Democrats are right to at­tack Obama's tax deal

This re­duc­tion is sup­posed to stim­u­late growth. These Democrats don't care. They don't want to mess with the re­tire­ment pro­gram.

The Pak Banker - - Editorial5 - Amity Shales

Lib­eral Democrats are at­tack­ing not only the rates in the White House-Repub­li­can tax-cut com­pro­mise but also the plans for So­cial Se­cu­rity. The deal would trim the pay­roll tax to 4.2 per­cent from 6.2 per­cent for one year.

This re­duc­tion is sup­posed to stim­u­late growth. These Democrats don't care. They don't want to mess with the re­tire­ment pro­gram. "This is a grand plan of starv­ing So­cial Se­cu­rity so you can then pri­va­tize So­cial Se­cu­rity," Rep­re­sen­ta­tive Jackie Speier, a Demo­crat from Cal­i­for­nia, said Dec. 10. "I'm very dis­ap­pointed. He's out-Bushed Bush."

She is right, though not in the way she means. The pay­roll tax break of 2011 en­cap­su­lates what's wrong with our en­tire tax sys­tem. This one piece of the com­pro­mise plan also ex­plains why growth af­ter next year is likely to be weaker, not higher, than the cur­rent op­ti­mistic pre­dic­tions.

The prob­lem is the na­ture of that growth. In the past cen­tury both par­ties and the econ­o­mists be­hind them have fo­cused on the busi­ness cy­cle, their the­ory be­ing that for the coun­try to grow, that cy­cle must be man­aged, prefer­ably by them. But eco­nomic growth re­quires some­thing else: trust that deals and con­tracts will be hon­ored by all, in­clud­ing gov­ern­ments. Pen­sions are con­tracts, even pub­lic pen­sions like So­cial Se­cu­rity.

Hard-core prop­erty rights lawyers would re­ject the idea of So­cial Se­cu­rity be­ing a con­tract. They see the pro­gram as a govern­ment mug­ging dressed up as a con­tract. Nonethe­less, the framers of So­cial Se­cu­rity, in­clud­ing Pres­i­dent Franklin Roo­sevelt, viewed the ben­e­fit con­trac­tu­ally. In var­i­ous draft­ing dis­cus­sions, Roo­sevelt talked about So­cial Se­cu­rity as a pen­sion, or an an­nu­ity, not a tax ar­range­ment.

The pro­gram is grand be­cause it is the orig­i­nal, the show­case con­tract be­tween Amer­i­cans and their govern­ment. The New Deal it­self used con­tract as a theme. That is why the New Deal was called the New Deal and not, the "New De­mand Man­age­ment Pay­ment."

When a show­case con­tract like So­cial Se­cu­rity is com­pro­mised, cit­i­zens' faith in other con­tracts, pub­lic or pri­vate, be­gins to fray. Their will­ing­ness to in­vest or hire weak­ens.

Roo­sevelt and oth­ers doubt­less be­lieved that the So­cial Se­cu­rity con­tract com­ple­mented their plans to make the busi­ness cy­cle less bumpy. Af­ter all, in the 1930s, mil­lions of el­derly in the U.S. lan­guished in poverty. Feed­ing them was smooth­ing the busi­ness cy­cle in the most cru­cial way.

But in 1937, the first year of So­cial Se­cu­rity's im­ple­men­ta­tion, that strat­egy was chal­lenged. That's when Amer­i­cans be­gan mak­ing pay­ments into the sys­tem; the govern­ment's take amounted to 2 per­cent when you in­clude the em­ployer side. As Fran­cois Velde, an econ­o­mist at the Fed­eral Re­serve Bank of Chicago, pointed out in a paper pub­lished in the fourth quar­ter 2009, the amount taken rep­re­sented 10 per­cent of all fed­eral re­ceipts that year.

Next, came the De­pres­sion within the De­pres­sion of 1937 and 1938, in which in­dus­trial pro­duc­tion dropped a third in six months and un­em­ploy­ment moved into the high teens. Other forces were far more im­por­tant in caus­ing that Dou­ble Dip. One was mon­e­tary and bank­ing pol­icy, an­other was Washington's hos­til­ity to busi­ness. (Roo­sevelt ac­tu­ally told the coun­try that he would prove to Wall Street that he was "their mas­ter.")

But the se­quence of the So­cial Se­cu­rity tax fol­lowed by re­ces­sion made a deep im­pres­sion. Amer­i­can lead­ers' take­away from the mis­take of 1937 was that the pay­roll tax was a nifty tool for de­mand man­age­ment. They liked the thoughts of Mar­riner Ec­cles, the Fed Chair­man. Ec­cles be­lieved that So­cial Se­cu­rity's pay­ment sched­ules should be so flex­i­ble so that au­thor­i­ties might raise it dur­ing strong growth, to pre­vent "over­heat­ing," and lower it dur­ing re­ces­sion­ary pe­ri­ods.

That play­ing with the heads of tax­pay­ers in this way might be dis­con­cert­ing didn't seem to oc­cur to any­one. The pay­roll tax cut for 2011 takes the idea of So­cial Se­cu­rity as fis­cal tool to Ec­cleslevel ex­tremes.

The re­tire­ment sys­tem faces long-term short­falls, re­gard­less of growth. Our econ­omy is not, cur­rently, shrink­ing. If in a non-cri­sis our lead­ers are will­ing to widen that So­cial Se­cu­rity debt by one penny, then, log­i­cally, they will be will­ing to trash the pro­gram more dra­mat­i­cally should a 1930s-style dou­ble dip take place.

They will also be will­ing to ad­just other con­tracts, even pri­vate ones. In its So­cial Se­cu­rity com­po­nent the new tax deal hon­ors the prece­dent set when the fed­eral govern­ment sac­ri­ficed bond­hold­ers and cred­i­tors to unions in the re­cent auto bailouts. It seems any deal or prom­ise is sub­or­di­nate to ser­vic­ing the gen­eral econ­omy and its man­agers.

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