Editore"s Note
Tilting at Windmills

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March 28, 2005
By: Kevin Drum

PRIVATE ACCOUNTS: MORE RISK THAN REWARD?....The Social Security trustees project that the economy will grow at a plodding rate of 2% a year over the long term. Nevertheless, President Bush projects that stock returns in private accounts will average a stellar 6.5% a year over the long term. Can both these things really be true?

Bloomberg surveyed 58 economists recently, and and 39 said no. And there's also this:

A Bloomberg analysis shows a strong correlation between investment returns and economic growth over the last 50 years. Gains and declines in the S&P 500 index preceded corresponding gains in gross domestic product and losses by about a year. The correlation coefficient was 0.92, with 1 being a perfect correlation.

If that's really true, it's pretty stunning. It stands to reason that stock market gains are correlated to economic growth, but nothing in the real world gets a correlation coefficient that high. If it's true, it means that economic growth explains 85% of the variance in stock prices. That doesn't leave much room for anything else, and it sure as hell means that lower economic growth in the future is almost certain to generate lower stock price growth as well. That's bad news for anyone who thinks that investing in private accounts will produce a miraculous windfall.

Still, it makes you wonder: what do the folks at S&P themselves think of all this? Via Josh, they seem to be pretty skeptical:

Personal Social Security accounts could bring more risk than reward to investors, and would shift more responsibility for saving for retirement to individuals, Standard & Poor's said Monday. "The key question is whether an individual account holder can build enough money in savings to retire comfortably while withstanding any inevitable investment risk," said David Blitzer, chairman of the index committee at S&P. Given the risks in the market, not all aggressive savers will retire with ease, S&P said.

I have a feeling that George Bush is slowly losing the backing of the business and investment community for his private account plan. Reality is closing in.

Kevin Drum 2:26 PM Permalink | Trackbacks

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