The Mises Institute monthly, free with membership
Volume 17, Number 5
Murray Rothbard once asked Ludwig von Mises at what point on the spectrum of statism can a
country be designated as "socialist." To his surprise, Mises said that there was, indeed, a
clear-cut delineation: the stock market.
Mises said, "A stock market is crucial to the existence of capitalism and private property. For it
means that there is a functioning market in the exchange of private titles to the means of
production. There can be no genuine private ownership of capital without a stock market: there
can be no true socialism if such a market is allowed to exist."
A corollary to this idea is that if the government is allowed to "invest" in the stock market, then
the economy can no longer be called market-based. President Clinton has proposed a plan to use
up to one-fourth of new Social Security funds to buy shares in our stock markets. The danger of
this plan may not be as obvious as his previous health-care plan, but they are just as serious.
The justification for this argument is that the Social Security system is unstable and will face
financial strains in about 2014 and will be exhausted by 2032. There are a few options that the
Washington elite have deemed as "solutions." Most of these ideas are politically unpalatable.
The first is an increase in taxes. Over time, the needs of the Social Security fund will be so high
that it will stifle the entire economy. There have been some projections showing FICA taxes as
high as 82 percent in forty years.
The second option is to reduce the "benefits" being paid out by the fund. This action is also
politically unacceptable. The third alternative is to somehow increase the rate of return on the
current surpluses to cover the future. The thinking in the Clinton administration is simplistic at
best. The plan assumes (wagers) that the stock market will continue to increase (forever) at rates
high enough to meet the projected needs.
The fundamental problem that the Clinton administration ignores is that the Social Security
program is based on what is called a Ponzi Game or a pyramid scheme. You have probably seen
this if you've ever received a chain letter that states, "Send money to the first five people on the
list, remove the first person's name, and place yours at the bottom." In other words, the first
people in the program (those at the top of the pyramid) are currently getting money from the new
people enrolling (those who are at the lower stages of the pyramid).
Social Security works in the same way. Those who are retired are receiving money from those
who are currently working. As long as the base of the pyramid is expanding at a geometric rate,
the system will continue to function. However, U.S. demographics show that after the
baby-boom generation, the base of the pyramid shrinks. It is mathematically impossible to
continue the Social Security program indefinitely.
The best solution is to phase out the Social Security program by taking two steps. The first is to
stop enrolling new members into the system. The second is to allow anyone who is currently
enrolled in the program the option of leaving it and forfeiting all that they have paid into the
fund. Those who remain in the fund will receive the current level of "benefits" paid out of the
general fund. Since there is no real solution to the problem, we simply have to bite the bullet and
take the losses.
But what about Clinton's plan to try to increase the return on current surpluses? Won't this
expand the pyramid's base enough to cover the difference in population? To answer this
argument, let's examine the plan's assumptions. It supposes that we have cured the business
cycle (i.e., no more recessions), and presumes the stock market will grow at the phenomenal rate
it has in the 80s and 90s. Now, ask yourself if these are realistic assumptions. Most reasonable
people will conclude that they aren't. We simply have to look to last October when everyone was
worried that we were on the brink of another recession. Even though we are feeling good now
with the recovery of the stock market, the earliest stages of production are showing signs of
recession. (The evidence is similar to the spring of 1929.)
However, let's take a closer look at the impact of Clinton's proposal on the economy. Within
fifteen years, the federal government will own approximately 4 percent of the market. Ownership
brings control. Entrepreneurs are subject to the will of the consumer. Those entrepreneurs who
are best able to read market conditions and correctly allocate goods and services to meet
consumers' needs, wants, and desires are rewarded with profits. Profits are the result of
coordinating the market. Those who do not, suffer losses. A string of losses forces the
entrepreneur from his position as entrepreneur and back to a position of a laborer. In other
he must go to work for someone else. Only those who are successful at serving the customer
remain as entrepreneurs.
The government has no such check to its ability to direct resources. The government's source of
revenue is from taxes, not from serving the customer. Therefore, it is not subject to market
forces. It invests money (and thereby directs resources) according to its own bureaucratic rules.
Think of the political games that can be played with $700 billion of your money. Companies that
are in favor with the government will become direct recipients to special interests. Imagine the
consequences if a company does something that is not aligned with the political climate. The
result is that entrepreneurs will no longer listen to customers' needs, wants, and desires. They
will be stricken with fear by the implicit or imagined consequences of disobeying the politicians.
In Fascist Germany and Italy, entrepreneurs owned their businesses, at least on paper, but in
reality they became pawns of the politicians. Fear is a powerful motivator.
There will be those who will say this is good because it constrains the "evil" companies and
makes them do "good." This is, of course, wrong. Currently, regulations have at least some
degree of oversight. If the EPA or IRS makes a ruling, there are legal recourses to challenge the
abuse of power. However, with implied threats, there is no recourse. If a politician says, "Do as
we want, or else," the entrepreneur has no alternative. This is regulation by whim.
Of course, there will be a set of "rules" on how to invest and divest government ownership of
stocks, but imagine the burden of proof one would have to present to prove that the government
sold your company's stocks because of political reasons. (Incidentally, if the rules become so
strict about investing that it handcuffs the government's "investors," then it runs counter to the
purpose of wisely investing for the higher rates of returns.) What we are left with is the
"bureaucratization" of our entrepreneurs.
No longer will profit and loss guide resources to their most needed ends; rather political
decisions will dominate. Our economy will be set on the same path as the failed economies of the
Eastern bloc and the other government controlled economies. The clear consequence of the
Clinton administration's plan is the socialization of America's stock markets and its
Paul Cwik, a Mises fellow completing
doctoral dissertation in Auburn University's economics program, teaches economics at Campbell