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John Waelti: The death of a bad idea
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It never was a good idea. The financial debacle of the past 18 months should convince all but the inconvincible.

Privatization of Social Security - we haven't heard much about that lately, and with good reason. Let's bury that bad idea permanently.

The high-flying stock markets of the '90s seduced younger workers and portfolio managers who never had experienced a bear market into equating soaring stock prices with potentially higher Social Security returns. Proponents of privatization also include critics who still are fighting FDR's "New Deal," of which Social Security is the flagship component.

Sure, we all can find some fault with Social Security as it exists. But the nation is far better off with it than without it. And it should remain totally public. Let's examine two basic reasons for keeping it entirely public; effect on individuals, and effect on the broader macro economy.

Privatization would place on the individual the responsibility of investing Social Security taxes. Most people don't follow this economic gobbledygook and don't necessarily want to take time and effort to learn about financial markets. Even those of us who follow it religiously cannot always pick winners - and for sure not in tanking markets.

Of course, one always can seek professional financial planning advice. That's a good idea anyway, and there are competent certified financial planners around. But the best of them cannot and will not guarantee consistent high returns, especially in a down market. Only a suede shoe artist like Bernie Madoff will promise that, and you know what happened to his clients - they lost everything.

The point is that with privatization of Social Security and checks tied to the stock market, some people might fare well, but some would fare poorly, even with rising markets. And nearly all would do poorly during bear markets - like right now. Reduced Social Security checks would come at the very time when recipients, especially those for whom Social Security is the main source of income, could least afford reduced income.

Stable, dependable Social Security checks provide income that can be depended on during good times and bad. This leads us to effects of privatization on the broader macro economy.

The downside of the business cycle is characterized by reduced consumer spending. This translates into reduced demand for goods and services, causing businesses to lay off employees and reduce investment. Reduced investment and higher unemployment further reduce spending. Tax receipts by local and state government fall, creating pressure to cut programs. These factors are mutually reinforcing, leading to a downward spiraling economy and recession. The opposite occurs during the rising phase of the business cycle.

If the recession is mild, monetary policy - tinkering with short-term interest rates by the Federal Reserve System - may be sufficient to reinvigorate the economy. But in severe recession, such as we are experiencing, it takes fiscal policy, i.e., deliberate spending and taxing policies by the federal government to turn it around.

Ideally, to counter or moderate the mutually reinforcing factors typical of the ups and downs of the business cycle, the federal government should promote a counter-cyclical fiscal policy - which would curb spending and increase taxes during prosperity to take the peak off the cycle and prevent inflation. Conversely, during recession, a counter-cyclical fiscal policy would reduce taxes, especially for low and moderate-income recipients, and increase spending.

Let's emphasize "ideally." In the real world, this is tough to do, both for technical and political reasons. The primary technical reason is that nobody has the clairvoyance with which to anticipate swings in the business cycle - at least far enough in advance that the president and the Congress could be ready with timely corrective fiscal action - even if they were willing to do so.

The political reasons? Politicians don't like to raise taxes any more than their constituents like to have them do it. And during prosperity, this seems like the logical time to fund popular government programs rather than curb them. To put on the brakes during prosperity is thus politically unpopular.

During recession, it's tough to convince politicians, and the public, that this is the proper time to increase federal spending. Since consumers and small business must cut spending during recession, it seems counter-intuitive to advise the federal government to increase spending. Yet, that is exactly what is needed to stimulate the economy by compensating for reduced private sector spending. The difficulty President Obama is having selling his stimulus plan illustrates this very point - that a counter-cyclical fiscal policy is politically tough to pull off.

Social Security is not strictly a "counter-cyclical" program. But it is, nevertheless, a moderating or stabilizing program in the sense that these checks come in reliably and consistently during good times and bad. They keep the trough of the business cycle from being as deep as it otherwise would.

If today's Social Security checks were tied to the current depressed financial markets, not only would individuals relying on these checks be in a world of hurt, but reduced checks would result in reduced spending at the same time everything else is in the tank, thus reinforcing and aggravating the downward spiral. Reduced Social Security checks tied to the tanking stock market would be the exact opposite of what is needed.

In other words, dependable Social Security income provides at least one stable source of spending, keeping the recession from being worse than it otherwise would be.

Those with the means and tolerance for risk still can put money into financial markets. But this is not for Social Security. Let's bury this bad idea permanently.

- Monroe resident John Waelti is former Professor of Applied Economics, University of Minnesota; and Professor Emeritus, New Mexico State University. He can be reached at