I can’t figure out Paul Krugman. Some weeks he’s off his hinges; hell-bent on agitating, his scornfulness consistently getting the better of his credibility. Other times one can actually detect traces of sobriety in his writing — finesse, level-headedness, wit — all attributes the New York Times columnist can every so often claim as his own. Take last week. Krugman’s Tuesday column about the “fighting moderates” in the ranks of the Democratic Party was a well-reasoned and tempered piece, argued straight from the heart of the political center. His tone was calm and collected — his gift for penetrating commentary undeniable. But three days later, Krugman was back at boiling point. Social Security, as it has been for months, was his topic of choice, and this time Alan Greenspan would be the riled columnist’s personal chopping block.

Jess Cox

Democrats had turned the Federal Reserve Chairman’s routine testimony before the Senate Banking Committee last Wednesday into a show trial on Social Security privatization. From federal financing to individual investment returns, Greenspan was grilled on the whole gamut of policy angles. It’s hardly uncommon for lawmakers to seek the Fed chief’s counsel on front-page legislative issues. A nod of approval from Greenspan, a critical constituency in and of himself, is a golden stamp for any fledgling economic policy. His position as a non-partisan monetary official, of course, demands complete impartiality, and Greenspan has been distinguished for his unruffled, almost stoic matter-of-factness in these surroundings. Well acclimated to the conventions of congressional testimony, the monetary grand master has proved virtually unflappable in a committee room setting.

By most accounts of Wednesday’s hearings, his stagecraft was flawless. Though he ultimately backed an abstract private savings model, Greenspan’s approval was couched in explicit reservations, his enthusiasm lukewarm at best. In fact, with all of his disclaimers and carefully measured provisos, it’s baffling to think how anyone could question the chairman’s neutrality.

Well, if you hadn’t guessed, Paul Krugman found a way. In Friday’s column, he said Greenspan (keep in mind this is arguably the most powerful man in the world) “deserves to be treated as just another partisan hack,” maintaining that “by repeatedly shilling for whatever the Bush administration wants,” Greenspan has “betrayed the trust placed in Fed chairmen.”

Now it should go without saying that these views found scarce accordance in the media. Actually, that same Friday, The New York Times editorial board (writing just inches from Krugman), argued that Greenspan’s assessment of the President’s privatization proposal “by any logical consistency, could hardly be read as approval.” That’s pretty embarrassing. But had Krugman bothered to lend any credence to the caveats that anchored the chairman’s testimony, he may have been surprised to find continuity with some of his own reservations.

Greenspan, like Krugman, doesn’t buy into the hype of an imminent entitlement crisis. Neither economist foresees the U.S. Treasury defaulting on its commitment to America’s retiring taxpayers. And both have little confidence in the system’s long-term financial solvency. Indeed, their reasoning runs almost parallel until we arrive at 2018 — the year the system’s benefit payouts begin to exceed incoming tax revenue.

Here’s where Krugman banks on the “trust fund” — the excess payroll income the government has amassed over years of collection. In a Jan. 4 column he wrote, “When benefit payments start to exceed payroll tax revenues, Social Security will be able to draw on that trust fund. And the trust fund will last for a long time: until 2042, says the Social Security Administration; until 2052, says the Congressional Budget Office; quite possibly forever, say many economists.” Comforting, right?

Problem is, there is no trust fund — at least not the kind Krugman would have you envision. If you’re trying to conceptualize it, get that large pot of cash the government can dip into at its leisure out of your head. Instead, picture an empty bank account. As I said, there is no trust fund.

Unlike private plans in which pensions are invested in real financial assets, the government converts its payroll receipts into special-issue bonds — IOUs to the Social Security trust fund. These accounting entries take place solely for the sake of bookkeeping, and at no point does the trust fund see a hint of liquidity. Treasury pockets the money in an agreement to pay back the principal, plus some marginal interest, when the bond matures. Never having changed hands, the borrowed revenue is integrated into normal budget appropriations, and as characteristic of the Bush administration, hemorrhaged from Treasury coffers. The trust fund is empty, and as Greenspan points out, this pay-as-you-go system “creates no savings; it merely transfers from taxpayers in any particular period to beneficiaries.”

Krugman is right that Social Security still has its breathing space. But in his crusade to discredit the virtues of privatization, he’s managed to whitewash most of the current system’s financial aggravation. Social Security, as Greenspan argues, may be able to safely parachute its way into the middle of the century — the United States Congress, however, cannot.

As long as the Department of Treasury remains standing, benefit payments will be protected by the full faith and credit of the U.S. currency. But when the first payload of Treasury securities is activated in 2018, the brunt of the debt burden will fall on lawmakers in Washington. More likely than not, according to the CATO Institute, taxpayers will have to swallow a 50 percent increase in the size of the payroll tax – that’s tantamount to 12 percent of an individual’s average annual income. If it’s not the payroll, it will be the general income tax, or a screeching halt to discretionary spending, or more federal borrowing. The money will have to come from somewhere, and it will have to arrive in the hundreds of billions.

Whether Krugman will wait until 2018 to own up to his misapprehensions remains to be seen. Whenever he does, I just hope Alan Greenspan is on a beach somewhere, laughing.

 

Singer can be reached at singers@umich.edu.

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