The Failed Compromise

Republican pundits are busy separating themselves from what is stacking up to be the biggest calamity of the second Bush term: Social Security privatization. By calamity, I mean in a political sense: vast capital expended with no payoff for the regime. The result is less trust among the American people for those who pushed the reform. Just as Clinton’s medical-reform scheme was said to be the source of the Democrats’ undoing in 1994, Democrats now hope they can turn the Bush Social-Security failure to some kind of political advantage.

Maybe they can. But the real failure here is not due to the political calculus as such. An administration that staked out a principled position only to have it shot down by a political culture unwilling to consider doing the right thing is an administration that deserves respect. What we have here is a classic example of the failure of compromise, a result of the fundamental intellectual incoherence of the privatization position, hatched decades ago as a means by which Republicans could roll back FDR’s scheme without having to tell the truth that the whole program should and must be scrapped.

The death knell for Bush’s proposal is rightly seen to be the White House’s tax-increase trial balloon. Bush failed to rule out the proposal by Lindsey Graham to raise the cap on income that would be subject to the Social Security tax. Democrats immediately spotted this as a back-door tax increase that would hit the professional class harder than any change in government financing in a century. But Bush refused to rule it out, and many insiders intimated that the White House would gladly go along with this in exchange for getting “private accounts.” As weeks passed, it seemed that even the “private accounts” agenda was being back-burnered in favor of what would end up being another Greenspan-style tax increase.

At some point, I received an hysterical memo from a DC lobbying group to the effect that the glorious agenda to privatize the program was being hijacked by people who were plotting to loot middle class Americans. Sorry: I just can’t muster any sympathy for these sad sacks. They had bet their money on a mule dressed as a racing horse. Their regrets here amount to panic that someone exposed the reality beneath the appearance.

That the privatization scheme was as untenable and unsustainable as the program itself is no big secret. In fact, nothing has changed at all concerning the essentials. Where we stand today is precisely where the reform plan stood in 1997, when I asked: "Has Washington political culture become so corrupt and so perfidious that the largest tax and debt increase in history can be touted as ‘privatization’ and ‘free markets’?”

The idea of private accounts itself is a mess. From 1997 again: “A new forced saving program will compete with existing voluntary savings, and ironically reduce the amount people put away for retirement. Moreover, when government is involved in the process, it also influences the direction of market competition. Bureaucrats, not private investors, end up picking the corporate beneficiaries and, therefore, corporate losers. No fire wall between the pension manager and the government is thick enough to forestall that unhappy fate.”

Most absurd, however, were the lies then being told about the financing: “The present system works on a pay-as-you-go basis, with the spare change spent on government debt. The more revenue that is diverted to stocks, the less money there is to pay current recipients and the larger the unfunded liabilities grow. Thus, the bigger and bigger tax increases necessary to make up the difference.”

In eight years, nothing has changed. It is the same old scam. Privatization advocates are only pretending to be shocked that people are talking about a vast tax increase to fund the transition to forced savings. But this was inevitable. Diverting the revenue leaves a massive funding gap that can only be closed by tax increases, debt, or benefit cuts. There is no third option, no magic funding source that will appear and drop revenue on the system to make it fiscally sound.

It is a wonder anyone could have believed it at all. In fact, when the professional journals first started discussing this idea back in the 1980s, they spoke openly about the tax increases that would be necessitated by the creation of privatized forced savings. Any attempt to pass off an article that didn’t deal with the transition would never have passed peer review. But there is no peer review in politics, so the advocates felt free to lie, lie, lie for ten years.

The idea was so crazy that it is a wonder that anyone went along with it. This is all the clearer in retrospect: they proposed to fix the fiscal crisis of Social Security by redirecting vast amounts of its revenue stream to a new system. Of course this can only make matters worse. It is roughly akin to trying to repair a drafty house by putting a wrecking ball through an external wall. Such an approach replaces a draft with a full wind. Is it any wonder that this idea didn’t make much headway?

Meanwhile, the Bush administration has expended vast time and resources, and Wall Street has paid many millions to think tanks that were willing to operate as fronts in the political push to make investment in the stock market mandatory. And what do they have to show for it? They won’t get their “private accounts” but even worse, the rest of us will not get genuine reform.

A low point in this debate occurred when a parade of Republican pundits claimed that FDR himself would have favored the Republican plan. Now, there are a number of ways to look at this. If they mean that he would have favored lifting the ceiling on taxable income, they are probably right. This was a man without a principled free-market bone in his body. All income was up for grabs. If, on the other hand, they were claiming that FDR would have supported the version of reform they sold to Republican ideologues — that private accounts were a sneaky way to eliminate the Democrats’ favorite program without telling anyone — they were just being duplicitous.

There is something about politics that convinces people that the truth is always the worst strategy. I just don’t see it. Let’s say that some president were open with the public and said:

Social Security is an unsustainable tax-and-spend program. It taxes half the population to fund the other half at any point in time, but over time we are all victims. Everyone would be better off without it, eventually. I propose that all who want to stop paying the taxes be allowed to do so, in exchange for which they give up all future benefits. If you want to surrender benefits, you may do so in exchange for dollar for dollar tax reductions. Currently promised benefits will be paid out of general revenue. Yes, this will blast a hole in the budget. But the liabilities at least have a stopping point. Folks, there is a name for this reform: freedom. Take it or leave it.

There are many other reform plans, such as that offered by George Reisman. What matters here is not the method but the goal, which is to eliminate the program. Now, if Bush had proposed this, Republicans might run for their lives. I don’t know. Maybe it would actually stand a chance of passage. At least the terms of the debate would be clear, and we wouldn’t be in the current fog in which “privatizers” seek the largest tax increase in history while Democrats who favor the current system are decrying the attempted looting schemes of the Republicans.

The privatization plot was hatched decades ago as a scheme to get around the need for truth and radical reform. It has amounted to nothing. Such is the price of compromise and “political realism.” The lesson is that there is no substitute for truth — even in politics.