Soc Sec XLIV: ‘We can’t grow our way out of this’

In reviewing some of the final comments on XLI: Why not assume Low Cost the following partial comment caught my eye: “We are not going to grow our way out of this. And it’s highly unlikely that we will tax our way out, either.” To which I would want to ask: “Who says? And can you give your answer in numeric form?”

In the mid to late 80’s the narrative of Social Security ‘crisis’ rested on two assumptions. One is that General Fund deficits were structural and could not be eliminated long term. This was summed up in the phrase ‘Deficits as far as the eye can see’. The second assumption was that Boomer retirement would arrive as an irresistable force right as those structural GF deficits were becoming unsustainable. The combination of these two was supposed to set a timetable for fiscal trainwreck right around the late 2020’s. And really at the time the logic seemed pretty good, in fact good enough that the country was willing to accept some ‘voodoo economics’ hoping that tax cuts now would create enough growth to at least mitigate the disaster.

Well one thing didn’t happen. Those tax cuts did not create growth that trickled down in any amount that would fund those retirement IRAs Cato was pushing as a replacement for Social Security (the Ferrara Plan). And then another thing did happen. Credit it to what or who you want a combination of tax increases, spending restraint and an investment climate served up a federal budget in surplus by 2000, not just in Social Security, which started running strong surpluses around 1998, but in the General Fund as well.

So those predictions so confidently made in the 1980’s turned out to be flat wrong, those people who said “We are not going to grow our way out of this. And it’s highly unlikely we will tax our way out, either” simply missed the boat. Which really is what inspired XLI. We know that outcomes at or better than Low Cost can happen, because in the period from 1998 to 2003 they did happen. Now as it turns out the 2003 tax cuts ushered in a productivity crash starting almost exactly 18 months after enactment (note I didn’t say ’caused’, but the timing is pretty god damn ironic since that is when idiots like Gramm tell us the positive impact of tax cuts should start being observable) and so we did not see the continued improvements after 2003 that some of us were expecting. But the argument that we can never get off the floor seems pretty defeatest. (And yeah I now the argument from tech, and the argument from peak oil, I don’t find either compelling but will address them in comments if anyone wants.)

So the question really remains: are the economic results needed over the medium term to fully fund Social Security actually impossible? Or even unlikely? And why (and please use numbers)? Or you could flip the question around. What would the implications be for the total economy and more particularly the General Fund deficit if Low Cost happened?

Low Cost is about a lot more than funding Social Security. It goes right to a vision about the future of America. I know what Roubini’s answer would be to this question, but is there anyone else out there really believing that nothing we could do in the way of taxation and spending policy to get productivity and Real GDP off of the 1.7% and 2.3% floor now being assigned to them by IC? I mean maybe we can’t get every half decade to act like the early sixties or the late nineties {ed}, but this notion that the future will never, ever be brighter than it was in 2003 no matter what we do goes beyond defeatism to anti-Americanism. (I thought it was us liberals that hated America and not the Chicago GSB).

I am not here to push Gore’s plan or Picken’s plan but if either one’s vision comes to reality in the next ten years we will be living in a whole new country. We have a Republican Party promising to put a Man on Mars in the next twenty years but they can’t or won’t promise 2.1% productivity and 3.3% Real GDP along the way?

Why oh why are economic conservatives running down America’s future by adopting Intermediate Cost economic assumptions? Or are they just pretending to accept those assumptions to sell Personal Account plans implicitly requiring better growth? Because as Dean Baker pointed out in his 2004 No Economist Left Behind challenge, you don’t get to have both.

We know precisely what it would take to tax or grow our way out of at least the Social Security gap, the Trustees tell us in detail. And if we do have those outcomes we should see mirror effects in the General Fund, more GDP, more productivity, more labor participation all translate to more tax revenues. So the question really is for the defeatests: why assume Intermediate Cost? Plus what would be the implications of that for the markets anyway?

This link is for Table V.B1: Principal Economic Assumptions. You can scroll up for the Demographics or down for the rest of the Economics.