Working Title: "Alan Greenspan is a worthless sack of shit"
During the discussion regarding then-President Bush's tax cut in 2001, Alan Greenspan, Chairman of the Federal Reserve , appeared before Congress in January of that year and stated he was worried about surpluses getting too large. This would have some negative effects. If too much of the national debt was paid down, there would not be enough bonds for the Federal Reserve to conduct open market operations, the medthod the Fed uses to affect short term interest rates.
It would also be too much of a temptation for the government to do something irresponsible with the money, such as invest it in the stock market or national infrastructure. Republicans used his arguments very well during the debate.
(As an aside, I want to get an a little dig at the supposed centrism of the Democrats who supported those tax cuts. They made a big deal about decreasing the total expected cost of the tax cuts to 1.3 trillion over 10 years, down from an original 1.6 trillion. But this was accomplished by fiddling with sunsets and delaying implentation of certain cuts, with the net effect of reducing almost none of the costs.)
There were several things that made Greenspan particularly dishonest. He never at all used the argument of necessity of national debt when a Democrat in office. I am sure Clinton could have used that argument in his fight with the Republican Congress. Of course as a conservative he prefers tax cuts, which is his right. But he omitted many things which were very much relevant to the discussion.
He knew that growth was slowing as of early 2001; that there was no way the historically high growth that led to the surplus would be anywhere near unsustainable. So this unwise large surplus was not really available to be tinkered with. Furthermore, a large portion of the surplus was excess revenue that was to be accumulated in the SS trust fund. He knew the purpose of that money was to pay benefits in the period after the program runs into deficits, the period after 2017. If his goal was a tax cut, payroll taxes should have been cut, since that was where the bulk of the surplus came from. His entire viewpoint seemed to dismiss the point of the trust fund.
The 1983 Greenspan Commission was a bipartisan commission established to fix the problems with social security. At the time SS was literally a few years from being unable to pay full benefits . The solution was a combination of tax hikes and a gradual increase in the retirement age. In addition, there was to be creation of a trust fund, i.e. the program would purposefully take in more than it paid out, to build up funds. This was ostensibly done because the larger than average boomer generation should be asked to pay a little more towards their own retirement.
So the SSA would take its surplus and hand it over to the Treasury an exchange for special issue federal bonds (and yes, Virginia, they are just as real as any other financial instrument issued by the government). This trust fund currently sits at 2.2 trillion. The The Old Age Social Insurance program, what most people think of as Social Security (though there are other components) currently pays out 562 billion and takes in 708 billion for a surplus of 147 billion for the most recent fiscal year. (more info available here here)
But this should have made the surplus untouchable. If the objective was to build up funds to keep the system solvent, why should they be used for something else? Therin lies the rub.
So what really happened? In 1981 Reagan's initial tax cut blew a hole in the budget and cut the top marginal income tax rate from 70% to 25%. Social Security was already in crisis at the time, and Reagan wanted to use that as a way to destroy it. Democrats hammered him and made large gains in the 1982 midterm elections. In comes the Greenspan commission's fix.
As noted before, SSA gives the money to the Treasury. What do they do with the money? Well, it gets put in the same pot as all other revenues. You had what was called the on-budget deficit (Everything that was not counting entitlement programs) and the SS surplus. Putting them together resulted in a smaller number reported to the public. This had the net effect of masking those large and increasing deficits.
To repeat, tax cuts for the wealthy were paid for by a tax hike on the working class.
It also meant that instead of issuing debt to the public, to pay for the deficits, they issued debt to the SSA. This probably had the effect of reducing what is called the crowding out effect, and kept interest rates low. Of course the opposite will occur during the period from 2017 to 2045, where the Treasury will have to issue debt to pay off the on-budget deficit and pay off the bonds that SSA is redeeming. Which will push up interest rates during that time, and put even more pressure to cut spending, both on other social programs and on social security itself.
It is very convenient that the very thing that would save the Social Security program ended up being used to fund tax cuts for the wealthy, not once, but twice. And now the pressure to gut the program will happen not just now, but in a decade from now as well. Greenspan was there both times and he knew exactly what he was doing. A disciple of Ayn Rand, he was never the non-partisan central banker he claimed.
I don't believe the trust fund was ever a good idea. The Pay-As-You-Go system was fine the way it was. Changes should have only been made on a temporary basis, renewed every few years only if the SS trust fund was a certain percentage of benefits paid out. I believe the entire project was a sham, especially when you consider during the 2005 privatization debate, when conservatives were claiming the trust fund did not exist. There is an argument to be made that does contain a grain of truth in it, but then why are we paying more in payroll taxes right now?
It's simply another instance of starving the beast – conservatives know that social programs are popular, so they starve the government of revenue and hope to force the changes they could not get through honest discussion.
The reason I am marking Greenspan for such a high amount of blame is because of the respect he still manages to command after all the shit he's pulled. Obviously it is less now after the housing crisis, but in 2001, he was considered the Maestro, and he used his non-partisan cache for partisan ends and nobody called him on it. It should be recorded for posterity.