The Breakfast Table

A Nation of Day Traders

Dear Jon,

I am glad that you have restored the credibility of on-line reportage by acknowledging your association with the New America Foundation. I’m surprised though that a philosophe such as yourself would even be aware of, much less concerned about creature comforts such as drinking water, voice mail, and a useable desk.

But, yes, let’s talk policy a bit. Social Security policy, as you suggest. After all it will give me opening to mention that I was chatting with Alan Greenspan at a soirée only last evening. Of course it was too noisy to hear much of what he was saying, and since I was so preoccupied yesterday that I didn’t even know he had testified on the subject earlier in the day, my questions weren’t very sharp. But you know, I think Greenspan’s wrong to oppose investing some of the trust funds in Social Security as Clinton proposes. (And I say this with all due deference because I think Greenspan is not only a charming and amusing man–which, I admit, can color one’s thinking–but a very smart one.) But he’s focusing too much on the pure economics.

To be sure, it makes no difference to aggregate saving whether the trust funds are invested in private markets or government bonds. While the relative prices of the two types of instruments may change somewhat, either adds to the pool of investment dollars. But there is a big psychological difference. Once the government publicly transfers the money to private hands it will be much, much more difficult for Congress or the president to divert it to other purposes, whether tax cuts as the GOP favors, or new spending programs that the president favors. It will get off the books and reveal the true state of balance or imbalance between what government takes in and spends for other purposes. Putting Social Security “off-budget” doesn’t accomplish this as long as the funds simply buy up government bonds and thus reduce the need for external government borrowing. (Putting programs “off-budget” is the fiscal equivalent of a dieter putting chocolate sodas “off-diet.” The calories still count.)

To be sure, as Republican lawmakers were lamenting yesterday, Congress could decide to de-invest the money and use it for other things. But imagine the public outcry. No one notices if the government dumps a few more IOUs into the trust funds, but they sure would notice if it started selling off private securities or even failed to make good on promised purchases of same. (Oh, dear, more “p’s.”) Yes, the investment fund could be politicized–forced to buy only “politically correct” investments or bail out politically powerful interests. But my friends at Brookings, Bob Reischauer and Henry Aaron (boring they may be–though, like Greenspan, they both have great senses of humor–but they’re usually right), point out that the 401-k plan set up for government workers hasn’t been politicized. And it would be easy enough to set-up a nonpartisan oversight board of financial sector heavyweights who would be under the gun if the fund didn’t do as well as the average conservatively-managed private fund.

On the other hand, the idea of setting up separate investment accounts for 150 million workers is truly loony. In the administration’s defense, it should be noted that this was an obvious sop to the Republicans in Congress who want to convert much if not all of the trust funds into private accounts. But it’s a bad idea on several counts. The administrative overhead would be enormous–not just to set-up and run a gazillion little accounts but to make sure workers really did deposit the money and leave it there. Clinton’s plan would make this worse by providing for federal matching of individual voluntary deposits–the matching to be “means-tested” no less. Drop by your local welfare office and they’ll tell you how easy it is to monitor people’s income.

And then, of course, there is the matter of risk. It’s easy to look like a financial genius when the market is doubling. And more and more people have been trading stocks–many using the Internet to buy and sell–hoping to cash in on the out-of-sight returns that the stocks of profitless Internet companies have been providing. David Ignatius had a great column about this on yesterday’s Washington Post op-ed page. The “day trader” he focused on doesn’t even bother to check the financials of the companies he trades in. He just looks for those showing high-volume activity, figures they’ll go up, buys, holds a few hours and then pockets his profits. With everybody trading all day long, who’ll do the work? And who’ll then pay the payroll taxes to fund the investing?

Back to you.