Wednesday, June 20, 2012

Reality Nine: Class and Age: Marx is Dead, Bury Him.

Social Security Reform: If twentieth century thinking is obsolete, try nineteenth.

A key element of many Marxist’s (and liberal’s) thinking is a conflict between workers and capitalists.  It ignores their common interest (and society’s interest) in having the worker working (i.e., employed).  At its extreme (among some Europeans and in Social Security), the pursuit of the conflict has been carried to the point of cutting-off-your-nose-to-spite-your-face.  They treat working as if being employed were antisocial (e.g., the displacing workers nonsense in the last posting).  But, that’s a side issue for another day or a different posting. The point is: anyone who is retired is living off of capital.  They’re capitalists.
Once life expectancies grew longer than most peoples’ working lives, it guaranteed that most people would spend part of their lives largely in each class.  Part of their life, they will be labor, the proletariat. Part of their life, they will be capitalists, living off of their capital, be it a pension, IRA, 401(k) or whatever. 
One needs to remember that the issue is how to produce goods the elderly want to consume.  Transporting productive capability from one period to another isn’t done by saving as such.  It is the use of the resources to produce in the future that allow retirement. That is capital formation.  It’s funneling production that isn’t being consumed currently into things that enhance production in the future.  It is only in that sense that future consumption becomes possible.
For an individual, the funnel that directs production into capital may be contributions to a well-run pension, an IRA, a defined contribution plan like a 401(k), an annuity, and stock, bonds, mutual funds, a business, real estate, etc..  For Social Security, the capital is all government debt. The interest and principal fund benefits to the extent benefits are paid from the trust fund. 
Clearly during the twentieth century anyone who was retired was living off of capital.  Most people were living off capital they created.  Granted, we have always structured Social Security such that there was an element of transfer payment from those best able to fund their Social Security retirement benefits to those less capable of funding their Social Security benefits.  The subsidy to those unable to fund their retirement was from a capital base that was increasing (i.e., a trust fund that was growing). However, benefits began being funded from current contributions as the trust fund growth stopped, and once the trust fund (i.e., the capital) is all sold off, Social Security will become nothing but a transfer from younger working Americans to older Americans.
The definition of capital as used above is very broad.  The traditional things people think of as capital are very important.   The total stock of things like tools; plants like factories, refineries, etc.; transportation equipment and infrastructure like pipelines, the power transmission grid, trucks, ships, roads, bridges, etc. is staggering.  Capital also includes long-lived assets like wells, mines, commercial structure, canals, dams, etc.. 
Agricultural land is one of my favorite examples. In agricultural areas it’s amazing how much effort has been put into making American agriculture as productive as it is. In some areas, there are huge piles of rocks or stone fences at the edge of fields.  Those fields have been producing for hundreds of years. Every one of those rocks was removed from the field.  Most were removed before much more than human muscle and a team of draft animals were available to do the task. In still other areas, one sees wells, diverted and dammed streams, or drained swamps.  Often trees at the boarder of the field tell of the effort to clear the land and remove the stumps.   The history of the effort to bring the prairies “under the plow” is probably the source of more myths, legends, and tales of heroes, villains and adventure than any other aspect of American development.
Long-lived consumer goods that are consumed over time, with housing being the leading example, are also capital.  However, from an individual’s perspective, they only allow retirement to the extent they are owned by the individual.   It’s the ownership, not the existence or occupancy that are relevant to retirement.  It’s the ability to consume the benefits the goods provide, not price change that creates the capital.
Since the passage of Social Security in 1935, the investment in human capital that allows generations to be more productive than their predecessors has been massive.  Prime examples are near universal k through 12 education, and, with the GI bill, greatly expanded access to college.  The elimination of historical patterns of excluding selected qualified students has continued the process.  The investment is substantial.  It includes the expense of the education, but also the forgone consumption implied by not spending the income the student could be earning from fulltime employment.    
From a society’s (or nation’s) perspective, human capital creation may be the most important capital formation.  However, from an individual’s perspective, it doesn’t facilitate retirement since the product it facilitates ends with retirement. When discussing Social Security it has to be mentioned.  It was vital to making Social Security viable. 
The issue we are facing is often seen as whether we, as a nation, have enough capital.  An individual facing the issue has two options: consume the income the capital produces or consume the capital by selling it off.  The individual’s task is simplified by the ability to assume that whether they provide capital for future generations can be ignored.  Consequently, many individuals ignore any responsibility for whether future generations are left better off than they were.  The financial service industry has developed products to accommodate the individual’s freedom from such concerns.  Most annuities are good illustrations, but many pensions actually fall under the umbrella of products designed to avoid leaving anything for future generations.
For a nation or a society the issue is a bit more complicated.  For starters, it shouldn’t, and in the long run can’t, ignore the impact of how it manages its capital.  Future generations count.  The scorched earth, “I’ll-spend-every-cent” philosophy many individuals display won’t work for a society.   
More importantly, compared to an individual, a nation’s choices are severely constrained.  It is not as free to choose between restricting consumption to the production generated by its assets verses selling off the capital. 
Nations do sell off private capital to foreigners, letting them buy companies, real estate, their debts, etc..  In the past, they generally restricted it to capital held by the people rather than common assets like roads.  Currently, some developed nations, with the US as a prime example, have found a way to relax the constraint.  They simply sell foreigners a general claim on future production in the form of government debt.  Technical knowledge is harder to sell.  Anyone who had American history knows how easily the US learned the industrial secrets of Europe’s industrial revolution.  Finally, human capital is so important, and it gets awkward when a nation tries to liquidate its human capital. 
The biggest stumbling block for those who try to hang on to this outdated, labor-verses-capital rhetoric is life itself as most people will experience it in the twenty-first century.  Social Security needs to address the role of capital as the only way retirement is possible.

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