Tuesday, June 22, 2010

Sen. Simpson's call for lesser Americans to forgive the debt owed the Social Security Trust

[This is a copy of a letter I just sent to the National Commission on Fiscal Responsibility. If you agree with what I have said in this letter, their email address is commission@fc.eop.gov.]

MoveOn is calling on me to ask Senator Simpson to resign from the National Commission on Fiscal Responsibility. They've put up a video of a pleasantly candid interview that Senator Simpson did on the way out of a meeting with a MoveOn journalist. I think Senator Simpson should resign, but the reason MoveOn gives in calling for his resignation is trivial in comparison to the real reason.

It's very encouraging that Senator Simpson was willing to be so frank. At the same time, though, several things Senator Simpson said indicate to me that he is out of touch with reality. I do not want the Senator Simpson that I saw in that interview deciding what happens to Social Security. I'm 45 right now, 20 years from retirement.

Senator Simpson said that Social Security is for "lesser Americans." I take it he means Americans like me, and like my parents, and like their parents. I find it astonishing that these Americans—the ones who voted him into office and paid his salary all those years that he was in the Senate, and the ones who are now paying for his enviable health care package, are somehow "lesser." But this is a trivial point; if it were all that Senator Simpson had said, I would not be writing this letter.

The thing that really bothers me is Senator Simpson's willingness to default on a loan made by these "lesser Americans" to the federal government. For many, many years we have labored under the illusion that the national debt was far less than it actually is, because the money borrowed from the Social Security trust fund was not counted as part of the debt, even though no honest accountant could ever argue that it is anything but.

Now it seems that Senator Simpson considers it a given that Congress will default on that loan. Rather than manning up and admitting that the national debt includes those IOUs, Senator Simpson considers it decided that those IOUs will not be paid, and intends instead to gut Social Security in one of a variety of ways. It is "necessary," he insists, in a very reasonable tone of voice. The only question is which of fifteen different ways of defaulting on this debt will be chosen.

Where I come from, we call this stealing. I've had FICA taken out of my taxes my whole life, and it's been a *lot* of money. Now Senator Simpson is saying "sorry, we're just going to keep that money."

Senator Simpson's remarks on "lesser Americans" pale in comparison to this calumny. It is for *this* reason that Senator Simpson should resign: because he is willing to casually default on a debt owed to the American people by a Congress that felt, for most of my adult life, that it was okay to lie to the American people, using an accounting practice that would land a corporate officer in jail for fraud, to pretend that the government had money to spend on Iraq, on Afghanistan, and on tax cuts to the wealthiest Americans.

So while Senator Simpson seems like a very pleasant gentleman, because of his willingness to shirk on such an important debt, I do call for his resignation.


Blogger Perry E. Metzger said...

You may correctly feel that the money has been stolen from you, but I don't see why you think it won't be defaulted on merely because it will hurt lots of people when the default happens.

If the money had been invested, even in savings accounts, it would still be around. However, as the system was a literal Ponzi scheme, in which old investors were paid off with money from new investors, the money is gone, just as surely as it was gone in Bernie Madoff's Ponzi scheme. I know many people are totally contemptuous of anyone who says the truth and calls SS a Ponzi scheme, but I am unwilling to varnish it for the benefit of such people.

Since the money is gone, it may be unfortunate that many people will be hurt by the default, it may be terribly damaging, but there is no real way to stop it. Many people proposed methods of transitioning SS to an actuarially sound basis, setting up individual investment accounts with half the SS tax revenue, for example, but they were always called dupes of Wall Street and worse, and everyone decided to ignore the problem.

Well, now it is too late. Millions of people are going to suffer. I don't see how it is going to be avoided.

Tuesday, June 22, 2010 6:06:00 PM  
Blogger Ted Lemon said...

The money is gone in the same sense that money borrowed by you from the bank to pay for your home is gone. Banks call loans like that "assets," because the presumption is that they will be paid back.

To speak of the money borrowed from the Social Security trust fund as "gone" is therefore simply incorrect. It is no more gone than the money the bank loaned is gone.

It's true that you could default on your loan to the bank, and the bank would then have the opportunity to reclaim the collateral, whereas in the case of social security there is no collateral. But at the same time, in the case of social security, the government has the power to tax, and the reason they are having trouble paying back the trust fund is that Bush cut taxes and massively increased spending at the same time.

The cure for this is not to default on the debt. It is to repeal the irresponsible tax cut that Bush enacted. I realize that you won't agree with that, because you think taxation is immoral, but the point I was making is that it's not the case that defaulting is the only option, or even a good option.

Tuesday, June 22, 2010 10:14:00 PM  
Blogger Perry E. Metzger said...

No, the money is gone in the same sense that money you borrowed to buy a home but spent gambling in Vegas is gone. There are no assets to cover it.

We could raise tax rates, but that would not necessarily raise revenues. Arthur Laffer explained that decades ago, but it is simple enough to understand.

Lets say you raise tax rates to 100%. What will your revenue be? Lets say you set them at 0%. What will your revenue be then? Somewhere between those two numbers is a maximum, and once you've hit that you can't get more blood from the stone. There is good evidence we exceeded that number a long time ago, and that raising taxes will simply reduce economic activity and revenue along with it.

The unfunded debt from SS and Medicare is on the order of 60T dollars. That is to say, that is the net present value of what we owe -- it will grow dramatically with time. There simply is no way our economy can generate that much tax money even if we could sustain much higher tax levels. We're also expanding the deficit at a rate now in the trillions annually, and debt service alone consumes over a third of the budget. We can't sustain the situation. There are no "assets" capable of covering this. At the same time, no one in government is willing to correct it.

At some point, we're going to default. We won't stop paying, the government will just print money until all existing debt becomes meaningless, which is much the same thing. You can hate this, but like the looming ground below you as you fall off a tall building, there is no way way of avoiding it.

Thursday, June 24, 2010 4:53:00 PM  
Blogger Ted Lemon said...

Perry, that's a ridiculous argument, because taxes have been repeatedly *lowered* over the past three decades. Arthur Laffer's work has been used to justify some of the stupidest monetary decisions made in the history of the country, *including* gutting the Social Security trust fund.

It's true that the government will have to make some hard choices, and it's true that the current government doesn't seem to have the will to do this.

Your answer to this is to give up and let everything fall into ruin. My answer to this is to at least try to elect a government that doesn't think it's okay to bankrupt the nation prosecuting foreign wars, and that prioritizes things that governments have the potential to do well, like regulation to control abuse of externalities, and like the common wealth.

The abyss that you see yawning before you is where we are all collectively headed because we have bought into a kind of madness over the past decades that says that whatever sociopathic thing we do is okay if it makes money, because by making money we do the most we can to help others.

But money is valueless without the thing that it purports to value: production. When the largest monetary rewards go to the least productive parts of society, that's not sustainable, and it's no surprise that we've launched ourselves over a cliff.

Whether we manage to fix the problem in a way that prevents mass pain, or whether we go through another really bad depression and *then* start acting less stupidly, is still an open question in my mind (although perhaps you are already resigned to the worst possible outcome). But one way or the other, reality has a way of catching up with us and teaching us what we need to know.

Thursday, June 24, 2010 9:32:00 PM  
Blogger Perry E. Metzger said...

Most of the times taxes have been lowered since Reagan, revenues have increased. My "ridiculous argument" seems to be grounded in facts. For example, there was a serious spike in capital gains revenue collected the last time the capital gains tax was lowered.

I realize that if you are running a bakery and not selling enough muffins to make money at $1 the idea that raising the price to $100 might lower revenue could be counter-intuitive, but there you go.

As for "giving up", I have choices on where I spend my time. I could, for example, attempt to perform CPR on week old corpses, or attempt to rebuild buildings consumed by fire by trying to glue the ashes back together again. These seem, however, like lost causes. The US has currently stuck its neck in a noose, tied the other end to a tree trunk, and jumped off an 800 foot cliff. It is still falling, true, and perhaps someone with astonishing timing will manage to somehow cut the rope and simultaneously catch it before it hits the ground. I wish those attempting this good luck.

BTW, there was an excellent study I saw a couple of years ago, which I regret I can't find quickly with google, that said that virtually all sovereign debt eventually defaults -- i.e., that no one else has ever found the trick of rescuing the country bent on suicide by debt either. Of course, past performance is no indicator of future performance, or so the SEC tells us.

For me, I think my time is best spent on things I can change, like building technologies that can be used to cure disease and feed the hungry. That I can make some impact on, if only a small one. Stopping the US from going bankrupt seems like more than I can manage, but good engineering, that's something I can do.

Thursday, June 24, 2010 10:47:00 PM  
Blogger Ted Lemon said...

Most inflationary spirals happen as a result of corrupt governments, where the power elite borrows a shitload of money in the name of the government, socks it away in a swiss bank account, and leaves the taxpayers holding the bag. Of course those events have bad outcomes. You can call it sovereign debt if you want, and it's not an inaccurate name, but really it's just plain old theft.

The sad thing is that this is pretty much what's happening to us now--a bunch of financial shysters figured out a way to rape the treasury, and we are left holding the bag.

Most of the revenue spikes you're talking about are the result of bubbles. During the bubble, you still pay tax on your gains, even though the money you're paying with is fake money generated by financial skullduggery. The problem is that we had to give it all back, with interest, when the bubble collapsed.

Correlation does not imply causation. I know it's an old chestnut, but you should bear it in mind when you make arguments like these. If you want to understand what happened and why, you need to look at the long view, not just the spikes.

And BTW, if you really think I'm so stupid as to think you can sell a $100 bagel or a 100% tax, why do you even bother commenting here? If I were that stupid, you'd have no hope of my even understanding your arguments, much less accepting them or providing good reasons why they are wrong.

Friday, June 25, 2010 1:34:00 PM  

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