The Death of Conservative Economic Policy: Part II
A week ago I wrote of the death of conservative economic policy. Its central, if not sole, platform—tax cuts—simply failed to provide the needed oxygen to keep this flimsy policy set alive. Let us use this AM’s news to hammer a few more nails in the coffin.
The oped-of-the-day award goes to Robert Ball, writing in the Washington Post, about Social Security. Ball, a former Social Security commissioner, knows the nooks and crannies of the program better than anyone, so he’s always worth listening to on the topic. In today’s lesson, he makes some critical and piercing points against the claim that cutting benefits is a necessary strategy to address the program’s fiscal shortfall.
Cutting Social Security benefits, as I wrote here, is an idea touted by Republican presidential frontrunners. But, as Ball points out, that’s the last thing you’d want to do at a time when private pensions are disappearing (he notes they currently cover 20 percent of private-sector workers). It’s a perfect example of a conservative economic idea that's diametrically out of step with what’s needed.
Social Security is such an old crone that we often forget how important it is. Ball provides the necessary reminders: it provides at least half of the income to two-thirds of elderly families, and at least 90 percent for a third. “It is the sole source of income for 40 percent of elderly African-Americans and Hispanic Americans.”
It’s true that Social Security’s coffers need more revenue, but the budget shortfall is absolutely manageable (the big—really big—fiscal challenge out there is health care, and that’s as much a private sector challenge as a public sector one). Ball offers some fine ideas. Since earnings inequality has surged, a larger share of high-end incomes are escaping payroll taxes. The solution is to raise the salary cap—the maximum amount of taxable earnings—to once again cover 90 percent of earnings. He also suggests investing 20 percent of the program’s assets in the stock market, a common practice in pension schemes (note: this is not personal accounts, which shift investment risk onto individuals; Ball’s method is good way to pool that risk and safely generate higher returns).
Oh, and did I mention that the long-term shortfall in Social Security is just about equal to the long-term costs of the Bush tax cuts…for the top one percent?
What I like about Ball’s message is its refusal to fold into the comfy, bipartisan: “I’m a reasonable person: let’s split the difference, cut some benefits and raise some taxes.” That may sound good to some people, but it lacks analytic rigor: if the benefits of the program are becoming ever more important, and the costs of fully financing it are manageable, than we shouldn’t cut it. Full stop, end of analysis.
Another coffin nail comes from a LA Times/Bloomberg poll this AM. Matt Benjamin writes: “Republicans seem to be losing the anti-tax card that has helped them win elections over more than a quarter-century. A majority of poll respondents oppose leading Republican presidential candidates' plans to cut taxes on corporate profits and maintain lower rates on investment income such as capital gains and dividends.” He goes on to report that 60 percent of respondents “would be willing to repeal tax cuts to help pay for a health-care program that insures all Americans.” A New York Times/CBS poll reported a similar finding earlier this year (“Nearly 8 in 10 said they thought it was more important to provide universal access to health insurance than to extend the tax cuts of recent years”).
I will continue to troll for evidence of the death of conservative economic policy, not because it’s snarky but because it provides real hope. Many—I’d say a solid majority—in the electorate recognize a) that the challenges of the new economy must be addressed, b) that the inequalities are unacceptably high, and c) that the risks posed by the tax-cut zombies are too great to ignore.
Robert Ball's op-ed was certainly welcome but curiously ignored the elephant in the room. Social Security financing is crucially dependent on initial assumptions, very small changes take you from a system that is projected to have Income fall short of Cost in 2041 and one that is fully funded through the standard 75 year window. The Trustees themselves lay out three different models or 'alternatives': Low Cost, Intermediate Cost, and High Cost with Low Cost producing a fully funded system with no changes in benefits, tax or retirement age. Over the last eleven years Low Cost has been consistently a better predictor over the short term with the results that can be seen in this table: EPI Social Security Issue Guide: Changes in Trustees Projections Over Time. The date of Trust Fund Depletion (which does not equate to bankruptcy) has been pushed from 2029 in the 1997 Report to 2042 in the 2004. Since then it bounced up and down a little for reasons that should be explored and with the 2007 Report is once again set for 2041.
Given the existence of this table when the debate broke out in 2004 you would think we would have had a spirted discussion revolving around two key questions. One, why was depletion receding in time at a rate of more than a year per year? Two, could this trend continue? That discussion has never happened to my knowledge and I have been looking for it actively for years now.
I know what my answer would be to question one: Better than projected growth. I know my answer to question two: Yes, because the growth projections of Intermediate Cost are absurdly pessimistic. The model assumes that Real GDP growth will slump over the next five years to a level 66% of 2006 rates (3.3% to 2.2%) and then continue to trend down to 2.0% ultimate. Table V.B1: Additional Economic Factors. I suppose this outcome is possible but I have yet to see a principled discussion of why we should accept this dramatic slowdown as the median projection, which after all is what Intermediate Cost is supposed to be. Per Table V.B1 we have not had a five year period of growth in Real GDP under 2.4% back to 1960 yet per this model the chances are 50/50 of growth at 2.0% or lower forever. Why? Why accept a working model that asserts that 2008 will be the last year of 3.0% growth, ever?
Low Cost is out there. Certainly because of the way the three models are designed some of its projections may be too optimistic, but on some of the key variables like employment, productivity, Real GDP and immigration it is a lot closer to trend than IC, and even at that LC predicts a steady slowdown of Real GDP to 3.0% in 2013 and a slide thereafter. It is odd in the extreme to assert that ultimate growth more than 10% less than 2006 rates is your optimistic ceiling.
Results between Intermediate Cost and Low Cost are more likely than not. And I say this not because I have some special insight or training, but because I have been watching the numbers for years and reading the papers every day. If there really is a definitive discussion going on about whether and why the United States is facing a dramatic and permanent shrinkage in growth rates going forward then point me to it. Till then I am betting on Low Cost.
October 29, 2007 9:48 AM | Reply | Permalink
Alternatively we could just accept Intermediate Cost as proof of Jared's case. Real GDP increased at an average of 4.1% from 1995 to 2000, slumped to 2.5% in 2000 to 2005 and is now projected to be 2.2% over the period from 2012 to 2016. THAT'S the miracle of tax cuts?
In that case all you can say is 'Heckuva job, Georgie'
October 29, 2007 9:57 AM | Reply | Permalink
For what it is worth the above link is really to Table V.B2 which gives figures for Employment, Real GDP and Interest. Table V.B1 gives figures for Productivity and Earnings, while Table V.A1 gives numbers for Fertility, Mortality and Immigration.
October 29, 2007 10:45 AM | Reply | Permalink
Thanks for posting these interesting comments, Bruce. I agree, and Josh Bivens and I wrote as much a few years ago:
http://www.prospect.org/cs/articles?article=sunny_forecast
One thing that could make you nervous, though, is the recent deceleration in trend productivity growth, from around 2.5% to ~1.5%--most analysts think it's a temporary slump, not a structural downshift, but we'll see...
October 29, 2007 11:39 AM | Reply | Permalink
At least two different approaches lead to the conclusion that a major downturn in the economy is coming. Such a downturn -- perhaps a depression? -- would result in much worse (in fact, negative) growth numbers. In that light, I would not agree that the Trustees' analysis is overly pessimisitic.
The two approaches are demographic (economic activity is driven by the number of people in their most productive years, ie. 40-somethings), and so-called "wave theory" (which, admittedly, seems somewhat less credible, at least to me).
Both of these approaches predict a 1930s-like depression, starting in the next few years. They both could be wrong. But what if they aren't? If they aren't wrong, then Social Security is in real trouble.
-- ARG
October 29, 2007 1:51 PM | Reply | Permalink
Jared, I appreciated this article. I was somewhat puzzled by Josh Marshall's post over on the mother-ship (TPM):
http://talkingpointsmemo.com/archives/057285.php
He says there that Barack Obama is off base attacking Hillary on Social Security. But I believe Obama is recommending exactly the approach that you/Robert Ball advocate, above -- i.e. extending the SS tax to higher income levels.
(I'm not so crazy about the government investing 20% of the funds in the stock market -- even if diffused through a huge fund. The government has no business owning any part of any private companies. Plus, the market could crash any time -- see my other post, above.)
Now, Josh may be right that the Iran issue could give Obama more political traction. But that doesn't mean his position on Social Security is wrong. I think it's right on. But that's just me.
-- ARG
October 29, 2007 1:58 PM | Reply | Permalink
ARG-- What Josh is saying, and he's right, is that it's crazy for Obama to trash Hillary for not having a plan to fix SS. It's crazy because it buys into the conservative b.s. that SS urgently needs fixing -- and that Hillary is dodging an important issue by not having a plan. Her response is exactly right -- the country has far more important and immediate problems to deal with. Obama should pick a different fight. (It's not about what the fixes to SS should be, which everyone involved would pretty much agree on, it's whether the issue should be addressed at this point in time or not). --Greg Anrig
October 29, 2007 2:07 PM | Reply | Permalink
I don't think a real depression (a la the 1930s) is possible any more-- assuming no catatrophes like asteroids hitting the Earth and the like. There are just too many circuit breakers in place (Social Ssecurity itself, unemployment, FDIC edtc.) that prevent a total meltdown on that scale.
A long-lasting recession on the other hand could happen. We've seen one of those in Japan so we know it can happen to an economy even with stoppers in place.
October 29, 2007 4:01 PM | Reply | Permalink
Obama's campaign announed that he was going to take Hillary on. He was going to come out swinging and show the differences between him and her. Paul Krugman said yesterday that if it was machismo he was looking for, Social Security aint it. Krugman said it was not even in the top ten of really important scary issues. So does he not want to differentiate or can't he differentiate?
"A thing moderately good is not so good as it ought to be. Moderation in temper is always a virtue, but moderation in principle is always a vice." Tom Paine
October 29, 2007 4:02 PM | Reply | Permalink
I opened TPM Cafe this evening to find my two favorite economists side by side. What a treat. Both of them write in a language I understand well...it's called English. Would that more economists used it. Thankee, Mr. Bernstein.
aMike
October 29, 2007 5:43 PM | Reply | Permalink
aMike: "I opened TPM Cafe this evening to find my two favorite economists side by side." Yep, a treat. And Greg A. weighing in on the thread, too. Maybe books by articulate people really exist.
John
http://www.haberarts.com/
October 29, 2007 6:31 PM | Reply | Permalink
I have a quibble about the first line: "conservative economic policy". I don't think there is such a thing. There is a Libertarian economic policy which pushes for elimination of taxation, but they are unrealistic utopians.
What we have instead, is a group of capitalists who are intent on gaming the system for their own benefit. They allow the Libertarians to provide a cover of intellectual blather which hides their true interests. Indeed much of the Libertarian effort exists because of the funding of a handful of wealthy right wingers. Most notable among this group being Charles Koch.
What the capitalists want is lower taxes for them. They understand that the government needs to exist and that funds need to be raised to pay for it, they just want the taxes applied elsewhere. If the Libertarians are going to equate liberty with freedom from taxation and this fools enough people into voting Republican then that's just fine with them.
I think you might even find that firms push (indirectly) for taxes to be applied against their competitors as a way to enhance their market power. A typical example is that of Walmart which forces tax concessions when it builds a new store, but these breaks are not available to existing competitors.
As Thomas Frank discovered a stated concern for "values" and promoting tax resentment is (was?) a powerful way to get citizens to vote against their own self interest.
There is an economic policy for capitalists, its called achieving monopoly power. Everyone from Adam Smith to Marx understood this. Why it has been forgotten now remains a mystery.
--- Policies not Politics
Daily Landscape
October 29, 2007 7:17 PM | Reply | Permalink
Certainly.
In 1997 I came up with a slogan that may sound corny but has substantial truth, since backed up by the No Economist Left Behind challenge (Google it)
If Privatization is Necessary it Won't be Possible. If Privatization is Possible it Won't be Necessary.
Clearly we could be heading over the cliff of a housing led recession. In which case the stock market is going to take a bath and a retirement plan based on returns from equities is simply not going to perform better than one simply based on 12.4% of payroll invested in Treasuries. Any rate of economic growth that would make any private account plan work rescues Social Security on its own. If we are really heading into a '1930's-like depression' then your IRA is not going to bail you out.
Privatizers are stuck on a data fork. They can predict crisis based on one set of numbers that has long term growth going into the ditch and staying there forever but then have the task of putting together a plan based on private accounts using those same growth numbers. Can't be done.
October 29, 2007 10:23 PM | Reply | Permalink
If I remember correctly, Robert Ball has said that when he signed off on the large payroll tax increase in the 1983 negotiation, he didn't expect it to have the effect of building up huge surpluses in the Social Security Trust Fund -- surpluses which, by funding the unified budget, have permitted the Republicans to get away with large income tax cuts and have rendered the tax code much less progressive than it was a couple of decades ago.
Back in 1983 the Commission members were looking at the high rates of inflation the economy had just gone through and projecting relatively high inflation rates in the future. They expected benefits to climb much faster than payrolls with the result that no large trust fund surplus would ever occur. Over a ten year or so time frame total FICA receipts were expected to approximate total Social Security expenditures -- a pay-as-you-go system. The immediate large increase in the payroll tax was agreed to because Commission members didn't want to have to come back in a few years to correct another shortfall.
The projections of high inflation didn't come to pass. The result: a huge surplus available to fund the operating budget. And I think the Old Man has figured out the solution.
Take 20% of annual FICA receipts and buy non-government assets. At the least such a program would generate a debate over whether such assets could be counted as funding the operating budget. And I think the answer is probably not.
Presto! The Trust Fund's current annual surplus is history, and Congress has to raise income tax rates or vastly increase the government's bond sales to foreign governments to fund the operating budget. How much more debt will China buy? And how much more indebted to China do we want to get?
Very neat, Mr. Ball. Very neat.
October 30, 2007 2:26 AM | Reply | Permalink
I’m not sure your narrative is correct.
I thought the idea of the large payroll tax increase was indeed to produce a surplus in the SS trust fund that would create an obligation for general to help pay benefits for the baby boom bubble when the payroll tax was no longer adequate. A way to shift the burden of SS onto the boomers during their working years instead of placing the entire burden on their children.
October 30, 2007 7:06 AM | Reply | Permalink
Yes.
I'm more and more convinced that 'ideology' or 'theory' is not at stake here.
It's just a snake oil argument: We'll get something for nothing - there'll be a free lunch.
The privatization number crunching misses the point. As one poster mentioned, they can only indict the current sytstem by predicting flat growth, but then they'd have to use those numbers for private funds anyway.
It's only a struggle by these elites to get loot the treasury. It's not about 'theory' at all.
October 30, 2007 7:14 AM | Reply | Permalink
If you don't mind a bit of self promotion, you might be interested in the essay I just posted in the user section:
After Capitalism, What?
--- Policies not Politics
Daily Landscape
October 30, 2007 8:36 AM | Reply | Permalink
Pre-funding is largely a myth, or was until about 1998. The 1983 tax increase that phased in for a total of 2 extra points of payroll was designed to bring Social Security back into 'short term actuarial balance' defined as having a year of reserves in the Trust Fund for each of the next 10 years. It achieved that goal by 1993 when the Trust Fund first returned to a Trust Fund Ratio of 100. You can see the actual numbers in Table VI.A4.-Historical Operations of the Combined OASI and DI Trust Funds, Calendar Years 1957-2006. It is worth noting that in the years before 1983 the flow of funds was as often from the General Fund to the Trust Fund as the other way around, in normal times the Trust Fund is simply a Reserve Fund.
The Trust Fund reached actuarial balance over those years because the economy did in fact perform in the midrange of expectations, but really this wasn't pre-funding anything. Now the Commission and the Trustees did allow for the possibility of some sort of fully funding the system. If the economy performed at the top of the range for some extended period of time, the entire system could be put in 'long term actuarial balance' which is to say more than a year of reserves in each of the next 75 years. Well we had that growth, the period from 1995-2000 returned average Real GDP of 4.1%, a rate not seen since the early 60's Table V.B2: Additional Economic Factors The result on the Trust Fund was the same as it was on the General Fund over those years (and how could it not), they system was on the whole set for sustainability going forward, i.e. paygo, given growth anywhere close to 90's era numbers meant the Trust Fund would never have to be cashed out and only a portion of the interest. At which time we could have had an honest discussion along the lines of what Robert Ball set out, a diversification of the Trust Fund away from its reliance on Special Treasuries towards other asset classes. Moreover we could have had an open discussion about the FICA rate which in 2000 looked to be too high given recent economic performance.
But of course Bush and Bush tax cuts and Bush's war and Bush's visceral decades long hatred for Social Security (he ran against it when he ran for Congress in the seventies) all combined to put paid to that particular discussion.
But the notion that the Trust Fund was ever going to bridge the total gap would have seem far-fetched in the early 90's. It was scheduled to go to Depletion in the late 2020's, which is to say right when the Boomer demand would be at maximum, which would make it a funny kind of pre-funding. Now that depletion has been pushed back to 2041 then 'pre-funding' is a reasonable description of the result, Boomers have in fact paid our way. But that was not a plan unless you count 'Hope' as a plan.
October 30, 2007 8:50 AM | Reply | Permalink
Interestingly you can actually calculate the Cost of Inactivity on Social Security. It is kind of a betting game, but instead of betting on economic activity in 2017 or 2041 you are simply betting on the next year.
The Trustees use Payroll Gap as their measure of Long Term Actuarial Balance, which is to say that any real 'solution' will mean some combination of benefit cuts and tax increases. But for simplicity lets assume it is 1997 and the only policy option on the table is a tax increase. The payroll gap was 2.23%, what was the cost of Inactivity? Well nothing, the 1998 Report showed that the new payroll gap was only 2.19%. In effect Nothing gave everyone in 1997 a 2.23% tax cut on income under the cap. If you repeat the exercise for the years through 2004 you can see that in each case Nothing was a winning bet, in the face of Inactivity, depletion went back in time and the gap shrank to 1.89%. Doing Nothing left dollars in wallets and had no extra costs going forwards. EPI: Changes in Trustees Projections over Time
The game got trickier in 2005. The payroll gap went from 1.89% to 1.92%, should we have moved on this in 2004? Well no, by not moving I essentially gave myself a tax cut of 1.89% for 2004 at the cost of an extra .03% of payroll going forward. For anyone whose income has stabilized in real terms it would take 65 years for the Cost of Inactivity to become positive, and then you would have to examine the potential interest effects of investing that 1.89% on your own.
It got even trickier in 2006. The payroll gap went up pretty sharply from 1.92% to 2.02%. Was not moving in 2005 a bad move? Well it depends on your age, for anyone less than 20 years from retirement Nothing was the right move. Moreover one that was fully vindicated when the payroll gap went back down to 1.95% for 2007.
What does this mean for 2008? Well each player has to examine the short term numbers and make a determination of whether the payroll gap will likely increase or shrink and if the former by enough to justify moving based on the current 1.95%. Well the result depends on your age. Everyone wins if the gap shrinks. But people my age win even if the gap goes up by .11 points each year for the next 19 years. Given that the gap only went up twice in the last 11 and only once at a rate approaching that, Nothing is looking like a very good short range plan.
People who claim that we need to move on Social Security because the problem only gets worse need to spend a little time playing the Inactivity game. Certainly the historical record over the last decade has shown Nothing to be a Most Excellent plan for Social Security. You just have to take it year by year.
October 30, 2007 9:23 AM | Reply | Permalink
As it relates to Social Security I thoroughly disagree. Alf Landon's violent opposition to Social Security in 1936 was not based on some desire to grab ahold of this income stream, in the early decades there really wasn't enough to care about.
Modern Conservatism was not founded on Libertarian principles, right from the end of WWII it was focused on smashing anarchism, socialism, and collective bargaining. Which is not to say that they weren't also vehemently against taxes, but I don't think you can draw a line between that and Social Security. Alf Landon hated Social Security because he correctly perceived it as Socialistic. If you let it in the door where was your defense against universal medical coverage? Free public higher education?
Well the answer is 'Nowhere'. We Social Democrats really do have a long range plan, and yes a good part of it requires some taxation. A Social Security system that can be shown to be solvent long-term is a profound threat to Landon style conservatism, it is their worst nightmare, a government program fundamentally out of their control that also works. Which incidentally is why lifting the cap is a thoroughly poor tactical move. Social Security as currently constituted owes nothing to Capital, and is not fundamentally a redistributive system and it would be best to keep it that way. If you want to ding people making over $100,000 or $200,000 the proper way is by adjusting marginal income tax rates or increasing capital gains tax. Simply shuttling additional billions through a system that is currently projected to return $200 billion dollar surpluses is just a recipe for resentment, just another opportunity to drive a wedge between the upper ranges of the middle class and the combined lower ranges plus the working class.
October 30, 2007 9:44 AM | Reply | Permalink
Darn, of course I meant 'from the end of WW I'
October 30, 2007 9:47 AM | Reply | Permalink
conservatism is an incoherent philosophy which seeks tio get ahead by proving a negative. There is no way to justify a position that government accomplishes nothing. Better to say we should find better ways for giovernment to do what it needs to do.
October 30, 2007 10:12 AM | Reply | Permalink
I don’t get it.
Isn’t the only real question whether future GDP will be sufficient to cover this particular
national commitment? Why is there any more need for a Social Security Trust Fund than for a National Defense Trust Fund? And is there any relevance to the dire prospect that there will be too many retirees relative to the work force? Were that really the case why not eliminate tax benefits for capital spending and depreciation (using the saving to fund SS)? The lower productivity per worker will require a larger workforce, presumably from increased immigration, and mirable dictu we’ll have corrected the ratio. Yes that’s dumb. Almost as dumb as trotting out the dread adverse ratio of workers to retirees. Why do fairly well credentialed economists insult our intelligence by advancing it with a straight face ?
October 30, 2007 5:50 PM | Reply | Permalink
Good points...I recall that in the heart of the privatization debate a few years ago, the stock market went into a swoon, and it had a profoundly negative impact. The idea of introducing that type of risk into a guaranteed pension quickly become clear to people.
October 30, 2007 10:10 PM | Reply | Permalink
Thanks for the good vibrations!
Paul K has been in a great zone lately, lifting his already superlative game even higher. Listen to his interview on Diane Rehm's radio show.
http://wamu.org/programs/dr/07/10/15.php
October 30, 2007 10:13 PM | Reply | Permalink
I've got two points of disagreement.
First, I think it's fine to adjust the cap upward as Ball suggests, not eliminate it (which would be a problem in the way you suggest). But I don't see what we gain if we allow earnings inequality to push a bunch more people over the cap.
Second, Soc Sec is surely redistributive in the sense that low earners get a lot more back than they contribute relative to high earners (who get a lot less back--another reason why eliminating the cap would be objectionable to the highest earners--they're already contributing more than they'll claim).
October 30, 2007 10:21 PM | Reply | Permalink
Furthermore.
Isn’t the entire discussion of the Trust Fund (hereafter TF) essentially shadow boxing?
At the risk of supporting the irresponsible (Why ?I could discuss but it would make this post too long) claim by the conservatives that the Treasury will never honor the “debt” represented by the TF, that fund qua fund is meaningless. Consider what will be happening in, say, 2050. SS benefits will require the Treasury to pay, say, $100 billion. Where will it get that? It will either obtain it from taxes or borrowing. And either way the amount it will have to obtain will be exactly the same whether or not there is a TF.
To the extent that the Treasury does borrow that will be facilitated if the total amount of the National Debt (ND) is reasonable relative to the GDP. In order to increase the chance of that we need to run affairs in the interim so that that ND is indeed reasonable.i.e.we need to obtain more from taxes than we spend – to run a surplus. Whether we do or don’t label part of that surplus as payments into the TF is irrelevant. What is relevant is that we are either decreasing the ND or at least causing it to grow more slowly so there’s more room left for future borrowing.
So TF is really short hand for limiting borrowing.
And OBTW Greenspan’s 2001 wail that the Clinton surplus was a problem because there was no way to invest it without undue Governmental ownership of private assets , was just self serving , or better Bush serving since it’s aim was to facilitate the Bush tax cuts without which we wouldn’t be having this discussion today. That Clinton surplus was automatically providing for future SS payments just because it reduced or eliminated borrowing thus leaving room for whatever borrowing might be needed for future needs such as SS or the DOD.
Of course ,as an alternative to running a surplus we could invest in infrastructure today which would otherwise have to be funded in 2050 which would have precisely the same effect as running a surplus which we arbitrarily label as the TF. Or better invest in non-infrastructure such as education that would increase GDP(and tax revenue) in 2050 having either the same effect or better than if we calculated a purely nominal increase in this purely nominal TF...
October 31, 2007 5:16 AM | Reply | Permalink
Shadow boxing and Kabuki.
The ratio has always been future GDP vs Cost. But the Economic Right issued a challenge back in 1983, would the supporters of Social Security sacrifice enough current utility of payroll dollar to secure their place at the head of the line when (or if) Income failed to meet Cost? Well we Boomers stepped up at least in part, we agreed to pay enough over the medium term to meet then current needs and in the event grew the economy at rates to send longer term needs back to 2041. At which point most of us will have shuffled off to Buffalo and points beyond. It was an intergenerational bargain, we give you an extra 2% of payroll now, you agree to pay for our retirement later, the rest is just bookkeeping.
But as it is the narrative has been shifted over to King Lear. The kids are admitting that we sent them to college and set them up in their own kingdoms but now are demanding the answer to "What have you done for me lately?" Well really the answer is "Not so much as we might claim, but we still have a credit balance" and by God we are going to claim it, and every penny.
October 31, 2007 7:21 AM | Reply | Permalink
Yeah, I think that's a fair statement. As for the Right's original challenge and subsequent response , I'm reminded of ...
Quiz Master: What animal has a long trunk , floppy ears, tusks and black and white stripes?
Contestant:Gosh I can't think of any animal like that.What's the answer?
Q.M. An elephant. I was lying about the stripes
October 31, 2007 8:14 AM | Reply | Permalink
The TF represents a claim on general revenue by virtue of the fact that not all payroll taxed were required to pay benefits and were borrowed by the treasury.
From an economic standpoint, the higher payroll tax on workers reduced consumption and freed up money for investment in the capital infrastructure either by government or private individuals. That investment theoretically will result in a larger GDP in the future that will be available to be taxed to help pay SS benefits from general revenue. From an economic standpoint, that is not unlike the government investing in the private economy without the risk of political corruption.
October 31, 2007 8:15 AM | Reply | Permalink
I agree with the last paragraph.
With respect to the first it seems to me that once the government commits to make certain payments that's a "claim on general revenues" altho it might be junior to the rights of the holders of US debt. Conversely I expect bond holders do classify the TF as a senior debt(which is why the Right is irresponsible to imply that some future US government might just walk away from it.)
But apart from whatever comfort this senior classification provides to those soon to retire Boomers it seems to me that from their standpoint an obligation of the government is an obligation of the government and it is at best merely interesting whether or not it is supported by the TF.
October 31, 2007 9:20 AM | Reply | Permalink
The TF is truly just an intergovernmental accounting mechanism, giving future retirees access to general revenue to partially pay their benefits without legislation, in effect shifting the cost to the entire economy rather than just the working people paying payroll tax. The bond market certainly does not care about the TF, they look at the long term obligations of the government and its ability to meet them.
Future governments can’t simply “walk away” from the TF, but they can avoid using general revenue to pay them off indefinitely by raising the payroll tax again or cutting benefits, which is de-facto the same thing.
October 31, 2007 9:47 AM | Reply | Permalink
Well we Boomers stepped up . . . . Bruce Webb
Yep -- stepped up to demand large tax cuts, large deficits, and a large shift of the tax burden to those who could least afford it.
Boomers -- the Largest Generation.
October 31, 2007 10:31 AM | Reply | Permalink
Ellen the context is Social Security.
October 31, 2007 11:21 AM | Reply | Permalink
Well, well, well. 3.9% GDP for Q3. Certainly it's early and plenty of time for revisions, but by my math 0.7 plus 3.8 plus 3.9 not only is a not bad trend line but averages to 2.8%. My bet against 2.6% for the year is looking pretty good right now. Any Q4 number above 2.0% looks to make Nothing another winner. Which would make it twelve years in a row for me, and eleven of twelve for everyone.
Who said Nothing was not a plan?
October 31, 2007 11:32 AM | Reply | Permalink
Sorry -- I consider it a package deal.
Boomers don't get any credit for loaning Gen X and Y's payroll tax to the USG and then, claiming that these special bonds forever (or at least until 2041 when most will be dead) take the issue of intergenerational transfers off the table. Had Boomers paid their way and not left the younger generations with a large debt, it might be a different story.
Boomers haven't "paid their way" as you claim. Like any other interest group they've simply figured out how to work the government.
October 31, 2007 1:26 PM | Reply | Permalink
I've always assumed that the ratio of the National Debt to GDP is significant and that the TF is included in the ND. Not true?
November 1, 2007 4:15 AM | Reply | Permalink
I’m not sure.
It really doesn’t matter though since I am sure that any competent financial analyst understands what the TF is and will adjust the numbers accordingly. As I said what really matters is the long term obligations of the government and the probability that they will be met as well as actual debt instruments held by the public.
November 1, 2007 6:39 AM | Reply | Permalink