Layering and Drift

What’s needed is a comprehensive program that seeks to update the welfare state to address the massively increased burden of risk that ordinary individuals are expected to bear today

-Just don’t make the mistake of using that phrase “welfare state.”

-I’m not alone in thinking him a bit of a milquetoast on many an issue but Kevin Drum has been all over this for quite some time.

Something I don’t understand–and I don’t mean this to be argumentative: doesn’t the theory that individual-level risk is increasing run contrary to the theory that social mobility is declining? Aren’t these contrary phenomena? I’m assuming the readership here is mathematically sophisticated enough to see that it can’t be, as some would say, that the chance of moving up the social scale has decreased, but the chance of moving down has increased.

y81 – Who mentioned relative status though? The picture I have is that social mobility, in terms of risk in one’s relative position, is decreasing, while risk in absolute terms is increasing (because of growing inequality).

The thing I am looking for is agreement on the definition of concepts and facts.

For example the future of paymets to the elderly is based on a few basic facts.

– What we can provide will be depend on the wealth of society. If we go through the hoped for technological miracle with growth consistently at 4 or 5% then there will be plenty no matter what the means of financing. If as seems possible we go through some sort of decline, then all proposals will be inadequete. What needs to be done is engage in a certain degree of iscal responsibility such as creating a general budget surplus by 2016, ideally sooner.

– Benefits from stocks are not confined to private accounts. There is nothing stopping the trust fund from investing in equities both foreign and domestic. Indded given the long term return of stocks it is probably a good idea.

On this as on simplified taxes the Republicans have succeeded in fully pairing one concept with another. Thus stock market investemt is supposed to require private accounts, simplified taxes are sipposed to require a flat tax.

Neither is true.

– One danger of private accounts as opposed to group insurance is that private accounts require much higher contributions per individual. An insurance system can collect enough payments to cover the average life expectancy with a bit of slack. A private system must make sure individuals have enough to cover a long life, each individual must be insured until 100 or more while a group system can assume much lower payments per person. Group systems are also able to average out varying returns. For example there will be very different circumstances for an individual who cashes out their stocks in September 1929 and one who casghes out a few months later. There are relatively long periods of gain (secular bull markets) and long flat periods (secular bears.) For example in 1968 the Dow broke 1,000 and in 1982 the Dow broke 1,000. 14 long years. A long term pension fund responsibly managed can balance out good times and bad better than an individual. Thus responsible individual accounts have to be padded to absorb long periods of bad returns.

All of these things are understandable, they seem almost unknown. It should be noted they do suggest a group insurance system of some sort, insurance was created for a reason. Rightists would like to argue that Ben Franklin was a crank and the “ownership society” way would be for everyone to save enough money in case their house burned down, that pooled and communal resources are socialistic, but they are actually quite capitalistic.

Which doesn’t rule out arguments for reduced benefits, perhaps gauged to inflation and not wages
and possibly means. There are arguments for freeing up money, reducing taxation and creating individually controlled stashes. But there are also sets of basics that can be agreed upon by most reasonable people.

I believe I have listed 3 of them and in this and other matters debate should perhaps begin with such things as common places.

Consider a larger ‘frame’.

Since Hayek et al. met in 1946 to ‘think the impossible’, incrementally, first (to borrow, metaphorically, from Leonard Cohen,) we ‘took’ the academy, then, we took every capital of capital.

The roof beams were shored– albeit with a ‘fear/reward’ marketing plan. It goes on.

We are also Wal-Martized, by and large by consent.

It is simply a different form of ‘colonialization’. Internal this time, rather than external, as once it was.

Good chefs boil lobsters slowly.

The grand invention was the lack of personal responsibility. The corporate executive lives by 3-month earnings figures. The government-wallah, at ministerial level, lasts about 20 months.

Everything can be flick-passed.

That is late modernism.

Tracy any social grouping can be said “not to exist” applying certain concepts. Going into philosophy or even the structure of certain societies the existence of individuals can also be questioned.

These sophisms may be interesting and ibn some cases useful, but they are also a rhetotical trick designed to dislodge analysis.

No one is saying that grouped resources “lower risk.” It is shown that they can “average risk.” Their ability to do so *seems* demonstrated by the relative economic stability of industrial states since WWII.

As for “paying” there are considerable complexities in the creation of wealth. Certainly many of us have benefited directly from Social Security long before we collect. In many families it meant not having to support grandparents leaving more for children, it increases size of inheritances. These things must be added to overall benefits.

Nowadays we are fed by an illusion that our accomplishments and wealth are all self achieved and independant of the social structure. This is called into question by the success of many immigrants who come into our society, their native talents would not have brought nearly as much in their home socities and for many from third world nations wealth is protected and regarded as deserved, no matter it’s sources. Huge disparities occur, the talents of the lower classes are not developed, people are economically broken.

The trend now on the right is to encourage concentrations of wealth, to say these are “earned” and in themselves a positive social value. But if wealth is not rebalanced then markets among the lower sectors diminish, wealth stops “trickling up,” the amount of money availible for “investment” increases, but since there is not a growing tangible econmy it is focused into relatively static things like stocks and real estate that bubble beyond traditional valuations, then crash eating up the alleged benefits. I would predict the Bush tax cuts will have precisely this effect. They have helped support stocks at 1929 valuations, they have celayed “corrections,” they will probably weaken the dollar and as Milton Friedman said a a tax cut not paid for in reduced spending or new revenue is a tax increase delayed. And we need to add interest.

There are a huge number of details that need to go into a widespread discussion. I argue that there are basics. These don’t preclude the possibility that existing systems take do much or reallocate resources in bad ways. A lot of valid conservative critique makes these points.

Certainly there is room for debate on my belief about the tax cuts. We shall see. But some rightists such as Norquist seem to hope that they will force government into a crisis which will collapse many functions. If that path is taken, then we will also see the validity of my belief that too much inequality distorts and eventually diminishes economies.

But before one trots off on utopian schemes one must know that a *possible* consequence is severe losses in the real wealth of those it will try to benefit.

I will stand by my first 3 claims that:

1) The resources availible to the elderly is based on the wealth of society.

2) The existing system could invest in stocks so hoped for returns as opposed to government bonds are irrelevant.

3) The existing system or variations there of can average costs thus reducing the current demands on income among the younger as compared with a system where they all must prepare for a maximum life span and historically common down turns in the market.

I will add one more fact to the argument, most ecnmomists believe that by itself the Bush medicare drug policy will add more to potential federal deficits than projected by social security.

This leads to the conclusion that the main scare point used to drive siociasl security “reform” is not a real concern and does an apparent nonchalence about the current general budget deficit.

The arguments for Social Security reform are primarily philosophical based on certain economic theories. Like most utopian theories they ignore certain problems that have appeared periodically through history.

The schemes as proposed now involve equity accounts cashed in for a guaranteed annuity at retirement. So what happens if we have a period (like the seventies) when stock prices decline and interest rates fail to keep up with inflation? This could be particularly severe because many annuities give a fixed rate of return independant of inflation.

Admittedly severe problems could occur no matter what the method for payment is used. But in a scheme where large proportions of income come from income currently distributed some correction can be made (with a several year lag) form increased income responding to the inflation. In a scheme where all or most such payments are going into private accounts this money is not availible until the future.

At this point those managing such privare accounts will frequently be faced with the burden of supporting their elders either privately and almost certainly (if prevailing values continue to exist) through new taxation. The private burdeen will fall disprortionately on the lower income people whose relatives are less likely to have economic cushions.

Also remember a useful rule of thumb on equity value. Stocks have tended to increase 9 or 10% yearly based on the following averages:

GNP growth + inflation + dividends.

Historically dividends have averaged close to 4 percent. Now with high valuations they are half that. Huge sums (hundreds of billions yearly) will push valuations much higher further reducing dividends, these huge prices are also likely to increase the volatility of the market making huge crashes more likely. This government mandated investment will also dilute the value of private stock investment.

I do think a proprtion of social insurance funds is usefully invested in stocks, but this isn’t a magical perpetual motion machine, the “real value” over time depends on the value of the economy.
Such government mandated investment is interferance with the private sector, it can significantly alter and distort markets.

To be taken seriously such proposals must try to guess at funding which is appropiate, there are also key economic issues such as trying to smooth the market by buying when it falls significantly, and selling when it rising. There are various techniques of “balancing” which are part of the tools of responsible investing. Thus one would be selling real estate holdings now because they have surpassed their alocated percentage of resources, in the late nineties one woukld be dropping stocks in many sectors.

Again this is based on the proposal now given that private accountsc will be channeled into a few responsibly managed funds. It is no secret that many advocates are hoping that this cracks open the door for private concerns. If this occurs we will have fees (often 1 1/2% or more) going to private concerns along with vulnerability among the least sophisticated investors. This would mean people putting in less will average lower returns thus increasing social disparity.

All that I have stated is common place among the investment educated. Some of my points are arguable, but they are basics to be understood and argued against.

They are not well understood even amiong the educated public, yet they are necessarily to seriously engage in this debate.

Starting off with “corporations and governments are not really real” is an attempt to avoid these things. If governments and corporations collapse then all the schemes being discussed become irrelevant. However the validity and relevance of many of these points in creating the new social organizations remains.

Personally I think there are good arguments for preparing for the *possibility* that it will be necessary to reduce social security in the direction of a means tested safety net and that payments can be increased at a slower projected rate that of prevailing wages. Indeed if wages do continue to fall before inflation then the current advocates will demand some other system, perhaps inflation based.

There is no doubt that established interests clutter up the discussion.

But there is also no doubt that on this and other issues where they’ve taken the revolutiionary offensive the right has engaged in revolutionary methods based on distortion, emotion and fear; avoiding reasoned analysis and discouraging.

Another more pressing example is in Iraq where the right has managed to reduce the perceptions in their own minds at least betewwen those who support all the steps the administration has taken and terror appeasing liberals. in fact many of us believe that serious problems exist, that obvious reforms were not made when they should have been because of a tendency to see no wrong and admit no mistakes, that responsible people have been slandered and others ignored for partisan impulses.

I have faith in this nation and in the balances and checks of our cybernetic system, I think the ideological onslaught will be discredited, but the tragedy is that it will also discredit many valid critiques of the system and possibilities ofvreform because at this point the democratic party is reactive.

However I am hoping a “third way” will be created, one that consists of people who have varying opionions on many issues, but argue with respect to each other, to facts and to logic. I sincerely hope that it will percieve one of it’s dfuties to take it’s approach to the people, to give them basics on which they can make reasonable judgements. The current “information propagation” schemes have failed to do that and in this country a majority are unaware of the concepts and principles of basic American civics, less so of econ 101 and even less of the principles that are part of basic investment.

When rightists argue for alleged “investment” schemes based on emotion and sound concerns of individual and institutional investment they seem to be disproving the claim that they favor “individual responsiblity.”

When they use “the bad democrats do it too defence” they further support this assertion.

Therefore a debate that ties into the nations finances and economy as a whole is reduced to often false assertions, nitpicking and ideological chosen conceptual frameworks. I would prefer the party with the “mandate” work for a public that has some conception of basics such as:

– The size of the economy/
– The size of the federal goverment.
– The size of state and local governments
– The rate of taxation
– The amount spent on welfare with subdivisions for medicaid and how much of that goes to disabled and elderly.
– The size of defence.
– The sixe of foreign aid.
– The amount spent servicing the debt.

etc.

Approximations of these numbers should be widely availible, they should be included in conversations. When the majority of the public believes we spend far more than 10% (the amount they deem proper) on foreign aid it is impossible to have a reasoned discussion on the subject.

So much for my rant. All sides are guilty.