Friday, February 18, 2005

Follow the Good and Services

At Chicago, when wondering about what people would do in the future, I found it much easier to think in terms of good and services than money. Money is weird, government accounting is a joke, and "lock boxes", "accounts" etc. are confusing. You cut through this clutter if you focus on goods and services.

Landsberg does this when talking about social security. He argues that the problems with social security is that the changing ratio of old people to young people means that, at current distribution rates, tomorrow's young will have to be very very heavily taxed to give enough stuff to tomorrow's old. This is correct, and has been accurately described elsewhere.

Landsberg goes on to say that there is very little we can do about this now. Changing benefits will not work because benefits can just be changed again. Changing taxes will not work, because taxes can just be changed again. Changing the retirement age will not work because people can just change that too. The only thing left is economic growth -- if there is more stuff out there to mvoe around, we can give more stuff to old people without being taxed to Europe ourselves.

Landsberg says that higher savings is one way to get higher growth. After all, savings get invested and build capital, and capital is the stuff that economies are made of. I don't agree with Landsberg here -- the US may have all kinds of problems but insufficient capital investment is not one of them. I don't know of any other place on the planet where it is as easy to finance good ideas as the United States, and a higher (or lower) national savings rate is not going to change that.

Now, it is true that the US does not save very much, but this does not matter because foreigners have been only to glad to lend us their money for investment instead. This is what drives the current account deficit. If this foreign investment money was to run out (the way it has in various Latin and Asian countries), then interest rates would go up, which would increase domestic savings because now you'd get 5% on your checking account instead of the current 0.001%. This market mechanism does not look like a problem to me, it looks like a solution, and since the current real interest rate in the US is so low, I really don't know how anyone can say the US is hurting for investment capital.

I favor personal savings accounts because it would lower marginal taxes, and therefore decrease deadweight loss and create wealth out of, literally, nothing. Right now, social security is taken out of the paycheck as a tax -- what you will eventually get when you retire is dictated by the whims of fortune and Congress. If it went into a personal account you could see exactly how much you had and you would not suffer at the whim of anybody. This means that instead of being taxed, you are now being forced to save. Lower taxes = faster economic growth.


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