Boskin on Social Security

Creation of a Deficit weakens the value of the Dollar, and I have never been an advocate of a weak Dollar to advance Trade. The weak Dollar only shifts American Production inefficiency forward without stopping it, which again reduces Trade as the weakened Dollar works through the Production cycle. Deficits are bad, even under Keynesian terms.

Boskin wants to shift the Retirement age, not politically popular; it will get overturned Down-the-Road, so is not an effective option. Price-indexing has a real problem with actual Senior maintenance, with automatic readjustment to suit Seniors in an Election year; again not a viable option. Reducing the Payroll tax to create Private Accounts worsens the actual Liabilities of the Trust Fund, through the additional Interest accrued on the formal Debt. The Bush option of unfunded Private Accounts is simply not viable. lgl

I don't see that the term "harmful" really applies to any type of deficit spending. The only way the word would apply is to assume that we must somehow pay off the debt, and I don't see how anyone could possibly believe that this will ever happen. The massive size of the US debt makes US Treasuries incredibly unstable, but paradoxically, it is this instability that makes them stable. No one dares make a rational move, such as demanding a higher interest rate, because to do so would result in the destruction of the belief in "full faith and trust", and a worldwide depression. So for now, the US government can continue to borrow enormous amounts of money at irrationaly low rates. This is a good thing. Nothing "harmful" about it. Eventually, of course, there will be a crash. But there's no point in worrying about it because it is already too late to do anything about it. Take the money and run.

For Discussion. Boskin says that a larger deficit to finance more private investment is not as harmful as a larger deficit to finance current government spending. Is that a valid point of view?

Assuming there are about 300M US citizens then what would you make of the following plan:

1. Borrow $300B (which is a tad smaller than our current deficit).

2. Issue a 'private account' to every American with a $1,000 of 'starting money'.

Classic economics will say this would be neutral. While the 'private accounts' are savings the act of borrowing $300B is dissavings. $1 borrowed cancels out $1 saved resulting in a net $0.

However if this was really just impotent then what would happen if the gov't did this every year? Every month? Why couldn't the gov't borrow $10 million for every citizen and give every citizen a $10 million 'private account'?

I suspect the answer would come from the fact that the investment markets will become grossly distorted with 'smart money' buying the Treasury bonds and ending up in the hands of 'private accounts' which by definition will not be as efficiently handled. Why? Because the 'private accounts' will hold money that is basically just a gift...not money people had to work hard to earn and invest wisely.

In the long run I suspect you'd end up distorting the economy and making investment markets less efficient.

Boskin calls for bigger benefit cuts than even the Bush administration's price indexing formula would require.

Boonton, I call your "infinite borrowing" analogy the "Laffer curve" model of transition financing. Surely, there is a cost to raising actual capital, and the absurdity that there might not be any cost is exposed by increasing the borrowing 10 fold or 100 fold. The Bush administration is now saying there is no "cost" to transition, though there are "financing" issues. Presumably, the people who would extend the credit don't equate the issuing of actual current credit with a potential future obligation to either raise revenue, cut benefits, or borrow from someone else.

Some years back, one view of government spending was that it was OK to borrow prudently for "capital" spending, but not to borrow for current expenses. That was beaten back by the balanced budget amendment types.

One wonders. If we'd actually passed a constitutional amendment to balance the budget, would borrowing to create private assets be an exemption? Would capital spending be an exemption?

I know you believe there is no such thing as transition costs, but before you keep talking about these "wet dreams" of unlimited borrowing by the govt please explain why the projection of this scenario by the angry Bear showing that just the interest on the federal debt is equal to 14% of gdp in 2050 have no negative economic impact.

Some years back, one view of government spending was that it was OK to borrow prudently for "capital" spending, but not to borrow for current expenses. That was beaten back by the balanced budget amendment types.

It's logical to differentiate between spending on 'capital' that lasts a period of time versus consumption and transfer payments. A highway or battleship may last ten years so its sensible that its cost be divided over several periods. Consumption such as military payroll takes place in a single period, ditto for transfer payment such as welfare or social security.

Boonton, I call your "infinite borrowing" analogy the "Laffer curve" model of transition financing. Surely, there is a cost to raising actual capital, and the absurdity that there might not be any cost is exposed by increasing the borrowing 10 fold or 100 fold.

What is good about the Laffer Curve or my question is that it illustrates things by trying to imagine the extreme. A 100% income tax bracket is pretty extreme yet we all agree if such a thing was enacted few people would bother trying to earn income in it. So the effect is real, the question of how powerful this effect is at lower rates like 30% or 25% is more difficult to answer.

In principle I see the 'financing the transition' as nothing more than having the gov't borrow a lot of money and putting it in a bunch of private accounts. A gov't could do this even if Social Security was never enacted. Is there no cost in doing this really? If not then what would happen if a gov't tried to take it to extremes?

Agreed that the proposed question deserves a big ole:
It all depends. In a very crude model, if all we care about is economic growth, it depends on

(crowding out rate x productivity of private investment)
-
(fraction of borrowed money spent on g-capital instead of g-consumption x productivity of g-investment)

Isn't switching from price indexing to wage indexing effectively a tax increase on future generations? Right now, the average person gets a benefit with (time adjusted) value roughly equal to most but not all of the value of what they contribute. The effective tax rate net of benefit is much less than 12.4%. If we switch to price indexing and raise the retirement age with life expectancy, the average per capita value of the benefit for a given cohort will become roughly constant, but their tax liability will grow in real terms since real wages grow. Many generations down the road, workers will receive a benefit of trivial value compared to wages. The effective tax rate net of benefit will approach 12.4%.

Think of it this way: Put everyone born after 1990 into a new social security program with the same taxes and benefits as the current one (except index retirement age to life expectancy). The NPV of taxes collected would exceed the NPV of benefits paid. In this sense, there's no problem with the current social security program. The problem is, in the past a bunch of workers got benefits with value in excess of what they put in and we're still paying for it. The excess SS taxes from new cohorts is apparently not going to be enough to cover it as things stand. This debt must be paid off somehow -- perhaps as quickly as possible, or perhaps equally across all future generations. Disporportionately by far-future generations seems unfair (or at least should be explicitly acknowledged if that's the solution). That's what Boskin's (and similar) proposals would do.

OK. So taking it to the extreme, if the government were to borrow $45 Trillion instead of $4.5 Trillion for transition costs, there isn't that much liquid capital in the world to loan.

So how would it be financed? We'd presumably have to monetize the debt. That is, we would experience a hyperinflation. Correct?