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Thursday, December 29, 2011

An Economy Of Scale

Matt Y:

the best way to "save" for retirement is to live in a country with a properly functioning Social Security system. The way a system like this works is that a certain share of national income is set aside to support the living standards of elderly people. That share is collected as taxes from working people and paid out as benefits to retired people. The benefits received are proportional to the taxes you paid when working, so incentives to maximize earnings are preserved. This way everyone "saves" (i.e., reduces consumption below income) while working in exchange for a payoff that's properly calibrated to overall long-term economic growth without needing to act as an "investor."


The larger problem is that Social Security was never big enough. Instead, just as we made up for the lack of a national health program with employer-provided insurance we made up for Social Security's inadequacy with firm-level defined benefit pensions. Given a large enough and sufficiently durable firm, a defined benefit pension can be a perfectly sensible idea. But no firm is nearly as big or durable as the entire United States of America so it would have made a lot of sense to address the substantial problems with defined benefits pensions by moving to a bigger Social Security program. Instead we moved in the opposite direction, turning tens of millions of middle class Americans into "retail investors" who don't know what they're doing and don't save enough.

The result is nice, I guess, for the guys who collect the management fees and print the 401(k) brochures but it makes no sense as a social arrangement.

Yup.  And the problem with so many disparate employer-based pensions is similar to that of devolving such insurance to the states (as observed by SCOTUS in 1937 when ruling Social Security was constitutional):

The problem is plainly national in area and dimensions. Moreover laws of the separate states cannot deal with it effectively. Congress, at least, had a basis for that belief. States and local governments are often lacking in the resources that are necessary to finance an adequate program of security for the aged. This is brought out with a wealth of illustration in recent studies of the problem. Apart from the failure of resources, states and local governments are at times reluctant to increase so heavily the burden of taxation to be borne by their residents for fear of placing themselves in a position of economic disadvantage as compared with neighbors or competitors.

One might argue that myriad corporate retirement plans would be a differentiator, allowing employers to attract better workers, and perhaps that was true at one point.  Now, however, pensions are just another cost center to be cut to "remain competitive," so even the burden comparison to state-level issues is apt.

Really, nobody enjoys a greater economy of scale (particularly in terms of addressing fundamental social needs) than the Federal government.  Thus it really makes the most sense to provide for the...say, general welfare, at that level where we get the best aggregate bang for the buck, whether it be the ensuring national defense, establishing a social safety net, offering health insurance, delivering the mail, or regulating interstate commerce, markets and industry.  

For things more local in nature, like fighting fires or providing police protection, you put responsibility more on local government.  And for some things a profit-driven corporation makes sense, such as manufacturing cars and solar panels.  I'll note, though, that even in these latter areas, there is a national interest so Federal financial involvement might still be warranted.

Just remember what Adam Smith said in his Lectures:

[T]he government in a civilized country is much more expensive than in a barbarous one; and when we say that one government is more expensive than another, it is the same as if we said that the one country is farther advanced in improvement than another. To say that the government is expensive and the people not oppressed is to say that the people are rich. There are many expenses necessary in a civilized country for which there is no occasion in one that is barbarous. 

Yes, Social Security and health insurance and regulation and all the other stuff cost money.  When you have grandma living off catfood, children hungry, sick and uneducated, and firefighters standing around and watching houses burn down--all while the rich accumulate so much wealth they can disregard the rest of us need--you no longer have a civilized country.  

If you want to live in a barbarous corporatist society, vote Republican or simply do nothing.  If you prefer civilization, consider helping get a constitutional amendment passed that tips the balance back to real people so we can keep our safety net and other good things intact.  If we all work together we can create an economy of scale in our political system that no company can match.


December 29, 2011 | Permalink


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Well said. Thank you.

Posted by: Steve Bates | Dec 29, 2011 6:20:03 PM

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