December 28, 2006

About Giving Money Away

I wince when I hear a politician giving money away. But I am trying to consider, seriously, some policy ideas that may be the best we could expect.

First was Senator Jeff Sessions's $1000 to newborns. He was on Larry Kudlow's TV show early this week pitching this idea. He has been pushing it for sometime but believes it may be more conducive to the 110th Senate.

The idea is to create a government savings account fir every child born after the bill is signed, to fund that account with $1000, paid now not on debt. Then to mandate employers' contributions of 1% of wages to the account and to have the government match it under a certain income level.

"Oh my God!' yells I at the TV. "This is Republicanism in the 21st Century?"

But Mr. Kudlow is -- not only deferential -- supportive. He sees it as a step toward private accounts and an introduction to savings and investing to some lower on the income scale.

Today The Everyday Economist links to an article in the NYTimes by George Mason U. Professor Tyler Cowen. Cowen suggests Universal 401(k) Accounts Would Bring the Poor Into the Ownership Society

The core idea is simple. The federal government creates tax-free retirement accounts for lower-income Americans, supplementing private accounts where they already exist, and matching personal contributions to those accounts. The amount of the match would depend on the income of the family and how much they save.

Cowen wants to fund it by removing $1 from Medicare or Social Security for each dollar applied to matching 401K contributions.

Once you admit that we're not going back to the 19th Century, these giveaways look pretty good. There will be a huge government component in retirement, why not create a viable funding mechanism and wrap it in a positive incentive structure?

Milton Friedman appreciated the efficiency and incentive of the EITC. I'd love lasseiz faire but this is a good model to settle for.

Economics and Markets Posted by John Kranz at December 28, 2006 2:02 PM

Sorry JK,

You can't get me on board for this one. First of all it does not appear to be, "universal," 401(k) but low-income only 401(k) paid for by my tax dollars. Suddenly wealth re-distribution is OK as long as it is properly incentivised wealth re-distribution. It will only create yet another giant and inefficient government bureaucracy. I would be on-board for the privatization of social security where some portion of the taxes I pay get saved in my name. I note that the EITC is held up as a similar program with a positive incentive structure. Did you know that EITC fraud has become one of the IRS's largest issues?

Posted by: dagny at December 29, 2006 12:32 AM

I really was not expecting to find you on board.

Yes, I have given up on wealth redistribution. It is popular with the electorate and we will have it to some level with certain mechanisms. I will choose to fight the scope and the scale of it and to choose the best mechanisms.

The alternative to this is not lassiez faire, everybody gets to keep their money -- the alternative is a huge tax increase bundled as a raise in the Social Security cap. Said tax increase will prop up the existing defined-benefit plan for a few more years. While the SS budget is still in surplus, it will also give our New Democratic Overlords an injection into general revenue that they can use to do more things you and I won't like.

This is less government intensive than the existing plan, it shifts incentive to saving, and it replaces outmoded defined benefit plans with defined contribution. Not a bad day’s work.

Posted by: jk at December 29, 2006 11:01 AM

Let's explore some practical realities then:

1. Why are the impoverished poor so lousy at earning money? As 'half sigma' said in comments on the Universal 401K post, "Either (1) instead of working towards acquiring job skills they do drugs and have sex (lack of future time orientation); and/or (2) they just born stupid.

People with the above traits aren't going to be able to effectively manage their retirement savings."

2. Government "management" of "retirement" (how do you retire from the government dole?) savings for these people will work about as well as government management of snowplows, i.e. not as well as private self-interested management.

3. Adding a new entitlement does nothing to limit or restrict existing entitlements, regardless of what line of crap were given at the time of inception.

4. Whatever good may be done by the "positive incentive structure" of an "introduction to savings and investing to some lower on the income scale" is totally dwarfed by the harm of unearned income. (Why work for money when the government gives it away?)

5. No amount of creativity, novelty and charm will alter the fact that entitlement programs don't eliminate poverty, they perpetuate it. Always.

JK abandons the line in the redistribution debate because such is inevitable in our "modern" world. No, it is not. Taxes are inevitable but giving money away is a disease that CAN be cured. It will not be done democratically, but by visionaries. "One man with courage makes a majority."-Andrew Jackson

Posted by: johngalt at December 30, 2006 12:10 PM

I expected healthy and intelligent debate from you two on this one and you do not disappoint.

The idea of my giving up when you have not is an interesting point that can be explored but I doubt resolved. Pragmatism vs. purity is a pretty fundamental difference between us. As far as this proposal is concerned, I think it's a good example of pragmatism. I'll address each of your points.

1) The article mentions that some strict rules will be required to prevent withdrawals. This is the safeguard for the hopelessly inept money managers. More important to me, however, is repairing behavior at the margins. Welfare reform did not fix poverty, but it did allow millions to escape the slavery of public repentance and discover the benefits of work and freedom. This could likewise grab millions who don't save now but might discover the benefits with a little nudge from incentives.

2) My street was plowed quite nicely by a government plow. I'm sure it cost more, but the street is plowed. I'll look for something of Sen. Shelby's proposal. The idea is based on the Government workers’ Thrift Plan that provides a menu of choices. It is restricted but includes a personal component.

3) This is a great argument and difficult to counter. My brother-in-law always ends up here on immigration (he's in your camp there). "They'll promise what we want to get what they want but they won't deliver." I reply to both of you that that is legislation. Write it in the damn bill that they have to cut an even amount from other programs. Our New Democratic Overlords believe in PayGo, here it is.

4) You're at McDonalds and foie gras is not on the menu. You can give people a defined benefit when they are old and poor, or you can match their savings and encourage thrift thorough their life, Lassiez faire is not a choice. Sorry sir, we don't have pheasant either, but the Big Mac is quite filling...

5) My point #1: I am not going to fix poverty. Jesus said that couldn't be done (although that was 2000 years before Milton Friedman). But I can improve a lot of lives around the margins.

Won't be done democratically? Put in a good word for me when your people take over, jg. Tell them I was just misguided, make them go easy on me...

Posted by: jk at December 30, 2006 1:37 PM

Perhaps your suburban street was plowed but many a Denver mayor has lost his job because 70% of Denver streets were not. Want better service? Privatize it. Want your investment accounts to perform to your advantage? Don't hire your congressman to manage it for you. Want another man to do something he doesn't want to because "it's good for him?" Go piss up a rope. (Apologies for crudeness. It was the best metaphor I could remember.)

My point #3 (as well as #4, #5, and tangentially #2) is best addressed in your response to #1: "Welfare reform did not fix poverty, but it did allow millions to escape the slavery of public repentance and discover the benefits of work and freedom."

3) This success was the result of reducing an entitlement, not creating a new one.

4) "Money for nothing" is a cancer on the financial well being of the underclass.

5) How many years did this social experiment in the "war on poverty" last before it was finally reformed?

2) Welfare is a perfect example of government management: It can't make decisions and adapt to maximize results. It just goes on in whatever direction it was imprecisely pointed by congress until things get bad enough that congress makes "reforms."

Which brings us to where I think we agree. We both want to improve financial self-reliance for those who lack it and we both want (I think) to reduce the magnitude of wealth redistribution at every opportunity. The obvious answer is reform and restructuring of Social Security. Privatize it. Self-direct it (mutual funds only). Give nominal federal matching or seed contributions even, if you must, but DON'T let it stand as is, separate from your shiny new entitlement.

Finally, what I meant was that great ideas are not arrived at and embarked upon democratically. Naturally one must have the votes to make it happen. My point was that if you abandon the position that wealth redistribution is wrong in principle then you have virtually no basis on which to prevent its future growth.

Posted by: johngalt at December 31, 2006 12:30 PM

I think Welfare Reform is a good model. To make it palatable, it bundled a pile of job training and child-care subsidies. Sadly, we've been reduced to having to buy freedom with sops to socialists. And yet, I think you'll agree it was a huge net plus.

I don't see replacing your private 401K with this. Hence, it is not replacing private management with public management. You'd have to keep a small section of your portfolio in an approved vehicle, but a small T-Bill position isn't going to kill anybody.

You dysphemize it by calling it "a new entitlement." But I say that we have a de facto entitlement of a public pension through Social Security and Medicare. Getting me on board requires Cowan's idea of a dollar-for-dollar reduction from current entitlements to fund this. Same cost, different incentive structure.

I hate to go too far down an icy side road, but the demand for snow removal that cost Mayor McNichols his job ushered in Federico Pena and an era of big government in Denver. Mayors now know that a lot of services are required to keep their job. I don’t see that it has resulted in much private incentive.

Posted by: jk at December 31, 2006 3:58 PM | What do you think? [6]