Saturday, January 05, 2013

Promises that can be kept

In "Promises That Can't Be Kept", John Long argues that the government benefits are like free ice cream, eroding the profitability of the economy until it becomes bankrupt. Yes, people like free stuff, but Long argues that if a business starts giving out too much free stuff, someone has to pay for it, and the people who can afford to pay extra will go elsewhere. There Ain't No Such Thing, dontcha know, As A Free Lunch. Long explicitly describes his on-the-course-to-bankruptcy ice cream shop as an analogy to the federal debt. Mentioning (but not citing), I presume, "Why $16 Trillion Only Hints at the True U.S. Debt," by former Republican congressmen Chris Cox and Bill Archer. In this article, Cox and Archer claim that the federal government owes $86.8 trillion:
The actual liabilities of the federal government—including Social Security, Medicare, and federal employees' future retirement benefits—already exceed $86.8 trillion, or 550% of GDP. For the year ending Dec. 31, 2011, the annual accrued expense of Medicare and Social Security was $7 trillion.
According to Cox and Archer, we will soon have to collect $8 trillion per year to fund these entitlement programs, a task that would be difficult even in an economy with an annual gross domestic product of $13-14 trillion. Sooner or later, something has to give. But Cox and Archer's numbers are suspect; more importantly, Long's ice cream shop analogy is misleading and fails to accurately describe the macroeconomic role of a government with a sovereign currency.

Cox and Archer are trying to scare us with big numbers, and they don't describe these numbers and their sources accurately enough for us to really understand the numbers. On what time-frame does the government "owe" $86.8 trillion? Are these actual debts, or just promised payments? There is a difference: I could say that you personally owe more $1 million, because that's how much money you'll have to spend to stay alive over the next 30 years. But you don't have to reduce your spending to pay back that "debt": that "debt" just is what you'll have to spend. I'm not an expert in social security accounting, but I do more-or-less vaguely know that both Social Security and Medicare project income and expenses over about 75 years. So if that's $86.8 trillion over 75 years, then that's about $1.16 trillion per year, which is not particularly scary. Similarly, as an accountant, I look carefully at qualified numbers. When Cox and Archer talk about an "annual accrued expense of $7 trillion," the first thing I want to look at is how they calculate an "annual accrued expense." Even the most honest accountant uses bullshit numbers, and this $7 trillion smells like a bullshit number. Without telling us how they got it, I just don't know what it means. Finally, these are Republicans talking about government money, and Republicans have less credibility talking about money than Kent Hovind has talking about population genetics. I don't even bother to check Republican math anymore; I simply presume it's an outright lie.

John Long's analogy, though, is not merely unhelpful, it is actively misleading. First, the government is not handing out free ice cream, and it is not handing things out to poor people. They are providing a service that everyone must have: retirement income and old-age health care to people who have, for the most part, worked and paid taxes their whole lives. No rational person would forego these benefits, and the only reason anyone might do so would be to survive in the short term. By making it a universal tax-supported government benefit, employers cannot force workers to compete on who is willing to starve later to work now. Second, the government is not a business that must make a profit (or at least not make a loss) to survive. The government must have debt, because net government financial debt is net private-sector financial assets. If we want to have net private financial assets, then we must have net public debt. That's how the financial system works. Furthermore, the government does not, like an ice cream shop, have to compete with other businesses, and does not have to match its revenues to its expenditures, even in the long run. The government not only must run a deficit, it can print money at will. There are pros and cons to printing money, of course, but they are completely different than the pros and cons of a private business borrowing from individuals. Any time someone compares the government to a business, they simply do not understand fundamental macroeconomics. John Long does not understand fundamental macroeconomics.

Social Security and Medicare are obligations that Americans, as civilized human beings, must meet. We simply cannot choose to let any of our old people starve or go without adequate medical care. We simply must do it. And we can. Even if it did take 50% of our GDP to take care of our old people, then that's what we would have to do. Letting old people starve and die is simply not an option. But the idea that we will have to spend 50% of our GDP to take care of our old people doesn't make any sense. In "A Summary of the 2012 Annual Reports," the Social Security and Medicare Boards of Trustees report that total Social Security spending, 4.2% of GDP in 2007, will rise to about 6.4% of GDP in 2035 and then fall to about 6.1% of GDP in 2050. Similarly, Medicare, at 2.0% of GDP in 2011, will rise to 4.0% of GDP by 2086. Cox and Archer are pulling annual expenditures of 50% of GDP out of their asses; The true amount of 10-11% of GDP isn't couch-cushion money by any means, but it's hardly impossible. For Long to repeat these numbers is simply irresponsible journalism. Our promises to, well, ourselves, that our society will ensure that we won't starve or die of treatable medical conditions in our old age, must be kept, and they can be kept.


  1. Yes SS & medicare are awful things that should be done away with so that congress can 'LOOK LIKE' they are doing something, but are just slamming the 47% into the financial brick wall. BUT....
    The two biggest drains on the money are the congress itself which has its own health and retirement systems. But the BIGGEST drain is the MILITARY!! When was the last time they did anything to protect us from a REAL hazard??? WWII was it. Since then we have spend the years killing mostly harmless people in mostly harmless countries. SO make the crooks in the government join SS and Medicare, like everyone else, cut military by 50% and problems are nearly solved.

  2. Well said...except do you know how much of the American economy depends on "military keynesianism"? Talk about economic collapse. of course...this spending is horribly capital (not people) intense and produces nothing of long term valeu, but to cut off the crack coaine of military spenidng abrutply would be devastating!

  3. do you know how much of the American economy depends on "military keynesianism"?

    I do. It's one of the most obvious pieces of evidence that Keynesianism is correct.


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