Coyote Blog

If Medicare is really an insurance program, than as I wrote last week, the premiums are absurdly low.  And this isn't even a rich-poor transfer issue - the premiums are too low for everyone.  See the bar chart about halfway down on this page at the NY Times.  Here is a screenshot:

Take Social Security first.  Taxes come fairly close to covering benefits, with some rich-poor redistribution.  These numbers look sensible (leaving aside implied annual returns on investment and whether the government should be running a forced retirement program at all) -- the main reason social security is bankrupts is that in the years when premiums exceeded benefits, Congress raided and spent the funds on unrelated things.

Medicare, though, is a huge problem.  Even for high income folks, premiums cover only 43% of the expected benefits (I am not sure how they treat present values and such, but again lets leave that aside, I don't think it affects the underlying point).  Assuming we end up with some rich-poor transfer, it looks to me that premiums are low by a factor of three.

Everyone seems to think Medicare is a great deal.  Of course it feels that way -- premiums are only covering a third of the costs.  There is no way we can have intelligent debate on these programs when the price signals are corrupted.  Its time to triple Medicare premiums.

Yesterday, Congress agreed to extend the payroll tax reductions for another period of time.  I have been thinking about this for a while, and I am slowly coming to the conclusion these taxes should be raised.  I am still thinking this through so I welcome feedback.

I don't think I have to convince regular readers of this site that I am against government-run and mandated-for-all retirement funds (income via Social Security, medical via Medicare).  But if we are going to have such programs, and maintain the pretense that they are insurance programs and not welfare/transfer programs, then the "premiums" we are forced to pay should reflect true costs.

I don't think Medicare premiums are covering anywhere near the actuarial-expected costs of one's future medical care.  And while Social Security rates may be set correctly if trust funds were truly held securely, the fact of the matter is that past Social Security premiums that were paid to support future benefits have all been spent by a corrupt Congress.  Rates are going to have to be raised to replace this theft.

I don't like raising taxes.  I wish these two programs would go away or else be restructured drastically.  If they exist, though, there is nothing more dangerous than an incorrect price.  Prices help consumers make price-value tradeoffs -- the Keanu Reeves lifetime DVD collection may be a deal at $6.99 but not at $99.99.  So charging the wrong prices for these programs not only royally screws up the government's finances, but it also misleads Americans about the value of these programs in comparison to what they pay for them.

Neither Medicare nor Social Security should be government programs.  The government essentially takes on two roles in these two insurance programs:  1) To subsidize the premiums of low income Americans; and 2) To use its power of coercion to force everyone to participate.  I have no stomach for the latter role and the former could be much more cheaply achieved with some sort of voucher or credit program.

But these programs are not going away.  While both need reform, it may turn out to be politically impossible to even reform them.

But if we take off the table for a moment their existence and their basic structure, there is still an enormous problem we might fix:  pricing.  There is absolutely nothing more deadly to an economy than a false or corrupted pricing signal.  But that is clearly what we have with these two programs.  The Medicare "premium" (tax) taken out of every paycheck is clearly way too small to cover true actuarial costs of this program.  And while Social Security rates may have been set right if the premiums were really being kept in escrow for the future, the fact is that the so-called trust fund has been raided into oblivion by past government spending programs  -- Social Security taxes need to be reset to reflect that fact.

The result, of course, will be a substantial increase in both payroll taxes.  I am not a big fan of tax increases, and find taxes on labor to be among the worst.  But as long as we hold on to the collective notion that these are insurance programs and the taxes we pay are premiums, its time to stop fooling Americans into thinking that the premiums they are paying are truly sufficient to fund their benefits.  Maybe after we reprice the "premiums" to their true actuarial value, we can then have a real debate about the structure and existence of these programs.

More nominally intelligent people talking seriously about a Social Security trust fund as if such a thing exists.

The only thing supporting our ability to pay future Social Security benefits in full is the government's ability to print currency.

Social Security is a Ponzi Game:

Social Security is structured from the point of view of the recipients as if it were an ordinary retirement plan: what you get out depends on what you put in. So it does not look like a redistributionist scheme. In practice it has turned out to be strongly redistributionist, but only because of its Ponzi game aspect, in which each generation takes more out than it put in. Well, the Ponzi game will soon be over, thanks to changing demographics, so that the typical recipient henceforth will get only about as much as he or she put in (and today's young may well get less than they put in).

Paul Freaking Krugman, 1997.  Incredible how much his beliefs change depending on which party occupies the White House.

Several blogs have pointed out this February editorial in the USA Today by Jacob Lew, head of Obama's OMB.  In February he told us, no, in true Obama Administration fashion, he lectured us like little kids that:

Social Security benefits are entirely self-financing. They are paid for with payroll taxes collected from workers and their employers throughout their careers. These taxes are placed in a trust fund dedicated to paying benefits owed to current and future beneficiaries.

When more taxes are collected than are needed to pay benefits, funds are converted to Treasury bonds — backed with the full faith and credit of the U.S. government — and are held in reserve for when revenue collected is not enough to pay the benefits due. We have just as much obligation to pay back those bonds with interest as we do to any other bondholders. The trust fund is the backbone of an important compact: that a lifetime of work will ensure dignity in retirement.

According to the most recent report of the independent Social Security Trustees, the trust fund is currently in surplus and growing. Even though Social Security began collecting less in taxes than it paid in benefits in 2010, the trust fund will continue to accrue interest and grow until 2025, and will have adequate resources to pay full benefits for the next 26 years.

As many have pointed out this week, if this is the case, why does the debt limit even affect the ability to pay or not pay Social Security to grandma?  Because Lew was spouting complete BS.  Social Security has generated surpluses in the past, but these have been spent and replaced with IOU's.  And we are finding out right now how much those IOU's are worth - zero.

Here is some analysis of these reports. A few things I found interesting

• I have always understood the "trust funds" for these programs were a crock, that we had spent the money in these funds years ago.  But the accounting fiction is important for a reason I did not know - when the trust fund is used up from an accounting standpoint  (vs. a cash standpoint, where it is not only already used up but never existed) in 2036 or whenever, statutory authority for spending is capped at annual tax collections, which at that point will be way, way below programmed spending levels.
• Medicare alone is projected to grow to 6% of GDP.  wow.
• The reality of Obamacare's promises of cost reductions is starting to appear, as already these supposed cost reductions are being discounted by folks who have accountability for getting the numbers right.

One thing to note -- Social Security actually has some shot at being repaired, because benefits are a fixed, predictable amount (as long as your actuarial tables are right).  Medicare and Medicaid are far harder, because the benefits are open ended, and every recent "fix" has tended to shift incentives to encourage rather than discourage more spending.  Note, for an example, the political pressure to eliminate the part D donut hole that actually is there to provide incentives to camp drug spending and prices.

From Fox Business

U.S. Treasury Secretary Timothy Geithner told Congress he would start tapping into federal pension funds on Monday to free up borrowing capacity as the nation hits the $14.294 trillion legal limit on its debt.

The U.S. Treasury will issue $72 billion in bonds and notes on Monday, pushing the nation right up against its borrowing cap at some point during the day, according to a Treasury official.

Geithner said he would suspend investments in two government retirement funds, which will give the U.S. Treasury $147 billion in additional borrowing capacity.

"I will be unable to invest fully" in the civil service retirement and disability fund and the government securities investment fund, he said in a letter to congressional leaders

Why does this surprise anyone?  Up to this point, government workers have enjoyed a special privilege.  All other Americans have had their retirement accounts in the Social Security system raided and replaced with IOU's, such that $0 actually still exists in these accounts.  All this does is subject government worker's pensions to the same treatment.  It is in fact telling that government employees have been a protected class on this dimension for so long.

I am sure these funds will be quickly replaced.  No such luck for folks counting on Social Security for their retirement.

My column this week in Forbes is a response to yesterday's Presidential budget speech.  An excerpt:

President Obama is working from the assumption that the political leader who suggests painful but necessary budget cuts first, loses.   He had every opportunity to propose and pass a budget when he had Democratic majorities in Congress.   But Democrats feared that showing leadership on the hard budget choices they faced would hurt them in the November election, so they punted.

Even when Obama did produce a budget, it was the closest thing to a non-entity as could be imagined.   A budget that doubles government debt over 10 years and raises interest costs (under optimistic assumptions) to a trillion dollars a year would likely be controversial in any year, but is a non-starter given fresh memories of debt crises in Greece, Ireland and a number of other countries.

Of course there is an 800-lb gorilla in the room that no one wants to acknowledge:  Three programs —  Social Security, Medicare, and Medicaid — grow in the next 10 years under current rules to at least $2.7 trillion dollars a year.  Recognize that this figure excludes all the other so-called non-discretionary payments (unemployment, food stamps, etc.) as well as everything else the government does including the military and Obamacare. The 2021 spending on just those three programs is 25% higher than the total revenue of the federal government from all sources in 2011.

Later in the article, I suggest ten principles that should be the foundation of a budget deal.

Paul Ryan is catching grief for his proposal to convert Medicare from "all the medical care you wish to consume" to grants of $X per year.  This seems unimaginable to people (forgetting for a moment that the US functioned for nearly 200 years without it at all).

But what if Social Security were Medicare.  What if, instead of giving $X per year, Social Security made an open-ended promise to fund whatever consumption one thought necessary to maintain his or her lifestyle.  Can you imagine the fiscal disaster?  The horrible incentives

And if Social Security had been structured that way, and we were now trying to change it to fixed grants, what would people be saying?  They would say, "what if something unexpected happens - won't that just leave people in the cold?"

My new Forbes column is up, and it discusses an article by Michael Malone that said in part:

The recent quick fade of the Deficit Commission was the latest reminder that America no longer seems to have the stomach for big challenges.  There was a time "“ was it just a generation ago? "“ when Americans were legendary for doing vast, seemingly superhuman, projects:  the Interstate Highway System, the Apollo Missions, Hoover Dam, the Manhattan Project, the Normandy invasion, the Empire State Building, Social Security.

What happened?  Today we look at these achievements, much as Dark Age peasants looked on the mighty works of the Roman Era, feeling like some golden age has passed when giants walked the Earth.

My response includes the following:

The list he offers is a telling one "” all except the Empire State Building were government programs, just as were the "mighty works" of the ancient Romans.  And just like the Romans, these and other government projects have more to do with triumphalism than they do with adding real value.

It is interesting he should mention the Romans.  There were few grand buildings during the centuries when Rome was a republic.  Only in the later Imperial period, when Rome became an autarky, did rulers begin to build the monumental structures that Malone admires.  Emperors taxed their subjects and marshaled millions of slaves to build temples and great columns and triumphal arches and colosseums to celebrate"¦ themselves.  Twentieth Century politicians have done the same, putting their names on dams and bridges and airports and highways and buildings.  They still build coleseums too, though today they cost over a billion dollars and have retractable roofs.  Are these, as Malone suggests, monuments to the audacity of the greatest generation, or just to the ego of politicians?...

This is the same concern that drives Thomas Friedman to extol the virtues of the Chinese government, where a few men there can point their fingers and make billions of dollars flow from their citizens to the projects of their choice.  This is a nostalgia for coercion and government power, for Lincoln imposing martial law, for FDR threatening to pack the Supreme Court, for the Pharaohs getting those pyramids built.  It is a call for dis-empowerment of the masses, for re-concentrating power in a few smart visionary folks, presumably including Mr.  Malone.

Everyone seems to know who Gloria Allred is, though I have never heard of her.  Apparently she is opposed to Meg Whitman getting elected (I am not even sure - is Whitman running for Senator or Governor?).  But her approach is weird.  She attacks Whitman for not identifying and firing an illegal immigrant fast enough.  There is no way for this accusation to be true given the timeline Allred outlines unless Ms. Whitman's illegal immigrant maid at some point farbricated or falsified documents.  In specific, Allred is claiming Whitman did not act fast enough when the Feds sent her a letter saying there was a problem with her maid's social security number.  Implicit in all this is that Whitman's maid must have fabricated documentation and as a minimum provided a false or stolen social security number.

OK, all normal team pepsi - team coke political BS, except for this:  Whitman's maid is Allred's legal client.  Allred, in order to publicly score points on Whitman, is hanging her own client out to dry by as much as admitting her client engaged in identity theft.  The maid's lawyer is complaining that her client was not fired fast enough.  Unbelievable.  Is this the true state of legal ethics today?  And not a mention of this obvious ethical issue in the AP story.

I had not realized that some Federal employees did not have to participate in Social Security.  Intriguingly, this fact was raised by people who were defending government pay as not being excessive -- they said something like, "well, some workers don't even get Social Security."  Via Bryan Caplan

Some government employees don't participate in Social Security. How does that change the benefits picture?

[T]hat's irrelevant because they're neither paying nor receiving benefits. If you follow Social Security, you know it pays a low rate of return... [N]ot to participate in Social Security is actually a benefit, because they're keeping more.

I agree. Not participating in Social Security is a huge benefit.  The implicit return on "premiums" paid by you and your employer is typically below zero.  In other words, if you took your social security taxes and stuffed them in a mattress, you would get a better return.  As I wrote in the link above

as a retirement program, [social security] is a really, really big RIPOFF.  Ever worker in this country is being raped by this retirement plan.  In fact, it is the worst retirement program in the whole country:

• As we see above, it pays a negative rate of return
• It is not optional "“ you go to prison if you choose not to participate
• Unlike a private annuity contract, the government can rewrite your benefits level any time, and you have to take it.  In fact, my statement says "Your estimated benefits are based on current law.  Congress has made changes to the law in the past and can do so at any time.  The law governing benefit amounts may change because, by 2040, the payroll taxes collected will be enough to pay only about 74 percent of scheduled benefits."
• There are no assets backing this annuity!!  An insurance company that wrote annuities without any invested assets backing them would be thrown in jail faster than Jeff Skilling.  The government has been doing it for decades.

From Kevin Drum

Bob Somerby is following the latest Social Security chatter and hopes that Paul Krugman can explain how the trust fund works in an understandable way:

The trust fund is just an accounting fiction "” a pile of worthless IOUs! Generations of voters have been misled by such skillfully-wrought presentations.

....Krugman is our most valuable player by far "” our only player at the top of the press corps. Can he disentangle the trust fund scam in a way average people will understand? We don't know, and it isn't his job; no player should be expected to carry the ball on every play from scrimmage. Tomorrow, we'll offer our own ideas at how the "there-is-no-trust-fund nonsense" might best be approached, in a way average people can follow.

Well, hell, I'll take a crack at it. Here's the simple version.

In 1983, when we last reformed Social Security, we made an implicit deal between two groups of American taxpayers. Call them Groups A and B. For about 30 years, Group A would pay higher taxes than necessary, thus allowing Group B to reduce their tax rates. Then, for about 30 years after that, Group A would pay lower taxes than necessary and Group B would make up for this with higher tax rates.

This might have been a squirrelly deal to make. But it doesn't matter. It's the deal we made. And it's obviously unfair to change it halfway through.

This is an incredible fantasy.  Absolutely no one thirty years ago (Drum dates the "deal" to 1983) explicitly or even secretly crafted any such deal.  Seriously, is Drum really positing that a Democrat-dominated Congress led by for-god-sakes Tip O'Neil really said "lets have poor people pay some of rich people's taxes for thirty years?"  Just last night I was reading a quote from Hitler late in WWII that asserted he actually let the British escape from Dunkirk on purpose because he wanted the British to know he had no real quarrel with them.  While it certainly is true Hitler never really wanted a war with Britain, this is just a self-serving rewrite of history.  Drum is doing the same thing.  Its amazing to me that an obviously intelligent person can convince himself of this.

Here is the real, simple explanation of the Social Security trust fund:  Social Security was spinning off huge piles of money and no Congress person of either the Coke or the Pepsi party could resist grabbing it and spending it in a way that would support their reelection.  They ended up spending it all.  Every bit of it, all gone.  The Social Security trust fund is the Enron 401K plan stuffed with Enron stock.

Drum gets to his bizarre theory because he believes the fiscal discipline problem over the last 30 years was all due to tax cuts rather than spending, and that all these tax cuts were for rich people.   Of course, throughout the last 30 years, the share of taxes paid for by the rich have steadily risen, so the claim is absurd on its face, but the false assumptions it is built on are ones that every progressive accept as holy writ.

This paragraph is particularly a howler:

The physical embodiment of this deal is the Social Security trust fund. Group A overpaid and built up a pile of bonds in the trust fund. Those bonds are a promise by Group B to repay the money. That promise is going to start coming due in a few years, and it's hardly surprising that Group B isn't as excited about the deal now as it was in 1983. It's never as much fun paying off a loan as it is to spend the money in the first place.

It would be some exercise to try to define groups A and B in a non-overlapping manner.  The fact is everyone is in group A, as almost everyone overpays into Social Security on a return on capital basis -- the retirement income most people get represents generally a negative net ROI on the "premiums" paid.  And it is amazing to me that I have never heard that we now have government bonds that must be paid back only by a specific sub-section of the population.  It may very well have been a progressive assumption that only rich people would be on the hook for every dollar of government debt run up over the last 30 years, but that fact will likely be a surprise to just about everyone else in the country.  Here is his conclusion:

But pay it off they must. The rich have been getting a loan from the middle class for decades...

Delusional.

OK, so after the monks and coffins, here is the future licensing act ripe for abuse by industry incumbents to protect their position.

New state licenses required for anyone handling a mortgage application could help prevent a repeat of the bad loans that contributed to Phoenix's housing crash....

The law, passed in 2008, creates state oversight for people who take loan applications, gives consumers an avenue for reporting misconduct and establishes a fund to help repay borrowers who lose money because of unethical or illegal acts by their loan officers.

The law faces hurdles, as cash-strapped Arizona struggles to process thousands of new applications.

Still, advocates call it a success. Many of the risky - and sometimes illegal - home loans that helped lead to record foreclosures in Arizona might not have been made if the more than 10,000 unlicensed loan officers working then had been subject to more oversight.

How?  If people were selling illegal home loans before, they were already breaking the law and the state obviously was unable to enforce the law.  How is adding a piece of paper that must be applied for each year going to help?  My company has all kinds of silly licenses - liquor licenses, guiding licenses, health licenses, tobacco sales licenses, over-the-counter drug sales licenses, even egg licenses - and in not a single case does the issuer of these licenses exercise any sort of oversight of our operations.  If they get their extensive paperwork (so workers have an excuse to retain their jobs - after all someone has to process the paperwork) and their check, that is generally the sum of interactions with these organizations.

Now, some of these licenses were hard to get in the first place, but not for any reason of my character or ethics or business model.  They were hard to get because their issuance has been co-opted by incumbent businesses in the state who use the process to limit competition.  Liquor licenses are a great example - in places like Shasta County CA and Lake Havasu City AZ, we had a real problem getting the liquor license over opposition from existing businesses.

This is almost mindless naivete:

"Loan-officer licensing is long overdue in Arizona," said Felecia Rotellini, who for five years served as superintendent of the Department of Financial Institutions, the state agency regulating the mortgage industry. She is running for Arizona attorney general.

"A lot of bad loans wouldn't have been made if we had it before," Rotellini said. "It gives me peace of mind for consumers to know we have licensing now."

The author of the article just throws the following statement out there without any source, as if it was an axiom with which we all would agree

In Arizona, the housing boom and crash were partly fueled by loan officers, how they operated and how they were paid.

In fact, the author's incredible confidence in licensing is undermined in this adjacent statement:

Mortgage brokers, who run firms that connect borrowers with the best loans, have long been regulated by the Department of Financial Institutions.

Brokers employ loan officers, who work directly with borrowers, collecting their Social Security numbers and financial information to determine whether they qualify for a loan. Loan officers usually recommend types of mortgages and lenders.

These officers, sometimes called originators, weren't subject to state scrutiny. They worked under the licenses of their brokers, much the way an apprentice would work for a licensed contractor. Previously, that oversight was considered sufficient.

So the firms these guys worked for were licensed, but the individual employees were not. But if that licensing of firms, which after all is the level where loan practices and compensation policy are set which supposedly are at fault, how does licensing individual employees help? This is a typical political step that a) gets some state organization more money and power, b) generates one sound bite in a news cycle for some politician to tell voters that they care and c) does zero for consumers.

At the end of the day, the real cause of the housing boom was easy credit, and yes loan officers participated in this given that their commission-based incentives caused them to want to make every loan possible.  But this incentive outcome would not have been some kind of insight to the people and system that employed the loan officers.  In fact, everyone from the loan officer to the Congress wanted easy credit, and to blame one link in the chain of delivering this credit to consumers is madness.  Going forward, there is absolutely no evidence that the government is going to reduce its history of promoting easy credit, as evidenced by any number of federal loan modification and lending programs over the last 2 years.  So the likelihood that a government regulatory agency could have somehow headed off the bubble and its bursting is just silly.  The government was a party to it.

In the long run this mechanism will almost certainly be co-opted by current loan issuers as a way to limit competition, much as real estate agents and lawyers and funeral home directors already do.  As a minimum, this is a way for mortgage brokers to outsource some of the cost of running background checks and such on their employment candidates onto taxpayers.  In fact, I wonder who was behind this law in the first place?

Backed by mortgage brokers and real-estate regulators, the law quietly went into affect on July 1

Via the USAToday

Paychecks from private business shrank to their smallest share of personal income in U.S. history during the first quarter of this year, a USA TODAY analysis of government data finds.

At the same time, government-provided benefits "” from Social Security, unemployment insurance, food stamps and other programs "” rose to a record high during the first three months of 2010.

Those records reflect a long-term trend accelerated by the recession and the federal stimulus program to counteract the downturn. The result is a major shift in the source of personal income from private wages to government programs.

Buried in the ariticle is a quote that I have to cite as perhaps the worst analysis I have ever seen:

The shift in incomeshows that the federal government's stimulus efforts have been effective, says Paul Van de Water, an economist at the liberal Center on Budget and Policy Priorities.

"It's the system working as it should," Van de Water says. Government is stimulating growth and helping people in need, he says. As the economy recovers, private wages will rebound, he says.

How does the income shift prove the stimulus worked?  The problem is, as usual, a difficult one of evaluating what the economy would have done without the stimulus.  The mere shift in income is a necesary outcome of the stimulus -- all it means is that we have succesfully robbed Peter to pay Paul -- it says nothing about whether Peter and Paul are more wealthy in aggregate had we not moved money around by force.  In fact, proponents of the stimulus never, ever address a very simple fact - someone was using the money to run a business or invest or buy things or employ people before the government took it for stimulus programs.  And it is really, really hard to look at the body of stimulus programs and come to the conclusion that the private sector was investing the money worse, which is the only way stimulus would occur.

First, the background.  Veronique de Rugy writes something that is undeniably true, though the Left has played semantic games with words like "trust fund" and "lockbox" for years to try to "shelter" the public from this reality:

In practice, [] the trust fund and interest payments it receives are simply accounting fiction. For years, the federal government has been borrowing the Social Security Trust Fund assets for its daily spending. The fund has nothing left in it except IOUs from the federal government. In fact, even the interest is paid in IOUs.

Hence, the only way Social Security will not go into the red this year and in future years is if the federal government pays back Social Security. But since the money has long ago been consumed, it must borrow money from the public or raise taxes to pay its Social Security debts.

In response, Kevin Drum whips out this absolutely stunning statement:

Back in 1983, we made a deal. The deal was this: for 30 years poor people would overpay their taxes, building up the trust fund and helping lower the taxes of the rich. For the next 30 years, rich people would overpay their taxes, drawing down the trust fund and helping lower the taxes of the poor.¹

Well, the first 30 years are about up. And now the rich are complaining about the deal that Alan Greenspan cut back in 1983. As it happens, I agree that it was a bad deal. If it were up to me, I'd fund Social Security out of current taxes and leave it at that. But it doesn't matter. Once the deal is made, you can't stop halfway through and toss it out. The rich got their subsidy for 30 years, and soon it's going to be time to raise their taxes and use it to subsidize the poor. Any other option would be an unconscionable fraud.

I really had a WTF moment when reading this.  Its hard to know where to start, so here are some reactions in semi-random order:

• For those of you over 40, do you remember such a deal?  No, you don't, because there never was one.  What happened was that Congress decided to sweep the Social Security surplus into the deficit calculation in order to disguise the magnitude of unsustainable spending, to help prevent the kind of electoral backlash we may well see later this year.  This is Soviet-style history making.
• Here is a thought problem: Picture Tip O'Neil, Speaker of the Democrat dominated House of Representatives at the time, publicly signing on to a deal that the poor would pay higher taxes for 30 years to give the rich a tax break.  It is a total joke to even consider.   The absurdity of such a notion is mind-boggling.
• It took me a while to parse this and figure out what he was even talking about.   For example, there was never a tax increase to the poor during the 1980's, so what does he mean that the poor would pay more for 30 years?  The only way this can even be the correct view of the world is if one makes two assumptions:
  1. Everything Congress chooses to spend money on is perfectly, morally justifiable and therefore spending levels are a fact of nature beyond our ability to challenge or question
  2. Rich people have the moral obligation to pay for all incremental government programs, and all budget gaps will be closed by new taxes on rich people.  Taxes on rich people, as a corollary, are never too high.

Given these assumptions, then the "Deal" sort of kind of makes sense.  By the progressive "logic" of these two assumptions, social security taxes in an alternate world would have been reduced during the surplus and the general budget deficit would have been filled not with social security surpluses but higher taxes on the rich.

• The previous logic depends on treating social security taxes as unfairly regressive taxes as part of an income transfer / welfare program.  If you treat them as premiums in an insurance program, the retroactive logic trying to cast this as a "deal" in 1983 doesn't work.  Interestingly, many on the left in other forums have argued against calling social security taxes anything but insurance premiums, including....Kevin Drum

The men in my family of my father's generation returned home after serving their country and got jobs in the local steel mills, as had their fathers and their grandfathers. In exchange for their brawn, sweat, and expertise, the steel mills promised these men certain benefits. In exchange for Social Security taxes withheld from their already modest paychecks, the government promised these men certain benefits as well.

"¦.These were church-attending, flag-waving, football-loving, honest family men. They are rightfully proud of providing homes and educations for their children and instilling the sorts of values and manners that serve them well as adults. And if I have to move heaven and earth, now that they've retired, the Republican party is NOT going to redefine them as welfare recipients.

• Note by the way, that if this really is an insurance program, any private insurer or private pension fund managers in America would be in jail had they done what our trustworthy federal government did.  In effect, they spent other people's pension money on current operations.

If we want to describe the last 30 year history of Social Security surpluses as a deal, here is what the actual deal was without ex post facto varnish:  Congress in the eighties said that they were going to spend that surplus money now to get themselves re-elected, and some other Congress 30 years hence would have to figure out how to deal with the bare cupboard.   That was the deal.  It was a simple screw you to future generations.

Drum, given his progressive assumptions, fantasizes a deal based on his assumption that the only way to fill in the hole is with higher taxes on the rich, because his mind is incapable of wrapping itself around any other alternatives (see the two assumptions above).

But it is worth noting that the surplus was in the main handed away by the Democrats to the poor and middle class through new entitlement spending.  Its hard to figure how a series of actions that took seniors pensions and frittered it away in a variety of programs that at best helped the poor and in reality probably helped no one but government bureaucrats somehow obligates the rich to pay 30 years of new taxes to clean the whole mess up.

This is from the national ID card portion of the Democrat's immigration proposal:

Tough penalties will be put in place for fraud in procurement of a fraud-proof social security card.

Jim Harper has a thorough analysis of the proposal at the link.  My fear is the Republicans and Democrats will one day realize how similar they are on this issue and agree to an authoritarian compromise.

From the new bill signed by Obama today:

Under the new law, businesses that hire anyone unemployed for at least 60 days would be exempt from paying the 6.2 percent Social Security payroll tax through December. Employers also would get an additional $1,000 credit if new workers remain on the job a full year.

This is absurdly game-able.  How do I know?  Because as I read this here (I have not read the legislation) this is a ridiculous windfall for our company.  As a seasonal business, my current payroll is about 40 people.  Over the next two months, I will hire nearly 400 workers for the summer, most of whom have not been working over the winter as they are retired and just work a few months of the year.  Am I really not going to have to pay Social Security taxes on all these people?

And how is anyone going to administer this?  Are my payroll company and I going to have to figure out the employment status of all of our hires for the last 60 days to figure out what taxes to collect?  Does anyone in Congress even think about this stuff when they pass this garbage?

Update: ADP has more

Update #2: Here is my prediction, if they forgot about seasonal hiring  (again, I have not read the letter of the law yet).  This will be like the cash for clunkers program - in a month or two they will announce that they have used up the money they had allocated for the whole year.

I find it pretty hilarious that folks on the left suddenly feel the US is ungovernable, largely because they have not been able to pass a couple of complicated and risky legislative initiatives.  Was the US ungovernable when Bush couldn't pass Social Security reform?   It seems that showing leadership on a national scale with diverse interests is a tad harder than running a grad school policy round-table.  Oddly, the left seems befuddled by actual diversity of opinion, rather than the faux diversity with lock-stepped beliefs they built in academia and among themselves.

I don't read Real Clear Politics much but I thought Jay Cost makes a good point:

Let's acknowledge that governing the United States of America is an extremely difficult task. Intentionally so. When designing our system, the Founders were faced with a dilemma. How to empower a vigorous government without endangering liberty or true republicanism? On the one hand, George III's government was effective at satisfying the will of the sovereign, but that will had become tyrannical. On the other hand, the Articles of Confederation acknowledged the rights of the states, but so much so that the federal government was incapable of solving basic problems.

The solution the country ultimately settled on had five important features: checks and balances so that the branches would police one another; a large republic so that majority sentiment was fleeting and not intensely felt; a Senate where the states would be equal; enumerated congressional powers to limit the scope of governmental authority; and the Bill of Rights to offer extra protection against the government.

The end result was a government that is powerful, but not infinitely so. Additionally, it is schizophrenic. It can do great things when it is of a single mind - but quite often it is not of one mind. So, to govern, our leaders need to build a broad consensus. When there is no such consensus, the most likely outcome is that the government will do nothing.

The President's two major initiatives - cap-and-trade and health care - have failed because there was not a broad consensus to enact them. Our system is heavily biased against such proposals. That's a good thing.

One of the roles of the President is to bring some adult supervision to his party in Congress.  Bush failed on this, allowing Republicans to run rampant in earmarking excess, and Obama has if anything been even worse on this dimension.  He routinely remains aloof from the legislative details (some would say he just got rolled by Nancy Pelosi) and then proceeds to speak as if the actual bill matches his grand words and promises when it is obvious to all that it does not.

One aspect of the recent debate about the Supreme Court's Citizen's United decision that really irritates me is the notion, propounded by the NY Times among others, that corporations and the individuals assembled in them do not have free speech rights because corporations are "state-created entities."

This is wildly untrue, or alternatively, if you accept the logic, then nearly every aspect of our lives is state-created.  Take your pick.  Basically, the argument is that because the government has set the rules for corporate incorporation, and that these incorporations require state approval, that makes corporate entities "state-created."  But corporations are nothing more than a structure by which people can assemble and aggregate their capital and share ownership of an enterprise that employs that capital.  If government incorporation law did not exist, individuals still would have the incentive to assemble in some sort of entity.

I don't know of anything in the corporate structure that could not be duplicated with contract terms.  People point to the liability limitation as some sort of government gift to the corporate world, but that could easily be written in to every contract of, say, a partnership  (certain torts are an exception I would have to think about).  Vendors might choose not to accept such contracts, preferring to be able to pierce the partnership to go after individual owners to settle debts, but that choice exists today.  I have many, many vendor contracts in my corporation, and nearly all of my bank loans, that require the personal guarantee of all the owners, effectively waiving the liability limitation for those transactions.

My point, though, is that corporate forms have evolved as they are because that is what the sum of investors and business people were working towards on their own, and government merely enshrined these forms into law.  In fact, this basic rules-setting of the contracts playing field is one of the few arguably useful things government has done.  If we allow government rules-setting over certain activities to be the test of whether it can further restrict our Constitutional rights, then nearly every aspect of our lives would be subject to such restrictions.

At its heart, this is the classic "heads I win, tails you lose" argument of statists.  They claim that individuals must petition the state to register their corporation and license their business, and then use the fact of these required registrations to argue that the business is a "state-created entity" and that individuals give up their ability to exercise their rights when assembled into these entities.  By the same logic, the fact that every commercial transaction is subject to license and taxation by the state would make our every transaction a "government-created exchange."  Think I am exaggerating?  Just look at this from our Arizona state web site:

The Arizona transaction privilege tax is commonly referred to as a sales tax; however, the tax is on the privilege of doing business in Arizona and is not a true sales tax. Although the transaction privilege tax is usually passed on to the consumer, it is actually a tax on the vendor.

Rights, like the ability of free exchange between individuals, supposedly can't be revoked, but privileges can.   Thus the name.   For folks who treasure individual liberty, we have already lost the battle when we allow the state this kind of language.

Anyway, I feel like I am having a failure of eloquence over this issue.  Ilya Somin got me started thinking about these issues, so I will turn it over to him here.

Third, it's important to consider what is meant by "state-created entity." If the term refers only to institutions that literally would not exist absent state authorization, it does not accurately characterize many, perhaps most corporations. If the federal government passed a statute abolishing corporate status tomorrow, most actual corporations would still exist and still continue to engage in the same business or nonprofit activities. They just would do so under different and perhaps less efficient legal rules (maybe as LLCs, partnerships, or sole proprietorships). But they wouldn't all just collapse or go away. There would still be a demand for most of the products produced by corporations.

If "state-created entity" doesn't refer to the mere existence of organizations currently defined as corporations but to the particular bundle of legal rights currently attached to the corporate form, then it turns out that virtually all other organizations are state-created entities as well. Universities, schools, charities, churches, political parties, partnerships, sole proprietorships, and many other private organizations all have official definitions under state and federal law. And all have special government-created privileges and obligations that don't apply to other types of organizations.

Even individual citizens might be considered "state-created" entities under this logic. After all, the status of "citizen" is a government-created legal entitlement that carries various rights and privileges, many of which the government could alter by legislation, just as it can with those of corporations (e.g. "” the right to receive Social Security benefits, which the Supreme Court has ruled can be altered by legislation any time Congress wants). In that sense, "citizens" are no less "state-created" entities than corporations are.

By the way, in case I was not careful with my language, I offer the same proviso as does Somin:

I should clarify that in this post, as before, I'm not arguing that corporations themselves are "persons" with constitutional rights. Rather, I'm asserting that their owners and employees are such persons and that that status enables them to use corporations to exercise their constitutional rights. Similarly, partnerships, universities, schools, and sole proprietorships aren't people either. But people can use them to exercise their constitutional rights, and the government can't forbid it on the sole ground that they are using assets assets assigned to "state-created entities." This distinction was unfortunately obscured in the current post by my shorthand references to "corporations'" rights. I only used that terminology because it's cumbersome to always write something like "people exercising their constitutional rights through corporations."

The Baucus Health Care bill follows in the tradition of many other pieces of recent legislation in raising taxes in ways such that Congress can claim that it didn't actually raise taxes.  Here are four such taxes in the Baucus Bill  (note that no one that I know of has read any actual legislative language, so this is based on the press releases by the bill's authors.  Actual bill language can only be worse).

Employer Penalty is a Tax: In a step right out of Goldilocks, the Baucus bill will impose "penalties" on employers with no employee health care plan as well as on employers who have plans that are "too rich."  Never mind the insanity of the government micromanaging how an employer chooses to structure his compensation package to employees.  These "penalties" are structured as percentages of wages -- the one for having no health care plan was 8% of wages in the last bill.  This is a direct tax on employment, making hiring people more expensive (effectively the same magnitude as doubling the Social Security tax).  So how does this effect the average person?  Think of it this way, for the same wage, you job will be more expensive to a company that it was before the bill, making it less likely you will get hired at that wage.

Insurance Mandate as a Tax: The mandate that everyone must have insurance is a tax on the young and the healthy, as I explained previously:

People focus too much on the penalty itself being a new tax.  But the new tax is actually the requirement that individuals buy a product (in this case a health insurance policy) that they feel has no value (or else they would purchase it of their own free will today).  The government stopped pretending long ago that these younger middle class families will get much value from such a policy.  In fact, if they did get value commensurate with the premiums they will be paying, the mandate would not be achieving its purpose.  The whole point is that healthy people pay more into the insurnace system than they get back to support sick people.  If that payment is mandatory, then it is a tax, even if it is called an "insurance mandate" instead.

In fact, this is made all the more clear when politicians also suggest that cheaper high deductible health insurance plans be banned, as they were in Massachusetts.  Again, the whole point is to get young healthy people to overpay for insurance, and allowing them to buy sensible, cheaper, high deductible insurance defeats the whole purpose.

In fact, the bill's supporters have explicitly discussed requirements that insurance companies raise the price of insurance to the young and healthy to help reduce premiums for the old and, er, politically more active.  This is a redistributive tax, hidden within an insurance rate structure that will be heavily regulated by Congress.  Though don't expect Congress to admit this when young folks start to complain, they will say "blame the insurance companies."  Which is the whole beauty of such a hidden tax.

Corporate Taxes as Consumer Taxes: The plan would place new excise taxes on insurance companies, drug companies, and medical device providers.  But these taxes, particularly in the low margin insurance businesses (Yeah, I know if you only listened to Obama, you would never realize they were low margin but they are) just get passed onto consumers in the form of higher prices.  Congress knows this, but pretends it doesn't happen, so it can tell the economically ignorant that it hasn't raised taxes on consumers, and that rising prices are all the fault of the evil insurance companies blah blah, you know the drill.

Price Controls as a Tax: A large part of the Baucus Medicare savings is instituting price controls on doctors and other medical suppliers --  basically cutting their reimbursement rates.  This, by the way, just confirms what we all have known, that Obama and the Democrats don't have some mysterious win-win way to cut medical costs.  The only levers they have are 1. Price Controls and 2. Denying care.

There is absolutely no difference to a doctor between price controls and a tax.  A cut in the reimbursement rate from $50 to $40 is the same as having a 20% tax put on his $50 reimbursement.  Again, price controls in this context are just a way of hiding a tax.

And this might be the most dangerous tax of all, as such price controls always, by the immutable laws of economics accepted by monetarists and Keynsians alike, reduce available supply.  Doctors, for example, are going to be less willing to stay in the medical profession.  The result is inevitably shortages and long waits, something that should surprise absolutely no one as shortages and queuing are endemic in every government health care system in the world, starting with liberal darling Canada, whose citizens get medical treatment quickly only by crossing the border into the US.

A Cafe Hayek Reader asks:

Imagine we had entirely private health insurance market "“ no Medicare or Medicaid.  If I live to be sixty-five, I will probably have a personal and/or family history that indicates a strong probability of developing an expensive chronic condition. I would wager that is true of almost all sixty-five year olds.

So here is my question: which insurer in their right mind would take on my risk?

I suspect none. Once philanthropy and savings were exhausted, I would surely risk a painful life and preventable death.

Do I want this? Does anyone? Isn't "socialized" medicine for older people an unpleasant moral necessity for our wealthy society? Please note I am deeply suspicious of most arguments cast in moral terms in discussions of politics and economics. I ask these questions guardedly.

I answer in the comments:

Imagine we had entirely private life insurance market "“ no government options at all. If I live to be sixty-five, I will probably have a pretty high probability of dieing in the next 15 years or so. I would wager that is true of almost all sixty-five year olds.

So why would anyone insure me?

Because the life insurance market has developed a very reasonable solution to this -- you negotiate a term life rate for X number of years. Your rate might be Y a year for 10 years, or 1.5Y a year for 20 years, or 2Y a year for 30 years. The longer the rate guarantee, the higher the rate. You are explicitly paying higher rates than you might have in younger, less risky years to make sure you get a coverage guarantee at an affordable rate in later, risky years.

Of course, if you play the grasshopper and never buy insurance until you are 65, your price is going to be awful. But I don't think it is a reasonable role for government to do all kinds of individual-liberty-defying and costly things just because you did not take responsibility for your old age earlier in life. However, saying that, I of course know that this is EXACTLY what the government does with Social Security.

I have a high deductible individual insurance plan from Assurant who specializes in insuring individuals, and they have been evolving to a pricing model sort of similar to the term life model I listed above, though they are not quite there yet.

To the folks that say this is no solace for folks already 65, that is an implementation transition issue, not an argument against the market's ability to deal with this. Certainly a lot of folks have paid Medicare taxes for years and are counting on it. Some kind of phase out, possibly where the government redirects Medicare funds to make up the difference in policy prices for having not started locking in earlier, is possible. But the question was not an implementation question - it was a question of whether the market inherently fails for 65-year olds, and I think the answer is that it does not. We have a perfectly serviceable analog in life insurance to prove it

I call this the "failure of imagination" argument against free markets.  Some sector of the economy (such as education) has been dominated by government for so long that folks can't imagine a private model.  For example, when I argue for private grade school education, I can't tell you how often people say "private schools are all really expensive, no one could afford them."  Private schools are expensive because in the current government model, the only market niche for private schools is for families that can afford to pay the government for education they don't use and then pay a second time for a private school.

Previously, I used 1970s gas price lines as an example of a situation where the government, as Uwe Reinhardt puts it, "reduce[d] rationing on the basis of price and ability to pay."

Here is another example:  The Pruitt Igoe housing project in St. Louis, which was abused so badly by its occupants it had to be torn down less than 20 years after it was built.

I will remind you of my earlier comparison of universal health care to public housing:

Lyndon Johnson wants to embark on a futile attempt to try to provide public housing to the poor?  Our taxes go up, a lot of really bad housing is built, but at least my housing did not get any worse.  Ditto food programs "” the poor might get some moldy cheese from a warehouse, but my food did not get worse.  Ditto welfare.  Ditto social security, unemployment insurance,and work programs.

But health care is different.  The author above is probably correct that some crappy level of terribly run state health care will probably be an improvement for some of the poor.  But what is different about many of the health care proposals on the table is that everyone, not just the poor, will get this same crappy level of treatment.  It would be like a public housing program where everyone's house is torn down and every single person must move into public housing. That is universal state-run health care. Ten percent of America gets pulled up, 90% of America gets pulled down, possibly way down.

I remember Democrats scoffing at GWB's on-time tax refund checks last year.  I agreed with them at the time, thought potentially for different reasons, saying that one-time rebates are far less attractive than permanent rate changes, and a rebate that just increased the national debt was robbing Peter to pay his dad.

So I am not sure how the Democrat's explain this any differently (from an email I got from the SSA)

Dear Colleague:

On February 17, 2009, President Obama signed the American Recovery and Reinvestment Act of 2009. This new legislation provides a one-time payment of $250 to Social Security and Supplemental Security Income beneficiaries.

Over 60 million beneficiaries will receive a one-time payment. We expect all payments to be delivered by late May 2009. To assist us in issuing these payments as quickly as possible, beneficiaries should not contact Social Security unless they do not receive their payment by June 4^th. As we move to implement the new legislation, we will continue to provide updates to keep you informed of our efforts in this area.

You can learn more about these one-time payments at www.socialsecurity.gov.

We ask that you share information about these efforts with members, colleagues and any parties who would find them of interest.

I look forward to the opportunity to discuss this important legislation with you.

Sincerely,

Cheri Arnott

Associate Commissioner

for External Affairs

The only difference I see is 1) the rebate is going to a lot of people who do not even pay taxes and 2) by giving it to social security beneficiaries, the generational wealth transfer is all the more stark.  Now we are robbing Peter to pay his grand-dad.