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02/06/2005

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» Supporting Privatized Retirement Accounts from Kentm401 - Economics
Becker of the Becker-Posner blog takes an vastly different angle at supporting Privatized Retirement Accounts. [Read More]

» Monday's Daily News from The Club for Growth Blog
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» Catching my eye: morning A through Z from The Glittering Eye
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» PRIVATIZED INDIVIDUAL ACCOUNTS IN THE SOCIAL SECURITY SYSTEM from Pejmanesque
Gary Becker is all for it: Today both Republicans and Democrats are passionately arguing about the future of social security. Although there is merit in each sides argument, neither side is portraying the situation accurately. In my view, movement tow... [Read More]

» Bulldozing Us from Centerfield
Somehow, I got the impression last week that President Bush's social security proposal might turn out more moderate than I expected. Now, VP Cheney admits, it will be deficit-funded Appearing on "Fox News Sunday," Cheney said the government would have... [Read More]

» GARY BECKER -- from PRESTOPUNDIT
"Why I Support Privatized Individual Social Security Accounts."... [Read More]

» Gary Becker on Social Security and private accounts from Where's Travis McGee?
Nobel Prize winning economist Gary Becker has published a very interesting post on why he supports creating private accounts. [Read More]

» Becker on Social Security Reform (Becker-Posner) from Dummocrats.com
Becker on Social Security Reform (Becker-Posner) [Read More]

» http://libertariangirl.typepad.com/my_weblog/2005/02/private_account.html from Libertarian Girl
Private accounts and the stability of the markets Nobel Prize winning economist Gary Becker supports private accounts for Social Security, and says account owners should only be allowed to invest in index funds: "We should follow the President’s prop... [Read More]

» "Why I Support a Privatized Individual Account Social Security System" from Coro Blog
From The Becker-Posner Blog, which is typically formatted as an online conversation between the two University of Chicago professors. Gary Becker won the Nobel Prize in Economics in 1992 . [Read More]

» Becker and Posner Respond to Comments on Their Ideas on Social Security from The National Political Observer
On February 12, 2005, University of Chicago Nobel Prize winning economist Gary Becker and Seventh Circuit Court of Appeals Judge Richard Posner posted responses to their arguments on Social Security. On February 6, 2005, Mr. Becker posted a column at... [Read More]

» Some Social Security Facts from Hennessy's View
In March 1998, the AARP published a study by Alicia Munnell and Pierluigi Balduzzi, both of Boston College. The pair conducted extensive research into the potential effects of investing Social Security trust fund assets in the stock market. Their con... [Read More]

» Straight Talk About Social Security from The Conservative Philosopher

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Palooka

Corey,

That cash isn't "hoarded" or put aside doing nothing. It is invested in corporations which produce jobs for the little folk. The folk you are supposed to care so fervently for. The many benefits of wealth accumulation have been recognized for some time, Corey. I have serious reservations that Buffet's or Gate's billions would be better spent in the hands of the government. Innovation and job production versus inefficient government hand outs? Hey, but if it helps the limo libs relieve some of their guilt, then it must be worth it.

So much of the Left's disdain for capitalism and the evil accumulation of wealth is rooted in simple envy. Envy is often couched in the most sympathetic terms. Yachts versus health care, for example. But the Coreys of the world find inequality per se unacceptable, even if the claimed "minimum standards" were reached for everyone. Hey, you have two yachts and I only have one! Would Corey really be satisfied with universal health care? Would his envy and/or guilt end there?

As I pointed out in a previous post to you, 99% of Warren Buffet's wealth is in his company, Berkshire Hathaway. He plans on giving the vast majority of his wealth--which he currently enjoys very little of--to charity. Considering he's a Democrat, it will probably go to all sorts of left-of-center think tanks and foundations.

Moreover, considering Buffet's stock has averaged about a 15% increase per year for decades, you can rest assured that his billions are an excellent investment for the future of liberalism (presumably much of his wealth will go to liberal, or quasi-liberal causes). So do your "progressive" brethren a favor, and stop picking on the fellow. Otherwise Buffet might wake up and see modern liberalism for what it is.

monkyboy

There is no guarantee that capital invested today will equal more American jobs in the future. It might go towards opening a plant in India, the purchase of capital goods that actually eliminate jobs, or simply go to buying a so-so CEO a new yacht.

Did Michael Ovitz really deserve $140 million for a years worth of work at Disney? Does the CEO of Lockheed, a company that is entirely supported by government money really deserve $20+ million a year?

It's easy to point out the flaws of the left. But the right still clings to a vision of capitalism from the 50s, when common decency prevented corporate executives from looting their companies for, yes, excessive luxury.

When a CEO makes a huge income for no other reason than he packed his board with relatives and friends, I think it's fair to ask if it's justified. Particularly if that executives' company gets most of its income from government spending...

joeblow

Corey, thank you for confirming everything I said.

jb

joeblow

monkeyboy "I assume the private SS accounts will be tax free. In the long run, all capital gains will go to the private accounts. How will the government make up this lost revenue? Raise taxes on people who have to work for a living, I guess."

The accounts will be funded from diverted FICA, so we're not talking about lost capital gains tax revenues for the IRS. All funds that earn capital gains in SS private accounts are actually monies that would have been general fund liabilities in the form of T-Bills purchased by the SS Trust Fund.

I agree with you on one thing however. The govt will most certainly stick to the taxpayer, from the working man to the rich man, to cover profligate budgets rather than reduce spending.

jb

monkyboy

I think you are missing my point, jb.

Last year, American companies did pretty well for themselves. They had after tax profits of around $800 billion. They kept about half of that for reinvestment and paid the other half out in dividends. I assume some of that $400 billion was subject to capital gains tax. In addition, large sums of money were made by people selling stocks that have gone up in value. Some of this was subject to capital gains tax.

If we create tax free private SS accounts, they will reap the benfefits of corporate growth and profitability (otherwise, why make them?). Eventually these private accounts will receive most, if not all of the captial gains in the country, tax free. Lost tax income to the US government.

Sure, some of it will be recaptured when retirees draw down their accounts, but probably at a much lower tax rate.

Bill

For those who may be powered more by beliefs than by facts on both sides, an excellent article in Newsweek shows how, with a little tweeking, the problem can be resolved: http://www.msnbc.msn.com/id/6920720/site/newsweek/
The one point that persons overlook is that the presidents proposal is one big tax increase. Perhaps necessary to cover increasing military spending and rising deficits.

Ryan

"Take my case:
I am 62 and started receiving SS. My wife and I total contribution to SS is $89,080. The company had to pay an equal amount for a total of $178,160. If I had invested this money at the risk free 10 Year Treasury Note. We would have $ 591,547 today. Our life expectancy is age 85 and 88. If we keep this money invested in the long bond at 5.75% and live until 85 and 88; we would receive an average of $40,300 per year (2005 dollars).

Social Security will pay me $16,500/yr (adjusted for inflation) and my wife $7,512/year starting in 2008. So $24,000/yr in 2005 dollars.

If invested in stocks and bonds at a 60/40% allocation I would get $63,000 for the rest of our lives (2005 dollars).

So $63,000 vs. $24,000. Which would the voters choose if given the choice.

Jay S."


So let's get this straight:
We're operating under about about fifteen dubious/erroneous/absurd assumptions here. Among them:
- That you'll earn 5.75% for the rest of your life. Given the way Bush is treating the economy, that's questionable.
- That you can completely disregard the $2 trillion or whatever it is we'll have to borrow to implement the system (which makes investing in the US economy so secure, when you're borrowing against a deficit)
- That everyone here has the same amount to save and to contribute to social security, when an absurd amount of people in this country can't save - not because they are stupid or lazy but because they honestly cannot afford to
- That all benefits will remain the same when it appears clear that whatever 'reform' emerges, something is going to go to cover up the enormous drain left from Bush's upper class tax cuts
- That this whole scheme would work despite overwhelming evidence against it EVERY SINGLE PLACE IT'S BEEN IMPLEMENTED.
So yeah, best of luck with that. Especially when none of these concerns have been remotely addressed by supporters.

Ty

Mabye I'm wrong here, but there are a lot of excuses that we're given as to why there is a problem. Really, if you look at the system, when properly managed, there's absolutely no problem with it unless you get an influx of cripples. A boom in population and life expectancy will result in a largeer overall population (the population booms, you get the baby boomers popping out 2 or 3 kids a couple, ect.) An increase in life expectancy means you also get an increase in the health of the elderly and how long they can work for; these boost the income going into the social security system. The young population is almost always significantly higher than the older population unless you decide to kill a lot of them off in a war.

Moreso, you only have problems with paying money if you didn't put enough money into the system in the first place, or there's a radical decline then increase in living standards. The design of "everyone puts money in, and gets a certain amount out minimally" seems pretty simplistic and foolproof to me.

Additionally, if indeed 12.5% of, an as example, $20,000 a year job pays out, say, for 40 years, that's person has $100,000. Factoring out interest, taxes, investment, pay raises and inflation, that's 5 years of normal income if they squandered it all. If they didn't then theoretically by the age of 60 they'd own a house and have a lot of wealth built up. If it's $30,000, then you'd have $150K, if $100,000, you'd have $500,000 built up. Really in our day and age if you spend some time and really think it out, living expenses aren't all that bad if you do it right; it is the disposability and lack of long range planning in our society which is a problem. You can buy a new pair of $30 boots every 8 months or you can buy a pair of $200 boots and a $40 care kit and have them last 10 years if not longer. You can buy new bags for $20 or $30 a pop every year, or you can find some military backpacking equipment and mabye even some webbing for $60 or $80 which will last 10 or 20 if you have sewing skills. You can buy an antique cabinete which will last you lifetimes for a few hundred, or buy $80 stucko furniture. It's the luddite way of doing things really.

My grandma is living quite comfertably off of $100,000 she saved on her own in addition to the social security, but if the government did really get all that money and has had all this time to invest it, then I wouldn't see the elderly handing me carts at wal-mart.

I am of the opinion that most, if not all, of the money in the social security system has been essentially squandered on war, outright dumb research, secret projects (Area 51 can't be denied, and someone has to have the paychecks; there are a lot of other things going on however but going into them here will accomplish nothing). There's ample proof of the money being gone; most of what's in there is non-marketable bonds or as I call it, play money.

It's actually a pretty ingenious mind-hack if you look at it. Every time the government raises taxes they say it's to put money into social security and it's temporary. 5, 10, 15 years down the line nobody notices and they do it again so long as the living standard increases. They then take money out of it without telling anyone, then proceed to make up an excuse that, when thought about, really makes little to no sense on paper when mathematics are applied.

This money then, of course, gets wasted on making lucrative contracts for corporations or paying out to companies like halliburton for repainting rubble and selling troops $40 cans of dr pepper. Which really, how much trust can you have in the governments fiscal responsability when you hear stories like that, especially when it's known not to be uncommon and especially when nothing is done about it?

Perhaps you guys could show me some numbers to back yourselves up? I'd certainly like to be wrong on the whole "government squandered the cash" notion because if the fiscal responsability of the government has dropped that far into the toilet drain then it's only a matter of time before this shindig implodes and I'm out in the middle of the forest pickin' berries. My personal hunch isn't that it's the declining ratio of working people to retiree's half as much as it's the decline in the relative living standard which I personally believe to be a function of mismanagement at top levels of government and outright overconsumption spurred by the advance in marketing and advertising technology which was targeted at youth.

Americans do have massive credit card debt, and McDonalds does try to get people reliant on their poison..er..food, for emotional support, afterall.

And as a final point, I don't believe corporations are at fault here for paying taxes half as much as they are at fault for lobbying or bribing people to pass laws into place to make markets more favorable to them. And I don't even think the corporations, as a network of managers and people, are themselves responsable for that; I think the investors are responsable for that. There are an auful few people with an auful large quantitiy of capital and therefor, power over the government. It seems quite fishy when you've got a mass media owned and operated by 2 people who shut out of people like nader who, even though I may not support or even remotely like the guy, I still think he has a right to participate in a debate without being mugged by riotcops. I find it aufully fishy when the news industry stops covering things that really matter and purposefully turns down big stories which could net them big revenue like "social security bankrupt" for fear based consumption.

Corey

"I have serious reservations that Buffet's or Gate's billions would be better spent in the hands of the government."

Everyone here claims to love freedom and individual autonomy right? OK, then explain to me why it is better to have billions in the hands of unknown individuals with property and personal rights that prevent anyone from influencing what they do, vs. billions in the hands of a democratically elected fed/state/local government which can be petitioned, lobbied, voted on, or overthrown?

Locke and Hobbes loved their King, and you all love yours. All this talk of autonomy, yet all this trust in the gods the market has elevated above you. The reason I dislike liberalism so much is all of these creepy anti-democratic undertones.

It seems like, if we recite the incantation of personal autonomy enough, no one will see that corporate leadership structures look exactly like feudal facism. Supreme authority vested in the CEO/Soverign, who holds capital in the public trust and grants artisans the terminable right to ply their trade according to strict office rules for a middling sum of money.

Does civic virtue make you rich? Can you even get rich if you are truly actuated by the complex needs of the people around you? Do you really really believe that success in the economic marketplace is the prime qualifier for "control of the public trust"

These are honest questions, I have never been able to understand how people who prefess to distrust government prefer instead to rely on the unproven benevolence of some mega-capitalist who lives in a fortified compound and rules for life.

Yes I do believe that inequality is per se unacceptable, at least to the extent that you cannot justify it by showing a difference in skill or productivity on a personal level. That is why I modify the Marx quote "from each according to his talent" to read "from each according to his good fortune." The stuff that comes from talent you can keep.

World GDP is large enough to give EVERYONE on the planet $6200 US per year. Do you know how many billions are living below that? I'll give you a hint, its more than half the world's population. It is reasonable to assume there would be a global democratic majority supporting massive wealth redistribution...

Hey, I just figured out why y'all are afraid of democracy! :)

Fred

It's not hard to understand, Corey. For systematic reasons, most money spent by government is not spent as well as that in private hands. While it's necessary for some purposes, once it gets beyond those, it's people who didn't make the money, and therefore use it with less care spending it on others, and therefore with less care. It's people spending money who are not experts in particular things they spend it on, but are experts on getting money through government.

Also, taking money from those who have earnred it, and giving it to those who haven't lowers the value in society as a whole. While it may be more equitable if redistributed in small cases, overall, having those who earn it getting the money guarantees that value will be created to gain it, while giving it to those who do nothing for it rewards those who don't create value and takes money away from those who do.

To say this is somehow against autonomy or democracy(!), in that people can discover they can vote other people's money to themselves, shows, if anything, no your part, a strong disregard for the individual--a willingness to steamroll over rights in the alleged name of the collective.

I also don't understand your bizarre fear of CEOs. Corporations hold little power over me. If I don't work for them, they can do almost nothing to me. If I do work for them, I can always quit in a free market society, and if a company is a hellhole for workers, it'll go under. Meanwhile, the meanest governemtn employee can command me to appear before him, and if I don't jump through the proper hoops, he can force me to do what he wants or I'll go to jail.

And how do corporations get what they want from me--by pleasing me, that's how? (Unless they're in cahoots with the government--but then, that's the problem of government taking my money against my will.) Corporations are merely useful ways of organizing people to efficiently create value in our society. They are responsible for spreading more money to more people than almost any other legal construct. Those who don't like corporations would create a world those with less skill, who create less value, would be able to work the system better to gain more money, while consumers would have to settle for more expensive, lower-quality goods, in general. In particular, the poorest third of our citizens would be hurt the most.

The best way to unleash this creativity that helps everyone is to allow economic inequality. Legislating against such inequality lowers the quality of life for the average citizen, and if followed for enough, creates slavery.

If you gave everyone $6200 this year regardless of what they contribute, you would very soon have widespread poverty, since you'd be rewarding indolence and punishing initiative. If you think that people get money from luck, you'd soon find out how wrong that is if you take money away from the hardest, cleverest workers. (Some do get it through luck, but if that's all they have, they lose it, too.) Communist solutions of massive redistribution have always failed, and not just minor failure--destruction of basic freedoms, diry poverty, massive death.

monkyboy

"Communist solutions of massive redistribution have always failed, and not just minor failure--destruction of basic freedoms, diry poverty, massive death."

Hehe, Fred, that's a little over the top. Certainly the U.S. economy is the largest experiment in redistibution in history, and we seem to be doing ok.

I'm sure if Marx were around today, he would see the attempts to privatize Social Security as a clear sign that the proletarians had won. The bougeois have sunk all their capital into underperforming assets, and they want to sell them at a mark up to the workers.

Should the people really put their money into near-bankrupt airlines, debt-ridden and out of touch US auto companies, internet bubble 2.0 stocks like EBay, Google and Yahoo with their laughable valuations? I don't think so.

The wealthiest 20% of Americans own 96% of the stock in this country. They know they're holding paper that will be worthless in the long-term. This plan to get their sock-puppets in the Republican party to force us to buy their crap looks like a desperation move to me...and I'm sure Marx would see it that way too :)

Palooka

I think Corey fails to recognize that the poor ARE better off because of capitalism. The presence of inequality does not mean capitalism has made things worse for the poor. While redistributing every last dollar of income to achieve perfect equality would delight the poor at the time, there is no reason to believe such a redistribution would be beneficial to ANYONE in the long run.

I am unsure what the last commenter, Monkyboy, means by American being "the largest experiment in redistribution history." Every capitalist economy in the world today is suffused with "socialist" elements, but America isn't even close to being the "greatest experiment in redistribution of history." That'd be the USSR or Communist China. Two "experiments" which worked out wonderfully for the poor!

I have no problem accepting many social programs, and even seriously considering large expansions. But Corey and his ilk fail to recognize the truth that equity compromises efficiency. And if you compromise efficiency too much, then you aren't helping anyone!

monkyboy

Is China doing that badly, lately?

I recently saw a list of 25 Communist Party and Red Army officials who are billionaires...

I'm sure economists and capitalists would like to claim the success of America is due entirely to capitalism...but it's hard to get past all those redistribution programs like Social Security.

The battle between Kapital and Labor is over. Who makes the real money in America these days? Service is where it's at, now. Movie stars, CEOs, trial lawyers, sports stars, lobbyists, etc. are all making a fortune without investing a dime in the means of production. Poor ol' Kapitalists are only making 5% a year on their money...a return even Marx would say is fair.

Palooka

"Is China doing that badly, lately?"

Maybe you didn't notice, but China has adopted the evils of capitalism.

joeblow

"Because SS is insurance, not investment. There is only a modest link between payments and premiums in insurance, and we don't regard insurance as irrational for that reason."


It has been painted as such but it's NOT insurance by any definition I'm familiar with. Even SSA.gov says it is insurance against loss of earnings in old age retirement, yet everyone who pays in collects money, whether or not they have suffered a loss of earnings.

This is not what I call insurance. It's something else. So let's stop pretending it's merely an insurance policy.

jb

joeblow

maritn bento: "I would also like to point out that if the basic problem - to the extent there can be said to be a problem - is the decreasing ratio of young to old, it would not be hard for the US to increase its supply of young by simply easing its immigration requirements "

Good lord! You want to fix the broken pyramid scheme by importing more suckers to start at the bottom? Now I've heard it all. It's gotten to the point where for those defending Social Security status quo, it is an end unto itself. At all costs, Social Security must be preserved in its present form, no matter what the price. Unbelievable.

jb

Ken

"Everyone here claims to love freedom and individual autonomy right? OK, then explain to me why it is better to have billions in the hands of unknown individuals with property and personal rights that prevent anyone from influencing what they do, vs. billions in the hands of a democratically elected fed/state/local government which can be petitioned, lobbied, voted on, or overthrown?"

Because there's no conceivable reason why anyone who believes in individual freedom and autonomy would feel the need to control what billionaires do with their private assets, any more than they should feel the need to control what you do with your assets. Why do you object so strongly to successful capitalists being left to enjoy their personal assets in peace?

As for Social Security, we need to reduce promised benefits, period. Stop promising never-ending increases in the amounts that retirees are paid; hold the real value of their checks constant. Then, leave people alone, and let them invest as they see fit. I don't see anything morally outrageous about paying tomorrow's retirees the same as we pay today's, regardless of the gains earned by tomorrow's workers, and I don't see any reason to add in any scheme that gives anyone in Washington the right to direct your assets to their approved investments. Just limit the burden that people have to carry, contain the damage from our extravagant promises, and then leave people the hell alone after that. Retirement is not the most important thing in the world, after all...

Mahan Atma

"However, neither is there any special transition problem in moving to a fully funded privatized system since future generations in some way or another have to pay for the implicit debt due to commitments toward present and future retirees. But it is better to transit smoothly to fund this debt rather than require a sharp increases in taxes on later generations."

Hmmm... Surely, Prof. Becker, a person as smart as you can imagine more than two possible policy alternatives.

Personally, as a member of one of the younger generations, I would prefer a solution that spreads the debt more equitably across the generations, by forcing present retirees and near-retirees to pitch in their fair share.

Prof. Becker, can't you imagine a policy alternative that does so? I sure can, and I don't have a Nobel Prize in economics...

Jim S

"It's easy to accuse reformers of wanting to put disabled people out on the streets, but that's simply not the case." - joeblow

Really? Matt Blunt was elected the governor of Missouri. Young, Republican, hyperconservative, and the son of an equally hyperconservative Republican member of the House he represents the future of the party and of America if the Republican party has its way. He said that while the state has budget problems he wouldn't solve those problems on the backs of the poor. Medicaid could be reformed and made better. In January he announced his compassionate reforms. 89,000 people would be forced off of the Medicaid rolls and another 60,000 would be affected by further benefit cuts. A program called First Steps to help disabled children and their families would be virtually eliminated. Don't shovel some BS about how noble Republican reformers are. They're all nothing but pathological liars with the morals of Jeffrey Dahmer.

Daniel Chapman

Well... I suppose it's more original than Hitler...

monkyboy

Rereading Dr. Becker's original post, he seems to be saying that private accounts will somehow get the government out of the retirement business and force it into a more honest accounting of defecits.

How is the government getting out of the retirement business if there is a government panel picking which stocks we can invest our money in?

There is no such thing as an independent when it comes to money. Surely the Republicans will dump billions into News Corp, home of Fox News to reward them for their support. The Democrats, when they get back in power, will channel private account monies into alternative fuel companies, liberal press companies, etc. If anything, private accounts will get the government more deeply involved in our retirement funds.

The Social Security trust fund could just be allowed to sell the government bonds it holds on the open market if we want better accounting. No need to go to all this fuss to accomplish that.

Jack Sprat

"Rereading Dr. Becker's original post, he seems to be saying that private accounts will somehow get the government out of the retirement business and force it into a more honest accounting of defecits. [But h]ow is the government getting out of the retirement business if there is a government panel picking which stocks we can invest our money in?"

Administration of the accounts would be handled by agents of government, but government administration is different from singling out groups of citizens for income redistribution for partisan purposes. As Posner has pointed out, young people do not vote. So: as a practical matter, they do not participate in the process that determines how retirement benefits are allocated. Removing the government apparatus that permits the elderly electorate to single out the non-voting young for income redistribution is a good thing. That the system which does that will require some government administration is beside the point.

monkyboy

Social Security also helps younger people by easing the burden of supporting parents who have retired wihout sufficient funds, Jack. There will still be plenty of inter-generational battlefields like Medicare, Headstart, nutrition programs for children, etc. even if SS private accounts are approved.

Companies like Haliburton and Bearingpoint LLC receive government funds now seemingly just because the Republicans are in power currently. Imagine the trouble that will be stirred up if trillions of dollars in Social Security funds can be awarded to or taken away from companies based on their political ties.

On top of that, imagine how much money waits to be made trading on insider information about which companies will be added to or taken out of the approved index funds...why create the environment for so much political corruption if a simple adjustment to SS will keep it solvent through our current century?

David Nieporent

First off, the economies you speak of illustrate how you can create a strong economy with jobs for nearly everyone. It is the same thing the U.S. had last time we had a strong economy with jobs for nearly everyone... 70% top tax rate, progressive social insurance programs.

Except, of course, that employment in the U.S. is significantly higher than in Europe. In many of those socialist economies of western Europe the unemployment rate is _routinely_ at levels the U.S. sees only in deep recessions.

-------

World GDP is large enough to give EVERYONE on the planet $6200 US per year.

Well, no, it isn't. Money is just paper, Corey. (Or in the modern world, electronic bits.) You can shuffle around that paper, but all that does is destroy the value of that paper. If you confiscate 90% of a person's labor, you're quickly going to find people doing 10% of the work they used to do. And then what are you going to redistribute next year, instead of $6200 for everyone? $620 per person? Will there ultimately be equality? Sure. Everyone will be equally poor.

Jay Cline

China is neither communist nor capitalist; it is feudal with modern day warlords.

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