Personal Accounts, FDR, and a Modest Proposal

In the course of some work I did yesterday, I stumbled across the following quote by President Roosevelt from the initial debates on Social Security:

"In the important field of security for our old people, it seems necessary to adopt three principles: First, non-contributory old-age pensions for those who are now too old to build up their own insurance. It is, of course, clear that for perhaps thirty years to come funds will have to be provided by the States and the Federal Government to meet these pensions. Second, compulsory contributory annuities which in time will establish a self-supporting system for those now young and for future generations. Third, voluntary contributory annuities by which individual initiative can increase the annual amounts received in old age. It is proposed that the Federal Government assume one-half of the cost of the old-age pension plan, which ought ultimately to be supplanted by self-supporting annuity plans."

I am not about to argue, as some rather foolishly did, that this proves that FDR somehow would support President Bush's Social Security proposal on personal accounts; annuities are a whole different animal from a typical investment account. But the quote sparked an idea on one way to make personal accounts more palatable to some who presently oppose the plan.

I have seen two credible objections (to say nothing of the absurd objections) to the personal accounts plan as it is now formulated. The first is that money invested in the stock market is always subject to losses, which rather defeats the point of Social Security. (You could always invest 100% in bonds, but your rate of return will suffer.) The second is that even if an individual's personal account has excellent returns, it does nothing for the solvency of the system; people receiving benefits at the moment will still be paid out of the General Fund, which would be getting even less revenue than before because of the personal accounts.

A year or two ago, I saw a prospectus for a new model of annuity that allows policy holders to capture some of the benefit of a rising stock market, while protecting their principle. It was sold, I think, by The Hartford, though I cannot find it now on their site; the terms seemed too generous to me at the time, and they probably ended up losing money. Regardless, the model was interesting, and could work if the initial terms were tweaked a bit.

[UPDATE 7/3: My source in the financial planning business tells me that not only is The Hartford still selling this type of annuity, but so are most of the other major players. It has proven very, very profitable, which only makes the argument to follow more compelling.]

So, I propose that we add another option to personal Social Security accounts. This option would work as follows: funds paid in will grow along with the broad market, up to a cap established by the government (let's say 10% per year, for example). Any additional returns will be transferred to the General Fund, and will be used to pay current beneficiaries. In return, the government will guarantee that whatever the market does, participants will at minimum receive back what they put in. The principle will be protected, eliminating risk.

Furthermore, at periodic intervals the level of protected principle will be ratcheted up to more closely match the present value of the account. So for example, say I paid $100 into this program for my individual account. Over the next five years, say the fund grows to $180. At a given time, my guaranteed benefit would be recalculated upward (the exact amount would have to be decided on by the actuaries), so that I can protect my gains.

If this option is added to the personal-accounts proposal, it will allow for greater returns than an all-bond fund, and at the same time provide security for people's money. Moreover, when the stock market does well, returns in excess of the cap will be transferred to the General Fund, helping to guard against insolvency. This deals with the two objections put forward so far against personal accounts, as noted above.

If this were added to the table, I think we would see a lot more support from moderate Democrats for the idea of personal accounts, which is all to the good. And in any event, more flexibility in your options is always a good thing. We need to broaden the debate to include this hybrid model of annuities, to give people options that tap into the power of the market, yet give them some protection as well.

Government and the Inequality Gapor The Mastiff Channels Marx!

Much has been made in recent years over the growing "inequality gap" or differences in wealth between the rich and the poor. Various means have been proposed to correct this gap, most of which involve (surprise!) redistributive taxation and government spending. This is yet another example of what Howard Jarvis meant when he said, "An election year is the time politicians promise to get us out of the trouble they got us into in the first place."

What? Do I mean to say that government, that great defender of the poor and oppressed against the rapacious capitalist exploiters, has caused this problem to begin with? Perhaps not entirely, but they certainly have a lot to do with it.

How is it that the rich make money? Either they invest in the stock market, or else they build or finance new businesses. "Yes," you say, "but can’t we do those things too?" Sure. But, thanks to government regulations found in the Securities Act of 1933 and the Investment Advisors Act of 1940, those of us not already rich are operating with a serious handicap.

When a new business seeks to raise money, it has a few options. It could theoretically sell registered securities on the broad market through an IPO or bond offering; but that is expensive, and government regulations require that the company already have significant assets before it can do so (something of a catch-22). Or, the business can make a private offering, the usual course of action. Private offerings are when the first real investors get on board, buying shares for less than a dollar per share in many cases. They are taking a large risk, as many companies fail before the investors can make back their stake.

At the same time, the potential for profit is huge. Once companies get established, they usually hold IPO’s. At that point, the easy money has already been made; the original private investors are making many times their original investment on the starting IPO price alone, to say nothing of what the stock can do later. Compared to them, buyers on the public exchanges are playing for pennies.

But here’s the catch: thanks to the aforementioned government regulation, only "accredited investors" can buy into private stock offerings. And accredited investors are defined as people who either are buying on behalf of a financial institution, or make $200,000 per year, or have a net worth of $1 million. In other words, only those who are already rich are allowed to make the most money.

(Comparatively, we are pretty well off today. Imagine what those numbers meant back in 1940!)

Now the government defended the regulations as necessary to protect unsophisticated investors with little to lose from the risk of private placements, which do after all have a high rate of failure. But investing in the broad market is not much safer for those who lack the discipline to invest properly. And purchasing options and futures are incredibly risky when not part of a comprehensive strategy—believe me, I know—yet there are no restrictions on them (nor should there be).

Worst of all, governments are quite willing to use state lotteries to pad their own balance sheets. If you want a risky activity, you can’t get much worse than this. People, often relatively poor people, pay hundreds of dollars per year to the state, and get back nearly nothing. And government has the audacity to tell us that private stock placements are restricted for our own good?

Plain and simple, this is a government policy to enrich those already on top at the expense of everyone else. Investing should be on a level playing field, not rigged to favor Washington's bankrollers. The American tradition is one of limitless opportunity for those with audacity and vision; how can we deny opportunities to the poor in the name of risk-aversion?

And it is not only investors who are hurt. Business owners, to get the funding they need, must kowtow to wealthy investors, often signing away large portions of their businesses. And such wealthy investors have demands on their time, and are relatively few in number; who can say how many fledgling businesses collapsed due to lack of funding, simply because there was no good way to let the millions of small investors in America buy in?

Indeed, this is the true function of the stock market: to enable companies to raise funds. But for most of us, unless we buy into an IPO (when the easy money has already been made), our purchases do practically nothing for the companies we trade; we are essentially trading expensive baseball cards. (Ask shareholders of WorldCom how much of the company they “owned,” and how much benefit they got when it was bought out by MCI. I’ll tell you: none. The stock shares themselves were devalued and replaced by a new issue, none of which went to the original owners.)

If we are serious about reversing the trend towards concentration of wealth, we need to work for the good of the small investor, and the small business owner. It is unconscionable that only the wealthy may participate in the best way to make money in America, the true engine of our growth. The accredited-investor caste must be abolished.

Freedom, Not Democracy

One of my professors for the summer is Dr. Claes Ryn, faculty member of Catholic University and author of “America the Virtuous” (which we are using as a textbook). His major thesis is that American society, previously characterized by distrust of human reason, and humility in the face of man’s fallen state, has been transformed by Rousseau-style Enlightenment thinking; it is now possible to imagine a central blueprint for the “perfect” society, and then to attempt to implement it, both here and across the globe. This tendency first arose as a major force with the Progressives, strengthened with the Socialists, and is now continuing with the Neoconservative (in the strict sense) movement.

Dr. Ryn calls all such utopians, who have a global agenda built on the perfectibility of human reason, “Neo-Jacobins” after the French revolutionaries. His book focuses mostly on the strain of Neo-Jacobinism to be found within the Neoconservative movement, simply because they are in power right now. His presentation was unfortunate, as I found myself struggling to avoid writing off the book as simply one more rant about the eeeevil neocons. But Dr. Ryn has even more disdain for the Socialists, and does not hesitate to identify their new base of support as the Democratic Party, so he has that much going for him.

But I think that in his analysis of what elements of American foreign policy are motivated by “Neo-Jacobinism” or utopianism, Dr. Ryn misses a fine distinction that is nevertheless crucial for explaining why President Bush, no ideologue, is seemingly falling into step with the Neoconservative program. In Chapter 15 of his book, Dr. Ryn mentions that while many Neoconservatives speak of fighting to spread democracy, the President nearly exclusively speaks of fighting to extend freedom. Dr. Ryn simply sees the one term as substituted for the other; but if that were so, why does the President use “freedom” and not “democracy” most of the time?

President Bush has said that Natan Sharansky’s book, “The Case for Democracy,” lays out his own foreign policy reasonably well. When I asked Dr. Ryn if he would consider Sharansky a Neo-Jacobin, he said yes. This misses a key distinction between Sharansky’s views and the “democratism” that is Dr. Ryn’s main complaint with the Neoconservatives.

A “democratist” believes that democracy is the best form of government for all peoples, and that therefore it should be American policy to spread it across the world.

Sharansky, on the other hand, is not primarily concerned with democracy per se. Rather, his argument is that regimes that fail the “town square test” of tolerating dissent are driven to create outside enemies for domestic consumption. Therefore, to promote general peace and tranquility, we need to promote governments that tolerate dissent, or more broadly that respect the rights of their people. Thus far, democracy seems to be the government most likely to do that.

The key difference is that one view is ideological, the other practical. If some new form of government were to arise that more consistently protected the right of dissent, a Sharanskyite such as myself would have no problem advocating it instead of democracy. (The merits and demerits of democracy will have to wait for another post, sadly.) But a Neo-Jacobin democratist would be just as fiercely attached to democracy as Marxists are to communism today.

What Dr. Ryn does not consider is that many people support the spread of democracy for practical reasons, and are therefore guided by practical considerations. While the concrete differences between a true Neo-Jacobin and a Sharanskyite are miniscule today, they may not be tomorrow. So while I am willing to grant that utopianism in any form is troubling, we are hardly being brainwashed by the new Marxists. “America the Virtuous” is a valuable book, if shrill at times, but this is a point worth keeping in mind should you decide to read it.

Legislated Morality

In a previous piece (The Free Market and Morality), I argued in favor of legislated morality, in the abstract. Fortunately, my sloppiness could not survive for long, and I was asked in the comments section to specify what laws in particular I would prefer, which did not involve people actually injuring each other.

(For my purposes, I am going to restrict myself to activities that are entirely voluntary for all parties involved, and do no direct harm to anybody.)

Having thought about it for a few days, I keep coming back to the entertainment industry. Take music, for example. The Greeks knew the degree to which a person’s moral instincts were shaped by the very music they listened to; Aristotle even went so far as to advocate banning certain musical modes entirely from the city, as being too discordant and not instilling the proper love of harmony in the listener. The Phrygian mode especially (which is today called Dorian mode) was seen as promoting vice. Much to be preferred were the morally edifying Lydian and Dorian modes (Dorian is today called Phrygian mode, ironically enough).

Does this seem farfetched? It is widely known today that hooligans generally do not like classical music, and public malls have taken to playing such music on loudspeakers to drive away criminals. How can such people dislike classical music so much that they will actually leave places where it is playing?

I remember when I first began listening to Metallica. I really liked the music, which was unusual for me; generally I consider most rock to be terrible. But at the same time, as I listened I could feel myself becoming coarsened in some subtle manner. Perhaps it was the aggressive electric guitar, or the pounding precussion. It was worse when I would work out in the campus weight room. Someone would usually put on some sort of rap or hip-hop, which makes for excrable listening. Aside from the lyrics, the effect of the music itself was like a jackhammer to the brain, with a relelntlessly pounding beat that obliterated all thought before it.

Music is a language, and communicates information just as surely as words do. That the information is emotional and not logical does not make it any less real. And its effect on the human spirit is profound. Aristotle wrote that good music teaches the listener to recognize and even to seek out true virtue. The opposite is true as well. Are we then to simply allow people to make whatever music they want, and then to inflict it on the public sphere?

The Beatles were seen in their day as shocking, even dangerous. Compare them to the cesspool that is modern music. Can anyone doubt that there has been a real moral decline? Or that its effects are felt throughout society?

Similar arguments can be made for television or movies, or computer games for that matter, and much more easily than for music. Now I am not arguing that "immoral" music should be banned entirely, if such a thing would even work. But it should be banned from the public sphere. If children want to listen to such things in the home, that is their parents' concern. But the public sphere is our concern, and we should not permit it to become the dumping ground for everything that people don't want in their homes, as it has become.

So much for entertainment. The other thing that comes to mind is body piercing.

I am continually astonished by the miracle of the human body. That nerves and sinews and muscle work together so flawlessly (in general), that the endocrine system can maintain such a complex and delicate balance of chemicals, is staggering. And people are so cavalier about poking holes in themsleves?

Earrings and nose piercings have a long tradition, and I have no quarrel with them. But the more exotic manifestations denote a certain disregard of the human body, or even in some cases actual self-loathing. It cheapens the value of human life; it is perhaps suicide writ small. A bit overstated, but not by much. So I would ban all piercings besides ear and nose; teenagers can keep their melancholic angst to themselves, and should not be allowed to damage their bodies on a whim.

Both degraded public entertainment and body mutilation hurt no one directly, or even indirectly except at several removes. They are purely voluntary for those directly involved. And yet to allow both free license, as has been done, undermines the morality of entire societies. It is here where the Non-Agression Principle fails, I think, and where strict libertarians come up short. Morality best grows in an environment suited to morality. It is the task of societies to provide that environment.

Rafsanjani's Doubletalk

I am right now staring with some amazement at the front page of the Investor's Business Daily, which is graced with a photo of former (and would-be future) Iranian President Akbar Hashemi Rafsanjani. The caption quotes this worthy as saying, "I am going for a policy of relaxation of tension and deténte." Rafsanjani is apparently running on a platform of specifically not developing a nuclear weapon.

This is of course the same Rafsanjani who said on December 13, 2001:

If a day comes when the world of Islam is duly equipped with the arms Israel has in possession, the strategy of colonialism would face a stalemate because application of an atomic bomb would not leave any thing in Israel but the same thing would just produce damages in the Muslim world…. Jews shall expect to be once again scattered and wandering around the globe the day when this appendix [i.e. Israel] is extracted from the region and the Muslim world.

I am willing to imagine that he may have changed his mind. After all, the nuclear program is wildly unpopular within Iran; Iranians have no desire to get into a shooting war over some mullah's homicidal fantasies. But I think this is just one more sign of how rigged the elections really are. Rafsanjani is hardly an outsider candidate, promising to reform the system. He is an old friend of the ayatollas, and everybody knows it. If there were real reform candidates on the ballot, our dear friend Rafsanjani wouldn't stand a chance. He may be moderating his talk now in hopes of avoiding Western ire, but I don't think we should let him get off that easily.

The Free Market and Morality

For a long time I've been nagged by a sense of inconsistency in my beliefs. I am as absolute a defender of free-market capitalism as you will find, under the assumption that people can generally be trusted to sensibly pursue their own interests. At the same time, I believe that morality can only be assured through a system of law, and that leaving morality to the individual is a recipe for disaster.

When thinking about the distinction between them, the best I could come up with is that individual freedom seems to work better in economics than in morality. That answer is unsatisfying, since it says nothing about why this should be so. Yesterday, I finally put my finger on what I think the essential difference is.

In economics, you can keep score. In morality, you can't.

In economics, your success or failure can be clearly quantified at any time, by counting up your assets. By watching your score, you have immediate feedback on whether the choices you make are beneficial. With that information, each individual can analyze his options and decide which are best, at least when taken generally over the whole system.

But in morality, the very standards you use to measure yourself are based on a moral decision. There is no single standard. What I would consider a debauched disintegration of society, others might call the free expression of individual potentialities or other such nonsense. We cannt agree on how to score ourselves, and therefore groups of people cannot effectively regulate their own behavior without the intervention of an outside standard. People cannot be trusted to do the right thing, because they cannot agree on what the right thing is.

Libertarianism, when applied to morality, leads to anarchy.

Draining the Swamp

The program I'm on seems to have a very clear theme: government has gotten out of everyone's control. As one example, it has become so musclebound because of its huge network of subsidies and preferential laws, and the growing mass of lobbyist groups that have arisen to defend them, that it can get nothing done. That's the basic premise of Jonathan Rauch's book "Government's End: Why Washington Stopped Working." He takes great pains to avoid demonizing the lobbyists; after all, they are only acting rationally, given the high costs for a single group not to lobby Washington when everyone else is. If you don't get in on the action, you're left screwed.

The major problem is that lots of people say they want small government, but nobody wants to personally suffer from government's retrenchment. So every time a particular program or subsidy goes under the ax, hordes of concerned citizens shriek like the Furies and send lobbyists to save "their" piece of the pie. This is absurd, of course. We need to realize that if we want to clear away the deadwood of government, and free up the small businessman from the morass of laws that favor the big boys, we will need to suffer some pain first.

I think one good place to start would be in housing.

Everyone is worrying about a "bubble" in housing. People are overstretching their means, and buying houses they clearly cannot afford, using such risky and shortsighted methods as interest-only adjustable loans. Why, you ask, would so many people put themselves at such risk of going upside-down on their mortgage?

Simple. Because paying interest on mortgages is government-subsidized. To wit, you get to write it off on your taxes.

How many times have you heard that buying a bigger house is the best tax-shelter available (assuming you aren't extremely wealthy)? How many people do you know who have actually bought massive houses for just that reason?

This cannot go on. If sanity is not restored to the housing industry soon, we are going to end up with a meltdown that will make the S&L crisis look like small fry. We have to remove the tax-free status of interest payments. It can be done in increments, naturally, to make it easier to adjust to, but it must be done.

"But," you ask, "how can we possibly do that? Think of how much money we will be paying. We can't afford that!" So along with making interest payments taxable, we should lower the tax rate to compensate. No more subsidizing interest-only foolishness; just fair taxes across the board. (Plus, it would be "progresssive"! After all, most poor people do not make mortgage payments.)

Best of all, by doing this we will demonstrate our fundamental willingness to accept a little pain in the short term in order to correct a fundamental distortion for the long term. That is, if we are indeed willing to do so. Philosohpically, ending mortgage subsidies should be something liberals and conservatives can agree needs to happen; the only thing standing in the way is our questionble tolerance for pain. That is why we need to start spreading the word now, to get the idea out into the open.

We need to face the facts. The only way to really fix government is to suck it up and do without many of the entitlements we have ourselves demanded, and benefit from. Housing subsidies is as good a place as any to start.

Update: Georgetown Live!

Yesterday I arrived at Georgetown University, where I will be having classes for the next two months. Tomorrow I begin my internship (I am not blogging about it unless and until I get my boss's approval).

The university is large and very beautiful (aside from the disconcerting presence of crucifixes in most of the major buildings). The other students on the program look like a really good bunch, and my roommates are good guys. So far it's been a lot of fun.

I haven't had a lot of time to think about what I'm going through, but rest assured that my cogitations wil be cogitating as always, so there should be some fun reading here before long. So far, the biggest issue has been dealing with kosher food, given that all the good shopping is outside of walking distance from the university. Once I start using the Metro more, that should be taken care of.

Now I have a lot of news to catch up on. I'll be back...

Trouble Brewing in Uzbekistan?

After the massacre of several hundred (perhaps thousand?) civilians by the Uzbek military, the US became rather uneasy about its support for President Karimov. After Karimov and China publicly aligned with each other, the US started moving.

Via Instapundit comes word that the State Department is evaucating the families of its personnel from Uzbekistan. Apparently the Peace Corps and other NGO's are about to pull their people as well. This comes just after a delegation of Senators visited the capital to express their displeasure over the massacre and subsequent crackdown by Karimov's thugs. It seems that practically overnight, Uzbekistan has become hostile territory, or at least unfriendly.

If Karimov is seeking closer relations with China, there is probably some sort of Russian involvement. Russia and China both want to limit American power in Central Asia, and Russia has been nervous over American bases in Uzbekistan in particular. The massacre and its reprecussions gave China a chance to extend its own reach, and Russia is probably happier this way because the American presence is being undermined.

Was this the impetus behind our new pressure on the regime? Or is it simply that we have finally decided that we can no longer tolerate "our SOB's" in order for the spread of democracy to become a true geopolitical weapon against extremism? I don't know, and frankly the practical difference is slight. It seems like the recent tide of democratic feeling in tyrannies is going to stick, and is being supported by the United States. If we should hope to preserve isolated outposts of tyranny because the State Department feels it to be in our immediate interest, it would be foolish and ultimately futile. The Mubaraks of the world are doomed, whether Foggy Bottom likes it or not.

At any rate, what next for Karimov? The presence of American troops in Uzbekistan has to be a constraining factor, but what if he should demand that they leave? I don't think he's ready to do that yet, but the possibility has to be worrying President Bush. I suppose it depends on whether China is willing to make it worth Karimov's while. It will be interesting to watch, at least.