February 27, 2004

Hell Is Briefing George W. Bush on a Complicated Issue Like Social Security Reform

Ron Suskind has added a new document to his online collection of documents that crossed Paul O'Neill's desk while he was Treasury Secretary. Today's document is an October 2001 NEC/CEA draft briefing "memo" for Bush on Social Security, a fax cover sheet on which CEA chair Glenn Hubbard asks to talk to O'Neill, and a two-page memo from then-Treasury Social Security expert Kent Smetters (a very smart and good guy) on the issues and the bureaucratic process.

The most remarkable thing is the form of the "memo" that is being drafted for Bush: it is a seven-page Powerpoint presentation plus nine pages of charts. 659 text words total. That's one text word for every ten billion dollars that is going to be spent on Social Security over the next decade, and one word for every hundred billion dollars that is going to be spent on Social Security over the next half century. Hell is briefing someone like George W. Bush on a complicated issue like Social Security reform. (The 2004 Economic Report of the President's discussion of Social Security reform is about 7,000 words, and it just skims the surface of the issues itself.)

Kent Smetters's two-page cover memo asks Paul O'Neill to attempt to get CEA chair Glenn Hubbard to change the Powerpoint text (and, presumably, the verbal briefing that will accompany it) so that the "memo" getting to George W. Bush will:

  1. Get George W. Bush to say whether or not he will accept a reform plan that cuts the benefits of people currently under 55 (through "price indexing").

  2. Get George W. Bush to clarify what he means when he says that private Social Security accounts should be "voluntary". Does he mean that those who don't volunteer keep receiving the current Social Security law's benefits? Or does he mean that (a) everyone sees their benefits cut to a level that current Social Security taxes can sustain, and (b) people then have the opportunity to take an additional benefit cut and in return receive some of their payroll tax contributions in a private Social Security account? (At this point, George W. Bush has been calling for "voluntary" private accounts for eighteen months. The fact that his senior aides do not know what he means is disturbing, to say the least.)

  3. Get George W. Bush to decide whether he still wants the Social Security Commission to come up with a single plan for reform, or whether past assurances to Commission members that their consensus reform plan will be welcomed are now "inoperative."

  4. Not confuse George W. Bush by presenting him with numbers and charts for different policy reform scenarios that he will not yet understand, and that are not yet on the table in any case.

  5. Keep Larry Lindsey's plan "the mixed approach" from being presented to George W. Bush. (What this Larry Lindsey plan is is not completely clear in the documents. Suskind tries to provide the context: "during the campaign and the first six months of the administration, Larry Lindsey had convinced Bush that there was a so-called 'free lunch' option of creating costless personal accounts... to sustain old-style benefits... by confiscating some of the higher returns for those opting for new-style personal accounts. That math on this never worked, though it took concerted efforts by Treasury officials and others to press Lindsey, and by association, Bush, to abandon this idea. When Smetters refers to Larry's 'plan', this is what he's writing about.")


Ron Suskind writes:

The Price of Loyalty: The Bush Files: ...[draws] from the Bush Files two documents that show the administration's plans for Social Security during the only time -- the fall of 2001 -- when the President was fully engaged on the issue. A bit of context: the President's Social Security Commission was about to meet with the President before it began public deliberations. In preparation for the sit-down, the President needed to be briefed by his advisers about various options for reforming Social Security. The Council of Economic Advisers, headed by Glenn Hubbard, and the National Economic Council, headed by Larry Lindsey, prepared a 17-page report for the President in the form of a PowerPoint-style presentation. As is clear from his faxed cover sheet, Hubbard wants to talk to O'Neill about that package before it is sent to Bush.

O'Neill... receives the proposed 17-page briefing... beneath a cover memo from Kent Smetters... a leading specialist in Social Security reform. Smetters's memo carries pointed suggestions, especially that the President needs to define "what is the meaning" of his rhetoric on this issue so the commission is not confused about its basic guidelines. There is another concern at this point inside Treasury: during the campaign and the first six months of the administration, Larry Lindsey had convinced Bush that there was a so-called "free lunch" option of creating costless personal accounts -- essentially issuing some debt to sustain old-style benefits that would then be serviced and paid down by confiscating some of the higher returns for those opting for new-style personal accounts. That math on this never worked, though it took concerted efforts by Treasury officials and others to press Lindsey, and by association, Bush, to abandon this idea. When Smetters refers to Larry's "plan", this is what he's writing about. Smetters also notes what is common knowledge within the administration's senior ranks about the President's decision making habits -- that a key role will be played by whoever gives Bush is "verbal background briefing." Finally, there is the central question: is the President "willing to live with benefit cuts (i.e. "pain") like that called for by price indexing benefits?" This refers to a little known fact: Americans get an annual increase in their social security accounts based on "wage indexing," which includes adjustments for both productivity growth and cost-of-living increases.... The "pain" of price indexing means that productivity growth would be cut out of this equation from the start.

Posted by DeLong at February 27, 2004 01:23 PM | TrackBack

Comments

Check out http://csss.gov; this is the home page for the president's commission. Note the date at the top: May 2, 2001. Now note the fifth guiding principle: "Modernization must include individually controlled, voluntary personal retirement accounts, which will augment Social Security."

So when Smetters writes his memo, the commission has been in business for _more than five months_, and doesn't know what the president and administration mean by "voluntary". This is one of the "Guiding Principles"! Truly scary!

I would assume that Lindsey's "free-lunch" option is like Feldstein's plan, which claims that the private accounts boost corporate income tax receipts. The government then recaptures that revenue and shifts it to Social Security to pay for the transition. It always seemed pretty bogus to me. Phil Gramm had a similar proposal.

Posted by: Dave on February 27, 2004 02:20 PM

____

I have been reading "Dutch" in my ususal hop skip and jump way reading and am coming to the opinion that Dutch and his advisers were so much better than bush and his advisers. What would have happended if bush had been the one to negociate with Gorby?
I have started reading "The Price of Loyalty" but havent gotten far.
What do the smart people who read this blog think about "Dutch"? If you agree please tell me what the hell happened to the Republican party. Did the end of the cold war cause the return to narrow self interest politics????

Posted by: dilbert dogbert on February 27, 2004 02:42 PM

____

Any real privatization or Social Security reform will be bought at the price of a number of years of people paying taxes for benefits they will never see. Since no reform will survive without guaranteeing existing benefits to at least those people within shouting range of retirement, this goes without saying. As private alternatives catch up, and the public-funded retirees die off, this will get better. But it will take years, and God help whatever politicians have to shepherd America over that hump.

This would be a lot easier if people realized that Social Security is basically a welfare program, i.e. standard wealth redistribution. Since most of us pay ruinous taxes now for wealth redistribution benefits we will never see, and have managed to resign ourselves to that, this change in perception may be what gets us over the hump.

As long as people believe that "our" Social Security payments are sitting in a little basket in Washington with our name on it, waiting for us to retire, we won't have much luck changing anything.

Posted by: tbrosz on February 27, 2004 02:50 PM

____

Well, now it should be obvious Bush is no puppet, but a dangerous ideologue of limited imagination and total inflexibility. Besides other more obvious virtues

Posted by: bob mcmanus on February 27, 2004 02:53 PM

____

Privatization "would be a lot easier if people realized that Social Security is basically a welfare program."

This is simply not true. Social Security is an insurance program that people pay for through their working years in return to benefits in retired years. My dad worked more than 40 years and my mom 30 years and happily paid for Social Security benefits for others, knowing that they would in turn receive benefits. Social Security and Medicare are programs that have insured the well being of middle income and low income workers through retirement. I love these programs! Privatization is not warranted, cuts in benefits are not warranted.

Posted by: anne on February 27, 2004 02:58 PM

____

"Define the meaning of his rhetoric"! That says it all. Any serious discussion of Social Security reform should define in very clear terms who is getting what and who is paying what. Even a Libertarian like Robert Barro would insist on this as he would note rational individuals who adjust their private savings plans accordingly. And Barro's 2000 Business Week oped clearly noted that privatization offers no free lunch. But if one is honest this way - the real Bush agenda might lead to a Bush defeat. Maybe Smetters never got the memo that this was some giant Enron fraud and he worked to provide real policy discussions when that was never really the game at all.

Posted by: Harold McClure on February 27, 2004 03:00 PM

____

I have a soft spot in my heart for the "good drinking buddy" defence. I have always thought that this particular dimension of my judgemental apparatus put me in a position to understand, say, karl Rove's "the most charismatic man I had ever seen," said, apparently, of Dubya in fly-boy drag.

But here's the thing that must confront all Bush defenders: he never was a good drinking buddy: he was a towel-snapping frat-boy asshole type. In parallel, all his other cloth-coat Republican vbirtues are bogus.

Can anyone tell me: where can he possibly have defenders?

Posted by: David Lloyd-Jones on February 27, 2004 03:50 PM

____

This stuff continues to frighten me. A complete idiot surrounded by con men and psychophants.

Posted by: JM on February 27, 2004 04:25 PM

____

> where can he possibly have defenders?
they are drying up fast.
Lou Dobbs, of all people, had Dave Johnson on pushing his book "Perfectly Legal". Johnson claims SS is in bad shape and "reform" won't fix it. At the end of the interview, Dobbs made a point of asking Johnson how he votes and Johnson said he was a registered Repub. Maybe some Repubs are starting to come out of their deep denial about how bad the Bush fuzzy (voo doo) economic program (or lack thereof) is. I believe the Dems have to publisize the SS issue more strongly which would go a long way to winning back the WH.

Posted by: cj on February 27, 2004 05:03 PM

____

or publicize it (doh)

Posted by: cj on February 27, 2004 05:08 PM

____

I would be interested in hearing this group's response to the thread at drezner's blog re Greenspan and Social Security. You will find quite a few Bush supporters there.

Posted by: TexasToast on February 27, 2004 05:27 PM

____

I think I have a strategy that could work, if we could find someone to deliver the message.

Step One: Deliver a one minute, basic explanation of a flaw in Bush administration reasoning.[1]

Step Two: Suggest something simple and good, see if you can't get something permanent, e.g. Prof. DeLong in an Eisenhower OEOB office, and regular meetings with the man in charge :-D

The biggest, well dressed, articulate, sympathetic, and polished among the interested individuals should deliver the message. Although if thousands of dollars appear, anyone can be well dressed, but I'm not sure there is time to polish anyone.

[1]Since this President is so interested in tax issues, I think the inheritance tax would be most appropriate issue. The President wants to end it, I say it is the most Republican of taxes, and the last that should be left standing in an ideal GOP world. Applied once, post-mortem, never on earned income. If welfare is no good, welfarex1000 or x1,000,000 can't be any good. Someone smarter than I (although I'd like to be told, of course) needs to design something to deal with the Gallo wine family (Ernst & Julio, vineyards, can't stay privately owned and avoid tax, doesn't want to go public) and M&M/Mars family. The Campbell's soup family defected to Ireland rather than pay.

How do you define the productive (ugh) qualities of Gallo and M&M/Mars, and have it be irreproducible via paper transaction?

hth

Posted by: JSN on February 27, 2004 05:29 PM

____

From:

The Economic Policy Institute: Research and Ideas for Working People

"Facts At A Glance...

FACTS ABOUT SOCIAL SECURITY FINANCES

To pay for benefits, Social Security receives income from three sources.
Most of the money that is needed to pay for benefits comes from payroll taxes. Currently, employees and employer each pay 6.2% to Social Security, for a combined tax rate of 12.4% of wages and salaries. Self-employed workers pay the full 12.4% out of their earnings. Taxes, however, have to be paid only up to an earnings ceiling, which is $84,900 annually in 2002. Earnings above the ceiling are not subject to the payroll tax. In 2001, Social Security received a total of $516.4 billion in payroll taxes.

As a result of reforms to Social Security in 1983, a trust fund was specifically set up as a savings account to pay for baby boomers. Since then, Social Security has taken in more money than it has paid out in benefits. Consequently, it has built up a trust fund over the years. Social Security earns interest on this trust fund. In 2001, the trust fund received 6.6% interest on its assets, earning $72.9 billion in interest.

Finally, some Social Security benefits are subject to taxes, which are then paid to Social Security. In 2001, taxes on Social Security benefits amounted to a total of $12.7 billion.

Social Security is building up a trust fund.
Because income is currently exceeding expenditures, Social Security is building up a trust fund. Total income to Social Security was $602 billion in 2001. Its expenditures came to $439 billion, $432 billion of which was benefit payments. Consequently, Social Security managed to increase its trust fund by $163.1 billion in 2001. As a result, Social Security held a total of $1,213 billion in assets at the end of 2001. If Social Security faces a shortfall in income, the trust fund assets can be used to pay for the additional benefits.

Trust fund assets are invested in government bonds.
Social Security trust fund assets, currently worth over $1 trillion, are invested in special, non-tradable government bonds. Each year the U.S. Treasury issues these government bonds, up to the amount of the Social Security trust fund surplus, to be added to the account. The bonds earn an interest rate comparable to the market interest rate for tradable government bonds. During 2001, the effective annual interest rate earned on all bonds held by the trust funds was 6.6%.

Social Security is not going broke.
Each year, in early spring, the trustees of Social Security release their report. As required by law, the trustees present what can be described as their best guesses for three different scenarios for the future of Social Security. In their annual report for 2002, the trustees project that Social Security will take in more in income than it will pay out in expenditures until 2017. Between 2017 and 2027, interest income earned on the trust fund assets is forecasted to make up the difference between income and expenditures. After 2027, Social Security is expected to draw down its trust funds to pay for the expenditures that are not covered by income. Finally, in 2041, the trust fund assets are expected to be gone, and income is projected to be less than expenditures. However, the trustees project that Social Security will still be able to pay for more than 2/3 of its promised benefits from 2041 to 2076.

Social Security is not going broke. The trustees instead project a financing shortfall that may happen almost 40 years from now. These projections, however, are based on pessimistic assumptions. Real growth is expected to fall to between 1.7% and 1.8% over the long-run, which has never been the case for an extended period of time during the post-war years. Similarly, the trustees assume that in the long-run the economy will settle on an average productivity growth rate of 1.6%, which is again too low by historical standards. Higher productivity and consequently faster real wage growth -- which have both historically been about 2.0% -- would be more realistic and improve Social Security's finances.

One solution to the shortfall would be to increase Social Security's revenues.
It may seem prudent to increase the amounts available in the trust funds as long as the trustees provide a pessimistic outlook for the future. Eliminating the cap on earnings that are subject to Social Security taxes can cover three quarters of the shortfall. Currently, the cap is $84,900 per year. Earnings above $84,900 are not subject to the Social Security payroll tax. Eliminating this cap would provide Social Security with sufficient income to cover at least three quarters of the shortfall that Social Security's trustees expect based on their pessimistic assumptions."

http://www.epinet.org/content.cfm/issueguides_socialsecurity_socsecfacts

Posted by: Mike on February 27, 2004 06:13 PM

____

mike this assumes that the government does not renege on its bonds. the fund doesn't have a bank account with money in it, just pieces of paper from the government, promising to pay ,

Posted by: big al on February 27, 2004 06:39 PM

____

"Social Security is an insurance program that people pay for through their working years in return to benefits in retired years."

If this is true, then may I opt out please? If I can bail out today, I'll even let the system keep what I've thrown in so far. No benefits for me, but the government stops tapping my paychecks. What's not to like?

Won't let me, will they?

The idea that this is an "insurance program" does not hold up well when the gun is being held to my head. My Social Security money is going straight into the pockets of the elderly, and everyone knows it. Grandpa's payments vanished decades ago into the pockets of somebody older. Look up "Ponzi scheme."

The myth you subscribe to has no reality. A real profitable retirement program, or a private insurance company, invests in things that create wealth, not just move it around.

There is no "Trust Fund." The government borrowed that tax money a long time ago, and will pay it back to the borrowers with interest--interest taxed from those same borrowers. No creation of wealth, just sapping productivity for political ends. Pretty cool, huh? I'd be thrown in jail for doing this.

Posted by: tbrosz on February 27, 2004 06:50 PM

____

I think it is important here to compare the concepts of "borrowing" and "interest" when undertaken by a private citizen, and by a government. Most people will try and tell you there's no difference. There is.

To oversimplify a bit:

A farmer borrows money from a bank to buy seed. He grows a crop, sells it for more than the seed cost. Wealth is actually created. From this surplus, he pays back the loan with interest. If he's done it right, he has surplus money left over.

When someone takes out a loan to buy a car, they pay back that loan with money earned on a job. Productive work creates wealth, so he too pays back the loan and there is at the end more wealth than everyone started with.

When a government borrows money from productive citizens, who, say, buy T-bills, the government promises to pay it back with interest. However, the government does not create wealth. It simply taxes it from productive citizens--the same ones who bought the T-bills. So, when the T-bills get paid back with interest, where did that interest come from? Right. The same taxpayers. Wealth hasn't been created. In fact, to some extent, it's been destroyed. While there is more money seemingly in circulation (T-bill amount plus interest), no real wealth has been created. This is one cause of inflation.

If a farmer borrowed money from a bank, and then secretly robbed the bank to pay the interest, the bank loses out, even if the farmer then pays back the loan with interest with great fanfare.

Posted by: tbrosz on February 27, 2004 06:58 PM

____

tbrosz thinks "the government does not create wealth." I think Hal E. Burton gets wealth from the government. As a former gov't. contractor, I know that much of my wealth (yeah, right) came from the government. I think that government employees get their wealth from the government. Old folks and disabled folks get their wealth (at least some portion of it) from the government. AFDC provides wealth to recipients. Do I need to continue? Because I can.

Posted by: wolf on February 27, 2004 07:16 PM

____

"mike this assumes that the government does not renege on its bonds. the fund doesn't have a bank account with money in it, just pieces of paper from the government, promising to pay"

Posted by: big al on February 27, 2004 06:39 PM

Last I heard, bank accounts don't have money in them; they are promises to pay.

Posted by: Barry on February 27, 2004 07:23 PM

____

The reference to the little known fact about "wage indexing" is misleading. Social Security uses wage indexing only for adjusting contributions made prior to retirement to calculate the initial monthly benefit upon retirement. Once an initial monthly benefit has been determined, it is price indexed from then on to protect retirees from inflation.

Posted by: Dennis on February 27, 2004 07:57 PM

____

Wolf: "getting" wealth and "creating" wealth are not the same thing. The former involves the application of human skill and effort. The latter can simply be theft.

You make a good point that many people do useful work and are paid for it by the government--returning value for value. This does not fall into the category of "wealth redistribution" as I see it. But welfare, standard or corporate, does. If the government pays an aerospace company to build a fighter for the military at a reasonable price, that is not wealth redistribution. However, paying a subsidy to that company to pay for advertising those fighters overseas--a giveaway that benefits the company but not the customer (the government)--would be.

Barry: "Last I heard, bank accounts don't have money in them; they are promises to pay."

Banks are required, formerly by common sense and now by law, to keep sufficient reserves for their needs. If they run short, they don't get to tax their customers or print new money.

Oh, wait. Now that we have Federal Deposit Insurance, they DO get to tax customers for their failures. As we found out a while back, deregulating banks while leaving this government-funded financial escape hatch for the bankers is not a good application of market principles.

Posted by: tbrosz on February 27, 2004 08:16 PM

____

tbrosz-

Of course SS has to be mandatory to protect people like yourself who might think themselves so smart and so rich that they won't need any help from SSI in their retirement. While it may work for you, it will certainly fail for many people who choose similarly. These people, often through no fault of their own, i.e., globalization of an industry, natural disaster, illness, etc., will then be destitute in their old age. We Americans (like every other country in the modern industrialized world) have chosen to try to prevent scenes of destitute, starving old folks on the streets which used to be so common in times past.

If you would prefer to abolish social safety nets, I will not agree, and I believe that the majority of the US population won't either. Perhaps you would prefer a destitute third world country without public investment in infrastructure and no social safety net. Then you would really have the ability to keep every precious cent you 'earn' and ignore the impoverished masses. Just watch out, you might end up having some extra costs for private security etc. But for a strong individualist like yourself, it would be a small price to pay.

However, I would prefer to live in a place where the invalid and destitute are not left to die like animals on the street.

Posted by: non economist on February 27, 2004 08:27 PM

____

Some random comments. First, this pathetic little summary document shows how much Bush gives us of the folly of the MBA mills. The most he can bother with is a simple, yet obfuscatory, executive summary. But that's the b-schools for you; remember that graphical interfaces only became necessary when executives started to use computers.

Re "The government doesn't create wealth": But it does. Taxes pay for education systems-- intellectual infrastructure-- and for roads and other physical infrastructure, subsidize air travel and irrigation water and grazing lands, seed research that turns into commercial propositions (think DARPANET).
I'm with Mark Shields on this one. The idea that I'm going to go out and build a road or an internet or an F-16 of my own is just preposterous. We who live in cold climates know that we need some of the things governments do. We can't pretend we do it all individually. Everybody should try a little bit of that realization.

Re Dilbert Dogbert's question about the Republican party: Now that the Cold War is over, they no longer have to pretend to care about ordinary people. They want to go back to the 1890s economically and the 20s culturally, but they'll settle for the 50s.

Posted by: Altoid on February 27, 2004 08:29 PM

____

"Of course SS has to be mandatory to protect people like yourself who might think themselves so smart and so rich that they won't need any help from SSI in their retirement. While it may work for you, it will certainly fail for many people who choose similarly."

"non economist." No shit, Sherlock. Thanks for looking out for my welfare, whether I want you to or not.

It's nice to know that citizens who are smart enough to buy their own houses, cars, food, and clothing--citizens who raise families, teach children, feed half the planet, and have built the greatest technological society on Earth--are too damn dumb to save for retirement without amateur socialists handling it for them.

I'm probably a lot older than you, and I never saw old people dying in the streets. Even before Medicare, believe it or not.

If you want to tax a third of my income to pay for idiots who can't figure out how to find their butts with both hands, fine. Not like that's new. Just stop pretending you're doing me a favor, and leave me out of your Ponzi retirement plan. It's not like I can live on the measly $2,000 a month it will pay me anyway, and that's if I wait until I'm 70 to start collecting it.

Posted by: tbrosz on February 27, 2004 10:36 PM

____

tbrosz: "If you want to tax a third of my income to pay for idiots who can't figure out how to find their butts with both hands, fine. ..."

I considered responding to a number of remarks you made, but his once convinced me to spend my time on worthier things. (Not that I would hopefully be one of those "idiots". I'm doing quite well, thank you. But shit can happen to everybody; I'm spending 1+ hour every day on the freeway, which is scary enough given what driving I see.) No offense meant, anyway.

Posted by: cm on February 27, 2004 11:14 PM

____

Altoid: "Now that the Cold War is over, they no longer have to pretend to care about ordinary people. They want to go back to the 1890s economically and the 20s culturally, but they'll settle for the 50s."

Coming from Germany (where East and West bordered on each other and could observe to some extent how the other side was doing), I observed a similar thing after the Iron Curtain fell -- once the "Communist" East Bloc to whom a social supremacy had to be demonstrated fell, things started to (actively) deteriorate. I'm still unsure whether it was driven by intent/malice, or by economic pressures (or a mix of both). East Germany and most notably East Berlin were called the "showcase of socialism" for a reason. On the Western side it was probably similar, although they didn't put a spiffy name on it.

Posted by: cm on February 27, 2004 11:25 PM

____

"it is a seven-page Powerpoint presentation plus nine pages of charts. 659 text words total. That's one text word for every ten billion dollars that is going to be spent on Social Security over the next decade..."

Well, see, a picture is worth a thousand words, so a PowerPoint presentation might be worth a thousand... thousand thousand words.

Could someone who does everything you have to do to be President ever have time to truly understand a Social Security reform plan? I have time to read about all this stuff, but I work 40-hour weeks.

Dennis -- thanks for the factual post about wage indexing. I am glad it does not work the way that Suskind was saying.

"A real profitable retirement program, or a private insurance company, invests in things that create wealth, not just move it around."

Paul Samuelson, Nobel-prize-winning economist:

“The beauty of social insurance is that it is actuarially unsound. Everyone who reaches retirement age is given benefit privileges that far exceed anything he has paid in...Always there are more youths than old folks in a growing population. More important, with real incomes growing at some 3% a year, the taxable base upon which benefits rest in any period are much greater than the taxes paid historically by the generation now retired...A growing nation is the greatest Ponzi game ever contrived.”

Another difference between private insurance and social insurance: your benefits from an annuity can't be lowered by a future vote.

Posted by: Noumenon on February 28, 2004 12:23 AM

____

Noumenon: "Another difference between private insurance and social insurance: your benefits from an annuity can't be lowered by a future vote."

Consider this: Your (nominal!) benefits from an annuity can be lowered by a declining currency. Your benefits from stock sales can be lowered by falling stock prices.

Why would currencies decline, or stock valuations fall (in the context of private retirement accounts)? Well, think about the pressures that ensue when a large number of people (retirees) are dumping financial instruments into a market.

But then maybe you can bank on the hope that your cohort is smaller than the baby boomers, and you will buy the baby boomers' stocks cheap at the time they dump it like hot shit?

I don't know how people get the idea that private accounts are a way of evading the demographic issues. There is no way around aggregate demand and supply at the time when the action happens, in whichever form it is financially mediated. Maybe somebody can explain what I'm missing.

Posted by: cm on February 28, 2004 12:55 AM

____

Well this does seem to put a damper on the theory of Bush as sock puppet, if he was a sock puppet these memos would not be about getting clarification from him they would be about, show the president a boring powerpoint until he goes to sleep than ask Cheney what to do.

The problem I have is, if this guy isn't someone's sock puppet, how the hell did he get elected?

Posted by: bryan on February 28, 2004 12:56 AM

____

cm,

I don't think you're missing anything. People and politicians usually ignore the realities of investing during a challenging demographic situation when they try to compare Social Security as it is now to a hypothetical private savings system (they often ignore the longevity insurance and disability insurance aspects as well).

The current investment situation is challenging enough without more savings accounts and would only be made worse if these accounts existed. It would be completely inappropriate to plug in historical rates of return when we are currently faced with zero real returns on cash, sub 4% on the 10 year treasury, and aggressively priced equities and real estate (which as you point out, are sure to be not so aggressively priced 20 years from now).

But it's also true that with the help of low interest rates we can partially address the demographic situation before it becomes a problem.

One way this happens is higher investment. Although it is really hard to build a factory now that benefits us 20 years into the future, there might be some kinds of construction or equipment or basic research which will. The danger of course is that people become so desperate to invest that they throw money at things which lead to current overinvestment (declining returns) rather than higher returns far into the future.

Another way is to use low interest rates to build in advance durable items such as houses and to some extent cars, so that we can reduce production of these things in the future. And we seem to be doing this, so here we have an example of how some future consumption can be pulled into the present. But unfortunately due to the nature of the things which will be demanded, there is not too much we can do now other than consume more now and less later, although hopefully due to productivity increases "less later" will be close to or better than than "more now".

Posted by: snsterling on February 28, 2004 05:30 AM

____

Further to tbrosz on the government not creating wealth:
Try having a successful economy without a government. Too much govt. is obviously a bad idea (see USSR); not enough govt. is also an abysmal failure (see the failed state of your choice). Looking around the world, the rich countries all have some intermediate amount of government. The simplest conclusion is that a reasonably competent, not-too-large but not-too-small government does indeed create wealth. It shouldn't borrow extravagantly or for stupid things, but the idea that industrious right-thinking citizens could create our modern way of life without also creating a government is libertarian froo-froo.

Posted by: karl on February 28, 2004 05:37 AM

____

And another thing:
I love this canard about "what if the government decides not to honor its bonds." If the US government defaulted, yeah that would really hurt Social Security, but it would only happen in a world so screwed up that Social Security's demise would be the least of our worries.

Why are US govt. bonds the archetypal "safe" investment? Not because default is strictly impossible, but because default only comes after everything else has gone to hell in a handbasket.

Posted by: karl on February 28, 2004 05:40 AM

____

karl

I think the point is not "default",but "printing money" which leads to inflation which lowers the "real" return on the security. If investors think we might be forced to "print money",they will look for a larger "real" rate of return.

Posted by: TexasToast on February 28, 2004 06:44 AM

____

I didn't read all the preceding comments that closely, but I don't think I saw anyone comment on the timing of the memo. October 2001! Even if one accepts that Bush once was serious about planning for social security reform during his first term, his inauspicious first seven and a half months and more importantly the events of 9/11 had to put efforts like social security reform on the most back of back burners. This is more a sad display of earnest advisers toiling in vain than a frightening example of the difficulty of raising a momentous issue to an executive not up to the task.

Posted by: Joel on February 28, 2004 07:01 AM

____

Joel,

If the commission had been at work for five months a that point there were four months up until the memo during which Bush was not the "9-11" president and, as we know, had nothing better to do with his time than take a month long vacation in texas. The memo, and the entire process, remains a 'frightening example of the difficulty of raising a momentous issue (one that he ran on) to an executive not up to the task."

Kate G.

Posted by: Kate G. on February 28, 2004 07:28 AM

____

http://www.nytimes.com/2004/02/28/politics/28BUDG.html

Budget Office Predicts Deficit Over 10 Years: $2.75 Trillion
By RICHARD A. OPPEL Jr.

WASHINGTON — President Bush's new tax and spending plan would produce deficits of $2.75 trillion over the next 10 years, the Congressional Budget Office reported Friday in the first detailed analysis of the White House budget.

If there were no changes in taxes and if spending increased only at the rate of inflation, the deficit would be about $2 trillion over the next 10 years, the budget office reported today. But the new estimate is $737 billion higher, primarily reflecting Mr. Bush's desire to make permanent the tax cuts due to expire by 2011.

Three years ago, the budget office forecast budget surpluses totaling $5.6 trillion for the 10-year period ending in 2011....

Posted by: anne on February 28, 2004 07:49 AM

____

Yes, the Government creates wealth. That is the whole point of the legacy of Franklin Roosevelt. Think of the New Deal flow of funds through the economy from social security to the TVA, and imagine the struggle we would have had were such programs not adopted. Think of Thomas Jefferson and the University of Virginia and where we would be without the tradition of public education from elementary and on. Of course, the University of Texas has created wealth beyond proper measure.

Social Security and Medicare have created and preserved wealth from the onset.

Posted by: anne on February 28, 2004 08:00 AM

____

"Yes, the Government creates wealth. That is the whole point of the legacy of Franklin Roosevelt. Think of the New Deal flow of funds through the economy from social security to the TVA, and imagine the struggle we would have had were such programs not adopted."

Anne, no one will claim that the government can not cause money to flow into an economy. The problem is that this money has to be first removed from that same economy.

One of the root conflicts between left and right is that the left assumes that the State has--for some reason--superior insight into where money can best be used for productive purposes, and acts accordingly, removing wealth where the government has decided it is not necessary, while pumping wealth where the government has decided it will do something useful. Like buy votes.

The right (mostly) believes that money is the most productive when it is left to those who earned it, who can then decide individually where best to put it based on their own insight.

You could argue this back and forth all day from a standpoint of philosophy, economics, or morality. Not sure what the point would be.

It's already apparent that simply looking back at the glaring contrast over history, between nations that have adopted centralized control over their economies versus nations that adopted free market principles, is still not enough to convince many people.

Posted by: tbrosz on February 28, 2004 09:18 AM

____

"Try having a successful economy without a government. Too much govt. is obviously a bad idea (see USSR); not enough govt. is also an abysmal failure (see the failed state of your choice). Looking around the world, the rich countries all have some intermediate amount of government. The simplest conclusion is that a reasonably competent, not-too-large but not-too-small government does indeed create wealth. It shouldn't borrow extravagantly or for stupid things, but the idea that industrious right-thinking citizens could create our modern way of life without also creating a government is libertarian froo-froo."

Karl makes a good point. I am libertarian, but not the anarchist variety. I believe government has a role in defense, police, courts, and other areas of this kind.

The purpose of the government is not to create wealth, but to protect it, from the richest person down to the poorest. And that's not its only function. Life, liberty and property are rights for all people, and governments, as the Declaration says, are instituted to protect these.

Where governments get in trouble is when they extend themselves far beyond these basic purposes. Almost two thirds of our Federal budget is dedicated to sheer wealth redistribution, taking money from one group of citizens and handing to another group--and not just the needy by any means--for no value returned. When voters are permitted to vote themselves money out of the pockets of other voters, this result is not too surprising. In addition, many other functions the government undertakes could easily be performed by the private sector, although it's difficult to convince some people of this when they have lived all their lives under government monopolies in some areas.

While I don't expect a libertarian minimalist government any time soon, I think our current system is heading in the wrong direction, and if we can't turn it around, we should at least put on the brakes.

Posted by: tbrosz on February 28, 2004 09:33 AM

____

Well, the heck with public schools, the heck with highways and roads and waterways, the heck with public water supplies, the heck with food and drug safety protection, the heck with public safety entirely, the heck with national defense, the heck with Social Security and Medicare and Medicaid, the heck with veteran benefits....

Posted by: anne on February 28, 2004 09:39 AM

____

"I considered responding to a number of remarks you made, but his once convinced me to spend my time on worthier things. (Not that I would hopefully be one of those "idiots". I'm doing quite well, thank you. But shit can happen to everybody; I'm spending 1+ hour every day on the freeway, which is scary enough given what driving I see.) No offense meant, anyway."

In the context of my remark, I was responding to the standard socialist mantra that even if I made the right choices in retirement, or health care, or insurance, or nutrition, or anything else that an adult has to deal with going through life, there will always be those who can't figure this out, so I have to sacrifice my freedom so those who can't handle freedom don't get hurt. In other words, I'm shackled to a bogus socialist retirement program because some boob might dump all his life's savings in Pets.com.

To add insult to injury, I'm still putting my own money into IRAs, above and beyond what I'm paying into Social Security, because I know I'm going to need it.

I don't know if you're self-employed, but you really see the Social Security bite when your employer isn't paying half of it. Or, to be more accurate, taking the other half off your cost of employment without you seeing it.

Sure, shit happens. That's why I pay through the nose for health insurance, life insurance, and the rest. There are a lot of things I can't buy because I'm spending money on these things, but that's part of being a grownup.

Once again, if you want to help the seriously poor or people who are in a bad crack through no fault of their own, with things like food, health care, or even old age care, fine. Food stamps help feed the needy without the necessity of the government owning the damn grocery stores. Subsidize the purchase of health insurance on the open market for the poor. Keep Social Security, but put a means test on benefits. I could live with that. A lot of my tax money already goes to benefits I'll never see. It's time we outgrew the notion that it's anything but a welfare program anyway.

Posted by: tbrosz on February 28, 2004 09:54 AM

____

"I don't know if you're self-employed, but you really see the Social Security bite when your employer isn't paying half of it. Or, to be more accurate, taking the other half off your cost of employment without you seeing it."

Fair point.

The Social Security tax is a flat percentage of earned income to about $89,000. As the rest of the Federal tax system has become less progressive, the flat to regressive nature of the payroll tax becomes more glaring. I could easily wish the payroll tax cut in more fairly structuring the entire Federal tax system, but I have no hope for that these days.

Posted by: anne on February 28, 2004 10:33 AM

____

It would be interesting to see how much of our wealth in America has come from true individualism, vs connections, either by inheretence, family history, etc. (And even with individuals, somebody got screwed - you think Bill Gates did not get his billions by being a nice guy do you.)

Don't know offhand what the failure rate is for start-up businesses, but if memory serves me right, it is relatively high. So making on your own, even when you have all the right ingredients in education and alike, is not so good, (and bush probably presents the best example of that, even with the connections, etc.).

SS is a monetary and moral requirement for a civilized nation. If left to their own devices, the public at large would probably be in fair to poor shape, in their golden years. Which means that health care, housing, etc, would fall the hospital ER's, (govenment?)food banks, etc. All of which would be a reactionary process, not well planned out, and very probably much more expensive than a SS type system. From the moral issue, I can't give you specifics, aside from what we each decide is morally the right thing to do. What can be said on that front, is that any previous govenment that did not have the moral undestanding that it was good to care for all, is no longer with us (aristocracy is the best example I can think of right now).
Our SS may not be the best system, but no system is not the answer.

Posted by: Bb on February 28, 2004 10:44 AM

____

http://www.nytimes.com/2004/02/28/nyregion/28employ.html

Nearly Half of Black Men Found Jobless
By JANNY SCOTT

It is well known that the unemployment rate in New York City rose sharply during the recent recession. It is also understood that the increase was worse for men than for women, and especially bad for black men. But a new study examining trends in joblessness in the city since 2000 suggests that by 2003, nearly one of every two black men between 16 and 64 was not working.

The study, by the Community Service Society, a nonprofit group that serves the poor, is based on data from the federal Bureau of Labor Statistics and focuses on the so-called employment-population ratio - the fraction of the working-age population with a paid job - in addition to the more familiar unemployment rate, the percentage of the labor force actively looking for work....

Posted by: anne on February 28, 2004 11:05 AM

____

Tbrosz says: "The purpose of the government is not to create wealth, but to protect it, from the richest person down to the poorest."

From whom is the wealth of the rich to be protected? Why obviously, from the poor. And exactly why should the poor agree?

Posted by: masaccio on February 28, 2004 11:14 AM

____

I think tbrosz has made some excellent points here-

1. He doesn't care about anyone else but himself.
2. He doesn't want to live in a society with a social contract.
3. He doesn't care about anyone else but himself.

tbrosz would likely prefer the dark ages and feudalism based upon the ideas expounded upon here. Maybe we can arrange to have a country somewhere, maybe Cuba after Castro dies, where we can send all of the 'true believer' Randian sort of individualist libertarians where they can (for the first time in history) build a state with no state and see how far they get. It would be an interesting experiment, don't you think?

Posted by: non economist on February 28, 2004 11:18 AM

____

The article on employment of African-American men in New York City is terribly sad, and points to how sorely we have squandered the effects of massive tax cuts with so little in the way of job creation. Also, we can understand that we can all too often be vulnerable to economic vagaries and need insulation.

Posted by: anne on February 28, 2004 11:19 AM

____

non economist wrote, "Maybe we can arrange to have a country somewhere, maybe Cuba after Castro dies, where we can send all of the 'true believer' Randian sort of individualist libertarians where they can (for the first time in history) build a state with no state and see how far they get."

Why wait for Castro to kick? Last I heard, Mogadishu or Afghanistan would work fine.

Posted by: liberal on February 28, 2004 11:30 AM

____

tbrosz wrote, "The purpose of the government is not to create wealth, but to protect it, from the richest person down to the poorest. And that's not its only function. Life, liberty and property are rights for all people, and governments, as the Declaration says, are instituted to protect these.

But the wealthy are severely undertaxed. People should, roughly, be taxed as to their wealth, and yet they're not.

"The preservation of property is the end of government, and that for which men enter into society. It is true governments cannot be supported without great charge, and it is fit everyone who enjoys his share of that protection should pay out of his estate his proportion for the maintenance of it." (John Locke, Second Treatise on Government, 1690)

Sure, the wealthy are taxed on income (well, when they don't dodge it), but income isn't wealth. And disparities in wealth are far greater than disparities in income.

"Where governments get in trouble is when they extend themselves far beyond these basic purposes. Almost two thirds of our Federal budget is dedicated to sheer wealth redistribution, taking money from one group of citizens and handing to another group--and not just the needy by any means--for no value returned."

First, some of that wealth distribution is gross, not net. E.g. if my dad gets a SS check and I pay SS taxes, and if my dad gives me a bequest, then some of the transfer nets out. That doesn't mean that the system is thus right or efficient, but "2/3" is an exaggeration. By the same logic, someone who pays local taxes is having his wealth "transfered" to his child (in the form of public education).

Second, there is a large transfer of wealth to landowners, who contribute absolutely nothing just by owning the unimprove value of land, which they had no role in creating. Government guarantees landowners the right to pocket the annual income (so-called economic, or Ricardian, rent) that can be extracted from this asset that they played no role in creating. Estimates vary as to the size of total Ricardian rent in the US; 10-15% of GDP is probably a reasonable estimate. And note that, net, landowners tend to be much wealthier than nonlandowners. This is one reason (among others) that the so-called libertarian position is both morally and economically incoherent. (For a more coherent strain of libertarianism, see http://members.aol.com/_ht_a/tma68/geo-faq.htm .)

Posted by: liberal on February 28, 2004 11:47 AM

____

karl: I submit that the _primary_ problem with the Soviet Union (and other Eastern Bloc countries) was not too much government in quantity. It was that the "goal function" of the society was set wrongly. They thought offering the population a pretty much universal subsistence standard of living, and bullshitting them how good they have it would be enough. In line with this ideology the government was trying to manage every single aspect of people's lives, and to (largely successfully) quelch most private initiative. In the later years it became ever more of a challenge to deliver even the subsistence level, as people lost all motivation to contribute in the face of what they are getting out. The size of the bureacracy was just a corollary to that.

The success of the capitalist/market economy model (and any other, actually) is grounded in people having faith that their efforts, and taking initiative, will improve their lives. To the extent that this faith is impacted by running the economy down with bad policies, the success of the society is in danger. Big government is just one factor out of many in that, although there is definitely a correlation between policies and the size of government.

Posted by: cm on February 28, 2004 12:19 PM

____

Only a country as rich as America could create the libertarian. Truly, libertarians are not so much stupid as they are idiots.

But, as long as they have absolutely no power over the rest of us, who cares?

Posted by: Kirby on February 28, 2004 12:22 PM

____

tbrosz: "Anne, no one will claim that the government can not cause money to flow into an economy. The problem is that this money has to be first removed from that same economy."

Not necessarily. It depends how you define "economy". Only a fraction of the money out there is circulating in the "real" economy, i.e. being used as a means of exchange in goods and services transactions. A larger part is constantly turned over in trading of financial instruments that contributes essentially squat to the real economy. In real economy terms, this is idle money, and "rerouting" it through the real economy would create goods and services. (Although some degree of financial transactions is desirable, as among other things it functions as a transport for money to the places where it is needed.)

Viewed from a different angle, all those people who are out of a job, or who are not engaged in productive activities (which admittedly involves some value judgement) could contribute something to the real economy. It's not that they are unwilling, but too much money is siphoned off into idle financial transactions, so there is not enough financing for all those useful activities.

The way of routing money through the real economy is to put it in the hands of those individuals and entities that will spend it on desirable "real" activities. The trick is how to do it without too much central planning. I'm not sure anybody has figured that out yet.

Posted by: cm on February 28, 2004 12:32 PM

____

tbrosz: "don't know if you're self-employed, but you really see the Social Security bite when your employer isn't paying half of it. Or, to be more accurate, taking the other half off your cost of employment without you seeing it."

No I'm not, but I'm well aware that the other half exists. But it's not just that I "don't see" how my employer pays it, I also don't see how the salary they offer me has this and other amounts (health plan contributions, unemployment insurance, etc.) figured in.

Or why do you think does the rate that independent contractors can ask at least in good times figure by somewhere around 30+% higher than a nominal salary? The contractor rates are adjusted for all the costs that are not paid by the employer but by the contractor. (It is also adjusted for a "flexibility premium", etc.)

Self-employed or not, if you work for somebody, you get a share of the (assumed) revenue/value you are generating for them, and if they are forced to pay overhead costs on what you nominally get, the nominal amount will be adjusted accordingly.

If you play the self-employment game well enough, you will end up netting out more, which is fair as you are taking more risk in some ways than an employee. But don't you ever think the higher rate that you get is because you are so good. It's because those overhead costs are not paid on you, but you have to pay them yourself.

Posted by: cm on February 28, 2004 12:48 PM

____

"Your (nominal!) benefits from an annuity can be lowered by a declining currency."

Can't you get an annuity with inflation protection if you want to pay for that extra insurance?

"But then maybe you can bank on the hope that your cohort is smaller than the baby boomers, and you will buy the baby boomers' stocks cheap at the time they dump it like hot shit?"

cm -- you've guessed my age group just from my political positions! I feel so self-interested. But if you can guess my birthday, too, you could make big bucks working at the carnival.

Posted by: Noumenon on February 28, 2004 02:43 PM

____

tbrosz writes:
"I'm probably a lot older than you, and I never saw old people dying in the streets. Even before Medicare, believe it or not."

Come visit Philadelphia! Make sure to take a side trip through New Haven, Baltimore, and DC...

Posted by: Brendan Skwire on February 28, 2004 03:55 PM

____

Noumenon: "Can't you get an annuity with inflation protection if you want to pay for that extra insurance?"

Yes, in principle you can, but the savers cannot in the aggregate offload all the risk, only redistribute it. If too many people buy the insurance, then the insurer will simply be bankrupted when everybody redeems their paper, in the same way as allegedly Social Security will be bankrupted. You cannot (in the aggregate) remove the risk from the system.

If on the other hand the insurer correctly predicts the calamity, then the insurance premium will eat up your gains, or even exceed them (as both the insurer and the bank want to make a profit today).

And, BTW, the government is pretty much the largest insurer you could think of -- they have the power to distribute the risk over the whole population, to the extent they are in a position to levy taxes. (But even the government cannot squeeze blood from a turnip, i.e. an underperforming economy.)

"cm -- you've guessed my age group just from my political positions!"

No, I was just trying to find a flaw or counter-example to my reasoning. The statement I made was to point out a condition under which my reasoning (about _your_ case, not the general case) would not hold.

Posted by: cm on February 28, 2004 05:08 PM

____

I've never heard a good alternative to having a centralized gov't to direct large infrastructure projects like the US interstate highway system. It seems obvious that a well-designed transportation system, necessarily directed and built over decades, has reduced the price of getting products to market, making the country as a whole more efficient, and also more competitive globally. Can you imagine a system as effective of random pay-as-you-go toll-roads to get from NY to California???

That's just one example for tbrosz et al. A much bigger better one is the gov't investment in basic and applied research, which has contributed to the best grad education system ever devised, and the components of an extremely powerful economic engine. I honestly would like to hear how cutting all this off now would do anything but accelerate the relative decline of the US among nations.

Posted by: Tubino on February 29, 2004 04:37 AM

____

Naturally things are more expensive and complicated than they used to be. When I was young, guys like tbrosz could whine about the government all morning using nothing more than a doughnut, a cup of coffee, and a radio tuned to Paul Harvey.

Now tbrosz is using all kinds of fancy government programs like the internet, and seriously depleting our national store of tired adjectives and retired one liners. This has gotta cost money and where do you think this comes from? That's right, people like you and me who otherwise would invest our money in our future, and have plenty of tired comments of our own to make when we age.

Tbrosz would solve a lot of his problems if he would just save some of his comments for his old age. Maybe by then deregulation will make it possible for him to have his own radio station, and we can hear "the rest of the story".

Posted by: serial catowner on February 29, 2004 08:32 AM

____

Say it with me, "lockbox". "Lockbox, lockbox, lockbox." Hahaha! That sure sounds kooky!

Posted by: melior on February 29, 2004 01:01 PM

____

Post a comment
















__