Out of the Box

The New Republic


Last week the Congressional Budget Office confirmed what every semiconscious observer of the budget process had known for months: that proposed spending by President Bush and Congress would force the government to take $9 billion from the ostensibly sacrosanct Social Security surplus. And over the following three years, CBO projected, the government would swipe another $21 billion--assuming, optimistically, that the president and Congress didn't spend even more money.


In reality, these are piddling amounts. The federal budget will be nearly $2 trillion this year, meaning that a few billion here or there are hardly worth a second thought. But you wouldn't know it from listening to leading Democrats. Virtually without dissent, party leaders have announced that they are prepared to protect every single penny in the Social Security surplus, even if it means slashing the programs they consider most important. "You can go down the whole list--education, health care," House Democratic Leader Dick Gephardt said recently on NBC's "Meet the Press." And just this Sunday on ABC's "This Week," Kent Conrad, Democratic chairman of the Senate Budget Committee, reiterated his party's commitment to preserving the entire Social Security surplus no matter what. "I don't think it is wise to have additional spending that's not paid for in this environment," said Conrad, "because it would have to come right out of the Social Security trust fund."


Box Populi Jonathan Chait defends the lockbox. What's going on here? Once upon a time, when consumers and corporations tightened their belts as they are doing now, Democrats would call for the government to fill in the gap and spend more than it was taking in. And, even in good times, Democrats used to champion long-term investments in America's productive future, even if it meant modest deficits. Today, by contrast, Democrats are demanding a balanced budget and spending cuts in the face of a potential recession. Goodbye, John Maynard Keynes. Hello, Herbert Hoover. Tom Daschle and Dick Gephardt may think it's good politics to paint Bush as an irresponsible manager of the federal budget. But it's actually the Democrats who are being irresponsible--by abandoning their traditional commitment to fiscal stimulus and government spending and, in the process, mortgaging our economic future.


The origins of the Democratic love affair with fiscal austerity date back to late 1997, when the Clinton White House faced a budget surplus growing faster than anyone had predicted. Republicans were talking about enacting a large tax cut. The White House needed a way to head them off.


President Clinton's economic advisers (not including me--I had already left the administration) recommended that he link the surplus to the future of Social Security. Under their proposed strategy, Clinton would declare the entire budget surplus--which was, in fact, a surplus in Social Security coupled with a small deficit in the rest of the budget--off-limits until the White House and Congress agreed on how to preserve Social Security for the coming decades, when millions of baby-boomers would retire and claim their benefit checks. Clinton's advisers figured this would trump the GOP's call for tax cuts: If the public viewed the Republican tax cut proposal as a possible threat to Social Security, they'd oppose it. And many Clinton advisers favored the plan on economic grounds as well: They believed that reducing government debt was the surest way to keep the nation's economy strong--which would, among other things, make it easier to pay future Social Security benefits.


Clinton ultimately agreed to the strategy largely because he couldn't think of a better way to block Republican tax cutters. But there was, in fact, another way to head off the GOP: Clinton could have announced that many of the things he had promised when he first ran for president were now affordable. He could have talked up universal preschool care, expanding health care, tens of billions of dollars in new spending for public education, or mass transit that would alleviate the pressure on the nation's choking suburban highways. He could have returned to the vast, unfinished agenda he put on hold during his first term while he got the nation's "fiscal house" in order. And in so doing, he probably could have painted a picture far more compelling than the Republican tax cut, which, polls showed even then, wasn't all that popular.


Admittedly, this would have meant using payroll taxes to finance other government spending. But barely anyone would have noticed. For years, the government had routinely used the revenues from Social Security payroll taxes to finance everything it did. Not even during the long, harrowing negotiations with Republicans over balancing the budget, starting in the spring of 1995 (long before anyone knew the surpluses would surge and make budget-balancing easy), did anyone on either side think there was a meaningful difference between the revenues rolling into the Treasury from payroll taxes and those rolling in from other sources.


It's impossible to know whether Clinton's personal embarrassments figured into his calculation. He began urging Republicans and Democrats to "save Social Security first" in his 1998 State of the Union address. The story about his liaison with Monica Lewinsky had broken just weeks before, and he had already been forced to publicly deny that he had ever had sex with "that woman." Some aides wanted him to delay the State of the Union, but he forged ahead, giving perhaps the best speech of his entire presidency--a jocular, confident, bravura performance--perfectly and resolutely "compartmentalizing" the scandal, as the pundits would report.


Notably, Clinton didn't call for reserving the Social Security surplus for Social Security per se. He merely said that, before spending "every penny of any surplus" on something else, Congress and the administration should come up with a plan for maintaining the solvency of Social Security. After the State of the Union, in order to keep the pressure on Republicans and ward off a tax cut, the White House held a series of debates throughout the country about what that plan might be. Not surprisingly, those debates were drowned out by the Lewinsky media circus.


But even as Clinton's bid for a long-term Social Security deal went nowhere, the budget surplus kept swelling. By mid-1999, the surplus had grown so quickly that even the portion of the budget not dedicated to Social Security was in the black. And this changed the GOP's strategy. With the non-Social Security part of the budget also in surplus (a surplus expected to continue growing), the Republicans could agree to put Social Security in a "lockbox" and still have enough money for their precious tax cut. Clinton responded by going even further; he proposed that 62 percent of the total projected surplus--more than just Social Security revenues--be devoted to Social Security. That proposal went nowhere, but it hardly mattered. The lockbox had become a political reality.


Soon both parties were swearing up and down that they would never touch Social Security money. And in the 2000 presidential campaign each candidate vowed to respect the lockbox. Picking up where Clinton left off, Al Gore promised to leave the Social Security surplus alone and proposed dedicating a large portion of the non-Social Security surplus to reducing the national debt, so that the entire debt would be paid off by 2013. George W. Bush vowed solemnly that he wouldn't touch Social Security either--though he insisted he would have enough money left over to finance a whopping tax cut, a missile defense system, education funding increases, and his plan to privatize Social Security.


Fast-forward one year, and Bush has changed his tune. His promise that he could afford his tax cut and his new spending proposals without touching the Social Security surplus has been exposed as a lie. Of course, no one likes to reward lying. But, in fact, Bush's lie is beside the point. The Social Security surplus is an accounting fiction. And by defending it tooth and nail, the Democrats are abandoning their historic commitment to government spending and fiscal stimulus. The result will likely be the worst of both worlds: a huge tax cut and smaller government. The Republicans will have gotten exactly what they wanted--at the country's expense. And the Democrats? Well, they'll have their nice little lockbox.


Defenders of the lockbox say that, in protecting the Social Security surplus, the Democrats are trying to head off what could be a terrible long-term problem. According to the projections of the Social Security actuary, by about 2016 the yearly revenues from payroll taxes won't be enough to pay promised benefits; and by about 2038 the trust fund as a whole will have only enough money to pay 75 percent of what was promised. The government would then have to find the money somewhere else--either by going deeper into debt or by raising taxes.


But what pro-lockbox Democrats never acknowledge is that these actuarial projections, while worrisome, are just that: actuarial projections. Behind them lie many assumptions about how fast the economy will grow in the interim, how many people will have jobs and be contributing to Social Security, and how many people will be withdrawing money and for how long. Long-term economic projections are notoriously inaccurate, often by wide margins. Not even short-term projections are worth much. Throughout the '90s, year after year, CBO consistently overestimated pending deficits and underestimated pending surpluses. The truth is that it's next to impossible to predict decades in advance the trajectories of revenues going into Social Security and payments coming out of it when they're both influenced by so many factors. The Social Security actuary has never come close to predicting the actual state of Social Security, even a single decade out.


Under the actuary's current assumptions, the U.S. economy will grow at an annual rate of only 1.6 percent in the long term. With the economy now growing barely at all, 1.6 percent may seem optimistic, but in fact it's quite low. The effects of technology and population growth are sure to expand America's productive capacity way beyond 3 percent per year, and, even if the nation falls short of its capacity from time to time (as it is doing now), the long-term average is almost certain to be above 2 percent. (The average for the last 30 years was about 3.1 percent per year, and that was largely before computer and information technology became widespread.) Technological advances continue to improve productivity in ways difficult to measure (no one knows how to account for the growth in the computing power of all sorts of gadgets, for example). And the workforce is sure to grow faster than the 0.2 percent per year that the Social Security actuary predicts for the long term. The actuary's model also figures that only one million immigrants will come to these shores annually--about 600,000 legally and 300,000 illegally. That illegal-immigration figure is way below most demographers' estimates. And that matters because most illegal immigrants enter the workforce, and many pay into Social Security through wages that their employers withhold.


Raise any one of these unrealistically low assumptions, and the projected date of Social Security's insolvency is pushed back many years. For example, if average yearly growth is one percentage point higher over the projected period--leading to a growth rate of 2.6 percent instead of 1.6 percent in the long term--Social Security remains solvent many years past 2038, the date at which Social Security is now predicted to be insolvent. In suggesting that the figures are unrealistically low, I don't mean to criticize the chief actuary personally. He does his best to meet an impossible demand for near certitude about a set of conditions decades hence that can't possibly be known and have taken on more political weight than such projections were ever intended to support. One way he responds is by using very conservative assumptions so the nation is more likely to be pleasantly, rather than unpleasantly, surprised. But that doesn't change the fact that, in the end, his projections are little more than educated guesses.


This isn't to say we should throw a party and forget about the baby-boomers' Social Security. Other things being equal, it would be preferable for Social Security to eat up less public debt in future years, leaving more money for both private and public investment. It's just that there's so much uncertainty about when and if the "crisis" will hit that politicians shouldn't be scaring the public into thinking that taking several billion dollars out of the Social Security surplus right now will make much difference one way or another. And it's the height of demagoguery for Democrats to accuse Bush of "raiding" Social Security by dipping into the current Social Security surplus, since Democrats did the very same thing for years--back in the early '90s--without a second thought.


A serious approach to reforming Social Security would involve reforms like raising the retirement age to 70 (which seems only sensible, given that we're living longer) and making the benefit formula more progressive so wealthy retirees don't end up collecting such fat Social Security checks every month. But keeping sacrosanct a fictional account called the yearly Social Security surplus is the silliest way imaginable. Not only does it require balancing the rest of the budget even when deficit spending is needed to keep the economy moving, but it also prevents the government from borrowing money to spend on all sorts of other useful objectives--including objectives that might fuel economic growth and help save Social Security. As Clinton noted at the start of his presidency (but later forgot), it's better for the government to borrow money to enlarge the nation's productive capacity--investing in better schools, more affordable and higher-quality preschool care, better health care for young people, mass transit, and so forth--than for the nation to do without these things. A rational family or business would surely borrow to make these kind of investments.


Make no mistake: I'm not saying that Bush's $1.3 trillion tax cut was wise. Although this year's and next year's tax cuts may help fight the economic slowdown, most of the cuts will go into effect years from now and will thus do little to stave off a potential recession. What's more, even in the short term, the tax cut's extreme regressivity--which will widen the gulf between rich and poor--also undermines its antirecessionary effects. Rich people are unlikely to spend additional dollars because they already spend all they want; poorer people will spend the additional dollars because they don't. But, under Bush's plan, the poor get barely anything.


So, yes, Democrats should be hollering. But right now they are hollering about the wrong thing. By pledging not to touch the Social Security surplus and by criticizing Bush for doing so, Democrats are putting themselves in a fiscal straitjacket that has nothing to do with the real issues facing the country. They'd be wise to open the lockbox and throw away the key.

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