Monday, October 05, 2009

A Response to Robert Reich, or God Save Us From Our Friends

Robert Reich in a post at TPMCafe proposed a four point proposal to create jobs: Specifically, What Should Be Done For Jobs?. In it he falls into the typical trap certain technocratic liberals do, mostly those younger than Reich, they get too cute by half and neglect the political history. Here was my response to bullet point (2).

Secretary Reich, and I call you that because that made you ex officio a Trustee of Social Security, with all respect this is one of the stupidest suggestions I ever heard.

"(2) Propose a one-year payroll tax holiday on the first $20,000 of income. "

As you must be aware actual Social Security income from payroll tax and tax on benefits will barely cover outlays in OAS this year, while DI went cash flow negative in 2006. The two Trust Funds still show surpluses simply because of interest accrued on the Special Treasuries, but this interest has not come in the form of cash, but instead in the form of more Special Treasuries. Now these Special Treasuries are backed by Full Faith and Credit of the U.S. but can only be redeemed in cash by the Treasury doing borrowing in the public markets dollar for dollar.

What this means is that every 95%+ of every payroll tax dollar that comes in the door goes out immediately out in the form of benefits. Which means that every dollar not collected because of a tax holiday has to be replaced by a dollar of public borrowing and has the effect of flatlining the growth of the Trust Fund and so making a phony Social Security crisis into a real one.

Every time I hear of a 'temporary' payroll tax holiday I want to tear my hair out. The reason they are embraced by Blue Dogs and Republicans is because they make it easier to achieve their long term goal of rolling back the New Deal by 'proving' Social Security is a 'failure'.

Social Security is not a regressive tax, not when you consider the system as a whole. And Social Security was designed specifically NOT to be a welfare system lest it gets caught up in exactly the kind of proposals you are putting forth here.

Leave Social Security alone. It is worker insurance paid entirely by workers for workers. It demands nothing from capital and so owes nothing to capital. No one gets a free ride although there is a mild transfer from the middle class to the working class (because most people making $102,000 or less know they could easily have ended up closer to the bottom).

Under your proposal would workers still get credit for these dollars not withheld? Or would their future retirement simply be permanently reduced? These proposals always seem easy. Regressive carbon tax? Reduce payroll tax to compensate. Regressive flat tax? Reduce payroll tax to compensate. But each and every proposal has the effect, and often the intent, of defunding Social Security and transforming it from insurance to welfare.

Mr. Secretary do you have trouble sleeping at night? It is probably the ghost of Frances Perkins haunting you for even thinking about helping those who would kill her brainchild.
Either Social Security is in some sort of existential crisis or it is not. If it is the last thing you want to do is blow a big hole in its current income stream, and even if it isn't in crisis as a whole it is entering a period when it needs cash dollars. As noted above sometime soon income extracted in the form of payroll taxes and taxes on upper income benefits will no longer cover outlays. This will start as short term event in 2009 and 2010 but will return sometime after 2013 or so. This is not a problem it was exactly to counter the short term events that caused Congress to mandate that Social Security maintain a one year reserve right from the beginning. Right now those reserves are sitting right at 3 1/2 years, plenty to handle a cash shortfall that will be something less than 1% of outlays.

On the other hand even a short term payroll tax holiday blows a big hole in the Trust Fund. I don't know how much of SS tax income comes from the first $20,000 of income, but surely it is more than the $110 billion or so in interest on the existing Trust Fund, interest that will have to be paid by money borrowed on the public markets, there not being any free lunch here. Every $100 billion not collected in the present cuts $200 billion or more off the Trust Fund projected peak total. Good for Biggs' 'sustained solvency', not so good for the long term interests of workers.

Social Security is NOT welfare. Until you start exempting the first five, ten, or twenty thousand of income. For the love of FDR and Francis Perkins (the Labor Secretary who oversaw implementation of SS) resist the temptation to show how progressive you are by screwing around with FICA taxes. The wall between Social Security was carefully constructed for a particular purpose, it holds back those who would destroy Social Security in the name of 'fiscal responsibility' and 'intergenerational equity'.

Payroll tax holiday = defund Social Security. No matter how reasonable it sounds to offset some proposed regressive tax by a cut in payroll tax you always have to keep this equation in mind. You are not doing the poor any favors no matter how regressive you might think FICA is in theory. In practice it isn't. Just leave it alone.


coberly said...


what are the chances of getting Reich to actually hear that?

(in case any visitors to this blog don't already know it, Bruce is 100% right about this.)

Bruce Webb said...

Well pretty good assuming he reads the comments to his posts on TPM Cafe. The blockquoted piece is cut and pasted from my comment over there.

Rdan said...

I can send him your piece.

Bruce Webb said...

I am assuming he reads comments on stuff he posts at TPM Cafe. This was just a cut and paste from that. Plus I am more interested in targeting his readership.

Rdan said...

yes...but take a look at tyler cowen, dani rodrik, etc at marginal revolution today

Rdan said...

I e-mailed Dean Baker...he agrees with you Bruce. He says if you are to do the cut, call it something else.

coberly said...

well, if Reich reads his mail

he has heard from me before

to no visible effect.

the sad thing is that many experts can't learn anything new.

Bruce Webb said...

Dale you forgot the first rule of the NY-DC corridor: Big People don't listen to Peasants.

Except when they do. There is a NASI SS brief coming outthat will be mentioning you by name in the body of the text with me and Arne relegated to a footnote.

Basically NASI is issuing a list of policy options including one that is very similar to your original $1 a week deal. Joni was going to credit it to me but I pointed out it differed quite a bit from the NW Plan. So we tweaked the text at my suggestion so that both your original contribution to the debate and the NW Plan derived from it are differentiated.

The particular plan they are suggesting starts in 2015, extends for ten years and closes 69% of the actuarial gap. Why they didn't just take it a couple of years longer or bumped it to .22% a year from .20% is beyond me. But either way the idea of an incremental tax increase at less than the rate of growth of real wage is out there in the world with us at least referenced as associated with the concept.

coberly said...

Thanks Bruce.

Is there anywhere I can "read all about it"?

coberly said...

speaking of footnotes

if the people fifty years from now still have meaningful Social Security, they need to build a Statue of Bruce. Bruce is smarter than me, works harder, and is more effective.

I just happened to come in at the right door, sit down, and count on my fingers. The answer was easy because the problem has always been a whole lot easier than the non partisan experts want you to think.

Bruce Webb said...

Dale it is not published yet which is why Joni was able to make some last minute edits. They are going to have a panel to discuss the Report on Oct 30th which usually implies a release date a couple of weeks before that.

NASI is the National Academy of Social Insurance, an organization founded by Robert Ball and is like other Academies invitation only. NASI has a small staff whose income security branch is led by Virginia Reno who is backed up by a Policy Analyst. This job was filled until today by Joni Lavery (who is moving over to SSA) so If any qualified policy person wants to check it out the job description is here.

Bruce Webb said...

Oops. Typo. I meant a "couple of days" and not a "couple of weeks"

Bruce Webb said...

A Statue of Bruce would have kind of an odd inscription:

"A man who confronted a serious public policy issue head on and after years of study emerged to declare the plan that saved Social Security: 'NOTHING!' He cried. 'We DO NOTHING!!!'

coberly said...

good plan.