Thursday, November 24, 2011

America Inc.

The Occupy Wall Street protestors provide an example of what can happen when thousands of unemployed or underemployed people exist even if those people are fed and housed due to public welfare programs. People weren’t protesting because they were starving or because of police brutality, they were bored and had nothing better to do. Idleness, in addition to poverty, is a Public Bad. One of the arguments for Social Insurance, including Welfare, is that by reducing or eliminating the suffering of others is a Public Good in that everybody’s Utility is decreased by seeing others in poverty. However, the welfare programs that exist today exacerbate the Public Bad of idleness.
Everyone agrees that it would be better if they had jobs, but some claim that there aren’t any jobs out there. Poppycock! To say that there aren’t any jobs is akin to saying that scarcity does not exist. They might not be the jobs that the protestors want (and think they deserve), but there are jobs out there. As long as people have unmet wants, then jobs exist. I wonder how many protestors have volunteered to join the military, pick up trash, or harvest crops.
Unfortunately, our system discourages both workers and employers. Welfare programs are based on income levels. Thus, the loss of government assistance to employed people is effectively an extremely high tax rate. People are better off staying on welfare and working on the black market instead of joining the legitimate labor force.
Employees and employers aren’t allowed to agree on wages below the federal minimum. Frankly, some people aren’t worth $7.25 an hour. The real problem is the asymmetric information. Employers don’t want to risk hiring someone with unknown abilities and people can’t show their abilities without getting hired.
America needs an ongoing employment program to help the situation. My vision is to have government-owned enterprises in almost every sector of the economy – agricultural, manufacturing, construction, services, retail, … The government would own farms, plants, and stores whose primary purpose is to employ people, however, the enterprises themselves could be profitable. These enterprises would replace most welfare programs, and there could be some contribution from government. However, the contribution would be fixed so that more people employed in these enterprises would mean lower wages per worker.
The ultimate goal is to get people into private jobs instead of living off the public sector. Private sector employers would be relieved of the burden of testing out and training unqualified workers. This program gives these people training, experience, and an opportunity.
While this program obviously has some Socialistic characteristics, I am in no way a Socialist. However, turning part of the economy socialist is preferable to turning the entire country socialist. I firmly believe that these programs will narrow in scope as people who want to work and do a good job end up with private sector jobs. Meanwhile, those who don’t really want to work end up off the government dole.

Monday, November 21, 2011

Social Security and Consumer Debt

Proponents of Social Security like to say that it is the only thing that keeps millions of
seniors out of poverty. Of course that ignores all the taxes that they paid
into Social Security before retiring. I doubt you’d thank a mugger if he give you
twenty bucks back after stealing your wallet. In order to decide whether or not
social security actually benefits people, you have to look at what they would
have done had they not had to pay all those taxes. Proponents implicitly assume
that people would completely waste all that money and it would just be gone by
the time they retire. Thus, any payment from social security is treated as a
pure gain.

If you look at social security as an investment, you can calculate the return to your investment. Social Security returns are higher for low income workers with long lives. The Social Security administration provides numbers here and more analysis is available here. Suffice it to say that the returns are pretty bleak with an average of 1-2% after inflation.

These returns are pretty pathetic when compared to investing in the stock market
where inflation adjusted returns are closer to 8%. When there are discussions
of privatizing social security, they talk about how risky stocks are and they
revel in every dip in the Dow. The real risk is not having enough money during
retirement and social security is at least as risky for this standpoint.

Instead of looking at the stock market, you can look at debt. Americans, especially the poor, are
drowning in debt – from credit cards, auto loans, underwater mortgages, to
student loans. The Wall Street protestors and community activists like to blame
banks and demand principal reductions and loan forgiveness. Simple math will
tell you that it is foolish to earn 1-2% on your savings while paying 10% on
your debt, but that is exactly what Social Security forces people to do.