Normally keeping Matt Bai honest is John’s job (see here or here ). However, with John off at Ezra Klein’s blog this week, I figured I would step into the breach.
Bai had a piece in the NY Times on Wednesday on reasons why progressive might want to think seriously about combating the deficit, which essentially revolved around a conversation he had with Rep. Earl Blumenauer (D-Oregon). The central argument is interesting – that progressives need the government to be solvent and trusted so that it can continue to fund programs that progressives hold dear, including Social Security. My problem with the article, however, concerns Bai’s explanation for why Social Security is in trouble. He writes that:
The coalition bases its case on the idea that Social Security is actually in fine fiscal shape, since it has amassed a pile of Treasury Bills — often referred to as i.o.u.’s — in a dedicated trust fund. This is true enough, except that the only way for the government to actually make good on these i.o.u.’s is to issue mountains of new debt or to take the money from elsewhere in the federal budget, or perhaps impose significant tax increases — none of which seem like especially practical options for the long term. So this is sort of like saying that you’re rich because your friend has promised to give you 10 million bucks just as soon as he wins the lottery.
Really? The last time I checked 30 Year US treasuries were trading at 4.06%; 10 year US treasuries were trading at 2.99%. And it turns out that China owns about $843 billion worth of US treasuries. So apparently there are at least a few people out there that think the US government is likely to repay its debts. Perhaps it is more like saying you’re rich because you have a friend who has promised to give you 10 million bucks and can access international capital markets.
To be clear, there are plenty of “problems with the Social Security trust fund”:http://www.kansascityfed.org/PUBLICAT/ECONREV/PDF/1q06hakk.pdf; owning a bunch of US treasuries is just not one of them.
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The Fed publication says, on page 14: “The assets in the Trust Fund are simply IOUs, signed by the federal government. To pay the IOUs the government must look elsewhere for real resources.” That’s all that Bai is saying. Perhaps you don’t mean to endorse the Fed publication you linked to?
It is possible that we have a problem, but China has an even bigger problem.
^^Thomas: you, Bai, and the Fed are technically correct in your characterization of the Trust Fund as mere “IOUs,” in that the money has been spent, and thus will need to be generated through taxes, deficit, or spending cuts to make good on the IOUs. The complaint, however, is that this particular spin — the preferred Republican spin — is extremely misleading without pointing out that the IOUs are backed by the full faith and credit of the safest investment in the world.
Joshua and Adam, you seem to be missing the point. Yes, the SS fund has valuable assets. Those are valuable because the government has to pay them back. And where is it going to get the money to pay them back? Exactly what Bai said: “issue mountains of new debt or to take the money from elsewhere in the federal budget, or perhaps impose significant tax increases” In other words, owning assets with the “full faith and credit” of the US government only means that the US government has to come up with the money at some future date. So like Bai says, IF the US government is solvent, the SS Fund is in good shape–therefore, let’s keep the US government solvent.
Two follow up points: First, the major thing I was objecting to was the characterization of the US government in terms of a friend who thinks he is going to win the lottery. My point about the current interest rates is that even with our mammoth deficits and debt at the moment, people and countries are willing to lend to the US government. Could that change? Sure. Is it likely to change any time soon? Probably not. Is it the same as hoping you are going to win the lottery? Certainly not.
Second, and here I’m more just speculating, but wouldn’t there be a tremendous “reputation cost”:http://www.amazon.com/Reputation-International-Cooperation-Sovereign-Centuries/dp/0691134693/ref=sr_1_2?ie=UTF8&s=books&qid=1283195479&sr=8-2 to the US government if it defaults on _any_ of its treasuries, regardless of who holds it? Once the US defaults on any treasuries, I assume the cost of borrowing would go up astronomically. So it seems to me that for the fund to hold US Treasuries, we are talking about something fundamentally different from, for example, some kind of policy pronouncement that the government could or could not provide funding for in the future. If I’m wrong about this characterization, I’d be interested in knowing why. Would there really be no penalty in international markets if the US defaulted on treasuries held by the trust fund but nowhere else? Would this even be legal?
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