Some Links

by Don Boudreaux on March 11, 2011

in Myths and Fallacies, Politics, Social Security, Trade, Video

Bryan Caplan defends libertarians against the charge of being callous.

Writing in the Wall Street Journal Europe, Jamie Whyte properly criticizes British P.M. David Cameron’s embrace of mercantilism.  A key passage:

The benefits of trade are not increased by the presence of a national border between those who do it. Suppose that the pattern of trade between the United States and Britain remained unchanged but that, seeing the error of their fateful decision 235 years ago, the Americans successfully sought reunification with Britain. Would those of us in what is now Britain be worse off because of the sudden decrease in their exports and increase in internal trade? Mr. Cameron surely cannot think so; he cannot believe that borders create value. Why, then, does he act as a salesman for British firms selling abroad but not for those selling at home?

Charles Krauthammer explains the fraud that is the so-called “Social Security trust fund.”  (Question: if Jack Lew were CFO for a private corporation, would he be charged with criminal fraud?)  See also here.

John Stossel discusses Sen. Bernie Sanders’s lament that too little of the American economy is devoted to manufacturing low-value trinkets.

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{ 23 comments }

Daniel Kuehn March 11, 2011 at 11:28 am

Krauthammer writes: “When you retire, the “trust fund” will have to go to the Treasury for the money for your Social Security check”

I can understand why he’s so uneasy about this. The OASDI Trust Fund just gives the Treasury cash from FICA taxes and then they have to go begging later when benefits need to be paid! That sort of dependent relationship is disconcerting.

You know what we need – what we need is for the Treasury to make a legally binding agreement with the OASDI Trust Fund to pay that money back with interest. That way Krauthammer wouldn’t be as worried!

Oh… wait a minute…

Daniel Kuehn March 11, 2011 at 11:34 am

On the Jack Lew point and your video, you’re using a sleight of hand to make a bad argument. You treat the Treasury and the OASDI trust fund as the same financial entity when the FICA taxes come in but as a different financial entity when benefits are paid out. You have to choose one or the other, Don.

If Jack Lew were the CFO of a private corporation and we want to treat Treasury and the Trust Fund as the same entity, then this would be the equivalent of taking in revenue, redeeming some bonds with it, and paying for new costs either by issuing new bonds or new revenue or what have you. If we want to treat the Treasury and the Trust Fund as different entities and Jack Lew wer the CFO of a private corporation, then it would be the equivalent of buying another company’s bonds and selling the asset later to pay costs.

Either way, there’s nothing wrong with this.

You can’t pretend the two are the same when money comes in and pretend they’re different when money goes out. You have to choose one or the other. Most policy analysts working on entitlements treat the OASDI trust fund as a financial entity that is distinct from the U.S. Treasury. You don’t have to if you don’t want to, but you should keep it consistent.

DG Lesvic March 11, 2011 at 1:55 pm

Bryan Caplan misses the point, but then why should he be different.

Taking from the rich to give to the poor doesn’t reduce but increases inequality.

The libertarians who won’t attack the fundamental assumption of the Left concede it, and are virtually the Left’s first line of defense.

Don Boudreaux March 11, 2011 at 2:00 pm

Responding to Daniel Kuehn: I treat the trust fund and the U.S. treasury the same throughout the entire transaction. Who is responsible for paying Social Security benefits? Uncle Sam. Who holds I.O.U.s in a so-called ‘trust fund’ allegedly as assets that can be redeemed to pay Social Security benefits? Uncle Sam. Who is responsible for paying cash for those I.O.U.s when they are redeemed? Uncle Sam.

The fact that Uncle Sam CALLS that part of his operation to which he delegates the task of writing the Social Security benefit checks the “Social Security Administration” (or whatever) doesn’t change the essence of the matter – and that essence: an I.O.U. that you hold and that you are also responsible for paying cash when you present it to you for redemption is not an asset.

Daniel Kuehn March 11, 2011 at 2:22 pm

Don – but if they are the same thing, then what does it matter how they internally account for the fact that funds will be paid out when benefits are paid out?

If they are the same thing, then it’s no different from a corporate internal transfer pricing system. If they aren’t the same thing, it’s like one company holding anothers’ bonds.

You seem to be hanging an awful lot on the fact that it’s a bond. It’s a bond because most people don’t agree with you and treat them as separate entities. If more people agreed with you it would just be an internal transfer – one department would agree to pay another department back at a future date and the agreement would be the same but they wouldn’t refer to it as an asset. But no matter what you label it there’s nothing strange going on here.

Daniel Kuehn March 11, 2011 at 2:27 pm

btw – I couldn’t tell precisely what you were arguing because your recommendation was short, but Krauthammer definitely acts like the Treasury and the OASDI trust fund are identical when the money comes in, but different when the money goes out.

Don Boudreaux March 11, 2011 at 2:42 pm

Daniel: I have real trouble grasping your trouble grasping this straightforward point.

Suppose I owe you $10,000 on Jan. 1, 2020 and I designate the right side of my body as the part of me that will pay you this $10,000. With my left-hand I write the following I.O.U.: “I, the left side of Don Boudreaux’s body, will pay $10,000 to the right side of Don Boudreaux’s body on Jan. 1, 2020 for the purpose of allowing the right side of Don Boudreaux’s body to pay Daniel Kuehn $10,000.” With my left hand I then tuck this I.O.U. securely into a pocket on the right-hand side of my pants.

If you are worried that my projected stream of income is too low, or my projected spending is too high, to allow me actually to pay you $10,000 cash on Jan. 1, 2020, are you comforted if I show you this I.O.U. that I owe to myself? Do you sigh with relief upon beholding this bond, comforted that no matter what happens to my income-earning ability and expenses over the next nine years, you’ll get $10,000 from me because I have an I.O.U. dedicated to being redeemed to pay you?

Daniel Kuehn March 11, 2011 at 3:00 pm

You write: “If you are worried that my projected stream of income is too low, or my projected spending is too high, to allow me actually to pay you $10,000 cash on Jan. 1, 2020, are you comforted if I show you this I.O.U. that I owe to myself?”

But you’re changing the subject Don! If you are concerned that they don’t have the money to pay you back that would be one thing. That’s just a solvency question. But as an accounting question, if the trust fund and the treasury are one and the same, the way funds flow between them should be irrelevant as long as that entity is solvent enough to pay you back. You are citing a solvency problem here that has nothing to do with the way money moves in the government. If a company owes me money and they aren’t solvent and they just hand me an internal transfer memo I will be concerned. But I’m concerned because of the insolvency, not because of the way that interdepartmental transfers happen on paper!!! If the company owes me money and in the interim they juggle money around between different internal departments as needed and keep an account of it so that when the time comes the department that owes me has the money to pay me that’s fine by me. I don’t care that the money went through different hands internally first. Money is fungible. I would expect it to be transfered where it can be most efficiently used, rather than just sitting in a safe in the particular department that owes me money. Those transfers are not my concern. My concern is the solvency of the company.

If you are concerned that money gets passed between funds and agencies I don’t think you have a leg to stand on from a logical perspective.

If you are concerned that when you turn sixty five the government is going ot have no money left I think you don’t have a leg to stand on from an empirical perspective.

But the point is – those are two very different concerns and the fact that the OASDI trust fund holds bonds is no reason for concern whatsoever. I don’t care what your left hand and right hand work out amongst each other as long as one of them pays me back.

Cord Blomquist March 11, 2011 at 3:09 pm

How is this?

Don Boudreaux March 11, 2011 at 3:43 pm

Thanks Cord.

Don Boudreaux March 11, 2011 at 3:39 pm

Daniel: With respect, the subject is this “Is Uncle Sam solvent enough to honor all his obligations under Social Security?” The answer might be yes; it might be no – but the trust fund’s holding of U.S. treasuries does NOTHING – absolutely nothing – to add to that solvency or to ensure it.

Lot’s of people argue – including politicians on both sides of the aisle (and here they are correct) – that Uncle Sam’s future obligations cannot be fully met without significant revenue increases or spending decreases. The likes of Jack Lew then wave their hands and say that Social Security is fine because its trust fund holds I.O.U.s that Uncle Sam promises to pay. So, voila, Social Security is solvent.

But Lew’s assertion does nothing to show that Social Security is solvent because the very agency that people worry will be unable to honor all of its financial commitments in the future is the very agency that is the parent of Social Security: Uncle Sam.

If you really do believe that Social Security’s “trust fund” is full of valuable assets that ensure its solvency (at least up to the dollar value of those ‘assets’), then I have an offer for you: Lend me $25,000,000 today and I will repay you principal plus interest of, oh, say, 100 percent a year from now. (If you don’t have $25M on hand, surely you can find someone to borrow it from, given the high rate of return I am promising. You can offer your borrower, say, a 25 percent rate of interest.)

And when you watch me spend the $25M today on a huge, spectacular party (you’re invited, of course), you won’t worry about the soundness of your investment because I will show to you $50M worth of I.O.U.s that I wrote to myself to ensure that I’ll be able to pay you principal and interest one year from today.

If you think I’m nevertheless able to earn at least $50M from the moment my party ends and the time that I’ve promised to pay you $50M, then you’ll not worry – my I.O.U.s will be beside the point.

If, on the other hand, you have real doubts about my ability to accumulate $50M between now and the time I’m contractually bound to pay you, your doubts will – IF you are serious in what you write above – be utterly calmed by the fact that I hold $50M of I.O.U.s that I’ll redeem (from myself) and pay you.

Reverend Moon March 11, 2011 at 8:43 pm

The government doesn’t fund itself like a private company. Social Security isn’t solvent or insolvent. The appropriate question is whether the US economy can support Social Security recipients’ consumption of real resources. Not whether the government can make nominal payments in the money it has a monopoly in production of and creates by spending. It makes no sense, to me, to lock up a bunch of money or shares of google in a fund to save for later so you don’t have to worry about whether the monopoly producer of money will be able to produce that money when the time comes. In fact the act of locking money away would likely result in higher interest rates and less economic growth. Growth required to support future Social Security recipients. Or, were you saying that you would be more comfortable if the government puchased securities issued by the private sector to back the trust? Get more involved in private sector finance pick some winners and losers.

And, your credit is not the same as the aggregated credit of the people of the US and their government so…

If however, you create a currency of your own and then give it to me i will lend it back to you at 100% interest and will be entirely confident that you will be able to make the payments as they come due, in your own currency. Even if you throw a huge party. But, if you paid for the party with some currency other than your own and your obligations to me were in a currency other than your own I might feel different about it since your chief export is economic literature.

Unless we live in some post financialiptic wasteland, the monoply issuer of legal tender money will obviously be able to make their payments unless they choose to default.
There are not nominal constraints on Social Security spending only real ones. (real resource or political)

I could, however, be wrong. I am not an economics major.

Daniel Kuehn March 11, 2011 at 3:52 pm

re: “But Lew’s assertion does nothing to show that Social Security is solvent because the very agency that people worry will be unable to honor all of its financial commitments in the future is the very agency that is the parent of Social Security: Uncle Sam.”

Well, to repeat, if you think the U.S. government is going to go broke and default then it makes sense for you to worry about it. But that’s not a problem with trust fund management, that’s an issue with solvency of the government. It’s a very different issue.

I don’t see how your example is relevant.

Let’s say you pay me premiums now for a retirement account that I’ll pay you years down the road, and let’s say I do a lot of other things in the finance industry too – for example, in addition to managing retirement accounts I make home loans. Would you be concerned if I said “well Don’s not going to collect on this policy for a while now, and my co-worker over in the department that does mortgages has work right now – we’ll transfer some of these funds over to that department and just write up in the internal accounts that the mortgage department needs to transfer the funds back again closer to the time that Don retires.”

Would that concern you in the slightest? No. It’s a responsible use of your premiums. If the other department was making terrible deals, you might be concerned. But your concern has nothing in the slightest to do with the fact that I’m holding an IOU from that department and everything to do with the management of the company as a whole. If the company were managed well the IOU arrangement wouldn’t be an issue for at all.

kurlos March 11, 2011 at 3:55 pm

You guys want to get a room?

Methinks1776 March 11, 2011 at 4:20 pm

I believe this is Don’s room.

Daniel Kuehn March 11, 2011 at 3:59 pm

In other words – if you’re worried the government is going to default on its debts, talk about government finances.

Don’t promote these worries about IOUs and make claims that “if they were in the private sector they’d be arrested for this sort of accounting”.

Think of it this way – if the Libertarian party swept Congress and the budget was put to your liking, and let’s say for the sake of argument we still had a social security program, would you want the Social Security trust fund to hold government bonds or cash?

Clearly, you’d want it to hold bonds if you thought everything was fine with the budget.

So let’s stop talking about “IOUs to yourself” – let’s stop pretending that that is your concern. Your concern is solvency, not “IOU’s to yourself”. “IOU’s to yourself” talk is good for only one thing – electing politicians that make stump speeches about lockboxes.

indianajim March 11, 2011 at 5:27 pm

Daniel,

It is important to talk about governmental duplicity about lockboxes and IOUs as long as such talk is good for what you say (electing politicians who make stump speeches extolling the merits of meaningless IOU fraud). This, my dear fellow, serves the public good via debunking a dangerous myth.

Daniel Kuehn March 11, 2011 at 8:28 pm

Yes… government duplicity… they talked about a “lockbox” as an image of safety, when in fact they did not lock up the money, they invested it so it could earn a return.

Ooooh… I’m furious!!!!

Look – government is duplicitous. But not about this. This is about the dumbest thing you could try to incite public fury over. There is only one reason to do that: if you want to get other politicians elected, or if you’re just taken in by how the accusation sounds and you’re an unknowning partner in getting other politicians elected.

If you want to talk duplicitous government, lets talk about the drug war, the Iraq war, the demonization of teachers, and farm subsidies. Let’s not complain that the trust fund hold Treasury bonds.

Methinks1776 March 11, 2011 at 9:12 pm

they invested it so it could earn a return.

This is the lie you tell yourself. I know from experience that I will never be able to disabuse you of your fantasy, but government spending money and promising itself that it will jus tax people more in the future to meet its obligations is not “investment” in any meaningful sense.

demonization of teachers

You mean “canonization of teachers”, don’t you?

brotio March 11, 2011 at 11:32 pm

Daniel,

Your comment about demonized teachers has me interested in your take on the recent death threats issued by Tea Party-types, and McCain/Palin voters, who were angered by Democrats’ brilliant passage of legislation to more fairly compensate government employees, while pantywaist Republicans attempted to block humanitarian aid to government employees by fleeing to Illinois.

http://www.620wtmj.com/shows/charliesykes/117726263.html?blog=y

Methinks1776 March 12, 2011 at 5:48 am

That’s racist Tea Party-types, thank you very much.

Methinks1776 March 11, 2011 at 5:56 pm

we’ll transfer some of these funds over to that department and just write up in the internal accounts that the mortgage department needs to transfer the funds back again closer to the time that Don retires.”

Nope.

A company would only ever transfer money from one department to another in pursuit of new revenue opportunities. What revenues are received by the government when it simply flushes it down the subsidy toilet? None.

A more appropriate analogy would be to give the money extracted forcibly from people to the mortgage department to subsidize their permanent vacation in Aruba. In return, the company writes your department a note promising to go into the neighbourhood and extract from them at gunpoint the amount owed to you by the mortgage department. You don’t think you’d go to jail for that in the private sector?

would you want the Social Security trust fund to hold government bonds or cash?

Are those the only two assets in the world? No. The better choice is to hold securities that actually have a revenue stream that doesn’t come from a promise to rob people. It’s much more effective. You understand the incentive effect of knowing that the next dollar you sweat to create will be wrested from you, right?

Why, just the effect of the diversification of holding corporate bonds and stocks – actual investments – is much better than holding bonds you issued to yourself.

SS is nothing more than a forced Ponzi scheme. Money is being extracted from people today with a lie that it is being invested on their behalf and the only “asset” in the fund is a claim against money that politicians hope will be extracted from other people in the future. Ponzi scheme.

nailheadtom March 11, 2011 at 6:32 pm

Bryan Caplan says: “Libertarians are also prone to: . . .Ask questions like, “If there shouldn’t be a legal responsibility to support the parents who gave you life, why should there be a legal responsibility to support complete strangers?”
___________________

This particular question doesn’t get asked nearly enough.

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