Federal Reserve Chairman Alan Greenspan dropped a bomb on American politics during his Feb. 25 testimony to the House Budget Committee where he proclaimed the nation’s finances to be in such dire straights that cutting Social Security benefits was the only viable path out of the quagmire. So well regarded is the “maestro,” as Bob Woodward’s 2000 hagiography termed him, by the nation’s press corps that it was left to a Washington Post letter writer to point out that his remarks were an exercise in brazen hypocrisy.
Back in the 1980s as co-chair of a commission of Social Security Greenspan proposed that the system be shored up by a sharp increase in payroll taxes – paid primarily by the working poor and the middle class – that would generate large budget surplus capable of floating the program through looming demographic changes. By 2001, however, the Fed Chairman was singing a different tune, enthusiastically supporting the Bush tax cuts overwhelmingly aimed at the wealthy on the grounds that it would be dangerous for the nation to amass large surpluses. With the budget now in the red in 2004, Greenspan supports extending the Bush cuts to make the situation even more dire and proposes cuts at spending directed toward seniors as the cure. The political agenda here – fewer government services and a shift of the tax burden toward the poor – couldn’t be clearer and has nothing to do with Greenspan’s actual job steering American monetary policy.
Nevertheless, the press seems constitutionally incapable of grappling with Greenspan’s efforts as a policy entrepreneur, never noting in these contexts that he is a partisan Republican and a former acolyte of libertarian extremist Ayn Rand, rather than the non-ideological technocrat of his self-presentation. Nor, indeed, does the media seem interested in his other freelance activities. Testifying before the Senate Banking Committee earlier that week, the chairman opined that Americans ought to consider abandoning their reliance on fixed-rate mortgage in favor of the adjustable-rate kind.
Adjustable rates are, indeed, advantageous if interest rates fall or stay flat throughout the period of the mortgage, but with current rates at historic lows, the advice makes little sense. If, as seems more likely, interest rates begin to rise (perhaps as a result of the budget deficits Greenspan did so much to help create), homeowners with adjustable rate mortgages could find themselves in a very uncomfortable position. Their payments could increase substantially, perhaps beyond what they can afford, while at the same time the underlying values of their homes decreases making it impossible to sell and trade down. The result: default, foreclosure, homelessness and a lifetime of poor credit ratings. Just one example of Greenspan’s long track record of bad investment advice – advice that will be all the more harmful if he succeeds in dismantling the public-sector retirement system.
Rather than point any of this out, The New York Times responded to Greenspan’s proposed Social Security cuts with a “news analysis” claiming that “he was if anything understating the magnitude of the problems ahead.” According to the Times, “looming shortfalls for the two retirement programs [i.e., Social Security and Medicare] are projected to be in the tens of trillions of dollars.” And so they are, but spread out over a period of 75 years. More important, though the lumping together or Social Security and Medicare as “entitlements” or “retirement programs” is a useful rhetorical tool for advocates of Social Security cuts, it has no basis in reality.
In fact, just 16 percent of the projected shortfalls are related to Social Security, with the rest relying on dubiously accurate guesswork about the costs of medical care in the distant future (think about trying to predict the health care system of 2004 from the standpoint of 1929). Were the nation to do nothing whatsoever about Social Security, it would continue to take in more in revenue than it pays out until 2018 and could meet obligations out of the current trust fund through 2042. Relatively modest increases in taxation like eliminating the “cap” that allows income over $87,900 to escape payroll taxes could keep the program solvent for decades more to come.
The sense of a looming “crisis” demanding cuts as a solution is brought on not only by conflating Social Security and Medicare. Another tactic is demonstrated in George Will’s March 5 reference to “the gap between promised outlays and projected revenue.” Such a gap does indeed exist, but the entire purpose of earlier Greenspan-backed payroll tax hikes was to generate a pre-existing surplus to cushion the programs against the future aging of the population.
The Social Security trust fund thereby created is often dismissed as an unreal “accounting fiction,” but it is only a fiction in the same sense that all financial savings are fictional. True, the program’s trustees are not sitting on top of a pile of gold coins, but no one saves money that way. Rather, Social Security, like many people all around the world, owns U.S. Treasury bonds – a promise from the government to repay loans with interest. This is generally regarded as the safest investment a person can make – far safer than the corporate bonds or stocks that Americans could purchase under a privatization plan. That the government will repay what it owes to bond owners is a matter of American law, not an accounting gimmick. As a country we certainly could do what Greenspan suggests: Change the law, decline to repay the loans and instead use the borrowed money to finance tax cuts for the wealthy, but why would we want to?
Put that way, most of us wouldn’t, hence the effort to create a sense of panic surrounding an eminently manageable financial imbalance. Maintaining the current system would cause federal spending to rise by 2 percent of GDP over the next 30 years. Not only is this less than the cost of making the Bush tax cuts permanent, a step Greenspan has endorsed, but increasing federal spending by this amount would leave the total public-sector share of the economy below where it stood under presidents Ronald Reagan and George H.W. Bush – hardly a pair of radical socialists. There is nothing unsustainable about maintaining a government of this size unless you’re monomaniacally dedicated to the tax cut agenda which has reduced federal revenues to an unprecedented low share of national output. Faced with an honest choice, the American people would prefer a restoration of the pre-Bush tax code to drastic cuts in the retirement system, which is exactly why advocates of such cuts don’t want to give it to people. Greenspan may be good at his job – maintaining price stability by setting interest rates – but when he steps out of that role he’s just another conservative hack, and it’s time for the press to start treating him like one.
Matthew Yglesias is a writing fellow at The American Prospect. You can read his blog here.