It's not that we don't trust people, it's that we don't trust corporations. How odd that a capitalist supporter would recommend an index fund. No attempt is made to sort out good companies from bad, just hand money to every company.

The last time the government tried to save a program by relaxing restrictions on what it could invest in we got the Savings and Loan fiasco. A few wealthy Republicans, including the Bush family, made millions and the government was left to clean up the mess. Average Americans went broke.

If economists want to be thought of as anything but pseudo-scientists, they need to look at facts instead of feel-good theories. If you had put your money into an index fund in September of 1929, you would have seen your investment drop 90% in value and would have had to wait over 25 years to break even.

The trillions of dollars of debt the government would have to add to its already massive debt to fund private accounts would make the economy as vulnerable to a depression as it was in 1929.

Mindless support of phony capitalism may make for easy boilerplate, but we are talking about the future of real people here. The fact that the Bush administration hasn't even produced a plan for Social Security reform should tell us something. In theory it's great, in practice it will just be a transfer of money from average Americans to the wealthy who currently own almost all stocks.

How about a little disclosure, Dr. Becker? How much stock do you own?

mb once again demonstrates his pseudo-logic. Instead of randomly picking a moment in history to pin his anti-market arguments, he chooses the one, and only one, date that could possible provide any semblence of credibility to his pseudo-theories.

Also, there is no need to add trillions to fund private accounts. Just take it from the SS tax and use it for social security.

Stick to blogging, mb. I'm not sure you'd survive anywhere else.

I guess I shouldn't be so critical; it does make him feel good, no?

With regard to the safety of a pay-as-you-go system of social security vs a market-based ownership system in the face of economic collapse, allow me to partially repost something I posted on another blog:

Fortunately, a similar argument for the survivability of private investment accounts, broadly diversified into conservative mutual funds, can also be made. If the market tanks to the point where these retirement funds are permanently devastated, wiping out lifelong savings, well, the economy would be in such shambles that even the tax rolls couldn't provide security. In either system, the national debt would skyrocket to sustain us over the troubles.

Both the 1987 and Tech bubble burst recouped their losses within a couple years. Competent financial advisors at the time told everyone not only to wait it out, but if you had money available, pump it back in to the sharply discounted market.

Even the aftermath of the crash of '29 recouped a large share of the losses in 4 or 5 years. And as those who stand guard over the current SS non-fund constantly point out, we didn't have a national retirement plan then. And our fathers and mothers and grandfathers and grandmothers survived. Scary? yes. Gut-wrenching and heartbreaking? ya. But survivable. And the ROI on stock investments, through bull and bear markets has proven consistent and fantastic. And the benefits of personal ownership on your own future? As MasterCard says, priceless.

So, mb's scare tactics are no better than that, misleading statistics to scare people into believing only the government can be trusted with that much money.

It'll take somthing more frightening than that to actually make me believe that.

Hehe, don't worry about me, Jay. I make a good living as a mime.

Let's pick another day for you, shall we?

March 30, 2000 - NASDAQ = 5048
Feb. 12, 2005 - NASDAQ = 2076

Hmmm. Anyone buying in at the high is sitting on 41% of what they invested. Explain to me what the robotic free-marketers plan is if the stock market goes in the crapper for twenty years?

"Let's pick another day for you, shall we?

March 30, 2000 - NASDAQ = 5048
Feb. 12, 2005 - NASDAQ = 2076"

Interesting that you chose Nasdaq, and not S&P. Also interesting that the assumption is that, in the context of a retirement plan funded periodically, we suddenly are discussing funding 100% of all contributions on one date. Three words that might help you out monkeyboy - dollar ... cost ... averaging.

mb, Well, there you go again.

Let's pick another useless statistic:

March 11, 2003 - NASDAQ = 1271

Feb. 12, 2005 - NASDAQ = 2076

63% gain in two years, with an index no less.

You really need to find another financial advisor, someone who understands that $1 = 100 cents.

Once again, my arguments stand unmolested.

"I have great confidence in the ability of even the poor and less educated to generally look out for themselves, however limited are the opportunities available to them. Judging from some but far from all the comments, many of you do not have that confidence in people."

I have faith in the proliferation of scam artists who, once they have done their work, leave their victims with no way of recovering their lost money. They are convincing. They are smooth. Their line of patter sounds quite reasonable to those with little or no experience judging factors that influence return on investments. What is your solution for them? Will you propose a system that not only imposes stiff criminal penalties on the crooks but replaces the funds lost?

I have faith that there are more Ken Lays, Bernie Ebbers and Jeffrey Skillings in the corporate world that have yet to be discovered. When they are revealed the innocent investors are always the ones who pay far more than the crooks.

I have faith that there is no way to change our system from one that leaves a large number of people closer to the bottom than the top of our economic structures. When they are there it is not only their opportunities but resources that are limited. Only so long as the guaranteed minimum you propose has a secure underpinning and is somewhere above the poverty level can any privatization scheme that is not simply placed on top of the existing system justifiable.

Jim, care to speculate on the impact of the Ken Lays, Bernie Ebbers and Jeffrey Skillings on an indexed mutual fund during that same time period?

mb, the dollar cost averaging that Jason refers to means that a retirement plan started on your Sep '29 date, faithfully funded every month in a DOW JONES index fund would have returned 300% in the same time frame you said it took to break even.

Like I said, get a better financial advisor.

Americans spend every dime they make, our government is borrowing hundreds of billions of dollars every year from foreigners, our dollar is at record lows, corporate taxes are the lowest they've been in decades, and China is rising up to challenge the U.S. in every aspect of business. Our examples show the volatiliy inherent in the stock market. There is no way to know if today is the peak of the market for the next 50 years.

The only thing we know for sure is that stock brokers, investment bankers, venture capitalists and the rich who currently own almost all stocks (the Republicans' major supporters) will be made very wealthy with private Social Security accounts whether the markets go up or down.

The surest way to guarantee the financial security of average Americans is to balance the federal budget. Borrowing 5+ trillion more dollars on the off change the market will go up continually for 50 years is a sucker bet.

One nice thing for the Republicans, the Social Security debate has distracted us from the pork laden budget Bush gave to congress this month. I'm sure that's just what they wanted.

I would like to address a few issues outside the box of privitization.

Currently Social Security is a defined benefit plan. The debate seems to be whether to make it a defined contribution plan, which is the trend for companies presently. The idea would be to entitle every retiree a minimum kitty that would then free the government from future obligatory payouts. The question is: what would be a fair minimum amount (not payments) that a person or family needs to survive?

The government's role would be to guarantee a minimum net worth for individuals, instead of a minimum benefit. A person worth a million dollars might not need any subsidy at all, while a pauper would at least have some type of income-producing asset that would provide the necessary funds to survive on.

The consensus is to put the funds into the stock market, which is not only dangerous because of its inherent volatility, but also it might overcapitalize businesses to the point where they would invest in foolish projects that would eventually go bankrupt. The better alternative is to spread the monies into a diverse universe of asset classes, e.g. real estate, business, bonds, foreign investments, etc. that produce a revenue stream, albeit not steady or equally rewarding.

The talk of deficits centers the debate on money flow and ignores governmental assets. Selling off property and such might eliminate debts the government owes. What is the balance sheet for governments, i.e. what are it's assets worth if they were put on the market? Governments, which means federal, state and local, all own massive amounts of real estate that can be collaterized. This is besides vehicles, office equipment and much much more in the way of marketable materials. Britain is suggesting marking gold to market, which increase paper wealth of the US gold supply almost ten times.

my problem is not that, as you say, "people are good but stupid" or that you believe privitization is a good thing. if it was a feasible alternative, I would support it too. My problem is that I raised about 5 points (mostly borrowed from Paul Krugman, I must confess) that you totally neglected to mention as you talked in the abstract. We live in the real world, not a fantasy world, and hypotheticals and theories don't work. We need a practical solution to a real and costly problem and you completely failed to realize that. That could be dangerous if someone, say, the head of economic policy for a presidential administration, did the same.

Jay, you have totally missed the point that was being made.

When something like a bubble burst happens, some people lose everything. They may leap from buildings like in 1929, or they may find themselves with only enough money left for food and rent. THESE people do not benefit from later recovery in "the market" viewed holistically. They are not able to reinvest, or they are dead.

In the context of a debate on social security, it is exactly these people who we are worried about. The fundamental basic assumption of social security in the first place was that EVERY person who works their whole life is entitled to a minimum standard of living in retirement. We did not want to watch ANY old person die of starvation. Because of social security, we have not had to for decades. Social Sequrity has never cared about the people who do well, or those who can afford good financial advisors.

Privatizing social security is a way of ending it, the only way that would not amount to political suicide. In fifty years, Bush will be hated for moving trillions of dollars from the public trust into corporate index funds.

And yes you can make an argument that "the economy" as a whole will be better off, but that is exactly not the point. Social insurance programs are NOT designed to further capitalism, they are designed to mitigate the immoral effects of unrestrained capitalism. You cannot say that some individual people will not lose all their money and starve in old age under the Bush plan. All you can say is that "the economy" will perhaps improve.

Your children will hate you for hijacking social insurance for short term corporate profits. When we all die and people have to once again take to the streets to demand basic minimum social guarantees from their government, they will curse Bush and everyone who supported him.

Those who disregard the lessons of the past are profiting at the expense of the future.

Corey, I have not missed the point. You are correct in stating that social security is to protect those few who have not been able to create an adequate retirement fund. But 1) that was not the point being argued, and 2) that Social Security has succeeded only by taking the rest of us down.

1) Is a pay-as-you-go the best, or even an adequate method of ensuring the most disadvantaged don't fall between the cracks? No. Is a compulsory savings plan up to the task? Yes.

2) SS currently taxes 15% of the GNI of the country. Objections to the proposed reform say it'd cost $2 trillion dollars to convert. GNI is about $10 trillion, so let's say SS pays out the 15% ($1.5 trillion) and forget about what is happening to the remainder $500 billion.

What is that $1.5 trillion for? Current benefits. If we are not trying to provide a retirement program for all, but a security net for those who would otherwise fall through the cracks, what would you say is an adequate yearly benefit for this net? $20,000? Let's say $30,000. $1.5 trillion distributed in $30,000 allotments is 50 million beneficiaries.

Huh? 50,000,000 people on SS getting $30,000 a year every year?

I'm not up on my demographics, Corey. How many Americans are currently over 50? Sounds like guaranteed income for all, not a saftey net for a few.

Finally, to make the point that MB and I were in disagreement, that the statistics he quoted is proof that private retirement accounts, invested in an indexed mutual fund using dollar cost averaging, are inadequate; well, go to Yahoo.com, download the historical prices for ^DJI (that's the Dow Jones Industrials) and run 'em through a spreadsheet. No need to hire a financial advisor, this sort of basic investment advice is freely available, even here on this blog. The results are surprising (well, not to me).

After 45 years of monthly investments of 15% of gross income yielded a nice little nest egg of 50 times your annual salary at retirement, and that assumes you never get more than a cost of living increase to offset inflation. And this was across TWO bubble burst, 1987 and 2001. If you're not greedy and want to retire early, after 35 years, it comes to about 35 times your annual salary.

C'mon people. Deep six the polemics and do the math.

As it stands, the social security system has never really paid off the massive amount of debt that created by the benefits for the original generation. This debt has been carried forward under this pay as you go system, causing looming insolvency as our population growth rate slows. Currently this debt is considered part of the social security system itself. If however, we use the current debate to borrow funds to infuse into the system that eliminate the rolling debt, we would create long term solvency within the system. An advantage for Democrat constituencies in this case is the shift of this debt from a system with regressive taxes (SSecurity) to one with progressive taxes (general fund).

If this is done by shifting the cost of benefits for current retirees and those over, say, 55 to the general fund and then giving everyone else private accounts (plus a lump sum payout as a function of age distance to 55 from the general fund), young people could attain their currently promised benefits by investing in treasuries, and probably surpass them by diversifying. As Becker suggests, any such diversification must be regulated and subsidized by guaranteeing some level of benefits and constraining investment options to mitigate distortions towards risk taking this guarantee causes. This returns the government to a more natural role as insurer rather then financial planner.

That said, I remain unconvinced that private accounts are the only way to accomplish this reckoning of accounting with reality. I do not see why Becker feels government institutions are doomed by time inconsistency problems (which is essentially what Becker believes the SSecurity “political” problem is). There are many examples of governmental institutions overcoming this difficulty (though some may argue that these victories are temporary and that we are witnessing he beginnings of the time inconsistency problem creeping back into the system). Two prominent examples are the Supreme Court of the United States as well as the Federal Reserve Board of Governors. The Supreme Court is defined (by some people) as the institution in society that must most resist the time inconsistency pressures of decisions, creating a stable body of law that people can be expected to know and follow (because of its stability). The Fed also must make time inconsistent decisions regarding interest rates in election years, yet the US does not experience huge inflations. So there are government institutions that overcome this problem.

(I guess if taken to hyperbolic extreme, we could argue that some small coterie of military and NSA officials defeat time inconsistency problems everyday by not establishing their own military junta.)

One potential solution to the problem of segregating the SS Trust Fund from problems of time inconsistency would be to appoint a long serving (i.e. serves terms longer then the term of the [elected] appointing official) technocrat to administer the system. This would be completely analogous to the other institutions in place that currently do not experience the time inconsistency problem (Bush v. Gore and Greenspan’s support of massive tax cuts notwithstanding).

tj raises some interesting examples of successful government programs, but arguments against Plato's philosopher-kings notwithstanding, every federal agency he/she doesn't list argue against such an approach.

Current federal 'techno-' and not-so-technocrats are nearly as entrenched as tenured professors. I don't see excellence coming out of our current bureaucracies.

How's that dollar cost averaging coming along on Enron, Jay? I bet you are picking up a lot more shares now at $0.03 than when it was at $90+.

Funny you would cite the DJIA as any indicator that long term investments pay off. The DJIA regularly dumps failing companies and adds in more successful ones to keep the Dow going up up up. You don't hear too much about General Railway Signal, Victor Talking Machine or Nash Motors lately. These were all original components of the Dow.

In the last 5 years, companies like Union Carbide, International Paper and Kodak were removed and Intel, Microsoft and Home Depot were added. It's easy to be a winner if you can just dump your losers at no cost. Holders of private SS acounts won't get that option.

mb, you are learning. There may be hope for you yet. It's easy to be a winner if you can just dump your losers at no cost. Yessir, the Dow Index regularly dumps the losers.

But you blow it with the next sentence, Holders of private SS acounts won't get that option. They don't need it; the fund managers of the private indexed mutual funds that will be investing our retirement money DO have that option, and in fact are required to, as they track the Dow index and follow the Dow right along, keeping the winners and dumping the losers.

Funny how you always come up with dog statistics and never challenge what I present as facts. I am beginning to understand why you choose the moniker you did.

Jay, you and Dr. Becker seem to have both a child's faith in and a child's understanding of the U.S. stock market. Nobody denies that stocks might be a good investment for an individual. I am saying it's not a good investment for every working American. It's like you find a good restaurant and invite everyone in America to eat there on the same night. Their experience will vary from yours.

The U.S. stock market isn't some imaginary, limitless thing that constantly rewards anyone who invests in it. It is, rather, a quite limited thing that is currently way overpriced.

Five years worth of Social Security money invested in the stock market will buy every single company worth owning outright. What then? Do we funnel SS funds in the walking corpses of the U.S. airline or auto industries? Inflate Ebay and Google to even more ridiculous stock valuations? Put our money into tobacco companies?

In short, if SS money is put into the stock market, there is no picking bad or good stocks, we will own them all. In 20 years, SS money is enough to buy every single U.S. company not bankrupt. And we will have paid waaaaay to much for the priviledge of buying them.

Facts, mb, facts.

This is the second time you have alleged that putting SS funds into the market will flood it and take it over without generating growth.

Facts, mb, facts.

Five years of $2 trillion dollars does equal $10 trillion dollars, which is the GNI (that is, gross national income, per year). Market capitalization (that is, how much it is worth, # of stocks times the value of the stock) of just the New York Stock Exchange is currently at $20 trillion. I think you are confusing income with net worth.

Facts, mb, facts

This is a capitalistic society, our markets are geared to make money. You pump more money into investments, you ARE going to create wealth. You have yet to provide facts to refute my claim that the influx of 401k funds in the 80s and 90s did in fact create new wealth. Hint: in the stock industry, this was called the 401k Revolution.

Facts, mb, facts

Ok, fair is fair. Here are some facts you might understand. The sky is blue only on Tuesday's when the groundhog sees his shadow.

Sorry, mb. No more free lessons. Come back when you can make an argument on facts.

The Quebec Pension Plan has invested its surplus in the private sector since the beginning, and was set up with structure which was supposed to make it impossible that its investable funds be used for political purposes. Some of its investments have been regarded as intended to support Quebec nationalism, but the policy of insulation worked to the degree that politicians have complained about not being able to direct the QPP's investments.

There doesn't seem to be any particular doubt that, if you hand a government a dollar, it will spend it. When you speak of the effects of a larger deficit, though, presumably you're referring to public perceptions? The Social Security Trust Fund is invested entirely in what I understand are non-marketable U.S. Treasury securities. That means that the surplus goes directly to the Treasury, where it's available for current government spending. Investing the surplus in the capital markets would force the Treasury to borrow in the market if it wanted to maintain the same spending, so the deficit might appear to the press to be bigger, but the markets would be following the net issues of Treasury securities of all types and would be aware that all that was happening was a substitution of one type of bond for another. And since the surplus of funds collected from the payroll tax would be put into the markets, the supply of loanable funds would go up by roughly the same amount as the demand (or by more, if the larger visible deficit discouraged the government from borrowing, for political reasons). Would there actually be much impact on the capital markets?

There are a lot of reasons for supporting investment of the trust fund surplus in the markets, not least of which is the fact that it would give low income retirees some claim on capital income - as it stands, the payroll tax essentially redistributes labour income. It's not clear, however, that most of the benefits couldn't be achieved by investing the trust fund in the market, and at the same time increasing the incentives for private retirement saving. After all, government will always have to be present in the system to act as an ultimate guarantor of people's retirement incomes. The Canada Pension Plan went from investing its surplus in provincial government bonds to investing it in the capital markets a few years ago. And proposals have been floated in Canada to create a private add-on to the Canada Pension Plan, in which individuals could place aditional retirement savings.

The one outcome which does seem to require the introduction of private accounts under Social Security is a higher, forced, savings rate among individuals at the margin of retirement saving.

It might be worth mentioning that the projected change ratio of retired to working population overestimates the impact of the ageing population on the dependency rate: because the youth dependency rate is much lower than in the past the overall dependency rate will not be much higher than it was in the 1960s. It's true that a young dependent doesn't necessarily cost exactly the same amount as an aged dependent, but the raw figures on the size of the aged population relative to the working age population do neglect this. And the retirement of the baby boom group will amount to a significant reduction in the labor supply, which will drive wages up, and ease the burden on the working age population.

"Deep six the polemics and do the math."

It is always funny to see people make a plea
for rational discourse in the middle of a rant. Pot, meet kettle... the only friend you will ever have.

The math contains averages, and averages smooth out the inequities such that no one notices the extremely poor or the extremely greedy. You want to put my grandma and Bill Gates in the same pool, then divide by 300 million and say, "look! anyone could live on that." The politics are showing through your math.

"They don't need it; the fund managers of the private indexed mutual funds that will be investing OUR retirement money..." (emphasis added)

Wow, the fourth branch of our government eh? Those Boston fund managers have been doing such a grand job of showing their integrity lately, it is no wonder we would trust them with several trillion dollars. Just think of the market timing on THOSE trades! I'm going to open up another Lexus dealership in Boston!

Lets just tax everybody 100% and put it ALL into stocks! After all, with those kind of returns, why waste time producing anything at all! I bet we could last a whole decade just on the inflation of the bubble!

Hehe, Corey.

Jay, The NYSE lists foreign companies' shares as well as domestic, including one third of the most valuable ones. Do we really want to dump our SS money into Chinese factories? In addition, many of the "companies" listed on the NYSE simply hold baskets of shares in other companies. The value of these shares is counted twice or more if you just sum up the market value of all shares on the NYSE.

Under the rosy scenario painted by the paid mouthpieces of Wall Street, ie the Repbulicans and many 'Economists', the only companies worth investing SS money in are those companies that will grow at 5% or more, or those companies that can pay 5% or more in dividends. Using those criteria there are maybe a couple trillion dollars worth of companies at best worth investing in.

More capital certainly does not equal more growth. Look at Japan with trillions of dollars sitting in accounts paying 1% annually. Their economy has been flat for over 10 years. Don't you think this massive amount of available capital would cause their economy to grow? Nope, the best investments they can find is giving it as charity to the US government...

mb, facts, baby. Where are they? But, to be honest, I like you're reference to the rest of the world. What would be so bad about American ownership in the world economy? That'd solve your Limits to Growth/Club of Rome problem with 'there is no place big enough for the money to go', huh? And China is a bad example. with only a little over $6 trillion in GDP, there is more room on the European continent, with a GDP equal to our own. We could assimilate them first.

Corey, yes, we obviously have differing politics. I take no umbrage on that. What do we do about the really needy and poor? $2 trillion a year divided amongst 50 million retirees, SS has solved that. But that is not a program for the needy, that is welfare for all, regardless. I'd have no problem debating the merits of welfare vs. critical safety net programs, but you first have to admit that SS is not a safety net program.

Money corrupts? Wow. What a concept! Now, I am not advocating turning a blind eye, but that is not the topic of debate. Those fund managers, whether they are in Boston or LA or Des Moines are already doing a heck of a job investing trillions of dollars. Those guys and gals at the SEC are doing a heck of a job identifying the bad guys/gals. Those guys and gals in the real fourth branch of the government, the media, are doing a heck of a job letting you know about it.

Don't hear too much about corruption in China; maybe we should model our society after them.

The fund managers are accountable to the people who put their money in the funds, accountable to the regulation and scrutiny of the SEC and the real fourth branch of the government, the media. Yeah, it happens, and it shouldn't be trivialized, but to condemn an entire system because it is only 99.9% perfect is throwing out the baby with the bath water.

To get polemic here, if that is to be our standards, we would have to send home all the government agencies that have failed in the past. Like the welfare programs that Clinton finally put a cap on. Two years, baby. We ain't feeding you for life. Welfare creates dependency, stifles innovation, disables the market forces that require success.

I believe that those 50,000,000 people should get a good retirement, especially as I will be one soon. How come Big Brother thinks he is more competent than I in planning for it?

As for the averages in the math, you really need to do your homework. Dollar cost averaging is not about theoretically "smoothing" out the rough parts, it is all about using averaging (hence the word in its name) to protect investments from natural swings in economic activity. Three smart guys even got a Noble Prize discovering that.

Oh, that 'fourth' branch you talk about, it isn't the fourth branch. The people controlling those investments, the people who would and should have ownership, the people who would provide oversight on those hired to do the investing; well, they are right here, in the first three words of the Constitution. That is who has the power, baby.

monkeyboy,

Please take this in the best possible light, but you spend a great deal of text arguing against principles you don't seem to understand.

Why would you argue that holding companies such as Warren Buffet's Berkshire Hathaway are not 'real' companies by placing quotation marks around the descriptive noun? Every mutual fund in the land is a company.

Why would you make an arbitrary distinction about the NYSE trading foreign issues? Diversification opportunity is a benefit. If we shouldn't invest in 'chinese factories', should we not invest in GM with its foreign factories, GE with its foreign factories, P&G with its foreign factories, and so forth?

What is with the comment about only investing money in companies that grow at 5% or more? Do you not understand what an index fund is supposed to do? Broad based indices are engineered to track overall performance of some segment of the economy. The S&P 500 is the 500 largest publicly traded US companies, for exampe. The Wilshire 5000 is broader by a factor of 10. The rosy picture is not that every company will grow at 5%, but that segments of the economy will grow at that rate.

The comment about Japan is especially bizarre. Japan's banking system is a complete disaster BECAUSE OF moral hazard created by government protectionism. Japanese companies are not competitive because they were not allowed to fail for decades. Having a high savings rate gives the individual money to invest. Having a government hostile to the creative destruction of capitalism guarantees that you have nowhere to invest it. Voila! Japan.

Jason, Berkshire Hathaway, because it simply holds stock in other companies, can't be counted in the total value of available investments.

If you want to get a 5% return on Social Security money, then the total value of companies available to invest in, assuming they average a 5% return, can be no larger than the GNP of America. Do the math.

Because of government spending and private companies and real estate, etc. That number is significantly less than our current GNP of around $11 trillion.

To reiterate a point I made before which no one, including Becker, has addressed: putting vast new infusions of capital into the stock market provides a structural advantage to large firms at the expense of small and medium ones. It is the small ones that provide most of the jobs, and the medium ones that provide most of the innovation. Peter Drucker has studied corporate innovation and done real-world consultancy related to it at probably greater depth than anyone else, and that is the conclusion he comes to. Big firms are too locked in to current markets and techniques; yes, they can afford a lot of R & D, but they cannot sacrifice their current markets to change direction. The new direction comes from the middle firms (the small can't afford much R&D, save in fields like software which are mostly R&D). The structural advantage this proposal gives big firms promises to stifle innovation, which is really America's only hope to remain competitive. And it's not a "natural" result of the "free market"; it will be an artifact of the beast we are creating now.

Becker continues to insist that a political plummet of retirement ages is inevitable, based on a broad survey of paygo schemes. However, the most relevant case is clearly the one we are discussing: the SS system of the US, which has already consented to *increasing* retirement ages. Becker is attempting to ignore a plain fact by trotting out analogies to other situation. Analogies are frequently useful but do not trump facts: you cannot argue that SS never permits increase of the retirement age, because it has, in fact, already permitted this.

As for those who like to argue from first principles, let me ask this: under what definition of freedom is freedom maximized by requiring people to give money to others, so that the latter may realize profit, only partially to be redistributed, on it? The current social security system sacrifices freedom for security and redistribution, and this is a generally-acknowledged tradeoff. But this proposal trades my freedom for several other things, one of which is the profit of someone else, said profit being expressly not based on "need" in the charitable sense. Suppose I object to corporate profits per se, as many people do. What is the moral basis for the government to require me to fund such entities?

Martin, I am not by no means addressing all your points, nor am I dismissing them, but my first reaction to your last point, Suppose I object to corporate profits per se, as many people do. What is the moral basis for the government to require me to fund such entities? is that under current proposals you would not be required to and I agree that you should not be required.

The 4% (not the 15% that has been generally touted here) of SS withholding that has been proposed to be allowed to go into private investments is first, voluntary, and second, it doesn't have to go to an indexed stock fund. You can fund government borrowing by placing that 4% in a US bond mutual fund. Or you can fund the General tax fund and opt out.

mb, I am honestly stupid. I don't get the math of If you want to get a 5% return on Social Security money, then the total value of companies available to invest in, assuming they average a 5% return, can be no larger than the GNP of America. Do the math.

No sarcasm from me this time; I really don't understand it.

Where does GNP come into the equation of worth?

"To reiterate a point I made before which no one, including Becker, has addressed: putting vast new infusions of capital into the stock market provides a structural advantage to large firms at the expense of small and medium ones. It is the small ones that provide most of the jobs, and the medium ones that provide most of the innovation."

I also made this point in the original thread but no one addressed it there either. This argument goes directly to the core assumption that privatization is justifiable because of trickle-down "well paying jobs" that magically are supposed to appear when you give millions to capitalists.

No one will address this because it is not in the talking points, the correct response to attacks on basic assumtions is hand-wringing about contractarian free will and the evil of "redistribution".

Corey and Martin:

Wilshire 5000 Index Fund as an investment option. Would that help you out? The beauty of the index option is that it does not pick winners. As companies move in and out of a given index, the fund will buy or sell it. The structural advantage is fairly evenly distributed, unless you are talking about the structural advantage given to those who issue stock at all vs. those who remain privately held. This does not get at 'mid sized companies' per se.

Note also that what you are also implying is that, on the whole, investment creates a net disadvantage to the economy unless cash goes predominately to the most risky (read young) investments. Innovation is, in theory, rewarded with price performance.

"This argument goes directly to the core assumption that privatization is justifiable because of trickle-down "well paying jobs" that magically are supposed to appear when you give millions to capitalists."

The argument is a little more sophisticated than that. Most who make it view jobs as an artifact of growth. A counter argument must be either that growth does not translate to jobs or that there is a better way to get jobs than to grow. The big lie is that there is an alternative. George Bush can't create jobs from the Oval Office, but neither could John Kerry. All you can do is grow or not grow. I hope it isn't too terribly disappointing for me to note that a direct handout to lower income Americans is the same as a cash subsidy paid directly to Wal Mart. There is an argument often made that this is how growth should be driven (as opposed to increasing investment), but even that is different from the argument that Wal Mart should not be able to turn a profit.

putting vast new infusions of capital into the stock market provides a structural advantage to large firms at the expense of small and medium ones.

I tried to find some reference where Drucker actually says this or the context that it was said, but can't. Can someone give me a big neon sign?

In the absence of any reference material, it does seem funny that someone would use Drucker to oppose investing in the stock market, given that Dr. Drucker enunciated the virtues of “worker capitalism” (The Unseen Revolution : How Pension Fund Socialism Came to America.)

From what little I have read (I am not an expert on Drucker), it is rather surprising that someone opposed to the current SS reform proposals would even mention his name, particularly given that Drucker, in the above reference, advocated the ESOP or employee ownership view that has now been made famous by Enron, MCI, etc.

Drucker is the guru of performance; he most definitely does not equate that with government.

Some short quotes from Drucker in an earlier article, Sickness of Government:

Of all social institutions, business is the only one created for the express purpose of making and managing change. Government is a poor manager.

government is big rather than strong; that it is fat and flabby rather than powerful; that it costs a great deal but does not achieve much. . . .

The best we get from government in the welfare state is competent mediocrity. More often we do not even get that; we get incompetence such as we would not tolerate in an insurance company.

there is no performance (in government) whatever—only costs. This is true not only of the mess of the big cities, which no government—United States, British, Japanese or Russian—has been able to handle. It is true in education. It is true in transportation. And the more we expand the welfare state, the less capable of routine mediocrity does it seem to become. . . .

Every government is, by definition, a "government of paper forms." This means inevitably high cost. For "control" of the last 10 per cent of any phenomenon always costs more than control of the first 90 per cent. If control tries to account for everything, it becomes prohibitively expensive.

The system which protects government employees from political pressures, Peter F. Drucker notes, "also protects the incumbents in the agencies from the demands of performance".

To fear corruption in government is not irrational.

Me again. I guess that says it all.

PS monkeyboy, fyi, this is called doing your homework, in case you need a refresher.

Jay, one measure of determining a companies' worth is its Price/Earnings ratio. A P/E of around twenty is consider a fair valuation.

This means a company is worth 20 times its earning. If a company earns a 5% profit on sales...it is worth 20 x 5% = its annual sales.

Even though the average company is only earning about 4% right now, and the average company is trading at a P/E of well over 20...saying a company is worth about its annual sales isn't a bad estimate.

Given this...ignoring our current $600 billion trade defecit...the annual sales of all US companies is a fair estimate of the total worth of all possible investments.

Taking a GDP of around $11 trillion and subtracting government spending, private companies sales and transactions like college tutition and payments to landlords, etc. leaves you with about $6 trillion in revenue generated by publicly traded (ie, the ones you can buy stock in) companies.

monkeyboy:

You are using specific terms very loosely. A P/E ratio is not a way to value a company as a whole. It is a proxy measure for the actual value of a company vs. its current stock price. P/E must be put into context of growth, because the market looks forward. So, a company with a large initial investment that is not expected to pay off for a few years may have a very high P/E ratio, and justifiably so. Your analysis above fixates on a certain point in history and therefore on the wrong variable.

What you are getting at is that, over the long run, the rate of growth of corporate profits can't exceed the rate of growth of the economy as a whole. Also, you are getting at the notion that P/E is already above historical norm on average. The questions to sort out are:

"What do we expect to happen in the way of growth and earnings?" and

"How will P/E ratios be brought into alignment with historical trends so as to justify historical growth rates?"

The historical answer to the second question is that there will be a correction. Note that this is not the same as saying that the market is doomed to low growth forever, which is the implicit assumption of the criticism you raise. If the market tanks in one year sufficiently to bring P/E to historical levels, we can expect historical growth, on average, thereafter if we hold to the notion that historical P/E is sacrosanct. Another possiblity is that higher than historical rates of innovation would justify higher P/E with higher growth than one would historically expect. Still another is that globalization helps us out quite a bit.

Jason, P/E isn't a bad estimate of a companies' value. Sure, start-ups can have a high P/E, but these companies aren't good investments for long-term stability. Nor are walking corpses like United Airlines and General Motors.

If you are going to invest for steady growth, you need to avoid high P/E, high risk stocks and you have to avoid the obvious dogs. I have yet to see a reliable figure on which companies fit this description and how much they are worth. There is also the question of whether Social Security money should be put into companies like Phillip Morris.

Even if private accounts get approved by congress, we may be trying to get an elephant to mate with a mouse. Social Security currently takes in about $600 billion a year. Most plans I've seen call for one third of that, or about $200 billion a year to be invested.

The total value of companies available to invest in is much smaller than most people seem to realize. Five years of SS funds equals over a trillion dollars. Is there room in the market for it. If so, for how long? If this is to be a long term fix, the other great source of wealth in the U.S., real estate will have to be looked at too...

"Still another is that globalization helps us out quite a bit."

Globalization only helps you out in the sense that you can use it to bring as-yet-unexploited resources (labor, oil, bananas) into the economy at discounted rates (vs. what it would cost to exploit equivalent resources locally). Of course, like all wells, this one will also eventually run dry.

In the last decade, our ability to globalize has increasingly run into the rest of the world's resistance to being globalized. It is harder and harder to hide the sweatshops given the internet and cheap global air travel. We can attach the terrorism label to the resistance, but we still aren't making any net profits in the middle east.

Last time we had crazy market growth, it started and ended in the tech sector, with a rush to bring startups public and admittedly silly valuations all around. Trillions went into the market, and things looked rosy. Wages went up across the board, jobs were everywhere. Of course, it crashed, but NOT all the way.

Now Bush and Becker (and by association Posner) want to drive trillions into the market again, with the unmandated conversion of social insurance trusts. They are correct in predictng that the short term effect of their plan will be to drive up the valuations of companies that are selected for participation in the index.

Of course, there is a difference that should be glaring between growth driven by innovation and growth driven by index fund investment. It is the mystery behind the "jobless recovery." (and no, I refuse to count part-time jobs now held by people who used to work full time as progress) You CAN grow the economy without changing the poverty rate simply by making sure the new money made goes exclusively to wealthy white male property owners. After all, its in the constitution eh?

So, the trillions are going into the index funds, and that brings me full circle to my original point that this is nothing but corporate welfare.

Large companies do NOT innovate, they regulate established markets. They purchase new technology only when the market for the old is saturated. They hire someone new when someone dies.

If Bush was serious about stimulating growth, he would foster a startup/IPO climate and make it easier to create 80 new jobs for every good idea. He would leave Social Security alone, as a safety net for the wild ride, and would open up stem cell research.

But Bush is only serious about rewarding "his base", the "haves, and the have mores." Bush said it, not me, not Michael Moore.

BECKER:"It is inconsistent to complain about the low savings in U.S. and object to a system that is likely to increase savings, much of which would be invested in equities. Higher savings would reduce dependence on foreign investments in the country, and would make more domestic capital available to be invested. Is that bad?"

It won't make more capital available. Every dollar diverted from SS will have to be borrowed by the Feds on the private market.

BECKER:"To be sure, people make mistakes, "

The Silent Scandal: 401(k)s and the Failure of Responsibility
by Robert Markman
Journal of Financial Planning
http://www.fpanet.org/journal/articles/1998_Issues/jfp1298-art2.cfm

Reality #1

Most investors cannot or will not manage their own portfolios. Adding more choices does nothing to change this and probably only makes things worse. Adding more choices to a 401(k) seems absurd when nearly every quantitative study confirms the fact that many plan participants are woefully ignorant of even basic investment fundamentals.

Reality #2

Calls for "more" and "better" education are the mutual fund industry's version of President Johnson's "War on Poverty." Enormous resources have been and will be expended. The goal is so noble, so self-evidently positive, that we are willing to ignore the fact that there is little evidence that force-fed information translates into substantially better results for most investors.

Reality #3

Survey after survey confirms that the shortage Americans feel most is not information, not education, but time! Barron's recently reported research that says "an astounding 44 percent confessed that, given the choice, they'd rather have more free time than money." (We doubt that they meant more free time to read Barron's.) The "lack of time/unwillingness to take the time" syndrome is the ultimate trump card in the whole equation. All efforts to empower, educate and expand choice ultimately fail when confronted with this reality. The bottom line is that current moves to expand participant choice and educate investors is the financial equivalent of rearranging the deck chairs on the Titanic.

Myth of Bull Market Returns
The answer lies in a common misperception about mutual fund returns. Even sophisticated fund investors frequently miss the fact that the return achieved by a fund is often far different from the return achieved by the investors in that fund.
The Boston market research firm Dalbar found that between 1984 and 1995 the average stock fund posted a yearly return of 12.3 percent, while the average investor in those funds made just 6.3 percent.

Fear of [Social Security] privatization generally centers on concern over what the long-term consequences would be for the inexperienced and uninformed investor. And, as we've seen, that concern is more than justified.

BECKER:"many of you do not have that confidence in people."

Chairman GREENSPAN. Senator, I thought that the initiative that
the Senate produced was very important and very effective.
As I said to the Chairman before the hearing, my original view
was that taking accounting standards and moving them out of the
private sector was really unnecessary because my view was always
that accountants basically knew or had to know that the market
value of their companies rested on the integrity of their operations
and that, indeed, that signature that they put on an order form is
where the net worth of the company comes from.
And that, therefore, their self-interest is so strongly directed at
making certain that their reputation was unimpeachable, that regulation
by Government was utterly unnecessary and, indeed, most
inappropriate. I was wrong.
FEDERAL RESERVE’S SECOND MONETARY POLICY
REPORT FOR 2002, COMMITTEE ON
BANKING, HOUSING, AND URBAN AFFAIRS
UNITED STATES SENATE, JULY 16, 2002

mb, so if value in your calculations is income multiplyed by P/E and the average P/E is 20, why are you not multiplying GDP times 20, giving $220 trillion in capacity to absorb an influx in funds?

Oops, you're multiplying only the profit portion. which completely ignores assests.

Sorry, my bad.

Ok, let's be straight here. Value is market capitalization, that is stock price times outstanding shares. That is, the total amount of money invested and its current value, which on the Big Board is $20 trillion. Divide that by 4% (not the total 15%) of GNI proposed to be potentially diverted to the market ($10 trillion times .04 = $400 billion) and you get 50 years, not 5 years.

So, mb, your homework for the day is to find out how many times Big Board capitalization increased from 1955 to 2005, multiply that by $20 trillion and determine when we can expect the SS fund to overwhelm the market. And don't tell me that is an unreasonable expectation, because it is at least as reasonable to assume that, as it is to assume the market cap will not change at all, which is what you have been braying.

You CAN grow the economy without changing the poverty rate simply by making sure the new money made goes exclusively to wealthy white male property owners. After all, its in the constitution eh?

Corey, you really diminish your credibility with statements like this. Read your Constitution, with Amendments. Specifically the 15th

Amendment XV

Section 1. The right of citizens of the United States to vote shall not be denied or abridged by the United States or by any state on account of race, color, or previous condition of servitude.

Section 2. The Congress shall have power to enforce this article by appropriate legislation.

and the 19th

Amendment XIX

The right of citizens of the United States to vote shall not be denied or abridged by the United States or by any state on account of sex.

Congress shall have power to enforce this article by appropriate legislation.

Jay,

I accept the figure of $20 trillion for the total market value of every publicly traded company in the world. I still don't think SS money should be put into foreign companies, though.

Looking at just U.S. publicly traded companies you get a total market value of around $14 trillion.

If you look at the value of just the Standard & Poor's 500, give or take the 500 most valuable U.S. companies, they have a combined value of around $12 trillion. So about 85% of the total value of U.S. stocks available for purchase are in just 500 companies.

How have they risen in value? As you might imagine, they have actually dropped in value over the last 6 years. I don't think you can go back to 1955, when our major competitors were still clearing away the rubble from their economies left from World War 2.

The value of the S & P 500 is down over the last 6 years and flat over the last 10 years. As the S & P 500 represents the maximum return large investments can earn, it certainly doesn't look promising for the SS private account plan...

Of course, the answer to your concern monkeyboy is to not force anyone to invest their money. Let them keep it to do whatever they like with it.

jb

mb, the 50 years is based on the estimate I gave to address your concern for how long it would take to flood the market with SS funds.

Dispute the 50 years or answer the question.

"If you are going to invest for steady growth, you need to avoid high P/E, high risk stocks and you have to avoid the obvious dogs. I have yet to see a reliable figure on which companies fit this description and how much they are worth. There is also the question of whether Social Security money should be put into companies like Phillip Morris."

Let me get this straight. If we discard all growth stocks, and restrict ourselves to P/E on the order of the incredibly arbitrary figure of 20 ish, then take out companies that don't sell products you like and companies with foreign ownership (presence?) from that list, you are saying that there aren't many companies left? I think I agree with that.

The other point I think I'm getting from all this is that a future-looking investment on the part of a company that is expected to pay off in the future should result in a high P/E currently. Innovators, therefore, have high P/E. If we exclude innovators from our list of available investments, there are no innovative companies to invest in. I think I agree with that statement, as well.

A P/E of 20 is hardly arbitrary, Jason. Only stocks trading at a P/E of 20 or below are returning the 5% needed to make private accounts viable.

It's hard to see how we are going to invest trillions of SS dollars in the stock market and not put most of it in S & P 500 companies as they account for 85% of the market value of all U.S. stocks.

Look at the internet bubble to see the fate of most stocks trading at high P/E ratios, Jason. A few were 'innovators', the rest were junk.

Jay, it looks to me like 25 years will buy every single share available. Don't forget, the SS is supposed to grow at 5% compounded each year.

Ok, let me blow the lid off of this notion of flooding the market and 'consuming' all available stocks.

Can't happen (despite my willingness to cater to mb's arguments). Why?

More money comes into market, increases demand for stock, stock price goes up, company doesn't like the high price of stock and offers split (say 2 for 1). Now, there are twice as many stocks available at old price and company has twice as many non-distributed shares available at old price.

Company sells some of that stock, pays off debts, reduces operating costs related to debt servicing, has more economic muscle to intiate projects and programs that it shelved because it didn't have the financing and didn't want to incur additional debt to finance.

Down the road, company benefits from investments from sale of stock and bottom line improves. Market Cap increases with increased profits.

If we are going to measure the true capacity of a market to take in an influx of investments, in the short term, one component (and there are others) would have to be the amount of non-distributed stocks, not outstanding stock. In the long term, increased productivity, return on investment, yadda yadda yadda, expands total value and yes Virginia, for the small amounts of influx we are talking, it is insignificant.

Sorry for the games, but I really thought someone would see the error a whole lot sooner (yeah, I am laughing all the way to the bank)

Hehe Jay, someone should make you president. Unfortunately, stock splits don't double earnings. You would simply be doubling the P/E of the stock. The whole argument for private accounts is that they would have a higher rate of return than the current policy of buying government bonds.

A more likely scenario is SS money, after causing a brief spike in stock prices so Bush supporters get a nice bonus, is that it will crowd out foreign investment and regular investers from the stock market...

In the end, I don't think politics or theory enters into this debate. Are there enough shares to absorb SS money. Hard to say, but it doesn't look like it.

"Company sells some of that stock, pays off debts, reduces operating costs related to debt servicing, has more economic muscle to intiate projects and programs that it shelved because it didn't have the financing and didn't want to incur additional debt to finance."

A perfect example of why that model doesn't wash is the current activities of the oil companies. They are awash in cash. Oil is hovering at just under $50 an hour. No serious analyst thinks that (pending some amazing technological miracle) oil prices will be dipping below $30 a barrel ever again, much less any time soon. What do the oil companies do? They base all of their spending on exploration on prices of $20 a barrel or lower. There is some financial activity in the nature of dividend payouts. While that benefits shareholders it doesn't necessarily do wonders for overall economic activity. Several articles I've read said that there is a ton of VC going begging for someplace to invest it. What does that say about your claim that the existence of investment money will always lead to economic growth and jobs?

Wilshire 5000 Total Market Index

Check volatility vs. S&P 500. Check total number of investable shares. Check historical performance. Check whatever you want, it seems to solve a great deal of the problems you think are out there with only going with S&P 500. It is probably the most broadly diversified index in the world. I think, despite its name, it has over 6,000 US based companies.

Anon glosses over long histories of performance of small and mid cap stocks, telling us that volatility makes them not pay off. Corey complains that invested assets would only go to The Big Boys, even though real innovation comes from the smaller players. MB tells us that the largest 500 companies in America do not have enough shares to support social security invested over a period of time (because, you know, no one will be selling shares to spend their money), but then tells us that no other companies can be invested in.

Given all of these assumptions, I have to agree that the problem would be unfixable. I happen to disagree with all of them, so I don't know where that leaves us.

Smaller, growth oriented companies innovate more, that is true. They take risks. They borrow and make big investments. These investments quite often pay off. Innovation IS rewarded on the market by share price movement. Diversification across capitalization categories is smart, not foolish. Some of this money will go into bonds because diversification across asset classes is smart, not dumb as well. As people approach retirement, more and more of their money will go into debt instruments as they begin to seek stabilization, income, and ultimately liquidity. I am not at all convinced that even if we only invest in the S&P 500, we will run out of shares.

I am not convinced, either, Jason. Just trying to get the facts. I think the debate about Social Security has raised everyone's knowledge of how that program works. Private accounts have made me dig deeper into corporate America.

One thing I find strange is that both the DJIA and the S&P 500 regulary dump underperforming companies and replace them with up and comers. In the year 2000 alone, the S&P 500 removed 147 companies from its index and replced them with better performing ones...

Those who claim that the stock markets always rise in the long term frequently point to these two indexes as proof. Constantly dumping losers and replacing them with winners doesn't seem like it would give an honest picture.

I welcome suggestions on where to look to get a clearer picture :)

MB:

You have to be careful not to conflate the following two statements:

"Stock A always goes up over the long run."

"The stock market always goes up over the long run."

The difference is in cases vs. moving averages. What the second statement is saying is that the performance of some defined segment of all stocks will increase in the aggregate over long enough periods of time. You look at the underlying value of the top stocks, whatever they are on 1/1/1970 and compare that total value to the underlying value of the top performers. The value increases over time. Capitalism is about creative destruction in large part, so, classically, no one would expect Walt's Buggywhips LLC to remain on the S&P 500 in this day and age. The question is, what should the indices be tracking?

Note, too, that the second statement is still very strong, and I don't know that many people who would comfortably use the word 'always'. Investment is about risk - and there is more than one kind of it. The part that most people don't understand is that conservative investment carries its own risk by eliminating opportunity for growth. A financial advisor who suggests to someone in their 20s that their retirement assets should be invested in money market securities or bank accounts because they are "safe" could probably be sued for negligent practice. This is not because, as some believe, financial advisors get kickbacks from big business, it is because that financial advisor illustrated an ignorance of risk balancing. The risk of insufficient growth, not beating inflation, and so forth is very real. Pay as you go social security also carries risk. It shifts the risk from the marketplace to the political arena, and any honest assessment should not talk about guarantees of pay as you go vs. risky stocks. The risks in the current system are demographic and political. If you have the political clout to vote yourself a greater return on your payroll tax, you can get a greater return. For the younger worker, this risk looms large. The risk of having to pay for more and more medicines for the elderly, more and more retirement funds for the elderly, and so on is not somehow 'fake' risk. It is real.

Unfortunately, stock splits don't double earnings. You would simply be doubling the P/E of the stock.

When a stock splits (say 2 for 1) there are twice as many stocks out there for half the price. So your P/E (price OVER earnings) would likewise be cut in half.

I'm sure this is just an innocent error on your part.

You are right, Jay. The P/E doesn't change in a stock split. P/E generally = Price of share / earnings per share.

Still struggling with my totals :)

I looked into new companies entering the market in the form of Initial Public Offerings (IPOs). Though it varies, it seems to be about $100 Billion worth of new companies a year are added.

It is much harder to total the value of companies 'leaving' the market. IPO = Birth rate, Bankruptcy = Death rate? Hehe. It is hard to tell when a company dies. Some go bankrupt only to rise up again...sometimes screwing the people who held shares in it before. Some are sold for parts. Some dying companies just merge with others. Its a hard number to track.

It seems like we may never really know if stocks are a consistantly good deal over the long run. The only way to truly tell would be to track every dollar put into the market, then somehow see what it was worth when it was removed. An impossible task.

It seems like we may never really know if stocks are a consistantly good deal over the long run.

Of course, you could always track indexes as broad measures of a market, or overall market cap, or, oh, sorry, you don't believe in them.

How about annual GDP? Oh, yeah, you would have to believe the market generally reflects the economy, as well.

The GDP actually counts government spending and output by private companies you can't invest in, Jay.

It's not that I don't believe in Indexes, I think they just show something other than how all stocks are doing...instead they just show how a select few are doing.

It's kinda like saying the average American worker is doing better. CEO pay has skyrocketed recently, but median income has been flat for over a decade. I'm looking for something more than how the elites are performing.

Jay,

I don't have most of my Drucker material handy, but I do have a few things that might give you a more fleshed-out idea of this complex thinker, who is hardly the sort of anti-government ideologue you've painted him by quoting in isolation a single essay written at the height of big government liberalism. Also, your attempt to paint Drucker as an advocate of Enron-style "employee stock ownership" is way off the mark. Let's start with that. Drucker proposes widespread employee stock ownership as a way to counteract excessive executive compensation (and, yes, he did acknowledge, back in the 1980's, that top executive compensation needed to come down. It was, of course, much lower then than now). Here's a bit from "Overpaid Executives: the Greed Effect", in The Frontiers of Management:

"Few people - and probably no one outside the executive suite - sees much reason for these very large executive compensations... One solution might be to establish a visible link between executive compensation and employee welfare. In the smokestack industries especially, managements are now trying to establish such a link between employee welfare and company performance through employee stock ownership or profit participation.... A simpler way would be a voluntary limitation on the total after-tax compensation package paid any employee - incuding the chief executive officer -to a preset multiple of the after-tax total compensation package of the rank and file... If the multiple were set at 15.. it would be eminently acceptable." "Overpaid Executives: The Greed Effect" from The Frontiers of Management (1986)

Here are some other quotes that show Drucker is a man of complex views, not a Republican cartoon:

"although I believe in the free market, I have serious reservations about capitalism. Any system that makes one value absolute is wrong." Interview in Inc., 1985 In The Frontiers of Management

"It is futile to argue, As Milton Friedman, the American economist and Nobel laureate does, that a business has only one responsibility: economic performance.... Every organization must assume full responsibility for its impact on employees, the environment, customers and whomever and whatever it touches." "The New Society of Organizations" from Managing in a Time of Great Change (1995)

Finally, on the question you specifically brought up on the government and social problems, here is a more nuanced view from "Social Needs and Business Opportunities" in The Frontiers of Management:

"From the British Factory Acts of 1844 to Bismarck's social security legislation in the 1880's, one social problem after the other was tackled by governments - and solved triumphantly.

The twentieth cnetury and especially the last fifty years saw this idea elevated to an article of the faith, the point where a great many people consider it practically immoral and certainly futile for a social need to be tackled any way other than by a goverment program... But the years since then have brought increasing disenchantment.

One reason is surely that government is doing far too many things. By itself a social program accomplishes nothing but the expenditure of money. To have any impact at all such a program requires above all the hard work and dedication of a small number of first-rate people. First-rate people are always in short supply. There may be enough for a very few social programs at any one time... But under the Johnson administration, the United States in four short years tried to launch a half dozen - in addition to fighting a major overseas war."

You can see how this is a much more thoughtful and balanced view of the problem than the hyperbole that you quoted, and yet you can see how, at that particular moment, Drucker might be tempted by hyperbole, as so many others were during the 60's.
And, indeed, Drucker will freely engage in hyperbole on the other side as well. To wit:

"Economists never know anything until twenty years later. There are no slower learners than economists. There is no greater obstacle to learning than to be the prisoner of totally invalid but dogmatic theories. The economists are where the theologians were in 1300: prematurely dogmatic." Inc. interview, IBid.

Sorry, Jay, I'm afraid you didn't finish that homework.

"It's not that I don't believe in Indexes, I think they just show something other than how all stocks are doing...instead they just show how a select few are doing."

I have to ask what you think you would be measuring here. What would the absence of Walt's Buggywhips from the big board tell you? The fact that companies fail is not an indictment of the market in general. It is, in fact, a feature that demonstrates the market is working. Be afraid of the economy where no one ever goes out of business, because capital ain't being used right in that neck of the woods.

It is very hard to dispute that stocks as an asset class have done very well over periods of time greater than 7-8 years. It is very hard to dispute that diverisifed stock holdings such as those in mutual funds spread the risk of having all your eggs in the Buggywhip basket out sufficiently that you can capitalize on the performance of stocks in general. Are there more dead companies than living ones over the course of history? Almost certainly. That doesn't tell us anything, though. The value of those failed companies is small compared to the value of the winners, and the value of the winners rises year over year. Creative destruction in net creates wealth.

"The value of those failed companies is small"

The value of failed companies is exactly zero :)

What's important to know is how much capital they took down with them. Not every investor has the luxury of writing off their losses at zero cost like the indexes do. Someone has to go down with the ship...