Democrats Are Not Against People Holding Stocks

Even if John Tamny thinks so. Much of his latest is just weird, but let me start with a canard we have heard from many others:

What’s odd is that given the chance to reform Social Security, and give Americans the option to direct their FICA dollars into private accounts that would include public-company stocks, the Democrats passed, instead using their opposition to bludgeon reformist Republicans at the ballot box.

Actually, Bill Clinton considered a plan where the Social Security Trust Fund would make that choice for us. Let me go back to an earlier version of a point I have made many times – often simply quoting Andrew Able in his March 2001 AER publication:

Some economists have argued that investing part of the Social Security Trust Fund in equity is simply a rearrangement of paper assets without any real allocational effects, and they have described such a policy as a “shell game.” The shell game argument is similar to the Ricardian equivalence proposition in public finance and macroeconomics and the Modigliani-Miller theorem in corporate finance. The argument is that private investors will react to any rearrangement of the social security system’s portfolio in a way that completely neutralizes the effect of the portfolio change. For example, if the social security system sells a dollar of bonds and purchases a dollar of equity, private investors would buy a dollar of bonds and sell a dollar of equity.

Or as I explained:

His paper considers the implications of a particular deviation from the perfect capital market model. To consider the perfect capital model, however, assume Joe has $300,000 in a private retirement account (PRA) and realizes that the government trust fund (GTF) is managing $200,000 for his benefit. Using the model from James Tobin’s “Liquidity Preference as Behaviour Towards Risk” (Review of Economics Studies, 1958), consider Joe’s choices are a risk-free bond with a 3% return and a stock portfolio with an expected return = 9% and a risk-index = 20. Imagine Joe’s preferences are such that he wishes to have half of his total retirement portfolio in stocks so his overall expected return = 6% and his overall risk taking is 10. Currently, GTF holds only bonds so Joe puts $50,000 of PRA into bonds with 80% of it in stocks. The Clinton idea was akin to taking one-fourth of the GTF and placing it into stocks so the expected return for GTF would rise to 4.5%. But Joe realizes that places his overall risk-index at 12 so even though his overall expected return rises to 6.6%, he is no longer optimally balancing expected return and risk. So Joe simply calls the manager of his PRA and asks that it now have $100,000 in bonds and only $200,000 in stocks. In other words, his entire portfolio including the GTF and the PRA would be half stocks and half bonds regardless of how the GTF is managed. Proponents of the Bush Social Security partial privatization plan wish us to believe that reducing the GTF from $200,000 to $150,000 and giving Joe the difference would induce Joe to hold more stocks. But if Joe was already optimally balancing expected return and risk, he would simply place this $50,000 in the bond portion of his PRA. Are the proponents of the Bush Social Security partial privatization plan telling us Joe was not already optimally balancing expected return and risk? If so, would not rational Joe have taken some of his PRA bonds and allocated them to stocks even before the partial privatization.

Blocking privatization did not prevent people from purchasing stocks through their 401(K) and had Bush succeeded with privatization, folks would have converted Trust Fund bonds into private holdings of government bonds. But Tamny’s rant is self-defeating in many ways:

The ten biggest fortunes in the U.S. are public fortunes in the sense that they are due to the rise of public-company stock owned by the ten richest people in the country … It’s mostly lost on Democrats that access to the stock market is the best and fairest equalizer of wealth.

Joe Sixpack living paycheck to paycheck wasn’t able to benefit from the rise in the stock price of Microsoft over the past 20 years, but watching Bill Gates gain billions makes it all better, I guess. In my view – the big controversy coming up will be whether to pay off the massive Federal debt with taxes on capital income or taxes on employment income. Tamny somehow believes taxing employment income rather than capital income will make Joe Sixpack better off.

Of course, Tamny also pulls out that free lunch supply-side canard – if we actually adopt fiscal responsibility by reversing those Bush tax “cuts” (aka deferrals), real GDP growth will suffer. I guess Tamny thinks the old Reagan “save and invest”, that is higher national savings leads to faster long-term growth, got things backwards. Or is it the case that Tamny’s brain was screwed on backwards when he wrote this?