Over at Forbes Louis Woodhill offers some out of the box prescriptions for stimulating the economy without government spending.
- Have the Social Security Trust Fund sell Treasuries and buy stocks. After a half dozen paragraphs of explanation of why bonds have out-performed stocks over the last 30 years and what a tragedy that is, here’s the justification for this that he offers:
A better way to meet the market’s demand for risk-free assets would be for the Social Security Trust Fund to sell some of its $2.6 trillion in Treasuries and buy a fully-diversified portfolio of common stocks. This would raise stock prices and reduce bond prices, thus restoring a more normal relationship between risk assets and risk-free assets.
As a side effect, investing some of the Social Security Trust Fund in common stocks would be highly profitable for Social Security. Historically, common stocks have produced much higher returns than government bonds. Interestingly enough, Social Security would be taking no real risk by buying stocks. If common stocks don’t produce a higher return than government bonds, the economy is going to be so dismal that Social Security will go broke anyway.
That’s essentially the Butch Cassidy prescription. When pursued by Bolivian federales and finding his path blocked by a sheer drop off a cliff into a river, he turns to his hesitant partner and advises him that that “the fall will probably kill you”. I’m actually torn about this strategy. While I think it would be better than portions of the fund going into independent accounts, I still think that the urge to “invest” in politically advantageous stocks would be irresistible.
- Require large organizations to pay their bills on time. That’s an intriguing proposal but I’m bedeviled by two questions: how do you know and how do you enforce it?
- Let companies opt out of Sarbanes-Oxley. My preference would be to repeal it altogether. I know first-hand the damage Sarb-Ox has done even to small, privately-held companies whose large publicly-held customers make Sarb-Ox compliance a condition of doing business with them. However, I find his argument for doing so peculiar:
In the good old days, people starting a company dreamed of going public. Now, the first thing that founders think about is “what big company will we be able to sell this thing to?†The Sarbanes-Oxley law, which was a hysterical overreaction to the Enron collapse, has so raised the costs of being public that only “moon shot†successes like Facebook can even consider an IPO.
My nostalgia is for something completely different: when people running hamburger stands wanted to make and sell hamburgers, people who ran bookstores wanted to buy and sell books, and people who had pet stores wanted to sell pet food and supplies rather than quickly build up a business, issue an IPO, and get fabulously wealthy.
All in all I don’t think much of his prescriptions but at least they’re different from the tired, old, inside the Beltway, red and blue talking points that fill the blogs and opinion pages these days.
Interesting. Bullet point by bullet point.
1. I have a bit more faith in individual accounts than you, but your observation about political buying is spot on. I’d add, market manipulation is always a suspect action for me. BTW – you are a man after my own heart with the movie reference…
2. I don’t even know what this really means. Its unworkable and unenforceable. Its bizarre, really.
3. I share your view on SarBox. I’ve seen it and experienced it first hand. ( and Dodd Frank is the new SarBox). As for this: ” Now, the first thing that founders think about is “what big company will we be able to sell this thing to?†” In my opinion it should be modified to eliminate “first” to “eventually.” Which leads into your lament about desire for the task vs $. I think that’s a bit idealistic, but I understand the sentiment. One of the reasons I oppose the inheritance tax is – as an example – my daughter has shown a preference for the arts. Dance, acting. She just got done doing a scene for “Man of Steel,” the next Superman movie. I’d like to think that part of what I can do with my lifetime of work is support, should she pursue a risky or low paying career for the love of it, is take away some financial concerns.
I’m not sure what 2. means either, particularly since he suggests that business can contract around the requirement. If I were asked to attempt to implement the suggestion, I would impose a federal interest rate on all contracts past due 30 days unless the parties contract otherwise. Most statesalready have such an interest rate (in Illinois its 5 per centum per annum simple), so I would have to operate under the assumption that state rates are too low. A very high interest rate would be the next best thing to requiring timely payment, but (a) businesses could opt out, (b) many small businesses will probably be reluctant to insist on their legal rights if the payment is 30-60 days late, and (c) once you start talking real money, a high interest rate could encourage disputes that might even slow down payment.
OTOH, you could reduce/eliminate 1099 requirements, those certainly slow payments.
Regarding political buying of stocks, with the kind of money we are talking about couldn’t some sort of randomization work in the picking of which stocks to buy?
Buying stocks will not stimulate economic activity. I’m curious as to what box of Crackerjacks that idea came out of.
Steve V –
I suppose the notion would be to buy a broad index. The Wilshire, perhaps.
Ben –
I’m not sure where you are going with the (good) snark. But see my reservations about market manipulation. I suspect the original author’s notion was that the flight to quality has resulted in a dearth of risk capital. I don’t buy it, and I know you will disagree, but we need to get rid of Obama and the current anti-business sentiment if we want business owners to open up shop again.
PS – but Dave is expressing a scepticism – well founded IMHO – that the Wilshire wouldn’t be bought, but, oh, say, Solyndra.
Drew,
You’re at least partially correct. There’s less risk capital available because the private sector is socking as much as it can away in treasuries. The problem I have with the author’s approach is that it would take money which currently resides in the safest possible place short of Odin’s palace in Asgard and places it in a market that has been rather volatile of late.
Woodhill still thinks we have a supply problem, which he presumably thinks can be alieviated by more capital investment.
Actually, the only proposal I can think of to make Woodhill’s list worse is to reference Krugman’s money multiplier foolishness.
I take that back, he could call for QE3.
“There’s less risk capital available because the private sector is socking as much as it can away in treasuries.”
The 64 dollar question is why?
I have views.
Yours?
Everybody with a stake hates Sarb-Ox. But it passed with very little opposition from either side of the aisle.
Drew,
I think the short and simple of it is that people expect things to get worse. I’m no fan of this administration’s economic policies, and I don’t think any potential GOP nominee would be any better.
““There’s less risk capital available because the private sector is socking as much as it can away in treasuries.â€
Because, how did Taibbi phrase it? Even a monkey should be able to make money when you can borrow money for free, then buy Treasuries with that money. I would also second Ben, that the world economy has remained unsettled since Lehman collapsed in 2008. I would further note that real estate remains a major, maybe the major drag on the economy.
Steve
When pursued by Bolivian federales and finding his path blocked by a sheer drop off a cliff into a river, he turns to his hesitant partner and advises him that that “the fall will probably kill youâ€.
I assume you are referring to the movie. In the movie that does not take place in Mexico, but in the Western US. It’s a posse hired by the railroad company to hunt down the Hole-in-the-Wall Gang, headed up by Joe Lefors. IIRC, Kevin Smith referenced some of that stuff in Mall Rats.
Yep, he did, though the character was named La Fours. I believe they wore the same hat, though. Smith also had Jaws references in that one, as well as in Chasing Amy. Incidentally, La Fours was played by Sven-Ole Thorsen, a favorite of Arnie’s. One really big dude.