January 13, 2005
More on Social Security Investing in Stocks
I had a couple of conservative bloggers respond to my post on why it would be better for the government to invest in stocks, than to set up personal accounts.
Josh Sharf at View From a Height concentrates on the fear of government power over firms if social security owns even a few percentage share of company stock:
Anyone with experience in the financial markets knows that a 3.7% share in a company is gigantic. It guarantees broad say in policy decisions, great leverage in proxy fights, and frequently means a seat on the board. Outside of confiscatory taxation, I can't think of a better example of galloping socialism than to start giving the government board seats.What policies could the government impose on companies due to holding a board seat that they can't impose through legislation? State pension funds hold significant shares of a number of companies and, most of the time, the problem is that management ignores most of their good governance complaints. The only time their presence makes a difference is when a lot of other shareholders get concerned about the same issue. And if the social security fund is reflecting the views of other investors in the private equities marketplace, we are hardly talking about a galloping socialist impulse.
But I'm more interested in his reaction to the idea that social security would benefit from targeting investments preferentially in companies that promote job and wage growth in the United States, since that would generate not only returns on equity but additional payroll taxes paid into the social security trust fund.
Josh Sharf argues that:
investing in inefficient domestic companies virtually guarantees the investors - you - lower returns. In effect, you're subsidizing inefficiency, a national version of making everyone pay more for groceries because you don't like WalMart.This last point is the ideological argument that "what's good for General Motors is good for America," but it's also patently untrue in this situation.
In a fair comparison, returns are returns, no matter who's doing the investing. And domestic economic growth only happens when there are returns to investors. Governments don't get any more out of that than anyone else.
If the social security trust fund loans money to build housing in the United States and gets an 8% return on investment, but also gets additional payroll tax payments from the labor involved, the additional payroll payments are hardly irrelevent to the gains to the trust fund over time. Money is money whether it comes through dividend statements or taxes. If that same investment by the social security fund goes to Enron investing in off-shore financial investments and there are no payroll taxes generated, the social security fund may do worse even if Enron pays slightly higher dividends than the housing investment paying the 8% return.
Stephen Karlson at Cold Spring Shops makes the slightly more interesting argument that these investments won't reflect any kind of publicly-minded goals:
The administrative costs that are saved in pooling all the moneys might be dissipated in rent-seeking over who shall be appointed as commissioners and what investments are in the national interest in addition to offering lower returns than mutual funds less constrained.If I was advocating some more nuanced version of industrial policy, this argument might be compelling, but I'm advocating for a pretty basic "bright line" rule on social security investing: invest in companies that provide jobs in the United States. As long as the returns are in the ballpark of comparable investments that don't promote US jobs that pay payroll taxes, the social security system will benefit.
In reality, both these comments reflect the neoclassical economic belief that stock market prices reflect pure economic efficiency, so it just offends their theoretical souls for the government to choose to invest in any way that does not seek to maximize stock market capital gains -- even if the investing strategy maximizes total gains when payroll taxes are factored in.
Update: Stephen Karlson in comments asks if I will accept that "rent-seeking" exists in government policies. Of course-- I have to watch corporate looting of the treasury via the Bush administration every day (and yes, this is an extreme version of what happens in many administrations). But as I note, all social security has to do is concentrate on domestic investments, hardly a fine-tuned strategy.
Compare that approach to the Bush administration's announcement of a massive tax break to encourage companies to invest domestically. This is just one of myriad examples of government regulations designed to influence corporate behavior. At least the one I'm proposing will actually lead to increased revenue for the treasury, rather than one more corporate windfall.
Update: Steve at Deinonychus antirrhopus weighs in as well. He argues that big corporations will lobby hard to get social security to invest in their industries, which is socially wasteful. Given that evidence of this kind of lobbying is not apparent in the case of the various state pension funds (not that there isn't some pressure), the direct economic waste of such lobbying is unlikely.
One interesting issue is raised by Steve's statement that "With individual accounts this kind of problem is largely removed in that special interest groups are unlikely to lobby 150 million people." Since most versions of suggested private accounts would not allow social security participants to invest in any mutual fund, but would probably create a few basic choices, you might see lobbying by firms to be included in those choices. In reality, part of my suggestion -- that investments in domestic wage-producing stocks are of greater benefit to the social security system -- could be accomplished by mandating that such private accounts could only invest in companies where say 50% or more of their revenues come from domestic production. The only problem that while the social security system would benefit from increased tax payments, the individual investors would not. Part of my argument is to align the rationality of investment strategies with overall returns. Even without regulatory mandates, it's rational for the social security system to invest in such domestic production. For individual investors, you'd need coercive regulation to accomplish the same objective.
Posted by Nathan at January 13, 2005 07:03 PM