Don,

Thanks for your heroic work over the years. This website is a national treasure.

But please forget the social security "problem."

Don't solve "problems." When you solve problems, you feed your failures, starve your strengths, and achieve costly mediocrity.

Nothing good is going to come from political haggling over some bogus social security crisis decades in the future, when our economy will be entirely different and hugely more productive.

We have to get beyond the idea that any reshuffling of taxes and spending today will improve the economy's ability to support medical care, housing and transport for the aged, such as myself, in 2027. That will depend not on actuarial trumpery but on the realities of productivity, technology, and immigration.

Only if we raise tax rates and regulations and cripple the GOP and our defenses with delusionary spending cuts can social security become a crisis. Yet that sums up the likely grand compact, doesn't it? Higher tax rates in some form or other, some jerrybuilt pension scheme full of government regulations on our financial markets, and gimcrack spending cuts that end up focusing on defense.

We should take the offensive. Lower tax rates will yield the additional revenues and borrowing power we need to sustain social programs for the aged in coming decades.

As a key first step, we need to reduce the payroll tax by at least one third.

Indeed, as part of a flat tax program, we should eliminate the payroll tax.

Make the Democrats talk about that, not about spending cuts, which always turn out to focus on defense. In a dangerous world, we will need defense.

Eurofare economic policies like Germany's would obviously destroy our ability to supply goods and services to coming generations. Under those conditions we would have to inflate away the liabilities one way or another. It may be horrible, but no conceivable compact with the Democrats today can save us from the nemesis of socialism. Indeed, a compact with the Democrats will tend to cripple the necessary Republican resistance.

If we keep our tax rates low, however, we will discover that this economy in future decades can easily sustain the necessary 40 trillion dollars of additional debt. Read Ken Fisher's The Only Three Questions That Count [here is a link to buy that excellent book at Amazon, and here is a link to my review of that book for SmartMoney.com - DLL].

He believes that the US incurs too little debt compared to the productivity of incremental investment. His regressions show that the larger the budget and trade deficits the higher the stock market. We already command a steadily growing resource of some $110 trillion of assets. We are already running an all-governmental surplus. Our corporations are laden with cash. Our current debt asset ratio is sub-optimally conservative.

The only thing that matters, as you know, is economic growth. Focus on that. Let Democrat accountant economists grouse about debt.

Don't solve problems. Pursue Opportunities. This is the Wealth creation website!

George Gilder

I understand that growth is the key. It is the case that the current Social Security program indexes benefits to growth, so that the more the economy grows the more the benefits are. It is difficult to "grow your way out of it." In that sense, growth becomes just another failed way to "solve the problem."

I blog a lot about the actuarial minutiae, but my heart and soul are with the dear departed Milton Friedman on this one. The correct approach to Social Security is abolition.

Refurbishment of the system with "solutions" is a mistake, as you say. Just kill the damn thing.

What bothers me the most about Ferrara's scheme is that it enshrines Leviathan bigger and badder than ever.

With warmest regards,

Don

When the US government ended "welfare as we know it" in 1996, it handed responsibility for reform to the states. In so doing, it also created a real-world test of two competing economic strategies used to fight poverty. The results are in and the lessons are clear: Low tax rates lift up the lives of America's poor...

Take Colorado. It reduced its childhood poverty rate by almost 27 percent. Meanwhile, Rhode Island's childhood poverty rate increased by almost the same amount. What accounts for those differences?

Using data from the Census Bureau, the report found that states with the lowest tax rates enjoyed sizable decreases in poverty. For example, the 10 states with the lowest total state and local tax burdens saw an average poverty reduction of 13 percent - two times better than the national average. The 10 highest-tax states, meanwhile, suffered an average increase in poverty of 3 percent.

Some high-tax states, such as California, Hawaii, and New York, suffered catastrophic increases in poverty. As California began to reject the low-tax legacy of the Reagan governorship, the state's poverty rate jumped 13 percent in the 1990s.

Update [12/16/2006]... our "public editor" Irwin Chusid checked out the trailer for "Pursuit" and highly recommends it. Click here.

Update 2 [12/16/2006]... My DC lawyer/lobbyist friend adds,

America is the place where great things can be created by people, no matter their origins or the odds against them. These "things" -- the rags-to-riches stories of glory -- happen elsewhere, of course, but they happen in America with regularity because of our (relative) high levels of freedom. When they happen in other countries, those people are described as being somewhat "American", aren't they? See this obituary of the Turkish immigrant who made it to the top, Ahmet Ertugen, and contrast it to Paul Krugman's laughable assertion from his recent Rolling Stonearticle:

America actually has less social mobility than other advanced countries: These days, Horatio Alger has moved to Canada or Finland. It's easier for a poor child to make it into the upper-middle class in just about every other advanced country -- including famously class-conscious Britain -- than it is in the United States.

Now, contrast the true American "sky's the limit" attitude with the latest noose from the petty bureaucrats at the NCAA who, knowing nearly nothing about sports, have managed to piss off the best female sports reporter in American journalism. So, the NCAA believes that the service to Title IX compels it to push a rule which will hurt women athletes. One day, President Hillary may appoint these kind of deep thinkers to the Supreme Court.

With the Democrats coming back in power, maybe we need to push the Republicans to adopt and publicly embrace a more libertarian path. Americans -- still -- wish for less strict rules in their lives, especially when they know that the rulemakers do not know the subject well, do not decide on the merits or fairly and do not abide by the rules themselves. Yes, Republicans are in the minority, but they are in large enough numbers to block bad bills. Will they? Or will they -- or some of them -- go along to get a few goodies?

Outgoing Speaker Denny Hastert used his last once of power to...extend tax cuts? No. To stop wasteful spending? No. Fix SarBox? No, his last act was to bestow a special favor worth $100 million on Aon, an insurance company with facilities in his district. Hey, Denny, here's a message from millions of Republicans, "Get the ---- out."

Former Congressman John Kasich tells the story that he joined the Republicans because it was the party of "fewer hassles." Well, we've got some brush to clear to get back to that.

In other former congressman news, Georgian Bob Barr has quit the Republican party, so things aren't all bad. With Barr in the party of the Libertarians, no doubt, its members will be looking to exit soon. Let's remake the GOP to invite them in.

By actuarial standards applicable to any private pension fund, the Social-Security Ponzi scheme already is insolvent, papered over by IOUs Congress has written to itself. Social Security's near-term cash-flow situation, however, is quite good, scheduled to remain in surplus until 2017; until 2027 if the annual interest due the Trust Fund is taken into account, as it should be. Therefore, higher tax revenues today that enlarged and extended the surpluses would not improve the program's solvency; they would only paper it over with more IOUs and magnify the size of the theft Congress perpetrates on the Trust Fund each year. If Congress wants to do something serious about Social Security's solvency, it should stop the raid on Social Security, not expand it.

Update... an anonymous reader sends in this penetrating commentary:

Concerning Larry Hunter’s Washington Times piece this morning, I’m all for saving the surplus but it’s really just a tiny part of the whole problem. The present value of Social Security’s total shortfall is something like $13.4 trillion. The present value of payroll tax surpluses from 2007 through 2017 is about $600 billion (the interest part through 2027 is silly). So that means that even if we truly save every penny of that amount (which means cutting the spending currently financed by payroll tax surpluses, rather than just issuing new government debt) we’ve addressed less than 5 percent of the total problem. And the longer we go without addressing the big stuff the more likely it’ll be done on the tax rather than the benefit side, given the changing ratio of collectors to payers. So while I agree with saving the surplus, Larry’s approach is likely to lead to more tax increases, not less.

Concerning Peter Ferrara's plan, he certainly shows clearly why the President’s drive to reform Social Security in 2005 faced so many difficulties; any talk of tax increases or benefit reductions is bound to be politically difficult. But simply because Peter he has his own alternative reform plan doesn’t mean that his plan would actually have worked. In fact, it is highly unlikely a proposal like Peter’s could ever become law.

Economists have a saying that $20 bills don’t lie on the sidewalk for very long. In other words, if something looks too good to be true then it probably is. Congressional and White House staff are well aware of the details of Peter’s approach. And as people who actually deal with angry constituents and political attack ads, you’d think they would be the first to embrace a plan that contains no tax increases, no benefit cuts, no risk and no pain. The fact that they haven’t should indicate there’s more going on than Peter always talks about.

Here’s a quick outline of Peter’s proposal:

• Workers get to invest around half of their payroll taxes in a personal account;
• At retirement, they’re guaranteed the larger of their current law benefit or what their account could pay;
• Transition costs are funded with transfers of general tax revenues;
• General revenues would be freed up by reducing the growth of federal spending and assuming increased corporate tax revenues through higher economic growth.

More details are available through the SSA actuaries’ analysis of Peter’s plan.

I note a couple of issues:

First, over 75 years, Peter’s plan would cost several trillion dollars more than it would cost to fund current law Social Security, even under favorable assumptions. While it would pay higher benefits, if the rising cost of funding Social Security is the problem it is very hard to sell Peter’s proposal as a solution. (Hint: The solution should cost less than the problem.) If we have enough money to pay for Peter’s plan, we have more than enough for current law. ‘Nuff said.

Moreover, without these general revenue transfers, Peter’s plan would increase the Social Security deficit by almost 50% (see the “Change in actuarial balance”). So much for the idea that the accounts restore the system to solvency; in fact, it’s simply infusions of additional tax revenues that do it.

Second, Peter’s plan to pay transition costs by cutting other government programs is highly unlikely to succeed. Total government spending generally over time has remained at around 18-20 percent of GDP. Peter’s plan to fund transition costs would reduce government spending by around 1.5% of GDP, with the proceeds going to Social Security. This doesn’t sound like much, but it amounts to roughly 10 percent of all non-Social Security spending; or around one quarter of all spending other than Social Security, defense, interest, Medicare and Medicaid; or almost one-half of non-defense discretionary spending. Leaving aside the merits of cuts of this size, nobody should be fooled that they would be easy or uncontroversial. Moreover, under Peter’s plan the general revenue transfers to Social Security would take place even if Congress failed to cut a penny of other spending programs. Given Congress’s reluctance to make even small spending reductions, the most logical conclusion is that Congress would simply borrow the money. That simply wouldn’t sell.

Peter’s latest idea involves generating savings by block-granting spending programs to the states. But it’s not the block grant that’s generating actual savings, it’s the cuts. To generate any revenue the grants obviously have to be far smaller than what otherwise would have been spent. While block grants may or may not be a good idea, Peter is kidding himself if he thinks this won’t be controversial. And constructing a reform plan that’s not controversial and could easily pass is ostensibly what he is working on.

Third, most economists and financial experts believe that the true cost of the benefit guarantee in Peter’s plan is significantly higher than shown in the SSA actuaries’ memo. The reason is that, unlike private financial markets, the actuaries do not count the cost of market risk in making their estimates. If the guarantee were provided by private financial markets, which presumably are as efficient as government and have every interest in pricing it accurately, it would cost 2-3 times more than the $2 trillion or so estimated by the actuaries. In addition, if Peter’s plan succeeded in raising economic growth the guarantee would get even more expensive. Why? Because the growth would come through higher saving, which would increase wage growth and reduce interest rates. Since current law benefits are based on wage growth and the account returns depend on interest rates, this means the target he accounts would have to reach would be higher but their ability to reach it lower. Result: higher costs.

Fourth, the recapture of increased corporate tax revenues that Peter would use to fund a significant part of his transition costs would occur only if accounts were funded with spending cuts (which, as shown above, is implausible). Moreover, the estimates of increased corporate tax revenues seem optimistic; by 2075 the assumed increase in corporate tax revenues would equal almost 3 percent of GDP despite the fact that total corporate tax revenues today are less than half that amount. A tripling in total corporate tax revenues implies a tripling of the corporate sector of the economy; this is simply implausible under any standard economic growth model.

Finally, while Peter attacks other plans for having “benefit cuts,” in his own plan the traditional Social Security benefit is cut to zero (see column 4, titled “OASI benefit cut for IA participation”). Full career workers would derive their entire benefit from the personal account. To compare his plan to other personal account plans he would have to include the other plans’ benefits provided by personal accounts, which he usually doesn’t.

In sum, Peter’s approach avoids the tough choices of increased taxes, reduced benefits or market risk only through a number of heroic assumptions, the implausibility of which are clear to most analysts who examine his plan. In the real world of politics and policy, these difficult choices can’t be avoided. Some difficult choices are better than others and so coming to agreement on reform isn’t easy. But it certainly isn’t made easier by people who claim there are no difficult choices at all.

Mr. Paulson asserted that as a result of the talks, China would move to open its economy and enforce intellectual property rights, and would adopt “greater flexibility” in exchange rates. The United States, he said, would strive to increase its savings rate so that it borrows less from China to feed an addiction to imports.

As the Chinese trade surplus has continued to widen, many analysts have concluded that the RMB is undervalued. Indeed, the situation has likely worsened recently; because of the RMB's link to the dollar, its trade-weighted effective real exchange rate has fallen about 10 percent over the past five years.

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