Home > Entitlements, Inflation, Sovereign Default > Will Default or Inflation fix Social Seccurity woes?

Will Default or Inflation fix Social Seccurity woes?

“Social security is an obligation the government has to it’s people.” I agree, but the Government isn’t above the law of finance. If they can’t pay for it, then they will default; either through outright default ( say “tough shit and deal”) or through inflation.

The “tough shit” approach will hurt seniors but that’s it, anyone not getting SS benefits will just have to start saving themselves, which will lead to economic growth, under a simple Solow model. But, it’s politically unfeasible. Seniors are a dedicated voting block and have their own self-interest first and foremost.

I don’t blame them either. They paid in, with the promise of a return by the Fed Government. In theory, that promise should have been good. In practice, that promise was meaningless as soon as the Government started paying other people off with SS money.

Inflation will hurt everyone and in the long run is more harmful than anything else. Unfortunately, it’s the most politically appealing path. Inflation is a creeping tax. Government use it because it decreases the purchasing power of the currency, so a Government pays off it’s debts with worthless paper.

Charles Rowley, economist at GMU , explains it well.

There are only three ways for a government to cover the cost of its spending: debt, regular taxes, and inflation.  Because regular tax increases cannot be hidden, at least easily, they tend to be vote losers, to be resorted to only as a last resort, and even then, only in a discriminatory manner designed to impact adversely on a small minority of voters. Because increased debt is less transparent to the voters, and therefore, politically feasible, deficit-financing tends to be the preferred instrument, up to the point where  its burden becomes apparent to the international community. At that point, inflation tends to comes into play, as governments scramble to reduce the real burden of the debt by debauching its currency.

When the currency is worth less and less, those on fixed incomes are hurt more and more. Prices go up in times of inflation, ask anyone around during the Carter years. Fixed incomes do not. The Government does not index SS benefits with inflation, they merely vote in a cost of living increase.

Here is some news for you, that COL increase is worthless. It’s measured using a flawed CPI number. I say flawed because it excludes such trivial things as energy and food. We all know how meaningless those things are right?Also, the weighting of the basket of goods is all off. It give a higher weight to goods that are falling in price rather than those rising in price. It’s akin to having 100 people; 90 Democrats, 4 Greens and 6 Republicans and finding the average approval for Bush. It’s not going to be an accurate representation.

From ShadowStats:

The Boskin/Greenspan argument was that when steak got too expensive, the consumer would substitute hamburger for the steak, and that the inflation measure should reflect the costs tied to buying hamburger versus steak, instead of steak versus steak. Of course, replacing hamburger for steak in the calculations would reduce the inflation rate, but it represented the rate of inflation in terms of maintaining a declining standard of living. Cost of living was being replaced by the cost of survival. The old system told you how much you had to increase your income in order to keep buying steak. The new system promised you hamburger, and then dog food, perhaps, after that….

The BLS initially did not institute a new CPI measurement using a variable-basket of goods that allowed substitution of hamburger for steak, but rather tried to approximate the effect by changing the weighting of goods in the CPI fixed basket. Over a period of several years, straight arithmetic weighting of the CPI components was shifted to a geometric weighting. The Boskin/Greenspan benefit of a geometric weighting was that it automatically gave a lower weighting to CPI components that were rising in price, and a higher weighting to those items dropping in price.

Once the system had been shifted fully to geometric weighting, the net effect was to reduce reported CPI on an annual, or year-over-year basis, by 2.7% from what it would have been based on the traditional weighting methodology. The results have been dramatic. The compounding effect since the early-1990s has reduced annual cost of living adjustments in social security by more than a third.

People on fixed incomes or low incomes spend the majority of their money on food and energy. So an increase in those two things, which aren’t part of CPI or COL, will negatively impact the standard of living of those people. Are seniors better off with that?

It’s a difficult question to face; default or inflation. I’m more inclined to argue for default. Sovereign default means that the people in charge and the people the caused the mess will be held accountable, to a certain extent. Inflation just mean pawning it off on the next guy.

  1. yttik
    February 22, 2010 at 14:55

    “I agree, but the Government isn’t above the law of finance.”

    LOL, are you sure about that? Seems to me that when they start violating the laws of finance they just change the rules.

    • February 22, 2010 at 16:22

      Ha, I know. But eventually they will have to pay the piper, like Greece is doing now.

  2. PJ
    February 22, 2010 at 16:58

    Sorry ZH – this is off topic, but I just read this article: http://www.salon.com/news/opinion/glenn_greenwald/2010/02/21/libertarianism/index.html and am very curious what you think about it. I’ve never thought about how incompatible the libertarian wing of the Republican Party is with the neocon wing, but I think Greenwald makes a pretty good case. Since I think it’s likely that the country will swing back to the GOP after experiencing the Obama nightmare, I’m wondering which Republican Party will it be?

    • February 22, 2010 at 22:03

      Thanks for the link. I like Greenwald, I don’t agree with him but he is consistent and likes to hold Dem accountable, which pisses off other Dems a lot which is a plus in my eyes. That being said, he makes a lot of grand statements with little facts to back them up. Not all libertarians are Paul types. I consider myself libertarian now more than ever. It’s been a slow creep for me. I like Paul’s economics, Austrian, but don’t agree with him all the time on policy. I def like the idea of auditing the Fed. The Fed is a monopoly power and needs to be held accountable, or dismantled (my choice)Glenn also makes platitudes when he equates the rest of conservatives as all Neo-Con. I think neo-cons are the minority. Very vocal and have a lot of power, but still a minority. I think most people who say they are conservative are more libertarian conservatives than neo-cons, but there are still a lot of social (religious) conservatives out there. The point is there is a huge diversity there, just like with the Democrats. Glenn shows his partisanship by trying to to say that Cons are either Libt or Neo-con. Just like a certain other commentator that likes to make use of the False Dilemma fallacy.
      Personally, I think the GOP in leadership are the old guard it’s only a matter of time before they get replaced.
      What’s more interesting, which Greenwald doesn’t mention, is how the Democrats completely fucked up courting any libertarians. The Tea Parties, to anyone that actually went to a rally or function, is made up of people of both GOP and Dem, that have had enough. They are libt simply because they have seen both parties operate and are disgusted.
      It’s interesting how the Dems are constantly trying to demean and marginalize the Tea Parties.
      The current Libt are the best hope for a third party in US politics right now. If they can marginalize the Neo-Con, all the better. It’s still in its infant stages but so far they have done more than any PUMA has done.

    • February 22, 2010 at 22:29

      Proof that not all Republicans are how Dem want to paint them as.

      Small, closed minded people won’t believe it though.

      • PJ
        February 22, 2010 at 23:18

        I think that’s awesome – Republicans supporting gay people to serve openly in the military. Thanks for the link. I hope they’re right about the GOP focusing almost exclusively on fiscal responsibility and dropping the social wedge issues (or at least putting them on the back burner).

        I hear what you’re saying about Greenwald. I just hadn’t thought about the libt/neocon disconnect before. I can see the libt/socialist-liberal disconnect a lot easier. I think there a lot of social liberal/fiscal conservative people out there without a “home”.

        I agree that people right now are really disgusted with both parties in our government. I guess Greenwald planted the seed that Repubs may “talk the talk” of being fiscally responsible but turn around and do something different, once elected.

        Like our friend, President Obama.

  3. yttik
    February 22, 2010 at 19:21

    This article was a bit disturbing:

    Class Warfare’s Next Target: 401(k) Savings


    • February 22, 2010 at 22:13

      I can’t believe your reading a Newt article!ha ha
      I’ve heard of that before. I don’t know if I buy into it yet….key word is yet. I think that would be too much of a power grab by the Dems. Like I said, they will relay on inflation before they try and mandate a new SS. There is no political will for a new SS entitlement program. It would also mean that the Dem admit defeat on SS. Dems dont want to admit that SS is broken. That would be a huge admission that it is. Like I said interesting but I just don’t buy it yet.

  4. February 23, 2010 at 04:32

    PJ – People are still stuck in a 1990s/2000s attitude. This is a new decade, people change. The Libt wing of GOP has always been there, but has usually been really small. Ron Paul has been around for a long time, why do you think he is only getting popular now? It takes a Bush type spending and increasing government to make Paul popular.
    When it comes to opposing Bush, who was more sincere, Paul or Obama? I think for the most part the Dems still have old hate issues to deal with. They have been taught to hate republicans for so long, they don’t know anything else. If they opened their minds and were actually tolerant for once they might get it.

  5. PJ
    February 23, 2010 at 06:33

    That’s true what you say about Dems and old hate issues, but to be fair, the same could be said for Repubs. Like I’ve said before, I live among mostly Republicans in a very red state and they are just as closed minded about Democrats as the two coasts are about Republicans. With Brown getting elected in MA, maybe that is starting to change? I’m not sure.

    I think both parties have a long way to go before people trust them again. Maybe that’s just wishful thinking on my part. I think politicians should have to earn people’s trust. With both Bush and Obama, you had/have people blindly willing to “worship” them no matter what they do.

    I think that Paul is much more sincere in opposing Bush policies than Obama. I would vote for him too. I’m very curious to see which direction the Republican Party takes – libt. or neocon. And if it’s the libt. route, will they nominate a true libt. or will it be someone like Romney who can put on any mask you want to see?

  6. February 23, 2010 at 07:27

    Yes both parties are myopic. But I’m speaking of a few specific people that we both know, when I say Dems.
    That said, I too am distrustful of most politicians. I think too many have an inordinate amount of faith in politics and politicians. There is almost a religious zeal that goes along with party politics, it’s depressing. I think the empirical evidence suggests that politicians make problems worse rather than better.

    I hope the GOP takes a more Libt route, if they do then I’d gladly participate. Yet, like Glenn I’m a bit distrustful too. I want to be sure it’s a grassroots change from the bottom up, instead of politicians pandering for votes. Though, besides Paul there are a few GOP congressmen that I like and feel are sincere.

    I think Dem are shooting themselves in the other foot now. They blew off one foot with Obama. There reaction to the Tea Party and Libertarians will relegate them to minority status for another 20+ years.

  7. PJ
    February 23, 2010 at 07:52

    I see – yes, very true of a few specific Dems we know. 🙂

    You are so right about the Dems shooting themselves in the other foot (ha) by their treatment of the Tea Party movement. That is unbelievably stupid. I truly hope they (Tea Partiers) stay independent of the Republican Party, but I’m guessing it’s going to be hard to do that. The Repub. Party is very smartly embracing them.

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