December 11, 2004

Social Security privatization

Aaron Larson over at The Stopped Clock has a nice response to David Brooks' column in today's NYT. Brooks equates opposition to Bush's scheme to privatize Social Security with a generalized hostility to "the market." Larson sees through this:

So obviously I'm not one of Brooks' mythic people who opposes this faux "reform" because I am "instinctively" suspicious of the market. It is because I am sufficiently knowledgeable of the market, and of pork barrel politics, government budgeting and long-term financial projections, to be inherently skeptical of this type of "privatization".
I agree with Larson's perceptive list of reasons for rejecting privatization, except for his #1 and #2.

1. Some people will lose out, big time. Investing in the markets is a "zero sum game" - for everybody who makes a dollar, somebody else loses a dollar.

If markets succeed at allocating wealth to productive uses, then everyone could conceivably win. It's not necessarily a zero-sum game, but of course it is a game where some people could lose.

2. Nobody is going to manage these accounts 'for free'.

Well, that's technically true, but it isn't a sufficient reason to reject privatization. The reason fees are a problem is that they may be so high that investors don't realize the putative benefits of their investment, and/or that the prospect of such fees corrupts the decision to privatize Social Security. Larson identifies this last point, though, so this is just a minor quibble.

Posted by Carey at December 11, 2004 08:37 PM