Monday, February 07, 2005

Becker: To reduce government spending, increase the deficit.

Becker plan for privatization:

1: Borrow benefits for retirees and current payees older than, say, 55 from source X.

2: Attach contributions from current payees younger then 55 to each such payee’s individual future benefits.

3: Allow each individual to choose how much they will diversify away from T-bills into equity assets.

Why not just borrow from source X and have some bureaucrat (as opposed to individuals) choose the aggregate amount of diversification? This eliminates all sorts of administration and transaction costs. After all, some government bureaucrat is either implicitly or explicitly charged with “regulating” these equities funds (if Uncle Sam says to only invest in S&P 500 index funds, this implicitly makes S&P employees government bureaucrats), and that is much more open to political corruption then simply the level of diversification. (As an aside, you could just make a law saying that the GAO cannot report the Social Security system as part of the general budget.)

But then again, all that would be happening in that case is the government would be issuing additional debt to invest in equities. According to Becker this is beneficial because:

Both theory and evidence indicates that a good fraction of the additional revenue would indeed be spent. “Putting aside” assets for the future is very difficult for all governments, subject as they are to immense demands for spending now from various interest groups.
Well, the answer seems obvious now. Clearly, the implication is that we must borrow huge sums of money to increase the apparent size of the deficit, investing these sums in equities whose value will be kept off the books (I’ll let the accountants and lawyers worry about how). The then apparent explosion of deficits will force spending restraint in our politicians. It’s so perfect only a Nobel laureate could have come up with it!

In all seriousness, I fail to see how a “sudden” increase in taxes would be significantly more disruptive then borrowing from source X the massive amount that would be required to finance current retirees’ benefits.


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