(Dean Baker is making the same points that I made on October 5th:
http://louisproyect.wordpress.com/2008/10/05/financial-crisis-the-welfare-state-and-disaster-capitalism/)
http://www.guardian.co.uk/commentisfree/cifamerica/2008/oct/20/social-security-peter-peterson
The quest to cut social security
Advocates of cutting social security and Medicare in the US are using
the financial crisis as a pretext to further their agenda
by Dean Baker
Wall Street investment banker Peter Peterson has been on long quest to
gut social security and Medicare, the core social insurance programmes
on which American workers depend. He recently endowed a new foundation
with $1bn to pursue this end.
Peterson and his crew are hoping that the financial crisis will help him
accomplish his goal. His foundation has lately taken to arguing that
because of the money spent bailing out the banks, we must make cut backs
in social security, Medicare and elsewhere. In reality this is just bad
economics. The Peterson crew is either badly confused or deliberately
trying to mislead the public to promote its agenda.
Before dealing with this issue, it is worth noting that Peterson has a
long history of being wrong in a big way about major economic issues.
For example, in the 1990s he argued for partially privatising social
security as a way to increase benefits. If Congress had taken his
advice, beneficiaries today would be receiving much lower benefits.
Peterson also argued that the consumer price index (CPI), the main
measure of inflation, substantially overstates inflation. Based on this
claim, Peterson wanted to reduce the size of the annual cost-of-living
adjustment to social security. Peterson's proposed cut would reduce
benefits for older retirees by more than 20%. This is a major cut for
the two-thirds of seniors who rely on social security for more than half
of their income.
While Peterson used the claim that the CPI overstates inflation as a
basis for cutting social security benefits, he never bothered to
consider that this claim implies that incomes are rising much more
rapidly than current data show. In other words, if Peterson had been
right in his claim that the CPI overstated inflation, then our children
(the supposed beneficiaries) would be far richer than we ever imagined
possible, because their incomes would be growing so rapidly. However,
Peterson was so anxious to cut social security that he never bothered
thinking through the implication of his claim.
Now Peterson wants to use the bail-out as a pretext for gutting social
security and Medicare. There are two important ways in which the
Peterson crew is trying to mislead the public on this issue.
First, the impact of the bail-out on the debt is not as large as
claimed. While the US government is likely to lose money on these
bail-outs, it certainly will not lose everything invested. On the $700bn
bank bail-out, it is unlikely to lose more than $200-300bn. While this
is not trivial, it is less than 2% of current GDP. The debt-to-GDP ratio
fluctuates by this amount all the time without even attracting any
attention. It makes no sense to charge that we have to rethink our core
social insurance programmes because the debt-to-GDP ratio rose by two
percentage points.
The other point on which the Peterson gang is misleading is the impact
of deficit spending in an economic downturn. Such spending will not make
our children poorer. In fact it is likely to make them wealthier by
creating jobs and boosting the economy.
This point should be easy to see. If the government has a $300bn
stimulus (raising the debt by $300bn), then the immediate effect on the
economy will be to increase GDP by around $400bn (assuming a
well-designed stimulus) and give jobs to approximately 4m workers. The
additional growth will lead to more tax revenues, so that the increase
in the public debt will likely be closer to $240bn rather than $300bn.
But, even this is not a net loss to our children. While the country will
owe $240bn more than it would in the absence of stimulus, our children
and grandchildren will also be the beneficiaries of the interest
payments on this debt. (The fact that the money may be paid to
foreigners who own the debt is immaterial, as I'll explain in future
writings on this topic.) In short, there is no good reason not to try to
use the government as a source of demand for the economy during an
economic slump like the one we currently face.
Unfortunately, Peterson either knows little economics or opts not to be
honest with the public. In this respect it is noteworthy that he somehow
managed to miss the housing bubble and the fact that its collapse would
create the largest financial crisis since the second world war. But,
Peter Peterson is not interested in warning the country about the real
crises it faces. He is interested in cutting social security and Medicare.
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