Security: Another Case of Innocent Fraud?
By Warren Mosler
and Mathew Forstater
his recent book, The Economics of Innocent Fraud, John Kenneth Galbraith
surveys a number of false beliefs that are being perpetuated among the American
people about how our society operates: innocent (and sometimes not-so-innocent)
frauds. There is perhaps no greater fraud being committed presently—and none in
which the stakes are so high—as the fraud being perpetrated regarding government
insolvency and Social Security. President Bush uses the word “bankruptcy”
continuously. And the opposition agrees there is a solvency issue, questioning
only what to do about it.
Fortunately, there is a powerful voice on our side that takes exception to the
notion of government insolvency, and that is none other than the Chairman of the
Federal Reserve. The following is from a transcript of a recent interview with
Fed Chairman Alan Greenspan:
RYAN… do you believe that personal
retirement accounts can help us achieve solvency for the system and make those
future retiree benefits more secure?
GREENSPAN: Well, I wouldn't say that
the pay-as-you-go benefits are insecure, in the sense that there's nothing to
prevent the federal government from creating as much money as it wants and
paying it to somebody. The question is, how do you set up a system which
assures that the real assets are created which those benefits are employed to
purchase. (emphasis added)
For a long time
we have been saying there is no solvency issue (see C-FEPS Policy Note 99/02
and the other papers cited in the bibliography at the end of this report).
Now with the support of the Fed Chairman, maybe we can gain some traction.
Let us briefly review, operationally,
government spending and taxing. When government spends it credits member bank
accounts. For example, imagine you turn on your computer, log in to your bank
account, and see a balance of $1,000 while waiting for your $1,000 Social
Security payment to hit. Suddenly the $1,000 changes to $2,000. What did the
government do to make that payment? It did not hammer a gold coin into a wire
connected to your account. It did not somehow take someone’s taxes and give
them to you. All it did was change a number on a computer screen. This process
is operationally independent of, and not operationally constrained by,
tax collections or borrowing.
That is what Chairman Greenspan was
telling us: constraints on government payment can only be self-imposed.
And what happens when government
taxes? If your computer showed a $2,000 balance, and you sent a check for
$1,000 to the government for your tax payment, your balance would soon change to
$1,000. That is all—the government changed your number downward. It did not
“get” anything from you. Nothing jumped out of the government computer into a
box to be spent later. Yes, they “account” for it by putting information in an
account they may call a “trust fund,” but this is “accounting”—after the fact
record-keeping—and has no operational impact on government’s ability to later
credit any account (i.e., spend!).
Ever wonder what happens if you pay
your taxes in actual cash? The government shreds it. What if you lend to the
government via buying its bonds with actual cash? Yes, the government shreds
the cash. Obviously, the government doesn’t actually need your “funds” per
se for further operational purpose.
Put another way, Congress ALWAYS can
decide to make Social Security payments, previous taxing or spending not
withstanding, and, operationally, the Fed can ALWAYS process whatever payments
Congress makes. This process is not revenue constrained. Operationally,
collecting taxes or borrowing has no operational connection
to spending. Solvency
is not an issue. Involuntary government bankruptcy has no application
whatsoever! Yet “everyone” agrees—in all innocence—that there is a solvency
problem, and that it is just a matter of when. Everyone, that is, except us and
Chairman Greenspan, and hopefully now you, the reader, as well!
So if solvency is a non-issue, what
are the issues? Inflation, for one. Perhaps future spending will drive up
future prices. Fine! How much? What are the projections? No one has even
attempted this exercise. Well, it is about time they did, so decisions can be
made on the relevant facts.
The other issue is how much GDP we
want seniors to consume. If we want them to consume more, we can award them
larger checks, and vice versa. And we can do this in any year. Yes, it is that
simple. It is purely a political question and not one of “finance.”
If we do want seniors to participate
in the future profitability of corporate America, one option (currently not on
the table) is to simply index their future Social Security checks to the stock
market or any other indicator we select—such as worker productivity or
inflation, whatever that might mean.
Remember, the government imposes a
30% corporate income tax, which is at least as good as owning 30% of all the
equity, and has at least that same present value. If the government wants to
take a larger or smaller bite from corporate profits, all it has to do is alter
that tax—it has the direct pipe. After all, equity is nothing more than a share
of corporate profits. Indexation would give the same results as private
accounts, without all the transactional expense and disruption.
Now on to the alleged “deficit issue” of the private accounts plan. The answer
first—it’s a non-issue. Note that the obligation to pay Social Security
benefits is functionally very much the same as having a government bond
outstanding—it is a government promise to make future payments. So when the
plan is enacted the reduction of future government payments is substantially
“offset” by future government payments via the new bonds issued. And the funds
to buy those new bonds come (indirectly) from the reductions in the Social
Security tax payments—to the penny. The process is circular. Think of it this
way. You get a $100 reduction of your Social Security tax payment. You buy
$100 of equities. The person who sold the equities to you has your $100 and
buys the new government bonds. The government has new bonds outstanding to him
or her, but reduced Social Security obligations to you with a present value of
about $100. Bottom line: not much has changed. One person has used his or her
$100 Social Security tax savings to buy equities and has given up about $100
worth of future Social Security benefits (some might argue how much more or less
than $100 is given up, but the point remains). The other person sold the equity
and used that $100 to buy the new government bonds. Again, very little has
changed at the macro level. Close analysis of the “pieces” reveals this program
is nothing but a “wheel spin.”
Never has so much been said by so many about a non-issue. It is a
clear case of “innocent fraud.” And what has been left out? Back to Chairman
Greenspan’s interview—what are we doing about increasing future output?
Certainly nothing in the proposed private account plan. So if we are going to
take real action, that is the area of attack. Make sure we do what we can to
make the real investments necessary for tomorrow’s needs, and the first place to
start for very long term real gains is education. Our kids will need the smarts
when the time comes to deal with the problems at hand.
Galbraith, John Kenneth, 2004, The Economics
of Innocent Fraud: Truth for Our Time, Boston: Houghton Mifflin.
Wray, L. Randall, 1999, “Subway Tokens and Social
Security,” C-FEPS Policy Note 99/02, Kansas City, MO: Center for Full Employment
and Price Stability, January, (http://www.cfeps.org/pubs/pn/pn9902/).
Wray, L. Randall, 2000, “Social Security:
Long-Term Financing and Reform,” C-FEPS Working Paper No. 11, Kansas
City, MO: Center for Full Employment and Price Stability, August, (http://www.cfeps.org/pubs/wp/wp11/).
Wray, L. Randall
and Stephanie Bell, 2000, “Financial Aspects of the Social Security ‘Problem’,”
C-FEPS Working Paper No. 5, Kansas City, MO: Center for Full Employment
and Price Stability, January, (http://www.cfeps.org/pubs/wp/wp5/).