The front page of Monday’s USA Today focused on Social Security and Medicare, and the reality that the benefits promised by both programs have the United States government facing roughly $53 trillion in largely unfunded liabilities. With the bill for this set to begin to come due in 2008, it’s safe to assume that both Senator Kerry and President Bush will be asked to comment on it in the next two debates.
On the Social Security question, Kerry has so far said he will neither raise taxes nor cut benefits. Different from Kerry, President Bush has proposed making those near retirement whole, all the while allowing younger workers the opportunity to invest a portion of their FICA withholdings in private accounts. What’s remarkable about the president’s proposal is that for perhaps the first time a politician is actually downplaying the benefits that will result from a campaign idea. If passed, privatization will surely be the gift to Americans that keeps on giving.
The answer for why this is so partially lies in what happens if politicians of both parties continue to ignore the obvious. Future benefits could be cut altogether, but another possible path will be that the federal government simply lowers its real debt by printing dollars. Liberal economist James Galbraith told USA Today that the government’s ability to print its way out of its debt obligations has him “not at all concerned about Medicare or Social Security.”
What Galbraith apparently chooses to ignore are the obvious inflationary implications of dollar devaluation. On the other hand, if some form of privatization is passed, it will be a sure signal to the markets that the U.S. government is dealing responsibly with its unfunded debt problems. This should pay dividends to homeowners, who are arguably paying higher long mortgage rates given the realistic fear that a future government will follow Galbraith’s advice.
As for stocks and bonds, private Social Security accounts are expected to include exposure to both. The lowering of long-term inflation expectations promises that each asset class will perform better. Economist Arthur Laffer has repeatedly stated over the years that inflation is one of the four “prosperity-killers.” Reducing the likelihood of it revealing itself will necessarily lower the risk premium on stocks and bonds, leading to higher prices for both.
Laffer’s other three prosperity-killers are tax-rate spikes, trade protectionism, and government over-regulation. Importantly, privatization protects stocks, bonds, and economic growth from the other three given the almost certain behavior modification that will result from all workers owning a piece of the capitalist system.
Doubters about the above assumptions need only refer to the Chilean privatization experience. In speeches around the world, Jose Pinera (Chile’s former secretary of labor and architect of that country’s privatization program) has stressed the cultural impact of privatization on Chilean citizens. It turns out that as their ownership of stocks and bonds grew, Chileans were less likely to agitate for the very income, capital gains, and corporate taxes that are known to harm stocks to begin with. Indeed, what sane person would ask for something that would shrink his net worth?
The same applies to trade protectionism and regulation. Voters could push for protectionist barriers, but as owners of companies that rely on world trade to grow, they would be asking for something that is inimical to their self-interested desire to have a comfortable retirement. Regulations? Their value is highly dubious compared to more effective market regulation — plus they cost companies money, plain and simple.
Perhaps the most important behavioral impact will be the one on those who make our laws. J. & W. Seligman’s chief economist Charles Kadlec coined the phrase, “bull markets don’t die of old age, but due to policy failure.” Social Security privatization will once again make all workers owners, and as owners, they’ll more likely turn out of office politicians eager to use inflation, taxes, protectionism, and regulation to reward narrow special interests.
For giving all workers a piece of the capitalist system, privatization will serve to align the interests of capital and labor in an extremely positive way. Beyond broad ownership, privatization’s gift will be in terms of its affects on the attitudes of people and politicians. Voters will want to see the value of their private portfolios grow, and wanting to keep their jobs, politicians will get out of the way so this can happen.
–John Tamny is a writer in Washington, D.C. He can be contacted at firstname.lastname@example.org.