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The Myth of the "Ownership Society"
J Bradford DeLong is Professor of Economics at the University of
California at Berkeley and a former Assistant US Treasury Secretary. His last piece in Webdiary was Bottom Dollar.
by J Bradford DeLong
"No," said former Fox News journalist Tony Snow, newly appointed as one of George W. Bush’s closest aides, his Press Secretary, when asked recently about his retirement savings. “As a matter of fact, I was even too dopey to get in on a 401(k). So there is actually no Fox pension. The only media pension I have is through AFTRA.”
A 401(k) is a heavily tax-favored account in which workers can save money for their retirement. Typically, employers – including Fox News – match workers’ 401(k) contributions, so setting up a 401(k) is an irresistible financial deal, a true no-brainer. Yet Tony Snow didn’t. Only the union he was forced to join, the American Federation of Television and Radio Artists, has been doing any formal saving and earmarking of his retirement assets.
Snow’s case, I think, holds very important lessons, and not just for the United States. To the extent that the Bush administration has a coherent philosophy for domestic policy, it is the idea of the “ownership society” – the belief that intermediary institutions, whether governments, unions, or the benefits departments of companies, should get out of the business of providing social insurance. Instead, individuals should rely on their own assets to provide them with financial security in retirement or in case of serious illness. Give people the incentives to plan for their future, ownership-society advocates argue, and they will.
In the future, Snow will have to stand up at the podium in the White House briefing room and advocate the various components of Bush’s ownership-society proposals. He will have to praise Health Security Accounts – and argue that people won’t stop going to the doctor for preventive care even if their HSA-tied insurance plan doesn’t pick up any of the bill. He will have to praise privatization of Social Security – and argue that individuals will make prudent and wise investment decisions with this baseline tranche of their potential retirement resources. And he will have to praise the decline of unions and the shedding of benefits by firms – and argue that individuals will make better choices than union experts or firms’ benefit departments.
The assembled reporters will look at him, and they will recall that when he was offered an unbelievably good financial deal, he was too “dopey” to take advantage of it. And they might reasonably conclude that his failure to channel some of his Fox News salary into a 401(k) account is a very powerful argument against the words coming out of his mouth.
This is not to say that the issues are simple or that there are easy answers. America has many people who do not set up 401(k) accounts, despite enormous incentives to do so. It also has people who do set up 401(k) accounts and then invest them badly – for example, Enron workers whose 401(k) money was overwhelmingly invested in company stock lost not only their jobs when the company went bankrupt, but also their pension assets. There are also well-known examples of highly corrupt union pension funds, such as the one bilked for years by the leadership of the Teamsters.
Finally, there is the example of politicians like George W. Bush, who enacted a government program that promises comprehensive drug benefits to the elderly and mammoth profits to pharmaceutical companies. His administration may preach the virtues of individual responsibility, but its program makes no provision for how and where the government is going to secure the resources needed to finance its promises.
In short, there are psychological and moral failures at all levels – individuals, firms, unions, insurance companies, and governments. Difficult problems of institutional design compound the difficulty of reforming social-welfare programs. America must also deal with the potential for corruption, both illegal in the case of the diversion of Teamsters’ pension resources and legal in the campaign contributions provided by the pharmaceutical lobby to complaisant members of Congress.
These problems are not America’s alone, for they are inherent to all efforts to privatize social welfare. As Americans and others look at this Gordian knot of public policy problems, we should learn one thing from the example of Tony Snow: the vision of an “ownership society” espoused by Bush is simply not plausible. If it were, his new press secretary would not be describing himself as “dopey.”
Copyright: Project Syndicate, 2006.
www.project-syndicate.org
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No need for "tax hikes"
Rob Wearne, re “what do you think the options are for the US?”
Only one way to go, a significant reduction in federal govt spending. Eliminating farm and energy subsidies would be a good place to start, cutting hundreds of billions in annual spending in one go. The retirement issues in the US are relatively minor compared to Europe and Japan. The Americans have and should continue to enjoy both a strong economy and a growing population to help support future expenditure. Although they could still benefit from a compulsory retirement savings system similar to our own.
Re “what do you think the implications are for say ahhh say global inflation and growth”
Global inflation/growth is a little broad for this short post. In my opinion American and Australian growth will continue around current levels and inflation will remain under control thanks to our mostly de-regulated industries and flexible labour markets. The Americans may jeopardise this economic outcome by increasing restrictions on trade and labour mobility (ie immigration).
Fairy Land
Jane, USA TODAY just released some new calculations on outstanding liabilities in the United States. According to them "The $57.8 trillion liability is the amount that government needs now, stashed away and earning interest, to generate enough cash to pay future obligations.... Like an unpaid credit card bill, the balance grows every year - about $25,000 per household annually."
USA TODAY arrived at it by pulling together up all the sources of government debt and unfunded liabilities.
Here's how USA TODAY breaks this $57.8 trillion debt down in a "per household"
Program..................................Liability per household
Medicare.................................$263,377
Social Security..........................$133,456
Federal debt.............................$42,538
Military retirement benefits.............$25,443
State-local debt.........................$16,395
Federal employee retirement benefits.....$14,256
State-local retirement benefits..........$13,257
Other federal............................$1,956
Total....................................$510,678 per household
Most of this debt is to cover the cost of promised retirement benefits for the 79 million baby boomers born between 1946 and 1964.
Those program costs will explode when boomers begin collecting Social Security in 2008 and Medicare in 2011.
Jane, best of luck trusting the politicians to look after your retirement – I don’t think I will.
Gareth, what do you think the options are for the US and what do you think the implications are for say ahhh say global inflation and growth...
To meet these costs will require massive tax hikes, massive inflation and/or a massive cutback in the promised benefits of these programs.
Ohh gee of course but we will be rescued by the politicians and unchecked third world immigration... they seem to have done so well in running their own countries.
Syndey has been enhanced by immigration
Rob Wearne, back to your points on immigration. Re “From an economic standpoint the increase in the supply of labour results in a transfer of power from the providers of labour to the providers of capital.”. I don’t know what you mean by “power”? Are you referring to changes in the cost/price of labour? All other factors being equal, increasing supply will reduce price when supply is at full capacity. I don’t think that simplified scenario can be applied here. Immigrants impact demand and supply is nowhere near capacity in many sectors of the American labour market. Besides this transfer can occur irrespective of the location of labour. If the labour can’t move to the jobs, many of the jobs will move to where the (cheaper and more productive) labour is. Indian call centres are an obvious example here. If the farms can’t get someone to pick their produce at a economic cost, they’ll close down and production will move to a cheaper location in another country.
Re “a large unassimilated economically backward underclass?” this sounds like many folks I know in the Sutherland shire. What this nation needs to compete in the global economy is more bold, keen and productive workers (like most 3rd world immigrants) and less ignorant and lazy bludgers (like many of the folk down here in Southern Sydney).
Re “Spend some time in Sydney to see what a population increase of 1Million over the last twenty five years has done to traffic, infrastructure, housing prices and environment!” I’ve lived in Sydney for more than a decade Rob. Blaming Sydney’s infrastructure problems on immigration is wrong. Poor planning , mis-management and a sprawling urban zone should bear the brunt of any blame. Where’s the F6, the M4 extension, the Parra to Epping rail line, the northwest rail line, another road & rail harbour crossing, a power station that doesn’t burn coal, any kind of new water infrastructure, higher density residential zones near the city?
Even with all this government inaction, on a global scale Sydney still rates as one of the finest places to live. Sydney is a perfect example of how millions of immigrants can be welcomed into a growing city to enhance the environment. Rob can you think of an example city that has improved itself by curbing immigration?
I'm going to stick to the BLS figures
Rob Wearne, I have previously been introduced to “The Daily Reckoning” and their string of related sites by other members of Webdiary. I recall reading some pretty ordinary economic analysis on that site in the past. Nonetheless I’ll try and counter the arguments posted on “The Daily Reckoning” and “Shadowstats”, rather than just dismiss the sites.
From “Manipulating the masses.”
Re “annual inflation is over 8%, unemployment is around 12%, and annual GDP growth is flat” John Williams provides no support for this (apart from his comment on common sense supporting the numbers), has he conducted his own comprehensive national surveys to obtain these numbers? The BLS surveys 60,000 households, 23,000 companies and 50,000 landlords every month, how many has John Williams surveyed?
Re “Gathering and reporting accurate information on a timely (one-month) basis for components of the U.S. economy is nearly impossible” Yet John Williams is able to inform us that “annual inflation is over 8%, unemployment is around 12%, and annual GDP growth is flat.” How does he determine these numbers?
From Shadowstats (John Williams’ website).
I have to question Mr Williams statistical analysis when he can’t even get basic numbers right. Williams states “Traditional inflation rates can be estimated by adding 2.7% to the CPI-U annual growth rate”. Ok, 3.5% (from the BLS) plus 2.7% gives me 6.2%. So exactly where did the “annual inflation is over 8%” come from?
Rob, the more I read from John Williams website, the less confidence I have in this guys analysis. He goes on to discuss methodology changes in weighting CPI and states “Once the system had been shifted fully to geometric weighting, the net effect was to reduce reported CPI on an annual, or year-over-year basis, by 2.7%” John appears to have plucked this 2.7% from thin air. The BLS estimated the actual impact on CPI will be a reduction of 0.2%, see here.
The reason for the change in weightings resulted from concerns that the previous model over-estimated inflation, the BLS states (referring to the old method) “the index does not reflect the fact that consumers can and do, to some degree, insulate themselves from the impact of higher prices by adjusting their spending to favour relatively lower-priced goods or services. Consequently, the current CPI, when compared with a measure that reflects this substitution effect, tends to overstate the rate of price increase consumers experience.” Sounds reasonable to me, how many banana’s have you bought in the last month?
Rob do seriously believe that John Williams’ figures for US inflation, unemployment and GDP are correct and that the BLS has got it all wrong?
Not the baby boomers again
Rob, you write: ‘The retirement of the baby boomer generation is almost upon us and the alternatives for the politicians to fund this massive off-balance sheet liability in pension and health care costs will be difficult.’
‘Almost upon us?’ ‘Massive off-balance sheet liability?’
Calm down. The grey tsunami they’re all predicting will be just another ripple in a pond. This is the stuff of sensationalist headlines and speeches by opportunistic politicians safe in the knowledge that their greying years will be comfortably provided for out of the public purse.
Most realistic trends actually indicate the reverse – that it is the young who are becoming an increasing burden on the aged. In reality, it is the aged who are looking after many of the social responsibilities being abdicated by governments bewitched by the siren-song of ‘user pays’.
The predicted blowout in healthcare costs is particularly out of touch with reality. For example, a 1999 study by the Australian Institute of Health and Welfare [http://www.mnforsustain.org/curnow_j_australia_aging_myths_and_the_fear.htm]
showed that the period of full-time care and high healthcare costs required by the average person over the age of 65 occurs mainly within the final six months to two years of life – a relatively tiny portion of the retirement years. It also showed that, despite a rapidly ageing population between 1981 and 1996, the proportion of total outlay for health, welfare and social security on older Australians actually declined from 43 to 33 per cent.
The aged are, in fact, major active contributors to the volunteer or non-paid economy – that often fulfills the needs of our increasingly time-deprived 25-55 year olds. To date, this other massive ‘off-balance sheet cost’ has been disgracefully overlooked. What estimates exist put the figure at tens of billions of dollars, at least equal to the size of the Gross Domestic Product.
Also, to be in any way realistic, the so-called burden of an ageing population needs to be offset against the decreased burden on the economy of the smaller family. Alarm over decreasing fertility rates does not consider the fact that the time and cost burden of caring for that portion of the population aged between 0 and 18 (and onwards up to age 25 – as is becoming increasingly common), dwindles accordingly.
The predicted blow-out in pension costs is another fizzer. The baby boomer generation was the first generation of the social welfare era to start actively investing for retirement. Combined with the fact that they have much smaller families than their predecessors, and up to two parental incomes for a large part of their child-rearing years, many of this generation will either not need a pension, or will only draw a partial pension. All the social indicators, particularly the increased entry of women into the workforce, show that this trend is likely to continue.
This highly suspect ageing population ‘debate’ really needs to be seen within the context of fashionable economic policies across the developed world that overtly favour the dismantling of the hard-won welfare state.
response
Gareth, in response to your points:
US CPI: Please see the following links for an explanation of the fixes to keep CPI artificially low in “Manipulating the Masses” (here) and a more technical explanation here.
Uncontrolled third world immigration: The large scale immigration that is currently happening in the United States and to a lesser extent the UK and Europe obviously has its winners and losers.
For the immigrants entering the west it is of course advantageous. However the issue is the economic and social effects on the target countries of such large scale immigration. From an economic standpoint the increase in the supply of labour results in a transfer of power from the providers of labour to the providers of capital. Taking your example of cheap farm workers it also a disincentive to mechanise/automate production/picking and depresses wages of those native unskilled labourers.
When the mix of the heavily welfare dependent and low skilled third world workers is thrown into the pot then the issue becomes one of the taxpayer subsidizing certain labour intensive industries.
Or think of it this way – what is the best way for us as a nation to compete in the coming millennium – by having a large unassimilated economically backward underclass?
Immigration and the environment: Sure there is immense environmental degradation in the third world but is bringing them here going to make it any better or are we subsidising their poor practices (poor farming methods and lack of property rights for instance) by in fact allowing it. Another question that immigration enthusiasts rarely ask is what does it do to our environment? Spend some time in Sydney to see what a population increase of 1Million over the last twenty five years has done to traffic, infrastructure, housing prices and environment!
M. F. McAuliffe, The market is a much better way of allocating scarce resources – just imagine the govt. trying to run Woolworths or Coles! Would you like 5 day old stale bread with that……
And another thing, not every one who knows that market is a better way of determining investment decisions is a neo-con. Neo-conservatism is an ideology that has more in common with many of the same statist principles as socialism and welfare democracy.
If you want to label me at least get it right and call me a paleo-libertarian.
And no, not every one whom is not on the left subscribes to the point of view that society does not have moral obligations to those that are less fortunate in our communities.
We just don’t agree that the state should have a monopoly or is indeed the best way doing it.
Neo NonCon
Dear Rob Wearne
I didn't call you anything. I'm sorry, I wasn't even thinking of you.
I do notice however, that the invisible hand of the market most often has its thumb on the scales.
The Shell Game Society
There was once an "ownership society". It was called socialism, but now that that has been permanently and officially conflated with Stalinism, we are not longer allowed to remember or conceive of the collective ownersip of assets.
The neo-con position is that Government is incapable of running anything. Therefore everything that the Government did run well (eg Qantas, the Snowy, Telstra) is being sold off so that the ideology will match reality.
The basis of this sell-off, apart from enriching Government cronies, lies in Margaret Thatcher's assertion that, "There is no such thing as Society. There are only individuals and their families." (Of course, if there's no such thing as society then no one is responsible for social justice. The very concept is becomes unformulable.)
The "ownership society" is simply another scam. Just as welfare reform ended up with subsidised wages for janitorial jobs and the like (until the government subsidy ran out and that lot of workers were fired and new ones fresh off thewelfare rolls were hired); just as the Medicare drug scheme was designed to benefit drug companies and not the taxpayers who fund it (and the taxpayers are increasingly not the corporations, so when I say "taxpayers" I mean those on limited incomes - small salaries - who Pay As They Go); so the privatisation of Social Security is designed to provide two benefits:
1 - an infusion of billions or trillions into the stock market
2 - transaction fees every time every stock-holder decides to buy or sell anything.
And neither of these benefits is aimed at the stockholder/putative retiree.
Apart from which, in design, in detail it turns out, according to Frontline a couple of weeks ago, that people in general are uninformed about financial matters and make bad stockmarket decisions; the bottom 20% of 401(k) holders make about 4% on their investments, while the top 20% of 401(k) holders make 20%-40%.
This gap in fact is putting an end to retirement for any but the rich.
When certain short men talk about an "ownership society" they mean it. They and their friends intend to own it all.
I say we need more of these "3rd world" migrants
Rob Wearne, I certainly agree with your conclusion. I have a few issues with your reasoning though.
Re: “large scale immigration also affects our increasingly fragile environment.” By ‘our’ are you referring to Australia? If so, are we somehow immune from the global environment? Do the countries these immigrants come from have no environmental issues of their own?
Re: “taking the example of the US, France and Britain with their massive third world immigration problem (legal and illegal) there are many issues including increasing welfare dependency, crime and an increasingly large unassimilated populaces that have nothing in common with the cultural traditions and norms of the nativist population.” Rob I have issues with this statement for many reasons. You state that third world immigration is a ‘problem’. For who is it a problem? The poor but bold and smart immigrants who manage to get themselves into these countries to make a decent life? I don’t think so. The farmers and small business people who are finally able to get their crops picked, floors cleaned, computers fixed, tyres changed etc at rate that allows them to make a profit? I don’t think so. The economy that benefits from the entrepreneurial spirit that seems to arrive with each new wave of migrants (many of Australia’s billionaires were once poor migrants)? I don’t think so. Rob, the way I see it, “third world” migration is a benefit, not a problem. Your basic premise of a poor economic outcome resulting from migration seems to rely on the point below.
Re: “If the US CPI and unemployment was measured the same way as it was in 1980 then inflation would be 11% and unemployment 15%.” Have you got anything to substantiate this Rob, or do I have to take your word for it?
Based on stats I got from the Bureau of Labor Statistics and the CIA world factbook, an economy taking in millions of “third world” migrants each year (ie the US and their millions of Latino migrants) looks like this.
Unemployment: 4.6%
Inflation: 3.5%
Life expectancy: 77
Literacy: 99%
GDP per capita: $USD 42,000
If this is what millions of “third world” migrants gives the US, maybe we should consider getting in on the action Rob. What do you think?
The "Myth of Govt. Created Prosperity"
What Prof. De Long is really saying is that individuals are too stupid to make their own decisions in relation to their savings and that this function should be trusted to others.
Although he is no doubt correct in individual cases the problem with his solution is when it is imposed on a whole population, govt intervention and welfare (foreign state, corporate and individual) has negative externalities.
Take for instance the large unfunded pension systems in both the US and Australia. The state by guaranteeing peoples retirement incomes has no doubt protected in the short term those less able or unlucky; however it has also been a partial but still significant contributor in the population as a whole under-saving for their retirements on the basis that another generation will pick up the bill.
The retirement of the baby boomer generation is almost upon us and the alternatives for the politicians to fund this massive off-balance sheet liability in pension and health care costs will be difficult.
So far the alternatives seem to be higher taxes, large scale immigration to help subsidise the taxpayer base and although not openly admitted a creeping inflation that will erode the real pension costs of beneficiaries.
In an increasingly globalised economy the imposition of higher taxes will result in more waste through the dead weight of bureaucracy, less saving, slower growth and a lower standard of living.
In the competition for global talent our higher taxes will mean that immigration will generally come from less educated circles. Although this immigration may nominally increase GDP, taking the example of the US, France and Britain with their massive third world immigration problem (legal and illegal) there are many issues including increasing welfare dependency, crime and an increasingly large unassimilated populaces that have nothing in common with the cultural traditions and norms of the nativist population.
Also large scale immigration also affects our increasingly fragile environment and hits the most disadvantaged in our society by increasing competition for unskilled jobs and scarce housing resources. In the US large scale immigration is seeing some areas turned into ghettos with up to five families sharing small three bedroom houses.
For those on govt. pensions and fixed annuities the real pain will come with govt’s. Continuing to depreciate their fiat currencies whist manipulating the measure of inflation so they don’t have to pay.
If the US CPI and unemployment was measured the same way as it was in 1980 then inflation would be 11% and unemployment 15%! One only has to look at the burgeoning gold price to see the judgment of the market as to inflation notwithstanding government manipulation – calculate stock market performance in terms of the gold price to see how the equities market is really performing.
This is bitter harvest of what the modern centralised welfare state has sown.
Trust the govt. to manage my assets – No thank you Prof. De Long.