First, our government through Congress does two things that have a profound affect on our economy. They tax and spend.
But I have that backwards, they spend and THEN tax. You and I can't pay any tax to the government unless they spend it into existence first.
Let me repeat that.
We can't pay taxes unless the government prints dollars first and spends it into the economy. There is no ambiguity of which comes first of chicken or the egg meme here, we all must get dollars from the government first, before you can pay your tax. This is what makes our currency in demand.
The spend and tax function of a currency issuer is what determines how much money is in the economy. Currency facilitates economic activity, and has no value in and of itself. It is simply the payment system we invented to facilitate the exchange of goods and services we create. If you want to increase economic, you spend new money into the economy. If you want to decrease economic activity, you tax a portion away. Our government exists to facilitate our economy for the benefit of us and it's main tool for doing this is the SPEND, then TAX function of our sovereign currency. So they buy fighter jets, or send money to the states to build roads, they give grants to College Professors for research, hire inspectors to make sure the food is safe and pay Social Security benefits to seniors. They then tax the economic activity they want to reduce. In the case of Social Security tax, it is to reduce the aggregate demand of workers to transfer it to retirees. If you recognize this simple function, then you will also realize that Congress is really, REALLY screwing things up.
The money the government spends is injected into the economy without any corresponding liability and the private sector uses it to buy more goods. Think of it as a circulatory system. The same dollar that originated from first being spent by our government as a Social Security benefit, is now moving through the economy to stores and manufacturers generating new consumption and growth and eventually ends up in your pocket. This is the multiplier effect, except, the money doesn't really multiply, the economic activity does. It is just the same money being used over and over again to pay for new stuff.
Not all the dollars spent into the economy stay in the system. Some is skimmed off by the savers and taken out of circulation, some is sent offshore to buy foreign goods and some is destroyed as taxes. If the government doesn't spend new money into the system, eventually you end up with less money in the economy. Economists call that leakage. So since a percentage of the money spent into the economy leaks out, the government must spend more to replace it. This cycle could go on forever as long as there are goods to buy and the government injects enough money into the economy to meet the demand for new productivity and consumption. As the population grows, new money is needed to increase the size of our economy to meet the new demand. This is a balanced economy, spending equals the economic activity we want to see based on the population and their needs.
But what if the government spends too much money? The biggest fear is that too much money will cause inflation because there are not enough goods to buy. Currently, there is little danger of us not having enough goods to buy, just look around at the country that is awash in products. In fact, there is not enough demand in the market which is causing all kinds of problems, but that is due to the government not spending ENOUGH money into the economy. But most of those who will disagree with me will cry foul over inflation so we will focus on that. If too much money were spent into the system by our government, then this is when the government should tax. In economic speak, taxes reduce aggregate demand.
Aggregate demand - the sum of all demand in an economy. This can be computed by adding the expenditure on consumer goods and services, investment, and net exports (total exports minus total imports).
This is exactly what Social Security payroll taxes are designed to do. Reduce the demand for consumption of those who are working, to shift it to the non-working retirees. Every dollar a worker's paycheck is reduced
by payroll taxes in the name of Social Security reduces their ability to buy goods and services in the market. Every dollar paid to a Social Security beneficiary increases
their ability to buy goods and services in the market. Voila! Balance!
(please note; this is not exactly a 1:1 ratio so don't go asking for my spreadsheets...)
Ever wonder why those who actually get monthly Social Security benefits must pay taxes if they also work and make over a certain dollar amount? Same reason, retirees having too much money could increase aggregate demand for goods beyond our productive capacity limit, which could create scarcity, which could lead to inflation... well you get the picture.
Taxes destroy money. They DO NOT fund the government. Don't ever say that our government needs to raise revenue or cut spending in public again or I will hunt you down and repeat the name of Alan Greenspan like Beetlejuice until you recant. But instead, picture in your mind every dollar sent to the government as a Tax being shoveled out the back door of the Treasury into an incinerator. That is what happens when you send real dollars to the treasury, they are burned. But the reality is most taxes are paid electronically and the dollars are simply numbers on a computer screen that are changed to zero to signify that you have paid up. They do not credit any other account, because they were created out of nothing, and they go to nothing when they are done. Poof! Remember, the government can always print more. So when inflation starts to become a problem, the government can take money out of the system by taxing. How you tax effectively is a different conversation entirely, but understanding the basic reality that taxes do not fund our government is the most important thing to know in the world right now.
Now that we know that spending and taxing by the government are how we balance economic activity, we need to return back to Alan Greenspan's statement on Social Security.
"The question is, how do you set up a system which assures that the real assets are created which those benefits are employed to purchase.”
What he means is that the concern isn't that Social Security can pay out promised benefits, it's that once those dollars are created and sent to beneficiaries, will there be enough goods to purchase? Basically, our payroll taxes are reducing the demand for goods in the economy by workers today, and transferring that purchasing power to retirees today.
They aren't saving that purchasing power for the future, that is just not possible, they are giving it up for retirees who are living today. If you understand this point, then you will know that the Social Security Trust Fund was never going to 'save' money for the future to pay out benefits and where the 'money' is today is a moot point. Basically, we reduced yesterday's aggregate demand with higher payroll taxes in the 80's and 90's so we could shift it into today for the expected increase in retirees. Ha! What a crock. How did that work out?
We could save pickles we put up today to eat in the future, and we could dig up and sell Atari systems produced in the 80's and sell them today, but medical services created today for retirees cannot be saved for the future, they must be consumed today. The majority of goods we purchase in the market are produced today. We really don't want to buy computers built in 1998, we want those that are built today. The medical services offered for sale in 1986 wouldn't cut it today and we couldn't have 'saved' them anyway. Demand for services will always be felt today, they are only for sale today and our grandchildren will not be able to travel back in time to provide them. So they will not ever have that debt on their shoulder. Our grandchildren will only need to produce the products and services they will consume and dollars can be printed to pay for it at that time, or taxed at that time to shift demand from one group to another. It is not physically possible to shift demand from a prior generation to a future one through the saving of dollars. You can only reduce demand today, that's it. Rather a pointless exercise.
Some people almost get the point when they start talking about how we won't have enough workers to support the large number of retirees in the future, but they really have it exactly backwards. We will have fewer workers with money to spend on goods, which could leave more goods available to buy for retirees and their benefits. It won't matter if workers pay in less or more in payroll taxes, because it is their demand for goods that would cause the problem. And, if you have seen charts making the rounds that show workers productivity increases since 1970, you will also understand that this argument of too few workers supporting too many retirees, is just a basic misunderstanding of aggregate demand. What we produced in the 70's has no bearing on today. And what we produce now will have no affect on what we are able to produce tomorrow. Zero, zilch, NONE! We cannot save today's demand for the future, nor transfer tomorrow's production back to today. Another scary meme making the rounds is, "What will we do when we are all replaced by robots???!?" (runs away screaming....)
With fewer workers, there may be fewer goods produced to buy. This is where people almost 'get it', but in a global economy, the production of goods has been shifted offshore to populations that are younger and even delegated to robots! Where we are really staring down the barrel is in services. Retirees purchase different goods than a younger population. They don't buy houses, baby carriages and refrigerators. They buy medical services, viagra and cruise vacations. These are more difficult to offshore or assign to a robot. Their consumption is a problem if we don't have enough workers here in the US to provide the needed medical services. It won't matter if Social Security benefits are increased, if there are not enough hospitals with a staff of doctors and nurses to service an aging population there will be less available to consume. We have the perfect example now in the VA. We chose to not fund new hospitals and educating new Doctors yesterday (because people said we were broke) and so now we are unable to meet the demand for today. All the money in the world saved in the past will not buy the doctors and nurses we need today. We have a scarcity which is in the real world causing inflation.
As Warren Mosler, put it, "'Well, we expect it's going to be cold in January and in order to be prepared for that we are going to start wearing our sweaters now." You can't save warmth for winter, you have to knit a sweater to wear when it gets cold, but all the money in the world saved in June will do you no good unless the yarn is available to buy in August to make the sweater in preparation for November. So you see why it is wrong to be worried about funding Social Security payments in the future, we need to be worrying more about fixing our healthcare system. We need to be more concerned with getting everyone who is able and willing to work back to producing. We need to be funding education and research today so that we learn how to deal with the aging population in the future. We also need to invest now to prepare for the future when we will need trained workers, robots, whatever, to produce the goods we will need then. And last, we need to fund the retraining of Economists and financial idiots like Paul Ryan so they can understand that when you are a monopoly issuer of the U.S. dollar, you can never be broke.
Now Alan Greenspan spoke the truth, but even he didn't understand what we need to do about it. He was focused on his own ideology and failed to recognize the tools that were at hand to balance our economy, our monopoly currency. We can raise the cap on payroll taxes, cut benefits, take money out of the Trust Fund or do nothing, but the plain truth is we cannot 'save' aggregate demand for the future. We can only distribute it today. So if we want Social Security to work, it must be a balance between what demand we take from current workers and transfer to retirees, and it must plan for a future by recognizing the needs of the future, and preparing the resources we have today.
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