Social Security Bullshit: A Socratic Discussion with a Texas Cowboy at McDonald's

FREE eBook below: Social Security Bullshit, A Socratic Discussion with a Texas Cowboy at McDonald's
by Steve Baba, Ph.D. - Sponsored by www.Shrewd.com (above)

Social Security Bullshit

A Socratic Discussion with a Texas Cowboy at McDonald’s

By Steve Baba, Ph.D.

Using non-technical language and a dialogue format, this short ebook explains the problems with privatization and misleading privatization arguments. Logical fallacies and economic concepts are presented in a Socratic discussion.

Steve Baba has a Ph.D. in Economics from the University of Maryland at College Park and has taught economics in the United States, Europe and Asia.

Contents:

1. Introduction – Family Values and Paris Hilton

2. Free money for families and claim the moral high ground of family values.

3. Transition Costs – Paying Double

4. The cost of risk

5. African-Americans and the cost of annuities – The insurance company’s cut.

6. What if we don’t require people to buy annuities?

7. Throw Yourself From the Train at 64 and your family can inherit.

8. All or Nothing Fallacy: Privatization or Bankruptcy

9. False Analogies

10. The false analogy that what is good for an individual is good for everyone: The Fallacy of Composition

11. Free Lunch – Just eliminate wasteful government programs.

12. If wasteful government spending could be cut, it could also be cut to save the current Social Security system.

13. Corporate bonds and starving the beast (government)

14. Let’s All Get Rich in the Stock Market

15. Diminishing Marginal Productivity: Diminishing Profits

16. Regression to the mean and other hazards of using past trends.

17. Money is a veil.

18. You can save money, but you can’t save most goods. You can’t carry your retirement on your back to avoid burdening future generations.

19. Aliens (foreigners, not space aliens) will buy our stock and produce our goods

20. Appeals to Authority and Personal Attacks

21. Present only selective facts. Half the story.

22. The magic of compound interest is not interest and is not magic.

23. Less Government is Better Generalization

24. More Choice is Better Generalization

25. Choice has more search costs

26. Using charts to make Social Security look bankrupt.

27. Big Scary Numbers

28. Privatization is always better generalization. Privatize the entire government?

29. Individuals make better investment decisions than government: requires separation of government (social security) and stock market.

30. The externality of having your mother-in-law live with you.

31. Gaming the System and Bailing Out the Stock Market Losers

32. Ownership with no insurance discourages entrepreneurial risk taking.

33. Growing our way out of the problem.

34. Taxophobia

35. You have no legal rights to Social Security. Scare Tactics

36. Leave if you want – but guarantee you won’t be a burden. The Slippery Slope.

37. Leave if you want – but pay your share of the transition costs before you leave.

38. The use and misuse of polls. Everyone wants more for less.

39. The use and misuse of opinions and forecasts: trying to have it both ways

40. The Current Social Security System: the worst system except for all others?

41. Ten Point Summary

If this text is difficult to read, try adjusting the text size, under the View menu.

1. Introduction – Family Values and Paris Hilton

Economist: This McDonald’s sure seems busy for being in the middle of nowhere.

Cowboy: President Bush is having a town meeting on Social Security privatization. Supporters and some demonstrators are here.

Economist: They handed me some brochures on privatization when I walked in. Unfortunately, it’s mostly sound bites and, while not outright lies, bullshit.

Cowboy: They handed me some brochures also. Some of it is obviously bullshit, wrapping oneself in the flag, family values and call the other side names, but I can’t tell if the economics is bullshit or not.

Economist: Look at this nice picture of a happy, smiling family in this privatization brochure – parents, children, and grandma – all happy to have their Social Security privatized.

Cowboy: They look like they just received huge checks from their private accounts.

Economist: But people investing in private accounts will not receive Social Security checks for decades.

Cowboy: In Texas, being so happy about money that one might earn in 2040 is counting your eggs before they hatch, but they are probably just models in the photograph.

Economist: If Social Security is privatized, some people will profit immediately.

Cowboy: Let me guess, one is Wall Street.

Economist: Wall Street will earn money from handling everyone’s retirement money. But to be fair, most supporters of privatization, privateers as I like to call them, realize this and include these brokerage costs in their estimates.

Cowboy: Who else will immediately profit from privatization?

Economist: If people start investing Social Security money in stocks, such as Hilton Hotel stock, what do you think will happen to the price of Hilton Hotel stock?

Cowboy: The price of Hilton Hotel stock will rise.

Economist: And who owns Hilton Hotel stock?

Cowboy: Paris Hilton, the Hilton Family, corporate executives, and other investors.

Economist: As the price of stock rises, Paris Hilton and other millionaires will benefit immediately. They should put a picture of Paris Hilton on their privatization brochures.

Cowboy: Will Paris Hilton buy our stock back at a higher price in 20 years when we retire?

Economist: It’s highly unlikely that millionaires will fund Social Security by selling stock low and buying stock high. But it’s a rather long and complex question.

Cowboy: But if millionaires and Wall Street are going to profit immediately, aren’t the rest of us going to have less?

Economist: It definitely means less for the rest of us – unless the economic pie grows. But there are also more costs of a privatized Social Security.

2. Free money for families and claim the moral high ground of family values.

Economist: This looks interesting for its audacity. This foundation says that it’s a “violation of family values” if you can die at 64 and your family gets nothing from all the Social Security payments you made all your life.

Cowboy: Well, if I die at 64, my family gets my land. I would guess that most people would leave their house and other assets to their family if they die at 64. Those without assets or those with young children should buy life insurance.

Economist: But wouldn’t it be nice if you could give all your Social Security to your family if you died at 64?

Cowboy: Yes, it would be nice if my family got an extra few hundred thousand dollars if I died before my 65th birthday. But wait, who is going to pay the extra hundreds of thousands of dollars to my family – the hundred thousand dollars that would go to other beneficiaries? It sounds like the foundation is trying to sell me a free lunch. Aren’t conservatives usually against free handouts?

Economist: I think the foundation would argue that it’s not a government handout, since it would be a return of your Social Security money – but that still leaves less money in the system for others.

Economist: If you die at 65, aside from being dead, you are also out of luck in that you paid Social Security all your life. But what if we live to 95?

Cowboy: We are here eating lunch at McDonalds so I don’t know if we will live to 95, but if we do, we will get years of Social Security checks.

Economist: The goal of Social Security is not to provide inheritances to younger generations.

Economist: But this added inheritance “life insurance” plan is not even a good life insurance plan, since a family with a younger father, say 30 years old, needs more to get his children through school, and there is unlikely to be much money saved while working in his twenties. While if a person dies at 64, he has probably already supported his family.

Cowboy: Doesn’t the private market already sell life insurance?

Economist: Yes, the private, free market does have a competitive life insurance market – but that is not stopping privateers from offering free insurance.

Economist: Introducing phrases like “violation of family values” is logical fallacy known as appeals to emotion.

Cowboy: Let me get this straight, Wall Street gets money for stock brokering, the Paris Hiltons of the world are going to get money from the increase in stock prices, and the families of everyone who dies before 65 will inherit money. Where is this money going to come from?

Economist: It’s going to come from the “magic” of compound interest, and we are all going to get rich in the stock market. (Laughing) But, seriously, I am getting there.

3. Transition Costs – Paying Double

Economist: In addition to Paris Hilton, other millionaires, Wall Street, and families that inherit, there are also the transition costs of paying today’s retirees, in addition to saving for your own retirement.

Cowboy: But here it says that the transition costs are offset but the reduction in future obligations.

Economist: Technically it’s true that if you and our generation pay double, the government will no longer have to pay the next generation – but you still have to pay double. Doesn’t that make you happy, that you can pay double, and the government will thank you for lowering the government’s future obligation to retirees in 2150?

Cowboy: I don’t care that much about retirees in 2150. How can I get out of paying double?

Economist: Most privatization plans will borrow trillions for the transition to avoid paying double.

Cowboy: But won’t I end up paying interest on the money?

Economist: Yes, if you don’t pay double immediately, you, society can pay the interest and pay it off slowly. Either way, there are transition costs if you switch systems.

Economist: But if we continue with a pay-as-you go system, we never have to pay it off completely. In effect, we will continue to owe every 65-year-old. They eventually pass away but are replaced by new retirees.

Cowboy: But if we switch to a private system?

Economist: If we switch to a private system, we have to pay off all the current people who have contributed to the old system and save for our own retirement.

Cowboy: Let me get this right, if we continue with the pay-as-you-go system we never have to pay the transition cost?

Economist: In effect we roll over the obligation from one generation to the next.

4. The cost of risk

Economist: There is another cost – which could informally be called the cost of risk – which privateers have largely ignored, but the risk is the most vocally expressed complaint about privatization.

Cowboy: I don’t like risk, but what does risk cost me?

Economist: You don’t get a bill in the mail for risk, but people are willing to pay to avoid risk. Suppose there were two possible retirement plans:

Plan A: $1000 per month guaranteed.

Plan B: $800 per month if the stock market is low when you retire (50% of time) or $1200 per month if the stock market is high when you retire (other 50% of time).

Cowboy: I would take the guaranteed $1000 per month. Living with $200 less, only $800 per month, would be a lot harder and not compensated by the chance of $200 extra.

Economist: The economic reason for taking the less risky option is being “risk adverse” because of the “law of decreasing marginal utility of income.”

Cowboy: OK, if you say so, but it’s been a few years since I was in college.

Economist: Suppose I changed the plans to:

Plan A: $1000 per month guaranteed.

Plan B: $800 per month if the stock market is low when you retire (50% of time) or $1300 per month if the stock market is high when you retire (other 50% of time).

which is the same as before except $1,300 per month is the good result.

Cowboy: I might take the gamble for $1300, but it would be a close, hard decision. I would definitely take it for $1400.

Economist: Lets say it’s $1300. You get $800 if the market is low and $1300 if the market is high, an expected value of $1050, but you would be just as happy with $1,000 for sure.

Cowboy: They sound the same but someone is paying $50 more. Somebody must be paying $50?

Economist: In order to make you as happy as you would be with a sure $1,000, you need an expected risky return of $1050 – which the market would have to pay you just to put you back to your original utility or happiness.

5. African-Americans and the cost of annuities – The insurance company’s cut.

Cowboy: Here it says that African Americans are cheated by the Social Security.

Economist: It’s true that African Americans die sooner after retirement and receive less money after retirement than a similar white person who made the same Social Security contributions while working. But African Americans benefit from the slight progressiveness of Social Security and benefit from disability and survivorship benefits. I haven’t looked at the studies in detail, but others have argued that African Americans receive a better deal overall.

Cowboy: Shouldn’t we try to equalize healthcare so African Americans live longer?

Economist: Yes, I am not a medical doctor, but there could be genetic differences, which we can’t change. For example, women live longer than men.

Cowboy: Should African Americans get more every month when they retire because they are likely to die sooner?

Economist: Private insurance companies will provide African Americans with larger monthly payments, since on average African Americans will collect fewer payments by dieing faster, which brings up a good point: When people retire at age 65, they have to buy an annuity to receive monthly payments the rest of their lives.

Cowboy: Isn’t an insurance company going to take its cut?

Economist: An insurance company is going to take its cut, and there are expenses in selling the annuities. I have seen figures that it costs private insurance companies 15% to 20%, but with a larger government program – it may be possible to get this down to 12%. Twelve percent is what Cato uses for their estimates.

Cowboy: Twelve percent is a huge cut of my retirement! Twelve percent is a huge cut of anyone’s retirement!

Economist: An insurance or other company selling annuities has to invest in bonds, do the actuary work, and take the risk that people live longer than expected. There are real costs.

Economist: This is why white males often earn low returns with Social Security: males don’t live as long as females.

Cowboy: Aren’t private insurance companies going to give less per month to women since women live longer?

Economist: In a free market actuarial system, white women will receive less per month. Did you every see the number of women compared to men in a retirement home?

Cowboy: I don’t see privateers emphasizing that women will receive less in these brochures.

6. What if we don’t require people to buy annuities?

Economist: If we don’t require people to buy annuities when they reach 65 and retire, many people will outlive their savings – and public welfare will end up paying.

Cowboy: But what if some people have enough money, say $2,000,000 in the bank and won’t be a burden to the rest of us?

Economist: A person with $2,000,000 in the bank should not become a burden to us – assuming they don’t gamble it away in Vegas or on risky stocks, but there are other reasons for making everyone buy an annuity.

Economist: Suppose you were sick when you retire at 65, and the doctor told you five years was the most you had to live. Would you buy an annuity?

Cowboy: No, I would live off my savings for five years and leave the rest to my family.

Economist: Right, you would do this avoid leaving your money to an insurance company. But if everyone who was likely to die soon did this?

Cowboy: Only the very healthy people would buy annuities.

Economist: In economics, this is known as “adverse selection.”

Economist: But what if you were sick and the government made you buy an annuity?

Cowboy: I would go to the insurance company, bring my medical reports, and say, I am sick and going to die. You will have to pay me less, so I want to pay you less.

Economist: Exactly, insurance companies will start screening people and profiling people. Health insurance companies want healthy clients who have lower medical bills. In contrast, annuity companies want unhealthy clients because they can stop making the monthly payments when the client dies.

Cowboy: It sounds a bit macabre to me.

Economist: We could require a one-rate for everyone, which would eliminate this costly screening and profiling.

Cowboy: Isn’t that what Social Security already does?

Economist: There is also another problem with inheritability and requiring everyone to buy an annuity at 65.

7. Throw Yourself From the Train at 64 and your family can inherit.

Economist: Suppose you are in the hospital at age 64, a few days short of your 65th birthday.

Cowboy: If I die before I am 65, my family gets to inherit, while if I die on my birthday or later, I get the annuity for a few days – a few dollars.

Economist: That is a rather strong incentive to die before you are 65.

Cowboy: I am strongly, but not absolutely, against suicide, but if one is very ill and my family can inherit – it’s something to think about. If it were a matter of a few days, I might stop medical treatment early.

Economist: By dying a few days earlier, you could give your family a few extra hundred thousand dollars. What if it were a few weeks, a few months, or a year?

Cowboy: It does not seem right at all. What if we changed the age to 66?

Economist: Then you would have the same problem at 66: die before your 66th birthday or lose money.

Cowboy: In addition to being macabre, it does not seem fair. Some people would get to leave an inheritance and others would not. What if someone threw mamma from the train, as in the movie?

Economist: I do not think or wish to imply that privateers are in favor of throwing people from trains. It’s an unintended consequence. I don’t even think that most privateers are liars, just good at political bullshit.

8. All or Nothing Fallacy: Privatization or Bankruptcy

Economist: Before we get into the details of investment, lets take a quick look at how privateers have tried to frame the issues. See here how they claim it’s, “privatization or bankruptcy.”

Cowboy: If the choice is really between nothing from a bankrupt system and privatization, of course privatization sounds better – but don’t we have other choices and is the system really going bankrupt?

Economist: What if our choice was between starving and eating at McDonald’s?

Cowboy: Well if we only had two choices, starve or eat at McDonald’s, McDonald’s is obviously better than starving, but I don’t think either of us would argue that McDonald’s food is health food.

Economist: It’s obviously ridiculous since we know there are other places to eat.

Cowboy: I also remember a speech by Castro at the United Nations when Castro said that his choice was between being loyal to either the “American Monopolists” or the “Cuban People.”

Economist: That’s another example of manipulating the number of choices, but when it’s done too blatantly, people notice it.

Economist: Obviously limiting the choices people have can change the choice. But I do find it interesting that it took the extreme of bankruptcy as the alternative to get people to choose privatization in public opinion polls. If someone showed me a poll saying the only way privatization would have support was if the alternative was bankruptcy, I would have continued to think that Social Security reform is the third rail of politics.

Cowboy: That reminds me, here in Texas before it was ruled unconstitutional, prosecutors would often only charge people with premeditated capital murder that requires the death penalty. The jury, having a person guilty of a lesser noncapital murder, would only have the choice between letting the murderer go free or convicting of capital murder with a death sentence.

Economist: While it’s good that the courts limit actions in the legal system to prevent these type of arguments, in the political system, it’s anything goes for free speech reasons – but we don’t have to believe it.

Cowboy: But is it fair to compare privateers to Castro or overzealous, hang-em-high prosecutors just because they used the same technique?

Economist: It’s wrong to use the all or nothing technique unless it’s really an all or nothing situation – like pregnant or not. But we are getting close to guilt by association by bringing up Castro. It’s not wrong because Castro used it, it’s always wrong.

9. False Analogies

Cowboy: What about this old 1935 car Republicans bring to their town meetings, claiming Social Security is as obsolete as a 1935 car and it’s time for a new car?

Economist: The republicans are trying to draw an analogy between an old, obsolete car and Social Security.

Cowboy: But my new 2004 pickup truck is not all that different from my grandfather’s 1935 truck. Both ran on gasoline, both had four wheels, a carburetor and doors.

Economist: That’s the problem with analogies. Analogies only work if the things being compared are similar. For example, a 1935 house or even an 1885 Victorian house is fine – as long as the house is in good condition.

Cowboy: But don’t the Republicans want to turn back time to even before 1935 and use a 1920s stock investment scheme?

Economist: That’s a good point. False analogies can be made fairly easily to support any position. But to be fair, there would be slight differences between the 1920s private savings for old age and the privatization proposals today.

Cowboy: What are the differences between the 1920s private savings for old age and privatization proposals today, beyond the obvious that the government will require people to save?

Economist: In addition to requiring people to save, the government will require that most investment be diversified rather than in a handful of stock. But other than that, there is not much difference.

Cowboy: So I could argue that the current Social Security system, with a 1935 design, is better than a 1920s system.

Economist: You could argue that the newer system is better, but it’s usually a false analogy. With technology, new systems are often better than older systems – A 2005 personal computer is better than a 1995 personal computer – but it’s a false analogy to extend it in every case. Many new technologies are not successes. For example, are you riding around your ranch on a Segway?

Cowboy: What’s a Segway?

Economist: A Segway is a personal transportation device that people stand on and has two wheels.

Cowboy: Now that you reminded me, I did see a few Segways in the news. But I have never seen a Segway on a ranch or in town.

Economist: But to be fair, I think many privateers realize the old car is a bad analogy and only use it as a publicity prop. It makes for good TV shots to have an old car in the background, since most of the Social Security issues are rather dry numbers and economics. But it’s important not to be confused by these false analogies. And there is another type of false analogy that is subtler – and that many privateers honestly fall for.

10. The false analogy that what is good for an individual is good for everyone: The Fallacy of Composition

Cowboy: But if something is good for an individual to do, isn’t it good for everyone to do it?

Economist: Absolutely not. It would be good if you decided to expand your business and raised 30% more cattle, but what would happen if everyone decided to expand their ranches and raised 30% more cattle?

Cowboy: The price of cattle would collapse, and I might get even less money for 30% more cattle if the prices fell by more than 30%.

Economist: That’s about right. If you increased your cattle from a round number of 1000 to 1300, if no one else raised more cattle, you would expect to earn 30% more, because 1000 or even 10,000 cows will not change the market price by even a cent since it’s a drop in the bucket of all beef in the world.

Cowboy: But if everyone raised more and the price of cattle fell 30%, I would be worse off with the same money for 30% more cost?

Economist: That’s about right. Technically a 30% increase, followed by a 30% decrease puts you in a worse position, but you get the idea. We could do the math on this napkin if you wanted to.

Calculation on Napkin: Suppose you increase the number of cows you have by 30% from 1000 to 1300 and suppose the price of cows falls 30% from $100 to $70. Originally you had 1000 cows times $100 or $100,000. After a thirty percent increase to 1,300 times $70, you only have $91,000.

Cowboy: But it would cost me more money to raise 30% more cattle, and I would be much worse off.

Quote from Social Security Trustees Report:
http://www.ssa.gov/history/reports/trustees/transcript1.html

"But let's turn to the really important issue, which is the economic issue. We obviously must be wary of the fallacy of composition, and worried about what might be true for a small individual portfolio, such as one that's a very small fraction of the economy. We have to wonder and worry whether that's also true for the nation as a whole or the trustees of a national policy or national institution."

Economist: The fallacy of composition often occurs when successful individuals and businessmen apply business or individual rule-of-thumbs to governments.

Cowboy: Like as a rancher, it’s great for me to expand my business 30%, but if I became a government official and advocated a policy that every rancher should expand by 30%, it would be folly.

Economist: Now, instead of raising 30% more cattle, suppose you decided to save 30% more in the bank.

Cowboy: I would earn 30% more interest.

Economist: But what if everyone decided to save 30% more?

Cowboy: Interest rates would fall, just like the price of cattle would fall.

Economist: And depending on how much interest rates fell, savers could end up with less interest income.

Cowboy: We could save more and get less?

Economist: Yes, the banks would pay less interest.

Cowboy: This seems tricky.

Economist: It’s basic economics. When supply increases, prices fall – shifting supply curves. Later, we can discuss diminishing returns and why the demand for capital is downward sloping. The fallacy occurs because one business is usually such a small part of the industry that they start thinking that the price is fixed – and they can buy or sell an unlimited amount at that price. Then in government, they start applying individual or business rules to the government.

Cowboy: Paris Hilton is going to get more money, people are going to inherit more, Wall Street and insurance companies are going to take cuts – and now you tell me that even if everyone saves more – it’s possible that we will earn less interest. Where is the money going to come from?

Economist: Privateers have a couple of free lunches which are eliminating wasteful government spending and making money in the stock market.

11. Free Lunch - Just eliminate wasteful government programs.

Economist: What could be wrong with eliminating wasteful government spending?

Cowboy: Is there enough wasteful government spending with the Republicans in charge today?

Economist: Radical conservatives see trillions of dollars of wasteful government spending.

Cowboy: How do you tell what government spending is wasteful? These hippies (glancing at a youth wearing a stop-the-war t-shirt) think the Iraq war is wasteful, while I don’t.

Economist: In addition to these hippies thinking the war in Iraq is wasteful, some isolationist right-wingers think the war in Iraq is wasteful.

Cowboy: I think most farm subsidies are wasteful government spending, but my farming neighbors don’t.

Economist: If ultraconservatives listed all the “wasteful” programs they would cut, they would end up upsetting a lot of people.

Cowboy: I guess that’s why they don’t have a list here – and just use the generic “wasteful government programs.”

Economist: Sometimes they use the “L” word ”liberal government programs.”

Cowboy: What government programs would they cut?

Economist: While some would not cut the military – it would be safe to assume that everything across the board would be cut 10% to 20%. They may want to cut some programs such as public radio more.

Economist: The beauty of attacking “wasteful government programs” is that everyone thinks it’s someone else’s programs. It’s a campaign trick to make everyone think you are against government waste, without saying what the waste is.

Cowboy: I have watched the Republicans attack wasteful government programs and big government for years. Then when they came to power, they spent as much as the Democrats spent.

12. If wasteful government spending could be cut, it could be cut to support the current Social Security system.

Cowboy: What if privateers did the right thing and listed all the government programs they want to cut. Is anything wrong with that?

Economist: No, but if they really have a list of trillions of dollars of programs that can be cut because they are wasteful, they should be cut anyway. They could be cut and the money could be used to support the current Social Security system.

Cowboy: Why aren’t these wasteful programs already cut?

Economist: There are always programs only a few influential people may like, there are better and worse government programs, and there are unsuccessful government programs, just like unsuccessful businesses.

Cowboy: What about these unsuccessful government programs, can we cut them?

Economist: Do you want to stop looking for a cure for cancer just because 90% of past research efforts have been failures?

Cowboy: No

Economist: Do all your cows live to a marketable age or do some “unsuccessful” cows die young?

Cowboy: I see your point. To have some successes, the government, just like businesses, has to take some risks.

Economist: The government is bound to have some failures due to risk taking, but public goods are inherently difficult to value.

Cowboy: What’s a public good, like a public park?

Economist: A public park is a good example of a public good. Since people don’t pay to use most public parks, it’s difficult to determine how much people like the park and if the park was a “waste” or not.

Cowboy: Some people say they love parks, and I like parks where I can hunt. While city folks may only like Central Park in New York City.

Economist: Take an abstract issue such as world peace. We all agree that world peace is good, but it’s difficult to determine if efforts contribute to world peace or not.

Cowboy: Like we may not know for years if this Iraq intervention – which is a government program – helped or hurt world peace.

Economist: We may never know if the Iraq intervention helped or hurt world peace since we don’t know and will never know what would have happened if we did not invade Iraq. Would we have caught Bin Laden and ended organized terror or would Saddam Hussein have terrorized the world in addition to Iraq?

Economist: Often with countries, there is the inability to run experiments and a sample size of one, which makes macro political and economic policies difficult to evaluate.

Cowboy: Ok, it’s difficult to determine which government programs are wasteful, but some must be pork.

Economist: Of course many government programs are pork, but even the pork recipients want useful pork, so it’s not a total waste. Since the most wasteful government programs are the most newsworthy, such as the billion-dollar bridge to nowhere, the most wasteful programs often are reported in the press, while the better programs are not reported in the press.

Cowboy: Isn’t that like the Bush administration claiming the press only reports bad news from Iraq, the bombings and assassinations, instead of the good news?

Economist: I think it’s just the nature of the press – if it bleeds, it leads. Murders, bombings and government disasters, while all true, don’t represent the entire picture, since people leading happy lives and normal government services aren’t newsworthy.

Economist: But the most wasteful government programs should be ended anyway.

Cowboy: Isn’t that what democracy is supposed to do? Choose the best programs through the political process. Why doesn’t the government just end these wasteful programs and use the savings to support today’s Social Security?

Economist: Aside from the fact that these wasteful government programs may not exist to the extent ultraconservatives imagine, they believe that the government is so addicted to spending, that government will only stop spending when it runs out of money. This is known as the “starve the beast” (government) argument.

Economist: In my opinion, the worst waste is often bad government regulations – like import restrictions that raise prices on sugar – instead of direct government cash handouts. I personally believe there are better ways, better than trying to starve the beast, to eliminate wasteful government spending and government regulations – such as limiting lobbying and campaign contributions. Starving the beast only targets spending and does not target any other government handouts like import restrictions.

13. Corporate bonds and starving the beast (government)

Economist: If you had an overweight son and wanted him to lose weight, would you tell him only to stop eating at McDonald’s?

Cowboy: No, he would just go to Burger King.

Economist: Trying to starve the government, the beast, by just saying no more Social Security money would just let the government get the money elsewhere.

Cowboy: Instead of buying stock from Paris Hilton, couldn’t we just lend the money to companies that could use it for new investments – and they would have to pay us back?

Economist: Sure, that would be buying corporate bonds. We would get our money back with interest – except in the few cases when companies go bankrupt.

Cowboy: Is there anything wrong with privatization with corporate bonds?

Economist: As long as the money is not lent for political reasons, privatization with corporate bonds is OK – but it would be virtually identical to buying government bonds. When you adjust for the chance of default, what do you think the interest rate difference on government bonds and quality corporate bonds is?

Cowboy: If good corporate bonds are virtually as good as US government bonds, I would guess that they would have about the same interest rate.

Economist: And if the interest rate is about the same as the Trust Fund is getting on government bonds – people would have no reason to switch or privatize.

Economist: And if the Trust Fund started buying safe corporate bonds instead of government bonds – the people who would have bought corporate bonds will just buy the government bonds (feeding the beast).

Cowboy: So there would be no change in the number of bonds sold – just private individuals would hold more government bonds directly and the Trust Fund would hold more private bonds?

Economist: Just switching the nominal ownership of equivalent assets does not change anything.

14. Let’s All Get Rich in the Stock Market

Cowboy: Here it says we can all get rich – or at least have a better retirement, provided by the stock market with the magic of compound interest. It says here if we give $5,000 at birth to everyone and let the magic of compound interest work, we can all retire rich.

Economist: What if I told you that every family could become rich by having one member, the husband or wife, become a doctor earning $200,000? If it worked for them, it will work for everyone.

Cowboy: I would say you are nuts. We can’t all become doctors. This is one of these fallacies of composition you are talking about?

Economist: Humor me; I know that we all can’t become doctors. But by asking the question, we can see what is wrong with why can’t we all earn $1,000,000 in the stock market.

Cowboy: While a few more doctors may be needed, we don’t need a doctor in every family.

Economist: So while a few more doctors would contribute, we would reach the point where doctor services are less and less needed. This is an example of the law of diminishing returns.

Cowboy: Also, we can’t pay the head of every family $200,000. There is not enough money to pay every family $200,000.

Economist: Let’s look at part of the stock market, Hilton Hotels again. Paris Hilton and some investors can make money from Hilton Hotels, but can everyone?

Cowboy: Just like my ranch, I would guess that Hilton Hotels has a profit that is shared between owners.

Economist: Hilton Hotels’ income is largely dependent on the number of hotels it has, which is their capital – and the profit from this capital is largely fixed, although it changes with the fate of the travel industry.

Cowboy: But couldn’t Hilton Hotels buy more hotels?

Economist: That’s a good point. Hilton Hotels could buy more hotels and earn more profits in the future. But would the new hotels be as profitable as the current hotels?

15. Diminishing Marginal Productivity: Diminishing Profits

Economist: Suppose the government passed a law causing people to invest part of their savings in ranching. What do you think they would happen?

Cowboy: Many people would buy currently operating ranches.

Economist: And who would this help?

Cowboy: The current ranchers like me would make out well if people have to buy ranches.

Economist: That would be the same as buying existing hotels from Paris Hilton.

Cowboy: I wonder if us ranchers could get our ranches included in the Social Security privatization. (Laughing)

Economist: That’s interesting. As a small business you are not on the stock market, but you could incorporate and buy a lot of other ranches and get listed on the stock market.

Cowboy: Then people would have to buy stock in my company?

Economist: If your company was large enough and you made it into the approved index funds, then people would have to buy your ranching stock just as they would have to buy Hilton Hotel stock – if they wanted the required diversified stock portfolio.

Cowboy: Interesting thought, but I make an honest living ranching, and don’t want any Wall Street tricks, especially those that would harm pensioners – since I know my ranch is only worth so much.

Economist: If you had to start a new ranch, without buying an old ranch, what kind of land and return could you achieve?

Cowboy: The unused land I could buy is near the desert or in the mountains. It’s not totally useless land, but it’s less productive than the land I and everyone else is using.

Economist: Why have people avoided this land in the past?

Cowboy: Because it’s less productive land.

Economist: Don’t you think businesses use the most productive land, materials and ideas first? Hilton Hotels built the most profitable hotels, in New York and Las Vegas already.

Cowboy: So you are saying that any new business would not be as productive as the existing businesses? That the only untaken opportunities for a new hotel may be like here, the middle of nowhere?

Economist: Yes, on average and expected. As economists like to say, there are no $100 bills on the sidewalk. All the best opportunities, $100 bills on the sidewalk, have been quickly picked up.

Cowboy: So you are saying that half the money may go to paying millionaires for their stock and the other half will go to investing in less and less productive land?

Economist: I am not sure it’s exactly half; it could be 40% or 60% to millionaires and the rest to less productive investment.

16. Regression to the mean and other hazards of using past trends.

Cowboy: Look at these charts of stock returns over the past 100 years. I know something is fishy, but it’s hard not to be tempted.

Economist: They could have shown you a chart of real returns from bonds or real returns from international stocks.

Cowboy: Returns on bonds have not done well. I know because I own some.

Economist: If bonds did well over the past 100 years and stocks did less well, what do you think privateers and investment advisors would tell you?

Cowboy: To invest in bonds.

Economist: And if foreign stocks did better than US stocks, what do you think privateers would tell you?

Cowboy: To invest in foreign stocks.

Cowboy: Because I am land rich. I always receive advertisements from banks and investment companies saying how much interest they paid in the past.

Economist: So why don’t you sell your land, invest in stocks, and become rich as their advertisements suggest?

Cowboy: Aside from liking my work as a rancher, not one of these companies is willing to guarantee me a high interest rate. They all say I have to take some risk to earn a high interest rate.

Economist: Do you think they are lying to you when they send you brochures saying, Fund X earned 20%?

Cowboy: No, I don’t think they are lying. There are laws against fraud here in Texas, but I think they are presenting their most successful funds.

Economist: Do you ever see firms advertising how much money they lost with some dot-com stocks? Have you ever seen ranches advertising their bull’s failures?

Cowboy: I have not seen Wall Street firms advertising their failures. But then I have never seen a rancher advertising their breeding failures, only the successes.

Economist: While people advertise their successes, their expected future results are likely to be their average. This is known as regression to the average or regression to the mean.

Cowboy: That sounds like saying everyone can’t be above average.

Economist: There is also the risk that something could happen to the total stock market. For example, the Internet or some other future invention could reduce the value of corporate stock. Don’t ask what losing a world war would do to the stock market.

Cowboy: If stock is a better deal than bonds, why doesn’t everyone invest in stocks and not bonds?

Economist: Maybe the market knows something about the risk of investing in stocks.

17. Money is a veil.

Cowboy: So where is the money coming from?

Economist: I think by money, you mean goods and services. Since people use money to buy real resources, people often concentrate more on the paper money than on the goods and services.

Cowboy: I vaguely remember something about paper money being a veil from my long ago college courses.

Economist: If all it took were printing paper money, the government would be able to solve Social Security’s problems by printing paper money. The government would be able to solve all financial problems by printing money.

Cowboy: But when the government prints money, isn’t there a lot of inflation – and no real economic growth?

Economist: Exactly. What matters to people are the real goods they can consume, not the amount of paper in their wallet.

Cowboy: OK, I get your point that it’s real goods that people want to consume, not money, so I guess I should rephrase my question. If Paris Hilton is going to get more, Wall Street and insurance gets cuts, and people will inherit more, where are the additional goods going to come from? Why did hassle me over the semantic difference between money and goods?

Economist: I wasn’t giving you a hard time. Nonacademic people always use the term money as meaning wealth or goods and services, but there is an important difference between money and most goods. Money can be easily saved while few goods can be saved.

18. You can save money, but you can’t save most goods. You can’t carry your retirement on your back, to avoid burdening future generations.

Economist: As an individual, you could save $100,000 in cash in your basement and use it to buy $100,000 more goods in the future – not that you would save cash in your basement. I am just trying to keep the example simple.

Cowboy: I wouldn’t save $100,000 cash in my basement since I could earn interest in a bank and a bank would be safer, but it would be possible to save $100,000 of cash in my basement if I wanted to.

Economist: And in the future, you could buy $100,000 more goods. But what if everyone saved $100,000 cash in their basement and everyone took their money out in the future when they retired?

Cowboy: I guess that would be a problem, since there would be more money than goods.

Economist: Another fallacy of composition is that if everyone don’t consume today, everyone can consume more tomorrow.

Cowboy: If I save my McDonald’s Hot Apple Pie, can’t I eat it later today?

Economist: Yes, you can eat your Hot Apple Pie later, and you can save some items for later for consumption – which is true – but this is the start of the fallacy.

Economist: Are you going to save tin cans in your basement so that you can live without help from the younger generation in the future?

Cowboy: No. I like beef more than canned food; I am putting my money in a bank where I receive a positive rate of interest.

Economist: So who is going to produce the beef and canned food in the future for you to eat?

Cowboy: The working generations at that time.

Economist: So you are going to depend on the younger generation to feed, clothe and house you in the future?

Cowboy: Except for a few long-lasting goods, I guess I am going to depend on the younger generation when I retire.

Economist: And any financial privatization program is not going to change the number of younger workers vs. older workers.

Cowboy: You have a point. While raising the retirement age may change the number of workers to retirees slightly, nothing is going change demographics.

Economist: Nothing civilized people will do will change demographics of living people and we, the Americans, hung the last group of people that tried to change demographics with genocide.

Economist: If we can’t change demographics and we can’t store most goods, and storing goods with the cost of storage would have in effect a negative interest rate, what does that tell us about who will produce the goods?

Cowboy: Goods will have to be produced by the young workers at any time, and we can’t change the number of young workers.

19. Aliens (foreigners, not space aliens) will buy our stock and produce our goods

Economist: Since academic privateers realize no economic policy can alter demographics, they still have to answer who will buy the retirees’ stocks and who will produce the goods in the future. Care to guess?

Cowboy: I don’t know. Maybe space aliens will land on Wall Street and buy the stock and produce the goods. (laughing)

Economist: You are close. Privateers argue that people in other countries will buy our stock and produce our goods in the future.

Cowboy: You have got to be kidding me. They want to base our Social Security on foreigners buying our overpriced stock in the future?

Economist: It gets even worse. Most of Europe, Japan and other developed countries are having fewer children than Americans have, and these European or Japanese young people are not going to be buying our stock or producing our goods in the future – simply because there are not enough of them.

Cowboy: So who, according to privateers, will buy our stock and produce our goods in the future?

Economist: The masses of poor youngsters in Latin American, Africa and Asia will buy our stock and produce our goods in the future.

Cowboy: You have got to be kidding. They want to base my Social Security on poor foreigners, such as Mexicans across the border, buying our overpriced stock in the future?

Economist: Unfortunately, I am not kidding. They argue that the United States is going to become like Florida, and just like the other 49 states are sending goods to Florida to retirees, the rest of the world will send goods to the USA in the future.

Cowboy: It sounds nuts, depending on other countries for our Social Security.

Economist: Privateers certainly don’t like to advertise the fact that their plans depend on foreigners buying our stocks.

Cowboy: Under the current system, we don’t have to worry about who will buy retiree’s stock in the future – the government makes people contribute to Social Security.

20. Appeals to Authority and Personal Attacks

Cowboy: Even a cowboy like me knows that engaging in personal attacks and insults is bullshit. I saw some privateers attack the AARP for allegedly supporting gay marriage.

Economist: At one congressional hearing on Social Security privatization, I noticed that all three of the privateers, the leading experts, were lawyers and the one antiprivatization witness was an economist.

Cowboy: Why are privateers hiring lawyers to design an economic policy? I wouldn’t hire a lawyer to watch my cattle.

Economist: It could be that lawyers are very good at arguments. Lawyers are usually good bullshit artists. To be fair, many lawyers work on many sides of many issues in government, and some lawyers have acquired some expertise beyond just the law.

Cowboy: But it would a personal attack to say that a policy is wrong just because a lawyer proposes it?

Economist: Likewise it’s a personal attack to say a policy is wrong just because a gay group supports the policy. Likewise, it’s not fair to say that privatization is wrong because the people who support it engage in a lot of bullshit.

Cowboy: Of course there is name calling on both sides. On TV, I have heard both sides accuse the other side of “stealing from our grandchildren.” Privateers accuse the “obstructionists” of stealing compound interest from out grandchildren, while here in this brochure, the other side accuses Wall Street of looting Social Security.

Economist: I am not totally opposed to honest good faith personal attacks in politics for executive positions since executives, such as presidents, are hired to make decisions in the future. But for arguments, an argument is correct regardless of who made it.

Cowboy: So an argument is not wrong if an idiot like Bush or Kerry, depending on your political view makes it, but on the argument itself?

Economist: Yes, but you may not want to elect Bush or Kerry, if you think either is an idiot since they have to make some presidential decisions quickly without consulting the legislature or voters.

Cowboy: I know it’s bullshit when privateers quote Albert Einstein on Social Security privatization, since Einstein passed away decades ago.

Economist: Aside from the fact that Einstein is long dead, Einstein was not an economist and as far as I know, never took a public position on Social Security privatization.

Economist: Even if Einstein was alive and he was an economist and he offered an opinion on Social Security privatization, an argument is not true because Einstein says it is true.

Cowboy: So you are like saying that a cow is not good because a bovine expert like me says it’s a good cow, but because the cow meets the standards?

Economist: Exactly. If Einstein was going to support an argument, he would give his reasons why the argument is true and not just say it’s true because I say it’s true. This is a logical fallacy known as appeal to authority.

Cowboy: This sounds like the opposite of personal attacks – saying the argument is wrong because a gay rights organization supports it.

Economist: Yes, personal attacks and appeals to authority are both opposite false arguments. An argument is no more wrong because an idiot made the argument than an argument is right because a genius made the argument. But granted it’s more likely – but by no means true – that an argument is right if a genius makes the argument, which is why people fall for the fallacy.

Cowboy: But what if a genius is arguing for and another genius is arguing against?

Economist: You identified the problem with appeals to authority. Geniuses or authorities can be and are often wrong.

Economist: Often it’s brought up that Cato, Heritage and others receive money from Wall Street firms, insurance companies and others and may be biased, if not outright hired guns. It’s good to be aware of a conflict of interest, but their arguments are right or wrong based on the argument not on who pays their salary.

21. Present only selective facts. Half the Story.

Economist: A lawyer can honestly claim that no one ever saw my client with the victim and the state proved no motive to kill the victim.

Cowboy: But if DNA was found all over the victim and the client had no alibi?

Economist: Exactly. Lawyers and bullshitters are good at presenting only half of the case, their client’s case, which in an adversarial legal system works since the opposing lawyer presents the rest of the story.

Economist: If a legal expert claimed in court that a group unfairly receives less from social security, the expert would immediately be cross-examined.

Cowboy: I am not a lawyer, but I would ask, does the group do better with disability? Does the group do better with survivor benefits?

Economist: But there are fewer rules in politics than the legal system because of the need for free speech.

Cowboy: Many of the people I see on TV, such as TV commentators and Young Republicans, are obviously not qualified to comment on financial matters and are spouting talking points or bullshit – not that Democrats don’t do the same thing.

Economist: One difference between bullshitters and both liars and truth tellers is that bullshitters do not even have to know the truth or the all the facts. The bullshitter only needs to know a handful of facts favorable to his side (talking points).

22. The magic of compound interest is not interest and is not magic.

Economist: What income do you receive when you own stocks?

Cowboy: Dividends and capital gains if the price increases.

Economist: So technically, the status quo is “robbing people of the opportunity to let their money ride in the stock market.”

Cowboy: Aren’t we already receiving compound interest from the Social Security Trust Fund?

Economist: That’s a good point. Social Security is already receiving compound interest from the US government.

Cowboy: Wait, if the government or someone has to pay, it can’t be magic.

Economist: And safe bonds or money in the bank earning government-guaranteed interest yield about what a government bond does.

Cowboy: So is it a zero-sum game with interest – where one person gains and the other loses and there is not any gain for society?

Economist: The loan transaction is zero-sum, not magic. Someone receives and someone pays. Only if the money is invested in additional assets, such as additional Hilton hotels does the economy increase in size. And as we discussed before, it’s a diminishing returns world.

Cowboy: Banks keep offering to lend me money at low interest rates to buy more land. Why would any company pay more – these 6% or 7% real interest rates that privateers are telling us about?

Economist: No company with a low default risk would pay high interest.

23. Less Government is Better Generalization

Cowboy: What about this less government argument?

Economist: (speaking quietly) Look at the fat people here at McDonald’s. Wouldn’t we both agree that these fat people should eat less?

Cowboy: (speaking softy as not be overhear) Some of these people definitely should eat less.

Economist: I agree that obese people should eat less. I think medical doctors would agree that these obese people should eat less, but should they eat nothing?

Cowboy: I did not say that they should stop eating. They should eat less and eat healthier food.

Economist: And how would you determine what healthy food they should eat?

Cowboy: I would look that the nutritional content.

Economist: But can you say that because they should eat less, they should give up vegetables?

Cowboy: No, they should give up French fries and deserts.

Economist: Why should they give up French fries and deserts – because they should eat less or because French fries and cake have limited nutritional value?

Cowboy: Both. I see what you are saying. We can’t say we should live without the police because less government is better any more than we should say we should eliminate Social Security because less government is better.

Economist: Exactly. One should do a cost-benefit analysis on the police – and everyone agrees we need police, and one should also do a cost-benefit analysis on Social Security.

Economist: Monopolists, polluters and criminals usually argue for less government, the less government generalization, when the government is “interfering” in their “business.

Cowboy: I see them scream, “government interference” and, “a waste of taxpayer’s money,” on the news. But we are close to guilt by association comparing privateers to monopolists, polluters and criminals.

24. More Choice is Better Generalization

Cowboy: What about the freedom to choose how to save your own money?

Economist: This sounds like another generalization, similar to the less government is better generalization, and it’s wrong for similar reasons.

Cowboy: Just like we can’t say less food is better, cut down on vegetables, we can’t say more choice is better, do anything you want.

Economist: Yes. It’s true that the government does force people to save for their old age, because some people, such as optimists and the totally irresponsible will not save for their retirement unless forced to.

Cowboy: But don’t we force people to save since if they did not save, we would end up supporting them anyway on welfare?

Economist: There a few extreme libertarians who argue that Social Security is a violation of freedom – but most privateers are not this extreme.

Economist: But the government also forces us to save with just government bonds. Some people argue that we should be free to choose how to save, such as saving by investing in stocks.

Economist: If you are one of the few people who believe in total unlimited individual freedom – ending only where the other person’s nose begins, then the freedom not to save for retirement or to save with risky investments is an honest argument. A bad libertarian argument in my opinion, but it's an honest argument.

Cowboy: Why do you think these libertarian arguments are bad?

Economist: These libertarians ignore the entire concept of public goods and say there should be no public parks because it forces people to pay for them.

Cowboy: No public parks, that’s absurd.

Economist: Libertarians would argue that private businesses would build private parks and charge people to visit private, gated, fenced parks. But there would be the added costs of fencing off the private parks and charging entrance fees. There would be deadweight losses many times larger than the deadweight losses caused by taxes. Poor children could not afford to go to the park.

Cowboy: I don’t believe in total unlimited individual freedom. I don’t believe prostitution should be legal. I don’t believe hard drugs should be legal. I don’t believe in legal suicide. I believed in the draft in World War II, and I don’t believe that gays should marry.

Economist: Different people will have different beliefs, but the vast majority of people on both sides believe in some limits to individual freedom – even when no third party is being hurt.

Cowboy: But it would be hypocritical of me to take a stance claiming individual freedom requires privatization when I don’t believe in total individual freedom?

Economist: But, if you believed in total individual freedom, you could honestly argue that people should not be forced to save for their old age as Milton Friedman argued.

25. Choice has more search costs (shopping costs)

Economist: Also choice is costly in time and effort. Did you enjoy searching for and purchasing your pickup truck?

Cowboy: Searching for my truck was a hassle.

Economist: With Social Security choices, you would have to spend time searching and evaluating different retirement programs.

Cowboy: But I don’t know much about Wall Street investments and consider it a chore to learn about it. It’s even more of a chore than looking at cows or trucks, which I have an interest in.

Economist: The time spent searching is usually not a dollar cost to individual, but it still takes valuable time and effort. Companies that have to purchase products often have purchasing departments.

26. Using charts to make Social Security look bankrupt.

Cowboy: What about the demographics that there will be fewer young workers and more old retirees in the future?

Economist: There are several problems with this chart. First is the starting time period. It looks like it’s going to rapidly decline from 1950 to 1960 to 1970 to 1980.

Cowboy: So

Economist: What year is it now?

Cowboy: 2006

Economist: So didn’t we get over the scariest, steepest part of the curve already in 1960, 1970, 1980 and 1990?

Cowboy: We must have.

Economist: The part of the curve going into the future is still down, with fewer workers per retiree, but it’s not as steep as in the past. I have also seen different ways of presenting the same numbers, where it does not look so bad.

Economist: Why do we have more older people today?

Cowboy: People are living longer and having fewer children.

Economist: Don’t children cost a lot of money to raise and school?

Cowboy: You don’t need to tell me about the cost of raising children. But children don’t get retirement Social Security.

Economist: Did you send your children to public school?

Cowboy: Yes

Economist: How much do you think public schools cost taxpayers?

Cowboy: I don’t know, but I hear conservatives saying it’s $12,000, $14,000 per student or more in large cities.

Economist: The average may be lower, but it’s still expensive.

Economist: It’s true that there will be fewer younger workers and more elderly in the future, but this is not a reason for privatization – since there will be the same number of young and old – with or without privatization.

Economist: And if you look at a chart with the total number of dependents, including children, an argument can be made that the worst dependency ratio is behind us – back in the 1960s when there were fewer women workers and more children.

Cowboy: This sounds like another case of privateers only presenting half of the facts by focusing on elderly dependents but not young dependents.

27. Big Scary Numbers

Cowboy: What about this 12 trillion dollar gap?

Economist: In fine print, it says projected over 75 years – and other studies also project it to infinity. This is the reverse of a common car sales technique – where the salesperson gives you a cost of “just an extra dollar a day.”

Cowboy: I know this trick. Car salesmen often try to make the price seem lower by saying it’s only an extra dollar a day. But if it’s a dollar a day for five years, that’s about $1,800.

Economist: In the Social Security debate, they use this technique and extend it to 75 years or even infinity.

Cowboy: So a dollar a day for 75 years would be what, 15 times $1,800.

Economist: Something like $27,000.

Cowboy: But is 12 trillion dollars large or small?

Economist: I don’t know offhand, because the number is not presented relative to total GNP for 75 years. A large number can look small compared to total GNP or total government spending.

Economist: If someone just said a farmer’s feed bill was $200,000, could you say it was large or small?

Cowboy: To say if a $200,000 feed bill was large or small, I would need to know the number of his cows and the value of his herd. It could be small or large.

28. Privatization is always better generalization. Privatize the entire government?

Cowboy: But aren’t private businesses, like this McDonalds, better than socialist state-run businesses?

Economist: Of course private businesses in a free market are better than socialist enterprises. Private business has more information and has more incentive, the profit incentive, than socialist planners. In 1776, Adam Smith in his book The Wealth of Nations developed this line of thought.

Economist: There are more modern mathematical proofs, but with full information and a lot of other assumptions, the market price is the best, most efficient price.

Cowboy: Then shouldn’t we have private Social Security just like private restaurants?

Economist: Hold on, even Adam Smith expressed reservations, observations, about a totally unregulated free market system. Adam Smith’s most noted observation was that without legal limits, businessmen will conspire to raise prices whenever they meet.

Economist: Even with McDonald’s, don’t you want health inspectors making sure no corners are cut handling food safely?

Cowboy: In the beef industry, if there were no inspectors in meat packing plants, the incentive to cut costs would lead some companies to cut corners – then honest businessmen, like me, are at a disadvantage.

Economist: So you are in favor of some government intervention in the beef industry?

Cowboy: But being in favor of health inspectors does not make me a liberal.

Economist: Of course, even many conservatives are in favor of health inspectors. Despite their 100% free market rhetoric, ask them if they will eat at restaurants that have no inspections.

Economist: If we were unhappy with the food here, we could walk across the street to Wendy’s. Likewise, we evaluate the food here largely by taste. With retirement savings, it’s a one-shot one-retirement deal – we don’t get to taste the meal until 2030 or when we retire.

Economist: Plus McDonald’s is making a firm promise to give us the food exactly as described. A Quarter Pounder weighs a quarter pound precooked. No investment company selling risky assets will promise us a fixed return.

Cowboy: But isn’t the reason for health inspectors is that we, even I a cowboy, can’t tell if this meat is germ free just by tasting it?

Economist: Since you can tell how the hamburger tastes by tasting it, the free market for tasty meals works well since you have full information with regards to taste. But since we can’t tell if the hamburger is germ free, the free market does not work as well for health or other unobservable qualities.

29. Individuals make better investment decisions than government – requires separation of government (social security) and stock market.

Cowboy: But don’t individuals make better investment decisions than the government?

Economist: Individuals make better investment decisions than the government because of the profit motive and individuals have more information.

Economist: Who makes the investment decisions in the stock market today?

Cowboy: Individual investors, mostly.

Economist: Who makes the investment decisions in the corporate bond market today?

Cowboy: Individual investors and maybe banks, mostly.

Economist: The reason Social Security is limited to purchasing government bonds is to avoid the government making investment decisions – which could be politically influenced.

Cowboy: Wait, this stock market Social Security plan or the government owning a large fraction of businesses sounds like socialism to me.

Economist: Many people on Wall Street wonder what will happen if Social Security controls a significant fraction of stocks and businesses.

Economist: I would not go as far as saying it’s socialism, but the potential for government action or inaction is a problem.

Cowboy: Would the government have rescued Enron if Social Security owned a third of Enron?

Economist: Exactly. Potential government control of firms is one reason why some capitalists don’t like social security privatization. But privateers have struggled to come up with a way around government control.

Cowboy: How can you get around government control, if the government is making you buy the stocks?

Economist: The privateers say that individuals owns the stock, not the Social Security Administration.

30. The externality of having your mother-in-law live with you.

Economist: There is an old joke that the benefit from paying Social Security is that we don’t have to let our mother-in-laws live with us.

Cowboy: I like my family and even my in-laws, but I don’t want them living with me.

Economist: Since men die sooner after retirement, we would get a better annuity – monthly payment, until we die. But women, including mother-in-laws, would get a lower annuity.

Cowboy: Also, my mother-in-law knows nothing about investing and lost money in the dot-com stock bubble.

Economist: We could say that male privateers, by trying to get a better deal than women, don’t want to support their women – like deadbeat dads. But this is probably a personal attack.

Cowboy: But if I have to let my mother-in-law live with me, the government is shifting costs to me.

31. Gaming the System and Bailing Out the Stock Market Losers

Economist: If the stock market tanks, are we going to let our senior citizens starve or become poor?

Cowboy: Of course we are going to support our senior citizens even with a privatized system.

Economist: Most privatization advocates do have some minimum payment or means testing since they are also not going to let the poor starve, but this creates incentives for people to game the system.

Economist: Suppose you are poor and know you are going to receive the minimum Social Security benefit regardless of what you do?

Cowboy: If I were going to get the same monthly payment regardless of what I do, it would not matter what I would do, and I would care less about my investment return.

Economist: OK, what if there was a 50% chance you would get the minimum payment and a 50% chance you would get more if you took some risks in the stock market?

Cowboy: With nothing to lose and something to gain, I would take some risks.

Economist: And the other people would have to bail you out if you took a chance with risky stocks and lost.

32. Ownership – With no insurance discourages entrepreneurial risk taking.

Cowboy: Here it says that ownership and the ownership society will help. Won’t ownership make people work harder?

Economist: It might and it might not. There are two effects. What if there were no economic safety net in society?

Cowboy: If there were no safety net, I would try like hell not to fail.

Economist: And how would you try not to fail?

Cowboy: Maybe I would work harder, and maybe I would not take risks.

Economist: From the mud on your boots, it looks like you work fairly hard now. Would you really work harder if you got to keep a few percent more of your income in a nominal account in your name?

Cowboy: I work hard now, and I don’t think I would work harder.

Economist: Have you taken any risks in building your ranching business?

Cowboy: At one point, I took on a second mortgage to purchase more cattle and buy more land.

Economist: If you thought you could be poor in your old age and a burden to your own children, would you have taken on the second mortgage?

Cowboy: With no social safety net, I might have gone to work as a corrections officer as my mother wanted me to. “There will always be criminals to guard,” my mom used to say.

Economist: So with no safety net, you might have become a government employee instead of a risk-taking rancher-businessman.

Cowboy: I don’t think this ownership society brochure is promoting more government employees.

Economist: And what if there were no social safety net and Bill Gates stayed in school at Harvard – which was and is much safer – than starting a technology company.

Cowboy: With no safety net and the new bankruptcy laws making it difficult to get out of debt, I would have told Bill Gates to stay at Harvard and become a lawyer like his father.

Economist: Part of the purpose of insurance is to help people take risks. You can build a house or factory and receive insurance if it burns down. During the early days of capitalism, when shipping by sea was very risky, it took insurance to enable trade.

Cowboy: What if people take too many risks. Didn’t we just discuss people taking too many risks in the stock market, since they would be “insured” by the minimum Social Security payment?

Economist: That’s a good point. It’s always difficult to keep people from taking risks with insurance since insurance reduces the downside of risk. This is known as the moral hazard problem with any insurance.

Economist: But with the current Social Security system, people can’t take financial risks.

33. Growing our way out of the problem.

Cowboy: Can we just grow ourselves out of this Social Security mess? We are a lot richer than we were in 1935 or 1965.

Economist: Yes and no. The average American is definitely going to be a lot richer in 2035 and 2065.

Cowboy: If everyone is going to be richer in 2035 and 2065, what is the problem with Social Security?

Economist: The problem is that retirees are going to be richer and want more in the future. In 1935 a retiree would have been affluent with just an AM radio. In 1965, a retiree would have been happy with a color TV and three networks. Today, most retirees receive cable or satellite TV and many have Internet access.

Cowboy: So like in 2035 or 2065 people may have high definition or three-dimensional TV, and we would have to support them?

Economist: Well we don’t have to provide them with every luxury, but in general people don’t want to lower their standard of living when they retire. Are you planning to reduce your standard of living much when you retire?

Cowboy: I may shop more for bargains like my retired parents, but I don’t see a large reduction in my standard of living when I retire.

Economist: Most people don’t want sudden changes in their lifestyle over their life, and it’s one reason why Social Security is indexed to wages. People want a constant standard of living over their life. This is known as lifecycle consumption, which is important in macroeconomics for consumer spending.

Cowboy: If we are all going to be richer in the future, why don’t we just increase taxes slightly to save Social Security?

Economist: Yes, we could have these richer people in 2035 and 2065 pay slightly higher taxes, but many politicians suffer from a fear of taxes.

34. Taxophobia

Economist: Nobody, including me likes paying taxes, but since Bush’s father lost the election, some Republicans have an irrational fear of taxes, in my opinion. It might be a rational political fear since the right wing can crucify politicians who raise taxes.

Economist: The first president Bush followed economic advice to increase taxes.

Cowboy: Bush’s father did say, “Read my lips, no new taxes,” but voters should realize that a leader has to be flexible when conditions change. Even John Wayne had to go back on a promise when conditions changed, but he owned up to it.

Economist: But privateers are not even willing to talk about raising taxes to pay for Social Security.

Cowboy: Look at this list of everything bad that they say taxes will do.

Economist: It’s obvious that they don’t even want to discuss raising taxes. But what if someone had a tax plan that solved the Social Security problem, while causing minimal distortions?

Cowboy: Everything should be considered. If they are looking at giving 12% to insurance companies, they better be looking at one or two percent taxes.

Economist: The rest of the story with taxes is that taxes do have a benefit. High taxes are bad, but useful government services provided by the taxes are good – they offset each other.

Cowboy: I heard that taxes are very high in Finland, but they have free health care and free child care.

Economist: Exactly, the high taxes are offset by the higher benefits. I am not saying that the Finnish system is better or worse, just that there are benefits to having higher taxes. Even conservative US businessmen are thinking about having the government handle health care, largely because US businesses are tired of paying for health care.

Cowboy: Don’t the ultraconservatives believe taxes are a total waste?

Economist: There are also administrative costs to collecting taxes, such as the cost of running the IRS. There are also deadweight costs of taxes, in that people will usually do less of the taxed activity.

Economist: Would you work any less if your taxes went up 2%?

Cowboy: I would probably keep working five days a week.

Economist: Your labor supply, like most married men is inelastic. There are also contrasting substitution and wealth effects, pulling your work effort in different directions. If you earn more, you may be tempted to work more to make more money, but you will also be tempted to take time off to have more leisure time hunting.

Economist: In theory, a tax cut could cause people to work less since richer people want more leisure. But the actual result depends on if the wealth (income) or substitution effect is larger.

35. You have no legal rights to Social Security. Scare Tactics

Economist: Here is one scare tactic:

“Under the current Social Security system you have no legal, contractual, or property rights to your benefits. What you receive from Social Security is entirely up to the 535 members of Congress. But personal retirement accounts would give you ownership and control over your retirement funds. The money in your account would belong to you – money politicians could never take away.”

Cowboy: But aren’t the privateers the people trying to take away Social Security? This sounds hypocritical to me.

Economist: It’s ironic that groups are both trying to take away benefits and saying it’s wrong that Congress could to take away benefits.

Cowboy: But is it true that congress can take away our Social Security money?

Economist: Yes, but it’s unlikely. But the government can also tax any retirement-investment income or send us to war.

36. Leave if you want – but guarantee you won’t be a burden. The slippery slope.

Cowboy: But what about letting some people opt-out of the system if they want to?

Economist: First, they would have to guarantee that they would not become a burden to the rest of us and contribute to the limited progressiveness of the system. Then, leaving might be OK.

Cowboy: How could they guarantee that they would not become a burden to the rest of us?

Economist: They could hedge their stock investments. But hedging investments would bring their rate of return back down to the riskless rate because of arbitrage. If one eliminates the downside risk – the cost is giving up the upside.

Cowboy: Aren’t they already earning the riskless rate of return on government securities?

Economist: Yes, which is why people don’t want to hedge, because of the costs. If you combine two securities to be the equivalent of another, they earn the same interest due to arbitrage.

Economist: And with people not contributing to the pay-as-you go system, it’s bound to have financial difficulties in the future – leading to its elimination which is what the privateers want.

37. Leave if you want – But pay your share of the transition costs before you leave.

Economist: But if they opt out of the current system – there are the transition costs, since they are not paying for the current retirees.

Cowboy: You mean privateers just want to let people opt out without paying the transition costs?

Economist: Privateers want the government to pay the costs of the transition.

Cowboy: That does not sound right. People could leave the current system, but they want everyone to pay for them to leave.

Economist: If they want to pay twice, I would say fine, go ahead. But one individual can’t just opt out of a pay-as-you go system on his own – and tell the rest of use to pay for his leaving.

Cowboy: Isn’t this like saying I want to move to Mexico to avoid paying my debts?

Economist: People in Texas move to Mexico to avoid paying their debts?

Cowboy: Some Mexicans do, because they are at home in Mexico – Rich Americans usually move to Florida and buy a large house.

Cowboy: This sounds like another government free lunch giveaway.

Economist: Giving people the “choice” to leave without paying is a giveaway. And if you ask people in polls if they want a giveaway – people will answer yes.

38. The use and misuse of polls. Everyone wants more for less.

Cowboy: Here it says that 79% of people polled want lower taxes.

Economist: People want everything. Would you like a larger house?

Cowboy: A larger house would be nice.

Economist: Would you like a Hummer SUV?

Cowboy: Yes, it would be nice to drive a Hummer like Governor Arnold Schwarzenegger.

Economist: Would you like lower taxes?

Cowboy: Lower taxes would be nice.

Economist: Would you like another public park nearby?

Cowboy: Sure. Wait – I can’t have both lower taxes and more government services. All you are doing is asking if these items are useful to me. You are not asking if I am willing to pay for them.

Economist: It’s easy design a survey with a list of things people would like to have. The problem is that you have to pay for them. The proper question is would you pay $100,000 for a Hummer?

Cowboy: No, my Ford truck is fine.

Economist: Would you like a 20% cut in taxes and a 20% cut in government services?

Cowboy: That’s a close call, but no.

39. The use and misuse of opinions and forecasts – trying to have it both ways

Economist: You can have your opinions, but not your own facts. Opinions about the future are often called economic forecasts.

Cowboy: So just like people, economists can all have their own opinions about the future?

Economist: Some economic forecasts are nothing more than unsupported assertions. Well some are more scientific than others. For example, one congressman claims that with his new, lower tax, the economy will double in 15 years.

Cowboy: Doubling the economy in 15 years sounds to good to be true.

Economist: Doubling the economy in 15 years is unlikely to happen, and the congressman’s arguments are highly optimistic in my opinion. But since we can’t see into the future, and his plan has not been tested, and probably never will be tested, there is no way to experiment and measure actual outcomes from his theoretical plan.

Cowboy: So anyone can make up any economic forecast?

Economist: You can have your opinion, but your opinions must be consistent.

Cowboy: So one should have consistent opinions or forecasts? Like in the 1960s, when I was young, I used to be what today would be called a bit sexist. But when I had daughters, I realized my opinions were inconsistent with how I would want other to treat my daughters.

Economist: Many privateers have inconsistent elements in their forecasts. For example, for new, real investment, they forecast a low cost of capital, low interest rates, but turn around and forecast high returns, high interest rates, to investor-retirees.

Economist: Also stock prices, which are a promise to pay dividends, move in the opposite direction of interest rates, leading to more inconsistent forecasts and confusion.

Economist: Stock prices and interest rates have an inverse relationship. At 10% interest, a stock that pays a dividend of $20 per year would be worth $200, but if the interest rate falls to 5% the stock price would increase to $400. But the capital gain is a one-time paper gain with no additional goods produced, and it’s unlikely if not impossible to go on forever.

40. The Current Social Security System, the worst system except for all others?

Economist: Do you understand the current Social Security system?

Cowboy: The current system is rather simple and has been around longer than I have been. We all put in money when we are young and working. The government uses the money we are now paying to pay the old and disabled, and the government saves the rest in the Social Security Trust Fund – which is government bonds.

Economist: The Trust Fund is just US government bonds. Because it’s not a diversified fund invested in private enterprises, it’s slightly misleading to call it a “trust fund” since it does not resemble the trust funds millionaires sometimes give their kids. But I would not say that US government bonds are worthless.

Cowboy: Well the weaknesses in the current Social Security system have been pointed out for years. A main weakness is that the Social Security trust fund is just government lending to itself – which the government uses for deficit spending.

Cowboy: The other weakness of Social Security is that people are getting older and older, with more retirees each worker has to support.

Economist: But since the number of young workers is fixed by demographics, and it’s impractical to store goods for years, all retirement systems have the same demographic problem.

Cowboy: Are you saying that there may not even be a better solution?

Economist: If there is a better solution, I haven’t seen it convincing argued yet.

Economist: There may even be more bullshit in government than there is in ranching. But, it’s always easier to point out flaws, to point out the bullshit, than come up with a better solution – if a better solution even exists.

Cowboy: So it could be like democracy – the worst form of government known to man, except for all others.

41. Ten Point Summary

1. A business or an individual investor can just think about their own slice of the cake (the economy). Even a rich person is such a small slice of the cake that increasing one slice of the cake is not a problem.

2. But if everyone tries to increase his or her slice of the cake, it can’t be done without increasing the size of the cake.

3. Increasing the size of the cake has diminishing returns in the real world and requires additional real, not paper, investment.

4. If we borrow money for the transition costs, there may not be any real additional investment. The size of the cake will not increase.

5. Just shifting paper ownership of stock around does not increase GNP, the cake, and the added transaction costs to Wall Street and insurance companies will consume some of the cake.

6. Business can do most things, but not everything, better than the government can.

7. Interest rates FALL when government borrows less and people save more. With lower interest rates, savers/retirees earn LESS interest income per dollar saved.

8. Interest Rates have to FALL to encourage more real investment to enlarge the cake.

9. Lower interest rates would also lead to more financed consumption spending, such as credit card spending and housing mortgages, not real investment.

10. The only way to help future generations is to increase the size of the cake or lower foreign-owned debt we pass on future generations.

Index – Since this is one long web page with no page numbers, I have not included an index. There is a table of contents at top. You can use your browser’s Find command to find any word.

Best News Websites Free Online