Social Security and Consumer Debt

Proponents of Social Security like to say that it is the only thing that keeps millions of
seniors out of poverty. Of course that ignores all the taxes that they paid
into Social Security before retiring. I doubt you’d thank a mugger if he give you
twenty bucks back after stealing your wallet. In order to decide whether or not
social security actually benefits people, you have to look at what they would
have done had they not had to pay all those taxes. Proponents implicitly assume
that people would completely waste all that money and it would just be gone by
the time they retire. Thus, any payment from social security is treated as a
pure gain.

If you look at social security as an investment, you can calculate the return to your investment. Social Security returns are higher for low income workers with long lives. The Social Security administration provides numbers here and more analysis is available here. Suffice it to say that the returns are pretty bleak with an average of 1-2% after inflation.

These returns are pretty pathetic when compared to investing in the stock market
where inflation adjusted returns are closer to 8%. When there are discussions
of privatizing social security, they talk about how risky stocks are and they
revel in every dip in the Dow. The real risk is not having enough money during
retirement and social security is at least as risky for this standpoint.

Instead of looking at the stock market, you can look at debt. Americans, especially the poor, are
drowning in debt – from credit cards, auto loans, underwater mortgages, to
student loans. The Wall Street protestors and community activists like to blame
banks and demand principal reductions and loan forgiveness. Simple math will
tell you that it is foolish to earn 1-2% on your savings while paying 10% on
your debt, but that is exactly what Social Security forces people to do.

You ARE the 1%

The Occupy Wall Street movement has been focusing on the level and growth of inequality in the US with their "We are the 99%" motto. In reality, they are the 1%, and not just because so many of the protestors are college students that come from priviledged backgrounds. They are the 1% because they live in a nation of great wealth, and that great wealth is largely the result of the corporations, banks, and economic system that they are protesting. Even those in poverty in the US are likely to have cell phones, color TVs, and computers -- luxuries that most of the world do not enjoy. We are a country of haves and have-mores instead of a country of haves and have-nots.


The protestors complain that corporations are unfairly shipping jobs overseas. Of course, providing jobs in developing countries helps the poorest people in the world and reduces global income inequality. Apparently, the 1% are supposed to help the poor, but not the really poor. The protestors really only care about their own well-being, just like the 1%.

The protestors complain that the 1% doesn't pay enough in taxes even though their share of the tax burden is even higher than their share of income. The protestors want that money to be redistributed to themselves to reduce inequality. They are just as selfish as the 1% that they rail against, perhaps just not as good at it.

The protestors want bankers to be held accountable for their part in the financial crisis. Do they want to prosecute people who didn't pay back the amounts that they borrowed? Do they want to prosecute people who lied on their mortgage applications? While I too want anyone who acted illegally to be punished, I am not sure the protestors will get the results that they desire.

Good vs. Bad Government Spending

Paul Krugman believes that the problem with the fiscal stimulus is that it just wasn’t large enough and that we are in need of another one to improve the economy. He even went so far as to suggest that a military buildup to protect us from a fake alien invasion would be a good thing.

As support for this he brings back his argument that World War II brought us out of the depression. The idea that war is good for the economy is absolutely wrong. While it may be true that war (or any fiscal stimulus) increases GDP, a higher GDP does not mean an improved economy. (I will give him the benefit of the doubt and assume that he doesn’t believe that the death of 400,000 military personnel isn’t good because of the higher per capita GDP.)
An economy only improves if people have more of the things they want. War does not do this and neither does wasteful fiscal spending. Professor Krugman also argues that cutting federal spending and austerity is bad which is wholly incongruous with his argument that World War II was good for the economy because the war was a period of tremendous austerity with the rationing of many goods.

Now this is not to say that Krugman is entirely wrong about fiscal spending. Government spending is worth it if the benefits outweigh the costs and this is true whether the economy is in a recession or an expansion. Some spending, such as protection against fake alien invasions, provide no benefits and should not be undertaken. I would also include land wars in Asia, most entitlement spending, and most wealth redistribution efforts in this category of wasteful government. Beneficial government spending would include some amounts of national defense, education, infrastructure, legal and regulatory framework, scientific research, and even some entitlements and wealth redistribution.

I would even agree with Keynesians that federal spending should increase during recessions. Not because it stimulates the economy, but because the cost/benefit tradeoff changes resulting in more beneficial projects. If unemployment is high, then the government can hire people at lower wages. If interest rates are low, then future benefits have a higher present value. Thus, a bad project during expansions becomes a good project during recessions. However, paying people to do nothing and trying to keep wages high completely nullifies this.

The main problem with the economy isn’t the lack of fiscal stimulus, it is the excessive use of bad government spending. If the government were to cut the wages of current employees and cut out a lot of the bad spending, then it could fund spending that actually has benefits.

Social Security does contribute to the deficit

There are many ways to solve the budget deficit and reasonable people may disagree as to which method is the best. Revenues could be increased through some combination of higher levels of GDP, faster growth of GDP, and higher taxes as a percent of GDP through either higher tax rates or eliminating tax expenditures (such as home mortgage interest deductions). Realistically, there is some limit to the ability to raise revenues because higher tax rates may also limit the level and growth rate. I have posted on the Laffer Curve before as have others with opposing views.

The deficit could also be reduced through spending cuts. There is also a limit here as lower spending could lower the growth rate of GDP (higher spending may also reduce growth if the spending crowds out private investment with greater growth opportunities). For convenience, the US budget can be broken down into four broad areas: health care (Medicare and Medicaid), Social Security, Defense, and discretionary non-defense. Right now, health care, Social Security, and defense are all in the $700-$800 billion dollar range, but health care has the highest projected growth rates and is definitely the biggest threat to the deficit. However, today I would like to talk about Social Security.

Many people, including Nobel-prize winning economists, argue that Social Security does not contribute to the deficit because we have historically raised more in revenues into Social Security than we’ve spent resulting in a large surplus in the “trust fund” that won’t run out for many years. While this is technically true, it ignores the fact that by soaking up such a large portion of US tax revenues, there is less opportunity to raise additional revenue.

Imagine if there were a law that said that 50% of all tax revenues were dedicated to the Department of Defense. If the defense department only spent 20%, would that mean that they are saving us money or that we don’t spend enough on defense? Of course not, the problem would be that we are dedicating too much of our revenue on defense.

That is the problem with Social Security. By dedicating 12.6% of most workers paychecks (including the “employers” portion, another myth), we are crowding out revenues that could be used for better purposes. An individual with an income of $50,000 would pay 15.3% in Social Security and Medicare, another 15% in federal income taxes, and maybe 10% in state and local taxes, sales taxes, property taxes, … No wonder so many people feel that they are Taxed Enough Already.

Collective vs. Individual Bargaining Rights

We are in the midst of attacks on unions in general and public sector unions in particular. While most critics argue that this unfairly limits workers’ collective bargaining rights, it should also be seen that unions restrict the individual bargaining rights of workers. The value of unions increases with the monopsony power of employers in the hiring process and the similarities among employees. For example, generous health care benefits may not provide as much value to younger, healthier employees and employees who already have coverage through a spouse. Pension plans that reward longevity may not provide as much value to mobile employees. Salaries that are based on experience and degree fail to reward those exceptionally talented teachers. However, these teachers have no voice for their needs. They are stuck with the deal negotiated by the union.

Kinky Health Care

How should health care be reformed? Well, the Kinky Economist has a plan that provides for both universal health care and the best damn health care that money can buy. The first major component is government provided health care available to anyone. This public plan would be modeled on the VA system where the government owns the hospitals and the doctors and nurses are employees of the government, so members would not be able to choose their own doctor. If you want to choose your own doctor, pay for it yourself (or buy your own insurance). There is no right to choose your own doctor.

The plan would focus on preventative care where annual check-ups are not only free, but you could get paid for a healthy lifestyle. So much of our health care costs, especially diabetes, heart disease, and respiratory problems, are driven by behaviors such as obesity, inactivity, and smoking. By focusing on wellness, these costs can be avoided (although healthier lifestyles do result in higher costs due to increased life expectancy and chronic diseases in old age).

Chronic and catastrophic health care would be rationed by Quality Adjusted Life Years (QALYs). For instance, the government may pay up to $40,000 for treatment that extends a patients life by one year, so the cost per QALY would be $40,000. Yes, health care will be rationed -- it is already rationed. Every scarce resource is rationed. If you don't want the plug pulled on Grandma. then pay for her health care. You shouldn't demand that other people to pick up the tab if you're not willing to pay the costs. If QALYs are used to ration health care, then how much are we willing to pay to save a life? More accurately, how much are we willing to make someone else pay to save a stranger's life? The budget for health care must be limited to a percentage of the total government budget. Once a fixed dollar value has been created, the cost per QALY will depend on how many people are in the government plan and how much health care they need. The government plan is meant for the poor and the sick, not the healthy and the wealthy. If more people get their own insurance, then the available funds can be spread among fewer participants resulting in higher costs per QALY. The plan can also accept contributions from donors that would increase the cost per QALY.Another focus of the plan is positive externalities of health care. The plan could require patients to be immunized resulting in a reduced likelihood that other people will get sick. The plan could strongly encourage organ donation to help save other lives. The plan could be used for research on new medical techniques and drugs. All of these characteristics result in social benefits.

Another focus of the plan is cost containment. Treatments would be based on comparative effectiveness so that costly, ineffective treatments are avoided. Medical malpractice costs would be eliminated or at least drastically reduced by not allowing patients to sue or instituting a program to resolve these disputes. Generic drugs would be prescribed instead of brand names in order to lower pharmaceutical costs. The plan would also use it's size to negotiate better terms for prescription drugs, medical equipment, and other purchases.

There would also be a greater reliance on medical personnel other than doctors such as Physician Assistants and Nurse Practitioners. Additionally, employment in the system could be worked into programs for medical and nursing schools. For example, tuition is free at military academies such as West Point, but students are required to give four years of duty after graduation. The GI Bill will pay for college for soldiers after they leave the service. The federal government could pay for medical school with a requirement that the doctors work in the system after graduation.

The public plan is not for everyone and most Americans can and should get their own insurance, just as they do today. However, the health care system does have flaws and room for improvements. The primary downfall of the plans that seem to be bandied about is the insistance on a single level of health care resulting in either reduced levels of care and/or higher costs. By recognizing that everyone deserves basic health care but not necessarily Cadillac care, I believe that the KinkyCare framework has the best potential to improve health care coverage and results.

The Four Hurdles of Global Warming

After health care, debate over global warming and the environment has been the most raucous over the past years. Before I go into a full discussion of my views, I do want to mention two points worthy of special mention. The first is whether or not global warming is caused by man. Who cares? Suppose we knew that it global warming was real, but not caused by man. Would that make it any less dangerous? The second point is that even if you don’t believe in global warming, fossil fuels are still pollutants that results in negative externalities. As we all know by now, even the most strident anti-government economists recognize that there is a role for government in the regulation and taxing of negative externalities. (Full disclosure: I consider myself a strident, anti-government economist). With that out of the way, I’ll move on by discussing the four questions that should really guide the debate.


Is global warming really happening? This is the question that has the least to do with economics and the most to do with climate scientists. I’m going to have to say yes on this question based on the climate reports. Admittedly, it is fairly easy to massage data to fit your hypothesis and the models have done a very poor job of forecasting the future. What I mean by this is that it is easy to create a model that explains what happened in the past, but if the model can’t predict the future, it isn’t of much use. So even if the Earth has gotten warmer over the past 100 years, I am not confident that it will continue to get hotter even if there are no actions taken to reduce global warming.
What are the positive and negative effects of global warming? It is possible that global warming may cause the ice sheets to melt and sea levels to rise, but it may also lead to longer growing seasons and more temperate conditions elsewhere. There is no reason to believe that the current climate is the optimal climate. It is entirely possible that a warmer Earth is actually better. Realistically, some people will gain and some will lose. It may suck to be a Polar Bear, but there are areas that will benefit from global warming. I have seen reports that the US would be better off with global warming, and not just because California will be under water.
Can human actions affect it? While I don’t think it matters whether or not humans cause global warming, I do think it is important to know whether or not humans can control it. It doesn’t really matter whether or not man caused global warming, what matters is whether or not we can do something about it. What effect will a reduction in carbon dioxide emissions have? Are there other actions that may affect global warming. The book SuperFreakonomics has a chapter devoted to alternative methods of fighting global warming that includes things like huge ocean mirrors and simulated volcanoes. These might be as effective and cheaper than reducing the use of fossil fuels.
Are the benefits of taking action worth the costs? In economics we talk about tradeoffs, and when I say costs I am not just talking about money, I’m talking about lives. Economics is sometimes known as the Dismal Science because it is concerned with Scarcity. It originally got this name due to the work of Thomas Malthus who basically predicted that population growth would outstrip food supply leading to constant famine. The question became one of forced population control (like China’s one-child policy) or natural population control through starvation. The Earth currently has almost 7 billion people. Many people believe that the Earth is overpopulated and a population of 5 billion may be more manageable. Is this a good thing? I’m not even sure if we can define what is good or bad, and if we can’t define an objective, how can we decide what to do? (Side note: Both Global warming and efforts to fight global warming may cause death). Beyond life and death, there is quality of life. If you could go back 100 years and prevent the development of the car or the discovery of oil, would you? By doing so, you may prevent global warming, but you’d also be eliminating the huge strides in our quality of life.

Frankly, I don’t know what to think. I basically support some taxes on fossil fuels due to the negative externality that results combined with some subsidies for greener forms of energy, but there becomes some point where the taxes and subsidies go too far. Just like the discussion of externalities, the tax should be equal to the marginal social cost – no more and no less. The goal is not to have no pollution (or no global warming) the goal is to have the optimal amount, and your definition of the optimal amount may be different from mine.