It’s Wednesday and I just finished a ‘Conversation’ with the Economics Society of Australia, where I talked about Modern Monetary Theory (MMT) and its application to current policy issues. Some of the questions were excellent and challenging to answer, which is the best way. You can view an edited version of the discussion below and…
Today, I am writing material for our textbook, given that we are pushing to get it finished before the end of the year and there is one macroeconomics class already using the trial draft version. In that context, we are having to keep feeding material to the lecturers and students to keep up with their schedule. So that is why I am departing from my usual practice of Friday textbook writing. I have also had a disrupted day, having earlier presented a workshop on professional ethics and responsibilities to a group of postgraduate students. And besides, today is September 11 and so it is our duty to honour the victims of the Pinochet coup in Chile, which occurred on that Tuesday morning in 1973. At least 60,000 people perished under the oppression of the right-wing junta that illegally seized control of that democratic nation with US support.
Chapter 25 Recent Policy Debates
In this Chapter we consider the following policy debates:
- 25.1: Ageing, Social Security, and the Intergenerational Debate
- 25.2: Twin Deficits and Sustainability Of Budget Deficits
- 25.3: Fixed Versus Flexible Exchange Rates: Optimal Currency Areas, the Bancor, or Floating Rates?
- 25.4: Economic Growth: Demand or Supply Constrained?
- 25.5: Environmental Sustainability and Economic Growth
25.1 Ageing, Social Security, and the Intergenerational Debate
The ageing society debate is at the forefront of calls to reduce government deficits. The debate is driven by the proposition that national governments will not be able to afford to maintain the spending necessary to support the growing demands for medical care and pension support as populations age.
At some points, the argument goes, governments will run out of money and other public spending programs will become heavily compromised.
Some economists support this narrative by advancing arguments about so-called financing gaps which are attempts to extrapolate future drains on public spending in relation to the projected scale of the economy.
In this Section we will show that these estimates of spending shortfalls are in fact constructed on flawed premises, which have led to the erection of an array of complex and voluntary accounting structures that give the impression that a currency-issuing government is financially constrained.
A dominant theme used by governments, business lobbyists, and economists to justify a preference for the pursuit of budget surpluses has been the so-called aeging population or intergenerational issues. Simply put, it is claimed that a number of government programs (such as health, social security, and education) are sensitive to demographic factors, and with population ageing, the budget ‘blow out’ will be unsustainable.
For example, in the US there is constant pressure on government to privatise the US social security system as a means of keeping it solvent. Similarly, in Australia, the so-called intergenerational debate, which began in the mid-1990s and is still a powerful political force, was central to the pursuit of budget surpluses by successive federal regimes.
The argument used to support the preference for surpluses in the context of an aeging population is simple: (a) the budget cannot be allowed to reach the projected level because the increasing public debt would push interest rates up and ‘crowd out’ productive private investment; (b) increasing debt will also impose higher future taxation burdens for future generations, which will reduce their future disposable incomes and erode work incentives; (c) the economy must produce more jobs and people must work longer (retirement ages must be lifted) to accumulate more funds to finance their own retirements; and, in some nations it is argued that (e) higher levels of immigration are required to reverse the ageing bias in the population.
In this section, we will examine the veracity of these arguments from the perspective of the macroeconomic framework we have introduced and developed within this textbook.
It is often suggested that budget surpluses are equivalent to accumulation funds that a private citizen might enjoy as a result of persistent saving. Using this metaphor, accumulated budget surpluses are seen as being ‘stored away’ for the future and thus provide the government with the means to deal with increased public expenditure demands that may accompany the ageing population.
TO BE CONTINUED
Advanced material: The US Social Security and Medicare Systems
The US Social Security and Medicare systems are organised into two separate Trust Funds, each having six trustees – including the current Secretary of the Treasury (the Managing Trustee), the Secretary of HHS, the Secretary of Labor, and the Social Security Commissioner. Two Public Trustees are added (one Democrat and one Republican) to provide scrutiny on the conclusions of the other four.
The Trustee’s Reports are annual legal requirements under the US Social Security Act and aim to report on the “financial status” of each of the “trust funds” to the US Congress.
They provide elaborate projections of the revenues and outlays expected of each the funds based on actuarial and economic assumptions and modelling.
The US Social Security Administration is underpinned by two separate funds. First, the Old-Age and Survivors Insurance Trust Fund is the accounting device that the US government uses in relation to the payment of future retirement benefits. Second, the Disability Insurance Trust Fund is the accounting device that the US government uses in relation to the payment of disability support pensions. Collectively, these funds are known as the Old-Age, Survivors, and Disability Insurance (OASDI) program.
The US Social Security Trustees Report 2011 notes that:
This type of reporting is very common and suggests that in operational terms, should there not be a positive balance in the Trust Funds then the attached social security programs will be unable to pay the benefits.
It is argued that the so-called “funding gap” will grow over time as the number of dependents on the funds grow.
The US Social Security Trustees Report 2011 said that 2035, social security benefits will be about 13-15 per cent of taxable dollars and the Trust Fund will be exhausted by 2036 whereupon the projected incomes would only match 77 per cent of scheduled benefits.
Clearly, these Trust Funds are the final responsibility of the US government, which can always ensure benefits are paid (in nominal terms).
To obscure that intrinsic capacity, successive generations of politicians have placed a series of restrictive administrative layers, which they use to justify their claims that the government is financially constrained. These claims reflect the ideological distaste for government programs held by many conservative politicians.
The organisation of the Trust Funds and the way they are funded exemplifies the way the public are mislead into thinking their future pension and health entitlements are in doubt as a result of the alleged inability of the US government to honour all its liabilities.
For example, the accounting smokescreen manifests through the US government’s decision to allocate payroll tax and income tax revenue to the revenue side of these Funds. Such an explicit gesture, which is totally unnecessary from a financial perspective, gives the impression to the general public that: (a) their taxes are being put to some specific use; and (b) that without those taxes funding those uses there would be not capacity to provide the services.
Of-course, both perceptions are false. Taxpayers do not fund anything in a fiat monetary system and the US government doesn’t need any “funding” to provide whatever goods and services to the non-government sector it chooses.
In the US Social Security system, the deception is very powerful. Should the current revenues be insufficient to match current obligations then the prior Trust Fund balances are used (which mainly represent past surpluses). These past surpluses were then invested in Treasury bonds.
It looks to be an elaborate mechanism for the government lending to itself and pretending to raise revenue that is necessary to “fund” pension and medicare entitlements. In fact, the US government (via the Congress) can always pass legislation which transfers “General Funds” into “Trust Funds”.
While in an accounting sense, these Trust Funds can become insolvent, in the way they are currently constructed and accounted for, there is never a possibility that the US government will not be able to provide the requisite US dollars to pensions and health care, should it wish to do so.
The summary facts are:
MORE ON THIS ON FRIDAY. Tomorrow, the Australian Labour Force data comes out and I am sure to be discussing that release.
A long flight awaits …
Remember Chile – September 11, 1973
Today we remember Chile.
Tuesday, September 11, 1973 – right-wing forces aided by the US overthrew the elected government Chile. It was a terrorist act we should continue to remember like other terrorist acts!
Here is my band – Pressure Drop – recalling the event (song written in 1978, this recording May 2011).
You can see the band in Melbourne tomorrow night – September 12, 2013 – at The Retreat Hotel, Brunswick, which is located at 280 Sydney Rd, Brunswick.
Details are available – HERE.
That is enough for today!
(c) Copyright 2013 Bill Mitchell. All Rights Reserved.