March 19, 2002
From the desk of Jane Galt:Story Hour
So let’s imagine that you have a small business. Perhaps you sell annuities to the many employees of the local fur-bearing trout farms. Let’s say that you recently inherited this business from your father, who started it during the great Fur-Bearing Trout Boom of the 60’s, when women everywhere were wrapping themselves head-to-toe in lustrous trout pelts, and the number of farms in the area quintupled.
For years, this has been a great business. You take in a lot of cash; you pay out a little money to the retired trout skinners and pelt-tanners. Your family’s fortunes wax along with those of the trout farms, which are growing like wildfire. Everything has been so good, in fact, that your father several times raised the promised annuity, to the general acclaim of all. Prosperity seems assured.
Then one day, perhaps a day much like today, you notice that some of the trout-skinners are getting a little long in the tooth. Not quite ready for the glue factory, perhaps, but certainly no longer spring chickens. It occurs to you that someday soon, they are going to expect to live off those annuities you’ve been selling.
As you walk among the green fields and gently burbling streams of the farms, you notice something else: there are a lot of old workers, but not so many young ones. When you gently query one of the farm owners about this, he explains that the pelt business isn’t what it used to be; many people no longer care for trout fur, and have switched to Jackalope Skin jackets, hats, and toaster cozies. Moreover, to stay competitive the farms have switched to machinery for many of the tasks that used to be done by hand The labor force isn’t growing anymore.
Back at the annuity building, you do a little calculating. While you’ve been coasting along briskly when there were a few retirees supported by a lot of workers, it looks like in about ten years there are going to be almost as many retirees as workers. The annuity business suddenly doesn’t look so profitable. A quick calculation indicates that over the next fifty years, you’re going to have to pay out $13 million more than you’re taking in.
If you haven’t guessed yet, I’m talking about Social Security. Now, let’s see where this goes.
In a panic, you ask your Chief Operating Officer and your CFO to give you plans to deal with this crisis.
Your COO, who we’ll call Al, goes first. He suggests paying down all of the debt you’ve accumulated, mostly in the form of loans from the Trout Valley Bank, which holds all the deposits for the trout workers. He also suggests offering more generous benefits to attract new customers and bring in more cash.
Your CFO points out that offering more benefits is hardly the recipe for solvency.
The COO retorts that people need the benefits, and anyway, the important thing is paying down your debt.
Your CFO points out that since the present value of your debt is less than a quarter of the present value of the annuities you owe payments on, it’s not mathematically possible for this to solve the crisis.
The COO stutters.
The CFO points out that the only thing paying down the debt is good for is lowering interest expenses a little, producing a trivial delay in the onset of the crisis, but making it easier to borrow money in the future. If there’s anyone to borrow money from, that is, since all the money for the loans comes from the trout skinners and pelt-tanners who will be living off their savings, not making new loans.
Your COO goes into the corner and sulks. However, the non-financial departments think that his idea sounds swell, since it doesn’t involve cutting benefits.
The CFO presents his idea: do a partial liquidation. Hand some money back to the customers both by reducing rates, and opening a mutual fund arm of the annuity business where part of their payments can be funneled. The mutual funds can channel money into productive investments, like buying Jackalope ranches, and by the time the future arrives, hopefully there will be enough money to pay off the annuity holders; at the very least, one hopes they’ll have something to live on, what with the Jackalope ranches.
The COO comes out of the corner to point out that if we give the money back to the customers, it will be even harder to pay them off when the time comes.
The CFO rejoinders that overhead expenses are out of control, largely because of your brother-in-law Tom, the sales manager, who lards every budget with gifts for his friends in the form of “investments” like, oh, say, light rail systems for their backyards. Cutting the budget will funnel money away from chump choo-choos into whatever more productive investments the people can make for themselves.
The COO points out that this will leave the firm incredibly over budget. Ands anyway, we can always do that later. Like, after the COO retires.
The CFO points out that it’s going to be hard to make productive investments after the bailiffs have carted away all the furniture and equipment.
The COO punches him.
Meanwhile, a guy from payroll asks why, since the firm is bankrupt, you don’t just say so and give people as much of their money back as is possible before it’s too late.
The COO and the CFO both punch him. Everyone else goes out for drinks.
Perhaps you can see now why the Bush plan is better, even though it’s inadequate. It at least tries to address the problem; the Gore plan to “fix” things by retiring a little 5% debt is like trying to save for your kid’s education by prepaying your mortgage. The Bush plan is partial, and didn’t stand up like a man and say “some of you aren’t going to get paid.” But at least the hope was that that 2% would ease things a bit for those who got the short end of the stick. Al Gore’s plan was to tell everyone everything was okay so that brother-in-law Tom wouldn’t have to give up his friends. (Would you be friends with him unless he paid you?)
Still a better plan would be the Chilean radical surgery approach: guarantee current benefits for those over 55 and move everyone else towards defined-contribution plans. Unfortunately, it may well be that you need a dictatorship to accomplish it. Anyway, hopefully you now understand a little about why I get so $#%! mad when Paul Krugman pretends that the Democrats have a better Social Security plan.
It’s not that he disagrees with me. It’s that it’s bad economics.
Posted by Jane Galt at March 19, 2002 12:36 PM | TrackBack | Technorati inbound links