Reflecting on fiscal and intellectual deficits

If beauty is in the eye of the beholder, the same might be said about social problems. With a war – unexpectedly costly in both monetary and human terms – raging in Iraq, job growth stagnant and large budget and trade deficits projected for the foreseeable future, Alan Greenspan made headlines early last year decrying the purported fiscal burden posed by retiring baby boomers.

Most of the mainstream media, including newspapers and local TV news in this state, treated his pronouncements with the usual reverence. His prognostications helped add momentum to the push to privatize Social Security. Nonetheless, this sage’s track record both on economic projections and on his own past promises make him a suspect guide to future public policy.

Ever since its enactment by the Roosevelt administration, Social Security has been a target of conservatives in the Republican Party. Only after Barry Goldwater lost decisively in his 1964 campaign, in which he promised to repeal Social Security, did most Republicans finally put this issue to bed for a time. Even Ronald Reagan never challenged the fundamentals of Social Security.

By the ’90s, however, some conservatives hit upon a new tactic. Rather than challenge the legitimacy of the program, they suggested that it was going to run out of money. They then claimed the best way both to secure the program and to improve retirement prospects for aging baby boomers would be partial privatization. In one of his greatest disservices to the Democratic Party, Bill Clinton went along with Republican prophecies of eventual doom for the system.

Despite this widespread consensus that Social Security is in trouble, the numbers have never been there. The Social Security trust fund’s own report says it will be able to meet all its obligations through the year 2042. Even these figures are based on the assumption that the United States economy will have a slower growth rate than it experienced throughout most of the 20th century.

The trustees assume rates of growth characteristic of the 19th century, when our economy, lacking such safety nets as Social Security and unemployment compensation, experienced several disastrous downturns. Interestingly enough, every time corporate interests have returned to this topic, the doomsday number projected by the Social Security trustees is even farther in the future.

Greenspan himself should and probably does know this. In 1982 he chaired a commission that recommended modest tax increases to sustain the system for the foreseeable future. Those recommendations were enacted and have been extraordinarily successful. The current push to cut benefits for baby boomers would in effect break a commitment. The large surplus built up by the Social Security trust fund would not be used for Social Security. Instead, the money collected through Social Security taxes will be used to pay for farm subsidies, defense and other general commitments, once funded through the taxes the Bush administration has slashed.

As it stands right now, the vast expenditures projected in the Bush budget will be paid for either by increasing the federal debt or, if Greenspan has his way, by cutting retiree benefits for Social Security. Yet we need to ask why we are in this predicament in the first place. Just three years ago, Greenspan recommended that the federal government embark upon substantial personal income tax cuts because, as he put it, the federal surplus was growing and was going to continue to grow.

Greenspan is not alone in faulty economic forecasts. But with a track record of failing to predict the bursting of the bubble in tech stocks, the accompanying recession and the more recent mistakes about the federal budget, Greenspan’s advice should hardly be treated as gospel truth.

The United States economy presents more obvious and immediate problems than a low-probability shortfall in a federal entitlement program four decades from now. That economy is running an unprecedentedly serious trade deficit. Despite recent declines in the value of the dollar, that trade deficit is an annual rate of about 6 percent of gross domestic product. These are numbers generally characteristic only of so-called Third World nations in fiscal crisis and facing the draconian guidance of the International Monetary Fund.

I will not join Greenspan in predicting imminent economic crisis. But for my money, the trade deficit is a more immediate and bigger issue. The Bush administration has granted extraordinary tax favors to the wealthy. That money would be far better spent in modernizing our energy and transportation systems, improving our schools and funding basic research. Expenditure in each of these areas is necessary if the United States is to resume its role as a world-class economic power. If our government pursues that course, it will be far more able both to deal with its trade deficit and to meet its obligations to future generations.

John Buell is a political economist who lives in Southwest Harbor. Readers wishing to contact him may e-mail messages to jbuell@acadia.net