Now, before the defenders of Krugman go ballistic, I would love to ask Krugman and his followers this question: If Social Security is a legitimate funding scheme, then why is Bernie Madoff in prison? Let me further explain.
Krugman writes the following:
We went through all this at length back in 2005, but let me do this yet again.Well, not exactly. The current "surpluses" from SS are borrowed by the U.S. Government to fund part of its deficit spending. Thus, the government owes the government money. While there are surpluses, the whole thing looks sound, but when there are deficits, the money needs to come from somewhere, and that will be the printing press or the Fed's application of its powers to create "money" from thin air.
Social Security is a government program funded by a dedicated tax. There are two ways to look at this. First, you can simply view the program as part of the general federal budget, with the the dedicated tax bit just a formality. And there’s a lot to be said for that point of view; if you take it, benefits are a federal cost, payroll taxes a source of revenue, and they don’t really have anything to do with each other.
Alternatively, you can look at Social Security on its own. And as a practical matter, this has considerable significance too; as long as Social Security still has funds in its trust fund, it doesn’t need new legislation to keep paying promised benefits.
OK, so two views, both of some use. But here’s what you can’t do: you can’t have it both ways. You can’t say that for the last 25 years, when Social Security ran surpluses, well, that didn’t mean anything, because it’s just part of the federal government — but when payroll taxes fall short of benefits, even though there’s lots of money in the trust fund, Social Security is broke.
And bear in mind what happens when payroll receipts fall short of benefits: NOTHING. No new action is required; the checks just keep going out.
If this sounds somewhat like Madoff's scheme, that is because it is Madoff with its own twist. When Bernie ran "surpluses," he paid benefits to people who already had given money to his "fund." However, at some point, the Madoff stash began to run deficits and everything went to hell after that.
Madoff, of course, could not print money, nor could he borrow from the central bank indefinitely. THAT is the only difference between SS and Madoff, period.
So, Krugman says that those who raise questions about the future of SS are "lying." No, they are not lying. They are those old-fashioned people who think that printing money is not the same thing as creating real wealth. So, who is not telling the truth here?
With all due respect, what is clear by both Krugman’s post, and your response, is neither of you understand how the monetary system works.
ReplyDelete“If Social Security is a legitimate funding scheme, then why is Bernie Madoff in prison?”
No, it’s not a legitimate funding scheme, because Social Security is not a funding scheme. The US government, and consequently Social Security, does not fund itself with taxes. The US government is the sole issuer of its currency, and since it has this monopoly power, it does not need taxes to fund itself. The US government is never revenue constrained; we went off the gold standard a long time ago. Taxation is just a means to control inflation. Therefore, Social Security, which simply is just a government expense, is NOT funded with taxes. And since it is not funded with taxes, there never was a surplus, and nor is it a Ponzi scheme. And since there is no Ponzi scheme, comparing Krugman to Madoff is just silly.
“The current "surpluses" from SS are borrowed by the U.S. Government to fund part of its deficit spending”
No, this is not correct. The US government does not borrow to fund deficit spending. Borrowing, or issuing bonds, is done to change the money supply and influence inflation. This is a common misunderstanding of the monetary system. US government spending is only constrained by inflation.
“when there are deficits, the money needs to come from somewhere, and that will be the printing press”
Are you saying public deficits no longer match net private savings? This is an accounting identity that I believe still holds, and if you have research that shows otherwise, please provide a link.
“Madoff, of course, could not print money, nor could he borrow from the central bank indefinitely. THAT is the only difference between SS and Madoff, period.”
True, but this is a HUGE difference. It’s like saying the only difference between a man and women are the reproductive parts.
“So, Krugman says that those who raise questions about the future of SS are "lying””
Ok, so they are not lying. They just do not understand how the monetary system works. It’s not surprising Alan Simpson does not. What is more disappointing is most academic economists do not as well.
That was one of the "smartest" (i.e., stupidest) anonymous comments of all time.
ReplyDeleteGet your head out of that God Awful macro textbook and think for yourself a little bit!
Anonymous,
ReplyDeleteThe government uses taxes only to control (price) inflation?
So how does this work exactly? Does the government collect taxes and keep them all in a vault somewhere? As far as I know, right now they spend every dime of them. It would be interesting to see the data you have that says otherwise.
If the government spends every dime in taxes, how does this any different than people spending the money they keep from not paying taxes?
If the government doesn't spend every dime in taxes it has a surplus. This surplus is kept in the banking system, which are part of fractional reserves. This money gets lent out and spent. How is this any different than people not paying taxes, and keeping their money in the banking system?
The government does not control inflation through taxes. The FED (tries to) through open market purchases, the discount rate, and the fractional reserve ratio.
On another note, are you saying if only Bernie Madoff ran a ponzi scheme and a counterfitting machine (like the FED), instead of just a ponzi scheme, he should not be in jail?
Brent - with comments like that, it’s pretty clear you are lost in the macro text books, since it’s the macro text books that teach you that a government that is also a monopoly supplier of currency funds itself with taxes and borrowing.
ReplyDeleteSomeone answer this: with all the money printing, and all the bond issuance of the last year, why is inflation going down? Why is the money supply shrinking? Why are long term rates lower?
“Does the government collect taxes and keep them all in a vault somewhere?”
No. Think about what happens when you pay your taxes. It gets debited out of your checking account or paycheck. The private sector is debited. If you pay in cash, the money is destroyed. So what does the US government do when they want to deficit spend? Credit money back to the private sector. Credit too much, you get inflation. Now I’m sure the response will be ‘oh no printing money is horrible and we are all going to hell’ but that’s simply not true under a monetary system such as ours where the government is the monopoly issuer of the currency. The US government always prints/credits to spend and uses taxes and bond issuance/purchases to control the level of inflation by debiting and crediting the private sector. This is the reality under a non convertible floating currency system. Unfortunately, people still think like we are on the gold standard.
“If the government doesn't spend every dime in taxes it has a surplus. This surplus is kept in the banking system”
Not true. Remember public deficits MUST equal net private savings. Staying with your example, if the public sector is running a surplus, then the private sector is running a deficit. If you have research proving this accounting identity no longer holds, please post it. Check the data. Currently the US government is running big deficits, and guess what? The banking system is flooded with excess reserves. When we ran surpluses, the opposite was true.
“The government does not control inflation through taxes.”
Not true. What do you think would happen to the price level if taxes dropped to zero tomorrow, and everything else was held constant. Remember MV=Py? If this has been disproved as well, please send along the research.
“On another note, are you saying if only Bernie Madoff ran a Ponzi scheme and a counterfitting machine (like the FED), instead of just a ponzi scheme, he should not be in jail?”
If you think the Fed is running a Ponzi scheme, then, with all due respect, you have no desire to understand how the monetary system works.
Sorry Anonymous, I still don’t follow.
ReplyDeleteThe government spends tax money on goods and services like everyone else. It affects the price level like everyone else who spends money on goods and services.
I am well aware that the FED, not the government, conducts open market purchases, adjusts the rate banks at which banks can borrow from it, and adjusts the reserve ratio to ‘control’ (price) inflation. I am well aware it has a monopoly over note issue and that these notes are not redeemable for gold. I have no idea why you think this privilege it has should forestall any future (and I believe inevitable) hyperinflation. The FED has had a monopoly of note issue since 1913 and the dollar has lost 95% of it value. Zimbabwe also has a monopoly over its note issue and taxes its people and I don't see them controlling inflation very well.
I don’t see how anything I have posted above or previously has overturned any accounting principles. Also, when I checked the FED website of excess reserves (EXCRESNS) vs. federal surplus/deficit (FYFSD), I frankly did not see the direct relationship you say exists between them. Please provide a link to the data that says it does. Also, I say banks running huge excess reserves because they are severely undercapitalized. They are scared to death. The FED has increased the monetary base to save them.
As far as MV=PT; I agree with those who say it was never proved in the first place. (See Rothbard Man, Economy and State http://mises.org/resources/1082/Man-Economy-and-State-with-Power-and-Market pp. 831-843). I am sure all the mainstream economists at the FED who managed us into this current mess believed in it and used it, and I don’t see that it worked out so well. Also, yes, if the government stopped taxing people and didn't cut its own spending (you did say hold everything else constant) I would expect inflation to increase. The government would have to rely on the FED to inflate the money supply on its behalf to maintain spending despite its lost tax receipts.
I admit I made an error drafting my Bernie Madoff comment. I meant to refer to Social Security as a ponzi scheme, and the FED as a counterfeiting operation. I apologize for that. I am not sure this will change your opinion that I have no desire to learn how the monetary system works, nor affect your presumed ability to read my thoughts.
Hi Richard thanks for the response. I’ll try and address a few your questions below but may I suggest you read this research report? It gives a good understanding of what the role the central bank plays in the banking system, and what excess reserves are.
ReplyDeletehttp://www.newyorkfed.org/research/staff_reports/sr380.pdf
“The government spends tax money on goods and services”
No, the government does not spend tax money. Put it this way, if the government collected $100 in taxes, and wanted to spend $105, do you think it would not spend $105? Of course not, it would print $105. The government is never revenue constrained. It is only constrained by the level of inflation.
“why you think this privilege it has should forestall any future (and I believe inevitable) hyperinflation”
I never said hyperinflation was not possible, but is not a possible outcome for the situation we are in. I’m sure you have already made up your mind that hyperinflation is inevitable you have loaded up on gold, rice, and shotgun shells, but when you are in such a deep balance recession, such as we are in now, deflation is the overwhelming trend. Ask yourself this, if hyperinflation is such a certain outcome, why are treasury rates low and moving lower? Why is credit shrinking? And sorry, comparing the US to Zimbabwe is just silly, for an infinite number of reasons which. Zimbabwe made the political decision to hyperinflation, and as bad as our political system, hyperinflation is not a possibility.
“I don’t see how anything I have posted above or previously has overturned any accounting principles”
In your prior post, you said when the government runs a surplus, it creates a private surplus. This violates the accounting identity that public savings MUST equal net private savings. So if the government runs a surplus, then the private sector must run a deficit.
“Also, I say banks running huge excess reserves because they are severely undercapitalized”
No. The excess reserves are due to the Fed growing its balance sheet in response to failures in the interbank market and to fund asset purchases. The Fed did not expand its balance so the banks would start lending again. If that were the case, they would not be paying interest on reserves. The destruction of credit demand combined with the interest on reserves is why the reserves will not cause inflation, much less hyperinflation. The Fed flooding the system with liquidity allowed time for the banks to recapitalize; it did not recapitalize them.
“I am sure all the mainstream economists at the FED who managed us into this current mess believed in it and used it”
No, the ‘mainstream economists’ (whatever that means) obviously don’t use it. The nonsense Greenspan wrote in the WSJ op-ed last week proves this.
“Also, yes, if the government stopped taxing people and didn't cut its own spending (you did say hold everything else constant) I would expect inflation to increase. The government would have to rely on the FED to inflate the money supply on its behalf to maintain spending despite its lost tax receipts.”
Exactly. You just proved my point: taxes influence inflation, and the US government is never revenue constrained. This is why Prof. Anderson is horribly wrong when he compares SS to a Ponzi scheme (and comparing Krugman to Madoff is just silly).
Anonymous,
ReplyDeleteI am afraid a gulf of disagreement will have to remain between us.
I have several responses to what you have just written, but I fear any further exchange will get us nowhere.
I would rather spend my time studying sound economics and building my bunker.
Thanks anyway.
My sincerest applause, Anonymous, for lighting a candle of Reason and Thought in this abyss of darkness and unreason and worship of a nonexistent Gold Standard of pseudoscientific pseudomathematical neoclassical or Austrian pseudoeconomics. Brent and Richard, face akrasia - you have no idea of what you are talking about, but you are luckier than Socrates, there are people who do. "MMT" (or Double-Entry Bookkeeping Applied to Macroeconomics) "Post Keynesian" or "Kansas City" are guideposts. If you disagree with Anonymous, you disagree with arithmetic and double entry bookkeeping. Yes, sure, if you want to analyse it in an unreasonable way, SS is a Ponzi scheme, it depends on parents having children. But if you analyse it in the same unreasonable way, so is all life on Earth. We all live on the beneficence of the Sun giving us some nice tasty low-entropy energy which we radiate away in higher-entropy infrared, which makes all our Ponzi-istic accounts balance. And what is truly comical is that even if we analyse SS in the silly gold-standard way, the claims of its egregious deficiencies are a pack of lies, as shown long ago - 1999 - by poor old Dean Baker et al.
ReplyDeleteGee, I had no idea that printing paper money creates wealth. I always appreciate being enlightened on such matters.
ReplyDeleteAnonymous,
ReplyDeleteIt is all clear to me now. We will be saved from economic catastrophe thanks to double entry bookkeeping and the sun.
Don't know how I could have missed that.
Thanks again.
Of course, no where in my posts did I say wealth could be created just by simply printing money. No where. But then again, that simplistic, illogical conclusion is to be expected if you believe that SS is a Ponzi scheme and you fail to recognize how a government funds itself in a non convertible, free floating exchange rate system.
ReplyDeleteMoney is an idea backed by the confidence it will be worth value in the future to the holder.
ReplyDeleteDon't we all have confidence in our Government and the Fed? Especially when the Congress doesn't operate under a budget, doesn't read bills, and write in the 900 Billion ARRA blanks check without hearings.
To the Uber Keynesians it is as if the amount of money created in circulation is senior to how it is wasted.
The only thing supporting our finances is the hope & prayer our savings will survive into the future. We are dangerously closing in on the House of Confidence crashing.
Bernie is no different than what we are seeing in our Government.
The mistake is believing time only means the present. Our country's wealth has been wasted in the past and that waste is moving forward in time.
"The Government is the sole issuer of currency."
ReplyDeleteYou're comparing Federal Reserve Notes to Colonial Scrip. You're either out of your mind or a shameless fraud.
Your move.
Actually, I'll throw another wrench in the mix.
ReplyDeleteHow is it possible that between landlords and elderly Social Security recipients not on Section 8, in a common scenario where neither makes significant gain or progress over the other to be accused of being able to turn the screws, how is it possible in such a wonderfully balanced system that the payments from Social Security are
1) completely not in keeping with the value of the dollar
and
2) consequently not sufficient always putting people on edge?
The essential argument is that the US economy can effectively manage the dynamic (relative/dependent) elements without care or concern for the static (accumulating and decreasing) elements.
Holy Pie in the Sky Batman!