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The Worm Turns

Tyler Cowen offers a solid libertarian case against forced savings (i.e., social security privatizaion) before concluding:

Yes there are some good arguments for forced savings, as Brad DeLong has pointed out.  But they are the least libertarian arguments available, namely that we should have forced savings, as a means of instituting government allocation of capital, and a large safety net.  The most robust libertarian argument is simply the view that we should not coercively transfer wealth to the elderly poor.  And this I cannot imagine sticking as policy.  I stand where I started, namely that social security should evolve into a welfare system for the elderly, but without the forced savings component.
Me, I'm no libertarian, so I'm all for "instituting government allocation of capital, and a large safety net" so I stand by what I've said on this subject.

November 14, 2004 | Permalink


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Tracked on Oct 7, 2005 2:00:15 PM


I completely concur with Cowen on this, even though I'm no libertarian, either. One need not be a libertarian to simply take a skeptical view of grandiose government schemes.

That said, I think there is an overwhelmingly strong case for the government to remove the disincentives against savings embodied in our tax code. Libertarians, free market conservative types, and even quite a few liberals, should take up this cause.

Posted by: P.B. Almeida | Nov 14, 2004 1:04:49 PM

I still maintain that the best way for "save" Social Security, in the sense of achieving the primary goals is to divide the program in two.

First, we should maintain a minimum safety net for seniors. However, this safety net should be utterly divorced from payroll contributions. The point is to keep seniors from eating dog food to survive.

As for the retirement account part. Yes, people should be encouraged to personally save for their own retirements, thus reducing the size of the safety net needed. And, no, the savings shouldn't be mandatory.

Republicans should be laughed out of office for suggesting that the individual retirement accounts should be managed through the federal government. Considering we already have a wealth of individual savings vehicles in the private sector, why on earth would you want a federal bureaucracy to handle this?

I thing healthy heapings of scorn and ridicule will be more effective in derailing Bush's Wall Street-handout plan than whining about taking away seniors' benefits.

Posted by: space | Nov 14, 2004 1:07:05 PM

If the proposed plan to allow a small percentage of folks' payroll taxes to be privatized is "forced savings", then the status quo must be "robbery."


Posted by: j.scott barnard | Nov 14, 2004 1:50:13 PM

Um, yes, robbery is exactly what it is.

Posted by: Nicholas Weininger | Nov 14, 2004 2:07:16 PM

Re: Robbery.

This is one of the big reasons I have so much disdain for libertarians: They are advocates of the free market. Unfortunately for them, when it comes to the marketplace of ideas, they lose like the Edsel and New Coke. What to do? Change the debate from a normative one, which they cannot win, to a purely moral one. Taxes are no longer a bad idea. They are "theft".

Like magic, it is no longer their obligation to convince the vast majority of the public that we would be better off living in an anarchic society with a microscopic government funded - presumably - by private donations. No, all other alternatives are simply immoral.

Posted by: space | Nov 14, 2004 2:29:44 PM

If the proposed plan to allow a small percentage of folks' payroll taxes to be privatized is "forced savings", then the status quo must be "robbery."

I'm happy the government has enough sense to rob me to pay for defense and courts. Admitedly, I'm not so happy to be robbed to pay for Warren Buffet's healthcare and Social Seurity check, but my unhappiness can be addressed via democratic means.

Posted by: P.B. Almeida | Nov 14, 2004 3:11:42 PM

"there is an overwhelmingly strong case for the government to remove the disincentives against savings embodied in our tax code."


American prosperty is driven by consumption, not savings. We need more demand to create more jobs, not more capital to build more excess productive capacity.

I know you supply-siders don't agree, but whenever supply side economics has collided with reality so far, reealty has won . . .

Posted by: rea | Nov 14, 2004 4:53:33 PM

American prosperty is driven by consumption, not savings. We need more demand to create more jobs, not more capital to build more excess productive capacity.

rea: I think this subject is well beyond the scope of a comments thread. But, for starters, let me clarify that I'm not advocating that government ought to incent people to save; I'm simply saying the government ought to be neutral (granted, my definition of "neutral" in this case might be very different from yours).

First, I'd like to make the point that it's difficult to argue we currently suffer from too little demand, or consumption. Americans consume something near $2 billion every day more than they produce. I have no problem with that in principle, as long as it's a phenomenon primarily driven by private actors. But when government is added to the equation, via negative savings (i.e., the deficit) the imbalances, when they finally are corrected (as they will be, soon) are likely to cause us considerable pain.

As to the question of whether or not there is too much or too little savings, or too much or too little consumption (I like to think that there's always plenty of demand, just not always enough money to finance that demand), I think in part it depends on where we are in the economic cycle.

In general, simply on a micro level, it seems clear to me that people don't save enough money and often borrow foolishly. This leads to everything from elevated levels of divorce to old age penury. Finanical experts, for instance, advise us to have a good six months or so (at least) in living expenses tucked away in cash or cash equivalents. But the vast majority of Americans don't follow this advice. And that's one reason (poor delivery of healthcare another) why losing your job is so calamitous in America. That's a very bad thing, given the volotility that accompanies life in the global economy.

Another big reason I'd like to see us move to more savings-friendly (or at least not so unfriendly) policies is poverty reduction. It's difficult, I think, to rise out of poverty without acquring financial assets, because few of us can work indefinitely, nor should we want to; nor, moreover can we always control the circumstances under which our labor is sold. In some sense, indeed in a meaningful sense, not being poor means financial independence. It means, in other words, acquiring enough financial assets to be independent of the labor market. This is by definition impossible unless one saves.

So, I guess in my case I'm interested in getting the government to stop disincentivizing savings not for some grandiose theories about capital accumulation (though increasing savings would no doubt exert downward pressure on interest rates), but simply because I think Americans would be happier, healthier, and less stressed-out if they saved more, and they ought not to be fighting the might of the US government in their efforts to do so.

Posted by: P.B. Almeida | Nov 14, 2004 5:42:32 PM

I'm with P.B. here. Also, American prosperity is driven by consumption, not savings, only in the short term. Long-term growth is driven by investment. So what you need is balance - the question is, in which direction are we currently imbalanced? At least in comparison with other industrialized countries, we seem to have too little investment.

I don't see this as a supply-side point of view, by the way. The idea that investment leads to long-term growth is pretty universal. Where supply side went wrong is in the idea that cutting taxes on the rich leads to higher investment. It doesn't, because it's canceled out by higher government deficits, i.e. negative savings. Supply-side would only work if tax cuts led to increased tax revenue. That, of course, didn't happen.

But if you could bring about a cultural shift where people would just save more of their private earnings on their own, that really would help.

Posted by: JP | Nov 14, 2004 11:33:47 PM

"American prosperty is driven by consumption, not savings. We need more demand to create more jobs, not more capital to build more excess productive capacity."

Does anyone else see htta this makes no sense?
People consume as much as they can, naturally. Too little consumption is not the problem when the economy is doing poorly. If that were th case, then we could get ourselves out of any economic downturn by simply buying as much stuff as possible.
Or, in true "broken wondow fallacy" mode, we should demolish all of New York, in order to stimulate the economy by having to rebuild it. Better yet, let's demolish New York, L.A., AND Chicago.
Also using that logic, the way to solve the problem of increasing oil scarcity in future years is to use oil as quickly as we can. You know what? Let's forget all environmental regulations and cautions, and pollute as much as we can, because that is what drives environmental betterment, and the consumption of all of our resources is what casues more resources to magically appear!

Posted by: Glaivester | Nov 14, 2004 11:39:01 PM

I want to say that Bruce Webb's comment on your previous entry is the clearest explanation of Social Security that I have ever seen. The key point, if I understand it correctly, is that Social Security was set up as an social contract between generations but within the working class. It is an old-age and disability insurance program that is mostly paid for by working families and mostly benefits working families. It is simple, fair, and focused, which is why it has been so successful.

I am all for savings doing whatever we can to increase our dismal savings rate in America. But why not do so through a separate program that is all about savings, such as Savings Bonds or Individual Retirement Accounts? (Fill in your favorite plan here.) If it's a good plan, wouldn't it be just as good a plan if we implement it without calling it "Social Security"?

Posted by: TomB | Nov 16, 2004 12:17:12 AM

I believe that supply side did work every time it was tried. Under Reagan its effect was masked by the Congress which allowed only 5% the first year so it was too little, too late. And Reagan engaged in an arms race with the Soviets which eventually brought the Cold War to a close.
Of course the Democrat-controlled Congress didn't help on the spending side either.
Reagan pleaded for a line-item veto to try and get spending under control, not that that's a good idea, necessarily.
I believe that supply-side worked for Kennedy, and others in the past.
To say "tax cuts" followed by "for the rich" is demogoguery. Define "rich".
It's also demogoguery to say that reducing taxes results in budget deficits.
Who said "forced" privatization? All I've heard has been "allow voluntary".
I'm no economist but for as long as I remember economists have been telling us that the US savings rate is abyssmal, hence IRAs and 401Ks.

Posted by: Loren | Nov 16, 2004 12:44:58 AM

To say "tax cuts" followed by "for the rich" is demagoguery.

Saying the Bush tax cuts are "for the rich" is not demagoguery, it's simple accuracy. It matters a great deal which taxes are cut. Cutting FICA would be a tax cut for the working poor. The middle class and the working poor don't benefit anywhere as much from cutting capital gains, the top income tax brackets, and inheritance taxes.

Define "rich".

Obviously, "rich" means different things to different people. I grew up in a very wealthy community and heard some amazing complaints from my friends about their parents' cash flow problems. But since you asked, let's say $200,000 in annual income. That's the threshold Kerry proposed, above which he was going to rescind the Bush tax cuts.

It's also demogoguery to say that reducing taxes results in budget deficits.

Reducing taxes while increasing spending is a surefire recipe for budget deficits. Saying the truth isn't demagoguery. This is demagoguery:

Dem´a`goguen. 1. A leader of the rabble; one who attempts to control the multitude by specious or deceitful arts; an unprincipled and factious mob orator or political leader.

In other words, the bullshit we've been getting from Bush, and from his apologists like you.

Who said "forced" privatization? All I've heard has been "allow voluntary".

It isn't like we need to change Social Security to allow voluntary savings. I already am saving money, all by myself, without anybody making me. We already have voluntary savings. Privatizing Social Security goes beyond that.

Basically, the "voluntary" savings plan is the marketing message. It's the tip of the wedge. As soon as people start diverting their Social Security taxes to the savings plan, it will cause a $2 trillion shortfall in the system. If the shortfall is addressed by reducing benefits, which seems likely, that will give people more of an incentive to participate in the :"voluntary" savings plan, causing further shortfalls and the end of Social Security as we know it. So yeah, you could say it's voluntary. Nobody will be forced. They will just be given a choice between saving for themselves, or paying into the existing system and getting screwed out of their benefits.

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