Wednesday, October 29, 2008

Bad, bad idea

James Surowiecki:
A couple of weeks ago, economist Brad DeLong suggested (at least semi-seriously, I think) that now might be a good time to “take the Social Security Trust Fund balance out of Treasuries and move it into equities.” As he put it, “Buy low, sell high after all. Just saying…”

This idea was proposed by the Clinton Administration, but didn’t get much traction, in part because Alan Greenspan opposed it for what, in retrospect, looks like largely ideological reasons, namely his disbelief that the government could own U.S. equities without interfering with corporate behavior. This isn’t entirely a red herring, but it’s hardly an insuperable obstacle, either. And given the massive government interventions we’ve seen in the past few months, having the government invest in index funds hardly seems like some intolerable transgression of free-market principles, either. (That’s not even to mention the fact that the sovereign wealth funds of myriad foreign governments have already bought major stakes in American companies, without any obvious disastrous effects.)

A nontrivial difference exists between taking stakes in banks to resolve a global financial crisis, and government investment in equities for the long-term. Yes, relative to the current bank equity plan, the idea of investing in an index fund appears less invasive. However, the time horizon for the government stake in the banks is relatively short - 2-3 years is what I've heard - while social security would be a permanent position in private enterprises. The risk to meddle in corporate governance when Uncle Sam holds a huge position in our largest corporation is just too high.

On the last point, about sovereign wealth funds, I am not sanguine that all of the consequences have been played out. Much of the growth of sovereign wealth and investment has occurred this decade. Given the investment horizon of an entity such as a government, I seriously doubt that the full impact has been felt. It will take decades for us to witness and comprehend the impact of sovereign wealth. Also, there's an important difference between sovereign wealth funds' investments and federal government investments. Namely, that when a foreign sovereign wealth fund invests in an American company, the United States Government can act as a check on their behavior. If worse truly comes to worse it could freeze, condemn, or appropriate the assets invested in the United States by any fund causing serious problem.

Again, the government is like the Marines. You want it there in a crisis, for a short period of time. But it is terrible at making the millions of decisions required to effectively solve large, complicated, lengthy problems. Trying to solve the social security shortfall by putting it into the equities would be a horrible mistake because it assumes the government will 1) be able to resist the lure of meddling and 2) if it does meddle will do so intelligently.

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