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Responses to Comments - Round 1
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
Posted by Robert Hormats on May 30, 2007 at 07:00 PM in Books | Permalink
Comments
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.
Posted by: dale coberly at May 30, 2007 8:12:15 PM
Oh, I was joking. Alex recently posted a humorous "guide" on how to tell him and Tyler apart, after Brad DeLong started using their names interchangeably.
Just a little bit of (apparently stale) blogger humor... ;-)
Posted by: Mr. Noah at May 30, 2007 9:10:44 PM
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).
Posted by: Barkley Rosser at May 30, 2007 11:20:02 PM
Barkley
you are clearly one of the good guys. but you are willing to give away too much to the enemy. those benefits will be 170% of what they are today because the standard of living will be 170% of what it is today. All you are doing is giving Hormats and friends room to say, well, lets cut benefits then to keep them at present levels. This is about like saying your gramma could keep cooking on an open fire rather than raise her benefits to keep up with a society that had gone over to electric ranges. a society that had meanwhile banned open fires.
Posted by: dale coberly at May 30, 2007 11:45:00 PM
the thing to keep in mind is that people are paying for their own benefits. this is not "government spending."
Posted by: dale coberly at May 30, 2007 11:46:37 PM
Dale,
Taxpayers today are paying for the benefits of today's beneficiaries.
The taxpayers of tomorrow will be paying for the benefits of tomorrow's
beneficiaries. No, people do not get what they paid back. Some die before
they ever get there, and someone who lives to be 110 gets way more than
they ever put in.
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Posted by: muchgooder at May 31, 2007 5:01:16 AM
Barkley
I am very surprised at your reply. Have you ever heard of statistics?
When we set up a massive program on a national scale we are relying on "averages." Sure the 110 year old does better than the guy who dies at age 66 (like my mother). But the program is designed so that the benefits paid out to the average earner with an average life expectancy just matches the money paid in by the average earner... with a little twist you have noted but not understood:
By using pay as you go financing, the guy paying in the money is paying in more money...because of the rise in average wages over time... than the guy who is getting the money paid in when it was his turn. This means the guy getting the money is being paid in inflation-proofed money with a little premium to reward him for his average contribution to the rising standard of living over his working lifetime. But the guy paying in the money today is not a loser by this, because when it comes his turn he will enjoy the same premium.
Now, may I very kindly suggest you spend a few hours thinking about this until you undrestand it.
Posted by: dale coberly at May 31, 2007 10:21:29 AM
Barkley
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.
Posted by: dale coberly at May 31, 2007 10:28:21 AM
"SS works on the insurance principle."
Actually it doesn't. Insurance principles hedge against unlikely or difficult to predict events. It works when a majority of the ratepayers don't end up needing it. The need for old age retirement benefits isn't an unlikely event. Social Security acts much more like a forced savings plan.
Posted by: Sebastian Holsclaw at May 31, 2007 2:28:17 PM
"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).
Posted by: Mr. Econotarian at May 31, 2007 2:33:49 PM
Sebastian Econotarian
if you like looking at the world through a certain hole i am not going to be able to persuade you otherwise.
you insure for any event, likely or unlikely, the premium and the payout are adjusted for the likelihood.
in the case of Social Security, you insure for the event of reaching old age (or dying first, or being disabled first, but we'll come back to that).
in an "unlikely event" like fire insurance the premium is very low relative to the potential payout. in the case of social security the event of reaching old age is so likely that the premium essentially equals the pay out. so why buy the insurance? well , because the government guarantees your "premium" against inflation...and also guarantees that you will actually pay the premium so you've got something to pay out whent you need it. and of course the dying and disability are also insured...less likely events, so the premium you pay for that part of it is less. and yes this is a forced savings plan. insured.
as for the better returns you can get outside of SS. yes. but there's that damned insurance again. there is no other investment guaranteed against inflation, market losses, theft, sickness, death...
didn't think i'd change anyone's mind. that's why SS has to be a tax. experience shows most people are too stupid to provide for themselves without it.
Posted by: dale coberly at May 31, 2007 3:59:53 PM
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).
Posted by: odograph at May 31, 2007 5:47:12 PM
odograph,
yes. exactly.
and the brave i'd rather do it myslef-ers forget that making money in a country where half of the elderly are dirt poor, and most of the working people are afraid to spend any money in case they won't have enough for retirement, is going to be harder than it when the poor are relatively secure.
they also think that if they can make 10% on the market, then everyone can make 10% on the market. this is like you found a particularly fertile acre of ground that always gave you a wonderful crop, you could go out and tell all your friends, and they could tell all their friends and then all of them would plant their seeds on your acre and all of them would get the same wonderful return. ??
Posted by: dale coberly at May 31, 2007 6:21:34 PM
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.
Posted by: dale coberly at Jun 1, 2007 2:34:13 PM
Dale, here are so many things wrong with your thinking on this that it's difficult to know where to begin. For starters, however, the idea that DIY'rs are expecting everybody to make outsized returns is silly. I don't expect you do do as well as I will; I'm ok with that, I don't owe you anything based purely on the fact that you have a pulse, nor will I 40 years hence.
Posted by: Bernard Guerrero at Jun 1, 2007 6:58:03 PM
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.
Posted by: dale coberly at Jun 2, 2007 12:17:02 AM
Dale: SS is a Ponzi Scheme. The fact that the payments have been structured so as not to blow up in the foreseeable future does not detract from its nature as a Ponzi Scheme.
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Posted by: SEO at Jun 2, 2007 10:59:27 PM
russ nelson
you need to sit down and think very carefully what you mean by a ponzi scheme. otherwise you are just repeating nonsense you heard somewhere because you like the sound in makes.
in a ponzi scheme there are no assets except the investments of an ever growing number of investors. when the investors stop coming in the scheme collapses and everyone loses money.
even though the number of "investors" in Social Security has been growing, and even though the people who receive benefits are being paid by the new investors... this is no different from any stock, especially a new offering, the difference is that with a legitimate stock the later investors are paid out of both a stable inflow of new investors and new customers of the underlying company,
this is essentially what social security is. it is a government program only because, first, only the government can guarantee against inflation and market losses, and second, because experience has shown that most people cannot manage their own retirement savings, so an involuntary program is necessary to protect both them and the rest of us from their improvidence and/or bad luck.
other than that, i could start a private company that would be essentially a bank/insurance company that would work exactly the way Social Security works. You put in 12% of your wages every month of your working life, 40 years, then i pay you 36% of your average wage every month for the rest of your life. This would work if average life expectancy was 12 years after retirement. When people start living an average of 20 years after retirement (this would be the same as having 2 workers per retiree), I would have to require you put in 20% of your wages.
The way it would protect you from inflation is that after 40 years the people putting in their 12% would be putting in 12% of the inflated wages... and, since there are three of them for every retiree, i would be paying the retiree 36% of the new wage.
The insurance aspect would come from agreeing with depositers that their payout would be a little less as a percent, but more in absolute terms, if their average income was higher than the national average,, and paying those whose average income was lower than the national average a slightly higher percent.
Now, you may not think this is a good plan. But lots of people would. Especially those who can remember a time when savings disappeared due to inflation or depression. The one thing you cannot say is that it is a ponzi scheme.
Oh. and in fact you only need to put in 6% of your wages, because I have made the boss an offer he can't refuse: so he matches your payment. And since "most economists agree" that it's really your own money that he is using to match the payment, he doesn't have any reason to complain.
There are lots of complications to this. But you need to try to see that the income stream never stops. And that's why it is not a Ponzi scheme. What happened was that in the very beginning of the program while it was being phased in, it was easy to pay the early "investors" from the contibutions of the later investors. That's why the "tax" was only 1%. By the time the system is fully mature (the flow of new investors has stabalized), the income will exactly match the outflow at a level where the tax is 12% and the benefit is 40%... until we start living longer. then the tax will increase to about 20% (you only pay half of this.)
I can't explain everything in a short post, but unless you start thinking, no explanation will help. And you will just be the fool of the Big Liars, who, believe me, know how to fool you. I have said a lot more about this on AngryBear.com.
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