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Sunday, Nov 8, 2009
Instead of accepting Greenspan's false argument that deficits will undermine Social Security, Democrats should actually call for more federal borrowing -- and spend the money on rebuilding America.
Mar 21, 2005 | In Reuters we read of Alan Greenspan's March 15 testimony to the Senate Special Committee on Aging, wherein he made a comment both true and outrageous, about his support for tax cuts back in 2001:
"Greenspan said most leading economists at the time had expected large surpluses to stretch into the future ... 'I don't think that the issue is a question of taking a wholly different view ... It turns out we were all wrong [about the surplus forecasts],' Greenspan said, but added he would take the same position again faced with similar circumstances."
Yes, most economists agreed that the surpluses of the 1990s would continue. But not all. Six years ago, in the Wall Street Journal, Paul Davidson and I warned, correctly, that the surpluses could not be sustained, that an effort to do so would produce recession. We wrote:
"This plan assumes that full employment will be maintained independent of federal spending, which will be strictly restricted in order to create surpluses. This assumption is foolhardy, for tight budgets depress economic growth and raise unemployment. Japan's recent experience illustrates the point: Strong economic growth plus a tight budget strategy produced a budget surplus by 1990 that then led to a decade of stagnation and recession ... The depressing effect of tight budgets means that the promised surpluses will probably never materialize."
But as we said back then, Democrats were to blame, no less than Greenspan, for fostering the contrary illusion. Their plan to retire the federal debt in 15 years was the brainchild of two former treasury secretaries, Robert Rubin and Larry Summers (where is he now?), and it carried the endorsement of President Clinton. As we wrote at the time, the plan wasn't responsible; it was "foolhardy."
Part of that fantasy was to put some of the surpluses into the Social Security Trust Fund to help "save Social Security." Davidson and I demolished that idea:
"But don't we need the surplus to save Social Security? No. The policy of 'saving the surplus' contributes nothing to the future of Social Security. It is impossible for 'savings' today to 'pay' for pensions 20 years from now. Proposals to 'fund' Social Security misunderstand the basic fact that putting 'funds' into the 'trust fund' is redundant. Congress, not the trust fund, controls benefit levels paid under Social Security. The promises to pay are already written into law. The special government bonds that the trust fund holds and that Mr. Clinton would have the projected surpluses add to are mere symbols of that legal commitment. So long as Congress leaves the law intact, benefits will be paid whether or not a bond is held in the trust fund to be redeemed when future benefit payments are met."
Why bring this all up now, when so much has changed, when Democrats are in the middle of a tough fight to save Social Security? Because today Greenspan is using their own argument against them. If the surplus was needed to save Social Security, doesn't it follow that today's deficits endanger it? Doesn't it follow that there is a "problem" and therefore "something should be done"? Shouldn't "responsible" Democrats therefore compromise on Social Security benefit cuts?
That is Greenspan's argument. In sounding his warning at Tuesday's meeting, Greenspan said that rising Social Security benefits, alongside Medicaid and Medicare, add to deficits that threaten to bring on an economic stagnation that will, at some future date, make our federal budget "unsustainable" and our current commitments to the elderly "unaffordable."
But just how is it that pensions for the elderly and payments to doctors and nurses hurt the economy? To begin with, such payments are the economy. It is nonsense to suppose that Social Security benefits per se can reduce the total output of goods and services. Purchases of medical care add directly to GDP, as do expenditures of the incomes provided to seniors. If you did too much of this (realizing full employment prosperity along the way) you might eventually have an inflation problem. But that is not Greenspan's complaint.
