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June 14th, 2013 
Peter Nolan
by
David Stockman
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by David Stockman: Greenspan
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Excerpt
from The
Great Deformation: The Corruption of Capitalism in America
by David A. Stockman. Published by PublicAffairs.
The Social
Security Act of 1935 had virtually nothing to do with ending the
depression, and if anything it had a contractionary impact. Payroll
taxes began in 1937 while regular benefit payments did not commence
until 1940.
Yet its fiscal
legacy threatens disaster in the present era because its core principle
of social insurance inexorably gives rise to a fiscal
doomsday machine. When in the context of modern political democracy
the state offers universal transfer payments to its citizens without
proof of need, it offers thereby to bankrupt itself eventually.
By contrast,
a minor portion of the 1935 legislation embodied the opposite principle
namely, the means-tested safety net offered through categorical
aid for the low-income elderly, blind, disabled and dependent families.
These programs were inherently self-contained because beneficiaries
of means-tested transfers simply do not have the wherewithal
that is, PACs and organized lobbying machinery to capture
policy-making and thereby imperil the public purse.
To the extent
that means-tested social welfare is strictly cash-based, as was
cogently advocated by Milton Friedman in his negative income tax
plan, it is even more fiscally stable. Such purely cash based transfers
do not enlist and mobilize the lobbying power of providers and vendors
of in-kind assistance, such as housing and medical services.
Social insurance,
on the other hand, suffers the twin disability of being regressive
as a distributional matter and explosively expansionary as a fiscal
matter. The source of both ills is the principle of income
replacement provided through mandatory socialization of huge
population pools.
On the financing
side, the heavy taxation needed to fund the scheme has been made
politically feasible by the mythology that participants are paying
a premium for an earned annuity, not a tax.
Consequently, payroll tax financing is deeply regressive because
all participants pay a uniform rate regardless of income.
At the same
time, benefits are also regressive because those with the highest
life-time wages get the greatest replacement. This regressive outcome
is only partially ameliorated by the so-called bend points
which provide higher replacement on the first dollar of covered
wages than on the last.
The New Deal
social insurance philosophers thus struck a Faustian bargain. To
get government funded pensions and unemployment benefits for the
most needy, they eschewed a means test and, instead, agreed to generous
wage replacement on a universal basis. To fund the massive cost
of these universal benefits they agreed to a regressive payroll
tax by disguising it as an insurance premium. Yet the long run results
could not have been more perverse.
The payroll
tax has become an anti-jobs monster, but under the banner of a universal
entitlement organized labor tenaciously defends what should be its
nemesis. At the same time, the prosperous classes have gotten a
big slice of these transfer payments, and now claim they have earned
them when affluent citizens should have no proper claim on
the public purse at all.
Accordingly,
social insurance co-opts all potential sources of political opposition,
making it inherently a fiscal doomsday machine. It was only a matter
of time, for example, before its giant recipient populations would
capture control of benefit policy in both parties, and most especially
co-opt the conservative fiscal opposition.
Within a few
decades, in fact, Republican fiscal scruples had vanished entirely.
This was more than evident when Richard Nixon did not veto but,
instead, signed a 20 percent Social Security benefit increase on
the eve of the 1972 election. Worse still, the bill also contained
the infamous double-indexing provision which since then
has generated massive hidden benefit increases by over-indexing
every workers payroll history. The fiscal cost of relentless
universal benefit expansion has driven an epic increase in the payroll
tax. The initial 1937 payroll tax rate was about 2 percent of wages,
but after numerous legislated benefit increases, the addition of
Medicare in 1965, the Nixon benefit explosion and the Carter and
Reagan era payroll tax increases, the combined employer/employee
rate is now pushing 16 percent (including the unemployment tax).
Accordingly,
Federal and state payroll taxes for social insurance generate $1.2
trillion per year in revenue four times more than the corporate
income tax. So with the highest labor costs in the world, the U.S
now imposes punishing levies on payrolls. It thus remains hostage
to a political happen-stance that is, the destructive bargain
struck eight decades ago when high tariff walls, not containerships
loaded with cheap goods made from cheap foreign labor, surrounded
it harbors.
Yet there is
more and it is worse. The current punishing payroll tax is actually
way too low that is, it drastically underfunds future benefits
owing to positively fictional rates of economic growth assumed in
the 75-year actuarial projections. As a result, the benefit structure
grinds forward on automatic pilot facing no political opposition
whatsoever. In the meanwhile, the fast approaching day or reckoning
is thinly disguised by trust fund accounting fictions.
In truth the
trust funds are both meaningless and broke. Annual benefit payouts
already exceed tax receipts by upward of $50 billion annually, while
the so-called trust funds reserves $3 trillion of fictional
treasury bonds accumulated in earlier decades are mere promises
to use the general taxing powers of the US government to make good
on the rising tide of benefits.
The New Deal
social insurance mythology of earned annuities on paid-in
premiums that have been accumulated as trust fund reserves
is thus an unadulterated fiscal scam. In reality, Social Security
is really just an intergenerational transfer payment system.
Moreover, the
latter is predicated on the erroneous belief that new workers and
wages can be forever drafted into the system faster than the growth
of benefits. During the heady days of 1967, for example, Paul Samuelson
and his Keynesian acolytes in the Johnson administration still believed
that the American economy was capable of sustained growth at a 5
percent annual rate. The Nobel Prize winner thus assured his Newsweek
column readers that paying unearned windfalls to current social
security beneficiaries was no sweat: The beauty of social
insurance is that it is actuarially unsound. Everyone … is given
benefit privileges that far exceed anything he has paid in …
Samuelson rhetorically
inquired as to how was this possible and succinctly answered his
own question: National product is growing at a compound interest
rate and can be expected to do so as far as the eye can see. …
Social security is squarely based on compound interest … the greatest
Ponzi game ever invented.
When 5 percent
real growth turned out to be a Keynesian illusion and output growth
decayed to 12 percent annual rate after the turn of the century,
the actuarial foundation of Samuelsons Ponzi game came crashing
down. It is now evident that Washington cannot shrink, or even brake,
the fiscal doomsday machine that lies underneath.
The fiscal
catastrophe embedded in the New Deal social insurance scheme was
not inevitable. A means-tested retirement program funded with general
revenues was explicitly recommended by the analytically proficient
experts commissioned by the Roosevelt White House in 1935. But FDRs
cabal of social work reformers led by Labor Secretary Frances Perkins
thought a means-test was demeaning, having no clue that a means-test
is the only real defense available to the public purse in a welfare
state democracy.
When the American
economy was riding high in 1960, Paul Samuelsons Ponzi was
extracting payroll tax revenue amounting to about 2.8 percent of
GDP. A half century later, after a devastating flight of jobs to
East Asia and other emerging economies, the payroll tax extracts
two-and-one half times more, taking in nearly 6.5 percent of GDP.
So the remarkable thing is not that wooly-eyed idealists who drafted
the 1935 act succumbed to social insurances Faustian bargain
at the time. The puzzling thing is that 75 years later with
all the terrible facts fully known the doctrinaire conviction
abides on the Left that social insurance is the New Deals
crowning achievement. In fact, it is its costliest mistake.
June
14, 2013
Former
Congressman David A. Stockman was Reagan’s OMB director, which he
wrote about in his best-selling book, The
Triumph of Politics. His latest book is The
Great Deformation: The Corruption of Capitalism in America.
He was an original partner in the Blackstone Group, and reads LRC
the first thing every morning.
Copyright
© 2013 David
Stockman
Source Article from http://lewrockwell.com/stockman/stockman26.1.html
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