Monday, March 21, 2011

The Hammer on social security "lock box"


Patrick_Landers said...

I understand this critique, and I certainly agree with the argument (made by many liberals for decades) that the government shouldn't be borrowing from the trust funds.

However, I think Krauthammer is incorrect in trying to draw too much of a distinction here. Certainly the actual full effect is more uncertain and indirect, but if the Treasury "stopped honoring the “special issue” bonds in the Social Security trust fund," it would still be an attack on the "full faith and credit of the U.S. government." It's an abstract (sort of), but still very important concept. Basically the answer is that if the Treasury did this, it would be a sign the U.S. government was actually in, or desperate to avoid, an imminent fiscal disaster- and the markets (aka investors domestically and abroad) would respond accordingly. If the Treasury did this, it would be the least of our concerns. However, since the Treasury and our government will everything possible to avoid fiscal near-collapse (U.S. economy is so strong we'd recover, but it would still be disastrous), the Treasury will not default on these bonds (or it does, and we're all screwed for other reasons). If you don't trust the policy argument, think of the politics. Can you imagine any administration, even a Republican one, doing this? I'm not certain the Tea Party with a majority in both houses and the Presidency would allow this- we are talking about a HUGE political upheaval which, even in a hypothetical situation where the Tea Party had gained so much power, many many economists, policy experts, and business-minded individuals would be screaming that this will be disastrous.

Now many experts, including CBO director Elmendorf in recent testimony and their reports make statements and voice policy concerns similar to the one Krauthammer quoted (from the OMB) that the funds "do not consist of real economic assets that can be drawn down in the future to fund benefits." That's referring to the fact that the U.S. government is going to have to pay them off with non-dedicated (to the trust fund) revenues (aka general part of the budget, not Social Security). Basically the bonds are pass-throughs (or at least that's how I imagine them). But they still represent something important- an obligation. The U.S. government will work its hardest to pay these obligations- it it fails, it's a sign of much bigger problems than just Social Security. It's not painless to do this (pay for shortfall), certainly, and its bad policy (as and many on the left have said for decades). We should avoid this and restore solvency to the trust fund itself, which Krauthammer accurately (implicitly) describes as requiring relatively modest changes (though I'd disagree over the composition). But our concern over the program shouldn't lead us to make bad policy changes (which is why center-left people who have been pushing for program changes for years our concerned about the current debate and therefore aren't pressing for immediate reform- not defending them, just pointing out the political concerns related to their policy beliefs).

Patrick_Landers said...

On the publicly-held vs. full debt depiction (which includes intergovernmental debt), I'd slightly quibble again. All experts are aware of the gross debt (public plus intergovernmental) measure and think it's important- it's just not the most important one, which is publicly held debt. The gross debt levels including the trust fund shortfalls has more limited uses- and isn't as good as a summary measure of the government's current fiscal health. So that's why all experts primarily deal with the publicly-held figure.

I give him a sort-of, half-true evaluation for this piece (a la Politifact-style). But he discounts the importance of the "full faith and credit concept." Defaulting on it is infinitesimally different in my mind from the "inconceivable" default on publicly-held debt.