since we made the money, a free-market system would leave us alone to spend it as we wish.

Under Bush’s plan, there will also certainly be calls for increased regulation of the equities market. Although, over the long run, stocks have always performed well in the past, this will not necessarily remain true forever. And the "long run" can seem quite a bit too long to some people. If we had a Social Security program invested in the stock market in 1929, can you imagine the pressure for the government to intervene in the market by, oh, 1953 or so, when the Dow was still below its 1929 high?

The need to approve which funds Social Security participants may invest in will tend to stifle financial innovation. The government will inevitably only permit investment in tried-and-true funds. The large, guaranteed flow of cash to these funds will make them more attractive to entrepreneurs than they otherwise would be, and will tend discourage experimentation with new financial instruments. Also, the need for the government to determine exactly which funds are approved will inevitably lead to increase lobbying and political maneuvering on the part of financial institutions. And since Bush’s plan amounts to a huge subsidy to the established financial firms, it will create a large, wealthy lobby interested in preventing Social Security from ever being eliminated.

Peter J. Ferrara tells us that: "The shift to personal accounts would also produce important general economic benefits…national savings would likely increase substantially. This increase in savings means more capital investment producing more jobs, increased productivity, and higher wages." The problem with Mr. Ferrara’s statement is that it implies that someone — the government, the experts at Cato, perhaps Alan Greenspan — knows the "correct" amount of savings, and knows that Americans currently save "too little." But the correct amount of savings is a purely personal judgement. Once "experts" think that they can decide that, since savings produces future growth, the government has the right to coerce people to save, why stop at 2 or 3 percent? Future economic growth would be even higher if the government forced everyone to save all income except what is necessary for a subsistence-level existence.

But it is Kudlow who gives the game away, when, talking about the budget surplus, he says: "In other words, plenty of money for tax cuts, plenty of money for private retirement accounts, and plenty left over for some rainy-day spending on education and prescription drugs. Or whatever it takes to win this election." This proposal is not about liberty, or free markets. It’s about winning.

Elimination of Social Security is, of course, not a possibility at present. Bush’s plan may turn out well, and may be as much reform as we can hope for. However, if our friend is contemplating chugging 3 quarts of whiskey, it does not do to enthusiastically recommend having only two. Certainly, if he asks us if two would be better than three, we can say, "Yes, but you’d really do better to get off the stuff." Similarly, Bush’s plan is probably better than the system under which we currently suffer. But lovers of liberty are poorly advised to sing its praises.

Gene Callahan is a writer and a partner in an equity-trading firm. He is a regular contributor to the web site of the Ludwig von Mises Institute.