Privatization: John Quiggin Says There is No Free Lunch
Readers of the Angrybear know that I have touted this wisdom from Robert Barro to suggest that privatizing Social Security will neither increase risk nor expected return. The introduction to Andrew Abel’s AER 2001 article states this position quite clearly as well. It turns out that Max Sawicky and John Quiggin are eloquently making this argument.
John does note an argument once raised by Donald Luskin (yes, Luskin has gotten lucky on occasion and made limited sense):
Suppose that the market is efficient in most respects but that some people are credit-constrained or face high borrowing costs. As a result they can’t hold as much equity as they want, since they can’t borrow to get it. This gives a case for either of the proposed reforms, since directly or indirectly, this gives credit-constrained households exposure to equity. Note however, that almost any violation of the EMH leads to interventionist policy conclusions unappealing to free-market types.
OK, Luskin forgot to mention the point of John’s last sentence. The point of Abel’s piece is that low-income households often are not credit-constrained but rather hold bonds as opposed to stocks in their private portfolios because of high transactions costs involved in investing in the stock market – a point often disputed by proponents of privatization.