Dumber than Dumb

Matthew Yglesias points our attention to the latest silliness from National review Online. Maya MacGuineas, a former classmate for whom I had some respect when she worked for the Concord Coalition and argued for deficit reduction, writes -- in response to those of us who have been critical of SSA actuarial projections of an 11 trillion Social Security Trust Fund deficit -- that it is appropriate to use an infinite time horizon when looking at Social Security.

"Social Security faces an unfunded liability of $4 trillion over the next 75 years. The liability is $11.1 trillion in perpetuity. Some dismiss infinite timeliness as absurd. The concept is an easy target: It's difficult enough to get people to care about the fiscal situation over the next 75 years; why should they care about Social Security benefits in the year to 2500? But that's not the point. The infinite horizon is necessary to ensure that any Social Security fix is a permanent one as opposed to the many temporary patches that are floated -- patches that would leave the system out of balance beyond the truncated window."

Actually I think the 75 year figure is 3.5 trillion. But never mind. Yglesias makes a great counter-point when asking why Social Security should always find itself in positive balance at every point in time from here to eternity?

"Well, yes, if you want to try and craft a policy in 2005 that will ensure Social Security receipts and outlays add up to zero in 2505 and beyond you do, indeed, need to use an infinite horizon projection. The relevant issue is, what kind of goal is this? Social Security is not just some kind of complicated math problem; it's an actual government program. It's important to recall that we don't actually have the ability to make binding decisions about what Social Security will look like in the distant future. The program has only just recently reached the end of its very first 75 years and it's already been drastically changed several times. How would it be advisable for us to try and make such decisions?"

Exactly. If we were simply arguing whether the formula to use were a 75 year discounting formula or a perpetuity that might be one thing. If we were arguing about the right discount rate to use, that would be another. But to argue for an actuarial model that stretches into infinity requires assumptions about economic growth into infinity, demographic change into infinity, changes in life expectancy into infinity, changes in productivity into infinity. In fact it requires so many assumptions as to be essentially worthless.

In fact, it makes more economic sense for Social Security, rather than to always find itself in positive balance, to function as an income smoothing model -- building surpluses when demographics allow, and borrowing from general operating funds of the US government when demographics require net drawdowns. This is not entirely unprecedented. As I wrote several weeks ago, Social Security has on several occasions needed to borrow money from the general budget. You cannot project multiple parameters of a model into infinity with any degree of accuracy or intellectual honesty. It is an intellectual exercise in fantasy building. It's an idea that is dumber than dumb. And I am disappointed in her.

Hassert and MacGuineas call Social Security a mishmash of IOUs. This is much the same point that George Bush tried, embarrassingly, to make yesterday next to a filing cabinet in West Virginia.

If I buy Treasury bonds from the US government through my brokerage company, I can also ask them to send me the bond notes so I can put them in my filing cabinet. And then I can say "Gee, look how silly I am. I traded a pile of money for a few sheets of worthless paper held in this filing cabinet." But this is how the entire economic system is built -- on faith and credit. That's why we say that bonds are backed by the full faith and credit of the US. Any financial obligation or security represents the commitment of the seller to pay you back at a future point in time. These obligations are always going to be IOUs unless someone hold a huge pile of material assets somewhere -- but, and this is the point, doing so makes no economic sense. The reason we have bonds and stock and paper money is so that goods can flow freely through society and people don't have to pile large amounts of material assets that have 'real' value. Because of IOUs like paper money and Treasuries, these material goods can flow through the economy and be consumed.

Imagine I sit on a few thousand barrels of oil. Perhaps they are under my yard. If I wanted to trade this for something that was not ultimately an IOU, I would need to make sure someone could pay me in the things I do want like apples, wheat, pork bellies, whatever. And then I would need to store all these things somewhere. What a waste. Maybe I could hoard gold you suggest? Well even the value of something supposedly tangible like gold is only worth what people are willing to ascribe to it. It has no intrinsic economic worth in itself. It cannot be made into many useful things. The value of gold, as James Surowiecki wrote in the New Yorker recently, like the value of paper money, is merely what others are willing to believe it is worth, what others are wiling to exchange for it. Calling Social Security a pile of IOUs and worthless fictions may make political sense by ginning up the anxiety people feel about ultimately being paid back, but it is dangerous economic policy. For the leader of the US to adopt this line is to suggest that all government IOUs are merely dependent on the willingness of the US government at some future point in time to honor them. Ultimately this is true, but if you aren't committed to paying back your IOUs than investors are not likely to trust you. If any investor has a reasonable sense that this willingness is in any doubt, they will drive up interest rates, jump out of such assets, and hinder the economic function of the broader economy. Bush's statement, a crude adoption of this causistry by folks like Hassert and MacGuineas, is worse than irresponsible, it is almost impeachable.

As Josh Marshall says, Bush is threatening to default on obligations to millions of working men and women who have paid into the Trust Fund only to see their money go towards tax cuts for the wealthy and general operating expenses of the US government. In fact, without the Social Security funds, the deficit this year is over $700 billion dollars. If Bush means to imply that he and other Republicans have no intention of repaying the money in 2018 when Social Security recipients need to draw down the money, well, there's a word for this - it's called theft.