“Privatizing” social security is a lightning-rod idea, guaranteed to stir things up in any political season. It came up again during the Republican debate last Wednesday (9/7/11) and afterwards in the obligatory analyses; both sides predictably dragged out their talking points.
The political right keeps bringing it up for two main reasons: (1) they like the idea of each individual worker owning the future benefits of the retirement safety net he or she has been paying for; and (2) they don’t trust future politicians to keep the promises of past politicians.
But the political left keeps gunning it down, because: (1) they see the stock market as a highly undesirable place to risk the nation’s social safety net; and (2) they dislike the idea of the Wall Street financial vampires sinking their fangs into yet another asset base worth trillions of dollars, collecting the economic rent they charge for their handling services.
Well, I think everybody has a good point or two. And I also think there’s a solution that should make everybody happy. Today, workers earn credits that accumulate on a spreadsheet at the Social Security office; the future dollars those credits eventually yield depend on future politicians keeping the promises of past politicians. Do you trust Barney Frank, or Rand Paul, or Rick Perry (...or their next-generation counterparts) not to devalue those credits in any way after they've been earned, such as by means testing or benefit cutting? Well, I don’t.
So, I propose that we create a new form of U.S. Treasury security: a Social Security retirement bond, a non-transferrable financial asset, issued to individuals based on the credits they have already accumulated for contributing to the system. Those new assets would begin to be convertible only into dollars, commencing only at retirement age. The new system would be one of individual ownership of the earned financial assets, no stock market investing would be permitted, the bonds would be fully backed by the U.S. government, with terms not changeable by future politicians. Experts at Social Security and Treasury could design them such that the total benefits would be no different from the current promises. The only difference, therefore, would be ownership of the bonds by the individuals who earned them; the promised benefits would be locked in at the time they were earned, impervious to any future politicians, immune to Wall Street vampires, and not exposed to the stock market.
Wouldn’t that satisfy both sides, based on their currently-advertised objections to either privatization or the status quo? Each worker takes private ownership of his or her own, government-guaranteed, politician-impervious social security safety net. I bet both FDR and Reagan would have liked the idea, anyway.
USA's debt burden unchanged in ten years
Everybody knows that the level of the U.S. federal debt has been increasing rapidly. Less well-known is that the burden of the debt is the same today as it was ten years ago. Believe it or not.
Although that should be good news, there’s bad news, too: that situation cannot last if the economy continues growing at nothing more than an anemic pace. It only means we have some runway remaining in order to get the economy growing again.
Back to the main point, though. How could the burden of the debt be no higher than it was ten years ago? In short, it’s because the burden of the debt is not the same as the level of debt. The debt burden is the affordability of any given level of debt, not the debt level itself.
A good indicator of the debt “burden” is the portion of federal tax receipts it takes to pay the interest on the publicly-held debt. (The inverse of that is the number of times federal tax receipts cover the interest payments—closely mirroring a widely-used private sector measure for a company’s debt burden, dubbed “Times Interest Earned.”) The two graphs below show both ways of looking at the debt burden (...back to 1998, which is as far back as the Treasury’s website goes with historical data).
Of course, today’s near-zero interest rates are helping to keep the burden down. Those low rates are largely attributable to the dollar’s status as the world’s favorite currency in a pinch—but the longer it takes to get our economy back on track, the less we can expect to milk the dollar's favored status.
Paying the interest, rolling the principal
People with private-sector financial experience know that the “burden” of debt for a healthy, going concern such as a business or a multi-generation family is the affordability of the interest that must be paid to creditors. Why just the interest? Because a healthy going concern can roll the principal over and over, consistently retiring maturing obligations and replacing them with newly-issued debt instruments. That financial reality is also true of governments presiding over healthy economies. Some examples of going concerns that have been rolling their debt over for many years are ExxonMobil, the last three plus next three generations of a typical family, and the USA’s federal government.
A large number of Republicans, Democrats, and independents alike have experience managing private-sector businesses (although an even larger number do not). The ones who do have it can more-easily understand that the true “burden” of debt in a healthy, going concern is the affordability of the interest obligations; debt rollover makes paying down the principal a moot point. The cost of capital is almost always reduced when a mix of debt and equity is employed to finance a firm, and maintaining a constant mix in a growing firm requires an ever-increasing level of debt (...the opposite of “paying down” the debt). ExxonMobil and General Electric have been rolling their debt over for years. A typical multi-generation family rolls their outstanding debts for automobiles and houses into the future; as the older generation pays off its house and car loans, the younger ones take out new loans. The USA has a similar track record; meeting its interest payments with tax receipts and rolling its principal over in the world financial markets have not been problems, are not now problems, and—provided we get the economy back on track—will not become problems.
Those with business experience can more easily understand that the highest priority problem is to get the economy growing again—among other things, to maintain or improve our ability to afford the interest payments. But those without business experience (or those who forgot it) can be expected to continue barking up the wrong tree, insisting on “paying down the debt.” In any case, a healthy economy with robust growth is the root solution to just about every fiscal and monetary issue being debated today: unemployment, the debt ceiling, the deficit, the defense budget, the nondefense budget, unfunded liabilities, paying the interest, and rolling the debt over. If the economy were growing at a clip of 4.5% or more, none of those would be viewed as a major problem.
What a difference a healthy economy makes. Good thing we have some extra runway buying us time to get back to that condition.
Social security versus six-buckle boots
During the Republican debate Wednesday night (9/7/11), I watched Rick Perry really step in it by calling social security a fraudulent “Ponzi scheme”—and not letting go of that stance even in follow-ups. At that moment, it hit me that Perry had obviously missed out on some very important advice I’d heard twenty years ago from a cowboy (...let’s call him Hank). According to cowboy Hank, he had received the advice in question from his mentor, a veteran ranch hand, on rookie Hank’s first day at work:
“When you’re wearin’ six-buckle boots,
don’t stand in eight-buckle manure.”
Too bad Rick Perry apparently never got that advice; if he had, he might have been more careful in the debate. I’ll be very surprised if Mitt Romney and Jon Huntsman don’t ride that one for everything it’s worth for the foreseeable future.
Social security doesn't pass the Ponzi-scheme test. It has a long history of taking in more than enough to cover its outgo. It’s a system in which those who funded it have counted on receiving future benefits from it, and those who managed it were willing and able to deliver them—similar to the system that builds interstate highways, the system that launches weather and military satellites, and the system that builds aircraft carriers and anti-missile Aegis cruisers. In each case the benefits expected, intended, and delivered are some form of future safety (i.e., some form of protection from a future threat or downside). Those are definitely not the characteristics of a “fraudulent scheme”—whether the fraud is concocted by Charles Ponzi, Bernie Madoff, or the Music Man.
The big question about social security, of course, is about its future: will demographics, productivity, and economic growth be sufficient for the system to continue providing current and future benefits to its users—or not? And, if not, what would be the best way to correct the problem?
There are two different ways to correct such a problem: (1) some combination of benefit cuts and tax rate hikes, to reduce spending or increase revenue; or (2) growth in the workforce and in productivity, to increase the revenue side without increasing tax rates. In the past, the main reasons social security stayed in a self-funding mode have been growing productivity in a growing economy that kept a growing number of workers working within a churning macro-mix of jobs requiring an ever-growing level of skill.
If it's not clear by now, I strongly prefer grow-grow-grow. Steve Forbes put it well years ago: “You can’t cut your way to prosperity, you’ve got to grow the economy.” And the growth solution doesn't just apply to social security; it also applies to the affordability of things like weather satellites, interstate highways, and Aegis cruisers.
But, based on what I heard in the debate, I’m guessing Rick Perry prefers cut-cut-cut, chop-chop-chop. In my view, a bad omen for him. It's a six-buckle answer to a problem that is eight buckles deep.
If Neil Were President
Here's a clip from Neil DeGrasse Tyson's response when asked what he'd do if he were president.
One objective reality is that our government doesn’t work, not because we have dysfunctional politicians, but because we have dysfunctional voters. As a scientist and educator, my goal, then, is not to become President and lead a dysfunctional electorate, but to enlighten the electorate so they might choose the right leaders in the first place.
Neil deGrasse Tyson
New York, Aug. 21, 2011
Here's the link to his blog post.
[He has a big following on Twitter.]
Gold versus fiat dollars: Money-printing for dummies, part 2
My previous article about money-printing by the Fed has been drawing a lot of flak in several discussion forums; the flak is from the anti-Fed crowd. That tells me a follow-up post is in order.
It’s common knowledge that the dollar can buy a lot less gold today than it could, say, ten years ago. The anti-Fed crowd says that should infuriate me, because it’s supposedly irrefutable proof that the fiat dollar is approaching worthlessness – due, of course, to profligate, criminal, treasonous money-printing by the scoundrels at the Fed -- which, of course, could all be remedied simply by switching the USA to the gold standard.
But the inflation of the price of gold doesn’t infuriate me. Reason: There’s something far more important to main street consumers than the dollar price of gold. It’s the amount of day-to-day stuff we can purchase from others, using the money we earn by producing stuff for others.
The important question is “How much of the stuff I need and want can I buy with 40 hours of my labor?”. Note that neither the word “gold” nor the word “fiat money” is to be found anywhere in that question. That’s because the “real economy” is about the real things we produce, exchange, and consume; money is merely lubrication for the real economy.
So let’s answer that important question. But first I’ll show the “common knowledge” aspect: How many ounces of gold 40 hours of labor can buy, 2011 versus 2001.
Wow, what a shocker! That 40 hours worth of fiat-dollar earnings buys 79% less gold today than it did ten years ago! Not only is that undeniable, that is also where most of the anti-Fed crowd stops their thinking process (...and where they’d like us to stop ours).
But it’s mentally lazy to stop thinking at that point, so let’s proceed with the important question, which also happens to be the well-kept secret: The amount of day-to-day stuff 40 hours of labor can buy, 2011 versus 2001.
Wow, that’s a much different story, isn’t it? In spite of the fiat dollar system we’ve chosen, one week’s labor can purchase 5% more real stuff now than it could ten years ago. Even though the dreaded “fiat dollar” can’t buy nearly as much gold any more, a week’s worth of labor can buy more of the stuff we really need. The real economy has become more productive.
The whole truth is this: The “money” we Americans earn and spend can be whatever our society chooses: gold coins, diamonds, bushels of wheat, seashells, packs of Marlboros, fifths of Jack Daniels, or – last but not least – fiat dollars. The problems we are having today are problems with the real economy, not with the monetary system we’ve chosen. We are not inventing, producing, exchanging, and consuming real goods and services in sufficient quantities -- that is our real problem.
The debate about gold versus fiat dollars is a counterproductive diversion. Our national debate should be about which policies would kick the real economy into higher gear (and why) – but for some crazy reason, we are wasting time debating which brand of lube would be better for the real economy: fiat dollars controlled ("printed") by the Fed, or gold (or seashells, or Marlboros) controlled by who knows who.
It’s like we're standing around a car with four flat tires and arguing which country's brand of oil to use in the engine. To me, the answer is simple: We should choose our own oil, made right here in the USA; and then we should immediately turn our attention to fixing the four flat tires.
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End notes:
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The United States of America currently defines money as “fiat dollars” supplied by its own central bank. That gives us monopoly control over the supply of those dollars -- control we do not have over the supply of gold, diamonds, or seashells. No other nation can produce U.S. fiat dollars; many other nations can produce gold, diamonds, or seashells. How well we manage that monopoly is completely up to us.
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Links to the data used to generate the charts above:
Pie chart of who owns the national debt: mid-2011
My pie chart has been copied all over the web for several years, so I guess that means it's a hit. But the data got stale since the last time I published it, so it's time for an update.
Here's who owns the U.S. national debt as of mid-2011.
Data sources:
• Foreign holdings
• Treasury debt reports
Two choices for balancing the budget: pro-Reagan, and anti-Reagan
Take a look at the graphic below depicting two different ways of balancing the budget, then decide which of those two methods you prefer. (Full disclosure: My strong preference is for method 2, the pro-Reagan balanced budget.)
Note the big difference between the anti- and pro-Reagan methods of balancing the budget. The first one indiscriminately labels everything "government spending"; the budget it balances with tax receipts is the unified budget. The second one discriminates between two types of spending, just as Reagan did, and just as most state governments do: (a) immediate expenses, versus (b) investments in the future; the budget it balances with tax receipts is the operating budget. The first one insists that no more money should be borrowed to fund any type of "government spending" whatsoever; the second one confirms the financial truth that it is perfectly sound financial practice to borrow money for good investments such as defense, infrastructure, and, as many argue, education. The first method fingers "borrowing" in general as the evil demon to be exorcised; the second fingers bad spending and bad investments as the culprits -- which are quite distinct from borrowing for good investments.
Reagan knew the difference between expenses versus investments. For example, he knew that beefing-up our defense and intelligence capabilities (backed by a stronger economy) would generate benefits not immediately, but in the future. That's why he steadfastly and unequivocally exempted national defense from budget-cutting, in spite of objections from all sides (including his own green-eyeshade employee, David Stockman). Exempting defense contributed immediately to the Reagan deficits; the benefits were not immediate, but accrued a few years later with the end of the Cold War -- which ended the threat of a thermonuclear war between superpowers. It was a good investment, and borrowing money to fund it was sound financial practice. [And to those who are fond of saying "investment" is just a code word for "spending" I ask, Is there really no such thing as an "investment" by our government? Really?)
Unfortunately, the pro-Reagan method has apparently been forgotten by the very people who should be keeping it alive. One example is the ex-governors who tend to brag about having balanced their state budgets when they run for president: they also tend to omit the important detail that it was the operating budget they balanced while they were simultaneously utilizing debt financing to help fund their capital budgets. Another example: The Republicans, of all people, should understand the long-established private sector business lesson that debt is frequently the preferred way to help finance good investments in growth and security -- so why are those Republicans now acting as if that same truth does not apply to government?
In short, the anti-Reagan method (an indiscriminate ban on borrowing) has been gaining a lot of support, driven by, but not limited to, conservative freshmen in the House of Representatives. It's ironic that the message is being amplified by supposedly pro-Reagan voices such as Rush Limbaugh and Sarah Palin. All of them are making a mistake best articulated by Einstein: "Everything should be made as simple as possible, but not simpler."
Keeping the budget under control
The oversimplified, anti-Reagan method supposedly keeps the budget "under control" by way of a constitutional amendment that forbids borrowing for any kind of spending, except during a declared war; see the proposed wording at this link. (Oh well, at least the proposed wording acknowledges that winning a war is a good investment for the future, for which borrowing is permissible. But that begs the question, Why shouldn't it be permissible to borrow money to prevent a war? For example, was having a surplus in the late-90s that much more important than investing at least that much in the intelligence and counterforce capabilities it would have taken to prevent 911, Afghanistan, and Iraq?) Seems to me the anti-Reagan way of balancing the budget can end up saddling us with a heavier debt burden instead of a lighter one.
But the pro-Reagan method would need a control mechanism, too. Capital budgeting isn't a panacea; it is full of potential pitfalls, one of the first of which would be that politicians would scramble to get their pet spending programs labeled "capital investments." The pros and cons were analyzed in this excellent CBO paper in 2008.
The control mechanism
I favor a results-oriented control: the ratio of debt to GDP, because the longer-term results are what count more than the shorter-term debates about the definition of capital. Because good investments tend to foster real growth of the economy (...or to prevent destruction that would damage our economy), the size of our economy (GDP) should play a role in the measure. Higher GDP means higher tax receipts, which in turn mean increased ability to afford the debt it took to fund the investments. (Although other measures may be more to the point, such as Times Interest Taxed, the debt/GDP ratio is more widely recognized and therefore an easier sell.)
Bottom line: Controlling to a specified "ceiling" ratio of debt/GDP permits borrowing for good investments in defense, infrastructure (and education?), and would therefore be far superior to the anti-Reagan method of an outright ban on any type of borrowing. Why the anti-Reagan balanced budget has so much support is beyond me.
National Debt Meter
I'm back, and it's the same old subject: the national debt (...more precisely, the federal debt).
Instead of the same boring debt clock we see everyplace else, I decided to display a debt meter, showing the debt as a percentage of the economy.
Notice where it is today compared with where it stood at the beginning of 2009; not good, to say the least. Also shown on the meter are the high- and low-water marks for the USA (1946 and 1835 respectively), as helpful benchmarks.
I presume we can all agree that the ratio has been growing much too fast. It grew from 45% in January 2009 to 64% today. That's not sustainable, and it begs the question, what should we do about it? Most of our politicians and pundits are talking about it, but almost all of them are trapped in a false dilemma: should we cut spending only, or should we cut spending and simultaneously increase some people's tax rates?
A false dilemma. It reminds me of something George Carlin said a while back: "Some people think the glass is half full, some think it's half empty. Not me; I think the glass is too big."
In reality, economic growth is the only way out. Robust growth rates of the Reagan-Clinton era are what we need, far more urgently than we need tax-rate hikes or generic cuts in infrastructure and national security "spending." (For a clue about where I'm coming from, check my 'about' page.) The best way to increase taxes is to leave tax rates where they are, and increase the number of people paying taxes (aka "job creation"). The best way to defend the country and to build the infrastructure our kids and grandkids will need is to grow tax revenues by fostering what Schumpeter dubbed "creative destruction."
Economic growth increases the denominator (GDP) over the long haul, which improves the debt/GDP ratio. Anemic growth as we have today is bad news; robust growth as we had in the '80s and '90s eliminates a lot of problems. Unfortunately, I hear almost nothing from either side's politicians about how any given generic "spending cut" or targeted "tax hike" will enhance private sector growth. I've become convinced that most of them don't understand growth -- just like they don't understand the arithmetic that explains why the ratio of debt to GDP improves when the denominator gets larger. And because they don't understand that, they have no hope of understanding the mathematical truth that the USA could continuously improve its debt-to-GDP ratio while running permanent deficits forever, as long as the economy grew faster than the debt. (Try that brain teaser out on one of the tea party politicians; I predict it will induce cognitive dissonance.)
In any case, I'll be posting here periodically again, and I suspect the national debt issue will be a central topic as it was before.
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End note: links to data sources for the National Debt Meter:
GDP - Bureau of Economic Analysis, Table 1.1.5
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