Saturday, November 27, 2004

Is The Bush Administration TRYING to Have a Debt Crisis!?!?

This article in the Times about how the Bush administration is planning on financing their new Social Security initiative is particularly scary:
The White House and Republicans in Congress are all but certain to embrace large-scale government borrowing to help finance President Bush's plan to create personal investment accounts in Social Security, according to administration officials, members of Congress and independent analysts.
Large-scale government borrowing? Haven't we already embraced that to pay for the rest of the budget? Isn't that what is about to cause a financial crisis once foreign central banks stop buying our debt? No, no, says the White House. Rather, it's a plan for SAVING:
"The president does support personal accounts, which need not add over all to the cost of the program but could in the short run require additional borrowing to finance the transition," Mr. Bolten said. "I believe there's a strong case that this approach not only makes sense as a matter of savings policy, but is also fiscally prudent."
So, if the personal accounts don't add to the cost of the program (they do), why is additional borrowing necessary? And furthermore, how does this make sense "as a matter of savings policy?" Isn't "additional borrowing" exactly what you don't want in a good "savings policy?" Essentially all the Social Security plan does is borrow at low (that is, low right now) Treasury rates and then invest at higher stock market rates. But, the stock market rates are typically higher for a reason: stocks are more risky. And with very high deficits that could send the dollar plunging, interest rates skyrocketing, and the stock market into a tailspin this doesn't seem "also fiscally prudent." Does it? Furthermore,
Proponents say the necessary amount of borrowing could vary widely, from hundreds of billions to trillions of dollars over a decade, depending on how much money people are permitted to contribute to the accounts and whether the changes to Social Security include benefit cuts and tax increases.
If this is how much PROPONENTS say it will require us to borrow, think about how much we will ACTUALLY have to borrow. So what exactly do they mean when they say this is a good idea?
A reasonable amount of borrowing now, the proponents say, would avert a much bigger financial obligation decades later. They say personal accounts would yield higher returns for individuals than the current system and could be a catalyst to broader changes that would bring the benefits promised by Social Security into line with what the system, which is also about to come under intense financial strain from the aging of the baby boom generation and the increase in life expectancies, can afford to pay.
Ahh...the old there IS such a thing as a free lunch argument. Although controversial, most economists have decided that there in fact is not. In other words, if it were profitable to borrow now at treasury rates and invest in guaranteed higher stock market returns, a lot more people would be doing it. In fact, no one would be invested in treasury bonds. Why would they, when they can get a much higher rate in the stock market? If they want to lower benefits, then just do it! They hardly need a catalyst, which will put even more strain on the ability of Social Security to meet its obligations. Some more whacky Republicans in Congress have a worse idea:
Senator John E. Sununu of New Hampshire and Representative Paul D. Ryan of Wisconsin, both Republicans, have sponsored legislation that would allow workers to contribute more to their personal accounts than most other plans proposed by members of Congress and outside groups and would not require tax increases or benefit cuts. But by some estimates it would require nearly $2 trillion in borrowing - and, in the view of its critics, much more - and even then would rely on the idea that the new system would create so much more economic growth that it would partly pay for itself by generating additional tax revenues for the government.
Need I say it again? There IS no such thing as a free lunch! Supply-side "economics" rears its ugly head once again. But, if the economy does have a structural level of output and there is a NAIRU, then any attempt to get the economy to grow beyond its limits will, in the end, only be inflationary. And at a natural level of growth (about 2.5%) there is no way the government can "grow itself out" of any outstanding obligations, certainly not obligations of $2 trillion!

What is most scary about all this is the Bush administration's willingness to mislead the public on economic issues. Specifically, Josh Bolten's comment that massive government borrowing is a good savings policy is total BS. It should be clear to anyone that every dollar increase in private savings from private retirement accounts will come at the cost of a dollar borrowed by the public. Either the OMB doesn't know basic arithmetic or they are deliberately misleading the public as to the costs of this plan. And, the administration's announcement of new large-scale borrowing during this time when central banks are slowly but surely purchasing less of our debt and financial markets could decide to cut off funds at any moment reflects a carelessness with the US economy that is stunning.


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