Over at TAPPED, Matt Y. makes a pretty good point about privatization, irrational investors, and the stock markets:

[W]hen the market is up, people think to themselves "I wish I owned some stocks" and are inclined to support it. But market peaks are, in reality, the worst possible time to buy stocks. After a crash is when you want to buy. But as the privatization polling shows, large segments of the population don't see it that way.

What this psychological reality means is that even with investment options restricted to just a handful of relatively safe funds, many people are still likely to do a very bad job managing their money by "churning" from one fund to another: Selling low and buying high, in other words, in an endless effort to own whatever's up in any given month even though this is the reverse of a sound investment strategy.

I said "pretty good" only because this sounds like a problem that can be patched up somewhat easily, either through regulation of investments or better financial education. In theory. In practice, though, it's true that many of the whacked-out privatization proposals simmering in the House wouldn't safeguard against this sort of investor irrationalism, and lots of people would, in fact, probably screw themselves over. On the other hand, I doubt Democrats would dare make hay out of the fact that people are morons and likely to do moronic things when given control over their own money. (Note, I'm really contradicting my efficient market musings below. Bear with me, I promise to get all these confusions straightened out by... next week. Promise.)

Anyway, set aside stupidity for now; there's another concern with privatization that I have, roughly along similar lines. It's this: During times of high unemployment—say, a recession—lots of people won't be able to purchase stocks for their private accounts on account of, y'know, not having jobs. But times of high unemployment are also often times when, in theory, the stock market is sluggish, and hence, the best time to buy stocks. Meanwhile, folks who do stay employed during these downturns get deuced too, since wage growth is likely to be slowest when stocks are down. (Hence, they can buy fewer stocks at precisely the best time to buy stocks.) Needless to say, women, minorities, and the poor are usually hit hardest by the ravages of the employment cycle, and hence would get the biggest gut-punch from this effect.

Now, in truth, I don't know how severe this "labor cycle" effect would be—if any economist has talked about this, by all means, link to it in comments. Perhaps there's enough of a lag between downturns in the employment cycle and downturns in the stock cycle that what I'm describing wouldn't come to pass. Or perhaps the effect simply isn't large enough to worry about. But it seems like a problem all the same.