The Worst Idea of the Decade

By Charles Krauthammer

In his State of the Union address, President Clinton said he wants $2.7 trillion of projected government surpluses set aside for Social Security. That is a good idea. He then wants a quarter of that, about $675 billion, invested in the stock market. That is a bad idea. Indeed, it might just be the worst idea of the decade.

Decisions about investing this huge sum will be given to some neutral body, says Clinton. Fat chance. There is no way federally appointed investors are going to pick and choose stocks without Congress or the White House pressing for choices that please political constituencies or conform to political pieties.

Does anyone really think that members of Congress, who routinely pillage billions of tax dollars for post offices and bridges in their own districts, will shy away from influencing the direction of this huge investment windfall? And even if they are not so crass as to pick a shipbuilding company in their district, they will be issuing every conceivable ideological litmus test for these investments.

Companies that deal in tobacco, belch sulfur dioxide, support Planned Parenthood, finance risque movies...the verboten list will be endless. Consider how city pension funds and university trust funds are pulled in and out of politically (in)correct investments at the behest of pressure groups--and multiply that by a thousand.

Even if the government investors could will themselves into strict political neutrality, they would distort the market simply by their size: $675 billion is a lot of money. The traditional role of government in a free market is to act as arbiter to prevent monopolistic big guys from dominating the market and pushing around the little guys. But once government became a player, it would be the biggest guy on the block, bigger than Standard Oil, IBM and AT&T were in their biggest, baddest days. Why sue Microsoft? The Federal Government could simply buy it.

And why in the first place do we want government money invested in private companies? The world has had 50 years of bitter experience with the failure and sheer destructiveness of nationalization. After World War II, the British Labour Party seized the "commanding heights" of the economy, nationalizing everything big in sight: coal and steel and rails and utilities. By 1980 Britain was the sick man of Europe.

Over the past two decades we have learned that the best thing government can do is rid itself of involvement in the private economy. From Britain to Chile to China, privatization has everywhere proved an economic boon. Investing Social Security funds in the private economy is a total reversal of this salutary trend. The idea is to get government out of private industry, not in.

The capital markets of the U.S. are the largest and most efficient in the world. They are a miraculous engine for creating wealth. They take surplus existing wealth and--directed by no one person or institution but instead by the impersonal action of thousands of independent investors--allocate it to the most productive new-wealth creators.

It is Adam Smith's invisible hand operating at breathtaking efficiency. Clinton proposes adding to the operation of this finely tuned machine the heavy hand of government. This is the ultimate in killing the golden goose. What it does not disrupt it will corrupt. The most valued piece of information on Wall Street will be not the earnings forecast for IBM but the investment plans of the Big Fed Fund.

Finally, efficient capital markets must permit big bankruptcies--something governments are loath to do. Will government allow companies in which it has large stakes to fail--and thus jeopardize the pension income meant to keep retirees out of poverty?

Not very likely. And this introduces yet another distortion: moral hazard. Companies with large government investments will enjoy a special, if unacknowledged, safety net and thus be tempted to make highly risky business decisions, secure in the knowledge that they are too important to the Federal Government to be allowed to fail.

All these distorting effects--for what? Investing in the market might not increase net government revenues anyway. Yes, stocks yield more than bonds. Redirecting federal money from bonds to stocks, however, will raise the interest rates the Treasury pays on the trillions that the Federal Government has borrowed. What it would gain from its stock investments it would at least partly give up in the increased cost of debt service.

This whole crazy idea has the mark of Big Government types (Democrats) trying to appease privatization types (Republicans). But this scheme for pouring government dollars into Wall Street is precisely the antithesis of privatization. It is velvet-glove nationalization. It is the last thing free-marketeers ought to countenance. It is the last thing the country needs.