American Civility

Many government programs depend on political legerdemain and budget gimmickry.  Social Security and Medicare are prominent examples.  Most Americans believe Social Security and Medicare funds are locked in a vault somewhere, ready for withdrawals when they retire.  We are disquieted to learn these “Trust Funds”, as they are called, are not funds at all, but accounting entries.  All those taxes we pay for Social Security and Medicare are borrowed from the “funds” by the government for the general budget, in exchange for IOU’s that are paid back with general revenues.  Any unfunded portion comes from future taxes.  Federal Reserve Board economist Roy Webb called these unfunded liabilities “stealth budgets”. ¹

The National Center for Policy Analysis (NCPA) observes, “The 2009 Social Security and Medicare Trustees Reports show the combined unfunded liability of these two programs has reached nearly $107 trillion in today's dollars!  That is about seven times the size of the U.S. economy and 10 times the size of the outstanding national debt.” ²  It is also twice the aggregate wealth of all American households. 

Economist Bruce Bartlett analyzed both the Social Security and Medicare reports for 2010 and discovered that the unfunded liabilities would require a tax increase of 81% in perpetuity. ³  Clearly, something must change structurally in the way we finance the safety net on which so many rely.   This system was workable when the public debt was 30% of GDP only 20 years ago, but is perilous when the debt is nearing 100% of GDP today.

Wishful thinking and illusion are not limited to stealth and complex government programs.   While Treasury Secretary Geithner was in Tokyo last week he affirmed the importance of a strong dollar. ⁴   A free floating currency exchange reflects the relative economic policies of the host countries and the relative demand for the goods they produce.   For the Treasury Secretary to "talk the dollar up" is as effective as a drug dealer proselytizing the junkie to drop his addiction.

" ‘Given the role of the dollar, frankly, there's not a tremendous amount one can do other than try to run a good, sound policy and restore the U.S. economy to growth,’ [World Bank President Robert] Zoellick told a panel discussion on the sidelines of the Asia-Pacific Economic Cooperation forum annual summit.” ⁵   And that is precisely what we have not been doing for many years.

What is worse, we have been flooding the market with cheap dollars in order to stimulate our economy, discomfiting Asian countries by a new impending bubble.   Even the communist Chinese saw fit to lecture capitalist Americans: “Liu Mingkang, chairman of the China Banking Regulatory Commission, said that a weak U.S. dollar and low U.S. interest rates had led to ‘massive speculation’ that was inflating asset bubbles around the world.”⁶   Have the Chinese become reformed monetarists?  Not quite.  They still insist on pegging the renminbi to the dollar while they complain.  This has three effects: 1) U.S. exporters cannot benefit from a lower dollar to sell more goods to China, 2) U.S. consumers push more dollars to China in return for artificially low prices on imported goods, and 3) other countries, particularly those in Southeast Asia, are similarly hurt by the artificial exchange rate because their currencies look high in relation to the yuan.   By any definition, this is not  free trade. 

Thus, our trade deficit actually grew in September with the lower dollar ⁷—just the opposite effect one would expect—because our appetite for foreign cars and foreign oil cannot be sated, and government won’t allow an otherwise normal exchange rate to attenuate it.   The administration’s response is to favor protectionist measures rather than to address the underlying economic conditions, potentially resulting in double trouble.

Another bit of hocus-pocus last week was the Obama administration’s plan to use TARP money to reduce the deficit:  “The administration wants to keep some of the unspent funds available for emergencies, but is considering setting aside a chunk for debt reduction.” ⁸  TARP—troubled asset relief program—was supposed to have relieved banks from the synthetic securities they designed that ultimately had no market.  Bailing these banks out was a questionable government activity to begin with, but Congress and two administrations have treated TARP like a floating fund, using it for anything but troubled assets, and arguably violating TARP’s foundational authorization that was passed over the will of the people.   Inasmuch as TARP originally added to the Federal deficit, not spending a portion would not reduce the deficit, but would merely not increase it.  There is no “setting aside” because TARP is one of those stealth programs—just an accounting entry.  This inconvenient truth does not dissuade the administration from creating the illusion that it is doing us a favor.

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[1] Webb, Roy H. “Economic Review: The Stealth Budget: Unfunded Liabilities of the Federal Government.” Federal Reserve Bank of Richmond, May/Jun1991 http://www.richmondfed.org/publications/research/economic_review/1991/pdf/er770303.pdf

[2] “Social Security and Medicare Projections: 2009”.  National Center for Policy Analysis, 11 June 2009, http://www.ncpa.org/pub/ba662

[3] Bartlett, Bruce. “The 81% Tax Increase.”  Forbes, 15 May 2009 http://www.forbes.com/2009/05/14/taxes-social-security-opinions-columnists-medicare.html

[4] “Geithner Affirms Strong Dollar Policy.” The Wall Street Journal, 11 Nov. 2009, http://online.wsj.com/article/SB125792362908743307.html?mod=WSJ_hpp_LEFTTopStories

[5] “Bubble Fears Surface at APEC Gathering.” ibid., 14 Nov. 2009 http://online.wsj.com/article/SB125812846361947215.html

[6] “China's Blunt Talk for Obama.”  ibid., 16 Nov.2009 http://online.wsj.com/article/SB125826103009548975.html?mod=article-outset-box

[7] “Sinking Dollar Aids Exports, but Trade Gap Grows.” ibid., 14 Nov. 2009 http://online.wsj.com/article/SB125811859626047087.html?mod=WSJ_hps_LEFTWhatsNews

[8] “White House Aims to Cut Deficit With TARP Cash.” ibid., 12 Nov. 2009 http://online.wsj.com/article/SB125799009185344567.html?mod=WSJ_hpp_MIDDLENexttoWhatsNewsSecond