Marron, Bartley, and Feldstein: Deceptions of the Privatizers

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Ever since Bush said he was interested in privatizing Social Security, but wisely (from his point of view) refused to go into the details, a parade of op-eds have defended him against Gore’s attacks. Gore is terrible, but the defenses of Bush have been strangely deceptive or off-the-point in a different way. They fail to admit that Social Security is a vicious tax scheme that deserves to be dismantled, not converted with huge transition costs into a stock-subsidizing mandatory saving scheme.

Before romping through their 700-word manifestos, a couple of comments on the general debate as it is shaping up. It is easy to get a fix on the people who like the status quo. We can, for example, assume that the Gore partisans are trying to suck up to seniors and unions, not caring how much it costs the middle class.

The privatization people are another matter. None of them deal with crucial questions such as: Why should this redistributionist welfare program continue to be talked about as if it were an insurance program? Why should we have mandated savings at all? What’s to be done with the system’s existing liabilities? Why is privatization more of a political priority than a tax cut?

Few privatization people ask, much less attempt to answer, such questions, which makes one wonder whether their entire program is driven by the desire to deliberately deceive. Then again, the many writers who have taken the privatization position might be innocently flummoxed by a notoriously complicated subject. They may be simply regurgitating the information found in the thousands of position papers that have been cranked out over the last several years.

Whatever the case, it’s worth taking a look at what they say.

1. Donald B. Marron, CEO of Paine Webber, has written "Not Privatizing Social Security Is the Biggest Risk of All" in the Wall Street Journal, May 18, 2000. He argues against the idea that stocks are risky and against the rhetoric that says privatization is "costly." Quite the reverse, he says. Two percent returns on Social Security taxes is costly to Americans, whereas privatization provides Americans "with an opportunity to receive a real market rate of return on their money."

Indeed, and anyone who wants to invest in stocks — as versus spend their money for other purposes — should be free to do so. But that is not what privatization provides. The choice being offered isn’t between saving and consuming. It is between assigning taxes to the purchase of stocks or the purchase of bonds. No money is being "returned" to the taxpayer; privatization merely provides a different means of tax holding.

Perhaps Mr. Marron doesn’t understand the program he is endorsing? Sadly, that is not the case. It turns out that he is actually alarmed at the low savings rate among young Americans. He sees privatization has a means to boost it, exactly as FDR saw Social Security as a means of providing additional security for older Americans. He writes: "One-third of Americans have no savings; a further one-third have saved less than $2,500…. the public and private sectors must find effective new ways to communicate the importance of saving early."

Thus, the mask comes off to reveal a full-blown statist browbeating people that they should save more (a kind of reverse Keynesianism). Not only that, but he wants a new government program to force people to save more: namely "privatized" accounts. At least his rhetoric has the virtue of honesty about it: it does not even pretend to be consistent with free-market economics. Yet in a free society, the trade-off between saving and consumption is something that should be made by the holders of property, not intellectual elites working in league with the government.

Finally, did I mention that Mr. Marron is the CEO of Paine Webber? Might he have a self-interested reason for wanting to steal the private wealth of Americans for purposes of boosting his business?

2. Martin Feldstein of Harvard University has a similar but more subtle take on the Social Security debate. His worry is that to meet future obligations, taxes will have to be raised or benefits will have to be cut. His way out of that box is to use the surplus to fund the transition to private accounts.

Not that Feldstein is opposed to tax increases. Before the surplus appeared (and it will disappear again in future years, as he admits) he was willing to endorse higher Social Security taxes to fund the transition. Hence he has no principled objection to extracting even more private wealth for public purposes. But let’s trust him that the math works out, and that 2 percent can be diverted from present recipients to nominally private accounts with no new surcharge.

Why is "privatization" a better use of the surplus than tax cuts? Let’s repeat for emphasis: anyone who proposes privatization without new taxes should be asked to explain why privatization is to be preferred to simply giving us our own money back in the form of taking less in payroll tax. As it stands, these people, in the name of market economics, are proposing to put off a tax cut to create a new layer of mandatory savings.

This makes no sense, particularly because, as Feldstein admits, the money kept in the nominally private account will have to be backed by a taxpayer guarantee. As he puts it, ominously: "anyone who invests in the standard stock-bond portfolio would be compensated if his annuity falls below the benefits projected in current law."

He assures that there is only a "1 percent chance that the total taxpayer cost — including the payroll tax as well as the guarantee payment — would be as large as the 19 percent tax" of the future. But he is assuming that account managers will behave the same way with guaranteed public money as they do with private money. This is not so: indeed, individual accounts replicate the error of the S&Ls with capitalist profits and socialized losses. As to the promise of higher costs later, this is a rhetorical trick taken from Hillarycare: her socialized medicine also promised to spend more now in order to save money in the long run. Such a promise is not to be trusted.

3. Robert Bartley of the Wall Street Journal also weighs in on the risk question with a very long demonstration that stocks make more money than government bonds in the long run. In the course of his demonstration, he tells some whoppers like "the final huge benefit of privatization is that workers would own something." Actually, that’s wrong: you don’t own something you cannot control. You won’t be able to withdraw these nominally private accounts even at a penalty.

But let’s leave this aside and go for the heart of the matter. I’m perfectly willing to believe that stocks are profitable. I’m all for them. Let’s hear it for the stock market. The question of the day isn’t whether stocks are great or not; it is whether mandatory savings, whether in stocks or bonds, is a good thing. It is inconsistent with a free society to demand that people save, no matter where the money ends up. That, and not the "low rate of return," is what’s wrong with Social Security.

His article finishes with an attack on "paternalistic liberal politicians and their intellectual apologists." I’ll end mine by decrying paternalistic Wall Street Journal editors and their apologists who prefer imposing new government programs instead of abolishing the old ones and letting freedom reign instead.

Llewellyn H. Rockwell, Jr., is president of the Ludwig von Mises Institute in Auburn, Alabama. He also edits a daily news site,

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