Friday, April 03, 2009

Social Security: Real vs Nominal

Mike Shedlock has the usual complaints about social security, but his arguments reveal that he does not understand the difference between "real" and "nominal".
'The U.S. recession is wreaking havoc on yet another front: the Social Security trust fund.

With unemployment rising, the payroll tax revenue that finances Social Security benefits for nearly 51 million retirees and other recipients is falling, according to a report from the Congressional Budget Office. As a result, the trust fund's annual surplus is forecast to all but vanish next year -- nearly a decade ahead of schedule -- and deprive the government of billions of dollars it had been counting on to help balance the nation's books'....And given that every cent of the fund has been spent, exactly how is the treasury supposed to repay that fund in light of $9.3 trillion (with a T) budget deficits when the "surplus" is a mere $16 Billion (with a B)?

Finally, why does everyone continue the charade of calling Social Security a "trust fund" when it's clearly not a fund and there cannot possibly be any trust in it?
Think about it -- the Government is a currency issuer, it has no need to "balance its books", nor will it ever bounce a check. Ever. Even Zimbabwe does not bounce cheques (although with it's recent move to the dollar, that might change). He is correct that there is no "fund", as SS obligations are merely part of the Government overall obligations. It certainly makes no sense for a currency issuer to keep a reserve of its own currency. Does American Airlines need to keep a reserve of it's frequent flier miles?

I first heard this analogy from Mosler, and it's extremely helpful. Imagine that the US as 300M retirees, and only one worker. Those worried about the SS "shortfall" (whatever that means) are concerned that the 300M retirees will not have enough money to pay the one worker for all the stuff that they want. This is the "nominal" view, and it is clearly ridiculous -- the problem is not how much money the retirees have or do not have, the problem is whether the worker is productive enough to make all the stuff the 300M retirees want.

The Obama Administration is bumping it's head against the same invisible wall. Take a walk outside -- you will see that the US has plenty of stuff. It also has plenty of needs, and plenty of idle resources to put to work. The problem of falling aggregate demand is entirely *nominal* -- people do not have enough zeros after whatever number is in their bank account. Solution: add a zero to every bank account. Or stop uncreating money through a payroll tax holiday. Whatever, it's a nominal problem, not a real problem. If you go to a third world country, you'll see real problems there.

Instead, the Obama administration, keep engaging in a number of increasingly expensive and deceitful practices to increase the number of zeroes in the accounts of bankers. This is because they think bankers are as important to the economy as bankers think. They are wrong. Banks are pro-cyclical, and will turn once the economy does. Banks are in the business of making loans that will be paid back, although they exited that business from 2000-2007. Once the non-bank private sector is able to pay back loans, and is interested in taking on debt, banks will revive. The Obama administration remains focused on the wrong part of the nominal economy -- it should just help the non-bank private sector save by running up its deficit.

On this crises, Michael Lewis said:
Since the beginning of the crisis I’ve wondered why the government has found neither the will nor the way to attack the root of the problem -- the people who borrowed money to buy homes they shouldn’t have bought.

Now I think I understand. It would be too simple. People would understand a lot of small payments to the guy down the street who doesn’t deserve them, and become outraged. Far better to throw trillions at opaque corporations, the inner workings of which no one still really understands.
He's wrong. People would be OK if the Govt gave a small payment to the guy down the street who doesn't deserve them so long as they get the same payment. One is a transfer, while the other simply raises all boats. The problem is that the transfer is not going to the financial industry.


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