Soothe Bond Market by Challenging Powerful, Not Gutting Social Security

The deficit hawks have been pushing the line in recent months that we have to make cuts in social security,
along with some revenue increases, in order to reassure the bond
markets about the creditworthiness of the US government. According to
this argument, by taking tough steps (ie cutting social security
benefits) we will have shown the bond markets that we are prepared to
do what is necessary to keep our budget deficits within manageable
levels.

There is some reason to question the merits of this
argument. First off, the deficit hawks don't have an especially good
track record in the insight category. Not one person among the leading
crusaders was able to see the $8tn housing bubble that wrecked the economy.
If they couldn't see something so huge that was right in front of their
face, we might wonder about their ability to ascertain anything as
amorphous as the sentiment of actors in bond markets.

Furthermore,
the fixation on social security is peculiar. The Congressional Budget
Office shows the programme can pay all future benefits through the year
2044 with no changes whatsoever. Even after that date the shortfalls
are relatively minor. If we instituted a fix in 2030 that is comparable
to the one put in place in 1983 it would leave the programme fully
solvent out to the 22nd century.

Furthermore, cutting benefits
for near-retirees (workers in their late 40s and 50s) seems cruel and
unwarranted. These people paid for their benefits through decades of
work. Also, this cohort has seen most of the wealth that they did
manage to accumulate destroyed with the collapse of the housing bubble
and the plunge in the stock market. The bulk of this cohort will
therefore be relying on social security for the overwhelming majority
of their retirement income.

For these reasons, the determination
to cut social security has the feeling of the class bullies telling the
rest of us that we have beat up the weakest kid in the class in order
to be admitted to the club. That may be the way things work in
Washington, but this doesn't mean it is right.

If the issue is
assuaging the bond markets by convincing them that we are prepared to
take tough choices to limit long-term deficits, let's put a few other
items on the table. For item number 1: how about a financial
speculation tax? Wouldn't the bond markets be impressed by seeing
Congress crack down on the Wall Street hot shots whose recklessness
helped fuelled the housing bubble? That one would show real courage
given the power of Goldman Sachs- Citigroup gang.

As
a second item, Congress could go after the pharmaceutical industry. By
2020 we are projected to be spending almost $500bn a year on
prescription drugs. We pay close to twice as much for our drugs as
people in other wealthy countries and about 10 times as much as the
drugs would cost if they could be sold in competitive market without
government patent monopolies.

Suppose Congress decided to pay for the clinical testing of drugs directly and then allowed all new drugs to be sold as generics.
This could save taxpayers hundreds of billions of dollars a year.
Wouldn't the bond markets be impressed by seeing Congress stand up to
the pharmaceutical industry?

As a third item, suppose Congress
revisited plans for a public insurance option. The Congressional Budget
Office projected that this would save over $100bn by 2020
and certainly much more in future decades. Wouldn't the bond markets be
impressed if Congress stood up to the insurance industry?

These
are three clear ways in which Congress can take big steps towards
reducing long-term budget deficits by standing up to powerful interest
groups. In each case Congress would be reducing the deficit in ways
that would likely make most people better off, not worse off. If
bringing the long-term deficit into line is the issue, all three of
these measures should be at the top of everyone's list.

Remarkably,
the leading budget hawks never discuss these measures when they push
their deficit-cutting agenda. Somehow we are supposed to believe that
cutting social security will do the trick with the markets, even though
this will hurt tens of millions of people who actually need the money.

If
the budget hawks had a track record of knowing about the economy or
financial markets then perhaps we should take them seriously, but they
don't. Therefore we should just view them as people who want to cut
social security and are putting out some nonsense to rationalise
beating up on retirees.