Over the last couple of weeks there's been an exchange between Charles Krauthammer writing in one of the austerity mongers' favorite newspapers and Jack Lew, the Director of the Office of Management and Budget (OMB), writing at the OMB blog. This exchange illustrates a kerfuffle, that ignores the real issue surrounding entitlements and fiscal responsibility.
Krauthammer's “Et Tu, Jack Lew?”
Krauthammer kicked off his criticism of the Administration's recent statements that Social Security is “off the table” for spending cuts at present with this:
“Everyone knows that the U.S. budget is being devoured by entitlements. Everyone also knows that of the Big Three - Medicare, Medicaid and Social Security - Social Security is the most solvable. . . .
Whenever anyone begins a piece with “everyone knows . . . ” my alert radar kicks in telling me that someone's preparing to offer a big lie, and that I need to keep my hand on my wallet. Social Security can't be devouring the budget, because right now, it's not even on the budget. However, even if it were, what exactly does “devouring the US Budget” mean, and why is that a problem?
I suppose it means that Krauthammer thinks that spending on these items is too big a percentage of the whole budget from his viewpoint, and that he thinks that's a problem because he thinks the Federal Government can't afford it. So, Krauthammer thinks the Federal Government has a solvency problem. But does it?
The Federal Government has the constitutional authority to spend whatever Congress appropriates and to new create money in the act of spending. There's no problem of being able to afford what Congress appropriates except for self-imposed problems created by Congress placing constraints on using its full constitutional authority to create currency, or issue debt.
Krauthammer also says that “Everyone knows” that the Social Security problem is more solvable than the other entitlement spending problems he targets. However, since none of the three areas involves a solvency problem for a Government like the US, sovereign in its own fiat non-convertible currency, with a floating exchange rate, and no external debts payable in currencies not its own, all are equal in that there is no problem except a political one, and the political one is the same for all three.
The problem, again, is Congress's imposition of constraints on the power of the Treasury to spend what Congress appropriates. So, the solution here is very simple for all three, and it is the same. Congress needs to stop imposing additional spending constraints like:
-- forcing debt issuance on the Treasury when it must deficit spend,
-- preventing its issuance of very much currency, and
-- placing debt limits on Treasury borrowing,
and just let the Executive spend the money it has appropriated.
Mr. Krauthammer next takes Jack Lew to task for claiming:
". . . . The new line from the White House is: no need to fix it because there is no problem. As Office of Management and Budget Director Jack Lew wrote in USA Today just a few weeks ago, the trust fund is solvent until 2037. Therefore, Social Security is now off the table in debt-reduction talks."
Krauthammer says that this “claim is a breathtaking fraud,” because the “trust fund is a fiction,” containing “nothing,” a mere “bookkeeping device,” that doesn't consist of a real economic asset that can be used to pay benefits. That's because, according to him, our taxes aren't placed in some “lockbox” and saved until needed. Instead, they're spent by the Treasury, paying benefits to current retirees, or, in the case of surplus SS collections, not needed to pay current benefits, are spent on other Federal programs.
When the Treasury uses the SS surplus for other needs, it issues special debt instruments to the Social Security Administration, and credits the SSA at appropriate times with interest specified in the debt instrument. Krauthammer claims that these bonds are “worthless,” because when they fall due they will have to be paid for “by raising taxes, borrowing from the public, or reducing benefits or other expenditures.” So, “the 'trust fund' will have to go to the Treasury for the money for your Social Security check.” And then Krauthammer comes to the point:
Why is this a problem? Because as of 2010, the pay-as-you-go Social Security system is in the red. For decades it had been in the black, taking in more in FICA taxes than it sent out in Social Security benefits. The surplus, scooped up by the Treasury, reduced the federal debt by tens of billions. But demography is destiny. . . . Instead of Social Security producing annual surpluses that reduce the federal deficit, it is now producing shortfalls that increase the federal deficit - $37 billion in 2010. It will only get worse as the baby boomers retire.“
So, according to Krauthammer, the bottom line is that Social Security won't be collecting more in taxes than it spends anymore, so the Treasury will be deficit spending in order to pay benefits and this is the big “problem” with Social Security that requires that we fix it.
Now, is this all that Krauthammer has to say about the ruinous coming Social Security crisis, that the Federal Government will have to deficit spend to cover the benefits? I don't know if I can stand the shock. The Federal Government has been deficit spending almost continuously since the end of World War II, with the longest period of surpluses being the closing years of the Clinton Administration. Further, the historical evidence is that surpluses are bad for us because they are shortly followed by recessions or depressions, as the Clinton surpluses were. There's a reason for this. In the absence of a positive trade balance Government surpluses must reduce private sector savings. After that happens for a few years, private sector economic expansion can only be sustained by increasing private debt. Such increases have their limits. When the economy reaches those limits, demand falls, and business pulls back causing recessions and depressions.
Krauthammer looks at Government surpluses as good and public deficit spending as bad. But as long as we have a negative trade balance; deficits provide the financial assets the private sector needs to keep saving and to expand. So, to have part of that saving come from a Social Security deficit is not a bad thing. In fact, it is more likely to be a blessing than a curse. But to Krauthammer, it will be a tragedy of the first order, a shocking event, when Social Security is in deficit.
Jack Lew's “Hammer Misses the Mark”
Jack Lew immediately responded to Krauthammer at the OMB blog defending “the integrity of the Social Security trust fund” and “ the integrity of statements I have made.” Lew begins his defense by denying that his “claim” of SS solvency for 26 more years is “a claim.” Why is it not “a claim?” Because, it's “a projection of the Independent Social Security Trustees,” who say that even though the system will collect less in taxes than it spends it will still be in surplus until 2025, and will be able to make all payments until 2037.
Last, I looked, the Social Security Trustees weren't infallible prognosticators about the future. So, I think I agree with Krauthammer. Lew is making “a claim,” even if he appeals to the authority of the Trustees' projection to back it up.
Jack Lew continues his response by denying that either he or the Administration say that Social Security isn't a problem, and he points out that the President wants a “bipartisan solution to strengthen Social Security for future generations,” and that he has said that it's “an important, but parallel, issue” that we need to address as quickly as possible. He then goes on to answer Krauthammer's characterization of the “trust fund” and how it relates to the rest of the budget. Lew agrees that there is no “lockbox,” but says that the Social Security “Treasury bonds are backed by the full faith and credit of the U.S. Government,” and that the obligation is just as great to pay back the bonds held by Social Security, as bond issues to any other bondholders.
Lew then goes off on some tangents concerning who produced our current financial crisis and points out that: “It is hardly fair now to say that those working people caused the problem just when they are ready to collect benefits.” He then says that we shouldn't blame Social Security for our problems when our challenges today are due to irresponsible fiscal behavior, and goes on to argue that we have, in the short term, to honor the legal and moral obligation to repay Social Security for the Treasury's use of its past surpluses, by getting our fiscal house in order as specified in the President's 2012 budget which “makes tough choices that will put the country on a sustainable fiscal path by the middle of the decade.”
For the long-term, Lew says that we need to replenish the trust funds and that “the sooner we act,” the easier it will be to adapt to any program changes. But when all is said and done, his argument against Krauthammer comes down to asserting that the Social Security bonds are an obligation that the Treasury ought to and must honor, just as it must honor all of its other obligations.
This is a very short, but also a very strong argument. After all, when it comes right down to it, which politician will say to the public that it the United States ought to honor its obligations to the rich, to big companies, to China, Japan, and the Arab oil nations, but not to workers who have been paying their FICA contributions in the expectation that those bonds do carry the full faith and credit of the United States. Or to put things another way to office holders: “are you really telling us that you care more about the rich, the big companies, and the foreigners than you care about us voters? If so, resign now, to save us the trouble of getting rid of you in the next election.”
Krauthammer's “Still an Empty Lockbox”
After accusing Lew and the President of “debt denial and entitlement complacency,” Krauthammer introduces the point that: “If these trust fund bonds represent anything real, why is it that in calculating national indebtedness they are not even included?” And after naming various agencies that don't include the SS debt in calculating the public debt-to-GDP ratio (because it is the public debt-to-GDP ratio) he says that this is because the SS debt is intra-governmental debt, just a bookkeeping device and “in judging the creditworthiness of the United States, the world doesn’t care what the left hand owes the right.” And then he talks about the disasters that will befall the US if we default on our public debt, and contrasts that with the consequences that would ensue if the Treasury defaulted on the Social Security bonds, which he thinks would result mainly in benefit cuts and mere grumbling at home.
He then asserts that Lew's claim that the “trust fund” bonds are backed by the full faith and credit of the United States are “empty bluster, and that the “IOUs” aren't “real economic assets that can be drawn down in the future to fund benefits.” And he finishes with:
Nonsense. That money is gone with the wind. Those trust fund trinkets are nothing more than a record of past borrowings. They say nothing about the future.
The trust fund “balances” are mere historical record-keeping. As the OMB itself admitted, future payouts will have to be met by future taxes and future borrowings — or by Social Security reform that, by reducing benefits, makes such taxing and borrowing unnecessary.
There is no third alternative. There is no free lunch. And there is nothing in the lockbox.
But there is a third alternative. And while there may be no free lunch when it comes to real, non-monetary resource or value costs, there is currency that can be created at no financial cost by the United States and other nations sovereign in their own currency. So, the trust funds do say something about the future, as long as want them to, and as long as we choose to recognize them. We are not limited to taxing and borrowing to make them good, and even if we choose to borrow to make them good, we will see that doing that won't affect US solvency.
An MMT Point of View on the Krauthammer/Lew Exchange
Even though the exchange between Krauthammer and Lew records their big disagreement over the “reality” of the financial asset represented by the Social Security Treasury bonds. There is one big area of agreement between the two that stands out: agreement on the idea that the United States cannot afford to continue to pay for the present level of Social Security benefits over the long term. This belief that the Government's financial assets are limited is, in turn, based on certain myths that deficit hawks like Krauthammer, and less hawkish, if not exactly deficit dovish people like Lew share. These myths are:
-- The Government is running out of money
-- The Government can only raise money by taxing or borrowing
-- We can't keep adding debt to the national credit card
-- We need to cut Federal Government spending and make do with no more money
-- If the Government borrows more money, the bond markets will raise our interest rates
-- If we continue to issue more debt, then our main creditors may refuse to buy it, an event that would lead us to insolvency and severe austerity
-- Our grandchildren must have the heavy burden of repaying our national debt
-- There is a deficit/debt reduction problem for the Federal Government that is not self-imposed
-- The Federal Government is like a household and that since households sacrifice to live within their means, Government ought to do that too
-- The only way to tackle our deficit is to cut excessive spending wherever we find it
-- We should also find a bipartisan solution to strengthen Social Security for future generations
-- We face a crushing burden of Federal debt. The debt will soon eclipse our entire economy, and grow to catastrophic levels in the years ahead, unless we either raise taxes, or cut spending or both.
-- The United States is in danger of becoming the next Greece or Ireland
-- Fiscal Responsibility means stabilizing and then reducing the debt-to-GDP ratio and achieving a Federal Government surplus
Each of the myths above is linked to a post that criticizes and debunks that myth. But the over-riding idea is that both Krauthammer and Lew are profoundly wrong to assume or contend that the Government is limited in its ability to spend to meet any of its obligations, whether theses are public or intra-governmental debt. What does it take to redeem the intra-governmental debt as it falls due and also to keep paying benefits? Nothing except that the Treasury mark up SSA's books and pay retirement benefits by instructing the Federal reserve to mark up an SS recipient's account balance, and mark down the Treasury's General Account at the Federal Reserve.
Krauthammer says that if we continue to allow this to happen according to the current SS entitlement benefit rules that apply, we will have increased deficit spending and debts to contend with. To that I say, so what? Krauthammer thinks that increasing deficits and debt affect the Government's fiscal solvency, and that there is a danger of “forced” default. So does Lew. Both are wrong. The markets can't force us to default; or even force us to pay high interest rates, since it is within our power, not theirs to set bond interest rates.
There are no solvency issues for a Government sovereign in its own fiat currency. The debt-to-GDP ratio may be a measure of Greece's solvency, or the solvency of other members of the Eurozone; but it is not a measure US government solvency. The Government's ability to spend/create US dollars is the same whether this ratio is 0% or 300%, or 500%. So, continuing with current Social Security benefit rules, even increasing the level of benefits, will have no impact on the solvency of the US, where solvency is defined as the ability to create currency.
Both Krauthammer and Lew are talking about a Social Security problem of solvency that exists for one reason and one reason only. That they and others like them choose to believe that the Government's ability to pay its bills is limited. Against this agreement between them, their disagreement over whether we can afford to, and ought to, honor Social Security obligations is far less important. Their error completely undermines the idea that we are living in circumstances of increasing insolvency. We may be living through a period of increasing deficits. But the Government of the United States is the issuer of its own currency; so it need not get dollars through taxing and borrowing only. This is the fatal flaw in both their arguments.
There is no need to make the tough choices with the retirement benefits of workers these budget warriors want to make. There is no need to sacrifice spending on other discretionary programs either, in order to be fiscally responsible and safeguard our solvency. They think there is, because neither of them understand our monetary system, and that is all there is to that. They simply believe in a false economic paradigm, and they are making us all pay the price.
Also, there is no need to even worry about the moral and legal question of whether we ought to honor those SS bonds. Of course, we ought to do so. Especially since the financial cost to the Federal government of generating the financial resources we need for deficit spending is zero.
So, Jack Lew's argument about the legal and moral obligation to honor those Social Security bonds carries the day over Krauthammer's cavalier view that defaulting on these promises is something we should undertake in order to give the markets confidence that we are fiscally responsible, and will be met mainly with mere “grumbling” here at home. That view is cynical and foolish, and assumes, to use the vernacular, that the American people will just bend over when a dignified retirement is taken from them. The spirit of Marie Antoinette is alive and well in Krauthammer, and at his rapidly declining newspaper, now little more than a Peter G. Peterson house organ.
The really fiscally irresponsible, as well as legally irresponsible, and morally irresponsible course would be to default on these indirect debts to the American people (technically the direct debt is intra-governmental), when there is no reason of impending long-term fiscal insolvency for doing so. The fiscally responsible thing to do is not to welsh on any of these entitlement benefits, but to make them more generous, and to strengthen the social safety net that recognizes the contributions that all Americans make to the economy we have today.
In closing, I'd like to leave you with some thoughts from Professor Stephanie Kelton about the Social Security issue. Stephanie says:
”The balance in the Social Security Trust Fund is absolutely irrelevant when it comes to the government’s ability to make payments, in full and on time – today, tomorrow and forever.”
Again, the solvency issue is a false issue. And:
”Funding Social Security is always and everywhere a political choice. The strongest evidence of this comes directly from the 2009 Annual Report of the Trustees. In that report, they predict gloom and doom for Social Security because “there is no provision in current law that would enable full payment of benefits, once the Trust Funds are exhausted”.
In contrast, the Supplementary Medical Insurance (SMI) Trust Funds are “both projected to remain adequately financed into the indefinite future because current law automatically provides financing each year to meet next year’s expected costs.”
It is that simple. The former is in ‘trouble’ because the government isn’t committed to making the payments, and the latter gets a clean bill of health because the government will always make the payments.”
So, there it is, to end all the nonsense projections of Social Security insolvency, all we need to do is have Congress amend the Social Security Act to “automatically provide financing each year to meet next year's expected costs.” That way neither CBO nor OMB could project Social Security insolvency in any future year without also projecting federal government insolvency, an impossibility. And then both Krauthammer and Lew would cease talking about difficult moral choices of the fictional kind.
The real moral choice here is between having the Government generate the financial resources we need to solve our national problems vs. having it restrict financial resources according to the dictates of an intellectually bankrupt neo-liberal ideology that is driving the United States more rapidly towards plutocracy with each passing year. Right now, Krauthammer, Lew, the Congress, and the President are all making the wrong choice: the immoral one, driven by fear and economic ignorance.
Update (March 24, 2011): Mathew Forstater, Associate Professor of Economics and Black Studies and Director, Center for Full Employment and Price Stability, Department of Economics, University of Missouri —Kansas City writes (in correspondence):
"On tsys and $US, there’s a quote I like from a former Northwestern U. econ professor and Prez of the American Economic Association (1987), the late Robert Eisner. In response to the claim that the federal government is “masking” the deficit by spending worker’s contributions and replacing them with worthless paper in the form of non-negotiable treasury securities Eisner wrote:
“Nonsense! The budget deficit...is the excess of total outlays by the Treasury over total revenues. All “contributions for social insurance” go directly to the Treasury, and Social Security checks–as retirees can readily attest–come directly from the Treasury. And if Treasury securities or promises to pay are worthless, then so is all our money.”
Speaking of Eisner, there is another quote from him I have been using lately. Eisner liked to make the point that, for the economy as a whole, contrary to the popular saying, there may be a free lunch, “and failing to take advantage of it may leave some of us without dinner as well”:
“The cost of anything is what has to be sacrificed to get it. What then would be the cost of providing lunch to the needy if we used surplus food that would otherwise be wasted? Would there be a cost to government’s giving lunch to hungry children? Would the people, otherwise unemployed, who might be paid to prepare the lunches perhaps thus secure the wherewithal to purchase dinner?”"
See this memorial paper by Mat written for a roundtable that celebrated Eisner's life and that he planned to attend before his death.
(Cross-posted at All Life Is Problem Solving and Fiscal Sustainability).
