(Yeah, it’s the obvious title, but what the hell.)
Seems like half my blogroll’s commenting on the fact that the Social Security Administration has slipped into the red land of deficit spending: they’re taking in less money than they’re doling out (NYT link; mind the dumbworms). A number of people are upset because this is happening six years ahead of schedule (turns out that Keynesian stimulus is working about as well when Bush and Obama try it as it did when Hoover and Roosevelt tried it), but there’s better cause to be upset than that.
Let’s start with the Social Security Trust Fund. Naturally, if the SSA only just now slipped into deficit mode, they must’ve been taking in more money than they were doling out for the last, I dunno, forty years or so. That sounds like an awful lot of money — and since the SSA has been investing it wisely over that time, it ought to provide an enormous cushion to absorb the impact of baby-boomers retiring and we’re really not in a position to worry.
Just kidding! The rest of the federal government has been spending the SSA’s surplus in exchange for IOUs. Social Security liabilities are now officially part of the federal debt, to the tune of $29,000,000,000 this year. But hey, what’s a few more billion dollars on the federal deficit? The feds have been drowning in debt for decades now, and nothing bad has happened unless you include shrill sanctimonious denunciations from the most hardcore deficit hawks.
Commenter aMouseForAllSeasons on Megan McArdle’s post In Funds We Trust cuts to the heart of the issue:
Unfortunately, the trust fund corresponds rather well to the average person’s perception of money, and monetary policy in general: If an IOU exists to a trusted party, then it will be repaid.
Social Security IOUs, Treasury bonds, dollars… they’re all backed by the United States Government. And as long as people trust the federal government to pay its debts — rather, to stick to its debt repayment schedules and contracts rather than defaulting on interest payments or inflating away the principal — the problem remains largely theoretical. And there’s a lot of trust going around, as witnessed most spectacularly by the fact that the United States Dollar is effectively the world’s reserve currency.
If you see a pants-pissing terrifying analogy between the Social Security Trust Fund IOUs and the Collateralized Debt Obligations and Mortgage-Backed Securities of credit-crisis infamy, it’s probably because you’re the same sort of nasty and suspicious fellow as your humble blogger. CDOs, MBSes, LMNOPs*, and the like were traded enthusiastically on the investment market, despite the fact that they were well-known to be full of shit, because everyone trusted the credit-rating agencies that said they were golden and the underlying quantitative models that said they were solid. Then the bottom fell out of the housing market, everyone lost faith in their CDOs and MBSes, and… well, you know the rest of the story.
But that’s totally different, right? I mean, everyone knows that the credit crisis was precipitated by the avaricious short-sightedness of money-grubbing fat-cat capitalists, while the federal government is run by wise and benevolent legislators with the good of their country first in their hearts.
Yep, people are starting to catch on.
- A fiscal train-wreck (Greg Mankiw)
Mankiw quotes a Bloomberg report thus:
The bond market is saying that it’s safer to lend to Warren Buffett than Barack Obama.
Two-year notes sold by the billionaire’s Berkshire Hathaway Inc. in February yield 3.5 basis points less than Treasuries of similar maturity, according to data compiled by Bloomberg.
This is… not good news. In the short term, it means that it’s more expensive for the feds to borrow money to pay off, say, Social Security IOUs. This increases the federal debt obligation, which of course makes it harder to pay off… which in turn makes investors more nervous and drives up interest rates; 50 GOTO 10 and eventually we hit a domestic debt crisis and default.
Or perhaps not. Since this is all domestic debt — priced in US dollars — the Treasury also has the option of inflating that debt away. Here’s what Paul Krugman has to say (again, from the Mankiw post):
How will the train wreck play itself out?…my prediction is that politicians will eventually be tempted to resolve the crisis the way irresponsible governments usually do: by printing money, both to pay current bills and to inflate away debt. And as that temptation becomes obvious, interest rates will soar. It won’t happen right away….But unless we slide into Japanese-style deflation, there are much higher interest rates in our future.
I think that the main thing keeping long-term interest rates low right now is cognitive dissonance. Even though the business community is starting to get scared — the ultra-establishment Committee for Economic Development now warns that “a fiscal crisis threatens our future standard of living” — investors still can’t believe that the leaders of the United States are acting like the rulers of a banana republic. But I’ve done the math, and reached my own conclusions.
Well, that’s what Krugman had to say in 2003, a few months after he called for the Fed to create a housing bubble to fight the dot.bomb recession. Lately, Krugman’s come to believe that doubling the inflation target is a pretty nifty idea:
- The case for higher inflation (Paul Krugman)
I’m sure that Krugman’s change of heart stems from a keener appreciation for the circumstances and sober reflection brought on by recent events, and has nothing to do with the fact that his party’s in power now (and wasn’t in 2002/2003). Given that I was still calling myself a socialist in 2003, it would be invidious of me to fault Krugman for having the temerity to change his mind.
Anyway, inflating away our troubles sounds like a great way for the feds to get the Social Security monkey off their collective back. Sure, it’ll make US dollars less attractive to foreign investors, but if inflation’s a serious option we’d be heading that way regardless. It might, however, be a bit of a problem for retirees, who suddenly find that not only their Social Security cheques but also any 401(k)s and other retirement savings they’ve socked away are worth a fair bit less than they’d planned on. I’m not seriously suggesting that we’re heading toward Alpo-and-wool-blankets territory, but that doesn’t mean it’s going to be pleasant.
Since the two options I’ve presented — default on domestic debt or inflate it away — are startlingly unpalatable, the obvious option is to raise taxes. Dr. Mankiw has his own prediction:
My own guess is that the United States will likely raise taxes substantially, and taxes as a percent of GDP will reach levels never seen in U.S. history (although common in Europe). The politics of that will be fascinating to watch. If the political process is stymied as our leaders debate the relative merits of tax hikes versus spending cuts, bond investors may get nervous, and we could witness either the Krugman inflation scenario or the much less likely default scenario.
The European example should be enough to convince us that tax hikes alone aren’t sufficient. (If you’d like another example, how about New Jersey?) Both tax increases and spending cuts — each reducing the necessary severity of the other — are going to be required to get this shit under control, but at some point soon we need to realize that Social Security is unsustainable and make plans to phase it out in an orderly and predictable way. This will, I’m dead certain, provoke howls of outrage from post-Boomers who paid into Social Security under the promise that they’d get theirs back. All I have to say to that is: We got fucked by our parents’ generation, but that doesn’t give us the right to fuck our kids.
* That’s a joke, son