My View on the Current State of Social Security versus the Dean Baker Disneyland View

 Dean Baker takes Marketplace Radio to task for its negative report on Social Security. He writes:

I often think it's too bad that Social Security isn't a private company. If it were, it could sue Marketplace Radio for libel for this sort of reporting. Does Marketplace's host have any idea what she is talking about when she says: "Social Security is in such a sorry state"? According to the Congressional Budget Office the program can pay all benefits for the next 34 years with no changes whatsoever and even after that can pay more than 75 percent of benefits indefinitely.

The program is in much better shape in this respect that it was in the 40s, 50s, 60s, or 70s. So what on earth is this person talking about? Can Marketplace Radio pay all its expenses for the next 34 years?

Oh yeah, Dean?

As of this year, SS goes cash flow negative. This means from here on out, at an escalating rate, SS will have to pay more and more money out than it takes in. Now, if it was completely bankrupt at this point, SS would have to go to the Treasury and get the money from Treasury  to make the payments to retirees. The Treasury would then, on top of the current horrendous deficit money that needs to be raised, have to raise money for SS.

But Dean Baker, doesn't see such a problem with the current SS situation, even though SS doesn't have any cash and only has Treasury securities it will have to sell in competition with the Treasury (or they may redeem some at the Treasury). Redemption or sale, it means more money that needs to be raised in the market on top of the current horrendous deficit money that needs to be raised by the Treasury. It's pretty much the same thing as an SS bankruptcy, more sales of Treasury securities in the market.

Let me repeat. The Treasury IOUs are a receipt with no cash behind them. THERE IS NO CASH!. The Treasury is running a deficit, it has no cash to buy up, or payoff its debt. The Treasury, in one fashion or another, will have to borrow the money, and the SS trust fund will be in competition selling Treasury securities along side the Treasury. With all this paper hitting the market, at some point  there will be no Treasury security buyers at reasonable rates, then the Fed is likely to step in and buy the securities. Super inflation here we come. Those are the facts. A bankrupt system that is likely to result in super inflation, which will screw beneficiaries two ways, through coming government legislated  reduced "benefits", and the reduced benefits will be worth less because of the inflation. Get prepared.

On the other hand, you can go with Dean Baker's view of the world, not worry about your future, not prepare for a world where are you are not going to get much, if anything at all, from SS, not worry about future inflation, and instead go every weekend to Disneyland until the money runs out.

Understanding Stagflation

It's apparent that Dean Baker has never heard of stagflation, Austrian Business Cycle Theory or Zimbabwe.

He writes:

It is worth noting that there is no economic theory that shows quantitative easing (the Fed buying long-term bonds) leads to inflation when the unemployment rate is far above normal levels, as is the case at present.

On stagflation as a monetary phenomena during a downturn see the important paper by Robert Barsky, University of Michigan and NBER, and Lutz Kilian, University of Michigan and CEPR, A Monetary Explanation of the Great Stagflation of the 1970s, where they write:

The data show a rather dramatic expansion in the world money stock (see McKinnon 1982), led by the behavior of the United States and facilitated by the breakdown of the Bretton Woods system. We view this expansion as the initiating cause of the stagflationary episode of 1973-1975. A similar monetary expansion preceded the second stagflationary episode of 1982. The recessionary element is provided by the fact that money-induced booms contain the seeds of their own destruction.

In otherwords, the money printing caused the unemployment.

As for Austrian Theory on unemployment and money printing Murray Rothbard writes:

Every time someone calls for the government to abandon its inflationary policies, establishment economists and politicians warn that the result can only be severe unemployment. We are trapped, therefore, into playing off inflation against high unemployment, and become persuaded that we must therefore accept some of both.

This doctrine is the fallback position for Keynesians. Originally, the Keynesians promised us that by manipulating and fine-tuning deficits and government spending, they could and would bring us permanent prosperity and full employment without inflation. Then, when inflation became chronic and ever-greater, they changed their tune to warn of the alleged tradeoff, so as to weaken any possible pressure upon the government to stop its inflationary creation of new money.

The tradeoff doctrine is based on the alleged "Phillips curve," a curve invented many years ago by the British economist A.W. Phillips. Phillips correlated wage rate increases with unemployment, and claimed that the two move inversely: the higher the increases in wage rates, the lower the unemployment. On its face, this is a peculiar doctrine, since it flies in the face of logical, commonsense theory. Theory tells us that the higher the wage rates, the greater the unemployment, and vice versa. If everyone went to their employer tomorrow and insisted on double or triple the wage rate, many of us would be promptly out of a job. Yet this bizarre finding was accepted as gospel by the Keynesian economic establishment.

By now, it should be clear that this statistical finding violates the facts as well as logical theory. For during the 1950s, inflation was only about one to two percent per year, and unemployment hovered around three or four percent, whereas later unemployment ranged between eight and 11%, and inflation between five and 13 %. In the last two or three decades, in short, both inflation and unemployment have increased sharply and severely. If anything, we have had a reverse Phillips curve. There has been anything but an inflation- unemployment tradeoff.

But ideologues seldom give way to the facts, even as they continually claim to "test" their theories by Facts. To save the concept, they have simply concluded that the Phillips curve still remains as an inflation-unemployment tradeoff, except that the curve has unaccountably "shifted" to a new set of alleged tradeoffs. On this sort of mind-set, of course, no one could ever refute any theory.

In fact, current inflation, even if it reduces unemployment in the short-run by inducing prices to spurt ahead of wage rates (thereby reducing real wage rates), will only create more unemployment in the long run. Eventually, wage rates catch up with inflation, and inflation brings recession and unemployment inevi tably in its wake. After more than two decades of inflation, we are now living in that "long run."

Baker must also be unfamiliar with the real world example of inflation and unemployment climbing in tandem:

...in Robert Mugabe’s Zimbabwe, a country’s whose unimaginable hyper-inflation rate (upwards of 231 million percent by recent accounts) and unemployment rate (as high as 94 percent throughout the country) cause not only economic, but civil and political strife..

Stagflation occurs whenever a central bank prints money, but a sum of money that is not sufficient to re-establish a previous central bank distorted capital structure. I see even Austrians get this wrong sometimes. Fed money printing does not always lead to stagflation. There can be periods when the central bank money printing is sufficient to boost the economy (though in a distorted manner). There can be some short-term stagflation when the Fed stops printing money and the economy starts to readjust toward consumer goods, which results in consumer goods price inflation. But mostly stagflation occurs when the Fed prints money that is not of sufficient quantity to uphold the previously distorted capital structure BUT is enough to add price inflationary fuel to the fire.

The current period is unlikely in the short-term to lead to stagflation, since the Federal Reserve is not printing any money. There may be some inflation, if the desire to hold cash balances diminishes, but it will not be severe. The threat of serious stagflation (double-digit inflation) won't occur until the Fed starts printing huge quantities of new money. There is no indication they are going to do so in the near term (3 months plus).

Dean Baker On a Roll

Dean Baker is back from vacation and is on a roll. He correctly suggests a look at the Argentine Experience as a way to solve the current soveriegn crises:

Back when I learned economics companies were supposed to make profits and economies were supposed to grow. That doesn't seem to be the case anymore. We have "saavy" businessmen like Goldman Sachs CEO Lloyd Blankfein who took his company to the edge of bankruptcy only to be rescued by bailouts from the Fed and Treasury. Most of the crew of Wall Street multi-millionaires would be on the unemployment line today without the big helping hand from the Nanny State.

In the same vein, the NYT is now citing research from Deutsche Bank reporting : "that euro-area countries 'can learn some valuable lessons from the Baltics’ experience over recent quarters.' Those countries survived drastic budget consolidation without devaluing their currencies.
The article then continues to quote the Deutsche Bank experts: "Restoration of competitiveness and weighty fiscal consolidation in the absence of currency adjustment is difficult but doable ... as long as politicians and the general public are willing to accept some up-front pain in return to longer term gains.”

Just to give a clearer idea of what the Deutsche Bank crew is talking about, the IMF projects that GDP in each of the Baltic countries will drop by close to 20 percent from its 2007 levels. In the United States this would be equivalent to losing $3 trillion in annual output. By 20007, the last year for the projections, GDP is expected to be 7.1 percent lower than its 2007 level in Lithuania, 9.1 percent lower in Estonia, and 14.5 percent lower in Latvia. Unemployment in these countries is more than 15 percent in Estonia and Lithuania and more than 20 percent.

It is nice to see that German bankers applaud this pain. Needless to say, it is unlikely that many bankers will ever have the pleasure of making similar sacrifices for the long-term good of their own countries. Of course, it is not clear how long the Baltic countries will have to endure this pain before GDP is back on a healthy growth path and the unemployment rate is at a more normal level. The IMF tends to be overly optimistic in evaluating the prospects of the countries adopting policies it favors.

It would have been worth explicitly discussing the alternative strategy that some countries may wish to pursue -- devaluation and debt restructuring. Argentina pursued this path at the end of the 2001. While the IMF and virtually all economic authorities insisted that this path would lead to disaster, the economy only contracted for six more months. It then turned around and grew robustly for the next six years until it followed the world economy into recession. At its pre-recession peak in 2008 Argentina's economy was more than one-third larger than it had been in 1998 when its crisis first sent GDP downward.

While the bankers may be more inspired by the tales of sacrifice by the Baltic peoples, many non-bankers may find the Argentine experience more interesting. Responsible reporting should note both options.

He also discusses some key nuttines in the ObamaCare legislation and calls out the NYT for not exposing it earlier:

The NYT just noticed that the pay or play provision in the health care bill makes no sense. The issue here is the extent to which larger employers will be obligated to pick up a portion of their workers' health care costs. The final bill included a provision that subjected employers of more than 50 workers to penalties if employees' health care costs exceeded a certain percent of family income.


The problem with this sort of penalty structure is that employers do not have control over workers family income and in general should not even know it. This sets up an absurd penalty structure where employers do not have the knowledge they need to act to avoid the penalty -- it's sort of like enforcing speed limits that randomly change and are never posted.
The problem with the NYT coverage is its description of this problem as: "a little-noticed provision of the law." Yes, it is true the provision got relatively little attention, but the NYT played a big role in this. Had the NYT opted to pick up on a problem that some people were trying to call attention to, notably Robert Reichsauer, the President of the Urban Insititute and also the former director of CBO (also CEPR), then maybe this ill-conceived penalty never would have made it into the final law.