Re: Dean Baker nonsense about Defaulting on the National Debt]]

[David Farber <dave () farber net>]

Begin forwarded message:

From: Dean Baker <dean.baker1 () verizon net>
Date: January 9, 2009 10:45:50 PM EST
To: dave () farber net
Subject: [Fwd: [Fwd: [IP] Re:   Dean Baker nonsense about Defaulting  
on the National Debt]]

Hi David,

I had this note passed along to me. I have a couple of quick points:

First, I can assure you I understand the finances of Social Security  
and I have no illusions
about there being individual accounts with bonds. However, this has  
absolutely nothing to
do with the issue at hand.

Social Security taxes were raised in 1983 with the explicit intention  
of running a surplus over
the current needs of the system. Under the law, the surplus was to be  
used to buy U.S. government
bonds. These bonds were to be used to pay for the costs of Social  
Security for the baby boomers'
retirement.

In the event that Congress substantially reduces benefits, so that the  
bonds are not used for the baby
boomers' Social Security, then this would amount to a defacto default  
on the bonds. Of course it is not
a legal default in that Congress created the law, therefore Congress  
can change the law.

But, there is no reason that the workers who lose their benefits  
should accept this logic in the sense that
we elect Congress. If the argument is that the country's fiscal  
situation is so dire that Congress has to default
on the bonds held by the Social Security trust fund, then it is  
perfectly reasonable to demand a partial default
on the debt more generally. Rather than having retirees accept a 100  
percent default on the bonds held by
Social Security, with other bondholders getting paid in full, why not  
have everyone get a 20 percent haircut?

There would be enormous consequences for this sort of partial default  
on U.S. debt, but there should also be
enormous consequences for defaulting on the bonds held by the Social  
Security trust fund. The elites would like
the people who lose their benefits to just suck it up, but there is no  
reason that they should agree to do that. Since
there are a huge number of people who would stand to lose benefits,  
and they vote in high numbers, there is no
reason why they should not insist that their representatives in  
Congress take steps to apply the same sort of pain to
bondholders more generally that the elites would seek to impose on them.

This is not a legal question. It is a political question.

regards,

Dean






-------- Original Message --------
Subject:	[Fwd: [IP] Re: Dean Baker nonsense about Defaulting on the  
National Debt]
Date:   Thu, 08 Jan 2009 21:29:57 -0500
From:   James Love <james.love () keionline org>
To:     Dean Baker <baker () cepr net>

-------- Forwarded Message --------
From: David Farber <dave () farber net>
Reply-to: dave () farber net
To: ip <ip () v2 listbox com>
Subject: [IP] Re: Dean Baker nonsense about Defaulting on the National
Debt
Date: Thu, 8 Jan 2009 21:04:19 -0500


Begin forwarded message:

From: John Levine <johnl () iecc com>
Date: January 8, 2009 5:12:59 PM EST
To: dave () farber net
Subject: Re: [IP] Dean Baker nonsense about Defaulting on the National
Debt

I believe this originally appeared in TPM Cafe at
http://tpmcafe.talkingpointsmemo.com/2009/01/07/president-elect_obama_suggests_defaulting_on_the_n/

Wherever it was, it's nonsense.  It is quite true that there is a
large accumulated surplus from Social Security taxes, and that under
the CBO's very conservative assumptions, the surplus won't be spent
down for at least 40 years.  Under more realistic assumptions, it'll
probably be a lot more than 40 years, perhaps indefinitely.  SS is no
financial danger in the forseeable future.

Nonetheless, the claim that SS changes would be equivalent to default
on the national debt is absurd.  Were SS benefits to be decreased, the
surplus money would still be paid out to SS recipients, it would just
be paid out later.

There is a widespread misconception about Social Security -- despite a
lot of smoke and mirrors to the contrary, it is not an investment plan
like a 401(K), it is basically insurance.  Its goal, which it meets
rather well, is to ensure that Americans who worked will not die in
poverty.  The account stuff is to track whether you've worked long
enough to qualify for benefits; the amount put in does not match what
you get out and never has.  There are no bonds in the SS surplus with
anyone's name on them.  What you get out mostly depends on how long
you live after you retire.

It's hard to believe that Dean Baker doesn't understand this, so I'm
at a loss to fathom what he's trying to do here.  Cutting Social
Security benefits is bad policy and bad economics, but please, the
issue is complex enough without turning it into a farce.

Regards,
John Levine, johnl () iecc com, Primary Perpetrator of "The Internet for
Dummies",
Information Superhighwayman wanna-be, http://www.johnlevine.com, ex-
Mayor
"More Wiener schnitzel, please", said Tom, revealingly.

> President-Elect Obama Suggests Defaulting on the National
> DebtPresident-elect Obama apparently believes that the crisis brought
> on by the collapse of the housing bubble will require defaulting on
> the national debt. The New York Times reported today that Obama
> believes that "changes in Social Security and Medicare will be  
central
> to efforts to bring federal spending in line."
> While Medicare is projected to face shortfalls because of the
> incredible inefficiency of the U.S. health care system, the
> Congressional Budget Office projects that Social Security will be
> fully funded until 2049 from its own stream of tax revenues and the
> U.S. bonds it holds.
> If Mr. Obama plans to cut Social Security in the near future, then
> this effectively amounts to a default on the bonds held by the trust
> fund which were purchased with workers' Social Security taxes. ...




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--
James Love, Director, Knowledge Ecology International
http://www.keionline.org | mailto:james.love at keionline.org
Wk: +1.202.332.2671 | US Mobile +1.202.361.3040 | Geneva Mobile  
+41.76.413.6584



--

Dean Baker (baker () cepr net)
Co-Director
Center for Economic and Policy Research
1611 Connecticut Ave., NW
Washington, DC 20009
202-293-5380 (ext 114)
202-332-5218 (H)
www.cepr.net




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