Thursday, July 07, 2005

Risk privatization

It's clear that the game these days is shifting risk. Bush wants to shift risk from corporations and government to individuals. That's what private social security accounts are all about. That's also what the newly toughened bankruptcy laws are about. The question is whether this is a good idea.

Here's a Paul Krugman column on the subject: The Debt-Peonage Society.

Jacob Hacker, a political scientist at Yale specializes in this area.

A good case can be made that one of the fundamental strengths of the American economy is that it makes it safe to take risks and that in doing so it encourages entrepreneurial behavior.

But who should bear these risks? If we weigh down our businesses by forcing them to carry risks for their employees, for example, in the form of employer paid health insurance, we risk making them uncompetitive.

The answer would seem to be to pool risks socially but not to burden our businesses with them. For all practical purposes that means that the government should be the risk bearer of last resort. And after all, that's one reason to have a government, to share burdens that we can't each bear individually such as defense, etc. Everyday personal risks, e.g., unemployment, health costs, natural disasters, sustenance during old age, etc., are among those burdens that must be shared globally.

And while we're talking about it, I think it's important to distinguish between private accounts for social security and investing the social security trust fund in equities. We can invest the trust fund in equities without private accounts. All that would be required is to do it. Instead of buying Federal bonds, the trust fund (or at least part of it) could be invested in an index fund. (It's not quite that easy. Since the trust fund is now used to fund ongoing government expenses. The way it is accounted for must be changed. But that could be done if politicians had any intellectual integrity.)

What's more important is that by investing the trust fund as a whole (or part of it) in equities, it would be the goverment that would be taking the risk if the market failed. Not individuals. If investing in equities is such a great idea, let's do it that way.

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