Does explicitly acknowledging the obvious really change anything important? Take my waistline, for example. I weigh more than is good for me. I know that. So do my doctor, family and friends.
Given that widely shared view, does my explicitly saying “I weigh too much” really change anything?
The issue is not a trivial one. Indeed, it is important in economics because it involves human rationality or lack of it. It has implications for specialized issues such as the Financial Accounting Standards Board’s new rules on accounting for stock options, and on broader ones such as the effects of borrowing hundreds of billions of dollars to finance Social Security “reform.”
Explicitly announcing that I weigh too much might trigger different behavior on my part. Honesty might lead to my eating less and exercising more. Then again, it might not.
Most economists are skeptical that the new rules will change anything. The issue of accounting for stock options has been around for years.
Economists generally agree that such options obviously have value to the top executives and others who receive them. They also must have some cost to the firms that give them. Transparent information contributes to sound economic decision-making. Accounting practices should recognize the obvious in such cases.
Some business leaders scream, however, that forcing firms to explicitly expense options will lower their reported profits. These firms will then be less attractive to investors, the argument goes, and less money will flow into crucial high-tech start-ups.
Economists counter that investors already know which firms are committed to such contingent liabilities, even if not explicitly booked. They know that value is passing from the firm to the compensated individuals. Will making this explicit really change investor behavior?
A similar question arises about funding Social Security if current workers are permitted to divert some of their FICA payments into private accounts. This will reduce funds flowing into the system, leading it to run out of cash sooner.
The Bush administration recognizes this and proposes increasing the national debt by some $600 billion by one Social Security actuarial estimate to $1.5 trillion or more according to other sources.
Opponents argue that a huge jump in the national debt will increase federal interest expenses, crowd out private investment, and make investors worldwide look askance at U.S. Treasury bonds.
Not so fast, proponents reply. Everyone knows that the Social Security benefits already promised are substantially more than existing revenues can ever pay. Our nation already has a huge implicit Social Security debt. The administration’s proposal just involves making that implicit debt explicit. Rather than reacting with alarm, investors worldwide will be reassured that the United States is defusing a fiscal time bomb.
You decide which side is more persuasive. I’m going to think about my new diet, which I will start right after the holidays.
© 2004 Edward Lotterman
Chanarambie Consulting, Inc.