Yesterday I referenced a snarky headline in Harper’s on Social Security. Well, today I got to read the article itself, by economist Michael Hudson. It’s a deceptively simple argument, but one worth sharing. Since Harper’s doesn’t make their content available online, I’ll try to summarize.
He starts with a couple of bare facts (I couldn’t verify these independently):
- the total value of all stocks on the NYSE, NASDAQ, and AMEX exchanges totals roughly $14.2 trillion (at the end of 2003).
- The total value of all non-SS retirement assets (i.e. public and private pensions) total $10 trillion. Nearly half of that, $4.7 trillion, is held in stocks.
- QED, retirement savings are roughly 1/3 of the total value of the stock market.
This was not always the case. He gives us a little history lesson: starting in 1950, General Motors (and, later, others) began to invest a portion of an employees’ paycheck in a pension system. The pension system, in turn, was invested in the stock market. The newly-juiced stock market exploded and the postwar boom began apace.
At the same time, companies were being overly optimistic about projected returns and not funding their pension systems as well as they should have. They had no choice, because more pension funding would have cut into profits which would have hurt stock prices which would have crippled, yes, pension funding.
So now, they have liabilities they can’t pay out. GM’s pension payouts add $675 to the cost of every car. That’s more than the cost of the steel.
The result is that pension responsibilities are crippling big companies, from GM to IBM to United Airlines. And that, in turn, is crippling Wall Street. This is a big reason why companies are turning from pensions to 401(k)s: they shift the risk to the employee to manage his or her own funds. And if the 401(k) contributions aren’t enough to live off of? So be it. At least the employer has no more obligations.
Fast-forward to 2005. The market needs some serious juicing. The only way to get our government out of debt is to grow the economy, according to the supply-siders (we can’t raise taxes!!). So Wall Street needs investment. Americans don’t save, in general, so where are we going to find more money to invest? Where is the cheap capital going to come from? We used to just lower interest rates, but we can’t do that anymore: they’re nearly at zero, the lowest rates, since, you guessed it: 1950.
So we look around for piles of cash. And we find there’s only one big pile left. It’s labor. If we could just siphon off a portion of wages and divert it into the market, we could almost guarantee a stock boom. And presto, the Personal Savings Account is born.
But this is still the market, of course. Which means every boom must be followed by a bust. And when that happens, in 20, or 30, or 50 years, Hudson concludes, we’ll be flat out of juice… and options.
Now, despite any snarkiness in my tone, I’m not aghast at this. If this is how capitalism is supposed to work, well, I guess that’s just the way it is. I’m not an economist, but it does seem kinda shady.
Readers, I encourage you to either (a) blow a hole the size of the deficit in Hudson’s argument, or (b) tell me that yes, this is the way it is and it’s no big deal. That’s what the comments section is for. Thanks!