Brad DeLong's Semi-Daily Journal: A Weblog

Crisis, not to worry. Crisis, not to worry. Pick one why don't you, this all makes my head just hurt.

Or stick your finger in the economists' wind, and decide which one you like.

Ok, I'm not an economist. You're confusing me. In your post earlier today "The Coming General Fund Crisis", you suggest that there is a real problem with social security (even if we call it a general fund problem). Then this is posted without comment; I assume because you agree. This suggests there is no problem.

I'm really trying to understand the issue. Could you clarify?

Thank you very much!

Thanks for posting this important oped from Paul Krugman. Someone over at Angrybear commented I had to read the latest wisdom from Dr. Krugman and alas Factiva is letting me down. Yes, invent a crisis so the GOP can raise employment taxes to make up for their General Fund irresponsibility. Pathetic!

Whatever it is, this issue doesn't seem real to people. It is as if the married couples earning between $30K-$120K don't seem to care if the Republicans ruin Social Security or not and that they will probably see 50% of the benefits their parents currently get.

Of course they do care -- they are either not paying attention or are so stupified by cable news that they might as well have the cognitive capability of a reasonably bright dog. By the time a real crisis arrives, Bush will be long gone and there will be a Democrat in office, who will then raise taxes to solve the problem.

Then of course people will vote heavily Republican because they are so fiscally responsible and never raise taxes.

I'll send a PayPal $1 to anyone who can convince me this problem can be solved. Should be worth about $.20 EU by then.

Disingenuous, at best. He knows perfectly well that the funds to pay-off the securities underpinning the system will come from the rest of the budget. The two are, effectively, one and the same. What it actually boils down to is priorities. As in, "Do I really want my kids to fork out to support a bunch of retired Boomers when they could keep the funds for themselves (be that in the form of cash or non-SSI governmental spending)?"

The answer, of course, is no.

Brad -

I keep wondering why no one nails Greenspan for this disaster. After all, he was the one who lo those many years ago brought forth "Peace in our time" - he devised this Trust Fund to General Fund loan, and then a few years ago had the audacity to say General Fund taxes should be cut. He of all people should have known - make that "he knew" - that future GF taxes were absolutely necessary to repay the Trust Fund. Has the man no shame? And has the Press no shame for not telling us this, rather than the hagiographic mist in which they shroud Sir Alan? The man may have been OK in controlling inflation (after Paul V did the heavy lifting), but we should not forget that he is no friend of the average Joe, and on his narrow shoulders should be placed the stigma of the destruction of the realizable middle class dream of a Social Security retitrement.

Can someone point me to an explanation on why the conservatives are so focused on killing off social security? (I understand the concern with respect to dealing with the boomer bubble.) Given that social security is funded by regressive taxation, I just don't get why it is such a big deal to the wealthy minorities. Is it pure ideology?

Can someone point me to an explanation on why the conservatives are so focused on killing off social security? (I understand the concern with respect to dealing with the boomer bubble.) Given that social security is funded by regressive taxation, I just don't get why it is such a big deal to the wealthy minorities. Is it pure ideology?

Alan,

Easy enough. Monetize the debt while holding down COLAs, thereby "euthanizing the rentiers", so to speak. (Nominal) Benefits don't go down yet relative taxes don't go up (the non-indexing issue aside), and my kids and I get to keep our income. Feel free to send over that dollar at your leisure. :^)

Can someone point me to an explanation on why the conservatives are so focused on killing off social security? (I understand the concern with respect to dealing with the boomer bubble.) Given that social security is funded by regressive taxation, I just don't get why it is such a big deal to the wealthy minorities. Is it pure ideology?

Bernard---

The money for the funds to support those assets has already been spent. It been spent for the past 20 years and will be spent for the next 10. The budget would have to deal with its past debt whether it was paid to the SSA or to teh Cinese. And this isn't a Baby Boomer issue, they'll be dea when Social Security runs into problems. Gen X will be in their first decae of collecting.

Too few now remember the late Sen. Daniel Patrick Moynihan's revelation of the original bait and switch behind the HUGE increase in FICA taxes (almost 50% by rate, and far more, given the increase of earned income to which the rate applied).

Moynihan was critical in the bipartisan push for the increased FICA taxes, and participated at the time in what he later said was a wholly fraudulent predicate for the increases.

You see, in the Reagan/Volcker recession, unemployment topped 10%, and actually got to 10.8% for a yearly figure (and I think 11.3% for a top monthly figure).

At those reduced rates of employment, the FICA yield was considerably (although temporarily) reduced from what it would be at closer to full employment. This temporary shortfall was used to falsely say the system was even then just about to go bankrupt, and the 'crisis' that was knowingly ginned up to make the public go along with this huge tax increase on workers and employers was really, according to Moynihan's later admission, not any kind of crisis at all, and had nothing to do with its alleged purpose of 'saving' SS, but rather, simply to staunch the flow of red ink in the deficits.

And in fact, the increased 'take' from the increased FICA tax WAS about the same as the reduction of the deficit.

Knowing this fact, that the purported 'saving' of the SS system was NOT the motivating factor in the increasing of the rate and earned income ceiling, at least according to Moynihan, who was among the most important actors in that staged action, explains why NOW, when the SS system needs those 'banked' assets (the bonds in which the surplus was parked), the plan seems to be to renege on the promised outcome.

I think I have said this before, but in any event, it seems as if everyone favors private accounts. The question, however, comes down to where. Take the 2000 presidential election. Bush wanted them within Social Security, whereas Gore wanted them on top.

I remember reading that Peter Orszag, who along with people like Peter Diamond, has advocated against privatization was in favor of expanding access to already existing ones and/or creating new ones. In other words, he wanted to modify the current system to preserve it, but also put something on top of it.

That sounds very reasonable to me. I'm obviously not an economic talent like Krugman, but I think I would agree with him on many things of a moderately liberal nature. I am a strong advocate of free trade, but I also think it's becoming clear that the governmnent, in one way or another, has to play a bigger role in helping everyone get health care insurance. Thus, I wonder what his thoughts are on altering the current system to largely preserve it but also building something on top of that.

Paul Krugman doesn’t deny that there maybe a crisis in general government financing, but that is a different problem from whether or not social security is solvent. And he is quiet right. The social security may have a long term financing problem, but it is not urgent and small tweaking is likely to fix it. More important, it is unwise to try to fix it now, given the difficulties and inaccuracies in long-term forecasts. But the general fiscal crisis may come much earlier.

For the sake of simplicity, we can assume that social security program is totally solvent under the current financing scheme. But the government still has a general financing problem about 10 years down the road. You see, last year, the fiscal deficit excluding social security program was about $600 billion. But government only needed to borrow about $420 billion in open market because it got about $180 billion from the surplus of SS (it wrote an IOU of $180 billion to SS trust fund). (These are just ball park numbers.) But this is going to change once babyboomers start to retire – starting from 2013, the annual surplus of SS is going to decline and in another 5-10 years time, it will start to drawdown its trust fund. Say at 2020, the fiscal deficit excluding SS will still be $600 billion (if the tax cuts are made permanent, the deficit is likely to be much higher), but then instead of getting $180 billion from SS surplus, the government needs to payback SS $100 billion – so the total annual borrowing it needs will be $700 billion! When the conservatives talk about SS crisis, this is the one they have in mind. Think about it for a while, you will realize that increase SS taxes now will do nothing to solve this crisis – in fact, the 1984 SS tax increase did nothing to help relieve this crisis. On the contrary, one can argue that because people have been focused on the total fiscal deficit including SS, the SS tax increase has made things worse – without the increase, many of the Reagan tax cuts would have to be reversed and many of the Bush tax cuts may never have a chance of passing. This is why Krugman calls that tax increase a class war, I think.

"it seems as if everyone favors private accounts"

Private accounts are ok--as supplements to Social Security. There are plenty of tax-favored options I've got some savings in some of these. Social Security is an important part of the package.

If I hadn't seen these people sell the country on the war with Iraq, I'd never believe they could get away with this fiasco. As it is though . . .

Bush says it, Americans believe it, and that settles it.

An OT conundrum: With almost all the best economists in the world teaching, researching, and writing in the US, how did this country even get here? How did these right-wing radicals win the war without making any sense? It will make a very worthwhile dissertation in pol. sci or political economy.

Rob,

"The money for the funds to support those assets has already been spent. It been spent for the past 20 years and will be spent for the next 10. The budget would have to deal with its past debt whether it was paid to the SSA or to teh Cinese."

The _nominal_ amount of calls-on-resources, denominated in dollars, will have to be paid. The _actual burden_ me and mine will face depends, in large part, on how much those nominal figures are inflated away. (Whether by domestic inflation or forex depreciation) Which is why I wouldn't mind some inflation. :^)

Euthanasia Rules!

Brad,

Krugman makes some very good points about how it appears that the Social Security crisis has been invented. I have been saying the same thing for years.

I think he is too partisan when he implies the privatizers are dishonest. Even though I cannot agree with them, you and I know some of the people on the last commission and while they were all picked for their privatization bias, they did try to come up with different options that they thought would be best for a long-run solution.

The discussion of changes in benefit formulas, retirement age, etc. should be separated from the privatization arguments.

When we just look at the arguments for privatization by itself, we need to think in macroeconomic terms. I wonder what has happened to the old “crowding out” verses Ricardian Equivalence discussions? They would seem to be relevant here.

Monday’s Washington Post had an editorial titled “The Cost of Reform.” It states “ … These concerns miss the fact that the increased government bond issuance would be countered by the new pool of capital accumulating in private retirement accounts. Government borrowing would increase, but private saving would increase equally. Net national saving would not be altered, so interest rates and the U.S. dependence on foreign savers would not change either.”

What was not pointed out was that if there is no change in national saving, then there will be no change in future output and workers are not going to be any better off. Even if these personal retirement accounts pay a higher return, this return net of the additional taxes to service the larger government debt will be no more than it would have been without out privatization. The “nest egg” that workers with private accounts might be able to pass on to their families will be nice, however, they will also be passing on a share of the larger debt.

Of course, if the privatization proposal includes reducing benefits, raising retirement age, or raising other taxes to reduce the debt, these measures by themselves will alleviate the alleged future problems. The argument for the urgency of privatization is gone.

I say alleged, as I cannot think of anything else where we trust projections ten to thirty years in the future to make choices today, but that is another discussion.

I know that many of the economists who are pro privatization believe that the funds that go into the Social Security Trust fund end up subsidizing other government spending more than they contributing to national savings. The underlying argument for them is that privatization will discipline Congress to spend less. My own thought is that this Congress does not see much connection between revenues and expenditures.

Sam Williamson

"Disingenuous, at best. He knows perfectly well that the funds to pay-off the securities underpinning the system will come from the rest of the budget. The two are, effectively, one and the same."

I think it's at best disingenuous to imply that PK makes any mistery about this. His point is that baby-boomers were proposed a deal: accept a regressive tax to keep their social security benefits. Now that time is coming to make good on this promise, privatization-supporters are trying to act as if this bargain never happened.

"Do I really want my kids to fork out to support a bunch of retired Boomers when they could keep the funds for themselves (be that in the form of cash or non-SSI governmental spending)?"

I didn't know that my kids were going to contribute to these private accounts. What I understood is that privatization would divert money from the ss fund towards private accounts for _my_ generation. The political reality of a society with an inverted age pyramid will make sure that cuts on current ss benefits will never fully offset the costs of creating these private accounts, so that my children will be left with more, not less, debt to service.

If you're doing it for our generation, don't pretend it's for our kids... Unless you are close to retirement yourself.

Jean-Philippe,

"His point is that baby-boomers were proposed a deal: accept a regressive tax to keep their social security benefits. Now that time is coming to make good on this promise, privatization-supporters are trying to act as if this bargain never happened."

Times change, my man. I was but a wee lad when that bargain was made, and I don't feel like paying for it, nor do I want to punt the ball to the next generation. Thomas Sowell reminds us that treaties are snapshots of the power-balance that currently obtains. So are tax codes. :^)

"The political reality of a society with an inverted age pyramid will make sure that cuts on current ss benefits will never fully offset the costs of creating these private accounts, so that my children will be left with more, not less, debt to service."

I actually agree as far as the crummy political reality of the situation, which is why I am coming to like the concept of a little constructive inflation to make all those nasty IOUs the government handed the Boom go away.

Posted by: Jean-Philippe Stijns at December 7, 2004 08:01 PM

Disingenuous... how so? Are you suggesting that the government has the option of selectively defaulting on bonds held by the SS trust fund or any other governmental agency/entity (includiing non-U.S.)? I hope not. The result would be chaos in the bond market and the economy at large.

Krugman's point is solid. These obligations of the government to the SS trust fund are solid and represent assets of the SS trust fund. Also, you fail to acknowledge that there is a bond market on which these assets could be "cashed", if so needed. Essentially, the bond market would act as the finance mechanism for SS. Of course, this would have to be planned carefully as a flood of bond sales would cause bond prices to drop too quickly.

Given all of these compelling points about the chimeras that are prompting the march towards privatization, a.k.a. the Fund Managers' Welfare Act of 2004-8, is there some group of economists working on TV spots, or some other type of agitprop campaign, to counter this? If the Swift Boat Veterans for a Republican Majority could do it, why can't we?

Jean-Philippe,

"Are you suggesting that the government has the option of selectively defaulting on bonds held by the SS trust fund or any other governmental agency/entity (includiing non-U.S.)? I hope not. The result would be chaos in the bond market and the economy at large."

Who said anything about 'selectively'? Insofar as the government has the ability to influence monetary policy and remains a sovereign debtor, it has the ability to effectively default across the board by turning on the printing presses and inflating away the real value of its debt. This would, obviously, result in rising yields and capital losses for the unlucky current holders, but it carries the political benefit of being a relatively _stealthy_ and broad way of screwing the 'rentiers'. The 'rentiers' being, in this case, the large-scale (foreign) holders of Treasuries and those who have retired or are near retirement, who are indirect holders via SSI and have been pledged nominal, rather than real, cash flows in retirement and no longer have access to employment income.

Look up "seigniorage" and Thomas Sargent.

Jean-Philippe,

"Are you suggesting that the government has the option of selectively defaulting on bonds held by the SS trust fund or any other governmental agency/entity (includiing non-U.S.)? I hope not. The result would be chaos in the bond market and the economy at large."

Who said anything about 'selectively'? Insofar as the government has the ability to influence monetary policy and remains a sovereign debtor, it has the ability to effectively default across the board by turning on the printing presses and inflating away the real value of its debt. This would, obviously, result in rising yields and capital losses for the unlucky current holders, but it carries the political benefit of being a relatively _stealthy_ and broad way of screwing the 'rentiers'. The 'rentiers' being, in this case, the large-scale (foreign) holders of Treasuries and those who have retired or are near retirement, who are indirect holders via SSI and have been pledged nominal, rather than real, cash flows in retirement and no longer have access to employment income.

Look up "seigniorage" and Thomas Sargent.

Anybody got transcripts from the 1983 Social Security reform, from folks like Alan Greenspan and Ronald Reagan?

I think Sam Williamson is exactly right about members of Congress and the disconnect between revenues and outlays. If the only reason to erode one of the most successful New Deal programs is because Congress is quietly saying "stop me before I spend again" I would like to have some better hope that the fix would work before proceeding. This seems like one more excuse. Congress was able to control spending with leadership from the White House, and the economy grew just fine under the Clinton tax regime. Now, we've got exactly one year of reasonable spending growth under Bush, never a veto, class-warfare tax cuts, and we are expected to believe that the only way to instill discipline is to de-fund a program that's solvent and will remain so for decades to come. Oh, please!

Williamson speaks up for those on the last commission, when speaking of "privatizers" but they are far from the only people in the discussion. There are far worse offenders among the "privatizers" – especially among politicians. Bush tends to stay so far away from statements of fact that he is rarely offers clear examples of dishonesty (could that be the plan?), so try Frist. The words "bankrupt" and "crisis" roll right off his tongue, right along with implications that shifting funds from the Trust Fund to private accounts will somehow raise the national savings rate and the rate of capital investment.

Bernard,
It seems you are discounting the very real costs of a de facto default.

Coach,

Oh, I believe there are _some_ costs. Much depends on how quickly it happens. But look around. How many large industrial nations have actually found themselves, say, cut off from the capital markets because of a period of effective default, whatever the mechanism? Hell, people are lending to _Argentina_ again, already.