Thank you, Alex, for your warm welcome and for your kind comments about The Price of Liberty. It is my pleasure to be a guest blogger at Marginal Revolution this week. It is a real privilege...
To Indiana Jim: Thanks for your question. I do not combine war
spending and entitlement spending. The former is in the so-called
"discretionary" portion of the budget; the latter is in the "mandatory"
portion (i.e., it is based on a predetermined formula set by past
legislation and will be paid out under that formula until it is
changed.)
To Freelance: Thank you very much.
To Adrian: Yes. Occasionally bribing foreign governments has been
used successfully, although it has been done covertly for obvious
reasons. But after 9/11, I don’t think we had that option with Al-Qaeda
and the Taliban in Afghanistan. And some terrorist movements are so
fanatical that bribing them is unlikely to work.
To John Thacker: I do not argue that current defense spending is
unsustainable. It could be more efficient, but the levels by historical
standards as a portion of GDP are quite low, as you point out. But this
will still be the second most costly war in U.S. history if it
continues to the end of the year. The cost of entitlements is, as you
point out, likely to grow, and these could squeeze many other programs
in the budget, including defense, in the next decade. They would have
to be reformed even if there were zero money spent for defense because
they are financially unsustainable.
True, FDR promised a balanced budget when he took office, but he
rapidly abandoned that pledge well before the war. But you are correct;
I was underscoring FDR’s call to make sacrifices at home to support the
troops on the battlefield through taxes, borrowing and the other things
you correctly mentioned.
To Barkley Rosser: I agree that Medicare presents a more difficult
problem than Social Security, which in fact, as you correctly point
out, enjoys a surplus. But neither is sustainable over coming decades
given the current trajectories of benefit payments and inflows. The
danger is that neither program will be sustainable without some
reforms, and the sooner they occur the less disruptive they will be.
The alternative is a bid increase in borrowing and/or taxes as well as
a drawing of funds from other programs. In all of these cases, we leave
our children a very bad legacy.
To Mr. Noah: What kind of guide do you need?
To Jay Livingston: Yes, I am. Great to hear from you. Where are you
living now? What great times we had together at Pocono. Hope you are
well. Best regards.
To Barkley Rosser: I agree with your May 28 posting in which you
said that the Social Security System is not in crisis, and indeed there
is a chance that it will not be for some time. But there is a high
probability that inflows will fall far short of benefits within a
couple of decades. That was the risk in the early 1980s, when with a
few changes the Greenspan Commission put it on a sustainable basis and
improved the chances that it would be there for many decades to come.
All I am arguing is for a few adjustments today, similar to those in
1983; to be sure that it is around for those who need it for a very
long time. And I do not want to see it reach a point where it gets so
out of balance that major change will be required, so let’s make minor
ones today.
More of my responses to your comments will be posted tomorrow.
Thanks again,
Robert D. Hormats
author of The Price of Liberty
Hormats
no need for you to address me, since i have been so fully engaged over at Angry Bear. I hope you will note that I am not particularly hostile to you. I just don’t think you understand Social Security.
Otherwise, I am entirely in favor of raising the income and corporate taxes to pay for the war or terror. This would be the honest thing to do.
But taking the money out of Social Security would not be honest. Even the Social Security Administration does not say “inflows will fall far short of benefits in the next two decades.” They say SS if fully funded until about 2042 when (if you do the arithmetic) an increase in the payroll tax of about fifteen dollars per week for the average worker will balance inflow and outflow. The adjustment will be needed because that same average worker will be living about six years longer than workers in 1983.
You gain absolutely nothing by changing Social Security…except to weaken it politically for the next assault. The “wealthy” workers that you say “don’t need it” have, nevertheless, paid for their own benefits. In any case the money that the benefits represent would have to come out of the economy anyway, if retirees are to spend a minimal amount on their own food and shelter.
What you are proposing is actually a tax increase on the upper tier of the workers-for-a-wage. By taking away what they get back from Social Security so the money can be spent on defense you have effectively taxed their benefits 100%.
It is easy to make yourself believe anything that is “against government” if that is your basic psychological stance. But if you prefer not to be fooled by charlatans with misleading numbers, you need to learn to do the arithmetic, and keep very careful track of exactly what it is you are counting.
There probably needs to be very serious thinking done about the costs of health care, but it won’t be done by presenting dishonest arguments to the people.
Robert Hormats,
I appreciate your willingness to recognize that the medical parts of the federal entitlements are the more serious problems than social security, and indeed that there is some chance that social security might not even be a problem at all.
Regarding this, I am curious what you think of my theory about this most recent push to do something with social security. Do you think it was really a calculation that this was the part of the budget that there was a chance to do something about rather than anything (or much) to do with social security itself?
Needless to say no one really knows what will happen. There are a variety of possibilities out there, although what will bring about the program being in trouble in the future would require a substantial worsening of long term economic performance relative to the past, something that most people are unaware of, and which also affects the viability of the stock market as a future alternative.
BTW, almost nobody in the public is aware that if the social security follows the mid-range forecast and does “go bankrupt” in 2041 or so, what this would entail would be a decline of benefits to retirees to about 70% of a level that would be about 170% of today’s benefits in real terms. In short, those future beneficiaries would be getting more in real terms than today’s do in real terms, after this so-called “bankruptcy.” The level of general ignorance about this point is appalling and overwhelming. It is another reason I find it hard to get worked up about this crisis, even if the more optimistic projections do not come to pass (and there will be plenty of time to make adjustments if they do not).
the thing to keep in mind is that people are paying for their own benefits. this is not “government spending.”
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and just in case you are going to wail that the worker who dies young gets cheated. i’d say yes, but he needs to take that up with god.
SS works on the insurance principle. Which I assume economists have heard about.
If you want to be allowed to rely upon your own individual work and luck, I’d suggest you find a cave on a remote island somewhere and start a life that does not depend on the economy and politics of the nation that surrounds you.
“Social Security acts much more like a forced savings plan.”
Except if you die, you usually can leave your savings to your children. Plus you generally get a much better return on investment than SS. And you can take out your savings as fast or as slow as you want (though you may want some in a fixed-income annuity for retirement).
The question of a uniform mandated SS system comes down to this: Even if you plan wisely, and are lucky (no “black swans”), and you do end up funding your own retirement … do you really want to step over bodies on the way to the market?
I don’t want to do that any more than I have to now (with the “relatively few” homeless in our country).
Anybody here who is really, really interested in this can come over to AngyBear.com where i have written way too much and Bob Hormats has kindly answered me. and i have written way too much more.
to be fair, my interest is mostly Social Security which it seems to me Bob is ready to sacrifice in order to buy more submarines to fight Osama. (Well, maybe to be not quite fair.)
If all Bob is saying is that we need to raise taxes to pay for the “war on terror” I agree with him.
Just really really do not believe the way to raise taxes is to steal gramma’s social security, which she paid for herself.
Bernardo Guerro
do you know what “cheap shot” means? how about “put up or shut up”?
I know I would not change your mind. But you might change mine. And, who knows, someone might be listening.
I wonder if you even understood what I was saying about DIT’rs.
You don’t owe me anything. The people who get Social Security benefits paid for them themselves.
You might be able to nit pick that statement, but on the whole it is true.
I did all right with my own investments. Not everyone will. That’s why SS was invented.
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