Social Security and Deficits: Bad Analysis
Sometimes you come across really silly commentary and allow it to slip by because it doesn’t seem worth the time to say anything. I must admit that has been a very frequent occurrence during the past few months. Especially so with respect to two favorite topics of the conservative politicians: Social Security and Federal Deficits.
I’ll keep this brief, so let’s take them one at a time.
Social security is not about to go belly up. It will survive. Many generations of Americans can look forward to receiving their payments.
There I said it.
Every time an opportunity presents itself to cry doom and the end of the world, right wing politicians and their economist allies kick up a huge cloud of dust full of foreboding and angst. They tell us in very studious and serious tones of the impending bankruptcy of the Social Security system, and how we might just as well ditch it since it is about to cave in under its own weight. The recent report by the system’s trustees analyzing the recession’s impact was just another such opportunity.
Gasp!
Wow. The recession actually made the finances of the Social Security system worse. Who’d have thought? You mean when the economy tanks financial stuff like Social Security receives a negative impact? No! Well than we might as well shut the thing down. After all its as good as bankrupt.
Rubbish.
The trustees report shows that the surplus runs out in about three decades from now. Three decades. The surplus runs out. Surplus. That’s not going bankrupt. It means that we revert to a pay-as-you-go system. The right wingers have been crying wolf on this one for years. Decades actually. Ronald Reagan called the system bankrupt over forty years ago. He called a team of ‘experts’ in to tinker with it, which they did, and now it still runs an annual surplus. That would be surplus as in more money comes in than goes out.
Reagan is famous for calling the system ‘socialist’ and for thinking it undermined the moral fiber of the American public. he wanted us all to rely on our savings for retirement. There’s probably plenty of folks who had their pensions eliminated by the likes of IBM who thank their lucky stars they ignored Reagan. And what about all those people unlucky enough to retire last year when the market had hammered their 401k’s? Think they look at Social Security and thank their lucky stars the doomsayers didn’t win the argument? I do.
Yes there are issues with the system. The problem is that we live far too long after retirement. Most pension plans, including Social Security, didn’t take into account our increasing life expectancy. They are all underfunded as a result. The days of retiring at fifty-five are long gone. Society can’t afford it anymore. The fix is to make up some of the under-funding, in Social Security we can do that by lifting the ceiling on contributions, and to raise the retirement age in line with life expectancy. When Social Security was introduced the average person collected for only a few years, typically between five and ten. Nowadays some people collect for over twenty years. These two actions solve any funding issues we might have. Both are completely politically feasible.
End of Social Security problem.
We should have learned long ago to ignore the doomsayers. Like Reagan their agenda is political, not economic.
Which connects nicely with my other bete noir. Federal deficits.
It was Ronald Reagan who plunged us into the huge deficits we now see as commonplace. He sought to cover up his profligacy, and his debasement of conservative ‘values’, by combining the Social Security budget and the government’s Operational Budget [defense spending etc]. This combined budget, what he called the ‘Unified Budget’, has a deficit much lower than the operational budget by itself. Why? Because Social Security runs a huge surplus. So here we have Reagan decrying the imminent collapse of Social Security while at the same time using its surplus to hide his own ruinous fiscal policies.
It is hard to find a better example of cynical and hypocritical politicking than Reagan’s attitude towards the ‘unified budget’.
The funny thing is that we have not learned much about deficits.
In general I would decry deficit spending. That’s why I spent so much time criticizing Reagan and then Bush. They both perverted the word ‘conservative’ and ended up running the largest peacetime deficits the country has seen. Neither cut government spending, yet both ran as fiscal conservatives. Their respective legacies are the deplorable shape they left the country’s finances in. They both enacted unaffordable tax cuts that were touted to stimulate the economy. Neither did.
Which brings us to the debate about today’s crisis.
There are many who are tearing their hair out over the massive run-up in the national debt that all the various bail-outs and stimulus policies are causing. By the time the crisis abates we are likely to have a debt to GDP ration of well over 80% maybe much more. The last time we approached those levels was 1945, and the debt was war-time induced. These naysayers presumably want us to let the ‘markets’ take care of themselves and to keep government frugal.
I most recently came across this lunacy during the excellent debate sponsored by the New York Review of Books. It was Niall Ferguson defending the Hooverites in that discussion, during which he faced off famously with Paul Krugman.
It was Brad DeLong who quipped recently that there are two rules to follow in economics right now:
- Paul Krugman is correct; and
- If you disagree with Paul Krugman, please refer to Rule # 1.
Ferguson’s defense of a purely monetarist approach to our problems places him at odds with Krugman. And it makes him wrong.
It is lamentable that we have collectively forgotten the salutary lessons of the Great Depression, and in particular the analysis of Keynes. Markets sometimes need help getting back on their feet. In fact markets are highly dysfunctional under the circumstances we now find ourselves in. This is not new thinking. It harkens back to the 1930’s. The Depression was made worse by the very policies that those afraid of deficits and debt now advocate. It is senseless to inflict ruin on ourselves purely because certain ideologically motivated analysts cry foul at rising debt levels. My own belief, as you know, is that we have not gone far enough: we should have spent even more.
This is not to say that fiscal policy should always be loose and woolly the way that Reagan and Bush seemed to think was OK. Not at all. We will need to deal with the debt quickly if we are to avoid damaging side effects such as lowered debt ratings and high interest rates.
But that does not mean we should not pull out all the stops to right the ship now. We can worry about the debt later. We have the capacity to raise debt, so we should use it to save ourselves.
Arguing, as Ferguson does, that the stagflation of the 1970’s is an inevitable result of Keynsian policy is nonsense. The circumstances of the two eras are entirely different. Plus the success of the Freidmanite monetarist revolution that many believe ‘solved’ the stagflation of the Carter years now appears to have been more a happy coincidence and perhaps an illusion: other factors played a key role too.
Bad analysis is rife. In more normal times we can laugh it off or engage in polite rebuttal. These are not normal times and so bad analysis should be called to task more aggressively.
People’s livelihood’s depend upon it.
