View From a Height

More Social Security Public Accounts

Nathan Newman has responded. My ups.

What policies could the government impose on companies due to holding a board seat that they can't impose through legislation? State pension funds hold significant shares of a number of companies and, most of the time, the problem is that management ignores most of their good governance complaints. The only time their presence makes a difference is when a lot of other shareholders get concerned about the same issue. And if the social security fund is reflecting the views of other investors in the private equities marketplace, we are hardly talking about a galloping socialist impulse.

Whether or not that's the problem depends on whether or not you think their good governance complaints are valid. Certainly, if you're Eliot Spitzer, you can legislate through the courts. But in a well-regulated economy, there's a process both for passing laws and for adopting regulations. Calpers and others like it do indeed have an oversized voice in corporate governance already, and a bully pulpit to push it from. A Social Security Investment Corporation would have the threat of government action behind it, as well. not merely on one board, but on many, many boards.

I said,

investing in inefficient domestic companies virtually guarantees the investors - you - lower returns. In effect, you're subsidizing inefficiency, a national version of making everyone pay more for groceries because you don't like WalMart.

In a fair comparison, returns are returns, no matter who's doing the investing. And domestic economic growth only happens when there are returns to investors. Governments don't get any more out of that than anyone else.

And Newman replies,

This last point is the ideological argument that "what's good for General Motors is good for America," but it's also patently untrue in this situation.

If the social security trust fund loans money to build housing in the United States and gets an 8% return on investment, but also gets additional payroll tax payments from the labor involved, the additional payroll payments are hardly irrelevent to the gains to the trust fund over time. Money is money whether it comes through dividend statements or taxes. If that same investment by the social security fund goes to Enron investing in off-shore financial investments and there are no payroll taxes generated, the social security fund may do worse even if Enron pays slightly higher dividends than the housing investment paying the 8% return.

I'm actually not making the "good for General Motors" argument. I've always despised that argument. It refers to the chairman of that company arguing for preferential treatment on the grounds that he was better for the economy than the alternatives. I was obliquely referring to laws, such as Manhattan had for decades, that kept small groceries open at the expense of larger shops, by limiting the size of certian types of retail establishments. Everyone paid more for plums because of this policy. Which means they ate fewer plums, or less of something else.

The latter point stands. The government collects taxes whether those new jobs were created through private investment or public investment. And the businesses that created those new jobs did so by rewarding their investors. The comparison between dividends and taxes had occurred to me, too, but I rejected it because taxes aren't dividends. If the government holds shares of AT&T, it collects dividends, too. You can't count things in one column and not the other, and you can't count things twice.

Those taxes that get collected will be reinvested at a lower rate, as well. Newman claims they compound the return. I say they compound the shortfall in the returns.