In a recent NY TIMES column (August 26, 2001), Paul Krugman likened the
Gorish "lock box" for US Social Security system to a "sinking fund." If I
remember correctly, he favored such a fund because it would raise
confidence in the SS system. (I can't afford to pay for a copy of his
opinion.)
According to MSN's financial glossary, a sinking fund is "A special reserve
account created by a bond issuer. The issuer promises to put money into the
account at regular intervals and to use the cash that accumulates to redeem
the bonds. A sinking fund gives bondholders an extra layer of protection
against default." I guess if you see SS recipients as bond-holders, PK's
analogy makes sense.
But does it make sense for SS to have a sinking fund (lock box)? It's
interesting to see what the founder of PK's putative school of economics says.
"We must also take account of the effect on the aggregate propensity to
consume of Government sinking funds for the discharge of debt paid out of
ordinary taxation. For these represent a species of corporate saving, so
that a policy of substantial sinking funds must be regarded as reducing the
propensity to consume. It is for this reason that a change over from a
policy of Government borrowing to the opposite policy of providing sinking
funds (or _vice versa_) is capable of causing a sever contraction (or
marked expansion) of effective demand." (GENERAL THEORY, 1936, Harcourt
Brace & World paperback edition, p. 95.)
"... [corporate] sinking funds, etc., are apt to withdraw spending power
from the consumer long before the demand for expenditure on replacements
(which such provisions are anticipating) comes into play; i.e. they
diminish the current effective demand and only increase it in the year in
which the replacement is actually made. If the effect of this is aggravated
by "financial prudence", i.e. by its being thought advisable to "write off"
the initial cost _more_ rapidly than the equipment actually wears out, the
cumulative result may be very serious indeed.
"In the United States, for example, by 1929 the rapid capital expansion of
the previous five years had led cumulatively to the setting up of sinking
funds and depreciation allowances, in respect of plant which did not need
replacement, or on such on so huge a scale that an enormous volume of
entirely new investment was required merely to absorb these financial
provisions; and it became almost hopeless to find still more new investment
on a sufficient scale to provide for such new saving as a wealthy community
in full employment would be disposed to set aside. This factor alone was
sufficient to cause a slump. And, furthermore, since "financial prudence"
of this kind continued to be exercised through the slump by those great
corporations which were still in a position to afford it, it offered a
serious obstacle to early recovery." (Ibid, p. 100.)
I can't endorse JMK's interpretation of the post-1929 slump as explaining
the whole story, but it does describe one part. More importantly, he points
to the fact that "sinking funds" -- and saving in general (including
government budget surpluses) -- can and do make recessions worse. It's sad
that an economist who wrote a book titled "the return of depression
economics" would miss this.
Jim Devine [EMAIL PROTECTED] & http:/bellarmine.lmu.edu/~JDevine
"It takes a busload of faith to get by." -- Lou Reed.
