A Guided Tour of the ‘Ownership Society’
President Bush’s “ownership society” is like his war in Iraq: It may have merits, but these do not include addressing the problem it is intended to solve. Bush might just as accurately present the war in Iraq as a way to finance healthcare and Social Security, and present his “ownership society” as a path to victory in the war on terrorism.
At the moment, we are a Debtorship Society. The government is spending far more than it is bringing in. And even so, our commitments, primarily to supply pensions and healthcare to the elderly, exceed the amounts we are putting aside to pay for them. Then there’s the rhetorical commitment of all politicians to do something about the nearly 45 million Americans with no health insurance.
Bush proposes “ownership” as a cure for debtorship. As a general concept, it’s fine: Assets are empowering, people spend their own money more carefully than other people’s, and market forces promote efficiency. But how does all this apply to the specific problems we face?
Taxes. Our complex tax system is costly in itself and messes up the economy with perverse incentives. Bush says he wants to simplify taxes, and everyone likes tax simplification in the abstract. But people also like deductions. Bush has already promised to protect charity and home mortgage interest deductions. And, he wants to introduce new deductions for healthcare savings accounts and whatnot.
Any change in the tax system that raises the same amount of money means higher taxes for some and lower taxes for others. Are you still for tax simplification if it means higher taxes for you? Bush will probably try to hide this effect by combining simplification with a tax cut. But these are different issues. You can have a tax cut with or without simplification. Are you still for simplification if it makes your tax cut smaller?
Healthcare. This is one area where the ideas grouped under the label “ownership society” hold some real promise. There are vast inefficiencies in the current healthcare system and vast potential for improvement by using market forces -- putting the money in people’s hands and letting them make more of the decisions is one way to do this.
However, no one seriously believes that improving the efficiency of healthcare delivery will be enough to pay for our healthcare commitments and goals. There are important limits on market forces in healthcare. You’re not going to price-shop for a brain surgeon or negotiate for a visit to an emergency room. There’s also a basic conflict between the “ownership society” notion that people should shoulder more of their own risks and the basic idea of insurance, which is to protect you from risks. The more that market forces are built into healthcare, the more people will not have access to the healthcare they need. The more you protect people from that, the harder it is to create market incentives.
Social Security. Here, the “ownership society” solution is a simple mathematical fraud. The concept: Government lets you keep some portion of the taxes you now pay into the Social Security trust fund, you invest those dollars and end up with more than you would have in the form of government benefits, and then (the rarely mentioned third step) your Social Security benefits are cut because you’re doing so well. Basically, the idea is that profits on private investments will close the gap between projected Social Security revenues and payments.
The problem is this: The money in the Social Security trust fund is invested in government bonds. This money helps to finance the deficit. Every dollar of Social Security tax revenue that gets siphoned away to private retirement accounts would require the government to borrow one more dollar from the private sector in some other way. Of course, the government could also spend less, but (as with tax simplification) it could also just spend less and not bother with Social Security privatization. Privatization by itself doesn’t add to the total pool of capital in the economy or reduce the amount claimed by the government.
So where will the extra money for Social Security come from? From greater economic growth? Nothing about Social Security privatization even theoretically increases economic growth. Millions of small investors, many with no experience, are suddenly making decisions previously made by professionals. Will this make the economy more efficient, or less so?
If Social Security privatization won’t make the economy any larger, or reduce the amount claimed by the government, how can it produce extra cash to close the Social Security revenue gap? Only by taking money out of the capital pool for private investment. This is what privatization enthusiasts actually assume.
They say that investing Social Security funds in stocks will raise more money because stocks pay a better long-run return than government bonds. If they are right, such a bonanza used for Social Security benefits would mean less money invested in the private economy -- and slower growth, a poorer future. Which wouldn’t be good.
But they can’t be right. Their theory assumes that morons would step in and buy government bonds, even as stocks, with their higher returns, were being snapped up by Social Security recipients. Free market theory (which I thought these folks believed in) says supply and demand would make sure that the returns would soon be about the same. And Social Security would be back where it started.