The coming Democratic blowout

How much does Donald Trump want to win reelection? So much that there is literally nothing he won’t try to win it. The only weird part is that the harder he tries, the more he screws himself.

He’s going for broke, which is sort of the way he’s run the Trump Organization, given its many bankruptcies over the years. He’s only increasing the odds that he will have to deal with many criminal charges and civil lawsuits after leaving office. In addition to his actions being counterproductive to him, they are going to devastate Republican candidates across the board, including in state legislature races.

Literally no other president would even consider doing something so patently illegal as maiming the Post Office. The Post Office has the overwhelming approval of people in all parties. It’s one of the few functions of government specifically written into the U.S. Constitution. Our founders saw a mail service as so essential that it is explicitly chartered as an allowed government service. Since its first postmaster Benjamin Franklin set it up, it’s been largely untouchable.

But to Donald Trump, it’s just something to manipulate to help ensure his reelection. His toady of a new postmaster general has prohibited overtime and removed mail sorting machines from hundreds of mail processing facilities, as well as removed dozens of people from his senior staff with deep institutional knowledge. It’s true that mail volume has decreased and some of this is necessary, but not when Americans are filling the mail system with ballots. Mail is backlogging in postal facilities nationwide and in many cases it now must be sorted tediously by hand by postal clerks who are prohibited from accruing overtime. People, particularly rural people who vote disproportionately Republican, depend on it for critical things like getting prescription drugs and social security checks. How do you think this way play politically for Trump?

But that’s all appears to be expendable to Donald Trump because he’s convinced if ballots can’t be counted because they don’t arrive, he’ll win. It will throw a huge amount of chaos into the election, but it’s unlikely to change any results in his favor. People concerned about their vote counting will probably drive by city hall instead and insert their ballots into the ballot box instead. That’s likely what we are going to do.

Similarly, there are his executive orders. Four were recently issued, but actually only one (the other three were memorandum with little teeth) qualifies. All this is because he and Democrats in Congress can’t agree on a pandemic funding bill. Democrats offered $3 trillion; he offered $1 trillion. Democrats suggested meeting in the middle at $2 trillion and he said $1 trillion and we’re not going any higher. When Democrats wouldn’t take the bait, he issued these “orders” instead, cutting the previous benefits from $600 to $400, of which states had to chip in $100 for unemployed to get any of this money. These states are already running in the red because the economy is down so virtually no states can afford this “system”. Oh, and the money would come from disaster relief funds … no chance of needing some of that money considering we’re having a very active hurricane season, right?

Then there’s his unilateral payroll tax “cut”, but it’s really a tax deferral. The taxes are still owed; it’s just that some employers may stop collecting them. This is very dubious legally, but of course it expands the budget deficit and worse, strikes at the heart of the solvency of the Social Security system. This is something else Trump doesn’t like and this looks like an end around to wound it, but his most staunch voters depend on its solvency.

Most likely Trump will eventually realize he has to strike a deal more to Democrats’ liking. He can hope of course that some of voters’ ire will also be directed at Democrats that can’t come to a deal, but the Democrat’s position looks much more politically tenable than Trump’s. In addition, it’s not like Democrats have been sitting on the sidelines. The Democratic House passed a generous bill back in May, but Senate Majority Leader Mitch McConnell refused to take it up. McConnell couldn’t even create a consensus bill among his own party and effectively washed his hands of the issue.

About half of his conference is opposed to all the deficit spending although not one of them will call for the repeal of their tax cuts for the rich to address the issue. That’s why Trump is left to negotiate with Democrats who are at least reasonably reunited. Naturally he can’t negotiate with Nancy Pelosi or Chuck Schumer directly. He’s got a tiff with Pelosi going, so it will have to be through his chief of staff and Treasury secretary. In the meantime, the unemployed don’t have much if anything in the way of income and most can’t pay their rent and many are likely to be evicted.

Then there is his continued bungling on the pandemic, which is now hitting mostly red states the most severely. He keeps pushing for deeply stupid things that make the crisis worse, which will get much worse when schools start to seriously reopen. Students will transmit the virus home to parents, and pass it on to their teachers and school staff. This will push infection rates even higher into the fall.

It’s a strategy not just for losing, but also for a Democratic blowout. And it’s not hard to figure out why. It’s because neither Trump nor the Republican Party have a clue on how to govern.

Republicans are simply racists and classists

Did you watch the last night’s Republican debate; you know the one where Donald Trump snippily decided he would not attend because he doesn’t like questions that Megyn Kelly might ask? You did? Good for you and apparently you are more into politics than I am. I was certain I’d learn nothing new and from the reviews I was right. So now voters wait warily for the results of the Iowa caucuses next Monday night. Let’s hope the Republicans get it right this time.

Some pundits are predicting the demise of the Republican Party after the next election. I’ll be lifting a glass of champagne if that happens to be the case. Abraham Lincoln wouldn’t recognize his own party anyhow. Republicans after all freed the slaves and today’s Republicans want to make them slaves again. I won’t be lifting my glass too high though because as bad as the Republican Party is, I do think whatever phoenix emerges from its ashes could actually be worse.

What got me thinking this way was reading the latest Washington Post OpEd by conservative Charles Krauthammer. After the obligatory sentences saying how Bernie Sanders couldn’t get elected because America doesn’t elect socialists (conveniently ignoring the fact that Franklin Delano Roosevelt won four terms on an effectively socialist platform, and by overwhelming majorities), Krauthammer looks at the factions within the G.O.P. In particular he notes that Donald Trump is not really conservative, certainly not in the sense that he wants to rollback social programs. In the same paper, Fareed Zakaria notes that Republicans have given lip service to getting rid of social programs and in many cases expanded them. In fact, he notes polls that economically conservative Republicans are going for Cruz over Trump by 15 percent, while Trump wins by 30 percent over Cruz from Republicans holding “progressive positions”, such as on health care, taxes, the minimum wage and the benefits of unions.

Well, this is a head scratcher, until you think about it a little while. One possibility is that Trump is expanding the Republican base, pulling in (principally white) people that don’t tend to vote Republican, or vote at all, because no one in the party represents them. However, there is no evidence that Republican Party registration is increasing significantly nationwide, as this recent Gallup poll attests. Zakaria does quote Michael Tessler of the Rand Corporation, who provided his statistics. Tessler says: “Trump performs best among Americans who express more resentment toward African Americans and immigrants and who tend to evaluate whites more favorably than minority groups.” This is a polite way of saying Trump does much better with the party’s racists. This is not surprising until you think about what this actually means.

What principally unites the Republican Party (to the extent it is united) is not fiscal conservatism. It’s not the importance of federalism (state control). It’s not God, an aggressive foreign policy and it’s certainly not Jesus. It’s not even guns. Their principle shared-value is that they think they are special and deserve a singular status over the rest of society, who they mostly look down on. In short, most of them are racists, even if they can’t even admit it to themselves. It’s more acceptable to be a classist, instead of a racist, which many will openly acknowledge. This basically means they don’t believe in egalitarianism and that some for whatever reasons (status, wealth, race, education, values) deserve to be privileged. Moreover because they are privileged, they should not feel (and apparently don’t feel) ashamed of this. It’s this energy that Trump is harnessing. When push comes to shove, this is what Republicans care about.

I believe it is part of Carl Rove’s master plan. He fed these primal fears to give the Republican Party oversize stature. They feel it slipping away, which is why Republican-led states enacted onerous voting restrictions. Their loss of their status, real or in many cases imaginary is their greatest motivation. Trump was savvy enough to cut through the bullshit and go for the jugular. This is why he is leading in the polls. (It does help to have so many competing candidates that the opposition is scattered.)

After all, if you want power it’s not about making a logical case; it’s about making a resonating emotional case. Fear is a great motivator and Republicans excel at looking behind their backs. Trump succeeds by saying that those others not like us are the cause of our fear of loss of status and privilege. Throw out the “illegals” and things may not be well, but they sure will be better. He has ruled out major changes to Medicare and Social Security because he’s read the polls and knows his fans support programs like these. Tax cuts go disproportionately to the wealthy but welfare goes disproportionately not to the poor, but to the middle class.

Medicare and Social Security are just two ways to keep the middle pacified, but it’s only the beginning. There is the employer health insurance tax credit, which annually costs three times as much as food stamps. There is the home mortgage interest deduction, tuition tax credits and even energy efficiency credits that go only to those who can afford to take advantage of them. Power is secured through keeping the rabble happy. Trump knows there are plenty in the middle who understand their standard of living is wobbly. The last thing most of these people want is more uncertainty to their standard of living, but they are perfectly happy to add uncertainty to those who don’t think and act like them: the others. Me first!

The Romans quickly realized that the rabble wasn’t happy unless the lions ate a gladiator or two now and then. They made it convenient for citizens to enjoy this entertainment by allowing everyone in for free. Trump is metaphorically doing the same thing: he is harnessing the power that is already there. He plays the crowd the same way Itzhak Perlman plays the violin. He plays up the juicy expectation of red meat to come: walls along the border with Mexico and less of the other among us. He says: less of them means more for us and will make us (the privileged) great again. And so they dance and he knows that the rest of the party will come along in time. The Republican Party leadership seems to understand which way the wind is blowing. Chairman of the Republican National Committee, Reince Priebus recently said as much, and even elder statesmen like Bob Dole seem to be acknowledging they will fall in line too. Power is what counts; whatever message gives them that power is okay.

It’s just that because of Donald Trump it’s now out in the open. Even Republicans can’t deny it anymore because their leading candidate simply won’t. They are the party of people like them: white racists and classists. They just can’t hide from it anymore.

Obama is losing his Democratic moorings

Like many liberals, I am going through a painful disillusionment phase with Barack Obama. I am disheartened and saddened by his approach to governing since his reelection. I fear he is setting Democrats up for failure in 2014.

If there is one thing that unites Democrats it is a passion for the needs of the middle class and the poor. Since his reelection Barack Obama is showing signs that he is putting some nebulous legacy and quest to “get things done no matter what the odds” ahead of the best interests of the American people.

The most painful aspect has been Obama’s repeated declarations, most explicitly in his FY2014 budget, that he is prepared to scale back social security cost of living adjustments and increase Medicare payments in order to balance the budget. He says this will only happen if Republicans agree as part of a grand bargain to also raise taxes elsewhere.

Obama is way too smart a politician to not realize that social security is not contributing to the deficit. Indeed in most years it diminishes the deficit by putting its surpluses into the treasury. This proposed means of diminishing social security benefits is through a mechanism called “chained CPI” (consumer price index). Basically it would reduce inflation protections built into social security, on the assumption that people will reduce spending patterns when prices rise, for example going with ground beef instead of steaks. However, the elderly spend a disproportionate amount of their income on health care expenses, which has proven resistant to the “ground beef for steak” approach. Regardless, this would still amount to a cut in income generally compared with inflation for people who can least afford to take the hit. This means they will endure a reduction of standard of living, which is already pretty poor for many social security beneficiaries without pensions or high valued 401Ks. Worse, it would do nothing to control the deficit. Obama appears to be willing to balance the budget on the backs of those least able to afford it, and who contributed to their social security over the years based on certain assumptions which may well go by the wayside. It’s unfair and it is back stabbing.

As for Medicare, the president is proposing means testing, essentially requiring those at somewhat higher income levels to contribute more in the way of deductibles and copays when we use Medicare. There is no question that Medicare is a growing entitlement and there is enormous waste in the system. I am all for removing the waste in the system, which can be done by moving it from a fee-for-service model to an outcome-based payment model. As a driver of medical inflation, Medicare is a laggard not a leader, with significantly lower costs and inflation per enrollee than private health insurance. As for means testing, it is unfair because those who earn more have contributed more of their income over the years toward Medicare, effectively subsidizing the care for those at lower income levels. The tax is 1.45% of your income. Someone making $20,000 pays $290 a year in Medicare taxes. Someone at my income level pays closer to $1900 a year in Medicare taxes. The result of this proposed change would be to charge people like me more for the same benefits when we claim them after having already paid more by contributing more to the system during our working lives. It’s sort of like paying an income tax twice. It is fundamentally unfair.

To add insult to injury, yesterday the president signed into law changes to the STOCK act that essentially undid the work of the last Congress to provide better visibility into stocks owned by members of Congress and the Administration. This was a no-brainer for a supposedly progressive president: veto it.

Meanwhile, the former organization Obama for American has morphed into Organizing for Action, and the organization has been petitioning people like me to contribute to it, supposedly to help promote progressive causes. What is progressive about cutting social security benefits for people in a solvent system? Why would I contribute to an organization that works for a president who wants to do the exact opposite of what Vice President Joe Biden promised in the last campaign: not to cut social security benefits, not even by one dime? How do I get excited about sending them money when they want people to contribute more toward Medicare instead of removing the waste in the system?

The worst part is this could easily set up a repeat of the disastrous 2010 election, which brought in Tea Party members that have largely obstructed work from getting done. What drives people to the polls is motivation. Seniors, already disinclined to vote for Democrats, will be even gladder to vote for Republicans who promise not to cut their social security benefits, as even Paul Ryan has pledged. How do you excite the Democratic base to turn out when they are being asked to enthusiastically endorse an agenda that further stiffs it to the working class and seems more a product of Republican thinking than Democratic thinking?

To say the least all of this is disappointing, which amounts to leaving us Democrats dispirited, which gives us little incentive to vote or to get further engaged in politics, which is supposedly the whole purpose of Organizing for Action. But OFA is really about promoting the president’s agenda, not the people’s agenda. They no longer align.

I will support and vote for true Democrats who will fight for the working class, who will fight to ensure that everyone pays their fair share, including corporations that pay increasing fewer taxes every year. Once these under taxed groups have paid their taxes, then I will consider tax increases on the working class. I will not vote for Republican-lite candidates.

I hope Obama wakes up because he is making a fatal mistake not just to his legacy, but to his agenda and to the needs of Americans. The compromise he is chasing simply will not happen with the current Congress, which is good, because Republicans in Congress will put lower spending ahead of deficit reduction, as they have shown time and again. However, there is no reason to move our goalpost first when they won’t move their post at all. The mere act of moving proves not statesmanship but cowardice because it will show conciliation without affect. It also drains energy from progressives and makes us feel all our energy was for naught.

Democrats would be wise to estrange themselves from Obama and OFA. I know I am until he asks for contrition and puts the American people ahead of the concerns of the rich.

Bet on more debt

Revolution is breaking out not only in Egypt but also on Capitol Hill. While protestors demanding freedom are taking over Tahrir Square in Cairo, Republican senators and legislators complaining that oppressive “socialism” is diminishing our freedom.

On Capitol Hill, we have the expected noise principally from Republicans about how dreadfully awful our $1.5 trillion dollar deficit this year will be (I agree) and how it must be stopped now! The chess pieces are moving. Earlier in the week, Senate Republicans forced a vote on the repeal of the Affordable Care Act, which predictably lost. Certain federal district courts apparently don’t like the ACA either. One Florida judge declared the whole act unconstitutional.

Glimmers of Republican sanity are emerging. House Republicans, or at least its leadership, seem to be backing away from an earlier threat not to extend the federal debt ceiling later this year, realizing that the resulting economic meltdown may not be good for their reelection prospects. Meanwhile, President Obama is playing a clever game of defense, setting boundaries on what is acceptable and not acceptable to cut and vowing to veto bills with earmarks. Overall, the momentum certainly seems to be on the side of those trying to cut deficits and reduce the size of the federal government. This time will the cut federal spending and deficits crowd actually succeed?

My vote: bet on more debt. It seems likely that non-defense discretionary spending will be frozen for a few years. Of course, there will be lots of threats and wailing about how bad things are and how the dynamics must change now. However, that’s all they are: threats and wailing. To effect real change, new external drivers are needed. Specifically, our creditors need to stop lending us money (or slow the amount of money they are lending us) or bond rating firms (some of whom were bailed out by federal tax money just a couple of years ago) need to downgrade the U.S. Treasury’s AAA bond rating.

There is little evidence now that either of these things will happen. Why? There are many reasons but principally there is an enormous surplus of capital in the world, including trillions held by U.S. companies. Many of those holding the capital are already heavily invested in U.S. treasuries and do not want to see their investment’s value diminished. A lot of their extra money can certainly be invested in other stocks and bonds, but even blue chip companies are not as safe a refuge for money as U.S. treasury bills. Seeking safety, it seems unlikely that capital will flee U.S. securities.

The improving economy will eventually increase tax revenues. It will be hard to see over the next few years, particularly since Congress and the president have already agreed to borrow money to fund a cut in social security withholdings. Nevertheless, eventually the economy will pick up a head of steam, bringing in more in the way of revenues and thus lessening the deficit. As the deficit shrinks, however marginally, the animus to cut federal spending eases as well. Getting out of wars in Iraq and Afghanistan will help eventually as well.

Another reason to bet on debt is to consider what really matters. For Republicans, the deficit is a talking point toward their real utopian goal of cutting the size of the federal government. To seriously do this they need sixty plus votes in the Senate, a majority of the House and a Republican president. Two out of three are possible in 2012, but three out of three are very unlikely. As for right now, we will all have to muddle through somehow. What this will amount to in the end is probably a freeze on non-defense discretionary spending. President Obama noted in his State of the Union speech that this is only fifteen percent of federal spending, so a freeze does not solve any underlying problems. Medicare costs in particular will keep rising.

Republicans talk about cutting Medicare and Medicaid, but it is mostly talk. What they really want to do is cut non-defense discretionary spending. They want symbolic victories, like getting rid of the Department of Education and the Corporation for Public Broadcasting because these agencies offend them. Even if they succeed, which is unlikely, they don’t address the real problem. Discretionary spending outside of Defense has not been the principle cause of deficits since the Great Depression.

The real problems driving up the debt, aside from the bad economy and tax cuts are: Medicare, Medicaid and defense spending. Of the three, only one is a realistic target for major cuts. Can you pick the right target? If you said Medicaid, come up and claim your prize. Why Medicaid? Because when push comes to shove, the disenfranchised are always the first to go. You can see it in being played out right now in state and local governments. Here in Virginia, for example, services for the mentally ill were one of the first cut. A few people speak for the mentally ill, but not many and they are not well organized. Nor do they contribute to politicians’ war chests. Even with Medicaid, it is not going to go away, but if forced to choose between the three, it will be the first to be sizably cut. That is because those who buy influence ultimately win. The poor, being poor, cannot buy influence, and survive only on largess. So Medicaid stands a decent chance of being a loser, while farm subsidies will doubtless continue. (After all, they go principally to red states, and principally to large agricultural companies.)

The Defense Department may get symbolic cuts, but that’s all they will be. Secretary of Defense Robert Gates is proposing “cuts”, but this does not mean he expects DoD’s budget to go down. No, he is proposing slowing its rate of growth. While there are some Tea Partiers who would favor real and painful cuts to the Department of Defense, there are too many teats feeding off the military industrial complex. Cuts will be mostly symbolic and weapons systems built in large numbers of congressional districts, as usual, will be mostly immune to cuts.

Social Security is largely untouchable. Social Security will neither be abolished nor will it be replaced with some sort of voucher system. Any honest Republican knows this. At worst, the retirement age will be increased but that will prove unpopular with voters, who can hardly keep a job now. Moreover, social security is not insolvent. It will always have a steady revenue stream through withholdings. The only concern is that over the next twenty years it will be slowly drawing from its trust of already accumulated savings, i.e. Treasury bills, unless the law changes.

Medicare spending is the most chronic and largest problem. Cutting it and raising taxes are the only two things that will seriously reduce the deficit. Unfortunately, it remains popular with the public and retirees depend on it. Republicans live in a fantasy world that it can be converted into a voucher system. To fix Medicare will require making painful choices among many vested interests including doctors, drug companies, retirees, hospitals, ancillary insurance providers and clinics. For it to become solvent will require that hardest of work: everyone must share in the misery. Of course, everyone will want someone else to endure the misery, not them.

The last reason to bet on debt is that tax increases have become anathema. When push comes to shove, Republicans will put deficit spending ahead of tax increases. This is as sure as the sun will rise. The only way to seriously raise tax rates is to have a Democratic congress, sixty plus Democratic votes in the Senate and a Democratic president. That too is very unlikely.

So for the short term, unless our creditors and rating firms force our hand, expect barbarians at the gate, but wielding only noise as weapons. More debt will win because it is the least painful choice. Future generations, after all, aren’t yet of voting age.

Introducing the non-retirement retirement

With stocks in some cases at half or less of their value of a year ago, many Americans are wondering if they will ever be able to afford to retire. To retire with a decent standard of living you generally need to have a number of financial ducks lined up. First, you depend on Social Security and Medicare benefits to provide basic subsistence and medical care. Second, if you are lucky enough to have an employer that actually provides a pension, you need to hope that the company does not go belly up before or during your retirement. Third, you have the value of anything in your 401-K or IRAs that you have squirreled away. Fourth, you may have some other savings or some sort of inheritance to draw from. Lastly, and really as a last resort, you may have equity in your house you can draw from, which perhaps you can draw from with a reverse mortgage. With enough of these assets, you can afford to retire when you hit a certain age. How many of us reaching retirement age can honestly say our financial ducks are lined up?

For many of you younger readers retirement may be an abstraction. You are probably far busier trying to hold on to your job and standard of living than to worry about something so far away as retirement. For us middle age Americans, retirement is on our horizon. For example, I am a civil servant who will soon be 52. In theory, I can retire at age 55 with thirty years of service, which will be in May 2012.

Will I retire and begin a life of leisure at 55? Probably not. If I did, certain other expenses would need to be trimmed. Even with my very generous government pension, I would get at best something like 60% of my government salary. However, I still will have bills to pay and I do not particularly want to reduce my lifestyle. Moreover, my mortgage will not be close to being paid off in 2012.

Without some substantial adjustments in my lifestyle, I cannot afford to really retire at 55. Since my investments like yours are in the toilet, it is unlikely I will be able to draw from them in a couple years. So I will still have that 40% gap in income to make up, at least until the mortgage gets paid off. Also, I have many more productive years ahead of me. I am a restless creature too. I simply do not have the constitution to “retire”, at least not at 57, the age when I currently plan to “retire” but when in reality I hope to simply start my next career.

I am betting though that many of you do not have these options. Your “pension” is probably anything in your 401K or IRA, which if you assess it at today’s value might make your heart skip. If you “retire”, your retirement home may be in a trailer park. It is also possible with today’s economy that your “retirement” will be involuntary and you will end up with a fraction of the benefits you were promised. So your “retirement” could simply mean getting one or more new jobs at a fraction of the wages you are used to, perhaps while also working more hours than you do right now. Even with all this, you may end up with a lower standard of living.

In short, for many in the fifty to 60 something age range, retirement, which used to seem almost tangible, is now off the table. We might as well pretend we are twenty or 30 somethings again. If this sounds like your situation, you will have one option: the non-retirement retirement. With this is a retirement you work as long as you are physically capable of working even after you “retire” by collecting social security benefits. You will be likely working at substandard wages perhaps making little more in real dollars than you did as a teenager. However, you will still have Social Security income to draw from and Medicare benefits to cover most of your medical expenses. The combination will not let you really retire, but it will keep you from having your standard of living drop through the floor.

Unless our new President Obama and Congress are able to fix things, and the macro-economic forces work in our favor for a change over the next few decades, “retirement” as our parents knew it may become a luxury most of us can no longer afford. In short, even though the Social Security system will survive the New Deal will have largely unraveled. Social Security and Medicare will provide seniors with a foundation for keeping their financial heads above water, but still not provide enough income to retire.

Many senior citizens are already dealing with this reality. Many retired to discover that they really could not afford to do so. Their actual cost of living exceeded their income and assets. For many, the new model looks like you retire when you absolutely, positively cannot earn money anymore. In other words, when you retire, you will have one foot in the nursing home.

Suppose you are fairly young and headstrong enough to think that you should be able to enjoy a real retirement someday, perhaps when you are in your mid sixties? What do you do? You can invest now while stocks are cheap and hope they will become nice juicy retirement assets by the time you retire. There is no guarantee here, of course, but stocks have tended to provide a higher returns over long periods than other forms of investment. You can also choose not to have children, or if you have children, have just one. (This is what my wife and I did, in part for economic reasons.) Children may be loveable and give purpose to your life, but they suck enormous amounts of money out of your wallet. In addition, you can spend your earning years living frugally while doing your best to climb the income ladder by having a well paying job and specialized skills. Perhaps these things, a resurgence of the American economy relative to the rest of the world, and a government that works for the people, will turn the dynamics around. My gut feeling is that we are sailing into very strong headwinds. We can tack as much as we want but moving forward is likely to be daunting.

For many of us, particularly those of us nearing retirement age, our retirement can be clearly envisioned and it is scary. The vision that we are seeing bears little resemblance to what we envisioned some decades back. The retirement our parents knew is dying from a combination of economic forces and bad government. We are likely to pay the price in an anxious non-retirement retirement.

Let us hope that President-Elect Obama and our new Congress can actually move us in the direction we need to go so we can really retire someday. I sure hope that a real retirement does not become something we lose in the 21st century.

Social Insecurity

President Bush tells us that the Social Security System is in crisis. He says the way to “fix” the problem is to allow younger workers to create “personal” accounts (do not call them private accounts) where they get to invest their money in stocks and bonds and not in the social security system itself.

On the surface it doesn’t sounds like a bad idea. Social Security was designed to provide a floor that would keep the elderly out of abject poverty. Not all employers provide 401-K plans. Workers who want to put their own money into an IRA are generally limited to $4000 in contributions per year. While the limit will increase to $5000 in 2008, surviving on a social security check and an IRA hardly sounds like the way to finance a successful retirement.

But of course what Bush really wants to do is to allow younger workers to channel part of the money that would go into the social security trust fund and place it in “personal” accounts instead. The major problem: social security is a pay as you go system. With less money going into the social security trust fund, the fund would go dry much sooner than 2042, the date predicted by the trustees of the social security system itself.

So to make up the gap Bush would borrow the money: hundreds of billions of dollars. Of course our creditors won’t give it to use for free. We’ll have to pay interest on that money. This of course means the real cost will be some multiple of the amount actually borrowed. But what’s a few hundred billion dollars to an administration that has no problem with $430 billion annual deficits? Apparently it’s monopoly money, not real money.

The fact is the system is in no crisis whatsoever. Currently more money is going into the social security system than is coming out of it. The demographics suggest that this will change in coming years when the baby boomers retire. But the fund will be no means go broke. It is flush with U.S. Treasury Bills, which it will cash in to pay expenses. It’s not until 2042 when, if current trends continue, all those treasury bills will be cashed in.

Will the fund then be broke? No! There will still be money coming into the system. Payroll taxes will still be withheld and it will go to provide social security checks to people like me. (I anticipate being alive in 2042. I’ll only be 85.) It is estimated that the money coming in would still pay 70% of the benefits due. My check would either be 30% less or Congress would have to place general tax revenue in the fund. And while it sounds a very burdensome thing to throw money from general expenditures into the social security fund (we prefer to borrow from the social security fund to mask the true size of our deficits) even this scenario is not all that dire. For example, it would cost less to pay this burden every year than it currently costs us to finance the war in Iraq.

So all this hand wringing is over something about forty years in the future and assumes we spend forty years doing nothing to solve the problem. Fortunately the problem is easily solved without raising taxes, something Bush conveniently doesn’t want to talk about. It is solved without raising taxes or reducing benefits by adding two more years before workers, who are living longer anyhow, can retire. They would have to retire at age 70. Or if we want to keep the current retirement age at 68 we could increase the payroll tax by no more than 2%.

Trial balloons coming out of the White House suggest that Bush wants to cut benefits as part of the solution to the problem. The idea is to hold future benefits to an inflation index instead of the average increase in wages. Make no mistake: this would be a reduction in benefits for a worker compared to what they can expect today. The same money would go in but less money would come back. It’s like thinking you are going to get that 16 ounce box of corn flakes for $2 and you find that $2 only buys 13 ounces.

And let’s be clear about the risks involved with these “personal” accounts. It means that younger workers, rather than the government, are assuming risk for their retirement. There is no guarantee that stocks and bonds purchased today can be traded in at the appropriate time to finance a nice retirement.

Those of us who bought stocks when they were high at the end of the 1990s are sanguine about the risks in the stock market. We are still taking losses when we sell our stocks. My modest portfolio has lost money during the years Bush has been in office and looks like it will again this year. You can gauge the problem by looking at the S&P 500 Index. At its peak in 2000 it was around 1500. When Bush took office it was at 1343. Today it is at 1171. It’s unlikely I will make a dime in my investments until Bush is out of office. Unfortunately I expect my daughter to start college before then so I will probably sell some of my funds at a loss.

Over the course of the next 30 years hopefully stocks will return modest gains, but there is no guarantee of future performance at all. In short instead of a defined benefit, younger workers benefits would fluctuate and may be markedly higher or lower than your social security benefit. There is no way to tell. Rest assured though that it would be your problem, and not the government’s. And it’s possible the American economy could undergo another depression. In this case those “personal” accounts may be next to worthless when you need to cash them in. And like their great-grandparents younger workers may look forward to spending their final years in the 21st century version of the poor house.

I am in favor of personal accounts to supplement the social security system. But I see no reason to radically change a system that is not in crisis. Arguably the system was in much worse shape in the 1980s. But back then the Congress did the sensible thing and increased withholding rates. Even President Reagan saw the wisdom in it. It never occurred to him to undo this critical program that kept older Americans out of poverty.

So what is really going on is not an attempt to save social security but to slowly strange it. To the neoconservatives it’s a philosophical issue, not a fiscal issue. But rather than change things in a revolutionary manner the neoconservatives are trying to do it in a sly, evolutionary manner. Some day they hope social security will be gone for good. See, neoconservatives believe we should all be engaged in a Darwinian struggle for survival. They see it as healthy and something that keeps America lean, mean and efficient.

But don’t you be fooled. The social security system has served this country very well. It has meant for the first time that most Americans can avoid poverty in their final years. It is there for a reason: because Darwinism was tried for millennium and didn’t work. We need a defined benefit in social security because we believe that those who spend their lives working deserve to stay out of poverty when they are older or are incapable of working. Stocks are no guarantee. And the government is the only institution large enough to be able to guarantee defined benefits. Consequently we need a social security system with a defined benefit. Anything else is social insecurity.

Greenspan tries to sober up Congress

This just in: Chairman of the Federal Reserve Alan Greenspan says the government should consider cutting benefits for social security recipients.

Buh wah hah hah! Those of us living in or near Washington know exactly where this idea is going to go. Drag this sucker directly into your Congress’s virtual shredder. Snowballs will survive in hell before Congress reduces social security checks.

Oh they may get cut in less visible ways. Perhaps the retirement age will be allowed to gradually creep up again. This sort of a creative accounting technique is familiar to us federal employees. We’ve seen it before when it came time for our cost of living raises (“Let’s just move the date a bit and drop the costs into another fiscal year. We’ve just saved tens of billions of dollars!”) Put an older retirement age far enough in the future and most people likely won’t complain because they are too far from retirement to raise a fuss.

But even these tricks won’t seriously solve the problem of all of us baby boomers planning to retire soon. All Alan Greenspan is really doing is reinforcing that those fiscal chickens are coming home to roost for Congress as well as for the Bush Administration.

Remember in the 2000 campaign Al Gore proposed putting a lock box on the social security trust fund? It seemed an idea on which both sides could agree. Until, of course, we went into recession, 9/11 occurred and we started to give obscene tax cuts to the wealthiest Americans. Then it became important to show that our deficits were not as bad as they looked. So of course the government “borrowed” from the Social Security Trust fund. It did this by depositing its wonderful IOUs into the funds account with a promise to pay back the money with interest some time in the future.

What does this mean? Well, in actuality the social security fund is currently running a surplus. The surplus was $164B last year. Assuming the same surplus this year, and assuming Bush’s plans for a $521B deficit this year are correct (they are likely to be larger when the supplemental spending bill for the Iraq occupation and reconstruction is introduced) this means that the real government’s operating deficit for this year is going to be at least $685B.

But the surplus in the trust fund is projected to continue to shrink until the baby boomer retirements reach critical mass. At that point the fund begins to run a deficit. That’s when we borrow a lot more money, raise a lot more taxes, cut benefits to social security recipients or try some combination of all of them.

Unless we radically change our representation in Congress the federal government is going to be borrowing a hell of a lot of money in the future.

Yes, we will borrow in mega quantities, but only if we can get anyone to lend it to us. Have you looked at the value of the dollar against other currencies lately? Today one Euro is worth $1.25. A year or so back a Euro cost around eighty cents. There are short-term benefits from a low dollar. It makes our products cheaper to purchase and has a stimulative effect on our economy. But the long-term trend is not good because our financing is largely coming from overseas capital. In fact a lot of this money is coming from other governments anxious to make sure their currencies and their products don’t get too expensive. By buying dollars they are in effect taking their capital and putting it to work in the United States, instead of in their own country where it might otherwise be used. But at some point our deficits may become so bloated that foreign investors lose confidence that they will get a return on their investment.

If that happens our house of cards falls. Countries say “Well, no point throwing our good money after a bad return, we’ll use it ourselves.” If the United States cannot borrow enough money from overseas to finance its deficits then the government must drastically increase interest rates to attract domestic money. And when that happens money becomes more expensive for businesses and consumers to borrow. And that most likely has severe and negative consequences for our economy. The worst result would be a wave of inflation and economic stagnation, recession or depression familiar to many countries in South America, but not seen here since the Depression.

Greenspan is being a good fiduciary. We need someone to impartially tell us the truth. Our government must change its ways and stop foisting off costs of these magnitudes on future generations. It’s really sad though that instead of being responsible our government will tinker around the edges a little bit but do nothing to really solve the underlying problem. Congress can’t say no to anyone. Not to the businesses that finance their campaigns, not to us constituents who want more federal benefits, low taxes and increased services, and not to the president who wants to please his party base and reward his cronies.

The smart investor should be quietly moving more funds out of American companies and into solid overseas growth companies and funds. Unfortunately, even that is not a great hedge. And that is because if the American economy tanks, so will most of the world economy.

So the health of the world economy is in large measure dependent upon whether our Congress can stop pandering and start swallowing the castor oil.

I don’t wish to sound bleak but really: God help us. For those who believe in the power of prayer it’s time to go into prayer overdrive.