2004 Nobel Prize in Economics recipient Edward C. Prescott wrote this earlier Wall Street Journal ($) piece advocating a restructuring of the current Social Security system to one based on mandatory individual retirement accounts.
In this op-ed from today’s WSJ, Professor Prescott again makes the case for converting Social Security to a system based on mandatory savings accounts, and makes his case with powerful reasoning based on simple common sense:

Social Security was developed at a time when the number of workers paying into the system greatly outnumbered those who were receiving funds, and thus the promise made by government was easily kept. But times change while policies atrophy, and Social Security has evolved into a system that places an increasingly onerous burden on the young; the ratio of workers to elderly has shifted from 41-to-1 in the 1930s, to 3-to-1 today.

Professor Prescott points out that it is rational for young workers to protest having to pay a disproportionate amount to subsidize such a system by working less to support such a system. Thus, he argues, let’s change the system to address such rational behavior:

Would such changes in tax rates and changes in government promises affect labor supply? Theory says “yes,” the statistical evidence agrees, and common sense concurs. These young workers are rational. They make labor/leisure choices on the margin, and these marginal choices add up.

So what to do? How to move from a pay-as-you-go welfare system to a self-funding retirement system that benefits from individual maximizing incentives? Again, the answer begins with the insight that labor supply is responsive to tax rates. We simply cannot keep cranking up Social Security taxes with impunity. What we need to do is turn the present tax-and-transfer system into a bona fide individual retirement system that is in line with individual incentives.
In short, the answer is to establish a system of mandatory investment accounts for retirement. Why mandatory accounts? Because without mandatory savings accounts we will not solve the time inconsistency problem of people under-saving and becoming a welfare burden.

And Professor Prescott observes that private retirement investment accounts must be made mandatory precisely because people are rational with their money:

The reason we need to have mandatory retirement accounts is not because people are irrational, but precisely because they are perfectly rational — they know exactly what they are doing. If, for example, somebody knows that they will be cared for in old age — even if they don’t save a nickel — then what is their incentive to save that nickel? Wouldn’t it be rational to spend that nickel instead?
So, indeed, people are acting rationally when they choose not to save. We have rational people making choices based on the rules. The trick is to get the rules right. A mandatory retirement system, properly designed, would establish effective rules.

And then with the wisdom that generated a Nobel Prize, Professor Prescott bores in on the main problem confronting Social Security reform and advises on how to overcome it:

No sooner did talk get serious about fixing Social Security in recent weeks than the political boo-birds went to work scaring people away from new ideas. It’s rare to open a newspaper editorial page these days and not find some Cassandra screeching about evil policy-makers and cranky politicians who are trying to destroy Social Security. Why a politician from any party would want to intentionally destroy a retirement program meant to benefit the elderly is beyond me. Such political claptrap makes me glad I’m an economist. Granted, politics is a game with its own rules and incentives, and people will rationally play by those rules for political gain, but such political role-playing certainly complicates matters, at best, and makes for bad policy, at worst.
Maybe one way to help avoid ad hominem attacks and political labeling would be to recast the Social Security question from one of reform to one of reconstruction. Let’s stop talking about reforming Social Security — let’s rebuild it. In other words, if we could wipe the slate clean, what kind of government retirement program would we build from scratch today? It’s one thing to snipe at new proposals, but it takes a plan to beat a plan, and I’m willing to bet that the best minds of both political parties, given such a charge, would not come up with a government retirement program as it currently exists.

Read the entire piece. Ed Prescott is a true clear thinker.

Our politicians at work.
When my Republican friends ask me why I am not a Republican (I am assiduously independent politically), I pass along to them articles such as this.

New York Attorney General Eliot Spitzer – for whom New York Governor George Pataki‘s press secretary once noted that “AG” stood for “Aspiring Governor” – confirmed today what everyone who has not lived the past few years on a deserted island already knew — that he will run for governor of New York in 2006.
Mr. Spitzer’s political agenda is downright frightening for anyone trying to make a living running a business, as his investigations into investment banking, mutual-fund trading, and business insurance have shaken those industries to their core. Indeed, those investigations have arguably made him a more powerful regulatory force than the federal and state agencies that are chartered to regulate those industries.
Consequently, Mr. Spitzer will likely portray himself in the governor’s race as the crusading protector of the common investor against the Republican-backed behomeths of Wall Street. However, it’s far from clear at this point that Governor Pataki will even seek a fourth term in 2006. Interestingly, early polls show that Mr. Spitzer would beat Governor Pataki in a head-to-head race, but that former New York City Mayor Rudolph Giuliani would beat Mr. Spitzer handily in head-to-head polls. Nevertheless, Mr. Giuliani may well not not run for governor in order to keep his options for higher political office open.
Meanwhile, as far as horse races go, I’m pulling for Dick Grasso to kick Mr. Spitzer’s ass in their upcoming lawsuit over Mr. Grasso’s compensation and severance from the New York Stock Exchange. In fact, I hope that Mr. Grasso kicks Mr Spitzer’s rear decisively.
For a particularly good archive of well-reasoned analysis of Mr. Spitzer’s damaging methods of regulation, check out Professor Bainbridge’s resources on the topic.
Finally, if you want a taste of how the fawning mainstream media naively views Mr. Spitzer, check out this ludicrous Loren Steffy column from the Houston Chronicle.

This NY Times article reports on the squabble that has arisen over the University of Texas at Austin’s decision to honor famed Houston trial lawyer Joe Jamail with his second statute on the UT campus:

Of the more than a dozen statues peppering the University of Texas campus here, one glorifies the first native-born governor, two pay tribute to deceased American presidents, and others honor Confederate leaders.
Another statue is poised to join the cast on Friday, honoring a graduate who is a successful trial lawyer.
The subject, Joe Jamail, a Houston alumnus who has donated $21.7 million to the university and its athletic programs, already has one bronze likeness at the law school and his name is on several campus sites. The newest statue of Mr. Jamail, who won billions of dollars for Pennzoil in a landmark suit in the 1980’s, is scheduled to be unveiled inside the football stadium before the annual game against archrival Texas A&M.
But not everyone looks forward to another likeness. The statue, . . makes Mr. Jamail the only person with two on the 350-acre campus, university officials say, and that distinction has rankled some faculty members.
“One is enough, with due respect to whoever,” said a journalism professor, Gene Burd.

The 78 year old Jamail is most famous (notorious?) for persuading a Houston state court jury in 1985 to award a record $11 billion in damages against Texaco for tortiously interfering with Pennzoil’s attempted acquisition of Getty Oil. The subsequent judgment prompted Texaco to file a chapter 11 case, which eventually resulted in a settlement of Pennzoil’s claim for $3 billion in 1987. Already a wealthy plaintiff’s lawyer, Mr. Jamail took the case on a contingency fee, so his piece of the settlement made him one of the wealthiest attorneys in the world.
Over the past 20 years, Mr. Jamail has become a philanthropist, and UT has been the main beneficiary of his philanthropy. Sites at the university named for Mr. Jamail include the swim center, the football field, the law school pavilion that contains the first statute of him, and the law school’s legal research center. The newest statue of Mr. Jamail planned for a corner of the football stadium will be placed near a new statue of the former national champion football coach and UT legend Darrell Royal. By the way, Mr. Jamail paid for the statute of Coach Royal.
To this day, the Pennzoil-Texaco case is most remembered in Houston legal circles for the catastrophic trial decision that Texaco’s general counsel made. Texaco’s main defense was that it was justified in competing with Pennzoil for Getty Oil and, thus, could not have tortiously interfered with Pennzoil’s takeover attempt. However, in support of an alternative defense, Texaco’s trial counsel recommended that Texaco put on expert testimony that would contradict Pennzoil’s evidence of alleged damages. Texaco’s general counsel decided that putting on countervailing damages testimony would be a signal to the jury that Texaco did not confidence in its primary defense, so he directed Texaco’s trial counsel not to put on any expert damages testimony.
Consequently, when the jury found in favor of Pennzoil on the liability issue, the only damages evidence in the trial record was Pennzoil’s. Thus, the $11 billion jury verdict ensued, and the trial record contained inadequate evidence upon which an appellate court could base a decision to reduce the damages.
As they say in defense circles, “Ouch!”

Bill Moyers will retire next month from full-time broadcasting at the age of 70. This Rocky Mount Telegram article explores the life and work of Mr. Moyers, who has been one of the most thoughtful journalists regarding public affairs during his long career in journalism. Raised in Marshall, Texas, Mr. Moyers met Lyndon Johnson during his 1954 Senate campaign and then served as deputy director of the Peace Corps under President Kennedy and as President Johnson’s chief advocate for the Great Society and the War Against Poverty from 1963-67.
Although I have not always agreed with Mr. Moyers’ views, I have always appreciated the thoughtful manner in which he has presented them. During these times of increasingly polarized views, such an advocate of reasoned debate will be missed.

This Washington Post article does a good job of describing the political landscape that confronts the Bush Administration in proposing and enacting tax reform legislation. The sponsors of the 1986 Tax Reform legislation — Dan Rostenkowski and Robert Packwood — are not particularly optimistic that the administration’s approach to the issue will result in successful reform. Check it out.

This earlier post noted that the brewing controversy in Dallas over the Wright Amendment provides a ripe field for politicians to reap financial windfalls so long as they are willing to make bad policy decisions that favor certain private business interests.
It appears that their is an inexhaustible supply of issues in which politicians can parley the sale of their political soul into a nice financial return for their campaign war chests. This Wall Street Journal ($) article reports that telecom companies are lobbying elected officials around the country to rationalize support for legislation that restricts free or inexpensive WiFi service for their constituents:

Dozens of cities and towns across the country are rushing to provide low- or no-cost wireless Internet access to their residents, but the large phone and cable companies, fearful of losing a lucrative market, are fighting back by pushing states to pass legislation that could make it illegal for municipalities to offer the service.

Philadelphia announced during the summer that it would hook up the entire city with Wi-Fi. Its current Wi-Fi service is free, but it hasn’t decided whether that would continue with wider deployment; it may charge a small fee. “There are some very specific goals that the city has that are not met by the private sector: affordable, universal access and the digital divide,” says Dianah Neff, the city’s chief information officer. She says that less than 60% of the city’s neighborhoods have broadband access.
However, last week, after intensive lobbying by Verizon Communications Inc., the Pennsylvania General Assembly passed a bill with a deeply buried provision that would make it illegal for any “political subdivision” to provide to the public “for any compensation any telecommunications services, including advanced and broadband services within the service territory of a local exchange telecommunications company operating under a network-modernization plan.” Verizon is the local exchange telecommunications company for most of Pennsylvania, and it is planning to modernize the region using high-speed fiber-optic cable. The bill has 10 days for the governor to sign it or veto it.
The Pennsylvania bill follows similar legislative efforts earlier this year by telephone companies in Utah, Louisiana and Florida to prevent municipalities from offering telecommunications services, which could include fiber and Wi-Fi.

Rather than encouraging municipalities to provide free or inexpensive broadband internet access for its citizens, telecom companies argue that legislators should be more concerned with protecting the telecom companies from competing with local governments to provide WiFi service. Even such palpably superficial reasoning is resonating with Pennsylvania legislators, who apparently need to replenish their campaign war chests:

The Pennsylvania bill, first introduced in 2003, was passed by the state Senate late Thursday night and then passed for a second time by the state House of Representatives late Friday night by wide margins. Senate supporters agreed with Verizon’s view of the legislation. Don Houser, a spokesman for Senator Jake Corman, the Senate sponsor of the bill, said “the thinking was the telephone companies didn’t want to have local municipalities using tax dollars to compete with private dollars.”

Well, citizens are perfectly capable of replacing their elected officials if they do not want their local municipalities competing with private business in providing WiFi service. Pennsylvania Gov. Edward G. Rendell has until November 30 to act on this legislation and has not yet declared which route he will choose. It’s not a close cal that he should reject the legislation, but money talks in politics and the telecome companies are willing to throw it around. Keep an eye on this one.
By the way, have you noticed that elected officials do not seem to mind having government compete with private financiers in connection with providing governmental financing for a new stadium?

Professor Bainbridge continues to do a good job of criticizing the Republican Party for its rather shameless lack of leadership in its indulgence of House Minority Leader Tom DeLay that was the subject of this earlier post.
What is most curious about the GOP’s witch hunt allegations regarding Travis County District Attorney Ronnie Earle — whose office is prosecuting three former DeLay aides — is that Mr. Earle is a well-regarded prosecutor in the legal community who has traditionally been quite even-handed. In fact, 12 of 15 elected officials who Mr. Earle has prosecuted over the years have been fellow Democrats, including former Attorney General Jim Mattox, former Speaker Gib Lewis, former Treasurer Warren G. Harding and former Lt. Gov. Bob Bullock.
As an aside, a funny anecdote arose after Mr. Earle’s unsuccessful prosecution of the late Mr. Bullock, who became a somewhat beloved figure in his declining years and a confidant of GOP Governor George W. Bush. After Mr. Bullock’s death, Mr. Earle — who clearly enjoyed the colorful former Lieutenant Governor — disclosed that Mr. Bullock had subsequently confided to him that he was “guilty as hell.”