Economic Narcissism

Years ago a psychiatrist we knew described a pathological narcissist she was treating.  The patient literally said

“How can the children be hungry — I had a big lunch.”

I couldn’t help thinking of that story when a friend passed along a piece by financial columnist, author and registered financial advisor Scott Burns.  I’m not saying Scott is alone in seeing his reflection and thinking he’s seeing the whole world.

In fact, he shows more awareness than most.

In the linked article and a book he co-authored a few years ago, Scott correctly identifies the massive transfer of wealth from those who worked to those who owned investments over the past several decades.

From the recent article:

Back in 1983, when Alan Greenspan led a commission that reformed Social Security, total Federal debt was only $1.4 trillion. Our reformed Social Security was supposed to be solvent for a full 75 years. Its accumulating surplus, held in trust, would cover the hefty cost of the baby boomers when they retired.

But as with a few other things, Alan Greenspan missed the mark. Today the unfunded liabilities of Social Security alone are $5.3 trillion. And the surplus is no more. Worse, U.S. Treasury debt is now $12.4 trillion— which includes $2.3 trillion of IOUs held by the Social Security Trust Fund. So when Social Security goes to redeem its IOUs and cover that $29 billion shortfall, it will go to the Treasury. Sadly, the Treasury is empty except for its tax revenue and whatever it can borrow. It’s a real hand-to-mouth operation.

So, instead of subsidizing other government spending, as it has for decades, employment tax funded Social Security will be just another program in need of cash.

This intrigued me, because maybe Scott and his colleagues have a prescription for fixing the problems we face.  After all, many who decry the “bankruptcy” of Social Security refuse to acknowledge where the money went, and who benefited.

I started reading Scott’s other columns.

He “gets it” — almost.  For example, one of his columns pointed out that the banks are being recapitalized by the Fed through zero percent interest rates, effectively taking earnings away from savers that hold CD’s.

He also understands and empathizes with retired people suffering from declining stock portfolios.

What he doesn’t do is recognize where the money goes when the government collects taxes, and who is “entitled” to those government services.  As far as he is concerned, Social Security and Medicare are obligations that the current recipients paid for, and can’t be changed.  He believes those who are paying the payroll tax now will (should?) be stiffed with lower benefits, and for those who die before age 67 or so, none at all.  I disagree.

The current recipients paid for some of their benefits, but nowhere near what they collect.  As far as I’m concerned, they are collecting three components when they cash their checks.

• First is the return of money invested, plus interest at the compounded T-bill rate.  This is the mandatory savings part of the plan.
• Second is the genuine insurance transfer of payments, which pools the insured, takes taxes from all, and only pays those lucky enough to live to the time they can collect.
• Third is pure welfare, consisting of payments taken from current workers and given to current retirees based on Congressional largesse.

So, pray tell, why is the “fix” to Social Security to screw the current working population while letting the country club welfare continue to flood out of the Treasury every month?  How about the “welfare” component only being paid to those with genuine need?  It would be a simple matter of mathematics to figure the actuarial return on any cohort group’s contribution (what people born a certain year paid in), and what they are entitled to by virtue of paying in, and winning the life expectancy lottery.

Meanwhile, let’s talk about the rest of the tax system and the expenditures it supports.  As I pointed out the other day, most of what our Federal government does has been to subsidize, defend, and promote commercial interests.  For the first 120 years of the Republic, those commercial interests paid for the government they received.

For some reason, the Defense Department is a sacred cow, with shrieks from otherwise fiscal conservatives if even the growth rate of spending is cut, much less the budget itself.  That’s at $662 billion this year, and growing.

Another huge part of the budget is interest on the debt, which was over $450 billion in fiscal 2008 (ending September, 2008), and came in under $400 billion in fiscal 2009 only because rates are so low during the crisis.

Finally, we have those Social Security and Medicare payments, totaling over $1.1 trillion.

Those hit$516 billion in 2008 for basic Social Security, with $109 billion in disability payments, $236 billion in Hospital Insurance, and $233 billion in “supplementals” — the payments for prescription drugs and doctors.  Here’s the chart from the actuary for the program, showing those trillions of dollars of imaginary assets that already got spent on other purposes.

	OASI	DI	HI	SMI
Assets (end of 2007)	$2,023.6	$214.9	$326.0	$42.9
Income during 2008	695.5	109.8	230.8	250.0
Outgo during 2008	516.2	109.0	235.6	232.6
Net increase in assets	179.3	0.9	-4.7	17.4
Assets (end of2008)	2,202.9	215.8	321.3	60.3

So what should we do?  The classic advice – when in a hole, stop digging comes to mind.  But how exactly do we stop digging this hole?

Here’s where Narcissus appears in the tale.  Scott’s advice sounds quite sensible when he describes his motives:

“What do we want more of? Saving.

What do we want less of? Debt.

Then let’s have tax policies that encourage more saving and that discourage debt.“

Huzzah!

But then he goes on to make his recommendations, and they are precisely wrong.  Here they are:

• Make all retirement account withdrawals tax-free. The same government that can reduce interest rates can also eliminate taxes on retiree income. As I pointed out in a recent column, many retirees have seen their income plummet by 23 to 35 percent, simply because yields on savings have declined. That’s a greater amount, by far, than the tax rates at which most people pay. Let Congress remove the insult from the injury.
• Make all dividend, interest and capital gains in taxable accounts tax-free. Retirees who need investment income to pay their bills would have more to spend. That would stimulate the economy a lot faster than public programs. Those who don’t need investment income for consumption would be encouraged to save more, reducing our need to borrow from China and other nations.
• Abolish the corporate income tax. Without the corporate income tax, more corporations would be self-financing and (somewhat) less money would be wasted buying political influence, special legislation and weird tax breaks.

He basically says we should leave the price of government to be paid 100% by wages of current workers and by self-employed small business operators.  Make no mistake about it, he doesn’t suggest we stop paying taxes to support the activities of those corporations and protect the property of investors.  He just thinks they should go from a partial subsidy from wages to a full subsidy.

On top of that, he thinks consumption by those who do not earn a paycheck, but trade in the investment casino, should also be untaxed.  What a deal!

We should have learned by now that lowering taxes on capital gains to zero disrupts the markets (look at the housing bubble, driven by cheap financing, but even more so driven by the lure of $500,000 a year in tax-free speculative profits).

Try this on for size:  The only capital gains that don’t get taxed are for stock you buy directly from the issuer.  In other words, buying stock in the secondary market doesn’t do anything toward increasing the capital stock of the corporations that issued the stock, so no tax break.  Now that would increase investment.  His suggestion would only increase the efficiency of the High Frequency Trading “tax” on the market. During the Eisenhower years people held stock for the long haul exactly because the tax was high from realizing profits by trading.   You can’t be telling me selling stock adds any more jobs than a couple more computer techs at the NYSE, can you?

But he fell into a common trap we all have to watch out for:  To believe that what gives you, personally, the greatest advantage is naturally what is best for America.

How could the children be hungry?  He wants a bigger free lunch.

Welcome to the new Feudalism, where whoever got there first and owns the stock gets all the benefits, and whoever works for a living pays to support them and protect their property.  It didn’t work for the Sun King and his heirs, and it won’t work now, either.

hh