Parastatals

On September 11 this year I attended a late-afternoon training session for my employer’s 401K program. The session was conducted by a representative of the company that manages the 401K accounts, a major financial institution that did not become a federal asset in the following week. The representative was a tall, blonde, perky woman in her late twenties. She talked very fast as she scampered about the splendid picture-window conference room just around the block from Wall Street. Sometimes she paused to hand out pamphlets or change the images on the PowerPoint screen that illustrated her presentation.

The burden of her discourse was this: In the past, most people belonged to defined-benefit retirement plans, which were managed by their employer, usually through some low-risk trust established at a reputable bank. Today, people in the private sector are responsible for making their own retirement investments, but investment had become a complicated profession. No one in that room was capable of managing their own investments competently, she told us, tactfully omitting to suggest that point did not apply to her. Competent investing was what her company was for. She was there to encourage the people in the room to immediately invest as soon as possible in the new age-specific funds that had just been established for their 401K plans. Despite the novelty of these options, they were certain to do well in the long run.

Towards the end of this exhortation (it lasted over an hour) the penny finally dropped. The 401K model had little to do with retirement. It did not even have much to do with “investing”; at any rate, that’s not a term that you should apply to a system whereby people are told to turn their money over to an entrepreneur who promises to find some ill-defined but profitable use for it. What I was seeing was the in-take port of a financial bubble-blowing machine. The system compresses resources from the Ignorant for the convenience of the Self-Interested who expend it in blasts of Folly.

The home truth about “the ownership society” model of political economy has always been this: If everyone were 100% invested and perfectly advised, their rate of return would be the GDP. In other words, the more perfect the system of investment, the more it resembles the Social Security system. Of course, perfection is hard to come by in this world, so the actual behavior of any system is going to be uneven, granular, episodic. These effects are aggravated by Friction and Fraud.

Friction is actually a diminishing problem. It used to be that financial panics were long-lasting in part because a long time was needed to sort through all the paper and determine just what had happened. It was like running through a Quicken program by working through the algorithms with penciland paper. I think perhaps the 21st century will be less spooked by purely financial crises because we are used to information storms. The crash of a computer program is not different in kind from the crash of a market. Crashes are easy to fix. More interesting is Fraud, which in the current crisis has taken the form of the collapse of parastatal enterprises.

By about 1980, the West had determined, correctly, that command economies don’t work. Most governments began to focus on facilitating the market rather than providing public services. The problem was that the principle, “markets distribute resources most efficiently” became confused with the fallacy “any public good can be created by a market mechanism,” which decayed into the dark superstition, “any mechanism that does not involve public property is a market mechanism.” There are ridiculous examples of this progressive confusion, such as the belief that carbon-trading credits would be a market mechanism for controlling greenhouse gases. The more dangerous examples, however, are the ones that seem the most reasonable, as we see in the case of Fannie Mae and Freddie Mac.

There is a good argument to be made that widespread home ownership is conducive to social peace and political stability. Governments are wise to support the institution of home ownership. Actually, the US government got into this business by underwriting perfectly good mortgages for banks that were shell-shocked by the financial implosion of the Great Depression and were not responding well to ordinary market signals. In the 1970s, however, this policy of facilitating market action mutated into one of promoting ownership that a well-functioning market would not have created. This transformation was disguised when Fannie Mae (later joined by Freddie Mac) became a privately owned enterprise, and yet contrived to make a great deal of money for many years. Again, we know that dirigiste economics can produce sustained growth. We also know, as we are about to be reminded again by China, that dirigiste systems collapse in less than a generation. The wonder is that we continue to be surprised by these events.

If the people of the United States and their government think that every adult or pair of adults from sea to shining sea should own their own home, then the better course is for Congress to appropriate funds for simple grants. These would be issued to people to buy their own homes; perhaps the grants would be graduated inversely with income. That way, the only money at risk is the known sums provided by the taxpayers, rather than a great cloud of unknowing extending into the depths of the mortgage-derivative multiverse. In fact, here is a principle of public policy for you: given a public good that the market cannot supply, simple redistribution is better than state-supported leverage. The policy in question may fail, but at least not in a Hindenburg-over-Lakehurst-New-Jersey sort of way.

As readers of this space will know, much the same argument can be made about health insurance. It would be entirely possible for the United States to have a medical insurance system that was “insurance” in the old-fashioned actuarial sense of the term, and that charged premiums and accepted beneficiaries in a way that the market could bear. However, insurance in that sense could support only a boutique medical system, one that would not even purport to address the general needs of public health. In order to approximate the demands of an advanced society, therefore, the government overburdens medical insurers with persnickety regulations about not throwing derelicts who enter their emergency rooms out into the snow, and forbidding actuarial consideration of beneficiaries’ generic predispositions to disease; as for the beneficiaries, they are forbidden to auction their kidneys on EBay, or to take other steps that a genuine market system would require. So, the insurers fund public health, with coverage that the public perforce “chooses,” but the coverage is inefficient and unsustainable. Medical insurers, too, are parastatal enterprises, no matter what their certificates of incorporation say. In the long run they provide the worst of all possible worlds.

We may also extend this principle to notions like charter schools. There is a lot to be said for a mixed system of public and private schools, including homeschooling. However, it would be as great an error to try to replace all of public education with publicly subsidized “school choice” as it would be to replace Social Security with 401K plans. Most parents, including those in the professional classes, are about as competent to design their children’s education as the people in that conference room near Wall Street were to manage their own hedge funds. It is false comfort to say that the parents can be guided by experts who will manage the schools they select.

“Choice” may be the villain here, the deep-culture glitch that has distorted so much of public and private life since the 1960s. It was originally promoted as a slogan to market an antinatalist program that dared not speak its name, but it appears again and again, in all the context we have discussed here and in many others (the “choice” offered by cable television, to add another example, seems to be depressing viewership). The fallacy is the equation of choice and freedom. A good rule of thumb, perhaps, is the presumption that anyone who offers you a choice does not have your best interests at heart.

If everyone were 100% invested and perfectly advised, their rate of return would be the GDP. In other words, the more perfect the system of investment, the more it resembles the Social Security system.

Growth in per capita GDP, technically, but I get the idea.

The analogy is false, though. A 401K gives you a reasonably secure property right in the investment returns of a group of firms. What that flow is worth is an open question, to be sure. If Social Security taxes end up being really high because politicians have over-promised, for example, I would expect future growth in per capita GDP, and hence future stock returns, to be low.

Which brings up the fundamental difference. Social Security is not an investment. There is no social security "account" somewhere with your name on it. There is only an assertion by today's politicians that they will tax future taxpayers at a level to pay the retirement funds that have been pledged to you while money is taken from you now to pay benefits to today's retirees. How good is that pledge? How willing will future taxpayers be to bear that burden? Will the economy twenty years from now make that an easy sacrifice or a hard one for future taxpayers given what today's politicians have promised retirees (a level of largesse that may increase between now and then, if politicians discount the future as heavily as they usually do) in 20 years? And given what they have promised the sick, public employees, farmers, high-risk homeowners, etc.? You be the judge.

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