Category Archives: Social Security

The Social Dimension of Prosperity

By Dan Kervick

In a recent interview in The Straddler, James K. Galbraith discusses some of the points he developed in his recent book, Inequality and Instability.  One of the most important of those points is that inequality leads to a stop-and-go crisis economy of credit-fueled asset bubbles.  This economy delivers large rewards to a few fortunate predators, but delivers a lot of instability, stagnation and insecurity to the rest of us.

But, Galbraith also makes some striking and important points in the interview about what he sees as mistaken places of emphasis in contemporary progressive political rhetoric.  One problem is the tendency to lose sight of the most vital systemic constituents of postwar American middle class prosperity – and also the expectations and aspirations that constituted the middle class outlook.  Continue reading

MMT FOR AUSTRIANS 3: How Do YOU Propose We Deal with the Elderly, Disabled and their Depts?

John Carney agrees with me that supporting our elderly is not an “affordability” problem,but he claims that I fail to see the “real” burden—the dependency ratios and all that. Actually I’ve been writing about that since the early 1990s. The“real” burden is the only thing that matters.
Here’s justa short list of easily accessible things I’ve written at
Public Policy Brief No. 55 | August 1999 Does Social Security Need Saving?
This is just a small sample; the last one listed (PPB 55) and WP 468 are probably the best things to read first, then do PN 2006/5.

MMT FOR AUSTRIANS 3: How Do YOU Propose We Deal with the Elderly, Disabled and their Depts?

John Carney agrees with me that supporting our elderly is not an “affordability” problem,but he claims that I fail to see the “real” burden—the dependency ratios andall that. Actually I’ve been writing about that since the early 1990s. The“real” burden is the only thing that matters.

Here’s justa short list of easily accessible things I’ve written at

PublicPolicy Brief No. 55 | August 1999 Does Social Security Need Saving?

This is justa small sample; the last one listed (PPB 55) and WP 468 are probably the bestthings to read first, then do PN 2006/5.

Now to besure, I think that while his argument that paying benefits to great grandmasomehow makes young women infertile is bit of a stretch, there is a tiny bit oftruth in it. Research shows that the best form of birth control is the risingstatus of women. If you liberate women from the drudgeries of subjugation, youkill two birds with one stone, so to speak. They choose to have fewer kids(better for the environment and long run sustainability of the species—althoughI suspect Carney and the other Austerian Austrians don’t accept the results ofscience) and they get to enjoy greater equality with men.

There couldbe some impact from Social Security as well as all the other progressivegovernment programs that increase women’s security so that they do not feel sodependent on boorish husbands who just want to knock them up and keep thembarefoot in the kitchen. So, OK there is a loose link. As I said, the “publicpurpose” is inherently progressive. Government has an important role inpromoting gender equality. And that’s good for the environment, too. I considerboth of those to be important roles for government to play.

Carney and Iagree 100% on the MMT conclusion that we can always “financially afford”grandma. I think there is a bit of a disagreement on taxes and Social Securityspending, however. We make the benefit payments by keystrokes. The purpose ofthat is to move resources to grandma—we credit her bank account so she can shopat a store rather than dumpster dive.

Now, why dowe tax workers with the payroll tax? Not to pay for the benefits (Carney agreeson this, I think). Rather, it is to prevent current workers from buying up allthe output, competing with grandma’s small benefit checks for scarce goods andservices. That would of course cause inflation once we exhaust capacity.

(I want tobe clear here: I’ve always opposed the payroll tax as a poorly designed way toachieve the goal of ensuring demand doesn’t exceed capacity to produce. Betterto have a progressive tax that hits everyone. And John would probably agreewith Warren Mosler and me that payroll taxes improperly reduce the incentive towork—which is exactly the opposite of what we need if the problem is thatproduction is too low!)

So the worryis about the real resources. The question is about capacity to satisfy workers,their kids and other dependents, and all the grandmas and grandpas and peoplewith disabilities who collect Social Security. Clearly there is no problemtoday, and has been no problem in the postwar period. (WWII was a differentmatter as we had to shift half of all production to the war effort.)

We’ve alwaysoperated way below capacity (US capacity plus the net imports foreigners wantto sell to us). Indeed, our economy would have performed much better if we’dpaid all the grandmas more—to raise aggregate demand, to increase employment,and to let entrepreneurs produce and sell more so they could get more profitsencouraging ever more investment and creation of capacity.

Carney andother enemies of Social Security always claim the problem is in some distantfuture—not today—when dependency ratios rise, when we will have fewer workersper grandma. They say the “fact” is that the burden will become too great.

OK NEP hastwo responses.

1: He’s gothis facts wrong, as we have demonstrated in many publications. There are twoimportant issues here. First the total dependency ratio (old + young) peakedaround 1965 and will (likely) never reach that level again. Remember thatworkers had to support 3.7 kids on average back then—so there were fewergrandmas but more Biffs and Buffys. The kind of support needed is different(and yes, grandma support might possibly be more “socialized” than support ofkids—but even that is questionable, and that is a political not economicconsideration). But kids are a “burden”, too. (Believe me; I’ve got some. Thereare times I’d trade them for a few grandmas.)  Second, on all projections (even pessimisticones) the real living standard of workers will continue to rise even as workersare called on to support more old geezers. In real terms, they will be betteroff than today’s workers.

(As anaside, the presumption always is that gramps and grandmas do nothing tocontribute to production. False. Even if they do not work for pay, they helpout. Indeed, most of the care for the extremely old people is done by womenover age 65—and most of that unpaid. The idea that elderly people are nothingbut a burden is false. I’d go ahead and pay them for some of that work. Cananyone say Job Guarantee?)

2: But moreimportantly: what is the alternative? Soylent Green? Support ‘em or eat ‘em,that is Hamlet’s question. Even if we eliminate Social Security entirely thereal burden remains.

And indeedit most likely gets worse. Here’s why. Workers of each generation will need toset aside more saving (to avoid being turned into canned food or reduced todumpster diving or living with ungracious kids who are resentful that they gotstuck supporting parents who live too long) over their whole lifetime. Soconsumption out of wages will be chronically insufficient for firms to recovercosts. Sales will chronically fall short due to the “sinking fund” of workersaving. The inducement to invest and innovate would be much lower. AND THEN SAVINGWOULD BE LOWER! (Investment creates saving, you know. Trying to save more doesnot actually mean you get more saving—paradox of thrift. So unless budgetdeficits or trade surpluses rise to fill the gap created by lower investment,we end up with less saving to take care of elders thrown off the safety net ofSocial Security.)

And we knowfrom experience (think 1930s before Social Security) that workers never reallysaved enough (surveys at the time showed that huge portions of the elderly hadno visible means of support)—so many will be reduced upon retirement to livingon the fringes of society supported by handouts and fighting with stray dogsfor scraps of food.

I know thatsome Austerian Austrians actually relish such a dystopian future. They love themovie A Boy and His Dog, or Mad Max. It is just the sort of freemarket society they are trying to create.

But theproblem is that it can only be implemented undemocratically. As Carney andothers lay their proposals out on the table so that we can see what kind ofgovernment they want, the reaction by most people is sheer horror.

Don’t Let Him Get Away With It

The Politics of Deception

By Michael Hudson
(Cross-posted from Counterpunch)

The seeds for President Obama’s demagogic press conference on Thursday were planted last summer when he assigned his right-wing Committee of 13 the role of resolving the obvious and inevitable Congressional budget standoff by forging an anti-labor policy that cuts Social Security, Medicare and Medicaid, and uses the savings to bail out banks from even more loans that will go bad as a result of the IMF-style austerity program that Democrats and Republicans alike have agreed to back.

The problem facing Mr. Obama is obvious enough: How can he hold the support of moderates and independents (or as Fox News calls them, socialists and anti-capitalists), students and labor, minorities and others who campaigned so heavily for him in 2008? He has double-crossed them – smoothly, with a gentle smile and patronizing patter talk, but with an iron determination to hand federal monetary and tax policy over to his largest campaign contributors: Wall Street and assorted special interests’ cash. The Democratic Party’s Rubinomics and Clintonomics core operators, plus smooth Bush Administration holdovers such as Tim Geithner, not to mention quasi-Cheney factotums in the Justice Department.

President Obama’s solution has been to do what any political demagogue does: Come out with loud populist campaign speeches that have no chance of becoming the law of the land, while more quietly giving his campaign contributors what they’ve paid him for: giveaways to Wall Street, tax cuts for the wealthy (euphemized as tax “exemptions” and mark-to-model accounting, plus an agreement to count “income” as “capital gains” taxed at a much lower rate).

So here’s the deal the Democratic leadership has made with the Republicans. The Republicans will run someone from their present gamut of guaranteed losers, enabling Mr. Obama to run as the “voice of reason,” as if this somehow is Middle America. This will throw the 2012 election his way for a second term if he adopts their program – a set of rules paid for by the leading campaign contributors to both parties.

President Obama’s policies have not been the voice of reason. They are even further to the right than George W. Bush could have achieved. At least a Republican president would have confronted a Democratic Congress blocking the kind of program that Mr. Obama has rammed through. But the Democrats seem stymied when it comes to standing up to a president who ran as a Democrat rather than the Tea Partier he seems to be so close to in his ideology.

So here’s where the Committee of 13 comes into play. Given (1) the agreement that if the Republicans and Democrats do NOT agree on Mr. Obama’s dead-on-arrival “job-creation” ploy, and (2) Republican House Leader Boehner’s statement that his party will reject the populist rhetoric that President Obama is voicing these days, then (3) the Committee will wield its ax to cut federal social spending in keeping with its professed ideology.

President Obama signaled this long in advance, at the outset of his administration when he appointed his Deficit Reduction Commission headed by former Republican Sen. Simpson and Rubinomics advisor to the Clinton administration Bowles to recommend how to cut federal social spending while giving even more money away to Wall Street. He confirmed suspicions of a sellout by reappointing bank lobbyist Tim Geithner to the Treasury, and tunnel-visioned Ben Bernanke as head of the Federal Reserve Board.

Yet on Wednesday, October 4, the president tried to represent the OccupyWallStreet movement as support for his efforts. He pretended to endorse a pro-consumer regulator to limit bank fraud, as if he had not dumped Elizabeth Warren on the advice of Mr. Geithner – who seems to be settling into the role of bagman for campaign contributors from Wall Street.

Can President Obama get away with it? Can he jump in front of the parade and represent himself as a friend of labor and consumers while his appointees support Wall Street and his Committee of 13 is waiting in the wings to perform its designated function of guillotining Social Security?

When I visited the OccupyWallStreet site on Wednesday, it was clear that the disgust with the political system went so deep that there is no single set of demands that can fix a system so fundamentally broken and dysfunctional. One can’t paste-up a regime that is impoverishing the economy, accelerating foreclosures, pushing state and city budgets further into deficit and forcing cuts in social spending.

The situation is much like that from Iceland to Greece: Governments no longer represent the people. They represent predatory financial interests that are impoverishing the economy. This is not democracy. It is financial oligarchy. And oligarchies do not give their victims a voice.

So the great question is, where do we go from here? There’s no solvable path within the way that the economy and the political system is structured these days. Any attempt to come up with a neat “fix-it” plan can only be suggesting bandages for what looks like a fatal political-economic wound.

The Democrats are as much a part of the septic disease as the Republicans. Other countries face a similar problem. The Social Democratic regime in Iceland is acting as the party of bankers, and its government’s approval rating has fallen to 12 percent. But they refuse to step down. So earlier last week, voters brought steel oil drums to their own Occupation outside the Althing and banged when the Prime Minister started to speak, to drown out her advocacy of the bankers (and foreign vulture bankers at that!).

Likewise in Greece, the demonstrators are showing foreign bank interests that any agreement the European Central Bank makes to bail out French and German bondholders at the cost of increasing taxes on Greek labor (but not Greek property and wealth) cannot be viewed as democratically entered into. Hence, any debts that are claimed, and any real estate or public enterprises given sold off to the creditor powers under distress conditions, can be reversed once voters are given a democratic voice in whether to impose a decade of poverty on the country and force emigration.

That is the spirit of civil disobedience that is growing in this country. It is a quandary – that is, a problem with no solution. All that one can do under such conditions is to describe the disease and its symptoms. The cure will follow logically from the diagnosis. The role of OccupyWallStreet is to diagnose the financial polarization and corruption of the political process that extends right into the Supreme Court, the Presidency, and Mr. Obama’s soon-to-be notorious Committee of 13 once the happy-smoke settles from his present pretensions.

Should Congress Raise the Payroll Tax When the Economy Recovers?

By Stephanie Kelton

Dean Baker has just written another piece on Social Security. Dean and I have always disagreed at some fundamental level on the best way to run opposition against those that are committed to weakening and ultimately destroying this vital program. Thus, while Dean and the MMTers are on the same philosophical team (we all want to preserve the program), we run our offence using very different strategical play books.

When it comes to Social Security, MMTers have taken many pages out of Robert Eisner’s play book. To my mind, no economist has been a more honest and forceful defender of the program. (Eisner was Professor Emeritus at Northwestern University and one of Bill Clinton’s friends and former teachers. He passed away in 2010.)  In my favourite piece on the subject, Eisner said:

The notion that Social Security faces bankruptcy begins with a fundamental misconception, that payment of benefits somehow depends upon the OASDI (Old Age and Survivors and Disability Insurance) trust funds. The trust funds are merely accounting entities….

…Our payroll taxes or “contributions” go directly to the United States Treasury. Our benefit checks come from the Treasury-and those receiving them can verify on those checks that the payer is the Treasury of the United States, and not any trust fund. Social Security payments are an obligation under law of the U.S. government. Our government and its Treasury will not,indeed cannot, go bankrupt. As Federal Reserve Chairman Alan Greenspan has recently put it, “[A] government cannot become insolvent with respect to obligations in its own currency.”

Baker’s latest piece is interesting because it shows that he has at least one foot in the Eisner door. He says:

While there is nothing in prin­ci­ple wrong with fi­nanc­ing So­cial Se­cu­rity in part out of gen­eral rev­enue for two or three years in the mid­dle of a se­vere eco­nomic down­turn, the ques­tion is what will hap­pen when the economy recovers enough that we no longer need this tax cut as stim­u­lus. In prin­ci­ple the tax should sim­ply re­vert to its nor­mal level.

When the economy recovers, Baker is worried that Congress will lack the political will to raise payroll tax rates, leaving the program vulnerable. He says:

If the Social Security tax were not re­stored to its for­mer level, then we could in prin­ci­ple con­tinue to make up the dif­fer­ence from gen­eral rev­enue. How­ever, there cer­tainly is no agree­ment that this will be done. Since its in­cep­tion, So­cial Se­cu­rity has been fi­nanced from the des­ig­nated pay­roll tax. This tax has been used to sus­tain the trust fund, which is in prin­ci­ple sep­a­rate from the rest of the bud­get.

Okay, there is a bit of MMT in here — the government could always make up the difference from general revenue — but the rest of the argument breaks sharply from Eisner, who explained that the perceived funding of Social Security through a dedicated payroll tax is nothing more than a useful myth.

Baker accepts that myth, arguing that as long as Congress has the guts to return the payroll tax to its original rate after the recovery takes hold, then the Trust Fund “would be suf­fi­cient to keep the pro­gram fully funded through the year 2038 and more than 80 per­cent funded through the rest of the century.”

To ensure that this happens, Baker proposes:

[A] very sim­ple way around this po­ten­tial prob­lem. If we want to give a tax cut to work­ers equal to 3.1 per­cent of wages, as Pres­i­dent Obama has pro­posed, along with a sim­i­lar cut to some em­ploy­ers, we can just write that into the law with­out any ref­er­ence to So­cial Se­cu­rity.

In other words, the tax cut would take the form of a tax credit that is paid out to work­ers and firms in ex­actly the amounts that Pres­i­dent Obama pro­posed. How­ever this credit would have no con­nec­tion what­so­ever to the So­cial Se­cu­rity tax, which con­tin­ues to get col­lected at its nor­mal rate.

MMTers would argue against this. Indeed, we have argued in favour of a more generous payroll tax cut — i.e. reducing FICA withholdings to zero for employees and the employers — and we would prefer to keep it that way so that the entire program is overtly, and permanently, funded out of general revenue.  Baker has vehemently opposed our policy recommendation, arguing that it would make the program vulnerable to attack if it lacked a dedicated source of funding.  So Baker wants to make sure the Trust Fund is “there” in order to protect Social Security from attack.

Here’s how Eisner dealt with the same problem:

Expenditures alleged to be related to trust funds are often less than their income-witness the highway and airport  funds as well Social Security. There is no particular  reason they cannot be more. The accountants can just as well declare the bottom line of the funds’ accounts negative as positive – and the Treasury can go on making whatever outlays are prescribed by law. The Treasury  can pay out all that Social Security provides while the accountants declare the funds more and more in the red. 

For those concerned, nevertheless, about the “solvency” of the trust funds, there are simple, painless remedies for this accounting problem….why not award balances in the Trust Funds, instead of the current 5.9 percent interest rate on long-term government bonds, [a] higher return… [for] it was not God but Congress and the Treasury that determined the interest rate to be credited on the non-negotiable Treasury notes of the fund balances.”

So Congress could simply agree to credit the Trust Funds at 10, 25, 40, 100, or 500 percent, making the entire “problem” go away. At 100 percent interest, even the most pessimistic CBO official would have to give the fund a clean bill of health, and future retirees could get 100 percent of the benefits they have been promised.

Which solution should progressives advocate?  Baker’s tit-for-tat replacement tax that promises to preserve Social Security in its current state — able to pay just 80 percent of promised benefits to future retirees?  Eisner’s tongue-in-cheek remedy that artificially pumps up the size of the Trust Fund to astronomical proportions in order to placate the accountants?  Or the MMT solution that advocates a straightforward payment of promised benefits to all future retirees?

Pinch-Hitting for Peterson. Part 2: How Progressives Helped Stoke Deficit Hysteria; A Case Study

By L. Randall Wray

In Part 1 I argued that Beltway progressives aided and abetted deficit hawk Pete Peterson in his efforts to gut the last remaining vestiges of Roosevelt’s New Deal. By adopting Peterson’s views on government finances, they were unable to provide a progressive alternative to budget cuts. Since Republicans were willing to make a Custer’s Last Stand on the debt limit, and since President Obama was Wall Street’s designate to privatize healthcare and retirement, Democrats needed that progressive voice. But Beltway progressives had already caved, for reasons I discussed.

Indeed, it appears even worse than that. Yves Smith already blew the whistle on three progressive research groups (Roosevelt Institute, Economic Policy Institute, and the Center for American Progress) that produced reports with funding from Peterson. These reports adopted the deficit hysterian’s argument that the US budget is on an “unsustainable” course, and advocated a return to “fiscal responsibility”. Getting progressives to adopt neoliberal terminology was a real coup for the deficit hawks. With such hyped-up talk, there was no doubt that Obama would be able to put Social Security and Medicare on the chopping block.

I have recently discussed what I see to be problems with the Roosevelt Institute’s report over at FDL. This was also the main target of Yves. (Go here).

Let me say, however, that I think critics have been too hard on these three groups. I have argued that taking tainted money from Peterson can be justified if one uses the money to produce progressive research. I am sure all three groups believe that is precisely what they did—they thought they would get a progressive view into the debate, something that had been sadly lacking. In their budgeting exercises, they preserved what they saw to be progressive programs, they budgeted some new progressive programs, and they shifted tax burdens to higher income individuals and corporations. Surely, they believed, that is better than standing on the sidelines and letting Peterson choose which programs to cut? I get that. I sympathize with them.

But here’s the problem. They accepted—at least implicitly—the Peterson agenda. Deficits and debt ratios have to be reduced, if not immediately then eventually. In other words, they budgeted, but with Peterson’s Austerian constraints.

I do not know if Peterson demanded that they submit budget projections that showed debt and deficit reduction relative to the base case. But the RI proudly displays on the report’s homepage projections of very significant debt reduction relative to the “do nothing” baseline. (see here) In other words, they accepted the premise that debt and deficit ratios should be reduced. Once that is done, there is nothing to do but cut some programs and raise taxes.

Part 1 should have made clear, however, that progressives had already moved very close to the Peterson view before he put them on the payroll. For a variety of reasons they had already adopted a “deficit dove” position. The difference between a hawk and a dove is this: hawks want deficit reduction more-or-less immediately. Many of them hold the position that deficits are always bad because they always cause inflation and slow economic growth. The extreme hawk position is that even now, with official unemployment above 9%, government spending should be reduced. There is no plausible economic theory standing behind that position—it is ideological, or as Representative Ryan put it, it is a “moral” position. More “reasonable” hawks are willing to wait until a stronger recovery gets underway. Even Pete Peterson is on record favoring postponement of deficit-cutting until 2012 (see below).

By contrast, deficit doves believe that deficits are not only OK in a deep recession, they are even necessary. (Prominent deficit doves include Paul Krugman as well as many of the writers at New Deal 2.0 as well as individuals at the three institutions that accepted Peterson’s funds.) However, doves believe that “eventually” deficits need to be cut so that debt stops growing; they typically want to stabilize the debt-to-GDP ratio at some level. Some admit that the choice of a final resting place for the debt ratio is somewhat arbitrary—perhaps it should be 60%, or perhaps 100%. But doves are sure that 200% is worse than 100%, and that 100% is worse than 60%. Thus, “eventually” deficits must be cut—and that means hard choices.

A progressive dove can be identified by her preferred means of obtaining that final “sustainable” debt ratio. Tax increases on the rich and on corporations are good. Reductions in military spending and subsidies for corporate agriculture and oil companies are advocated. Raising taxes on the poor and cutting their benefits are rejected by progressive doves.

The problem is that most progressives accept the intergenerational warrior’s claim that “entitlements” (Roosevelt’s New Deal) will bankrupt the nation 25 to 50 years down the road. And those portions of the budget are already large and growing. Hence, as Peterson and his minions have argued for years, “TINA”—there is no alternative to hacking away at entitlements.

The more progressive doves advocate relatively small tweaks to Social Security (raising or eliminating the “cap” so that higher income folks contribute more payroll taxes; raising the retirement age; taxing benefits received by high income retirees; reducing the COLAs; and so on) or bigger tweaks to Medicare and Medicaid (greater emphasis on cost control—some go so far as to recommending the “public option”—or to slow health care cost growth more generally, using centralized bargaining over drug prices). The game played then becomes one of finding the least painful way to reduce longer-term budget deficits and growth of debt in order to move the government’s finances back toward “fiscal responsibility”.

That was a long excursion by way of introduction to what follows—an examination of EPI’s “progressive budget”. I want to make clear three points about EPI. First, EPI’s progressive credentials are not in question. It is without doubt the most important progressive voice in Washington. Second, EPI’s preferred budget was created before it accepted any Peterson money. I will actually refer to the budget it published in 2010, long before Peterson solicited EPI to produce a report. In all important respects, the earlier budget is the same as the budget EPI produced for Peterson. Thus, those critics who have argued that EPI “sold out” to get Peterson funds are wrong.

And, finally, I want to say that much of the budget is indeed “progressive”—it preserves progressive programs, it adds funding for new progressive programs, and it shifts taxes to higher income individuals and corporations. It obtains deficit and debt reduction mostly by increasing taxes. We could quibble over the allocation of funds or the budget priorities of EPI, but I have no problem agreeing that the priorities are consistent with a progressive agenda—albeit not necessarily one I would endorse. Further, EPI has been steadfast in its protection of Social Security. Unlike some other progressives, for example, EPI has rejected any attempt to cut benefits by raising retirement ages or fiddling with COLAs. So I want to make clear that when I criticize Beltway progressives for aiding Social Security’s enemies I am not including EPI, which has been a strong voice in support of Social Security.

Before closely examining EPI’s report let me quickly summarize my complaints about Beltway progressives:

  1. By adopting a deficit dove position, they legitimize the Peterson crowd’s focus on deficit ratios and debt ratios;
  2. By adopting the intergenerational warrior’s long-term budgeting methods, they legitimize the fear-mongering surrounding “unfunded entitlements”;
  3. This leads inexorably to weakening support for New Deal social programs by questioning their “affordability”; and
  4. More generally, it legitimizes the arguments of fiscal conservatives who want to reduce the role of government in the economy.

For the purposes of my analysis, I will compare an EPI report from 2010 (before EPI received funding from Peterson) with a Peterson-funded report from 2009, both of which provided “blueprints” for deficit and debt reduction. As one might expect, the dovish EPI report preserves and even enhances spending on progressive programs, while raising taxes on higher income individuals and corporations. The Peterson report is much more hysterical about a looming financial crisis if we do not do something immediately about unfunded entitlements. Further, the EPI budget would move toward deficit cutting much more slowly, and would stabilize the debt ratio at a higher level.

Still, as one reads the EPI report, one is struck by two things. First, both the goals of the research exercise as well as the major points made are remarkably similar to the earlier Peterson diatribe on the coming fiscal crisis: medium-term and longer-term deficits and debt ratios need to be reduced. I will next examine those similarities. Second, while EPI adopts a dovish position on budget deficits and debt, it offers no serious argument to justify that position. It simply takes as granted the belief that rising debts and deficits are bad, and the bigger they are the badder they are. I surmise that EPI simply presumes that everyone “knows” government deficits and debt are bad, so no explanation is required. Everyone, that is, within the Washington beltway. I suppose that because they all breathe the same hyperventilator’s air, it is just so obvious that Beltway progressives do not need to consider the assumption that the US is on an “unsustainable” course.

The EPI 2010 report provides the following summary of its “blueprint” for a progressive approach to budgeting that adopts a “sound fiscal path”:

1. Jobs first. Jobs and economic growth are essential to our capacity to reduce deficits, and there should be no across-the-board spending reductions until the economy fully recovers. In fact, efforts to spur job creation today will put us on a better economic path and create a solid revenue base. We believe there should be no consideration of overall spending reductions until unemployment has fallen to 6% and remained at or below that level for six months. 2. Stabilize debt. Over the long term, national debt as a share of the economy should be stabilized and eventually brought onto a downward trajectory. 3. Build on economy-boosting investments. We must build and maintain initiatives that directly support long-term job and economic growth. Failing to invest adequately in these efforts – or sacrificing them to short-term deficit reduction – would be a dereliction of sound public management. 4. Target revenue increases. Revenue increases should come primarily from those who have benefited most from the economic gains of the last few decades. 5. No cost shifting. Debt reduction must be weighed against other economic priorities. Policies that simply shift costs from the federal government to individuals and families may improve the government’s balance sheet but would worsen the condition of many Americans, leaving the overall economy no better off.…. We document the hard choices that need to be made and suggest specific policies that will yield lower deficits and a sustainable debt while preserving essential initiatives and investments. (p. V)

Note that of the 5 bullet points that summarize the blueprint, three address the supposed debt and deficit problems. Bullet 2 argues for stabilizing and then reducing the debt ratio; Bullet 4 argues for increasing tax revenues; and Bullet 1 postpones blood-letting through spending reductions until unemployment falls to 6%. It is also important to note, however, that EPI recognizes that it does no good to shift debt from government to households—so, for example, reducing Medicare costs by putting them on households only reduces government deficits and debt by increasing household deficits and debt.

Let us look at EPI’s projections, that compare the “do nothing” scenario against Obama’s proposals and the EPI proposals (labeled “OFS” for “our fiscal security”). This graph shows that EPI’s proposals will cut the deficit to GDP ratio by almost half over the medium term.

The next graph compares the medium term debt-to-GDP ratios under the three scenarios:

What is the source of the government’s financial problems? Rising healthcare costs and lack of adequate tax revenue. (“Any realistic solution to the long-term budget outlook must confront the real drivers of the growth of the national debt, namely the rapid rise in health care costs and the lack of adequate revenue.”, p. 2). It is important to note here that EPI wants to protect Social Security benefits—it does not advocate any cuts. So to close the “fiscal gap” it recommends higher payroll taxes by raising the “cap”. It tweaks “Obamacare” to reduce the rate of growth of health insurance costs. (Interested readers can go to the report. While I do not support either of these proposals, one could label them “progressive” given the narrow range of what passes for progressive discourse in America.) In summary, their proposal achieves deficit and debt reduction (relative to current policy):

Our suggested budget blueprint achieves lower deficits in the medium term and balances the primary federal budget (the year’s current revenue and spending, not counting interest payments on past debt) in less than a decade. This path recognizes the need to increase revenue while targeting certain areas for reductions in spending; in particular, our proposed path reallocates spending away from the Department of Defense by adopting common sense spending reductions. Finally, the blueprint protects core priorities such as Social Security and health care from economically counterproductive reductions in benefits. The net impact of the spending and revenue adjustments we put forth in this blueprint will produce the following short- and long-term results: • Substantial and sustained increased funding for job creation and investments, especially in the near term; • A budget path that significantly improves the 10-year budget window; • A transition from a primary deficit to a primary surplus in 2018, and sustainable debt levels by the end of the decade; • An improvement in the path for public debt in the long term (stabilizing debt as a share of the economy beyond 2025); • A solid footing for Social Security, Medicare, and Medicaid for the long term; • A modernized tax code that raises adequate revenue fairly and efficiently.

The following figure shows a significantly lower long-term debt trajectory as a result of EPI’s proposals.

Throughout the report, EPI refers to “fiscal security”, “fiscal responsibility”, a “sound fiscal path”, “sustainable debt”, and the current “unsustainability of the national budget”. None of these terms is ever adequately defined.

The report also discusses the “75 year fiscal gap”, that must be reduced to “stabilize the debt ratio at today’s level”, requiring tax increases or spending reductions amounting to 7-9% of GDP. It warns that the government is not raising sufficient revenue to cover its expenses and that we cannot face national challenges without adequate funding and a return to fiscal responsibility. I will return to these claims below.

It is interesting to compare the EPI Blueprint with the Peterson-Pew Commission’s report from 2009. The Peterson report is cited as a source for the EPI blueprint, and shares similar phrasing and analysis. Like the EPI Blueprint, the Peterson report advocates a return to “fiscal responsibility”, and the need to “return to a sustainable path”. And like the EPI, the Peterson group is committed to stabilizing the public debt over the medium term and then reducing the debt ratio over the long term. The Peterson report also attributes the fiscal problems to growing healthcare costs and insufficient growth of tax revenue, but it also adds as a cause an aging population. Hence, its attack on Social Security is direct, as one would expect from a group funded by Peterson. In summary, the Peterson report

“recommends that Congress and the White House follow a six-step plan: Step 1: Commit immediately to stabilize the debt at 60 percent of GDP by 2018; Step 2: Develop a specific and credible debt stabilization package in 2010; Step 3: Begin to phase in policy changes in 2012; Step 4: Review progress annually and implement an enforcement regime to stay on track; Step 5: Stabilize the debt by 2018; and Step 6: Continue to reduce the debt as a share of the economy over the longer term.”

The differences between the Peterson plan and the EPI blueprint are that EPI would move toward deficit and debt reduction more slowly, and its debt stabilization would be at higher levels (a ratio of about 80% for the medium term and 60% for the longer term, versus 60% and 40%, respectively, for the Peterson plan). According to the Peterson report, the consequences of not getting debt and deficits under control are: “An ever-growing debt would likely hurt the American standard of living by fueling inflation, forcing up interest rates, dampening wages, slowing economic growth and job creation, and shrinking the government’s ability to cut taxes, invest, or provide a safety net.”

I carefully searched the EPI report to find exactly what it is about growing debt and deficits that makes them “unsustainable” and “undesired”. There is no serious attempt made to justify the recommendation to “stabilize” and then reduce debt ratios. Indeed, in the 70-plus page document, the supposed negative impacts of growing debt ratios are discussed only briefly in three places. It boils down to this:

a) budget deficits and government debt might crowd-out private investment;
b) high deficit and debt ratios would hinder government’s ability to deal with future financial crises;
c) high debt ratios could trigger a fiscal crisis;
d) high debt service (ie paying interest on bonds) could crowd out other government spending;
e) high debt ratios could threaten confidence in government debt.

The Peterson report is much more hysterical about the possibility—nay, near certainty—of a fiscal crisis if debt ratios are not reduced. It also adds to the list above the possibility that deficits will spark inflation and devaluation of the dollar, and claims that deficits slow economic growth. But in general outline, the two analyses warn of similar dangers without providing any serious discussion of the mechanisms through which deficits and debts generate these outcomes.

Let me stick to the EPI fears. While we probably disagree about operational details, I suspect EPI agrees that government can make all payments as they come due in its own sovereign currency—that is a position to which even Ben Bernanke, Alan Greenspan, and Paul Krugman subscribe. But if that is so, I do not see how a “fiscal crisis” can be triggered. Let us say that market confidence in Treasuries is shaken. A sovereign government can offer to redeem all of them—that is, stand ready to pay off interest and principal by crediting bank accounts with US dollars. Yes, I know that the inflation hyperventilators are already screaming. But EPI did not list inflation as a possible result; it listed fiscal crisis. How can you have a fiscal crisis when you spend your own currency? EPI is silent on the matter.

The EPI report lists two types of crowding out. The first is the old and thoroughly discredited loanable funds idea: there is a fixed amount of loanable funds in markets and if government borrows, there is less available for private firms. Interest rates rise, investment falls, and growth suffers (one of the Peterson claims). There is also an ISLM version—but that is equally discredited (all modern macro has a horizontal LM curve) and too wonky for this blog. One must conclude that EPI’s macroeconomics is based on pre-Keynesian theory.

Actually, finance is not a scarce resource. (Anyone who thinks it is scarce had a Rip Van Winkle nap during the last two decades, when finance was more abundant than hot air within the Beltway.) Government deficits cannot financially crowd out investment. Yes, if we went beyond full employment of all resources, more government spending could crowd out private spending because there would be no real resources to devote to production of additional output. But it is pretty clear that EPI is not worried about real resources, since its Blueprint devotes Bullet 3 to ramping up public investment.

The second kind of crowding out listed is based on the belief that government faces a fixed budget so that if it spends more on interest it must cut spending (or raise taxes) elsewhere. This is also related to the view popularized by neoliberals Reinhart and Rogoff that low debt ratios are good because when a crisis hits there is fiscal policy space that can be used for bail-outs and stimulus packages. But that means EPI is using a circular argument: we must reduce the debt by cutting spending because the debt imposes a constraint on spending.

The reality is, as all those reading this blog know well, a sovereign government is never financially constrained in its own currency. Government spends by keystrokes. It can stroke keys to pay interest and as well stroke keys to undertake any progressive spending policies EPI proposes. And it still has “room” to stroke keys for bailouts. There is no affordability tradeoff. What matters is inflation—too much government spending drives the economy to the inflation barrier. And real resource use: a government that takes too many resources for its use (hopefully, to serve the public purpose) leaves too few for the private sector. But that requires full capacity use—otherwise at most you get bottlenecks.

Further, as all readers here know, the interest rate is a policy variable. The central bank chooses the overnight interest rate; the short maturity government bill rate tracks that closely since bills are close substitutes for bank reserves. Other rates are more complexly determined. Government bills and bonds are interest-earning alternatives to the rates paid on reserves by the central bank. Let us say that government decides it wants to spend less on interest on longer maturity bonds. Easy enough: stop issuing them. Facing a drought of longer maturity bonds, markets will bid up their prices and rates will fall. Government can stay in the short end of the market as long as it wants; indeed, it can stop issuing even bills and just pay 25 basis points on reserves (as it now does). Yes, this requires a change from current operating procedure. I won’t go through this now as NEP has provided ample analysis of operating procedures and the simple changes that would lead to an era of zero government debt (as conventionally measured, since reserves and currency are not counted).

Now, EPI might challenge me: what would my progressive 15 to 25 year government budget proposal look like? My response: I wouldn’t budget for 5 years, let alone 25. It is a silly exercise that only stokes the fires of Peterson’s hyperventilators.

The best argument against doing long-term budgeting exercises is here, a co-authored Policy Brief that was based on testimony we supplied to Congress. A quick summary is contained in my FDL piece (here). This blog is already too long to repeat the arguments. Budgeting by sovereign government does make sense, and one could even envision budgeting for particular long-lived projects for periods as long as 25 years. But it makes no sense to project total government spending, taxing, and deficits out to 15 or 25 years, let alone to infinity and beyond. And once we bring in recognition of the three sectors balances and the necessity they sum to zero, the futility of calculating budget deficits for year 2035 becomes obvious. You cannot even get a budget deficit unless the private sector wants to net save and the rest of the world wants to earn dollars by net exporting. To calculate the budget deficit in 2035 we would have to be able to project out the current account balance and the private sector balance. That is something EPI did not do—and so, the whole exercise is not only silly but seriously incoherent from the vantage point of the sectoral balances.

In conclusion: critics have wrongly implied that EPI (and perhaps RI and CAP) adopted Peterson’s hawkish approach because they were paid to do so. The similarity between the EPI and the Peterson position on sustainability of deficits and debts predates the funding. The EPI Blueprint does adopt a progressive approach to budgeting, so long as one agrees that progressives should adopt a dovish approach to budget deficits, and that it is progressive to draw up budgets for the far distant future. Personally, I reject both of those stances.

But, MMTers are in a distinct minority—we are deficit owls. As I have argued here, most progressives have lined up on the Peterson side because they adopt the deficit dove position. And that is why all progressive policies adopted since the Great Depression are now in danger.

Counterfactuals can never be proven. What if Beltway progressives had mounted a strong opposition against Peterson? What if they understood and endorsed MMT? Would Democrats have found the will to call the Republican’s bluff? Would Obama have stood up to the attacks on the New Deal? We will never know.

I conclude: progressives have unwittingly aided and abetted the deficit hawks because they do not have any strong alternative to the argument that deficit and debt trajectories are “unsustainable”.

Pinch-Hitting for Peterson. Part 1: How Progressives Helped Put Social Security on the Chopping Block

By L. Randall Wray

It’s official. Obama has decided to become a one term president. He caved in to the Republicans, agreeing to gut Social Security in order to get them to agree to raise the debt limit. This was never a real trade-off, as it made sense only within the Washington beltway. Obama has adopted the Jimmy Carter approach: promising pain and more pain, presenting a dreary (and false) message of no hope, just mindless human sacrifice to please the gods on Wall Street.

In the days of Carter, it was all about stagflation, running out of oil, and national malaise; today it is all about jobless “recovery” as far as the eye can see and unfunded infinite horizon entitlements for the undeserving. I do not know which is worse, but I am positive that voters will reject Obama’s perverted vision of our future, just as they rebelled against Carter’s. American voters are an optimistic lot and they know our best days are ahead of us. We do not face the futures envisioned then by Carter or today by Obama. Voters do have the audacity of hope, even though Obama does not and probably never did. I do not know who will be the next president, but Obama’s actions indicate he has decided he does not want the job. Voters are looking for the next Reagan who shares their optimism.

It was clear all along that this was the real agenda of the fake debate. It never had anything to do with debts and deficits and tens of trillions of dollars of unfunded “entitlements”. The goal all along has been to find a Democratic president willing to kill Social Security. Washington finally has one. Al Gore probably would have done it—but his “lockbox” proposal was too silly to sell with a straight face, so he never got the chance. Obama became the willing sacrificial lamb.

Wall Street wants blood for its vampire squids, and Obama is willing to deliver it by the truckload. To be clear, he is no martyr. Martyrs have to be unwilling, at least up to a point. It appears that President Obama wanted this outcome from day one.

But that is not the story I want to pursue here. What is interesting is how Social Security’s enemies enlisted progressives to fight their battle for them, lining them up to pinch-hit for Pete Peterson.

In the old days, the enemies were simply too obvious to be successful—using Cold War rhetoric and labeling the program a communist plot, they never gained traction.

As they became more sophisticated, they moved on to railing against future costs of taking care of babyboomers. They enlisted Alan Greenspan, who chaired a commission that unnecessarily jacked up payroll taxes to run surpluses to be “saved” for future use—something that was impossible for a sovereign government to do since Trust Fund assets were simply government IOUs (something later admitted by Greenspan). But the high taxes helped to build hostility to the program.

Then the enemies created the Concorde Coalition—that included some Democrat wolves in sheep clothing—to fan across the country beating the drums and scaring college students about rotten “money’s worth” calculations that showed they’d be much better off “investing” in stocks rather than paying high FICA taxes. The dot-com crash did not help that cause—which was always a hard sell because the Concorde Coalition’s members were so darned intellectually dishonest—people like Bob Rubin, Paul Tsongas, Charles Robb, Sam Nunn, Warren Rudman, and Bob Kerry. I debated them on college campuses and I can definitely attest to the greasy propaganda that they thought would capture the imagination of students. It did not. Bad haircuts, bad breath, leisure suits, and stupid arguments were all they had to offer. It was a big zip. Nada. Zero.

So, finally, hedge fund billionaire Pete Peterson helped push the notion of trillions of dollars of unfunded entitlements that would bankrupt our nation. Unfortunately, he was getting nowhere, even with the help of Reaganites like Pete du Pont, and Larry Kotlikoff.

Until Obama got elected, that is.

A peculiar alignment of the stars pushed the Peterson agenda forward. First of course there was the financial collapse, which brought on the worst recession since the Great Depression (a downturn that is not over and that still might morph into the first depression of this century). That crashed tax revenue and generated a huge budget deficit—fueling the fires of deficit hysterians.

Second, Obama’s campaign platform had featured deficit reduction as a major goal. Those of us with some audacity had hoped he was not serious about this. He was. And he brought into his administration a number of Clinton people, all of whom had sworn allegiance to Wall Street and the Clinton spin that deregulation of finance plus budget surpluses had created Goldilocks. In return for tens or hundreds of millions of dollars of rewards, they had agreed to act as Wall Street’s fifth column. For all practical purposes, Peterson was selected to head Obama’s deficit-cutting team.

Which leads to point 3: many Democrats had learned the wrong lesson from the Clinton boom. They convinced themselves (against all reason) that the Clinton budget surplus caused the boom. In reality, it killed the Goldilocks economy and brought on the Bush recession. But, no matter. Wall Street was very generous with its billions, and it had decided that the Obama wave was something it wanted to surf right into Washington. Whatever finance wanted, finance got. What finance wanted was tens of trillions of dollars of bailouts, Obamacare (more financialization of health insurance), and elimination of Social Security (financiers hate the competition).

Point 4. Finally, Beltway progressives decided to join the deficit hysteria bandwagon. The endgame was a foregone conclusion. With no opposition from the left, the Austerians would get whatever they wanted. And what they wanted was to eliminate Social Security, Medicare, and Medicaid.

But why would Washington’s progressive think tanks decide to join forces with hedge fund manager Pete Peterson to undermine the Rooseveltian New Deal? Here the plot thickens.

Some had actually joined up during the “W” years—using the rising budget deficits under Bush (actually due to the recession he inherited from Clinton) as an argument that he was mismanaging the budget with taxcuts for the rich. If only Bush would balance the budget, Goldilocks would rise from the dead. It was an embarrassing display of stupid politics, as progressives sold their souls to Peterson to beat down Bush as a big deficit spender.

Some Beltway progressives—including organized labor—had actually signed up even earlier, during the Gore campaign, manufacturing a fake financial crisis for Social Security in order to offer lock boxes as a better alternative than Bush’s plan to privatize the program. Joining the bandwagon by arguing that Social Security was unsustainable, they offered critical assistance to Peterson. And, of course, they lost the election. (Oh, I know, they continue to claim “but Gore really won”. Come on, if a candidate cannot beat a “W” by double digits, he does not deserve office.)

Still others signed on to the Peterson agenda after the financial crisis hit, in order to argue against payroll tax relief on the bizarre argument that Social Security already faces an uncertain financial future, hence, if we give payroll tax relief to workers now we won’t be able to afford the program in 2050. (We have dealt with that issue here at NEP and also over at New Deal 2.0.) They desperately wanted to hang the fortunes of Social Security on a supposed American love affair with payroll tax hikes.

Again, too stupid for school. No one likes the payroll tax. It is regressive. It taxes work. It makes American workers uncompetitive. And by tying Social Security benefits to payroll tax revenue, it ensures program accounting insolvency—as the Peterson crowd argues. Indeed, it is only because of the payroll tax that we can calculate bad “money’s worth” and project the exact date at which Social Security becomes insolvent. Eliminate the tax and it becomes impossible to calculate solvency or insolvency. But our progressives instead chose certain death for the program on the argument that the albatross of payroll taxes makes the program too popular to kill. (Hint: they were wrong. Evidence? Obama.)

And, finally, there was the debt limit. In the past, we got political posturing, but the limits were routinely raised. This time around, it was clear that Republicans had much more incentive to draw blood—they would require the Democrats give up some popular program before the limit would be raised, and this would cost them in the next election. Yet, success was far from certain as the Dems could have just called the bluff. But the stars were aligned, because by this time there were no longer any dissenting voices within the beltway on the need to cut deficits.

Progressives had a choice—they could take the high road, which meant isolation from the beltway and its funding spigots; or they could join the deficit cutting party and drink the Kool-Aid. That is, they could swing the progressive bat or pinch-hit for Peterson. They chose to pinch-hit.

So how did the remaining progressives get co-opted? Peterson had the brilliant idea of hiring Beltway progressive organizations to join his team. Why not pay progressives to come up with deficit and debt cutting plans? If you can’t defeat them, pay them off. It is like choosing from among the prisoners which ones get to do the whipping and hanging of the recalcitrants.

So progressives lined up at the Peterson Pig Trough. I’ll have more to say about Peterson’s funding of Beltway progressives in Part 2.

With no Beltway progressives left to fight Peterson’s deficit hysteria, Republicans knew they had a winning hand—so they demanded the so-called third rail: Social Security. Democrats in Congress had nowhere to turn for support. Progressives had abandoned the debate, and Obama had been hand-selected by Wall Street to offer up Social Security. Just as only a Republican President could go to China, only a Democrat could finally kill the last remaining remnants of the New Deal. President Clinton had destroyed all the financial regulations, eliminated welfare, and undercut consumer protection. Now it is up to Obama to eliminate Social Security and Medicare.

Obamacare will hand over the nation’s healthcare system to Wall Street, with elimination of Medicare removing the last remaining obstacle to complete financialization of medical care. Similarly, getting rid of Social Security will put Wall Street in complete control of our nation’s retirement system. Wall Street hates competition.

And so does Peterson. It is unfortunate that Beltway progressives voluntarily muzzled themselves, to eliminate any alternative to Peterson’s propaganda.

In Part 2, I will look at a specific case of self-muzzling by the premiere Beltway progressive research institute. Stay tuned.

4 Trust Funds, 3 Problems: Why is the Other one so “Healthy”?

By Stephanie Kelton

Every year, the Trustees of Social Security and Medicare issue an annual report that examines the financial status of the various “trust funds” that purportedly sustain these vital programs. Social Security’s (OASI) and (DI) Trust Funds, as well as Medicare’s (HI) Trust Fund all face chronic problems, some in the not-too-distant future.  In contrast, Medicare’s (SMI) Trust Fund always receives a clean bill of health. Why is that?

The answer is so simple it apparently escapes notice, but here it is, straight from the annual report:

The Hospital Insurance (HI) Trust Fund is expected to remain solvent until 2029. The Disability Insurance (DI) fund is projected to become exhausted in 2018. And the Old-Age and Survivors Insurance (OASI) Trust Fund is considered adequately financed until 2040.  In contrast:

Part B of Supplemental Medical Insurance (SMI), which pays for doctors’ bills and other outpatient expenses, and Part D, which pays for access to prescription drug coverage, are both projected to remain adequately financed into the indefinite future because current law automatically provides financing each year to meet the next year’s expected costs.

In other words, it is sustainable — INDEFINITELY — because the government is committed to making the payments. Indefinitely.

And, as we have argued many times on this site (and elsewhere), the same commitment can easily be made to sustain Social Security (OASI and DI) and Medicare (HI) in their current form.  There is no economic justification for cuts to either program.  The decision is entirely political.

The American people must realize this before it is too late.

If You Really Care About Social Security, Stop Capitulating to the Left

By Stephanie Kelton

I woke up this morning expecting to spend the better part of the day writing letters of recommendation for Ph.D. students. Then I came across an e-mail message that had been posted to a list serve that is read by many progressive (some might say “radical”) economists. The subject line read: DEFEND SOCIAL SECURITY so I took the time to read it.

Its author was outraged by the recommendations coming out of President Obama’s “bi-partisan” deficit reduction commission, which he characterized as “disgusting” and something that should “be fought as hard as possible.” Then, having urged “credentialed economists” to “take the fight” to the airwaves, newspapers, Internet, etc., he drew my ire and derailed my morning plans (sorry students) with the following tactical proposal:

“[I]t sometimes is necessary to defend incremental reforms when they’re under attack.”

Allow me to suggest an alternative approach, one that actually would be “radical” and therefore appealing to a self-proclaimed radical: Let’s start telling the truth about Social Security. We are not (or should not be) patsies for the Democrats (or any other political party or organization). We are educators. So let’s educate people on the basic facts.

Fact #1: Social Security is not “broken.” It is not “going broke.” It will, as Eisner told us more than a decade ago, “be there” as long as we protect it from its so-called saviors.

Eisner, Robert. “Save Social Security from its Saviors”, Journal of Post Keynesian Economics, Vol. 21, No. 1, Fall 1998). This is, in my view, the most honest and concise essay on the subject.

Bell and Wray. “Financial Aspects of the Social Security ‘Problem’”, Journal of Economic Issues, Vol. 34, No. 2, June 2000.

Fact #2: The balance in the Social Security Trust Fund is absolutely irrelevant when it comes to the government’s ability to make payments, in full and on time – today, tomorrow and forever.

Eisner (again) who said, “Accountants can just as well declare the bottom line of the funds’ accounts negative as positive – and the Treasury can go on making whatever outlays are prescribed by law”.

Bell and Wray again.

Greenspan: “A government cannot become insolvent with respect to obligations in its own currency.” (1997)

Greenspan: “I wouldn’t say that pay-as-you-go benefits are insecure, in the sense that there’s nothing to prevent the federal government from creating as much money as it wants and paying it to somebody. The question is, how do you set up a system which assures that the real assets are created which those benefits are employed to purchase” (2005)

Social Security isn’t broken. It doesn’t need to be “fixed”. Why on earth would we play along with this charade in order to give cover to the Democrats? Doesn’t anyone remember 1983? For anyone who doesn’t, that was the last time we saw “incremental reforms” of the kind many “progressive” economists support. As a result of those reforms, today’s workers are contributing more and retiring later. And for what? Those reforms were supposed to make the system solvent for 75 years. Now, here we are, less than three decades later and it’s still “broken”? And we’re supposed to defend further, incremental cuts?!

I guess it sounds like a small price to pay. An added year to two before retirement, a small hike in the payroll tax, a modest reduction in the cost-of-living adjustment. Whatever. Worth it to “DEFEND SOCIAL SECURITY” according to some. But just look at the impact of one of these so-called “incremental reforms”, taken from a paper I wrote in 2005:

Benefits promised to an average wage earner who retires in 2050 are a full 69% higher than the benefits that were paid to the average retiree in 2004. Republicans argue that these increases are too substantial and that the system promises a full $5,600 more than it can afford to pay to retirees in 2050. To deal with this problem, [they] call for a change in the way future benefits are calculated. If the President succeeds in redefining the formula, the “bend points” will be calculated using an inflation index instead of the current wage index.

At first glance, this might seem like a relatively innocuous adjustment. After all, the historical trajectory for prices is also upward, so benefits will still tend to increase over time. But prices tend to rise more slowly than nominal wages – over the long run – so benefits would increase less rapidly under inflation- indexing.

To see the full impact of switching to inflation indexing, consider the benefits that would be due to a hypothetical 20 year-old worker who enters the labor force in 2005, earns the average wage throughout her working life (roughly $36,500) and retires at age 65 in 2050. Using Congressional Budget Office (CBO) projections, she would be scheduled to receive benefits of roughly $22,000 (in today’s dollars). Thus, under the current system, she would receive $459,800 in guaranteed benefits over the course of her retired life (estimated at 20.9 years).

Now consider the impact of indexing to inflation rather than nominal wage growth over this same period. During the relevant period, the CBO projects that nominal wage growth will outpace inflation by 1.2 percent (i.e. real wages will grow at 1.2 percent). With the “bend points” indexed to inflation beginning in 2009, this worker will lose 1.2 percent of her scheduled benefit in each of the 39 years (2009 to 2047) included in her benefit calculation, leaving her with only 62.8 percent of her scheduled (2050) benefit. This amounts to a reduction of $8,184 in her annual benefit (0.628 x $22,000), which translates into a $170,000 reduction over the course of her lifetime!

So there you have it. Incremental reform? I doubt the twenty percent of retirees who rely on Social Security as their only source of income would agree. (Or the 60 percent who rely on it as their primary means of subsistence in retirement.)

Funding Social Security is always and everywhere a political choice. The strongest evidence of this comes directly from the 2009 Annual Report of the Trustees. In that report, they predict gloom and doom for Social Security because “there is no provision in current law that would enable full payment of benefits, once the Trust Funds are exhausted”.

In contrast, the Supplementary Medical Insurance (SMI) Trust Funds are “both projected to remain adequately financed into the indefinite future because current law automatically provides financing each year to meet next year’s expected costs.”

It is that simple. The former is in ‘trouble’ because the government isn’t committed to making the payments, and the latter gets a clean bill of health because the government will always make the payments.

It does not take courage to rally around the liberal mantra (Obama, Reich, Baker, Krugman, etc.) regarding ‘entitlements’ and ‘tough choices’. It takes courage to speak out against it.

Which Party Poses the Real Risk to Social Security’s Future? (Hint: it’s not Republicans)

By Marshall Auerback
** Originally posted at ND 2.0

New Economics Perspectives contributor Marshall Auerback takes aim at the party of FDR.