| James N. Markels | ||||
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Personal
Information Constitutionalist
Party Political/Policy
Writing Creative
Writing Resume |
by
James N. Markels Move over
bin Laden; the big bad Dow Jones is quickly becoming Public Enemy #1. As
a result of the market’s recent freefall, the latest NBC News/Wall
Street Journal poll found the memory of September 11th fading to
where “strengthening the economy” has become the top priority for 32
percent of those polled, while “fighting terrorism” was cited by
just 33 percent—a statistically insignificant difference. The
public’s confidence in corporations and their executives also has been
stung by the recent string of accounting fiascos and bankruptcies. Democrats,
finally armed with an issue with which to beat on the Republicans, are
lacing their policy arguments with the assumption that the stock markets
are to be feared and corporations aren’t to be trusted. The biggest
target of this assumption is the proposal to privatize the Social
Security system, still backed by the Bush administration, which would
allow workers to buy stocks and bonds with some or all of their Social
Security taxes. When the markets were flying high it was easy to
advocate privatization, but to the Left the best argument against that
idea is the latest downturn, seemingly proving that the “stock market
[is] a game for rich people when they have money to play with,” and
the government should be “developing retirement programs that are
safe, secure, stable and not dependent on stock returns,” according to
Ellen Frank, professor of economics at Emmanuel College. Certainly,
when one considers that the stock market has lost about a third of its
value since the highs of two years ago, it can seem like a bad idea to
base one’s retirement on stocks. If we privatized Social Security back
when President Clinton was mulling it over before the Lewinsky mess hit,
detractors reason, then everybody’s retirement account would be in bad
shape today and wouldn’t we be sorry now? If pessimism about the
economy is bad in today’s world where only half of America owns
investments, wait until a plunging stock market sinks all boats, they
say. But wait,
the privatizers reply: Historically the stock market provides a return
of around 7 percent per year. Social Security, at best, will return
about 1.5 percent per year for the next generation of retirees, and will
most likely give a negative rate of return for the youngest
workers today. Detractors point at the recent stock market plunge: Where
is your 7 percent now? Hasn’t the bubble in favor of privatization
burst along with the market? The crux of
the anti-privatization argument is to only focus on the last couple of
years. Once you widen the scope, you find that the 7 percent return in
the stock market is safe and sound. On November of 1995 the Dow hit
5,000 for the first time. The bottom of the recent stock market fall was
7,702.34 on July 23rd. Do the math and you’ll find a return of almost
7 percent per year, which was pushed over that mark in the next day’s
recovery. Or go further back to November of 1972 when the Dow broke
1,000. A 7 percent yearly return means that the value of your investment
should double every ten years. Thirty years after breaking 1,000 the Dow
should be at around 8,000. Guess what? It is. The problem
with the stock market’s recent fall is that it happened to occur after
a time when the market was climbing at a far faster rate than has been
historically typical. We got used to the Dow breaking new records,
jumping up another 1,000 points every few months or so. When you’re
used to 15 percent returns, coming back down to earth feels like a
depression; similarly, only in a tall family is a person of average
height seen as a runt. And what
about the effects of a short-term dive on peoples’ retirement funds?
If a person were to retire this year, wouldn’t the recent crash have
severely crimped their plans if they depended on private investment? Not
unless they were foolhardy. As any privatization plan would allow people
to invest in government bonds and Treasury bills, a person for whom
retirement is on the horizon could easily shift their holdings into
these low-risk investments to ensure maximum security a good five to ten
years before they actually retire. The rest of
us have a much more long-term outlook. If you’re not retiring for 30
or 40 years, to what extent should you be upset over today’s
fluctuation? There’s plenty of time for a rebound. And despite the
market’s earlier “irrational exuberance,” we’re still on the
expected historical track for average returns. In fact, now is the time
to buy into the market. The long-term still looks good, and is certainly
far better than what the Social Security program has to offer. Indeed, when
one compares the safeness and stability of the stock market to Social
Security, the market still looks better on both counts. Despite the
slump, the Dow is still churning out the historical rate of return while
stocks are still completely safe from any attempt by the government to
steal them from you, while Social Security’s rate of return is
steadily decreasing from bad to worse as politicians continually whittle
away your “promised” benefits without your assent. If Prof. Frank
wants a system that provides a reliable retirement, stock returns are
the best way to get there. |
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