Monday, February 25, 2013

Assets, cash, and IOUs

I'm not going to argue directly against Fabius Maximus's argument in Who lies to us the most? Left or Right? that the "Left" lies to us as much as does the right. The Democratic party is "Left" only in relation to the reactionary Republican party. In a sane world, even in a somewhat less insane world, the corporatist Democratic party would be fairly far to the right. And the last few posts share the theme that the American people are all a bunch of sheep. While that position has some validity, I usually find most commenters use that tone to insulate their positions from criticism: if you disagree, you are just rationalizing your passivity. It's tedious. I don't know that Fabius is doing so, but it's a battle I don't want to join.

But I do want to argue against one particular assertion:
The Federal government has spent every dime of the social security taxes, stuffing the Trust Funds with IOUs. These are nothing but an accountant’s convention (an IOU to yourself is not an asset), since even the government can spend money only once. When the system goes cash flow negative soon (see projections from the 2012 Trustees Report) the system changes from a source of income to a cost — a drain instead of a supplement to the Government’s income. Despite this clear reality, the Left dogmatically insists that Social Security is well-funded do to the security of the Trust Funds.

This analysis reveals a deep and fundamental ignorance of basic economics. Every financial assets, i.e. the ownership of any asset not under the owner's physical possession and control, is an IOU: the possessor of the asset has promised to surrender benefits accruing to the asset, as well as possession under certain circumstances, to the owner. All stocks, all bonds, all loans, all bank assets, every component of the economy more sophisticated than 18th century (perhaps even 16th century) capitalism, consists of IOUs. One might argue that Treasury bonds were a particularly bad asset, but the fact that they are "IOUs" is irrelevant.

If one objects to the Social Security Trust Fund (SSTF) holding financial assets in general, the SSTF could hold physical assets. But the government does hold a lot of physical assets: roads, bridges, tunnels, airports, etc. That the SSTF holds government bonds creates an ownership stake in those physical assets. And indeed the excess Social Security taxes that I and the rest of the Baby Boomers have been paying since the 1960s have gone, in part, to (indirectly*) creating those assets.

*Strictly speaking, the government itself doesn't actually "pay" for anything (in the sense that the government doesn't have to spend its finite, limited, store of cash to obtain what it wants. The government just demands what it wants and prints the cash to pay for it. Thus, taxes do not actually pay for government spending. However, government spending takes resources away from consumer spending at full employment, and the United States economy was at more-or-less full employment continuously from the end of the Second Imperialist War to about 2001. Taxes pull private demand out of the system (as well as create demand for cash), so that government spending does not create excess inflation, changing who has to trade off consumer demand for government demand. But when I have to give up something (private goods) to get something (public goods), we can my taxes legitimately "paying for" public goods.

The alternative to holding financial or physical assets is holding cash. However, cash is also an IOU, and it's the worst IOU to hold, both from a macroeconomic perspective and from the perspective of the holders. Cash has no intrinsic use-value; even "commodity" money can be money only because it has no use-value. (Can you eat an ounce of gold? Wear it or burn it to keep warm? Use it to take you to the liquor store?) Cash is an IOU that is (abstractly) a demand against all of society.

But cash, unlike other financial assets, is demand in the complete abstract. When Alice invests, she trades the demand to which her cash entitles her to Bob, in return for a promise from Bob that sometime in the future, he will give Alice some of the demand to which he is then entitled. The demand is still being demanded in the present. But when Alice holds cash, she is simply not demanding what she is entitled to demand, and not allowing anyone else to use that demand in the present. Holding cash reduces aggregate demand. It does not make sense to produce more than we consume. It is very expensive in real terms to build up unsold inventory. When we do not consume all that we produce, we must reduce productivity. Holding cash therefore reduces the real production of goods and services.

Of course, we need some cash: cash is the circulating medium of the economy. It's the job of the government — and only a government can do that job — to ensure that we have just enough cash to keep everything circulating but ensure that not too much cash is stored. Cash is very much like blood: it moves economic demand around, just like blood moves oxygen and nutrients around. Holding cash is like holding deoxygenated and nutrient-free blood: it creates only the illusion that real value has been stored. In reality, we cannot store actual value. All we can do is increase productivity, and consume what we produce.

My generation paid more in Social Security taxes than our parents and grandparents consumed. We sacrificed some of our demand, our right to consume goods and services, to have more when we retired, and this sacrifice fell disproportionately on lower-income workers. We put the decision about how to actually use that demand in the hands of what passes for a democratic decision-making process. Some of that money was spent poorly, but a good fraction was spent increasing productivity and increasing the supply of public goods. True, had that sacrifice been used more wisely we would be even more productive and enjoy more public goods, but without our sacrifice, our economy would not be as productive as it is today. To simply dismiss our sacrifice as worthless paper is both economically illiterate and morally reprehensible.

We do have a real economic crisis looming: We must continue to increase (or, at the very least, maintain) the standard of living of all Americans when a diminishing fraction of them are working. There are only two possibilities. We can impoverish a substantial fraction of our old people, so that working people can maintain their own standard of living (the standard of living bequeathed upon them in part by we who worked and paid excess Social Security taxes from 1960 to 2010), or we can raise productivity so that the fraction of people working can support their parents and themselves in civilized comfort.

The capitalist ruling class does not want to raise productivity. We are at about the maximum productivity that capitalism can support; increase productivity and the rate of return on capital will fall precipitously. The "debate" over "entitlement reform," at a time when banks and businesses are intentionally holding cash and retarding investment and growth in productivity, at a time when we are leaving millions of young people — the young people we need to become productive to support us — uneducated and alienated from all but the most menial economic participation, at a time when the only economic "growth" is financial services and goods and services for the 0.1%, shows that capitalism has become morally and economically bankrupt.

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