Arnold Kling  

Hard Heads, Soft Hearts

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Niall Ferguson and Laurence J. Kotlikoff, writing in The New Republic (subscription required), propose to tackle the fiscal mess three ways. First, they suggest replacing existing Federal taxes (personal income, corporate income, payroll, and estate) with a consumption tax that amounts to 33 percent of consumption, which they say would be 21 percent of GDP.

Next, they would phase out Social Security and replace it with personal accounts (while taking great pains to distance themselves from the Bush Administration's personal accounts proposals).


accounts would be private property. But they would be administered and invested by the Social Security Administration in a market-weighted global index fund of stocks, bonds, and real-estate securities. Consequently, everyone would have the same portfolio and receive the same rate of return. The government would guarantee that, at retirement, the account balance would equal at least what the worker had contributed, adjusted for inflation--i.e., the government would guarantee that workers could not lose what they contributed. This would protect workers from the inevitable downside risks of investing in capital markets.

Finally, they would


abolish the existing fee-for-service Medicare and Medicaid programs and enroll all Americans in a universal health insurance system called the Medical Security System (MSS). Every October, the MSS would provide each American with an individualized voucher to be used to purchase health insurance for the following calendar year. The size of the voucher would depend on the recipients' expected health expenditures over the calendar year. Thus, a 75-year-old with colon cancer would receive a very large voucher, say $150,000, while a healthy 30-year-old might receive a $3,500 voucher.

Their goals fall within the tradition of what Alan Blinder calls Hard Heads, Soft Hearts. It is interesting to compare their positions to what I call Bleeding-heart Libertarianism. I think that the main difference is that I am less paternalistic in terms of directing people's retirement investments, and less wonkish in my approach to health insurance.

In fact, I do not think that Hard Heads, Soft Hearts is a platform that either major party is prepared to endorse. Instead, I think that Kotlikoff and Ferguson wind up being part of what I call The Long Tail in politics.

For Discussion. How is it practical for the government to provide insurance against losses on index-fund investments? How do we bail one another out if there is a stock market crash?



COMMENTS (6 to date)
Ivan Kirigin writes:

It seems only practical for the government to insure against retiree market account losses.

The government wouldn't need to bail out everyone in a market crash. It would only need to bail out those that are on the verge of retirement.

At retirement, your account would transition to a simple savings account, which is insured only for bank failure and not for a market collapse, which shouldn't affect a savings account.

John Thacker writes:

"writing in The New Republic... aking great pains to distance themselves from the Bush Administration's... proposals"

Not really joking when I say that that's practically redundant. The New Republic line for years has been that "Republican proposals and ideas are often interesting, but Republicans cannot be trusted to implement them."

Mr. Econotarian writes:

If the government insured against market losses for retirement accounts, it creates a moral hazard of old people not voting in a fashion to keep the economy going strong...

Mcwop writes:

If you insure against losses, then the cost of that insurance reduces your return.

Steve writes:

I would assume as a person gets close to retirement (5-7 years), their retirement investment mix would shift from something like "60% equity asset classes, 40% fixed income/bond asset classes", to something like "20% equity asset classes, 80% fixed income/bond asset classes". There should be plenty of money left for the individual to purchase an inflation indexed annuity (do they have these yet?).

Doesn't Shiller have the idea also of macro-securities to hedge national income and the like? That idea could be implemented.

Dewey Munson writes:
purchase an inflation indexed annuity (do they have these yet?).

Isn't that SS? At 84 mine is 25% on contributions.

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