All Quiet … Saving Congressman Ryan?

This week is has an eerie quiet about it: there is very little data being reported and most of the big policy conversations, debates, and arguments are now in internally focused ‘consultative’ stages. In other words there’s not much going on to get worked up about. There is a steady stream of shallow ‘sea of red ink’ articles and programs littering the media, but they should not concern us since they all seem resolute in avoiding any central relevance or substantive content. It remains astonishing that some of our politicians seem more content to watch than provide actual policy recommendations. Quite what they think they are paid to do I am not sure.

So I am impressed by Congressman Ryan, a Republican, who launched what appears to be an ‘unofficial’ GOP budget plan centered around the abolition privatization of Social Security and Medicare. It was amusing to watch the GOP leadership, who have promised their own ‘official’ plan in a month or two, try to distance themselves from Ryan’s key proposals. I suspect his was a trial balloon for the leadership who now have to re-work their own ideas and thus will have to take more time -why hurry when you’re drowning in a sea of red ink? In any case Republicans are stuck in the world called “No” right now and therefore are having too much fun dismissing Obama and the Democrats rather than suggesting their own plans.

With respect to Ryan’s call for the privatization of Social Security and Medicare: there was nothing new in his plan that had not been floated back when Bush attempted his own version of privatization. The critique that worked back then is just as relevant now.

Privatizing doesn’t save anyone anything. What it does is remove a cost from the government and put it firmly on the individual. It doesn’t lower costs, in fact it raises them since private suppliers of health care and retirement plans are more expensive than the government is. So our taxes would go down, but our total costs go up. Yea! That’s a big step forward. If you are a libertarian privatization achieves your objective: maximizing private choice. But if you are not a libertarian you should be indifferent or skeptical because of that likely cost increase. Plus, our vaunted money managers who are supposed to produce those wonderful returns that are ‘way in excess’ of the boring Social Security trust fund returns, are the very same folks who just blew the economy to smithereens. So much for the safety and soundness of that option. So yearned for maximization of personal choice brings with it an associated maximization of personal risk.

There will always be people who are convinced that they could have earned a much larger retirement fund if only they could have managed their own money. But all the evidence from behavioral economics suggests that average people are horrendous money managers, so they are likely to end up with very poor retirement funds. In addition, everyone would then be exposed to the swings of the stock market: can you imagine retiring just after a bear market? The hoots and hollers for government intervention from squeezed and aggrieved middle class retirees would drown the libertarians in a heart beat were we to suffer through a down cycle with a load of retirees facing years of poverty because of the idiocy of Wall Street.

It is precisely this scenario that Social Security, for all its many faults, mitigates. Everyone can rely on a fixed retirement amount regardless of the economic circumstances. That offset of basic economic uncertainty is worth a vast amount as we are all now learning. And it is why, deep down, the middle class wants to cling on to its entitlement programs and focus all the cutting on someone else’s.

The problem we have is that there really isn’t much else to cut.

As I mentioned last week the big three government programs – defense, Social Security, and Medicare/Medicaid/CHIPS – account for over three quarters of all government spending. To get our budget under control we need to tackle how much we spend on those three. Sure we can cut research or justice department costs etc, but they will not break the back of our deficit. The alternative is, of course, to raise revenues back to their historic levels. But that means getting rid of those infamous Bush tax cuts. In a country convinced that it can cut taxes, and still spend lavishly on its middle class, raising taxes looks like a non-starter.

But back to Ryan and his plan for privatization:

I don’t think he realizes the irony of his proposal. Just while the Republicans carry on a campaign to maintain their hard won deregulatory environment for banking – in the name of innovation and all the benefits that flow therefrom, Mr. Ryan proposes a plan where retirement money would be extremely highly regulated because of the risks to consumers of exactly what I mentioned earlier. This puts the GOP into an odd position: they advocate total deregulation of banks in order to foster market driven innovation and consumer freedom of choice; while advocating tight regulation of retirement money mangers – banks in many cases – so that consumers are not exposed to the risks associated with innovation and excessive choice.

Now I am am an advocate of tight controls throughout finance. After all the industry has just proved to us all that it, laden with professionals as it is, cannot manage risk well either. That’s OK if they are managing their own money, or that of rich folks with deep enough pockets to take a few hits along the way. But the vast majority of people do not have that margin for error. Most people eke out enough for retirement. Many don’t even manage that. Most need banking to be safe and reliable. They need retirement managers to be even more safe and even more reliable. So tight regulation seems to be the order of the day throughout any form of finance that touches the average household. So for the Republicans to have such a split personality seems ridiculous even for them.

Deregulate banks, but regulate them as well? Innovation is both great and awful? Choice is both fantastic and wicked?

This is why privatization is a hopeless but attractive cause for right wing politicians. They fervently believe in the ‘freedom of choice’ that privatization would bring. But they equally are terrified of the risks that freedom would also bring. One big economic downturn and its raft of permanently poor retirees, and the voters could well see the benefits of Social Security once more.

Congressman Ryan squares this circle by advocating that your private retirement money would have to be invested in a government run fund. That’s half baked. Does he really think that the government would not be forced to underwrite or insure the returns on those funds? And if the government is ‘running’ these huge funds how does he limit government ‘control’ of them? After all that’s a massive amount of cash flooding into the money markets through government controlled coffers. Which is exactly why the Republicans forced FDR to channel Social Security cash into government bonds rather than the stock market – it was that action that lowered the return on the fund that the modern Republicans cite as the programs weakness!

It set your head spinning doesn’t it?

The weasel construction needed to make privatization look private, yet remain government insured or underwritten is extreme. Ultimately it achieves nothing in the way of cost control either: the political pressure to prevent a return to the kind of old age poverty that was endemic before Social Security alleviated it – don’t forget that the elderly are no longer the poorest age group as they used to be, we have condemned children to that honor since they don’t vote – would be irresistible. So our budget would be exposed to bail outs of retirement programs in order to protect the elderly. Just what we need: an extension of moral hazard to yet more parts of the financial system.

So the Republican desire to extend personal choice founders on the fact that most people make very bad choices, and then want to be bailed out from the consequences of their freedom of choice. A true libertarian of the Ayn Rand mold would simply say “tough” to all those poor retirees. That would destroy the Republicans at the ballot box. It reads well in ‘Atlas Shrugged’, but makes for rotten real world policy.

So one more irony: our middle class was built only after it was protected from the vicissitudes of normal economic cycles. All those horrible and expensive programs like Social Security, Medicare, and unemployment insurance soften the blows of the real world and allow the middle class to thrive within the limited degrees of economic freedom that most possess. That smoothing out creates a confidence that breeds a consumption based, rather than a savings based, economy. On that basis post war American prosperity was built, and along with it our modern middle class. It is the central social contract within American society, and is its basic economuc strategy.

Unfortunately it is a difficult strategy to maintain when our population booms and we are faced with a bulge of expensive and unproductive retirees, just as world competition reaches a post war peak. That bulge presents the right wing with an opportunity to undo the safety net of the New Deal that they oppose with such fervor. But it places them in the odious position of returning a vast swathe of America to the harsh realities of the pre New Deal business cycle.

I prefer to fix the safety net. If that means more taxes, then so be it. Less volatility means higher prosperity over the long haul.

Meanwhile Congressman Ryan deserves to be praised for bringing the central problem of Randian/Reaganism out into the open: freedom of choice and individual responsibility is a great sound bite, and in general is great politics, but it also implies greater risk to individual prospects. We have history to show us what such policies result in: highly bifurcated societies where income inequality rises and more people fall to the bottom. Ultimately the middle class shrinks back to insignificance – just as it was before the New Deal.

Something to ponder while its all quiet on the economic front.