Train Wrecks on Trade and Taxes

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In the midst of war and economic calamities, two important items got lost in the news shuffle, one involving trade and the other Social Security. They both involve enhancing state power in the name of freedom, and the implications for our economic well-being are immense.

For two decades, presidents have pushed for "fast-track" trade authority, claiming that it is essential for the cause of free trade that the Executive be allowed to bypass Congress and negotiate his own deals. Republicans have generally agreed, even while Bill Clinton was president. On the left, meanwhile, we’ve heard cries of panic, that such authority would lead to the end of labor and environmental regulation.

As usual, you have to have an independent mind to see through the fog. It’s true that centralized power helps bypass Congressional rent seeking, but only by opening up an opportunity for other forms of power abuse. That’s the conviction of the classical liberal tradition, in any case, and it was put to the test last week when Congress finally gave President Bush fast-track authority, under pressure that not doing so would be unpatriotic.

And what happened? First it turned out that, as a quid pro quo for votes, treaties guaranteeing lower tariffs on textiles were upended, throwing textile markets in the developing world into chaos. Then Mr. Bush used his new authority to side with the steel industry in its demand for new tariffs. This is protectionism, plain and simple, and it will prove very costly to American consumers. It also comes at the worst possible time (recession).

Item two concerns the payroll tax. President Bush’s Social Security panel looked into possible reforms and generated the traditional three-option report. The introduction by Daniel Patrick Moynihan and Richard Parsons proposes a fourth. This confusing array tempts legislators to cobble together some compromise that combines the worst elements of all plans.

By way of background, Mr. Bush backed a privatization program during his campaign. To his mind, it was rhetorically attractive: let young workers establish private accounts but do not cut benefits. Sadly, this really was a case of devils in the details.

If revenue is diverted to private accounts, how will existing liabilities be paid? What exactly are the transition costs, how will they be paid, and are they worth the price? If you can’t refuse to participate in the new accounts, and you can’t tap the new account until you are 65, in what sense are they private? If they are not private (and they are not), will government ensure a certain rate of return, thus establishing a permanent and publicly funded line of credit for Wall Street? (Indeed, Wall Street firms are the primary funders of the campaign for "privatization.")

Economists who have looked at the system carefully conclude that there are only two options for reforming Social Security, all else being equal: raise taxes or cut benefits. There is no magic third option absent real steps toward eliminating the program. But you can bet that no one outside serious libertarian circles is talking about that.

So what has the newest panel wrought?

Option one: permit a 2 percent diversion of funds from current revenue streams into nominally private accounts, and put off dealing with the 28 percent shortfall until later. The most likely means of funding: new "premiums" for "new accounts"-longhand for taxes.

Option two: permit a 4 percent diversion of funds from current revenue streams into nominally private accounts, up to $1000. The good part: cutting the benefits of the existing system. The bad part: require government funding of $1.3 billion to $71 billion with 100 percent participation. Again, that’s longhand for mandates, taxes, and/or debt.

Option three: require workers to save 1 percent of annual income to qualify for the right to pay a higher tax to contribute to nominally private accounts, which government would match by 2.5 percent. Low-income workers get welfare to match, called a refundable tax credit. Early retirement is penalized. Total cost estimate: $8 billion to $55 billion, raised via a new tax. Translation: disaster.

Look, if the goal is to give taxpayers a break (a fabulous idea), then cut the payroll tax and stop all this talk about "private accounts." The only real private account is the one at your bank or brokerage. The revenue shortfall generated by a genuine tax cut will be just as substantial, but at least we can have some clarity about the fiscal implications.

We live in a topsy-turvy world where "free trade" is supposed to be accomplished by consolidating power, and where "privatization" comes about through new taxes called "premiums" for "private accounts." It’s one thing for the socialists to play these games, but it’s not a solution to counter their influence with more dissembling.

Llewellyn H. Rockwell, Jr. [send him mail], is president of the Ludwig von Mises Institute in Auburn, Alabama, and editor of

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