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February 21, 2010

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What we need is a grand budgetary bargain, wherein liberals and conservatives sacrifice some sacred cows. Entitlement cuts, military cuts and tax increases.

I'm not exactly holding my breath. If there was a negotiation on long-term budget problems, the Dems would surrender before it began, and the Republicans would reject it in the end anyway.

Notice the GOP championing Medicare lately? Of course they are. Seniors vote, and tend to vote GOP. So even the party that theoretically loathes social programs will fight for the most expensive one. The Dems, allegedly wimps when it comes to Defense, are actually a bunch of hawks (because they actually ARE wimps who are afraid of being labeled "soft on [insert boogie man here]") who are busy escalating the war in Afghanistan, for better or worse. And both parties know that tax increases are unpopular.

I don't think we'll deal with the problem until it's right on top of us.

What we need is a grand budgetary bargain, wherein liberals and conservatives sacrifice some sacred cows. Entitlement cuts, military cuts and tax increases

One of those was made in the 1980s, in which the middle class agreed to pay more in FICA taxes against the baby boomer retirement, and the rich and upper-classes got a tax cut. To actually 'save' the excess money, it had to go into T-bills (to anyone claiming otherwise: Where exactly do you bank hundreds of billions of dollars?). When the boomers retired and Social Security needed to redeem bonds, the rates would rise on the upper classes and rich to pay for them.

And now, as that day is on the horizon -- the rich and upper class want to cut Social Security benefits so that those bonds are never redeemed.

I'm a bit leery of 'grand bargains' with that history.

"To actually 'save' the excess money, it had to go into T-bills (to anyone claiming otherwise: Where exactly do you bank hundreds of billions of dollars?)."

As a general matter, when you're already in debt, the best investment you've got is probably going to be paying down that debt, not spending the money and saving IOUs in a jar.

The government holding it's own obligations is precisely as effective a savings mechanism as you or I filling a jar with IOUs made out to ourselves. You can pile up as many as you want, and it contributes not one iota to helping you pay bills down the road.

Buying another country's treasury bonds is a way for a government to save money. Buying it's OWN treasury bonds is a way for a government to pretend that it's saving money.

Brett: The government holding it's own obligations is precisely as effective a savings mechanism as you or I filling a jar with IOUs made out to ourselves. You can pile up as many as you want, and it contributes not one iota to helping you pay bills down the road.

What a T-bill bought by Social Security pre-funding represents today is some individual forgoing present consumption. If I pay $5,000 extra a year in payroll taxes, I am not spending $5,000 this year on flatscreen TVs, booze, and blackjack. When I give it to the government, they write down that they bought $5,000 in Treasuries, and that means they don't have to borrow $5,000 this year. That means that $5,000 in private savings can go to productive private investments instead of being crowded out by government borrowing.

What that Treasury bill represents is the fact that 30 years down the line, the reverse process has to happen. The federal government has to come up with that $5,000 (+ interest) to make payments on Social Security so that some retiree can get with the blackjack/booze/flatscreens. Now the government has to raise that money, either by borrowing or by taxing. Luckily, because they allowed $5,000 in extra private investment 30 years earlier, those taxes or that borrowing will be a lot less painful than they are now.

So yeah, T-bills are "just" markers in this game. But they're markers with an important purpose: to remind us, 30 years on, that someone today went without some of his income in order to help the economy invest for his retirement.

Brett labors under the delusion that the Social Security Administration is the same thing as "the government". That's the only way his metaphor about "filling a jar with IOUs made out to ourselves" makes any sense.

Brett ought to look at his paystub or his tax return. He pays money to the SSA under one set of rules; he pays money to "the government" under a different set of rules. The rules are different because the money is going to two different accounts.

Brett's delusion is perhaps understandable because too many people keep talking about Social Security outlays as "government spending".

--TP

I was googling for something more or less unrelated about Social Security and came upon this by chance:

Let's not overstate the case: none of us has actually "paid" for Dick and Dubya's Excellent Adventure. It was all done with borrowed money.

I keep telling you guys that the best way to expose the GOP's inherent loopiness on economics is to challenge them to carry their principles to their logical conclusion and PRIVATIZE THE NATIONAL DEBT. Split the check. Let every American service his own personal share ($32K or so, and rising) of the national debt. Let him kick in a bit extra to pay down his balance (and not mine) if he wants to. Let his own kids (and not mine) inherit his outstanding debt balance when he dies. This modest proposal may sound insane, but it is exactly symmetrical to the notion of privatizing Social Security.

-- TP

Posted by: Tony P. | July 09, 2008 at 01:30 AM

You get points for consistency on this one, Tony P.

Echoes of Hilzoy:

von: "arguing that Social Security faces not a present crisis -- or that it's really just all a part of a general funds crisis -- is silly."

I disagree. Arguing that SS does not face a present crisis just reflects the fact that the SS trust fund will be able to pay for SS benefits in full until 2042 or 2052, depending on whether you believe the SS trustees or the CBO. When you add to that the fact that both are (if memory serves) using fairly conservative estimates of both growth and productivity, plus the general uncertainty of economic forecasts of the distant future, the case for 'no present crisis' seems fairly clear to me.

We start arguing about a general funds crisis only in response to an argument offered by our opponents, namely: that more money goes out of SS than comes into it starting in 2018, and that this constitutes a crisis. We then say: it is indeed a very serious problem that the country is running serious structural deficits, and one bit of that problem is that we have been using the SS surplus to cover general funds. But the fact that we will have to start actually letting the SS redeem the bonds it holds, which we are legally required to do, is not part of a 'Social Security crisis'; it's part of a general funds crisis.

We also argue about a general funds crisis in response to the following argument: really , the SS trust fund doesn't exist; the bonds it holds are just IOUs from one part of the government to another. In response to this we say: (a) yes, it does too exist, but also (b) if you (our opponent) want to claim that it doesn't, and that the government is all one, then there is no reason to describe the need to repay these IOUs as a Social Security crisis, as opposed to a general funds crisis; and no reason to suppose that we have to make up the difference between money coming in through payroll taxes and money going out to SS beneficiaries by raising the payroll tax or cutting benefits, as opposed to just raising general taxes or cutting some other program.

The point is, in both cases we make the 'general funds' argument in response to arguments made by our opponents, which either construe a genuine problem with our federal deficits as a SS problem, or trade on viewing SS as just a part of the general fund when they want to make its trust fund disappear, but as a separate entity when they want to consider possible 'solutions' to the 'problem' they have, by this means, caused to appear.

Posted by: hilzoy | January 05, 2005 at 11:01 AM

I'm not sure what possessed me to dig up old arguments that are now being rehashed, but there it is. It feels like VH1 Classic or something, at once nostalgic and creepy.

"Brett ought to look at his paystub or his tax return. He pays money to the SSA under one set of rules; he pays money to "the government" under a different set of rules. The rules are different because the money is going to two different accounts."

If the money hadn't been loaned back to the government to fund the current (for then) spending, you'd have a point. As it is, not so much.

There is a general funds crisis, that is made worse by the fact that we can't keep funding it out of a Social Security 'surplus' because the 'surplus' is permanently on its way out and is on its way into becoming a deficit which will actually need to be funded by the general fund.

I don't care what you call it politically, it is a funding crisis caused by the fact that we can no longer hide behind Social Security 'surpluses'.

I also don't buy the characterization of the Social Security bargain as a grand bargain in the sense talked about. It was designed to be to the advantage of Baby Boomers while screwing everyone else. They got to pay lower income taxes in their prime earning years with the 'deal' of having everyone else pay higher income taxes when the Baby Boomers retired. They didn't give up anything, and took quite a bit.

Reynolds, knowing that he is not an expert in economics, did not make a suggestion. Reynolds asked a question on his blog. Informative answers were appropriate, but rudeness, not.

Since black people, statistically, are one of the poorest demographics, would we raise the standard of living if we shot them all?

PS: Please don't call this a racist question. That would be rude.

It was designed to be to the advantage of Baby Boomers while screwing everyone else. They got to pay lower income taxes in their prime earning years with the 'deal' of having everyone else pay higher income taxes when the Baby Boomers retired.

Seb, you have it exactly backwards, because you talk as if "the Baby Boomers" who paid into the SS Trust Fund were the same people who got the income tax cuts, and the capital gains tax cuts, and the estate tax cuts, that the SS Trust Fund surplus financed.

The people who got the bulk of the benefit from those tax cuts may have been boomers themselves. But they were not "the" baby boomers.

--TP

"Brett labors under the delusion that the Social Security Administration is the same thing as "the government". That's the only way his metaphor about "filling a jar with IOUs made out to ourselves" makes any sense."

If you're going to contend that the SSA isn't an arm of the government, I don't think we're going to agree about who's delusional.

The government holding it's own obligations is precisely as effective a savings mechanism as you or I filling a jar with IOUs made out to ourselves.

It's interesting that if you call something "an IOU written by the Democrats in Congress" Brett will think it's almost worthless, but if you call exactly the same thing "a United States Treasury bill" Brett will regard it as the safest investment in the world.

I can't help feeling that there must be some way to arbitrage this sort of thinking and, basically, take all Brett's money off him.

"but if you call exactly the same thing "a United States Treasury bill" Brett will regard it as the safest investment in the world."

Got any evidence at all that I've expressed the latter sentiment?

I do recall Brett writing that he was moving or had moved the bulk of his investments into foreign interests. He don't like dollars no more.

I'm not arguing that treasury bills are worthless, I'm simply pointing out that a treasury bill is a liability for the issuing government, and an asset for whoever holds it. Where the issuing government holds them, the liability and asset cancel out, leaving nothing behind.

Requiring that the SS surplus be 'invested' in US treasury bills, instead of being used to pay down the debt, purchase real assets, or treasury bills of other nations, was nothing but an accounting gimmick intended to conceal the fact that the surplus was being spent, not "invested".

Do we really have to go another round on the SS surplus? This has been explained endlessly.

First, if the SS Trust Fund (yes, there is such a thing) had invested the money in private securities instead of Treasuries then the government would have borrowed the money it borrowed from the Trust Fund elsewhere. The total debt would be unchanged.

Second, if you believe the investment in Treasuries is insecure because the government can refuse to pay, then I have news for you. An investment in private securities is equally insecure because the govt can confiscate them if it likes. There's no reason to think default is likelier than confiscation.

Third, refusal to meet the obligations to the Trust Fund would be a default on govt debt, with all the (extremely horrendous) consequences such a default would entail.

So can we put this argument aside please? If someone wants to talk about the dangers of the debt, fiscal responsibility, etc., fine, but leave the "It's just a drawer full of IOU's" arguments out of it. It makes you look foolish.

"First, if the SS Trust Fund (yes, there is such a thing) had invested the money in private securities instead of Treasuries then the government would have borrowed the money it borrowed from the Trust Fund elsewhere. The total debt would be unchanged."

Interesting: You're simply rejecting, as beyond even contemplating, not instantly spending any revenue that comes in? Even if the new revenue was, as in this case, explicitly justified on the basis that it would be saved for future use, rather than spent?

Basically you're agreeing with me: The federal government spends every cent it can lay it's hands on, and then every cent they figure they can get away with borrowing, and not doing so is off the table. The budget can not be balanced except under extraordinary, and transient, circumstances.

That's not Keynesian policy, that's just spending like a drunken sailor.

"Third, refusal to meet the obligations to the Trust Fund would be a default on govt debt, with all the (extremely horrendous) consequences such a default would entail."

No, it wouldn't. Because if Congress decides that it's not going to meet those obligations, it will simply order the SS administration to not cash the bonds. No default.

Maybe Reynolds learned something from Lenin.

In February, 1918, The All-Russian Central Executive Committee (of the Bolsheviks) decreed that the debts of previous governments were nullified.

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