Tuesday, April 05, 2005

And so it begins...

I happen to be perusing the Columbia Dems' blog and i stumbled upon this post.

Ever since the Columbia Spectator’s editorial page managed to print a character defamation, a blatant distortion, and truly unhinged rubbish, all in the same day (no small feat, I’m sure), I’ve been wary about taking them seriously. This struck me as a pretty rational reaction - after all, the defamee responded eloquently and the ridiculousness of the other two are fairly self-evident.

However, so much nonsense does get to be tiresome on the eyes, and the nonsense has unfortunately continued at full speed. Take, for example, Jeff Waksman’s recent piece, “Dean and Dems: Get It Together.” There is much silliness to poke at here, so I’ll just point out the most egregious bit: Waksman, in an attempt to demonstrate Democrats’ supposed inability to come up with any new ideas, argues that there is no Democratic plan to ’save’ Social Security.

Yup, that 'blatant distortion' is me, which makes that two CCL bashings in one post. Though the post is not about our articles specifically - it's really about Bush's plan for reform, or lack there of - I think it deserves a response.

The author [what's up with anonymous posts?] points to Eriposte, a site run by a guy who defines himself as "socially liberal, fiscally conservative (not the faux conservatism that is the norm these days, but actual conservatism) and somewhat hawkish from a foreign policy standpoint," and tries to give balanced information on various policy questions.

On the Social Security trust fund he quotes various sources. The first being Mark Weisbrot and Dean Baker of CEPR who wrote Social Security: The Phony Crises (which I have read) and excerpt that book in the Washington Post:

"That money's all been spent": When anyone lends money to the federal government by buying a bond, the government spends it. But the government still pays interest and repays what it borrowed. That goes for the Social Security trust
fund. Social Security has been running annual surpluses (now at more than $150
billion) since 1983. By law it must invest that surplus in U.S. Treasury obligations."

But the trust fund is only holding I.O.U.'s -- just pieces of paper!" Another canard: All bonds are I.O.U.'s. Those "pieces of paper" are backed by the full faith and credit of the U.S. government, which has never, ever defaulted on its bonds.

Eriposte cites more sources but they are basically reiterating the same theme.

Ok, so Baker and Weisbrot are correct in saying that, "By law [the SS trust fund] must invest [its] surplus in U.S. Treasury obligations;" I say the same thing in my op-ed, "the Trust Fund buys treasury bills, which are nothing more than government debt." Obviously the government will pay back its debts, as I say in my op-ed, "There is a reason why treasury bills are considered the safest investment in the world; the U.S. government does not default on its debt." But this is not the issue in question.

What matters is what it means for the government to own and finance its own debt. When an individual buys a bond and the government pays it back, money is being transferred from one party on another. However, when the government owns its own debt, no money is actually changing hands because it all happens within the government. It's circular, the only thing that changes is a number in an accounting book. And this is all I am getting at. You cannot claim that the trust fund represents real fungible assets. If the government uses the surplus from Social Security to finance its debt, then when it has to make good on that debt it has to borrow more; it's implicit debt.

If you still don’t believe me, listen to the Social Security Trustees in their report, "Status of the Social Security and Medicare Programs: A Summary of the 2005 Annual Reports, Social Security and Medicare:"

Since neither the interest paid on the Treasury bonds held in the HI and OASDI
Trust Funds, nor their redemption, provides any net new income to the Treasury,
the full amount of the required Treasury payments to these trust funds must be
financed by some combination of increased taxation, increased Federal borrowing
and debt, or a reduction in other government expenditures.
What is it exactly that i am distorting?

12 comments:

marco said...

Jeff responds in a comment here.

Josh B said...

Firstly, on the lack of attribution: for some ungodly wordpress-related reason, the author’s name appears on the front page, but not in the archived posts. I’ll try to take care of this as soon as possible.

I should’ve been much more specific on what exactly in the piece I was terming a distortion, and in retrospect, ‘distortion’ is almost certainly too strong a word, especially considering the slight might very well have been unintentional. Let me try to explain my thinking at the time: my issue with your article is that I think there’s somewhat of a misrepresentation of what these treasury securities are by means of omission. You claim that the trust fund has “nothing more than $1.6 trillion worth of IOU’s,” strongly implying there is some sort of strange racket going on, and never mention that “IOUs” fund everything from unbudgeted defense spending to education grants. Nothing you say in this piece is factually incorrect, but to mention the government-bond nature of the trust fund without ever stating all the other uses that this type of funding provides is to phrase it as an unreliable anomaly in government spending. (Distortions, by definition, aren’t mistruths, but misrepresentations of the truth.) As the link I provided states more elaborately, no rational person ever says “it’s nothing more than an IOU” or calls it a “worthless IOU” when loaning money to the government – because they have no real reason to expect to not be paid back, as your article acknowledges. Assuming the economy is not in crisis, it becomes the de facto equivalent of real money (which, incidentally, is under the same conditions – it only loses credibility when the government behind it loses credibility in being able to enforce the currency). My thinking at the time was, you certainly wouldn’t say there’s “nothing more” than $1.6 trillion of money in a given fund, so why say there’s “nothing more” than $1.6 trillion of IOUs in the trust fund?

I was wrong. Looking at the article now, I think it’s ridiculous to term the piece as a whole a distortion for what I think is one slightly unfair phrasing, and I apologize if there was any confusion. I’ve since amended the original post, and included a postscript with a link back to this one.

marco said...

I think you are right that simply saying, "The trust fund only contains IOU's," doesn't actually get at what is misleading about the trust fund. The problem is it doesn't represent any fungible assests, only a promiss to make good on debt, the quote from the SS trustees really puts this clearly. Thanks again for your thoughts.

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