DeLong--Economics Only

Why Oh Why Can't We Have a Better Press Corps? (Robin Toner/Social Security/New York Times Edition)

Ummm... Robin... Robin Toner's lead should have been: "Vice President Cheney tries to blow up Treasury Secretary Paulson's attempts to patch together a legislative deal on Social Security." It wasn't.

Robin Toner writes that hopes for Social Security reform are "fragile," and that "few other issues so clearly highlight the limits of bipartisanship these days, the mistrust and ideological division just barely below the surface.... It is, in short, a polarized debate, and likely to become all the more so..."

To back this up, we have:

People of both parties looking for a bipartisan deal: Senators Conrad, Baucus, and Gregg; Representatives Rangel and McCrery; Treasury Secretary Paulson; Assistant Treasury Secretary Davis.

Democrats afraid that Bush's pledges to negotiate in good faith are false: Senators Conrad and Baucus; Representative Emmanuel.

Democrats declaring that compromise with Republicans is unwise and unnecessary: "Brad Woodhouse of Americans United for Change, a liberal labor-backed organization."

Republicans declaring that compromise with Democrats is unnecessary: Vice President Richard Cheney, and Grover Norquist.

The people Robin Toner finds who aren't looking for a deal in the middle are named Cheney, Norquist, and Woodhouse. I guess it's fair to call this "polarized": Brad Woodhouse's standing and influence in the Democratic Party are about equal to the sum of Richard Cheney's and Grover Norquist's standing and influence in the Republican Party, after all.

Why oh why can't we have a better press corps?

Here's the story:

Fragile Hopes for Bipartisan Rescue of Social Security - New York Times: Social Security... few other issues so clearly highlight the limits of bipartisanship... mistrust and ideological division.... [A]ny fix -- which would be likely to involve a politically risky mix of benefit reductions, tax hikes or other painful changes -- will require broad and deep bipartisan support.

"The American people have to sense on these types of issues that it'a absolutely bipartisan and that the agreement was reached in an absolutely fair way," said Senator Judd Gregg, Republican of New Hampshire, the senior Republican on the Budget Committee.... Efforts have been made: Treasury Secretary Henry M. Paulsen Jr. has talked to crucial lawmakers, including Representative Charles B. Rangel of New York, the chairman of the Ways and Means Committee, "encouraging everyone to bring all their ideas to the table, and hoping that some kind of consensus can emerge," as Michele Davis, the assistant Treasury secretary, puts it. Mr. Rangel said he had also been talking about the possibility of action on Social Security with the ranking Republican... Jim McCrery.... Gregg and Senator Kent Conrad... a bipartisan working group....

But... Vice President Dick Cheney... said Mr. Paulsen's openness to all ideas did not indicate that the administration was open to any increase in the payroll tax.... "[N]othing's changed," Mr. Cheney said.... Conrad said that after those comments, his effort to move forward with his working group “is on life support.... People have interpreted that to mean that the administration is not willing to alter their position one iota.”... Rahm Emanuel... said that... it was all the more important “not to take away the one solid cornerstone of their retirement.” He added, “It’s not good politics and it’s not good economics.”

Senator Max Baucus of Montana... said... “I’m more than open, if the president is truly willing to look at all options.”...

[A] polarized debate, and likely to become all the more so.... [A]dvocacy groups are watching.... Grover Norquist... making a pre-emptive case against any payroll tax increase, although he had been assured by the president in December that he would hold the line.... “There is no reason for us, as a campaign working on this issue, and there’s no reason for the Democrats to compromise with this president on the most sacrosanct program to progressives after he lost the privatization debate and lost the election,” said Brad Woodhouse of Americans United for Change, a liberal labor-backed organization.

What Promises Have We Collectively Made to Ourselves with Respect to Social Security?

In the early 1980s, acting on the advice of the Greenspan Commission, President Reagan and the congress began "prefunding" Social Security--having the Social Security system run a surplus in the years from 1983 to 2017 or so in order for it to run a deficit later on. Reagan, George H.W. Bush, and the congresses of the 1980s and early 1990s (and George W. Bush and his congresses of 2001-2006) used this Social Security surplus as an excuse for not dealing with their enormous general-fund deficits: taxes were lower and spending was higher than if they had lived up to their responsibilities or not had the Social Security operating surplus to draw on.

What does this history entail for future fiscal policy, both as a matter of honor and a matter of prudence? Andrew Samwick tries to think through these issues, and gives his take. He says smart things:

Vox Baby: The federal government simply put a new Treasury [bond] in the trust fund and spen[t] the Social Security surplus on things other than buying back its existing debt from the public, as if the Social Security surplus were just like any other tax revenue at its disposal.... The federal government targets the unified budget deficit, which treats the Social Security surplus in this way. In my memory... the only time in the last 25 years when we did not [focus on the unified rather than the general-fund budget deficit was... in the [late] Clinton Administration.

President Bush [focused on the unified deficit] when he pledged "to cut the deficit in half in 5 years" (see this earlier post.) His Administration is doing it again with the more recent statements about budget balance by 2012. In all cases, the deficit in question is net of the Social Security surplus, and thus the policy presumes that the Social Security surplus is available to spend on general government expenditures.

I have in an earlier post argued that the government should be targeting the on-budget deficit and have Social Security in long-term balance. Bernanke stops short of saying this. That's the first way in which his testimony was not exactly what I would have said. There are two other things that I hope he stresses in his future public statements:

First, it is inconsistent for would-be Social Security reformers to be preoccupied with the debt burden placed on future generations due to Social Security's projected annual deficits but not with the debt burden placed on them by continued deficits in the General Fund. What is the rationale for running any deficit in the on-budget [general fund] account when the economy is in the up side of a business cycle?

Second, it is inconsistent for would-be Social Security reformers to be preoccupied with the debt burden placed on future generations due to Social Security's projected annual deficits while at the same time enacting legislation, like Medicare Part D, that will generate even larger annual deficits to be financed by these same future generations.

Readers of this blog know that I don't exhibit these inconsistencies. I have precious few compatriots among would-be Social Security reformers on the political right.

Returning now to Dean [Baker]'s second paragraph, he regards cutting Social Security benefits as theft, asserting that "workers have already paid for these benefits." I might believe that if the Social Security surpluses were actually being saved rather than spent. But they aren't. It would be more appropriate to say that what the workers--Dean, me, you, all of us--have paid for is all of the government services that the Social Security surpluses have purchased in the past 20 years. We've already consumed them. We have no compelling justification to assert that future generations of workers, who were not party to these decisions, should have to pay higher taxes to honor promises that our generation has made to itself.

But something has to be done, and the sooner it happens, the less disruptive it will be. As always, I recommend that policy makers start here.

What Kinds of Social Security Reform Are Tantamount to a Bond Default?

Felix Salmon protests that Social Security reform is not a bond default:

RGE - Is social security reform a bond default?: Dean Baker says so, prompting Brad DeLong and PGL to applaud loudly from the sidelines:

This is very important to understand when someone like Federal Reserve Board Chairman Ben Bernanke proposes cuts to Social Security. Workers have already paid for these benefits. The Social Security tax is very regressive. Its regressivity can be justified by the progressive payback structure of the program. However, if the benefits are cut, at a point when the program can still easily afford the benefits (e.g. 10-20 years), then the government has effectively stolen from the people who paid Social Security taxes. There are many people who want to do this – effectively default on the government bonds held by the Social Security trust fund....

Let's agree, for the sake of argument at least, that the social security trust fund exists, chock-full of government bonds. Like any trust fund, its trustees have control over what it pays out and when. If the trust fund reduces the amount it pays out, or only pays out later than currently mandated, that's a change in the trust fund. It is not a bond default. Insofar as the bonds in the trust fund exist, they will continue to receive their coupon and principal payments. It's what the trust fund does with those payments that's being debated.

I feel strongly about this one becuase I've spent a large part of my career following actual sovereign bond defaults, and they're not pretty things. Social Security reform is a serious subject, and it should be taken seriously. Spinning any change in benefits as tanatamount to default by the world's reference risk-free creditor escalates the rhetoric to unhelpful levels.... For me, the only question about whether something is a bond default or not is the question as to whether the bondholder gets paid or not. In this case, the bondholder is the social security trust fund. What the trust fund does with the money is entirely up to it.

It depends on what kind of Social Security reform we are talking about. There's one reform in which benefits are cut and taxes are raised but the equality:

(Current Value of Trust Fund) + (Present Value of Future Social Security Taxes) = (Present Value of Future Social Security Benefits)

is preserved. That's not a default.

There's another reform in which the principal purpose is to open up a gap between the left hand side and the right hand side and make:

(Current Value of Trust Fund) + (Present Value of Future Social Security Taxes) > (Present Value of Future Social Security Benefits)

That is tantamount to default.

Most proposals for Social Security reform that start out with statements like "The Social Security Trust Fund doesn't really exist" are proposals of the second kind.