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(This item originally appeared in Forbes.com on May 6, 2012.)
http://www.forbes.com/sites/nathanlewis/2012/...e-future/
It seems to me that we are in an era where our postwar institutions, having
become outdated and often corrupt, are gradually collapsing. This is true
across our society, whether public and university education, social security,
unions, pensions, the health care system, the financial system, big
government in general, or even the suburban pattern itself. Things that used
to work no longer work.
In this regard, I am a fan of the writing of William Strauss and Neil Howe,
who predicted that all of this would happen in the middle of the happy 1990s,
when it seemed to most people that everything would be fine and the DJIA
would rise placidly to 36,000. Their book The Fourth Turning(1997) is a good
place to start.
Politically, at present, it seems to me that not much can be done. The
attempt to maintain the present institutions will overwhelm all efforts of
reform. However, it is a good time now to start to think about what our new
institutions should look like.
Unlike many libertarian types, I think the notion of Social Security is,
broadly speaking, a good thing. The countries that have tried to do without,
such as libertarian Hong Kong, have found that the problems of old-age
poverty became too serious to ignore. This is especially true since, due to
demographic changes, more and more of the populations in most developed
countries are over 65. Hong Kong instituted its “Mandatory Provident Fund”
system in 2000, which puts a mandatory 5% contribution at both the employee
and employer level into an account that holds private-sector assets.
Similar plans are in use in India, Singapore, Malaysia, South Africa, New
Zealand, Chile and other places around the world. A 2005 study by the U.S.
Social Security system itself found 31 countries, and I think they missed a
few.
The Cato Institute, in February 2012, found that a simple 50% equity/50%
bonds portfolio, begun in 1968 (not a very auspicious time as it was the
beginning of a long bear market in both stocks and bonds), would have allowed
monthly benefits of $2,067 today for the average family, compared to $1,358
from today’s Social Security system.
This is all well and good, but there is another factor which I think is more
important – capital formation. Capital investment – the flip side of savings
– is what drives wealth creation, increasing incomes and job creation in any
economy. We are today saturated with the idea that “consumption” makes an
economy go, and there is some truth to that, but mainstream economists will
agree that capital investment is a more fundamental long-term driver of
economic gains.
In practice, domestic savings and domestic investment don’t line up
perfectly. There are countries, like the U.S., which use more capital than
they create. This causes a current account deficit, or more specifically
indebtedness to foreigners, which is a touchy subject for a lot of people.
However, even when capital flows across borders relatively easily, as is
often the case today, there remains considerable “stickiness.” In other
words, countries with a high degree of domestic savings, like China,
typically also have a high degree of domestic investment. The kind of small,
entrepreneurial ventures that often have the best return on capital are
usually funded by people who are familiar with the local situation.
Foreigners like to buy government bonds. And if savings were in excess of
local investment – in other words, if the U.S. began to run a current account
surplus – that might not be such a bad thing either.
We want to channel capital to real productive uses, not government
squandering. On the other side of every private investment is a productive
asset: your bond finances an office building, which generates the revenue to
pay the bond. Or, your stock finances a corporation, which generates cashflow
and profits. More private investments means more productive assets, which is
another way of saying a larger, wealthier, job-creating economy.
The idea that capital creation and investment should be a primary goal of
public policy was a central economic tenet for literally centuries. However,
the notion seems lost today.
The United States today gives me the impression of an economy that is capital
starved. Net private investment by businesses averaged 5.1% of GDP in the
1960s. In the last ten years, it averaged 1.92%. In that difference lies many
reasons why job creation and wages have been stagnant. Social Security
brought in and paid out about 4.8% of GDP last year – money which, if it were
directed into private-sector investments, instead of the present
pay-as-you-go system, would provide that much more capital for private-sector
investment and job-creation.
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