A Dead Parrot Denies Prefunding of Soc. Sec. Retirement

The Dead Parrot responds to my contention that the 1983 Soc. Sec. reforms prefunded the baby boomers retirements:

Ok, I’ll say it. The 1983 reform and Trust Fund didn’t work. The payroll tax led to increased government spending (although the excess tax revenue under Reagan wasn’t terribly large). But more critically, the IOUs in the Trust Fund were not freely sold on the market; the interest rate on those IOUs is formulaically determined.

This in a long line of rather weak replies to his critics may have been the weakest of all. Government spending as a share of GDP did NOT go up during the 1980’s and actually fell as a result of the peace dividend. Yes, total Federal debt rose AS A RESULT OF THE TAX CUTS. As far as the interest rate being “formulaically determined”, my understanding is that these rates track market rates. If I am wrong and if the formula is below market rates, then the Trust Fund is subsidizing the General Fund. Odd – we have covered this already noting that one of Bush’s plans to steal our retirement funds is exactly that.

To be fair, he concedes we will need to raise taxes to fix the General Fund deficit. He then writes:

Social Security represents the one place where future spending reductions can be committed to well in advance – indeed they have to be.

How does this reduce Federal government purchases or the rising spending on health care? Or are you suggesting we have to cut Soc. Sec. retirement benefits? Conservatives love to say cut spending but they are loath to be specific on the specifics. Of course, my ire is not directed at the honest conservatives who do admit there is no free lunch, but rather at the political hacks in the Bush Administration who continue to tell us there is.

The Dead Parrot also seems to be hung-up on the notion there is no expected return benefit from privatization:

In sum, Waldmann’s argument is that the interest rate is the inverse of the price of tomorrow’s consumption; as with any price change, there is the possibility that there will be offsetting income and substitution effects. Therefore, if privatization boosts the rate of return on your wealth, tomorrow’s consumption is now cheaper. The important thing to note here is that in his analysis and in virtually all cases, tomorrow’s consumption will go up; this, of course, is the entire goal of an increased flow of saving. If increased consumption can be achieved instead because of an increased stock of wealth, well, then that’s fine with me.

What did Gary Becker say about this?

Update: Has Jack Kemp told us how government spending will magically fall in 2018 as he writes:

The raid on Social Security revenues will end in 2018, when there won’t even be enough of your FICA contributions coming into Washington to cover the entire cost of current Social Security benefits because there will be so few workers contributing to support all the current retirees.

Of course not – but Kemp is assuming like the Dead Parrot the starve the beast theory (along with its converse feed the beast = more government spending). But the last 35 years of U.S. fiscal policy history suggests starving the beast does not work – whereas the Clinton tax increases were correlated with a drop in Federal spending.

Kemp also misrepresented Sen. Durbin’s Meet the Press interview. Durbin is opposed to carve-outs but he is not opposed to add-ons. Yep – Senator McConnell insisted we stop campaigning as they continue to campaign with brazen lies.

And AB reader Drew noted that I meant to say we had a peace dividend in the 1990’s. Thanks!

Update 2: The Dead Parrot Contradicts Himself – First, he writes:

I am presenting to the blogosphere the radical proposition that extra government revenue tends to lead – at least in part – to extra government spending. PGL disagrees…In my original post I pointed out that the excess payroll tax revenue in the 1980s wasn’t that great, so there wouldn’t have been a large effect in that decade.

As if payroll taxes had some special effect by themselves – sort of like Bruce Bartlett worried about VAT taxes. Then he writes:

My sole point here is that this structure for the Trust Fund assets is consistent with the view that payroll tax revenue is a substitute for other revenue (even if you don’t believe *less* revenue encourages less spending, surely the reverse is true and more revenue will encourage more spending).

Now here I agree – and my simple point was that starve the beast did not lower government spending. The REAL debate here is who will pay for future government spending as in an explicit income tax increase versus the Bush Social Security deform aka a back door employment tax increase. Can you just admit as much?

I always suggested to the Dead Parrot that Robert Waldman never endorsed, the Cato premise that privatization induces individuals to hold more stocks noting Becker’s WSJ op-ed piece. He notes with approval the piece but does not realize it undermines his substitution argument.

Victor – I love a good debate, but your contradictions are almost as tiresome as your misrepresentations of other people’s positions. And I don’t oppose a rational and honest means of insuring against the Bush proposal to steal our retirement funds. I just don’t trust the GOP to implement what you are suggesting.