The great Social Security debate, part two
Don't miss part one of my debate coverage, or part 1a where I talk about getting Krugman's autograph!
Update, 3/24/2005: NYSEC corrected at least two things in their transcript, without mentioning that they did so. The transcript is available here.
As promised, here's what was said in the debate itself. I really, really apologize for the length (over 6200 words), but if I may say so, this is worth reading through. These are based on my eighteen pages of notes taken on a 5"x7" spiral pad, and the debate did last two hours. I apologize in advance for any errors and any misquotings. I'm not a professional journalist, though I once was "sports editor" for my junior high school's newspaper. However, I remain exceedingly confident in the veracity of my general reporting, if not 99% of the quotes' wording.
At 6:53, after meandering through the crowd, I finally found a seat in the far-right wing (how deliciously appropriate!). A couple of gents sat down in the row in front of me. They were well-dressed, business suits and ties, compared to most attendees who were just in street clothes. I myself wore a classic black suit and tie so I'd at least look respectable, especially if Krugman had security shoo me out after asking him for an autograph.
One of the two gave a large Manila envelope to one of the ushers, saying, "Please make sure Mr. Krugman gets this." The envelope was stuffed full of something, and I wonder what it was. Perhaps data sheets to use during the debate? I couldn't resist asking them, "Pardon me, are you with any particular group?" Yes, said the one who had the envelope, they're with the Preserve Social Security & Medicare Coalition. Then they asked who I'm with. "Oh, I'm independent," I factually replied. I also gave them the name of my blog. "Never heard of it." "I'm not surprised, it's new."
Something I didn't mention about the moderator's initial prattle was her declaration, "The supreme aim of human life is to promote a more humane society." Even if that statist rubbish were true, just what does "humane" mean, and how do they intend to "promote" it? Is "a more humane society" one where wealth is confiscated from a successful person and given to others? Is "a more human society" one where war is always refused as an option, even when your far-from-imperialist nation is threatened by belligerent dictators? Or is "a more humane society" one ruled by the Supreme Court, United Nations, International Criminal Court and WTO, i.e. People Who Know Better Than You how to run your lives?
After Tanner got up and corrected Mallon about Cato, he said bluntly, "Social Security reform is not an option but a necessity... We can have semantic debates: is this a crisis or just a big problem?" He emphasized that under the current system, even the Supreme Court has ruled that you have no legal right to what you have paid in Social Security payroll taxes. "Social Security turns us all into supplicants," because we work and pay into it all our lives, and we can only ask the government to give us the "guaranteed benefits" it promised. He used the example of a working mother who died at 59 before she could draw any benefits. Obviously she won't get back a dime of her payroll taxes, but what about her children? That's just it: the money's gone. If you die before you can draw benefits, the government gets to keep it.
Most of the audience gave him polite applause, but incredibly, there were quite a few jerks who booed him as he sat back down! Contrast this with Krugman's introduction. It was probably those same jerks who were prematurely whooping and hollering as the moderator introduced Krugman: winner of the "John Clark Bates" medal, and a "regular co-op columnist" for the New York Times. I kid you not: those were her precise verbal gaffes. It wouldn't surprise me if she's hypocritical enough to call President Bush stupid for his so-called "Bushisms."
I have no mercy for the mainstream media's attempt to portray Bush as "stupid" or "ignorant" for how he speaks. Most people who know me think I speak well and am very articulate, but I sometimes get very tongue-tied; at times I'll try to say two words at once. Does that mean I'm stupid? Hardly; it just means I don't have as glib a tongue as other people. Nor does a great speaking ability make someone correct: Henry Clay, for example, was a great orator, but Thomas DiLorenzo has exposed him as just a corrupt statist. Clay was one of the founding fathers of pork barrel politics, especially "internal improvements," he manipulated the young national bank for his own gain, and worst of all, he was a mercantilist who supported tariffs.
Back to the moderator introducing Krugman. She called him "the leading voice against privatization." Is she serious? It wasn't until a few columns ago that he started talking about his early January promise. You know, this one? Even so, Krugman hasn't talked about how "to strengthen the program"; he's only attacked proposed privatization, and promoted removing the payroll tax earnings cap.
Krugman didn't offer a plan Tuesday night. Nothing. In his introduction, he said that Social Security isn't a pension plan or retirement program: "It is something that is there to protect people against misfortune." He said that in the example of a woman who dies at 59, her adult children are grown "and can take care of themselves."
Earth to Paul, Earth to Paul, that's not the point. All those payroll taxes should have been returned to her heirs. Even the $284 billion transportation bill, with all of its pork, at least creates something for all that money. But Krugman is saying people who die before getting a dime of Social Security are simply out of luck. In the real world, we call that a scam. And what's this rubbish about children "can take care of themselves"? Isn't it your right to work hard your whole life so that your children don't have to struggle as you do?
I don't know about anyone else, but I have sworn that my future children will not have to struggle financially as I have, and may God avenge me on anyone -- or any government -- that tries to take away their rightful inheritance. I don't expect someone like Krugman, who doesn't have children, to understand this.
Krugman continued on. "The program in itself -- there is a problem...but it's not particularly large." He said there's a bigger problem in the federal budget's looming fiscal crisis, which is one of his favorite themes. Once again, the old joke in economics: "Economists have successfully forecasted ten of the last three recessions." Predict a fiscal meltdown next year, or a recession, or a reversal in the current account deficit, and you'll eventually be right if given enough time. This is the true Law of Large Numbers, not some distortions that I've seen thrown around. The same principle applies to people who said every year from 1919 through 2004 that the Red Sox would win the World Series, or that the Bay Area will have an earthquake "soon."
Krugman went on to say that it's improper to talk about a "deficit" in Social Security. "We don't talk about the deficit of the Defense Department," which would be a good point if it weren't so completely wrong. Social Security taxes have always been considered separate from the General Fund. If not, then why is there a "trust fund" comprised of the payroll tax "surplus"? Notwithstanding that money is immediately borrowed by Congress, of course, but it is supposed to be paid back because it's separate.
Do you see Krugman's trick? He wants to lump everything together, so that Social Security can be made solvent by tax increases elsewhere, not in payroll taxes. After all, he opposes raising the payroll tax cap -- most probably because it would really hit him. So if government doesn't cut benefits, what taxes will it raise so Social Security has a "surplus" from other tax sources?
Krugman did say something I mostly agree with: "This is not a debate about the solvency of the program... This is about eliminating the role of government in providing a basic level" of a social safety net. I mostly agree. Krugman thinks government should keep that role. I don't. I flatly don't believe it's proper for government to provide a basic level of social insurance. I think that needs to be up to people. For several decades now, centralized government has slowly become Americans' nanny; we've gradually been taught that only government can significantly alleviate poverty and other social problems. Clearly, $2 trillion after LBJ's "War on Poverty," and with a very real problem in Social Security, it's clear that government has failed. Meanwhile, I think that government-administered "charity" has greatly dampened the spiritual aspect of American life. I use "spiritual" not necessarily meaning a belief in God (I am a Christian, though), but referring to that ineffable American essence of community. We can be cutthroat entrepreneurs, yet most of us have an inner something that compels us to extend a helping hand to a neighbor in need.
Now, I don't completely agree with Krugman because part of the debate is about maintaining Social Security's solvency. There's just no way around the demographic shift in our society. Even without the Baby Boomers, our worker-to-retiree ratio is still shrinking. The pyramid scheme will someday topple over, no matter how much you brace it.
Krugman sat down to thunderous applause. Then Joshua Marshall got up, and it became clear that his role in the debate was political analysis. He made a series of ridiculous remarks: "Michael's former colleagues are all over the White House... Paul is a voice crying out in the wilderness." His unmitigated arrogance was displayed in things like, "I went from the high terrain of public policy down to politics." Then he really began working the crowd: Karl Rove and President Bush (he said them in that order) allowed "the most dangerous thing to happen... [to] fall from your own spin," and when he mentioned President Bush can't run for re-election, what cheers from the crowd!
Marshall further claimed was that Bush is pushing for Social Security reform to create a "legacy," and that it's about "ego." He said that the White House didn't figure on the stakes for Republicans who can still be re-elected, and with low popular support for privatization, "Paul made the point, people like this program."
Mallon began throwing questions to the panelists. "Paul and Michael say there's no crisis... Why are we talking about Social Security when Medicare is worse?" Where has Mallon been? As I recall, Bruce Bartlett was talking about Medicare problems over a year ago.
Tanner basically replied that Medicare isn't being ignored, and he didn't like the Medicare prescription drug bill of late 2003 for its threat to Medicare's insolvency. (Nor do I.) There were quite a few boos when he mentioned that specific bill, which were rude but still justified against that onerous legislation.
Tanner got to the point: "We are in essence lying to these workers today." They have no ownership of the money taken in the guise (my word) of payroll taxes, nor do they have control over that money. So really, he continued, it's a "moral issue." Surprisingly, he got some claps from the audience. Not many, but some.
Krugman began his response, "Private property is a social institution, not a physical fact." Notice this trick? By generalizing the nature of private property, statists hope to make it less your own; if they repeat it often enough, you might eventually believe it's yours only because of "society." That in turn justifies the ability of the majority (or even a minority) to come together, form a "government for the common good," and seize your earnings or other wealth.
Not content to say private property isn't really yours, Krugman explained why it's for your own good that government takes your payroll taxes. First, "Government will not gratuitously reduce benefits." Oh? Then where will the money come from when our society averages only two retirees per worker? If you don't cut benefits, then you must raise each worker's taxes so high that he can support half of a retiree's needs; but Krugman will never admit this.
Krugman continued with more reasons you can't be trusted to keep your own wealth. "Investments sometimes do very well and sometimes they don't." Baloney! Investments over several decades, if properly diversified, do very well -- certainly better than Social Security's "bonds," which are merely loans to ourselves! Then Krugman really said it: retirement programs "have three legs: pension, private savings, Social Security. Why remove one of those legs?" Oh, no reason at all, Paul, just that the third leg called Social Security isn't as sturdy as the others. And if instead of making me work on that, I could have worked on the private savings leg and been much better off.
Marshall came up but I really didn't see where he was coming from. He said that the "moral issue" isn't what Tanner said. So like Krugman obviously does, is Marshall saying the "moral issue" is that society must force people to support others' retirement, just as the retirees had been forced to support previous retirees?
Mallon posed the next question, not really a very good one. What about the problem that Social Security privatization will concentrate more wealth in the hands of the wealthy? She claimed that property ownership today "is as concentrated as the days of the robber barons," that the top 1% own as much as the bottom 90%. Maybe so, but what about the other 9%?
Tanner stated that Social Security simply cannot pay the promised level of benefits. "In medieval times, people believed in magic... So now let's believe enough and hope hard enough," and maybe, like magic, Social Security will be fine. Good point, but what really drove home the pro-privatization point was saying privatization opponents are the real opponents of anyone being able to accumulate wealth for himself. Privatization doesn't make anyone "richer" than you are, quite the contrary!
I retract what I said last night. There was something new said, a new statistic. Krugman's rebuttal was the same "infinite horizon" line from his March 11th column: Social Security's $11 trillion unfunded liability is over an "infinite period." So, Krugman said, since the Bush tax cuts over the same period will "cost $20 trillion," we can save Social Security by reversing half of the Bush tax cuts. This is an economic fallacy of the highest order. Cost? Cost?! Donald Luskin wrote as good an explanation as any why cutting taxes doesn't "cost" the government anything.
You don't have to believe in full-blown supply-side economics to see that raising taxes discourages economic production. But let's reverse $11 trillion of those Bush tax cuts anyway. Now, as Bruce Bartlett recently wrote, each dollar collected in taxes (overall U.S. taxes) has a very real disincentive cost of 20 cents elsewhere, meaning reversing $11 trillion in tax cuts (which is the same thing as raising taxes by $11 trillion) costs the economy $2.2 trillion in other economic growth. This is independent of the economic period's length.
So Krugman's idea of reversing the Bush tax cuts would indeed "save" Social Security...at the cost of reduced economic growth. Why not allow people to take that money and invest it, which would have the two-fold advantage of giving them greater returns while simultaneously promoting more economic growth? Well, that was his next point. Krugman said, "You'll only come out ahead if you earn over 3% plus inflation." But Mr. Luskin already proved this last February that Krugman's own data show a 6.4% return. That's a hell of a lot better than the 3% annual return on the low-grade Treasuries in the "trust fund," which are merely loans to ourselves. I ask again, who will repay them plus interest, Santa Claus?
Then Krugman said something truly incredible: "It's only in the ivory tower of libertarians" where people believe "Social Security creates dependency." Doesn't it? After the government coerces 6.2% of your payroll taxes all your life, and a matching sum from your employer, unless you happen to be rich enough to have saved for your own, how else will you afford to retire except by depending on the government dole? He said, "We've been this way for 70 years." Paul, just because a people have been doing something for decades doesn't make it right! Our own Constitution permitted slavery for nearly 80 years, and did that make it right?
By that logic, Krugman should have told the Afghani people while the Taliban were still in power, "You've never had democratic government. You've been this way all along, why change now when your system of autocratic princes and warlords has worked fine for thousands of years?"
Tanner rebutted, "Nothing in life is risk-free," and that long-term investments of 30, 40 years are "remarkably safe." As I wrote before, Morgan Stanley (where I no longer work) has a nice color print illustrating the returns from Treasuries, small-cap stocks and large-cap stocks, and a fourth line showing inflation. Nobody is saying stocks never go down, but over a few decades, both the small-cap and large-cap stocks give really nice returns. You just have to diversify, and with all the low-cost index funds around, it's easy. It's certainly better than Krugman's fictional "3% return" that's not a real return, but a loan to ourselves. Who, again, pays the interest on those Treasuries in the trust fund?
Besides, Tanner continued, "These [private] accounts are voluntary," and at least give people the choice. "We shouldn't be so paternalistic to think we can run their lives and make choices for them." Even so, Cato's plan still has a social safety net, a guarantee that no senior on a private account will fall below the poverty level. It still has a social safety net for the few who get left behind. Contrast this with the current system where most are left behind.
Krugman repeated that Social Security is a social insurance system. "It is progressive -- lower income people get higher rates of return than higher earners," and government can provide "a certain level of social insurance." Indeed it can, but at what cost to those not on the government dole? Think, Paul, think! It's that pesky worker-to-retiree ratio again.
Mallon directed a question to Marshall, asking, "How are young people responding?" Marshall referred to the "zany" atmosphere of Wall Street, as if that really meant anything. Then he said a couple of things that really reveal his mindset: "Young people from a new generation are less risk averse," and "Young people don't know a lot about retirement." This is exactly what Donald Luskin's website is all about: all these politicians and pundits think you're too stupid to keep your own money!
"Retirees and near-retirees oppose this but agree, they won't be affected." Naturally! Retirees and near-retirees wonder where the federal government will get money, if young workers stop paying into Social Security and start saving money for themselves.
Krugman jumped in. "Just a political thought...when I got my first teaching job, I was 24..." Indeed, he's spent only one year of his entire post-doctorate life outside academia; he's lived in the ivory tower he had disparaged just moments before. Krugman said that one of the first parcels he received was his retirement plan. So? What is he implying, that a quarter-inch packet explaining benefits is too complicated for the average young person to understand?
Well, professor, what's not hard for any working person to understand is that the system gets worse and worse. I guess you could compare it to an old beat-up car: you've had it so long that it's too comfortable, and it can still take you a few miles without too much coaxing, but my, does it take a lot of maintenance each week! That's exactly what Tanner brought up: "We've raised taxes 24 times and reduced benefits." When the retire-with-full-benefits age for certain age groups was raised from 65 to 67, that was a benefit cut. So with the continued shift in our demographics, we'll have to keep raising taxes and cutting benefits. It's unavoidable.
Krugman said he didn't like this term "crisis," and that we can fix things by a "very low" increase of 50 percent in the payroll tax. Dear heavens, only a real liberal would say that confiscating 3.1% more of every person's income, with a matching confiscation from employers, is a "very low" tax increase! Then, Krugman went on, the 75-year cost of fixing Social Security is one-third of the 75-year cost of Bush's tax cuts. First he's talked about an "infinite horizon," and then he switched to a period of 75 years. Either way, he's still ignoring the fact that tax cuts are not a "cost" to government, and he's ignoring the fact that the economy wouldn't grow as fast without the supply-side incentive of tax cuts.
The moderator, as I said, was terrible, but her next question was really ridiculous. It wasn't even a true question, but a criticism of President Bush's plan because it would require borrowing. The idea is that with reduced payroll taxes, we'll have less to give to current retirees; so we'll have to borrow, a lot of liberals claim. I say, not necessarily, because spending cuts would do fine too. Tanner pointed out that in the long term, there are no transition costs. Eventually it will pay for itself, because the initial transition costs will be offset by savings later on. "It's like paying off your credit card... The whole idea of this transition cost bit is a red herring." I'm not completely convinced of a complete offset, because I'm always hesitant of promises of a free lunch. I do know one thing, however. Any costs from private accounts will be far cheaper than trying to keep the status quo afloat.
Krugman said, "I'm going to indulge myself and do some actual economics." He stated three possible scenarios, combinations of where the government can or can't pay, and whether people do or don't get their benefits. And? With the demographic shift, government can still continue to pay, but only at increasing cost. Then Krugman said something that I'll admit is a valid concern: "What we're really concerned about is the bond market." Certainly a sudden surge of federal borrowing could trigger trouble, but it doesn't have to be that way. We don't have to borrow for any transition costs, but rather initiate massive spending cuts.
Meanwhile, I noticed then how lovingly -- yes, lovingly -- the moderator was looking at Krugman. Trust me, I've seen that enamored look enough times to recognize it. Whoo boy.
Tanner made a brief rebuttal, probably unprepared to talk about the bond market. He simply stated that the advantage of Social Security privatization is that people's benefit levels will be locked, instead of the status quo where they'll be cut and cut again. Krugman, no doubt finding Tanner's weakness, brought it back to bonds. He said he's worried the markets will "freak" at all that debt, but tell me, what about freaking out starting in 2018, when we must start redeeming the trust fund's Treasury holdings? Let's be fair, as I'm trying to be, and consider all sides of the issue.
Mallon asked Marshall how the public is perceiving the argument of privatization. As any reasonably informed person can tell you, it's been taking a beating in recent polls. Marshall replied, "I think that it is a very hard argument." It surely is, and I don't think the American people (yet) understand the stakes involved. The rhetoric about demographic shifts, tax increases and benefit cuts has been around for so long, but most Americans aren't ready to turn in their old Social Security jalopy for something better.
Mallon finally brought up a good question: how well has privatization worked in other countries, specifically the UK and Chile? Krugman said "the rate of return has been pretty good" in Chile. Then with his usual correlation-causation fallacy, he mentioned that Chile had a civil war and a depressed stock market; this elicited tremendous applause and cheering from the gullible audience! In civilized discourse, I really try to refrain from name-calling, but what Krugman said is really one of the stupidest things I've ever heard an economist say. It's on par with a "world-class" economist's recent idiocy, "President Clinton's 1993 tax increase ushered in an economic boom." Oh dear, Krugman also said that.
Chile's privatization did so well despite all those problems, not because of them. Imagine how much better privatization would do here in the United States, then. Krugman then stated Chile has high administrative costs, but in the same breath he admitted the U.S. would have lower administrative costs. Again, Chile did so well despite that, so imagine how much better we would do. Now, regarding the UK, he said, "They, the details are quite complicated," but he briefly said that they have had problems like high fees and brokerage house scandals. How about comparing those to the current Social Security system's low returns and 100%-lent-out trust fund?
Tanner said he would never use the UK as a model, that it was "poorly designed." Then he made a real zinger: "Paul's maybe misleading things a bit when he talks about adminstrative costs." Only a bit? It turns out...a lot! "The fees in Chile are quite low," he said, 70 to 80 basis points. (For those who don't know, basis points are hundredths of one percent, so we're talking 0.7% or 0.8% in fees, which is about what a big brokerage firm will charge you for an index fund, and less than what they charge for managed money accounts.) Also, Tanner said he had talked to a certain Chilean who suggested those are high, that the true administrative costs are more like 65 basis points. Just about everyone had to chuckle when Krugman quickly interrupted, "He was one of my students." I chuckled for a different reason than most others: it seems the student didn't turn out too badly, despite being taught by Krugman.
Tanner then hit home by saying a young worker can expect a 1.4% annual rate of return from Social Security, and that it's betting against the American economy not to privatize. Of course, Krugman is the same economist who keeps warning, year after year, that we're about to have a fiscal crisis-meltdown-train wreck.
Krugman came back with another bad analogy. He said, "My wife and I would do better if we took my mother-in-law's money and let her starve." This is completely and utterly fallacious. Social Security privatization is about letting people keep their own money, not taking away from others. There will be "legacy costs," sure, from having to find other money to pay for current retirees. Nobody is denying that. Even if that comes from borrowing, it will be short-term expensive, but long-term cheaper than heading further into insolvency.
Does Krugman really not understand what makes us (those who support privatization) sigh? We sigh because it's such a damned shame the system grew into this. Why didn't his mother-in-law save for herself in all that time? Because, once again, the government was taking her payroll taxes to pay for current retirees, on the undeliverable promise that someday it would pay for her retirement by taking money from current workers.
Krugman harped again on the "has to be 3 percent plus the rate of inflation" BS. Then Tanner made a good point, "The problem with Social Security is that it really doesn't know what it wants to be." Is it a retirement program, a social safety net, a disability benefits program? All of the above? Krugman didn't really answer that but went back to talking about legacy costs.
Mallon had finished with her own questions and now turned to the audience's questions. We had been given 3x5 index cards on which we could write questions, and the ushers would give them to Mallon. My particular question was directed to Krugman. Would he would continue to oppose raising the earnings cap for payroll taxes, which he's already opposed in print, though the Economic Policy Institute claims Social Security can be made solvent just removing the cap (making all wages taxable at 6.2% individually with a matching employer contribution). I'll be perfectly honest: I deliberately asked that to put him at odds with a major liberal group like the EPI, and make him do it in public.
Alas, my question was not selected. Too bad! The first question was a real softball: "Is the trust fund a myth?" Tanner said it's real because of the bonds stored somewhere in a vault. "They're right there next to the Confederate bonds." That definitely earned the resulting laughs. Even the Clinton Administration, Tanner said, said that the bonds can be redeemed only by raising taxes or reducing benefits. So they're real, but "Where are they going to get the money to pay for them?" Tanner said it will be by taxing people more, "and that's simply wrong." I'll remind everyone what Krugman previously said, that government won't cut benefits. That leaves only one other option.
Krugman rambled incoherently for a minute, and I really didn't understand what his point was. Then he said the payroll tax is "just another tax." Aha! That brings us back to Krugman's fallacial claim that there will be no Social Security "deficit." There won't be one, not once Krugman & Co. change the nature of the financing and lump Social Security in with general spending. It's like saying 2 plus 2 equal five, once you've changed the rules of math. As I already said, isn't Social Security supposed to be financed by a dedicated payroll tax? So if payroll taxes can't pay all Social Security benefits, and we have to increase other taxes to make up the difference, what's the difference, other than the economic incidence, between raising those taxes and raising the payroll tax? Please, Paul, be honest here. Just admit your desire to maintain the current system requires raising taxes because you promise not to cut benefits.
What Krugman shouldn't have done is cited a figure worthy of Enron accounting: he said the Social Security Trustees' report says Social Security will run a surplus until 2028. As a matter of accounting, that is true. As a matter of the real world, that's horse excrement. Go to page 178 of the Social Security Administrations's 2004 "Performance and Accountability" report. Pay close attention to two particular wordings in the last paragraph:
So it's really misleading to say the "trust fund" runs a surplus until 2028. On paper, yes, it will, because of the "interest received on the bonds." When you consider how it gets the money in the real world, you realize, "Oh hell no, that's what Enron was doing with its own accounting!"
Mallon asked Marshall how citizens perceive the trust fund. He said, "The debate is largely semantic," but I personally disagree. Like Krugman, he rambled for a minute before saying something of note: "If the money is not paid back, then it's a scam of historic proportion." Well, the money will be paid back, but at a high cost. The scam is that Congress for years has been spending Social Security payroll tax revenues that we thought was locked away. The scam is that Clinton during his presidency claimed the national debt was only $3.5 trillion, when it was actually over $5 trillion. That's because the full liabilities included -- you guessed it -- what we had borrowed from the Social Security trust fund.
Mallon's next question was that Alan Greenspan in 1983 proposed creating the surplus with a combination of payroll tax increases and benefit cuts, but now that can't "secure" Social Security's future. She asked Tanner that if benefits can be cut, can private accounts be taken away?
Tanner began, "Yes," and I knew where he was going. "But the difference is that private accounts are private property. We'd be a totally different country." His answer is very true: the United States would have to degenerate into significant statism for the government to seize private retirement accounts. I wonder, though, are we that far off? We have an activist Supreme Court that's considering the possibility that government can force you to sell your private property to someone else, justified because that person will pay more taxes than you. If the Supreme Court rules that government can do that, it will be a first nail in the coffin of private property. After that, it wouldn't take much for an equally activist Supreme Court to rule, oh, in 2020 that your private account was never "meant" to be yours.
Krugman's rebuttal betrayed his misuse of economic history: he said current tax levels "are at their lowest levels since 1942... There is some fundamental injustice in all this." My late father could tell you that, though he later grew to love FDR, he was going to vote for Wendell Wilkie in 1940. Why? Well, FDR achieved such great things as not just raising taxes throughout the 1930s, but raising them to abominable levels. Krugman is simply being misleading to imply we have "low" tax rates today, when in the early 1940s they weren't low at all.
But, since Krugman believes Clinton's 1993 tax hikes "ushered in" that decade's prosperity, he longs for the prosperity of the 1970s. High marginal tax rates, high interest rates and inflation, and high unemployment. Yep, the glory days of the U.S. economy.
Onto the next question by an audience member: should a portion of the trust fund be invested in the stock market? Krugman answered, "I would have been perfectly happy with the federal government and Social Security Administration owning a global index fund." I can agree in one way. The one advantage of the funds being invested is that they become less liquid, and without a trust fund to loot, the federal government would have to be more fiscally responsible.
But there's a big danger that Tanner brought up, a view I've held since 1996, when Harry Browne explained it in his newsletter. Tanner said he opposes investing the trust fund itself, because that would make the federal government the largest owner of businesses. But this also doesn't address the problems with Social Security. Not solvency, but giving people control of their money, and allowing low-income people to build their own wealth. "Let's stop patronizing poor people...and let them start building wealth."
But, Krugman countered, Social Security is a good deal for low-income workers. That's true only for the very lowest incomes, who will indeed get more than they put in. What Krugman won't tell you is that it's a bad deal for working class and middle class folks, who will get hit the hardest by tax increases and benefit cuts. The middle incomes will get more if only they could invest that 12.4%, instead of giving it to the government as loans to ourselves.
Surprisingly, Krugman offered a good reason that the trust fund itself shouldn't be invested: who, then, chooses the index funds? He then tried to downplay the advantage of individually invested private accounts, sarcastically citing "the extreme effect of small stockholders in preventing corporate abuse." No, what prevents corporate abuse is the enforcement of the rule of law. And is Krugman really suggesting that it's a bad deal to invest in stocks, just because small shareholders don't have much of an impact on the company?
But Krugman wasn't done yet: "I don't think the last 70 years in America have been all that bad... There are these people called liberals like the way the U.S. is, and people called conservatives who don't like the way it is." Of course liberals want to maintain the status quo, when they're on the government dole (or expect to be). And of course we conservatives and libertarians don't like the way it is, because we're tired of working for other people. Charitable giving is one thing, but we maintain it's morally wrong for government to come along, seize the fruits of our labor, and just give it to someone else.
Tanner noted that there's a "high degree of politicization in those government [entitlement] programs," which would naturally affect the choice of index funds. Marshall dredged up the "winners and losers" fallacy, warning that "some people do poorly, some retire when" the stock market has been doing poorly. Yet he ignored that even the Cato plan, as libertarian as they are, has a social safety net.
I'm afraid by this time, after two hours of note-taking, my whole arm was getting tired, and I was starting to feel a bit fatigued. Each of the three gave short conclusions where they just reiterated the gist of their arguments, so I didn't bother to jot anything down from those.
Update, 3/24/2005: NYSEC corrected at least two things in their transcript, without mentioning that they did so. The transcript is available here.
As promised, here's what was said in the debate itself. I really, really apologize for the length (over 6200 words), but if I may say so, this is worth reading through. These are based on my eighteen pages of notes taken on a 5"x7" spiral pad, and the debate did last two hours. I apologize in advance for any errors and any misquotings. I'm not a professional journalist, though I once was "sports editor" for my junior high school's newspaper. However, I remain exceedingly confident in the veracity of my general reporting, if not 99% of the quotes' wording.
At 6:53, after meandering through the crowd, I finally found a seat in the far-right wing (how deliciously appropriate!). A couple of gents sat down in the row in front of me. They were well-dressed, business suits and ties, compared to most attendees who were just in street clothes. I myself wore a classic black suit and tie so I'd at least look respectable, especially if Krugman had security shoo me out after asking him for an autograph.
One of the two gave a large Manila envelope to one of the ushers, saying, "Please make sure Mr. Krugman gets this." The envelope was stuffed full of something, and I wonder what it was. Perhaps data sheets to use during the debate? I couldn't resist asking them, "Pardon me, are you with any particular group?" Yes, said the one who had the envelope, they're with the Preserve Social Security & Medicare Coalition. Then they asked who I'm with. "Oh, I'm independent," I factually replied. I also gave them the name of my blog. "Never heard of it." "I'm not surprised, it's new."
Something I didn't mention about the moderator's initial prattle was her declaration, "The supreme aim of human life is to promote a more humane society." Even if that statist rubbish were true, just what does "humane" mean, and how do they intend to "promote" it? Is "a more humane society" one where wealth is confiscated from a successful person and given to others? Is "a more human society" one where war is always refused as an option, even when your far-from-imperialist nation is threatened by belligerent dictators? Or is "a more humane society" one ruled by the Supreme Court, United Nations, International Criminal Court and WTO, i.e. People Who Know Better Than You how to run your lives?
After Tanner got up and corrected Mallon about Cato, he said bluntly, "Social Security reform is not an option but a necessity... We can have semantic debates: is this a crisis or just a big problem?" He emphasized that under the current system, even the Supreme Court has ruled that you have no legal right to what you have paid in Social Security payroll taxes. "Social Security turns us all into supplicants," because we work and pay into it all our lives, and we can only ask the government to give us the "guaranteed benefits" it promised. He used the example of a working mother who died at 59 before she could draw any benefits. Obviously she won't get back a dime of her payroll taxes, but what about her children? That's just it: the money's gone. If you die before you can draw benefits, the government gets to keep it.
Most of the audience gave him polite applause, but incredibly, there were quite a few jerks who booed him as he sat back down! Contrast this with Krugman's introduction. It was probably those same jerks who were prematurely whooping and hollering as the moderator introduced Krugman: winner of the "John Clark Bates" medal, and a "regular co-op columnist" for the New York Times. I kid you not: those were her precise verbal gaffes. It wouldn't surprise me if she's hypocritical enough to call President Bush stupid for his so-called "Bushisms."
I have no mercy for the mainstream media's attempt to portray Bush as "stupid" or "ignorant" for how he speaks. Most people who know me think I speak well and am very articulate, but I sometimes get very tongue-tied; at times I'll try to say two words at once. Does that mean I'm stupid? Hardly; it just means I don't have as glib a tongue as other people. Nor does a great speaking ability make someone correct: Henry Clay, for example, was a great orator, but Thomas DiLorenzo has exposed him as just a corrupt statist. Clay was one of the founding fathers of pork barrel politics, especially "internal improvements," he manipulated the young national bank for his own gain, and worst of all, he was a mercantilist who supported tariffs.
Back to the moderator introducing Krugman. She called him "the leading voice against privatization." Is she serious? It wasn't until a few columns ago that he started talking about his early January promise. You know, this one? Even so, Krugman hasn't talked about how "to strengthen the program"; he's only attacked proposed privatization, and promoted removing the payroll tax earnings cap.
Krugman didn't offer a plan Tuesday night. Nothing. In his introduction, he said that Social Security isn't a pension plan or retirement program: "It is something that is there to protect people against misfortune." He said that in the example of a woman who dies at 59, her adult children are grown "and can take care of themselves."
Earth to Paul, Earth to Paul, that's not the point. All those payroll taxes should have been returned to her heirs. Even the $284 billion transportation bill, with all of its pork, at least creates something for all that money. But Krugman is saying people who die before getting a dime of Social Security are simply out of luck. In the real world, we call that a scam. And what's this rubbish about children "can take care of themselves"? Isn't it your right to work hard your whole life so that your children don't have to struggle as you do?
I don't know about anyone else, but I have sworn that my future children will not have to struggle financially as I have, and may God avenge me on anyone -- or any government -- that tries to take away their rightful inheritance. I don't expect someone like Krugman, who doesn't have children, to understand this.
Krugman continued on. "The program in itself -- there is a problem...but it's not particularly large." He said there's a bigger problem in the federal budget's looming fiscal crisis, which is one of his favorite themes. Once again, the old joke in economics: "Economists have successfully forecasted ten of the last three recessions." Predict a fiscal meltdown next year, or a recession, or a reversal in the current account deficit, and you'll eventually be right if given enough time. This is the true Law of Large Numbers, not some distortions that I've seen thrown around. The same principle applies to people who said every year from 1919 through 2004 that the Red Sox would win the World Series, or that the Bay Area will have an earthquake "soon."
Krugman went on to say that it's improper to talk about a "deficit" in Social Security. "We don't talk about the deficit of the Defense Department," which would be a good point if it weren't so completely wrong. Social Security taxes have always been considered separate from the General Fund. If not, then why is there a "trust fund" comprised of the payroll tax "surplus"? Notwithstanding that money is immediately borrowed by Congress, of course, but it is supposed to be paid back because it's separate.
Do you see Krugman's trick? He wants to lump everything together, so that Social Security can be made solvent by tax increases elsewhere, not in payroll taxes. After all, he opposes raising the payroll tax cap -- most probably because it would really hit him. So if government doesn't cut benefits, what taxes will it raise so Social Security has a "surplus" from other tax sources?
Krugman did say something I mostly agree with: "This is not a debate about the solvency of the program... This is about eliminating the role of government in providing a basic level" of a social safety net. I mostly agree. Krugman thinks government should keep that role. I don't. I flatly don't believe it's proper for government to provide a basic level of social insurance. I think that needs to be up to people. For several decades now, centralized government has slowly become Americans' nanny; we've gradually been taught that only government can significantly alleviate poverty and other social problems. Clearly, $2 trillion after LBJ's "War on Poverty," and with a very real problem in Social Security, it's clear that government has failed. Meanwhile, I think that government-administered "charity" has greatly dampened the spiritual aspect of American life. I use "spiritual" not necessarily meaning a belief in God (I am a Christian, though), but referring to that ineffable American essence of community. We can be cutthroat entrepreneurs, yet most of us have an inner something that compels us to extend a helping hand to a neighbor in need.
Now, I don't completely agree with Krugman because part of the debate is about maintaining Social Security's solvency. There's just no way around the demographic shift in our society. Even without the Baby Boomers, our worker-to-retiree ratio is still shrinking. The pyramid scheme will someday topple over, no matter how much you brace it.
Krugman sat down to thunderous applause. Then Joshua Marshall got up, and it became clear that his role in the debate was political analysis. He made a series of ridiculous remarks: "Michael's former colleagues are all over the White House... Paul is a voice crying out in the wilderness." His unmitigated arrogance was displayed in things like, "I went from the high terrain of public policy down to politics." Then he really began working the crowd: Karl Rove and President Bush (he said them in that order) allowed "the most dangerous thing to happen... [to] fall from your own spin," and when he mentioned President Bush can't run for re-election, what cheers from the crowd!
Marshall further claimed was that Bush is pushing for Social Security reform to create a "legacy," and that it's about "ego." He said that the White House didn't figure on the stakes for Republicans who can still be re-elected, and with low popular support for privatization, "Paul made the point, people like this program."
Mallon began throwing questions to the panelists. "Paul and Michael say there's no crisis... Why are we talking about Social Security when Medicare is worse?" Where has Mallon been? As I recall, Bruce Bartlett was talking about Medicare problems over a year ago.
Tanner basically replied that Medicare isn't being ignored, and he didn't like the Medicare prescription drug bill of late 2003 for its threat to Medicare's insolvency. (Nor do I.) There were quite a few boos when he mentioned that specific bill, which were rude but still justified against that onerous legislation.
Tanner got to the point: "We are in essence lying to these workers today." They have no ownership of the money taken in the guise (my word) of payroll taxes, nor do they have control over that money. So really, he continued, it's a "moral issue." Surprisingly, he got some claps from the audience. Not many, but some.
Krugman began his response, "Private property is a social institution, not a physical fact." Notice this trick? By generalizing the nature of private property, statists hope to make it less your own; if they repeat it often enough, you might eventually believe it's yours only because of "society." That in turn justifies the ability of the majority (or even a minority) to come together, form a "government for the common good," and seize your earnings or other wealth.
Not content to say private property isn't really yours, Krugman explained why it's for your own good that government takes your payroll taxes. First, "Government will not gratuitously reduce benefits." Oh? Then where will the money come from when our society averages only two retirees per worker? If you don't cut benefits, then you must raise each worker's taxes so high that he can support half of a retiree's needs; but Krugman will never admit this.
Krugman continued with more reasons you can't be trusted to keep your own wealth. "Investments sometimes do very well and sometimes they don't." Baloney! Investments over several decades, if properly diversified, do very well -- certainly better than Social Security's "bonds," which are merely loans to ourselves! Then Krugman really said it: retirement programs "have three legs: pension, private savings, Social Security. Why remove one of those legs?" Oh, no reason at all, Paul, just that the third leg called Social Security isn't as sturdy as the others. And if instead of making me work on that, I could have worked on the private savings leg and been much better off.
Marshall came up but I really didn't see where he was coming from. He said that the "moral issue" isn't what Tanner said. So like Krugman obviously does, is Marshall saying the "moral issue" is that society must force people to support others' retirement, just as the retirees had been forced to support previous retirees?
Mallon posed the next question, not really a very good one. What about the problem that Social Security privatization will concentrate more wealth in the hands of the wealthy? She claimed that property ownership today "is as concentrated as the days of the robber barons," that the top 1% own as much as the bottom 90%. Maybe so, but what about the other 9%?
Tanner stated that Social Security simply cannot pay the promised level of benefits. "In medieval times, people believed in magic... So now let's believe enough and hope hard enough," and maybe, like magic, Social Security will be fine. Good point, but what really drove home the pro-privatization point was saying privatization opponents are the real opponents of anyone being able to accumulate wealth for himself. Privatization doesn't make anyone "richer" than you are, quite the contrary!
I retract what I said last night. There was something new said, a new statistic. Krugman's rebuttal was the same "infinite horizon" line from his March 11th column: Social Security's $11 trillion unfunded liability is over an "infinite period." So, Krugman said, since the Bush tax cuts over the same period will "cost $20 trillion," we can save Social Security by reversing half of the Bush tax cuts. This is an economic fallacy of the highest order. Cost? Cost?! Donald Luskin wrote as good an explanation as any why cutting taxes doesn't "cost" the government anything.
You don't have to believe in full-blown supply-side economics to see that raising taxes discourages economic production. But let's reverse $11 trillion of those Bush tax cuts anyway. Now, as Bruce Bartlett recently wrote, each dollar collected in taxes (overall U.S. taxes) has a very real disincentive cost of 20 cents elsewhere, meaning reversing $11 trillion in tax cuts (which is the same thing as raising taxes by $11 trillion) costs the economy $2.2 trillion in other economic growth. This is independent of the economic period's length.
So Krugman's idea of reversing the Bush tax cuts would indeed "save" Social Security...at the cost of reduced economic growth. Why not allow people to take that money and invest it, which would have the two-fold advantage of giving them greater returns while simultaneously promoting more economic growth? Well, that was his next point. Krugman said, "You'll only come out ahead if you earn over 3% plus inflation." But Mr. Luskin already proved this last February that Krugman's own data show a 6.4% return. That's a hell of a lot better than the 3% annual return on the low-grade Treasuries in the "trust fund," which are merely loans to ourselves. I ask again, who will repay them plus interest, Santa Claus?
Then Krugman said something truly incredible: "It's only in the ivory tower of libertarians" where people believe "Social Security creates dependency." Doesn't it? After the government coerces 6.2% of your payroll taxes all your life, and a matching sum from your employer, unless you happen to be rich enough to have saved for your own, how else will you afford to retire except by depending on the government dole? He said, "We've been this way for 70 years." Paul, just because a people have been doing something for decades doesn't make it right! Our own Constitution permitted slavery for nearly 80 years, and did that make it right?
By that logic, Krugman should have told the Afghani people while the Taliban were still in power, "You've never had democratic government. You've been this way all along, why change now when your system of autocratic princes and warlords has worked fine for thousands of years?"
Tanner rebutted, "Nothing in life is risk-free," and that long-term investments of 30, 40 years are "remarkably safe." As I wrote before, Morgan Stanley (where I no longer work) has a nice color print illustrating the returns from Treasuries, small-cap stocks and large-cap stocks, and a fourth line showing inflation. Nobody is saying stocks never go down, but over a few decades, both the small-cap and large-cap stocks give really nice returns. You just have to diversify, and with all the low-cost index funds around, it's easy. It's certainly better than Krugman's fictional "3% return" that's not a real return, but a loan to ourselves. Who, again, pays the interest on those Treasuries in the trust fund?
Besides, Tanner continued, "These [private] accounts are voluntary," and at least give people the choice. "We shouldn't be so paternalistic to think we can run their lives and make choices for them." Even so, Cato's plan still has a social safety net, a guarantee that no senior on a private account will fall below the poverty level. It still has a social safety net for the few who get left behind. Contrast this with the current system where most are left behind.
Krugman repeated that Social Security is a social insurance system. "It is progressive -- lower income people get higher rates of return than higher earners," and government can provide "a certain level of social insurance." Indeed it can, but at what cost to those not on the government dole? Think, Paul, think! It's that pesky worker-to-retiree ratio again.
Mallon directed a question to Marshall, asking, "How are young people responding?" Marshall referred to the "zany" atmosphere of Wall Street, as if that really meant anything. Then he said a couple of things that really reveal his mindset: "Young people from a new generation are less risk averse," and "Young people don't know a lot about retirement." This is exactly what Donald Luskin's website is all about: all these politicians and pundits think you're too stupid to keep your own money!
"Retirees and near-retirees oppose this but agree, they won't be affected." Naturally! Retirees and near-retirees wonder where the federal government will get money, if young workers stop paying into Social Security and start saving money for themselves.
Krugman jumped in. "Just a political thought...when I got my first teaching job, I was 24..." Indeed, he's spent only one year of his entire post-doctorate life outside academia; he's lived in the ivory tower he had disparaged just moments before. Krugman said that one of the first parcels he received was his retirement plan. So? What is he implying, that a quarter-inch packet explaining benefits is too complicated for the average young person to understand?
Well, professor, what's not hard for any working person to understand is that the system gets worse and worse. I guess you could compare it to an old beat-up car: you've had it so long that it's too comfortable, and it can still take you a few miles without too much coaxing, but my, does it take a lot of maintenance each week! That's exactly what Tanner brought up: "We've raised taxes 24 times and reduced benefits." When the retire-with-full-benefits age for certain age groups was raised from 65 to 67, that was a benefit cut. So with the continued shift in our demographics, we'll have to keep raising taxes and cutting benefits. It's unavoidable.
Krugman said he didn't like this term "crisis," and that we can fix things by a "very low" increase of 50 percent in the payroll tax. Dear heavens, only a real liberal would say that confiscating 3.1% more of every person's income, with a matching confiscation from employers, is a "very low" tax increase! Then, Krugman went on, the 75-year cost of fixing Social Security is one-third of the 75-year cost of Bush's tax cuts. First he's talked about an "infinite horizon," and then he switched to a period of 75 years. Either way, he's still ignoring the fact that tax cuts are not a "cost" to government, and he's ignoring the fact that the economy wouldn't grow as fast without the supply-side incentive of tax cuts.
The moderator, as I said, was terrible, but her next question was really ridiculous. It wasn't even a true question, but a criticism of President Bush's plan because it would require borrowing. The idea is that with reduced payroll taxes, we'll have less to give to current retirees; so we'll have to borrow, a lot of liberals claim. I say, not necessarily, because spending cuts would do fine too. Tanner pointed out that in the long term, there are no transition costs. Eventually it will pay for itself, because the initial transition costs will be offset by savings later on. "It's like paying off your credit card... The whole idea of this transition cost bit is a red herring." I'm not completely convinced of a complete offset, because I'm always hesitant of promises of a free lunch. I do know one thing, however. Any costs from private accounts will be far cheaper than trying to keep the status quo afloat.
Krugman said, "I'm going to indulge myself and do some actual economics." He stated three possible scenarios, combinations of where the government can or can't pay, and whether people do or don't get their benefits. And? With the demographic shift, government can still continue to pay, but only at increasing cost. Then Krugman said something that I'll admit is a valid concern: "What we're really concerned about is the bond market." Certainly a sudden surge of federal borrowing could trigger trouble, but it doesn't have to be that way. We don't have to borrow for any transition costs, but rather initiate massive spending cuts.
Meanwhile, I noticed then how lovingly -- yes, lovingly -- the moderator was looking at Krugman. Trust me, I've seen that enamored look enough times to recognize it. Whoo boy.
Tanner made a brief rebuttal, probably unprepared to talk about the bond market. He simply stated that the advantage of Social Security privatization is that people's benefit levels will be locked, instead of the status quo where they'll be cut and cut again. Krugman, no doubt finding Tanner's weakness, brought it back to bonds. He said he's worried the markets will "freak" at all that debt, but tell me, what about freaking out starting in 2018, when we must start redeeming the trust fund's Treasury holdings? Let's be fair, as I'm trying to be, and consider all sides of the issue.
Mallon asked Marshall how the public is perceiving the argument of privatization. As any reasonably informed person can tell you, it's been taking a beating in recent polls. Marshall replied, "I think that it is a very hard argument." It surely is, and I don't think the American people (yet) understand the stakes involved. The rhetoric about demographic shifts, tax increases and benefit cuts has been around for so long, but most Americans aren't ready to turn in their old Social Security jalopy for something better.
Mallon finally brought up a good question: how well has privatization worked in other countries, specifically the UK and Chile? Krugman said "the rate of return has been pretty good" in Chile. Then with his usual correlation-causation fallacy, he mentioned that Chile had a civil war and a depressed stock market; this elicited tremendous applause and cheering from the gullible audience! In civilized discourse, I really try to refrain from name-calling, but what Krugman said is really one of the stupidest things I've ever heard an economist say. It's on par with a "world-class" economist's recent idiocy, "President Clinton's 1993 tax increase ushered in an economic boom." Oh dear, Krugman also said that.
Chile's privatization did so well despite all those problems, not because of them. Imagine how much better privatization would do here in the United States, then. Krugman then stated Chile has high administrative costs, but in the same breath he admitted the U.S. would have lower administrative costs. Again, Chile did so well despite that, so imagine how much better we would do. Now, regarding the UK, he said, "They, the details are quite complicated," but he briefly said that they have had problems like high fees and brokerage house scandals. How about comparing those to the current Social Security system's low returns and 100%-lent-out trust fund?
Tanner said he would never use the UK as a model, that it was "poorly designed." Then he made a real zinger: "Paul's maybe misleading things a bit when he talks about adminstrative costs." Only a bit? It turns out...a lot! "The fees in Chile are quite low," he said, 70 to 80 basis points. (For those who don't know, basis points are hundredths of one percent, so we're talking 0.7% or 0.8% in fees, which is about what a big brokerage firm will charge you for an index fund, and less than what they charge for managed money accounts.) Also, Tanner said he had talked to a certain Chilean who suggested those are high, that the true administrative costs are more like 65 basis points. Just about everyone had to chuckle when Krugman quickly interrupted, "He was one of my students." I chuckled for a different reason than most others: it seems the student didn't turn out too badly, despite being taught by Krugman.
Tanner then hit home by saying a young worker can expect a 1.4% annual rate of return from Social Security, and that it's betting against the American economy not to privatize. Of course, Krugman is the same economist who keeps warning, year after year, that we're about to have a fiscal crisis-meltdown-train wreck.
Krugman came back with another bad analogy. He said, "My wife and I would do better if we took my mother-in-law's money and let her starve." This is completely and utterly fallacious. Social Security privatization is about letting people keep their own money, not taking away from others. There will be "legacy costs," sure, from having to find other money to pay for current retirees. Nobody is denying that. Even if that comes from borrowing, it will be short-term expensive, but long-term cheaper than heading further into insolvency.
Does Krugman really not understand what makes us (those who support privatization) sigh? We sigh because it's such a damned shame the system grew into this. Why didn't his mother-in-law save for herself in all that time? Because, once again, the government was taking her payroll taxes to pay for current retirees, on the undeliverable promise that someday it would pay for her retirement by taking money from current workers.
Krugman harped again on the "has to be 3 percent plus the rate of inflation" BS. Then Tanner made a good point, "The problem with Social Security is that it really doesn't know what it wants to be." Is it a retirement program, a social safety net, a disability benefits program? All of the above? Krugman didn't really answer that but went back to talking about legacy costs.
Mallon had finished with her own questions and now turned to the audience's questions. We had been given 3x5 index cards on which we could write questions, and the ushers would give them to Mallon. My particular question was directed to Krugman. Would he would continue to oppose raising the earnings cap for payroll taxes, which he's already opposed in print, though the Economic Policy Institute claims Social Security can be made solvent just removing the cap (making all wages taxable at 6.2% individually with a matching employer contribution). I'll be perfectly honest: I deliberately asked that to put him at odds with a major liberal group like the EPI, and make him do it in public.
Alas, my question was not selected. Too bad! The first question was a real softball: "Is the trust fund a myth?" Tanner said it's real because of the bonds stored somewhere in a vault. "They're right there next to the Confederate bonds." That definitely earned the resulting laughs. Even the Clinton Administration, Tanner said, said that the bonds can be redeemed only by raising taxes or reducing benefits. So they're real, but "Where are they going to get the money to pay for them?" Tanner said it will be by taxing people more, "and that's simply wrong." I'll remind everyone what Krugman previously said, that government won't cut benefits. That leaves only one other option.
Krugman rambled incoherently for a minute, and I really didn't understand what his point was. Then he said the payroll tax is "just another tax." Aha! That brings us back to Krugman's fallacial claim that there will be no Social Security "deficit." There won't be one, not once Krugman & Co. change the nature of the financing and lump Social Security in with general spending. It's like saying 2 plus 2 equal five, once you've changed the rules of math. As I already said, isn't Social Security supposed to be financed by a dedicated payroll tax? So if payroll taxes can't pay all Social Security benefits, and we have to increase other taxes to make up the difference, what's the difference, other than the economic incidence, between raising those taxes and raising the payroll tax? Please, Paul, be honest here. Just admit your desire to maintain the current system requires raising taxes because you promise not to cut benefits.
What Krugman shouldn't have done is cited a figure worthy of Enron accounting: he said the Social Security Trustees' report says Social Security will run a surplus until 2028. As a matter of accounting, that is true. As a matter of the real world, that's horse excrement. Go to page 178 of the Social Security Administrations's 2004 "Performance and Accountability" report. Pay close attention to two particular wordings in the last paragraph:
"...estimated cost starts to exceed income (including interest) in 2028."Do you see where Krugman got the 2028 figure? The trustees' report says they can use interest to pay benefits from 2018 through 2028. Once more, just who pays the interest? I don't know about the rest of you, but I'm not counting on a fat, jovial old guy in a red suit to bail us out.
"Estimated cost starts to exceed income excluding interest even earlier, in 2018."
So it's really misleading to say the "trust fund" runs a surplus until 2028. On paper, yes, it will, because of the "interest received on the bonds." When you consider how it gets the money in the real world, you realize, "Oh hell no, that's what Enron was doing with its own accounting!"
Mallon asked Marshall how citizens perceive the trust fund. He said, "The debate is largely semantic," but I personally disagree. Like Krugman, he rambled for a minute before saying something of note: "If the money is not paid back, then it's a scam of historic proportion." Well, the money will be paid back, but at a high cost. The scam is that Congress for years has been spending Social Security payroll tax revenues that we thought was locked away. The scam is that Clinton during his presidency claimed the national debt was only $3.5 trillion, when it was actually over $5 trillion. That's because the full liabilities included -- you guessed it -- what we had borrowed from the Social Security trust fund.
Mallon's next question was that Alan Greenspan in 1983 proposed creating the surplus with a combination of payroll tax increases and benefit cuts, but now that can't "secure" Social Security's future. She asked Tanner that if benefits can be cut, can private accounts be taken away?
Tanner began, "Yes," and I knew where he was going. "But the difference is that private accounts are private property. We'd be a totally different country." His answer is very true: the United States would have to degenerate into significant statism for the government to seize private retirement accounts. I wonder, though, are we that far off? We have an activist Supreme Court that's considering the possibility that government can force you to sell your private property to someone else, justified because that person will pay more taxes than you. If the Supreme Court rules that government can do that, it will be a first nail in the coffin of private property. After that, it wouldn't take much for an equally activist Supreme Court to rule, oh, in 2020 that your private account was never "meant" to be yours.
Krugman's rebuttal betrayed his misuse of economic history: he said current tax levels "are at their lowest levels since 1942... There is some fundamental injustice in all this." My late father could tell you that, though he later grew to love FDR, he was going to vote for Wendell Wilkie in 1940. Why? Well, FDR achieved such great things as not just raising taxes throughout the 1930s, but raising them to abominable levels. Krugman is simply being misleading to imply we have "low" tax rates today, when in the early 1940s they weren't low at all.
But, since Krugman believes Clinton's 1993 tax hikes "ushered in" that decade's prosperity, he longs for the prosperity of the 1970s. High marginal tax rates, high interest rates and inflation, and high unemployment. Yep, the glory days of the U.S. economy.
Onto the next question by an audience member: should a portion of the trust fund be invested in the stock market? Krugman answered, "I would have been perfectly happy with the federal government and Social Security Administration owning a global index fund." I can agree in one way. The one advantage of the funds being invested is that they become less liquid, and without a trust fund to loot, the federal government would have to be more fiscally responsible.
But there's a big danger that Tanner brought up, a view I've held since 1996, when Harry Browne explained it in his newsletter. Tanner said he opposes investing the trust fund itself, because that would make the federal government the largest owner of businesses. But this also doesn't address the problems with Social Security. Not solvency, but giving people control of their money, and allowing low-income people to build their own wealth. "Let's stop patronizing poor people...and let them start building wealth."
But, Krugman countered, Social Security is a good deal for low-income workers. That's true only for the very lowest incomes, who will indeed get more than they put in. What Krugman won't tell you is that it's a bad deal for working class and middle class folks, who will get hit the hardest by tax increases and benefit cuts. The middle incomes will get more if only they could invest that 12.4%, instead of giving it to the government as loans to ourselves.
Surprisingly, Krugman offered a good reason that the trust fund itself shouldn't be invested: who, then, chooses the index funds? He then tried to downplay the advantage of individually invested private accounts, sarcastically citing "the extreme effect of small stockholders in preventing corporate abuse." No, what prevents corporate abuse is the enforcement of the rule of law. And is Krugman really suggesting that it's a bad deal to invest in stocks, just because small shareholders don't have much of an impact on the company?
But Krugman wasn't done yet: "I don't think the last 70 years in America have been all that bad... There are these people called liberals like the way the U.S. is, and people called conservatives who don't like the way it is." Of course liberals want to maintain the status quo, when they're on the government dole (or expect to be). And of course we conservatives and libertarians don't like the way it is, because we're tired of working for other people. Charitable giving is one thing, but we maintain it's morally wrong for government to come along, seize the fruits of our labor, and just give it to someone else.
Tanner noted that there's a "high degree of politicization in those government [entitlement] programs," which would naturally affect the choice of index funds. Marshall dredged up the "winners and losers" fallacy, warning that "some people do poorly, some retire when" the stock market has been doing poorly. Yet he ignored that even the Cato plan, as libertarian as they are, has a social safety net.
I'm afraid by this time, after two hours of note-taking, my whole arm was getting tired, and I was starting to feel a bit fatigued. Each of the three gave short conclusions where they just reiterated the gist of their arguments, so I didn't bother to jot anything down from those.
posted by Perry Eidelbus at
3:08 AM
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