Was President Bush technically correct when he declared the Social Security Trust Fund (SSTF) bankrupt? In one corner, we have Victor and Andrew Samwick who defend Bush’s use of this term. In the other corner, we have Max Sawicky warning Professor Samwick about his Kool-Aid and Brad Setser extending the definitions to the discussion over the current account deficit.
When Thomas Sargent a generation ago was criticizing Reagan’s fiscal policy, he was careful to say that we were on the path to bankruptcy as he noted solvency could be maintained if policy makers had the courage to eventually cut spending or raise taxes. We had baby steps in that direction from CEO Reagan, more significant steps from CEO Bush41, and even more significant steps from CEO Clinton. Even though the Federal debt to GDP ratio doubled from one-third to two-thirds over the 1981 to 1996 period, these steps eventually got the path of the debt to GDP ratio to decline for the next 5 years. Then came CEO Bush43 – more on that later.
Don’t forget that the government — the non social security part — has expenditures well in excess of revenues RIGHT NOW. Dick Cheney apparently thinks cash flow deficits that have to be financed by issuing tons of debt don’t matter, but cash flow deficits than can be financed by drawing on the interest from your stock of existing assets are a real problem … interesting financial logic.
Translating Sargent’s wisdom into corporate finance analogies so our MBA President can follow, think of two companies: SSTF and GF (General Fund). Suppose SSTF signs 15-year renewable contracts with its suppliers and its customers. The contract through 2020 will insure its $1.6 trillion reserve grows to $8 trillion. The renewals for the next 15 increments can have modest changes from the current pay-outs and pay-ins but even if we renew on current terms, these reserves will be sufficient until rounds 4 and 5 (the period from 2051 to 2080) begin. When the SSTF bankruptcy crowd says there is some $10 trillion unfunded liability, what they mean is there is some estimate of expected future cash flows that generates this figure. Now anyone with a DCF spreadsheet can play with the cash flow assumptions to make Microsoft look bankrupt and make Enron look very valuable – but then the assumptions would have to be called into question. Small modifications in the contracts for rounds 2 through 5 will make SSTF solvent.
But let’s look at GF in the following way. By the end of the year, it will have $8 trillion in debt. Let GF earn commission income that is currently equal to 11% of GDP, while its operating expenses are 14% of GDP. On top of having operating losses equal to 3% of GDP, its interest expense is about 3% of GDP. And CEO Bush43 has packed the Board of Directors (Congress) with like-minded people who refuse to increase the commission rate and have no clue how to lower operating expenses.
I seriously doubt Victor and Professor Samwick would short-sell SSTF to buy lots of GF stock as that would have been like short-selling Microsoft in the 1990’s and investing in Enron during the summer of 2001. But if you know anyone who buys into the Dick Cheney school of finance, I have some Delta Airlines stock they can pick up for $15 a share.