A Buy Signal for Washington

The $700 billion plan isn't the first big spending idea to come from Washington.

By + More

Next to Al Gore's zero carbon emissions idea, the Paulson plan may be the most audacious way ever proposed to spend a trillion bucks (OK, $700 billion), turning the Treasury Department into a leveraged sovereign wealth fund that buys distressed debt or takes equity stakes in shaky banks. But it's not the first $700 billion megaspending idea to come from Washington.

Back in 1999, President Clinton proposed taking that exact amount from future budget surpluses and investing it directly in the stock market to help make Social Security solvent. Clearly, Clinton's not much of a market timer. The Dow Jones industrial average closed at 9355 on the day Clinton made that proposal in his State of the Union address. Almost exactly a year later, the tech stock bubble started to deflate, triggering a terrible bear market. Now, close to a "lost decade" later, the Dow's back in the same range. Adjusting for inflation, the stock market is actually about a fifth lower than it was in 1999 when the investor-in-chief flashed the buy signal.

Bullish. With stocks in the tank, who wants to hear about how important they are to saving for retirement, college, or your dream home theater? Big mistake. The only possible reason to be down on stocks as a long-term savings vehicle is if you're down on the American economy long term. But even that doesn't fly. Whatever the future financial woes of Social Security, for instance, a bad economy makes them much worse. As economist Arnold Kling points out in his blog, if "the market is down because future U.S. wealth is down...[then] government-provided Social Security in future decades is in trouble." But, he continues, if "the future outlook of the economy is good...the stock market will come back, and letting young people opt out of Social Security to invest in stocks would give them a windfall."

Just the sort of talk privatization advocate Michael Tanner of the Cato Institute wants to hear. "It's basic economics," Tanner says. "You buy low and sell high." So, he adds, this would be the perfect time, perhaps a once-in-a-generation opportunity, to let people start putting some of their payroll taxes into the stock market. He also realizes, of course, that given the current political climate, the idea is probably stuck in suspended animation for a few years.

Analyst Ray Boshara of the New America Foundation also thinks that the stock market remains a key to boosting our future standard of living. Here's why: Unless rising Asia becomes disappearing Asia, excess global labor supply will continue to push down hard on wages. "We are not going back to the 1950s," Boshara says. "The return from labor has been diminishing. Families have to earn income not just from a job but from assets."

But rather than Social Security privatization, Boshara is a proponent of "baby bonds." Each of the 4 million kiddies born every year would receive a $1,000 to $6,000 deposit from Uncle Sam into a "stakeholder account," where it would stay, compounding away, until the child hit 18. After that, the money could be used for college or a down payment on a home.

The stock market may be entity non grata in Washington right now. But let's hope it will be invited back to attend some future State of the Union address.