I would like to join Felix Salmon ,
in suggesting that Dean Baker has mischaracterized both Fed Chair Ben Bernanke’s remarks to the Congress as well as the substantive policy questions on the table.
Yes, an AP story tells us that President Bush wants to address the “looming insolvency of Social Security.” Since the non-partisan Congressional Budget Office projects that Social Security can pay all future benefits for the next 39 years, with no changes whatsoever, this definitely gives new meaning to the word “looming” or perhaps “insolvency.”
The real headline for this article should have been that Fed Chairman Ben Bernanke is apparently suggesting that the federal government default on some of the government bonds held by the Social Security trust fund. That would seem to be the implication of his suggestion that we restructure Social Security and presumably not pay the full benefits mandated under current law.
Perhaps Mr. Bernanke is following in the footsteps of President Kirchner in Argentina. Argentina has seen four and a half years of very impressive growth following the partial default on its debt. In fact, Rafael Correa, Ecuador’s new president, was sufficiently impressed that he is now considering a similar step.
Of course, if Mr. Bernanke wants to go in the direction of defaulting on U.S. government debt, the default should not just be on the government bonds held by the country’s workers through the Social Security trust fund. Any default should also hit the bonds held by wealthy people, large corporations, and central banks. Personally, I don’t think that default is a good strategy for the United States at this time, but the fact that Mr. Bernanke appears to advocate it is certainly newsworthy.
I would suggest first that the word “default” is completely inappropriate for this discussion. The term “default” has a very clear and very narrow legal meaning, used to refer to a situation in which one has promised to make a specific identified dollar payment to a specific individual at a specific date, and the payment is not made. The logical options on the table for Social Security are raising the age for social security eligibility (e.g., href="http://www.techcentralstation.com/102704D.html">, href="http://voxbaby.blogspot.com/2004/10/how-to-reform-social-security-part-ii.html">), or using means-testing to reduce payments to the richest Americans. Mr. Baker is entitled to believe that such adjustments would be undesirable or unnecessary. But to describe such proposals as a “government default” is to use inaccurate language in order to inflame passions rather than inform the discussion.
Second, I find nothing in Bernanke’s remarks that could be construed as his endorsement of these or any other proposals. Exactly the opposite– Bernanke has gone to great lengths to avoid recommending any particular policy remedy. Instead he understands his role to be to call attention to the issue without taking sides in the political debate as to how the goal might be achieved. For that matter, my reading was that the primary issue Bernanke was talking about here was Medicare rather than Social Security, though I’m willing to agree with Mark Thoma that one might have wished for Bernanke to be a little more clear about this.
Evidently what sent Baker off is the fact that, for purposes of summarizing the magnitude of the problem, Bernanke used the gross federal debt less that owed to the Social Security Trust Fund rather than gross federal debt alone; PGL also raises this concern. Whether one focuses on the unified budget or on the budget excluding social security receipts and expenditures depends on the question one is asking. If the government runs a $100 billion deficit from federal fund receipts and outlays and a $100 billion surplus from trust fund receipts and outlays, then the total amount of borrowing it needs to undertake from private or foreign lenders as a result of those operations is zero. The total interest payments for which it must find a source of revenue in the current year as a result of these fiscal operations is also zero. Thus, if one’s focus is on the impact of federal borrowing on capital markets, the feasibility of raising those funds on capital markets, or the difficulty the Treasury may face in finding a source of revenue with which to make interest payments– and such issues are precisely the focus of Bernanke’s remarks– the correct measures to use for the discussion are the net federal debt and the unified federal deficit.
The current political impasse in Washington has resulted because too many people are willing to play “gotcha” politics, attacking anybody who offers constructive ideas on these issues of heartlessness towards our senior citizens or wishing to tax us into poverty. Bernanke has performed a public service by putting this issue on the table. For this, he has my gratitude.