The Establishment Shows Its Hand

...In short, an attack on the Social Security system, the centerpiece of what little we have of a welfare state...

...Because of the fact that, unlike private insurance carriers (who must fund future liabilities in line with actuarially established risk), the federal government retains sovereign powers of taxation and borrowing, by means of 182 • DISSENT POST-REAGAN ECONOMY which it is always in position to fund its liabilities...

...He alludes at least twice to that red herring upon which the Social Security system's opponents love to dwell—unfunded liabilities and their supposed burden upon future generations...

...Congress of the United States, Congressional Budget Office, The Changing Distribution of Federal Taxes: 1975-1990 (Washington, D.C.: U.S...

...He insists on talking about net investment (that is, additions to investment after replacement...

...But income distribution among the aged is as skewed toward the well-to-do as among younger units...

...Parts of the deficits of the early 1980s were due to a falloff in revenue related to high unemployment, lower profits, and lower earnings...

...All of us except some of the companies run by the executives who signed the ads, that is...

...To imply that Social Security entitlements worsen the federal deficit is thus simply false...

...The GNP of the Unites States was 39 percent greater in 1985 than the combined GNP of all nineteen European OECD nations, and three times that of Japan...

...And, of course, business executives often argue that their workers, stockholders and the entire economy benefit when corporate tax bills are lower...

...It is significant that he praises President Reagan for having broken the air traffic controllers' strike in 1981, and thus having compelled a "moderation" of the "wage binge" of the 1970s — significant because that event, now seven years in the past, is evidently viewed by Peterson as a model for repressing "excessive" wage claims...

...Why red herring...

...A more important objection is to Peterson's proposal to gear the benefit to the income of the aged...

...In the other years, the trust funds, of which about threefifths account for the Social Security system in terms of outlays, have been in surplus...

...2 Let's look at some of Peterson's assumptions...

...But if foreign savings do supplement domestic savings, how can it be argued that fixed investment is too low...

...and the still unascertainable aftereffects of the stock market crash...

...9, 1987, pp...

...How then is this deficit to be shrunk...

...In turn, such a surplus is needed for reducing the enormous foreign debt incurred by the U.S...

...447 ff...

...debt instruments or stocks, instead of spending them on U.S...

...Here, then, is what the powerful of America think, and it merits close analysis...

...But let us pursue the argument nevertheless...

...business is supported by a stock of capital that, between 1980 and 1986 alone, grew by more than $525 billion (in constant dollars)—roughly half of the value of the GNP for 1970...

...Median means that half the families have incomes below and half above the indicated figure...

...In arguing his case that there is "too much" consumption (let's call it "overconsumption" for brevity's sake), Peterson makes much of the debt that presumably finances it...

...Thus, potential output growth at about 3 percent a year is already within reach in the absence of any net fixed investment...

...Is the U.S...

...The foremost spokesman for the business establishment has been Paul Volcker, former chairman of the Federal Reserve Board, who in the early 1980s used his powers to reduce employment, income, and the nation's productive potential in order to subdue inflation, which he largely identified with labor's wage claims...

...5 Harold G. Vatter, "The Atrophy of Net Investment: Some Consequences for the U.S...

...Stagnant real wages may well have led to a relative increase in household indebtedness as people try to maintain living standards...

...Surveying old-age assistance systems the world over, the Social Security Board wrote in 1937 of "the widespread objection to the means-test basis of noncontributory old-age assistance, and the desire to make grants available as of right on arrival of old age" —a desire shared by working people worldwide in order to live out their lives in dignity...

...This would destroy the entitlement character of the system, for the benefit would no longer be seen as an earned right...

...The increase in the ratio of consumer installment debt to income was closely associated with soaring automobile prices (as well as the increase in the number of two-earner families, often requiring additional transportation...

...Peterson complains that Social Security benefits go mostly to "non-poor" persons or households...

...Peterson levels a vicious attack against the Social Security system—vicious because replete with fallacies that could have been avoided by consulting such standard works as Robert Ball's Social Security, Today and Tomorrow and by referring to the "Funds in the Budget" chapter of the Special Analyses volume of any U.S...

...Government Budget of recent years...

...These figures hardly make a case for "overconsumption," except among the wealthy...

...The economic agenda of Big Business upon which Peterson elaborates must be rejected...

...So did Dwayne Andreas, chairman of Archer-Daniels-Midland Co., which benefits from the government's ethanol subsidy...

...These include enormous budget and balance-of-trade deficits...

...Automobile debt rose from 34 percent of total installment debt to 39 percent...

...Nevertheless, the business establishment has made Volcker's analysis its own, popularizing it recently in large newspaper ads as "A Bipartisan Budget Plan...

...Much of the U.S...

...Put everything on the table except programs for the poor," the group, led by former Commerce Secretary Peter G. Peterson, said in ads placed in the Washington Post and the New York Times...

...It has never, to my knowledge, been demonstrated...

...The deficit itself, however, has largely been financed by worldwide savings (which might better have been used for economic development elsewhere...

...As Harold G. Vatter has written, the rising impact of knowledge, training, and skills ("human capital") upon productivity improvement diminishes the relative importance of additions to fixed capital in raising output...

...By attacking, says Peterson, excessive entitlements, which have chiefly benefited "the middle class...

...In plain English: to means-test Social Security...

...It is a prescription that must be resisted...

...how well off its beneficiaries are...

...5 More generally, claims about the "inadequacy" of capital formation in the United States and the usual international comparisons indicating faster growth abroad in the pertinent measures, are rendered dubious, if not belied altogether, by the vast size of the American economy...

...Where then does the extra $1,800 come from...

...Signed by corporate executives, former high government officials, and well-placed lawyers, this statement could reasonably be taken as the American establishment's program for the next period...

...Mixed Economy," Journal of Economic Issues, March 1982, p. 237...

...q Notes I See the New York Times, Nov...

...I gather that by net investment he means fixed investment in plant and equipment after replacement of depreciated or scrapped capital...

...Peterson would lower the benefit of the aged well-to-do units, as well as tax it...

...Whatever imports these units (or for that matter, business firms) buy, they pay for by the work they perform...

...SPRING • 1988 • 185...

...Those federal funds, on the other hand, that are financed from general tax revenues, have been in deficit most of the time...

...Most unlikely...

...Assistance provided by Monica Langley...

...He would "reform" —that is, reduce or eliminate— benefit indexing...

...Volcker has been a vigorous advocate of shrinking the budget deficit in order to keep inflation at bay...

...But net investment has come to be a nebulous concept...

...and he cites no data to support the point he is trying to make...

...foreign debt represents the counterpart of those export surpluses...

...Social Security benefits are paid out of a federal government trust fund financed from earmarked payroll taxes...

...2 For a brief discussion, see Robert M. Ball, Social Security, Today and Tomorrow (New York: Columbia University Press, 1978), pp...

...His reasoning has been that the additional consumption generated by the budget deficit was the main cause for the excessive imports reflected in the trade deficit...

...The after-tax real income share of the top tenth of all families rose from 29.1 percent in 1977 to 33.6 percent in 1984 (and an estimated 33.8 percent in 1988...

...Between 1949 and 1978, Vatter writes, net fixed investment grew at an annual rate of 0.9 percent, while production of goods and services (outside government) increased at an annual rate of 3.5 percent...

...The dollar, as well as other leading currencies, should be stabilized— for example, through controls on capital flows entering and leaving the country...

...Government Printing Office, 1987...

...a banking structure weakened by deregulation and vast indebtedness not only of developing countries, but of such key economic sectors as agriculture, real estate, and petroleum...

...In some sense the foreign debt is a critical issue, but creditors of a debtor representing so vast an economy as that of the United States are inextricably tied to it...

...The average gross weekly earnings of nonsupervisory workers in all industries except government rose by just short of $6 between 1985 and 1986, to $304.85, or by about $300 for the year...

...One-time tax breaks aren't the only benefit enjoyed by some of the companies whose executives signed the ad...

...There is surely good reason for reducing the budget deficit, if only because it imposes a growing burden of interest (much of which is 180 • DISSENT POST-REAGAN ECONOMY collected by banks and insurance companies...

...debt to foreigners as critical an issue as Peterson and others make it out to be...

...Federal budget deficits may be analyzed into their cyclical and structural components...

...The competitive pressures that industry has used as the rationale for reducing employment and for holding down wages and salaries and the structural changes that these pressures often indeed compel should be mitigated by import quotas and other protective measures...

...and Kaiser Aluminum & Chemical Corp, even as their lobbyists sought to preserve or create special tax breaks that add to the deficit...

...That these dollars accumulate in the accounts of foreigners or are SPRING • 1988 • 181 POST-REAGAN ECONOMY used by them to purchase U.S...

...Are entitlements the cause of the federal deficit...

...exports behind imports...

...Peterson's prescriptions for reducing "overconsumption" point to a broadly reactionary but also, from his point of view, more promising foreign trade policy—one essentially aimed at reducing the costs of labor and of the social wage embodied in entitlements...

...Thus, the standard of living of the retired worker has come closer to that which he enjoyed while still working—an entirely positive development that affirms the idea that the benefit is a deferred wage payment...

...Is investment too low...

...The real median family income in 1986, although higher than during the recession of the early 1980s, had not even, as yet, recovered its 1978 level...

...Taxing the benefit is objectionable because it is derived from employee earnings on which income and payroll taxes have already been paid...

...Its real product per worker—its productivity—by far outranked that of Japan, Germany, and all other industrial nations except Canada...

...in recent years...

...All this so as to increase savings and thus capital formation...

...Deficit Reduction Peterson writes that we need stepped-up investment in fixed capital and lower domestic consumption because the competitiveness of the American economy must be improved in order to create a growing merchandise trade surplus...

...In 1970, the ratio was 17 percent...

...It is in fact, however, a prescription for economic decline, inasmuch as investment has been historically demanddriven...

...and that its inadequacy manifests itself in the lag of U.S...

...If federal spending has ceased to be related to revenue, this "stems from our decision to transform most non-poverty benefit programs into untouchable and inflation-proof entitlements," writes Peterson...

...One of their proposals for coping with the budget deficit is "Cuts . . . in . . . entitlement, transfer, and subsidy programs that are not means-tested...

...Attacks of this kind began in the early 1970s, once Social Security benefits began to be indexed to wage and price levels in order to relate them more closely to the recent earnings of retiring workers...

...From the Wall Street Journal November 19, 1987, by David Wessel...

...The distinction between gross and net fixed investment has become ever less meaningful, inasmuch as the replacement part of fixed investment most likely embodies all the technical advances that one expects from new (net) investment...

...Deficit Spending Peterson speaks of deficit spending (here referring to the federal budget) as having been "the primary engine behind this consumption bacchanalia...

...signed the ads at the same time the company is asking Congress to lift some of the burden of the past pension promises it made to employees...

...16 and 17...

...When investment in consumer durables is added, the ratio rises to 24 percent...

...Does this suggest "overconsumption...

...In economic terms, the size of the increase in these outlays enlarged the structural component of the deficit, as did the steep cut in personal and corporate taxes in 1981, with both stemming from policy rather than "automatic stabilizers...

...Paul Volcker has said, "For years, those countries [Japan and Germany] have been dependent for growth mainly on high and rising export surpluses...

...The liabilities to foreigners created by the excess of total imports over total exports are not the liabilities of individual importers or of units consuming the imports...

...In effect, SPRING • 1988 • 183 POST-REAGAN ECONOMY Peterson would means-test even contributory old-age benefits, defeating the principle on which the Social Security system has been based, and because of which it has succeeded...

...Averages here mislead, but lack of space limits detail...

...Like other consumer durables, automobiles are often classed as investment goods because they provide economic services over long periods of time...

...Is consumption too high...

...A more sustained argument, made with some skill, in behalf of this establishment position appeared in the October Atlantic, written by Peter G. Peterson, former secretary of commerce and an initiator of the "Bipartisan Plan...

...The burdens of deficit reduction should be shared fairly among all of us who can afford them," the ads said...

...Real hourly wages have not risen since 1973...

...However, for purposes of the unified budget, the surplus from the trust funds offsets part of the deficit from federal funds, in 1986 by $62 billion...

...He notes the change, under the Reagan administration, from a budgetary policy that by and large still linked spending and revenue to one that virtually broke that link...

...Reflecting differences in earnings history, the former received $6,000 in Social Security benefits per unit, the latter just over $4,000...

...And can it be resolved by efforts to turn the foreign trade deficit into surplus by promoting exports and constricting imports...

...He would lower the initial benefit to the relatively well-off, which of course would spell means-testing of all the others...

...Peterson avoids the term gross investment—which includes replacement of depreciated and obsolete equipment and structures plus new fixed investment...

...Stagnant real wages, high poverty rates, the increasing inequality of personal incomes, and continued high tax burdens on lower income groups suggest otherwise...

...The tax cut permitted a significant rise in consumption, but it was evidently enjoyed mostly by upper-income groups...

...According to him, that "freed up" that year "a fantastic $2,100 of extra personal consumption per employed American...

...In recent years, the equivalent of two-thirds of total fixed investment in nonresidential and residential equipment and structures has been financed in effect by the inflow of foreign funds, the counterpart of the import excess...

...In 1985, the average annual benefit of a retired worker and his wife came to $9,768, the equivalent of 49 percent of the average pretax weekly earnings of a manufacturing worker...

...He believes it to be inescapable that real after-tax employee compensation must fall, that the purchasing power of Social Security benefits must be reduced, and that real 184 • DISSENT POST-REAGAN ECONOMY government spending must decline or, at best, stagnate...

...goods and services, is another matter and has nothing to do with "overconsumption...

...3 The ratio of consumer installment debt to disposable income did, however, rise from 15 percent in 1975 to 19 percent in 1985...

...No, he would not touch funds for those in need (who are means-tested anyway...

...The after-tax shares of the other nine-tenths of all families declined.' For the lower half of the family income distribution, real income declined by 10 percent between 1977 and 1984, while for the families in the top tenth it rose by 10 percent...

...Even when total wage and salary disbursements in all industries, including government, are distributed over the employed workforce, the increase from 1985 to 1986 comes to but $720...

...This argument has been advanced by prominent economists since the early 1970s, though they have provided little evidence in its behalf...

...What About Investment...

...SAUCE FOR THE GOOSE More than 175 top corporate executives signed two-page newspaper ads last week demanding that "immediate self-interest" be sacrificed to reduce the federal budget deficit and "rescue our economy...

...What really excites him is the supposed overconsumption the entitlements have given rise to...

...It is also hard to measure...

...Too much" consumption, it is said, has caused high budget deficits and high labor costs, thus restricting the savings needed for adequate investment...

...It must be resisted by opposing any cutbacks in Social Security benefits...

...Twenty percent of aged family units received nearly half of all the income of the aged in 1984, and 40 percent received 15 percent of this income...

...In view of that dependence and declining economic growth rates the world over, a push for more exports will not be effective for long...

...The money income gap between aged and younger family units is not narrowed by greater frequency of homeownership among the aged (it is about the same as that among units with heads thirty-five to sixty-four years old) or greater accumulation of equity in a home (which tends to be lower than for units with heads forty-five to sixty-four years old...

...Also signing were the chief executives of Chrysler Corp., Cigna Corp., International Business Machines Corp...

...3 U.S...

...Leave aside the ideology that prompted the change...

...In that sense they do not consume more than they produce...

...The very size of the import excess points to worldwide overcapacity...

...Did the deficit in fact contribute to "overconsumption...

...Government Printing Office, 1987...

...These few facts indicate that no shortage of investment, net or gross, exists, and that to produce more and consume less, as urged by Peterson and other establishment spokespersons, misinterprets the problem confronting the American and, with it, the world economy...

...The receipts of the government's trust funds have fallen short of expenditures in only one of the forty-eight years for which data are available...

...that it is too low in relation to consumption or (possibly) total output of goods and services...

...Social Security benefits account for about 50 percent of modal-income aged families, those whose income clusters near the median...

...But they do not make recipients affluent or enable them to "overconsume...

...The ratio of fixed nonresidential investment (mostly by business) to domestic output has fluctuated within a narrow range, the low and high points coinciding with cyclical down and upturns...

...Is there really such a linkage...

...their books are always in the black (leaving installment debt aside for the moment...

...He writes that foreign borrowing financed the equivalent of 40 percent of net business investment in 1986 and all of net housing investment (by "net" he means after depreciation and scrappage...

...In 1987, average weekly nonfarm earnings (outside government) ran about 8 percent below their 1979 level (after adjusting for increases in the Consumer Price Index...

...The ratio of total (or gross) domestic investment in business and residential facilities and structures to the Gross National Product has for decades fluctuated around 12 percent...

...and Michael Darby, The Effects of Social Security on Income and the Capital Stock (Washington, D.C.: American Enterprise Institute for Public Policy Research, 1979...

...Overcapacity persists in many American industries...

...The chairman of Bethlehem Steel Co...

...Yes, he would cut military expenditures— though for him this is an aside...

...Several of the businessmen who signed the ad insisted the programs that benefit their companies reflect special circumstances, correct inequities or are otherwise justified...

...We turn to Peterson's claim that net investment is "too low...

...But there is a fallacy in this, arithmetical as well as conceptual...

...They arose also from increased outlays for unemployment compensation and other income supports...

...The upper fifth averaged more than $34,000 per family unit in 1984, the lower two-fifths $5,374...

...Bureau of the Census, Money Income and Poverty Status of Families and Persons in the United States, 1986 (Washington, D.C.: U.S...

...According to the Social Security Bulletin (August 1987), the median income of family units whose head was sixty-five years old or older was $12,407 in 1984, compared with $20,295 for all ages...

...They are mostly funded from earmarked payroll taxes flowing into trust funds, and they generate surpluses year in, year out, in fact reducing the deficit...

...That is the problem of slowing economic growth, a subject too complex and important for brief discussion...

...Thus, the rise in consumer installment debt cannot be linked, statistically or conceptually, to "overconsumption...

...In 1986, for example, the federal funds deficit was $283 billion...

...At the same time, defense outlays rose 57 percent (on a much larger base than income supports...

...Unemployment compensation increased by 75 percent between 1980 and 1983, food and nutritional assistance by 28 percent, housing assistance by 78 percent, and other income supports by 23 percent, which hardly suggests that the deficit led to a "consumption bacchanalia...

...But there is a message in Peterson's prescriptions: reducing consumption spells downward pressure on worker compensation, including Social Security benefits, and if such pressure succeeds, is a promising way to "improve competitiveness...

...International cooperation to secure high employment and decent incomes and to develop domestic markets rather than spur "export-led" growth should rise to first place in a progressive economic agenda...

...We have three issues here (other than the bogus one of unfunded liabilities): how Social Security is related to the federal budget...

...The conceptual fallacy in Peterson's demonstration that "overconsumption" originates in excessive imports consists in the fact that no definable relationship exists between the aggregate foreign debt of the United States and the obligations of individual households (or consumption units...

...Because of legislation enacted in the late 1960s and early 1970s, the real value of Social Security benefits has greatly increased, which means that it has been compensating for a rising portion of the loss in earnings aged workers suffer...

...and why it has been (and should remain) free of means-testing...

...Social Security benefits have been rising in line with, and in recent years somewhat faster than, prices and wages...

...Robert McIntyre, director of Citizens for Tax Justice, a labor-backed lobbying group in Washington, said that thirty-one of the companies didn't pay any federal income tax in at least one year between 1981 and 1985 even though they were profitable...