"Paying for the Welfare State Without Raising Taxes"

Mark Thoma offers Paying for the Welfare State Without Raising Taxes - Roger E.A. Farmer.

My initial thoughts:

1. If you get the economy running well, the need for a "welfare state" diminishes.
2. People think the Federal government runs in the red because it spends more than it brings in. That's perfectly true, as far as elementary school arithmetic is concerned; but if you really want to know the reasons, you have to get into the economics of it.

From the initial summary of Farmer's post:

Despite the old economic adage that there’s no such thing as a free lunch, there is a way for governments to finance social-welfare programs without imposing a higher burden on taxpayers. National treasuries should establish Social Care Funds that borrow money at low interest rates and invest the proceeds in the stock market.

The stock market is a casino. It isn't safe assets. Calling it "social care" doesn't change that.

Farmer asks: "What if there really is such a thing as a free lunch?" He's grasping at straws.

He dismisses the risk of loss on the grounds that a hundred-year average shows the stock market out-performing government bonds by almost seven percent (according to "one study"). But no one who suffers a loss in the market overlooks the loss.

Stock market performance depends on economic growth. When we can no longer get good growth, market performance comes to depend on rent-seeking, which undermines economic growth. To the degree that these statements are true, Farmer's plan to "borrow money at low interest rates and invest the proceeds in the stock market" is no more than institutionalized rent-seeking. It will prop up the market and provide capital gains for other investors as they cash out.

But are those statements true? Yes. As Farmer observes: "There is some evidence that the equity premium has been a little lower in recent years". But he interprets this evidence optimistically rather than realistically, saying "let’s conservatively assume that it will be approximately 4% over the next 50 years."

According to his evidence, the equity premium is "large" and

"provides a potential motivation for investing US Social Security funds in stocks rather than government bonds".

Farmer expands this thought by proposing that we borrow specifically for the purpose of investing in the stock market. But the picture of the equity premium as "large" is a still photo; what the movie shows is decline. Farmer is offering a prospectus that no one should consider.