Friday, October 24, 2008

So This Just Keeps Getting Better and Better

So yesterday, I posted about Argentina grabbing private retirement accounts and transferring them into public pensions in order to fund the government. JSK and most of the commentators couldn't possibly believe this could happen in the US.

Now, I must have been ahead of the curve (if only I could pick stocks like this). In today's online version of USNews, there a piece about how Congressional Democrats have invited a professor to testify in front of a Ways and Means Subcommittee to explain her plan to do something very similar to Argentina's action. This is also talked about more in depth here. Her plan is in short:

"In place of 401(k) plans, she would have workers transfer their dough into government-created 'guaranteed retirement accounts' for every worker. The government would deposit $600 (inflation indexed) every year into the GRAs. Each worker would also have to save 5 percent of pay into the accounts, to which the government would pay a measly 3 percent return."

The chairman of the appropriate subcommittee, Rep. Jim McDermott (D) had this to say regarding this proposal:

"the savings rate isn't going up for the investment of $80 billion [in 401(k) tax breaks], we have to start to think about whether or not we want to continue to invest that $80 billion for a policy that's not generating what we now say it should."

(Read: This is my excuse for taking your tax preferred accounts)

Now this doesn't mean this will happen, and even if a bulk of Congress wanted to, I doubt the new Congress will spend political capital on this move in the short run. However, the fact that this is even being discussed in a serious manner as a possibility is a start in that direction . Maybe we aren't so far from this after all and my my post yesterday wasn't so crazy? Maybe if the stock market declines further and people start panicking more, people will be willing to tolerate another power grab? As one investment fund manager said:

“People are afraid because their accounts are seeing some volatility, so Democrats will seize on the opportunity to attack a program where investors control their own destiny.”

Crisis is the health of state anyone?



A careful read of the article reveals that the plan the professor has in mind is likely to be ignored. If any action is to take place, it seems much more likely that (as noted in the second article EJB posts) 401K's will be taxed. I have less of a problem with this, since it would not constitute an illegal taking. Actually, even the first plan EJB links to isn't a perfect analog of the Argentina fiasco. Employer-sponsored 401-K's would be nationalized, but individual retirement funds outside of those would be left untouched. Thus one could keep their Roth-IRA out of the hands of the evil government.

Shocking, also, that an investment fund manager would be upset that government is looking to increase its control over private investment management. Perhaps, if we sink into a second Great Depression, this type of Argentina-style legislation would pass. But I still believe that EJB's concerns are premature. Congress, even a super majority democrat Congress, would be unlikely to pass these measures. That's because history has shown that just because the President and the Congress are controlled by the same party, doesn't mean that party's national agenda will be automatically ratified. NPR does a good job of illustrating this here.

Buck up, everyone. We will not descend into socialism. The sky is not falling. So confident am I of this fact, that I have offered EJB a wager of $20. If an Argentina-style bill is passed by Congress, my money is his. If it doesn't, I'll gladly take his twenty. He has yet to accept and likely never will, because this legislation will not pass. (Pictured above: EJB, in theaters everywhere Nov. 4th)



I can see that you continue to perfect your ad hominen capabilities which each passing day; you really need to stop doing that.

But I believe your outright dismissal of any reasonable chance of this occurring is rather naive. Congressional hearings are almost never used as actual information gathering devices. Congressmen do that behind closed doors. Rather, they happen almost always for only one of two reasons. Either they are to place on record "expert" testimony so that it can be said that due diligence has been done for any given bill, or it is to be used as a show trial like in baseball steroids case, or grilling oil execs etc. In this case it is not that latter. So the implication of this hearing means that at least some group of Congressmen have already made the decision that this plan, or something very close to it is something they wish to pursue. The fact that it is the chairman of the relevant subcommittee in which such legislation would have to originate makes it that more of an issue.

Now like I said, I don't believe this will happen immediately as Congress has other issues they wish to go after and there is not enough political capital for this given action. However, as discussed in all these relevant posts, crisis allows for a lot of action previously deemed impossible. As mentioned, the government purchasing stakes in banks would be unheard of just a few months ago. If I had told you of the Patriot Act in 2000, you would have laughed that such things were going nowhere, yet it overwhelmingly passed in the days after September 11th. With both it and Iraq it is often argued that there were members of the Bush administration who wanted these things all along but just needed to wait for the opportune political moment in the wake of panic. Likewise, the relevant Congressional powers have now indicated they want this type of program; it is therefore only a matter of having the opportunity that they will try to enact this.

So when is that opportunity? When the next financial crisis hits when our entitlement programs go bankrupt. Just as what happened in Argentina, the government's ability to sell bonds greatly diminishes as confidence in government to pay the loans falls. A similar thing could happen here. Moody's, a ratings agency recently said it may have to consider dropping the government's AAA bond rating. In this case, not only would this hurt the economy as a whole, but the dollar would plummet, and the stock market would fall. In this panic, mixed with the need and desire for more government revenue, then Congressmen who have had this desire all along are able to use the excuse, like in Argentina, that they are "protecting retirees." In reality this is just another power grab to force the purchase of treasury bonds which will allow more government spending, while at the same time transferring an incentive program to a universal "fair"one.

I do not believe as JSK tries to distort my argument that the Democrats desire to make the US the Soviet Union. I do believe; however, that many of them, if not most, wish to turn this country into something closer to France, Germany or Sweden, a social Democracy. The Democrats have also had a recent precedent of opposing any of these programs that incentivize a certain action and instead favor a centrally managed government program. They have apposed Health Savings Accounts, semi-private social security accounts, Medicare Advantage Programs, technology investment credits, capital gains tax cuts and so on. Instead they want universal programs because ideologically they believe in equality and "fairness" over flexibility and choice. In any of these incentive programs, there will be greater winners where some fair better then others. 401ks and IRAs are both creations of the past 25 years when Republican dominated ideas where prevalent. There has already been talk in Congress about removing or fazing out Medicare Advantage and HSAs; so it is not a stretch that 401ks also fit into this category, especially if the events described occurs.

So instead of outright dismissing this notion, where there is past precedent, a foreign example, an indication in Congress, and a logical scenario derived from a possible situation, maybe you should entertain this idea. I dispute that this is simply your belittling notion of fear mongering, simply because I am not asserting that is will definitely happen and therefore there is uncertainty. We will see moving forward, but I will not be surprised at all if some attempt similar this idea is made in the future.


PS. Your comment on the fund manager is another ad hominem.