Policy made plain.
Jan. 24 1999 3:30 AM

Scott's Weed Killer

Even those of you who never met him, and possibly didn't appreciate his e-mail missives urging you to subscribe, are going to miss our retiring publisher, Rogers Weed, if for no other reason than his name. Where could we possibly find a better named publisher than Rogers Weed? (Now that he's leaving, the full drama can be revealed: It's actually Alonzo Rogers Weed.)

Rogers was publisher of Slate for two and a half years, in other words almost since the beginning. With business savvy, personal charm, and Microsoft-style hard-nosed determination, he mastered the horrors of magazine economics, learned to tolerate the eccentricities of journalists, and set Slate on the path to success. He is leaving us to become marketing director of Windows CE, the Microsoft operating system for pocket computers and other small appliances. We don't blame him. We're not bitter. The appliances may be small, but the business is large. At least potentially. And we at Slate are not ones to sneer at potential. We do like to think that small appliances lack the glamour and social importance of magazine journalism, but then small appliances themselves probably feel otherwise. And Rogers will be hanging out with small appliances from now on, so he can give us a report. Maybe we'll even sign him up for a "Dialogue" with a PalmPilot.


Good luck, Rog!

Our new publisher is Scott Moore, who joins us from his previous job as advertising director of Expedia, the Microsoft travel site. Scott also has many fine qualities, and the entire Slate team looks forward to straining them to the limit.

Good luck, Scott!

And Don't Call Me Surly!


Commentators, including Slate's own David Plotz, have accused a few Republicans in Congress of surliness and worse for boycotting President Clinton's State of the Union address Tuesday night or for sitting there looking ostentatiously unenthralled. This is puzzling. It's the Democrats who are supposed to be pretending that we can conduct business as usual during an impeachment trial. The Republicans are supposed to be pretending that Bill Clinton has committed offenses so heinous that he should be the first president ever forcibly evicted from office. If they really believe this, ofcourse they shouldn't sit there respectfully and applaud the items they approve of on his endless wish list. Most Republicans, though, did precisely that, reflecting the official party line that you can impeach the president and reform Social Security (and, no doubt, walk and chew gum) at the same time. This may be a wise strategy for minimizing public annoyance at the whole impeachment thing. But it makes a mockery of the whole thing too. If congressional Republicans aren't going to act as if Flytrap is as serious as the result they seek, why should anyone else?

Inside Debunker

We'll soon be launching a new department called "Debunker," noting interesting errors of fact, logic, or mathematics in the news. The author will be Jonathan Chait, who is conversing with Jodie T. Allen this week at " The Breakfast Table." Suggestions are welcome at debunker@slate.com. It's too bad Debunker (someone suggested we call it "CrapShoot") isn't up and running now, because there were a couple of nice examples in the State of the Union.

Take President Clinton's proposal to invest part of Social Security revenues in the stock market. Characteristically splitting the difference with conservative Social Security privatization enthusiasts, he does not propose to let people invest the money for themselves or to make benefits contingent on how well the investment performs. These are terrible ideas (click here to find out why), but without them the notion is simply empty.


There's a pile of money called the Social Security Trust Fund. (Is there really a pile of money? Well, leave that aside.) Money comes in through the Social Security (FICA) tax and goes out in Social Security benefits. Someday, when boomers retire in hordes, more will go out than will come in. Right now, though, more comes in than goes out, and the excess is invested in government bonds. The stock market historically has a higher rate of return than government bonds do. So the argument is that putting some of the money in stocks will make the trust fund more profitable and avoid, or at least put off, the day it runs out of money.

Leaving aside the rate of return question for a moment, consider the whole transaction. When the trust fund puts $1 into private markets instead of into government bonds (i.e., the national debt, which is still here although the annual deficit is not), the general treasury must then borrow $1 more from those same private markets. If you believe that the trust fund is an accounting fiction (the government borrowing from itself, paying itself interest, and writing checks that are government commitments irrespective of the fund), then the transaction is a total wash. If you believe that the trust fund exists, then the transaction amounts to a $1 increase in both the trust fund and the national debt--sort of a pre-emptive bailout.

How does the higher rate of return on private stocks change things? Well, the government is now supposedly borrowing each of these dollars from the private sector for, say, 4 percent and investing them in the private sector for a return of, say, 10 percent. Nice deal! Too nice. If arbitrage were so simple and foolproof, why shouldn't we invest the whole trust fund in private stocks? And why stop there? Why not issue hundreds of billions in government bonds and plow the money into Fidelity Magellan? (OK, that would be irresponsible. So make it an index fund.)

Come to think of it, what is wrong with all these people who own government bonds? Don't they realize that selling a bond is just like issuing one? You get cash, which you invest in stocks for a higher return. Why aren't the Heritage Foundation, et al., advocating this? It's the ultimate: privatizing privatization.


Obviously, there's a catch. Government bonds have a lower historic return than stocks because stocks are riskier--and the market has decided exactly how large a premium that risk is worth. People win Nobel Prizes for figuring out how to minimize the risk of investing in stocks. But even these geniuses aren't alchemists: They can't make something out of nothing, and they can't produce a Garrison Keillor financial world where everybody does above average--or (same thing) where everybody enjoys a risk premium without taking a risk.

Ask yourself: If the government gets more money as a result of investing billions in the private sector, where does that money come from? Not from higher capital investment: The net effect of investing $1 and borrowing $1 is zilch. And not, presumably, from any management improvement because the government owns large chunks of private companies. Indeed, to ease fears of government meddling, the plan is to make these investments as passive as possible. Passive investment--money that settles for an average return--on balance reduces that average, because active investors, who are constantly acquiring, processing, and acting on information, make the economy more efficient.

So the government's windfall, if it exists, would have to come at the expense of rival private investors. For this to happen, the government would not merely have to match the average return on stocks but would have to beat it--regularly, guaranteed, forever. Unlikely--wouldn't you say?--even if the plan weren't expressly to hit the average. So the windfall would not come from private investors and would not come from economic expansion. It also wouldn't come from foreigners or the moon. Conclusion: This windfall would melt away.

How? Good ol' supply and demand. When the government wants to borrow an extra dollar and put it in the stock market, someone else must be enticed to sell a dollar's worth of stock to buy government bonds. The interest the government must pay on its borrowing goes up, and the return it can expect on the stocks it buys goes down (because it must pay more for the same shares). Since these changes would affect all government borrowing and investment, not just this particular program, the gap would not have to close completely for the whole exercise to end up a wash. The math is beyond us, but we're willing to bet that--on some reasonable assumptions--that's precisely what happens.


At Home

A second logical fallacy is easier to explain but harder to believe. In his Tuesday evening address, Clinton also called for a tax credit for "stay at home parents." Family values enthusiasts have long claimed that the tax credit for day care unfairly discriminates against stay at home moms. Some even maintain that the credit is an exercise in liberal social engineering, intended to pry women away from their children and into the workplace. If all it takes is another tax credit to pacify critics of the original one, Clinton is happy to oblige.

However, the truth is that even with the current credit, the tax code discriminates in favor of women who stay home with the kids and against those who get a paying job and pay in turn for day care. That's because there's no tax on the imputed income of taking care of your own kids.

Now wait, now wait. I told you it was hard to believe. But before you dismiss it as everything-belongs-to-the-government, my-goodness-they'll-want-to-tax-farting-next liberal nonsense, consider an example. Suppose I am taking care of my kids and you are taking care of your kids. No tax on that. But suppose I pay you to take care of my kids and you pay me to take care of yours. Suppose the kids are equally adorable and/or troublesome and we pay each other the same amount. It's a wash, in terms of effort and cash. But suddenly we both owe taxes.

When a parent decides to work for pay and to buy services she might otherwise provide for herself, she is bringing those services into the money economy, where they are subject to the same rules as other economic activity. Day care is just one example; restaurants and prepared food are another. An analogous principle applies to how you put your money to work. (You'll really hate this one.) If you buy a house for $100,000, you get to live in it without paying any income tax for the privilege. But if you bank that $100,000 and use the interest to pay rent, you have to pay income tax on the interest. (You pay property tax as an owner, of course, but you pay it implicitly as a renter too.)

Don't worry, no one is proposing to make you pay a tax on the implicit $4.95 you paid yourself today to open up a can of tuna fish and toast two pieces of bread rather than buying a sandwich from the local deli. And no one is going to tax you on the salary you're not paying yourself for child care. The purpose of the child care credit is to correct, only partially, the tax code's prejudice against working parents.

If you want to give yet another tax break to stay at home parents because you want to encourage women to stay at home with the kids or just because you love tax breaks for anything at all, fine. But it's not a matter of fairness or government neutrality. The opposite, in fact.