There's a bit of a scuffle going on in the progressive economist blogosphere about how the Social Security payroll tax holiday will play out. But this seemingly small scuffle could be the most important economic policy moment in some time and for some time to come.
On one side stand James Galbraith, Marshall Auerback, Randall Wray, and Ezra Klein. Galbraith advocated for a payroll tax holiday several months ago. Auerback and Wray recently wrote a piece on New Deal 2.0 that not only approves of the holiday but also calls for it to be extended indefinitely. Ezra Klein follows suit.
Jed Lewison's front page Dailykos post today gives the counterargument, citing FDR himself as precedent. Of course, Jed is echoing thousands upon thousands of defenders of Social Security. The separation of the Social Security system is what protects it.
The argument of Klein et al comes down to the idea that, however much we consider Social Security to be a separate program, with its own revenue and payout structure, that it is part of the overall system of Government finance. For Klein, a holiday that cuts into a regressive revenue system (payroll taxes, 6.2% for those making 106.8k or less, but decreasing rapidly at higher income), and the replacement of the funds from the General Fund (funded largely by the progressively structured Income Tax), is actually a move toward a more progressive economy and overall revenue structure. For Auerback and Wray, the reluctance of some liberals to support the holiday and put more money in lower and middle class people's pocket shows the incoherence of the attempt to keep Social Security safe by keeping it separate. Its separation is virtual, not real. It is an government assurance program, not a retirement program.
Simple economic models rely on simple metaphors. Gore's "lockbox", however unfortunate or unlearned, was an outgrowth of the metaphor of a safe, or even a piggy bank. If Social Security funds aren't "set aside," then they could be "robbed" for other uses. FDR's separate system of funding was instituted precisely to protect the long-term viability of Social Security. It had to be a system protected from the fickle winds of politics and economic disturbances.
Auerback and Wray dismiss such an idea as "fiction." It is fantasy to think that there is any real separate funds or account or storage system for Social Security funds. There is only one fund; accounting is only the tracking of credits and debits to this fund. Equality (or progressive economics) are simply a matter of to whom credits are given and to whom debits are made.
What these bright economists overlook is the philosophical and linguistic truth that the concept of the virtual is itself a metaphor, a form of modeling, as is every form of human thinking. Despite their aspirations to speak for "truth," Auerback and Wray are not purveyors of pure logic. Their "truth" is conditional, contingent, and finite. It may not "win out," despite their hopes, because their preaching of the gospel of "the virtual" may win but a few converts.
The concept of the virtual is also, of course, popular in IT. Virtual servers run countless websites. The emerging technology called Cloud is a virtual form of hosting and processing that, by relying dynamically on many servers simultaneously, is conceivably infinitely scalable and secure.
Of course, that we have "virtual servers" does not mean that there are not "real servers," that is, real disk drives, processors, etc., and that these parts are kept safe, power-supplied and air-conditioned in some place on the planet. Both are true in the sense that both work. While it is conceivable that one works without the other, the truth is that both are intertwined. Hardware setups provide for virtual computing, and virtual computing prompts and determines hardware setups.
Both metaphors are predicated on trust, or belief. Of course, money/currency itself is a form of trust, or belief, as well as a mutually agreed upon valuing of capital.
So the real question is, which metaphor will be trusted and believed?
For the time being, it appears that the battle over Social Security, even within Progressive circles, will be a battle of metaphors. What will win the day: piggy banks & iron-clad safes or virtual economics and constantly reallocated slush funds?
...
A Proposal that Splits the Metaphors
Rather than a choice between the safe-like security of a completely separate and untouchable system or the virtual security of a dynamically allocated slush-fund system, a third, middle way may provide something we can trust in difficult times.
The idea is simple, powerful, structurally progressive, and something that 70-80% of Americans and 80-90% of business owners would love, as I elaborate in my previous diaries:
1) permanently uncap the Social Security income limit and include capital gains, interest, and dividends as taxable income
2) permanently lower the rates for employers and employees to an estimated 3.5-4.2%
This accomplishes the goals of both groups. It protects the separate revenue and benefits structure of Social Security and keeps up the idea of people having a right to something for which they paid. Its permanence aims to strengthen this separate system for generations to come.
But the proposal also begins to line up Social Security with the progressive Income Tax structure and shows all the more how Social Security and Income Tax revenue are inextricably connected in the overall system of Government finance. It undercuts the fiction of Social Security as a collective bunch of individual retirement accounts, and shows it more clearly to be a Medicare-like government assurance program with disproportionate benefits for low-end contributors.