Friday, January 07, 2005

Social security and magic

Boonton made an important point in a comment to my post on social security. I made a similar point in a post entitled Paul Krugman and David Brooks agree on ob4.org. Here's most of it.
Paul Krugman characterized the Bush social security plan as follows.
borrow trillions, put the money into stocks and hope for the best
David Brooks put it this way.
The government would essentially borrow at 2 percent in real terms, invest that money through regulated private accounts in the market and get a return, based on conservative historical averages, of about 4.6 percent.
So they agree on what the plan entails. They disagree on whether this is a good idea.

Krugman says
everyone [who understood it] would denounce that plan as the height of irresponsibility.
Brooks says
People who instinctively trust the markets support the Bush reform ideas
So there you have it. At least the question is clear. Should the government borrow money and invest it in the stock market?

This really has nothing to do with social security. If this is a good idea, let's use it as a way to reduce the Federal debt, which is far worse than whatever problem the social security system will run into 40 years from now.

Has the President proposed to issue government bonds with the intent of using the money to invest in the market and then using the profits to repay the federal debt? If so, I must have missed it. I haven't even heard David Brooks make that suggestion.

But why not? After all, we issue bonds to cover the deficit and for capital investments. Why not bonds for pure investment purposes. We could call them capital appreciation bonds.

We could even set them up as zero coupon bonds so that the interest is all due at the end. That way it would be a completely free lunch. When the bonds are due, we sell the investments and pay off the bonds' principal and interest and have a little left over for the country.

In fact, why not finance the entire federal government that way? Forget about taxes. Borrow the money, invest the proceeds, and live off the excess profits. Eventually the government would be so rich, it wouldn't even have to borrow money to invest. It could invest accumulated profits. We would be financially independent.

No more worrying about taxes and deficits. Our biggest problem would be how to allocate the government's investment portfolio among index funds and more speculative investments. Should we invest in sector funds? hedge funds? individual stocks? Why didn't we think of this sooner? I'm calling my broker first thing Monday.

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