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Conservatives for Gold!

Noam Scheiber observes that -- shockingly -- Charles Krauthammer's take on Social Security is shot-through with logical problems. On top of the problems in question, let's also note Krauthammer's commitment to the rightwing doctine of Currency Fictionalism:

Let's start with basics. The Social Security system has no trust fund. No lockbox. When you pay your payroll tax every year, the money is not converted into gold bars and shipped to some desert island, ready for retrieval when you turn 65.
By this standard, not only is my bond porfolio not real, my bank account isn't real, and, in fact, the cash in my pocket isn't real. The only "real" money, apparently, is stacks of gold bars. Now once upon a time, your U.S. currency was redeemable for gold bars and, thus, one might consider it real. Alternatively, perhaps U.S. currency in the gold standard days was a "mere I.O.U." Either way, we've been off the gold standard for some time now, and people would be alarmed to learn that this means their money is fake. Does the Post pay Krauthammer in dubloons? Do we need to revisit Krugman's "Goldbug Variations" from his good old days at Slate?

UPDATE: See also, PGL. On the plus side, Krauthammer's ill-informed economics writing is less likely to do massive damage to the world than his more typical ill-informed foreign policy writing.

February 21, 2005 | Permalink

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Comments

David Altig (Macroblog) and William Polley are having some fun with my take on Krauthammer's oped (see Angrybear for original, links, and followups).

Posted by: pgl | Feb 21, 2005 1:47:10 PM

I've said it before and I'll say it again:

Bush's entire SS scheme is a preemptive attack on the trust fund by the general fund, and hence, an attack on the working class by the wealthy.

Posted by: Petey | Feb 21, 2005 1:52:59 PM

Petey - say that over and over again. Because transferring wealth from the working class to the ultrarich IS the GOP agenda here. And the mechanism is robbing the trust fund to subsidize the general fund. So succinct, so complete, and 100% accurate. WELL DONE!

Posted by: pgl | Feb 21, 2005 2:03:11 PM

Krauthammer overtstates, as does anyone who asserts that the SS trust fund bonds are the equivalent of bonds issued at auction.

Posted by: Will Allen | Feb 21, 2005 2:04:58 PM

Hack, thy name is Krauthammer.

Note the conservatives rushing in with their (now standard) post-modernism.

Posted by: Huh? | Feb 21, 2005 2:11:48 PM

Technically speaking, I suppose it would be possible for a bank to so mishandle its finances that its investments would be wiped out, which would mean that all those bank statements would become so much vaporcash. But at least bank accounts are FDIC insured up to a certain amount -- even if the occasional bank crashes, people know they won't lose their money.

Can the same thing be said about Social Security? What guarantee is there that people will get even the same value from the system as they put into it?

Posted by: Matt G. | Feb 21, 2005 2:22:03 PM

"No lockbox. When you pay your payroll tax every year, the money is not converted into gold bars and shipped to some desert island, ready for retrieval when you turn 65."

He is saying that they aren't assets. Which is correct. It is a slight overstatement, which as Will Allen mentions is less than the overstatement that bonds sold to other people are the same as bonds both held and paid by yourself.

Posted by: Sebastian Holsclaw | Feb 21, 2005 2:27:08 PM

I thought you all might enjoy reading my email response to Krauthammer on his column. He never responded:

Sir, your argument would have a lot more credibility if you had also recommended that the President immediately call for a refund of the excess payroll taxes individuals and corporations had been paying for decades precisely to help fund the gap that will begin in 2018. If those treasury bonds aren't "real," then those funds were misappropriated at the point of a gun under false pretenses.

The real problem, as you also neglect to mention, is that the original intent was to use those funds in times of surplus to reduce the national debt, making it easier to borrow again when the bonds came due. The fact that the current administration, having taken us to severe deficit, is spending the current Social Security surplus away allows it, precisely to that extent, to understate the real cost of its spending and tax policies. It is that, not the Social Security system, that is the true cause of the crisis. But in any case my original point still stands: If it's unfair to tax the next generation to remit the t-bills coming due, it is certainly unfair to have taxed the current and previous generation by telling them they're helping to fund their retirement -- a justification for the tax you're now saying was false. I want my money back.

Posted by: czapniks | Feb 21, 2005 2:28:24 PM

"which as Will Allen mentions is less than the overstatement that bonds sold to other people are the same as bonds both held and paid by yourself."

The bonds are not issued and held by the same entity.

Unless, of course, you've decided to buy into the malicious fiction that the trust fund is the same as the general fund.

The bonds were issued by income tax payers, and are held by payroll tax payers. The two groups are not the same people.

Bonds issued by the Ford Motor Corporation and paid into the Ford workers' pension fund are in an almost perfectly analogous position. The bonds are issued by Ford and held by Ford, but the bond issuer and holder are fundamentally different groups, both for purposes of accounting and for purposes of reality.

Posted by: Petey | Feb 21, 2005 2:38:15 PM

Can Social Security sue the government for the value of the bonds when they are due or can it not? Furthermore would the people filing a lawsuit be those that would have to pay up?

Posted by: Oliver | Feb 21, 2005 2:43:07 PM

I don't quite understand this. I thought Krauthammer&Co., the neocons, I thought they were big government imperial conservatives, sorta like national-socialists. Normally they don't mind high taxes and social programs. I guess they must've received a fax from the WH that says something like this: either you help us gut Social Security or no Syria invasion for you, fellas...

Posted by: abb1 | Feb 21, 2005 2:43:22 PM

Regarding this quote:

"Do we need to revisit Krugman's 'Goldbug Variations' from his good old days at Slate?"

Perhaps. I read the essay and did not find it very helpful. While he points out that gold is merely a convenient method of translating dollars into something more tangible, and while he states, "Very few economists think this would be a good idea.", he does not delve very deeply into the matter beyond a pronouncement by John Maynard Keynes that the gold standard is a "barbarous relic". Since when has Keynes become unquestionable?

A solid reason conservatives (e.g., Kemp) give for going back to the gold standard is because a nation may want to tie the dollar to a substance that takes some effort to create. Sure, overall gold reserves in the world do rise, but they do so slowly, or never more quickly than energy expenditures allow. Here's what Krugman writes:

"While some modern nations have chosen, with reasonable justification, to renounce their monetary autonomy in favor of some external standard, the standard they choose these days is always the currency of another, presumably more responsible, nation."

Krugman states, in other words, countries still tie their currencies to more responsible - more stable - currencies. How is this not a type of gold standard, where the gold in this case is the American dollar or the Euro?

We could continue forever to rely on the opinions of experts to keep the dollar afloat and hope they're right. Or we can tie the dollar to a standard of world output (like gold, or platinum, or something else tied back to production) which will keep our money amounts checked. I personally would find it better rely on the second option.

stephen

Posted by: stephen | Feb 21, 2005 2:54:43 PM

Petey-”Bush's entire SS scheme is a preemptive attack on the trust fund by the general fund, and hence, an attack on the working class by the wealthy.”


Hmm…There is no general fund. There is general revenue cash flow and a SS trust fund which represents a claim by SS on the general revenue cash flow available to be used as determined by this and future legislatures.

The Bush plan, as I understand it, proposes to use the SS trust fund claim on general revenue to prefund future benefits rather than use the fund to claim general revenue for SS benefits in the future.

This does not sound like an attack on the SS trust fund. Only a proposal for how to use it in the future.

Posted by: Robert Brown | Feb 21, 2005 2:55:43 PM

"Bonds issued by the Ford Motor Corporation and paid into the Ford workers' pension fund are in an almost perfectly analogous position."

However common it is, it is now frowned upon to have your pension fund invest a majority of its funds in your its own company.

"The bonds were issued by income tax payers, and are held by payroll tax payers. The two groups are not the same people."

If you are going to play that game, you should divide it up by generation too. The baby boomers paid the relatively low payroll tax when they were low-wage earners. They changed the rules and paid a relatively low income tax when they were high wage earners. And when they retire the rules shift back to emphasizing income tax. One thing is certain, those who paid low income tax rates in the eighties are NOT the same people paying high ones in the 2020's.

From the point of view of the US goverment, the bonds are loans from itself as a whole to a part of itself. They are not investments. They are accounting placeholders. They may be legally enforceable accounting placeholders that will causes taxes to go up in the future because they were underpaid in the past, but they are not investments.

Posted by: Sebastian Holsclaw | Feb 21, 2005 3:01:30 PM

Now I'm certainly no expert in trust fund policy, so please correct me if I'm mistaken...but I thought the problem Krauthammer was referring to is that the trust fund consists of treasury bonds, which don't have any intrinsic value beyond the US government's willingness to redeem them. The federal government certainly will redeem them (we're not Argentina), but the process of paying out the bonds will require funds to be raised from somewhere, either by raising taxes or by selling more bonds to Asian central banks (effectively increasing the size of the national debt). The difference between the trust fund and, say, Matt's bank account is that banks tend to operate in more or less a steady state of income flow - with the money coming in (new deposits) equalling or exceeding the money going out (withdrawls). In fact, the banking industry really likes to preserve that state of financial affairs, so much so that they have special rules in place to prevent runs on banks. With something like the Social Security trust fund, come 2018 we're not going to have that kind of financial steady state. Instead, we're going to see large sums of money being withdrawn from a body that will have to make up the shortfall somehow - again, by increasing taxes or the national debt. If the trust fund had been full of gold bricks or hard currency or private-sector assets or any kind of asset that would be directly payable in 2018 then this problem wouldn't exist.

I'd like to be a little more knowledgeable about this subject so if I've got the nature of the trust fund wrong let me hear about it.

Posted by: Nick | Feb 21, 2005 3:07:26 PM

This was my email to Krauthammer last Friday. I see Scheiber of TNR has the same view.

"Subject: I don't understand

If there's no trust fund, how would "tax increases" "in the fat years of the 1990s" have helped solve SS's 2018 problem?

Wouldn't raising FICA (unless you're referring to some other tax) just increase the Trust Fund balance by twenty years of additional cigar wrappers?

Why would we want to raise taxes before 2018?"

Posted by: Ellen1910 | Feb 21, 2005 3:18:11 PM

"If you are going to play that game, you should divide it up by generation too."

That "game" is the same "game" we've been playing for the past 70 years without any need to divide it up by generation.

"From the point of view of the US goverment, the bonds are loans from itself as a whole to a part of itself. They are not investments. They are accounting placeholders."

From the point of view of the US economy, your savings account is just a loan from a part of itself to a part of itself. It's an accounting placeholder. So I think I'll take it from you. OK?

The trust fund bought US Treasury bonds from the general fund. Those treasury bonds are only not real if, again, you buy into the malicious fiction that the trust fund is the same as the general fund.

Accounting "placeholders" are there for a reason. Your bank account is kept separate from the rest of the US economy for a non-random reason. And the trust fund has been separate from the general fund since the inception of Social Security for a non-random reason.

You might want to spend a few minutes figuring out what that reason is.

Posted by: Petey | Feb 21, 2005 3:19:37 PM


Krauthammer was using the notion of gold bars merely to illustrate his point. A metaphor. A turn of phrase. That's all.

Posted by: The Colossus | Feb 21, 2005 3:32:04 PM

Petey --

Isn't what you're describing a Ponzi scheme which has, thus far, not collapsed because growths of population (workers) and productivity have kept it solvent?

Are you confident growths in the future will mirror those of the past?

Posted by: Ellen1910 | Feb 21, 2005 3:32:27 PM

The unreality of the trust fund may be that every time we get close to actually drawing on it a big crisis in Social Security funding may be proclaimed and taxes hiked or benefits cut to avoid going into the "red" (as in 2018). The only reality of the fund may be the interest that it pays into the system every year -- only to be recirculated back to the regular budget -- back to unreality.

Meantime the "liberal" position is to raise the FICA cap -- which will expand the diversion of regressively raised tax to the regular budget and extend the time the diversion goes on.

One way to at least recoup the interest might be to eliminate the cap altogether which potentially could include enough growth in the system (per capita income hisorically grows at four times the rate of population) while cutting the FICA rate nearly in half -- possibly to about 7% with the the interest from the trust fund -- maybe to 8.5% without.

Denis Drew
Chicago
denis.drew@netzero.com

Posted by: Denis Drew | Feb 21, 2005 3:33:04 PM

Are you confident growths in the future will mirror those of the past?

If you aren't screwing around with social security is the least of our problems.

Posted by: Ed Marshall | Feb 21, 2005 3:34:01 PM

"Isn't what you're describing a Ponzi scheme..."

Ugh. What utter bullshit.

Rather than duplicating the wheel, I'll direct you to the Wikipedia's article on Ponzi schemes, which contains a section at bottom specifically addressing the question: "Are state pensions Ponzi schemes?"

One of their multiple reasons that they aren't is given as:

"Because receipts (taxes) and payouts (entitlements) can be calculated quite accurately in the short term (five to ten years), and predicted (with a range of assumptions) for periods beyond that timeframe, there will never be a sudden collapse."

---

"...which has, thus far, not collapsed because growths of population (workers) and productivity have kept it solvent?"

"Thus far" is now over 70 years. And given the SSA's rather pessimistic set of assumptions, it will remain solvent for another 47 years. Given slightly more optimistic economic assumptions, it will remain solvent infinitely.

That's a hell of a Ponzi scheme.

Posted by: Petey | Feb 21, 2005 3:51:32 PM

And, of course, even if the trust fund were invested in gold (which - be it noted would be to ignore the miracle of compound interest), there is nothing to prevent a Congress dominated by immoral Republicans from plundering the trust fund by dissolving the Social Security program that owns the fund.

We didn't believe the anti-government propaganda spewed out by Republicans when they were in the minority because we had never seen a government as bad as they described.

Now we have.

But the badness is not an attribute of governments, it is an attribute of Republican governments.

No man's property is safe when a Republican-dominated legislature is in session. Particularly if the man in question is in the bottom 98% of the wealth-owning population.

Posted by: TomR | Feb 21, 2005 3:56:21 PM

The central point about Krauthammer's column -- as far as I'm concerned -- is that he said, explicitly, that private investment accounts are a shill and a distraction. No matter at WHAT point you think the "crisis" actually begins, the solution to it is exactly the same: raise the payroll tax cap, cut benefits to prosperous recipients, (maybe) raise the retirement age, have the government itself start investing in equities -- and start doing all this as quickly as possible. Bush's scheme features all the disadvantages of private accounts without any benefits beyond those you'd get from just having the government itself do the investing -- and I'm inclined to give Krauthammer some Brownie points for at least helping to point out that it has no net advantages.

Posted by: Bruce Moomaw | Feb 21, 2005 4:01:01 PM

Could someone ask him if those new great personal accounts will be invested in gold and shipped to some desert island? I don't want to find out that my personal account is just a bunch of worthless papers when I turn 65.

OTOH, I'm a bit concerned about my gold bars sitting over there on that desert island as well; what if the piratizers get them?

Damn. What to do, what to do?

Posted by: abb1 | Feb 21, 2005 4:12:13 PM

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