Nov
12
The Three Holy Grails
November 12, 2008 | Comments Off
For many years we had three goals, as a society:
- Maximum Home Ownership
- Minimum Unemployment
- Maximum Citizen Participation in Equity Markets (Stocks)
In a way, we are being victims of pursuing these three. These three are killing us.
- Maximum Home Ownership – A house makes people more responsible – when they own something they take care of it. Problem is, how responsible is someone when they do not own anything (when they have little or no equity) ? They are essentially still renting, with an option to keep the property if things are great. Any tipping on the economy and we have a disaster where people abandon homes and prices spiral down causing even more trouble. Maximum Home Ownership is still a good goal: provided there is real Ownership, meaning at least 20% equity.
- Minimum Unemployment – There are two reasons why this may become a problem.
Employment Addiction
– People start to believe that a job is a right, and that no matter what they do, the government will find a way to keep them employed. People start to slack at work and start frivolous lawsuits if they are fired for not working. Government doesn’t want an unemployed person, so they will side with the employee rather than respect the rights of the employer.Debt Addiction
– The assurance of a steady salary makes people take on debt to the maximum of their ability — and when they are maxed out, the banks need more profits so they become flexible on their lending practices. Since there is an almost guaranteed salary, there is no perceived need for emergency savings. Problems spiral out of control when someone looses a job.Lack of Workers. This is unemployment as in asking people if they are still looking for a job. There are ways in which this goal is attained that do not contribute to the economy: for example, classifying people as “not looking for a job”: stay-at-home spouse, welfare recipient that has given up job search, retiree, eternal student, etc (neither of them bad by themselves). By focusing on unemployment, the government may be missing an even more important Workforce Participation Rate.
- Maximum Citizen Participation in Equity Markets - Capitalism is great, and I think is even better when everyone can participate on it. For many years, the pensions of many people where invested involuntarily on the stock market. That gave some stability in the market: even if markets where not doing very well, the money stayed invested and grew when markets recovered.
In recent years people started to invest their money by themselves through IRAs, 401k plans, mutual funds, and many other instruments. When markets do well they invest like crazy, even if it is on unworthy investments (think .com burst). When markets do badly, they take their money out even if there is still tremendous value on the stocks they have: sending markets in a downward spiral and motivating more individual investors to redeem their money, spend it and run away — leaving themselves defenseless without an IRA/401k and without the pension these instruments replaced.
Maybe government should not intervene that much. Let people decide what to do with their lives: by not helping them in any way – even if it means their temporary or permanent suffering. I think people would make better decissions if we stop steering them into a particular direction. (Even if they do not make the optimal ones – at least they will not take the self-destruct route when there is even the slightest economic downturn).
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