Jewish World Review Feb. 18, 2005 / 9 Adar I, 5765
Memo to the Dems: Greenspan the Oracle is not the guy you want
Alan Greenspan's status and role as an economic oracle is unfortunate.
The fed is supposed to be setting monetary policy to establish and maintain
price stability. Looking to its chairman to be an overall economic
"maestro," as Greenspan has been called, is to misunderstand both the
function and authority of the position.
Yet, an oracle Greenspan has become. And given that, it's puzzling why
Democrats would spend so much time in the Senate Committee on Banking,
Housing and Urban Affairs the other day grilling him about Social Security.
After all, Greenspan's support for personal retirement accounts was already
known. And his willingness to make the case for them, within the limits of
Greenspanese, was entirely predictable.
And, indeed, a powerful case he did make.
The existing pay-as-you system, in which today's workers pay for the
benefits of today's retirees, "is not working," he said.
The problem is demography: there are fewer workers per retiree, with
additional declines projected, and retirees are living longer.
Greenspan said he supported personal retirement accounts, in which workers
would save to provide their own retirement income. He accurately referred
to this as "forced savings."
Such a change, according to Greenspan, would not only better suit current
and anticipated demography, but would also benefit the economy, since it
would increase the savings rate. The pay-as-you system, he said, "basically
moves cash around."
Personal retirement accounts would also give more people a larger stake in
the economy, he observed, and create estates for lower- and middle-income
Now, none of this was in Greenspan's prepared remarks, which concerned the
current state of the economy. (He generally thinks it's pretty peachy, by
the way.) Virtually all of it came in response to suicidal questions by
Democratic opponents of personal retirement accounts.
There have been, as always, attempts to spin Greenspan's remarks. Some news
accounts played up his advice to proceed cautiously in establishing
personal retirement accounts, given the transition costs. But, of course,
President Bush has already proposed phasing them in.
Greenspan said that it was unknown how financial markets would respond if
the transition costs were debt financed, as they are sure to be.
That is, of course, unknowable until it happens. But there are some factors
on which a decent surmise can be based.
If the financial markets believe that the federal government is stretching
its debt capacity, interest rates will be a harbinger. The interest rates
on long-term Treasury notes remain historically quite low, despite recent
hikes by the fed in the federal funds rate.
Some fret about the amount of federal debt held by Asian central banks,
particularly China. But these interest rates suggest no shortage of demand.
Moreover, as John Makin, an economist at the American Enterprise Institute,
has pointed out, such banks don't have that many options for parking their
reserves in places that function as a safe storehouse of value.
In any scenario, the federal government is likely to be borrowing large
sums to pay Social Security benefits. Those who claim that there is no need
to act quickly to fix Social Security are counting on the federal
government redeeming more than $5 trillion in special Treasury notes the
trust will hold. Borrowing is the most likely way the federal government
will do that.
Markets are far more likely to respond favorably to borrowing that can
comfortably be predicted to decline over time, as personal retirement
accounts accumulate, than to borrowing to cover up a funding deficit in the
pay-as-you go system that expands over time.
Moreover, as Greenspan and others have pointed out, borrowing simply
recognizes an unfunded liability that already exists. Markets are
undoubtedly already somewhat factoring this in.
The Social Security debate is careening into unproductive territory. For
example, a cottage industry has sprung up calculating what sort of returns
personal accounts would have to generate for workers to be ahead. But these
are based on reductions in traditional benefits Bush hasn't specified,
compared to a current Social Security system that somehow gets miraculously
Bush has made a strategic mistake in not putting a specific proposal on the
table, which has enabled opponents to fill in the details for him.
Greenspan, however, reoriented the debate to its most basic, fundamental
truth: "The demographics are inexorable and call for action."
It doesn't get much clearer than that. Particularly from Alan
02/11/05: Federal belt-tightening: You call that an austerity budget?
02/27/04: How not to achieve a mandate