Shlaes argued against cutting payroll taxes. She was making a comment during a discussion, rather than a formal presentation, so she might not agree with my interpretation of what she was saying. Economists take the view that Social Security benefits and Social Security taxes are basically disconnected, so it does not matter if you substitute another tax for payroll taxes to pay for benefits. Shlaes said that what economists would call the illusion that benefits and taxes are linked is actually a key to maintaining American exceptionalism and avoiding a welfare state. That is, our Social Security system falls within a tradition of individual contracts and obligations rather than a tradition of socialism. Cutting payroll taxes and substituting other taxes would be a cultural shift toward socialism. I may be putting words in her mouth, but I think that is what she was saying.
Never mind the fact that Amity Shlaes is not an economist having received a B.A. in English. Not all economists would agree with the proposition that “Social Security benefits and Social Security taxes are basically disconnected” as at least some of us consider the sum of the current Social Security Trust Fund reserve and the present value of expected future contributions to this fund as something that should be devoted to the present value of expected future Social Security benefits. By at least some forecasts, the sum of the current Social Security Trust Fund reserve and the present value of expected future contributions come very close to paying for the present value of expected future Social Security benefits. Which is why we get very concerned about GOP calls to cut Social Security benefits to pay for those General Fund deficits run up during Republican administrations since 1981. After all, President Reagan suggested back in 1983 that the increase in the payroll tax was supposed to go to paying for our future Social Security benefits and not an excuse to give reductions in tax rates for capital income. President George W. Bush, however, saw the Social Security Trust Fund reserve and the Social Security surpluses we’ll likely see through 2017 as a giant piggy bank to raid precisely to give fiscal goodies to his “base”.
Since I was not at this forum, I do not know whether Arnold Kling’s interpretation of what Amith Shlaes said is accurate. But if it is – she has this whole thing exactly backwards. But hers is not a bad question for those who would have had the fiscal stimulus focused more on reductions in payroll taxes. How would the resulting Social Security shortfall be paid for?
Update: Amity Shlaes leaves a long comment over at Arnold’s blog with the key features being:
Any U.S. government, GOP or Democrat, should be shoring up its social contract with citizens. It can do that without promising more, and instead saying: "Here's what I can give you, and here's what I can't. At least I'll be truthful." … So I will tell you now that there isn't enough money there if we keep the current system. Let's make a few adjustments, and have reduced payouts but a commitment to at least make those payouts.
OK – President Obama should be a lot more truthful than President Bush was in 2005. Maybe a “few” (as in small) adjustments will be needed but truth be told – those advocating larger adjustments are hoping to use the Social Security Trust Fund to bail out the General Fund deficit. And when I hear folks uttering “there isn't enough money there if we keep the current system”, this is the kind of dishonesty that Steve Benen called “conversation enders”.