hard heads soft hearts

a scratch pad for half-formed thoughts by a liberal political junkie who's nobody special. ''Hard Heads, Soft Hearts'' is the title of a book by Princeton economist Alan Blinder, and tends to be a favorite motto of neoliberals, especially liberal economists.

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Friday, June 14, 2002
You've debunked one clear social security
misconception, which is that you can't just give the
money in the Social Security Trust Fund to younger
workers, because that money is earmarked for baby

But there's one other more opaque misconception (in
fact, I'm not quite sure its a misconception) which I
believe gets to the very heart of the matter, namely,
the belief that it is *always* superior to invest a
surplus in stocks rather than Treasury Bonds (or
paying down the federal debt, which amounts to the
same thing) because stocks *always* have a higher

I suspect this belief is what allows conservatives to
wave away your columns with bromides about "transition
costs": what they seem to implicitly believe is that
the trust fund can be given to investors to achieve a
7% real return, and that the resulting trust fund
shortfall can be made up by borrowing bonds at a 2 or
3% real return, using the "magic of the market" and
the "magic of compound interest". (and perhaps a
little voodoo as well)

Some people like Dean Baker have pointed out that this
belief is identical to believing that the Federal
government can create wealth by floating bonds and
investing the proceeds in stocks, but still, one has
the feeling this isn't the last word. This column by
Andrew Tobias

is one of the clearer explanations of privatization.
On the issue of shifting money from stocks to bonds,
Tobias writes:

"But whether the money were invested in stocks
efficiently, without appreciable fees, commissions or
paperwork . . . or inefficiently, with 150 million
amateur managers . . . the larger question is: would
shifting this 2% of the Social Security tax into
stocks really make us collectively richer?

If so, it would presumably be because the current
capital structure in the U.S. suffers from a lack of
equity capital.  Starved for equity, we do not start
expand businesses as we might, and thus stunt our
future prosperity."

I'm not sure what Tobias means here, and I suspect
that the best explantion will depend on parameters as
as principles. Some of the very early columns you
wrote about PE's being abnormally high I have a hunch
are relevant, but it needs to be put all together in a
coherent way, in the context of the privatization
debate. In other words, it needs to be spelt out for
the economically unsophisticated, myself included.(I
have a good economic intuition, which alas, currently
does not include much precise knowledge)

In any case, I think this is a subject you could write
some very good and much needed columns on.

another minor column suggestion:

this very good report on the beginnings of the
California power crisis

shows that the PUC and lawmakers deregulated in part
because they were mucho impressed by a March 1994 tour
of the UK's National Grid. I remember you writing in
Peddling Prosperity that Britain had lots of excess
capacity at the time because of their previous
deregulation. I think an interesting column could be
written on why the Grid system worked in the UK in '94
but not in California in 2000, and in general
examining what makes for a successful electricity