I've been thinking further about my concerns that 401ks may be having the perverse effect of ruining people's savings by creating bubbles in the stock market. The governmnet has designed a system where people blindly pump money into stocks and bonds week after week, whether the markets are rising, falling, or spinning in circles. I keep reading that, long term, the stock market will continue to grow. But, what if we are being encouraged to place our money in something that doesn't inherently possess the value of the dollars flowing into it?
One could argue that this was exactly what happened with the housing market. Government policy was designed to promote the altruistic goal of helping people buy houses. This was done partly through the tax code, partly through regulation, and partly through Fannie Mae purchasing loans of questionable value. The feeling was that homeownership is always a good thing, both for the individual and the community. But, the noble goal led to the creation of a bubble as people bought houses that they couldn't have afforded if the government policies hadn't been in place. This artificially boosted prices across the board, led to massive overproduction of houses, and created a collapse that has unfolded for the last five years and may take another decade to work out.
I also have to wonder if there isn't a bubble in higher education. Again, altruistic government policy has been to give everyone possible access to college through assistance with loans, grants, etc. The result has been a lot more people going to college, but it's come with the price tag of college costs rising much faster than inflation. And, while having a college degree is still preferable to not having one, it seems like a four year degree doesn't produce that much of an economic boost any more. Government policy has increased the supply of people with degrees, but the demand hasn't kept pace. In conditions like this, you would expect wages to fall... which, in fact, seems to be what's happening in the real world, though there are certainly so many complicating factors it's tough to pin the blame just on this.
Government policy also steered US farm policy to produce a lot of corn. So much corn that we had to find other uses for it than just eating it off the cob or baking cornmeal, so we used it to replace sugar in our beverages. Now, government policy is encouraging us to burn corn for fuel, and the prices of foods that have corn in them are rising.
It's thoughts like these that push me most strongly toward the libertarian camp. We need to scrap every federal legal code that encourages production or consumption of anything and find out what an actual free market looks like. It can't possibly be worse than what we have now.
Twinkles on bubble in education and housing market but I think the difference in 401k is that the money is then available for investment. This generally has the effect of increasing productivity. Extra money in houses you can't afford just drives up the price of housing and drives up the cost to those who actually pay for their houses. Extra money in education without a corresponding increase in the needed education for a particular job just results in more expensive education and people who are dissatisfied with their job because it is "beneath" them. Although I agree that there will be some inflation of the stock market, there is also the benefit of more investment dollars available.
ReplyDeletePlus I think, but I'm not sure, that you don't have to invest 401k dollars in the stock market, there are quite a few options.
Heresolong,
ReplyDeleteThanks for responding. My own 401k lets me choose a mix of stocks and bonds, but these days bonds aren't as safe as they used to be, and most of them yeild next to nothing.
While it's true that, in theory, the money flowing into the stock market can be used by companies to invest in people, technology, and other resources, my own tiny window into the corporate world shows little evidence this is happening. I admit I have a limited view. Perhaps someone can point me to evidence that corporations are using their stock market capital wisely.