James K. Galbraith Blasts Deficit Commission

We print below excerpts on Social Security, Medicare and the nature of the Deficit Commission itself from the testimony of James K. Galbraith, Lloyd M. Bentsen, Jr., Chair in Government/Business Relations, Lyndon B. Johnson School of Public Affairs, The University of Texas at Austin, before the Commission of Deficit Reduction, June 30, 2010. Professor Galbraith's full statement can be found here: http://www.angrybearblog.com/2010/07/professor-jamie-galbraiths-testimony-to.html

"Mr. Chairmen, members of the commission, thank you for inviting this statement.

I am a professional economist, but I have served in a political role, as Executive Director of the Joint Economic Committee of the United States Congress. I am offering this statement on behalf of Americans for Democratic Action, an organization co-founded in 1949 by (among others) Eleanor Roosevelt, John Kenneth Galbraith, Arthur M. Schlesinger, jr., and Ronald Reagan. Accordingly I would like to begin with a political comment.

1. Clouds Over the Work of the Commission.

Your proceedings are clouded by illegitimacy. In this respect, there are four major issues.

First, most of your meetings are secret, apart from two open sessions before this one, which were plainly for show. There is no justification for secret meetings on deficit reduction. No secrets of any kind are involved. Nothing you say will affect financial markets. Congress long ago -- in 1975 -- reformed its procedures to hold far more sensitive and complicated meetings, notably legislative markups, in the broad light of day.

Secrecy breeds suspicion: first, that your discussions are at a level of discourse so low that you feel it would be embarrassing to disclose them. Second, that some members of the commission are proceeding from fixed, predetermined agendas. Third, that the purpose of the secrecy is to defer public discussion of cuts in Social Security and Medicare until after the 2010 elections. You could easily dispel these suspicions by publishing video transcripts of all of your meetings on the Internet, and by holding all future meetings in public. Please do so.

Second, there is a question of leadership. A bipartisan commission should approach its task in a judicious, open-minded and dispassionate way. For this, the attitude and temperament of the leadership are critical.

I first met Senator Simpson when we were both on Capitol Hill; at Harvard he became friends with my late parents. He is admirably frank in his views. But Senator Simpson has plainly shown that he lacks the temperament to do a fair and impartial job on this commission. This is very clear from the abusive response he made recently to Alex Lawson of Social Security Works, who was asking important questions about the substance of the commission's work, as well as calling attention to the illegitimate secrecy under which you are operating.

A general cannot speak of the President with contempt. Likewise the leader of a commission intended to sway the public cannot display contempt for the public. With due respect, Senator Simpson's conduct fails that test.

Third, most members of the Commission are political leaders, not economists. With all respect for Alice Rivlin, with just one economist on board you are denied access to the professional arguments surrounding this highly controversial issue. In general, it is impossible to have a fair discussion of any important question when the professional participants in that discussion have been picked, in advance, to represent a single point of view.

Conflicts of interest constitute the fourth major problem. The fact that the Commission has accepted support from Peter G. Peterson, a man who has for decades conducted a relentless campaign to cut Social Security and Medicare, raises the most serious questions. Quite apart from the merits of Mr. Peterson's arguments, this act must be condemned. A Commission serving public purpose cannot accept funds or other help from a private party with a strong interest in the outcome of that Commission's work. Your having done so is a disgrace.

In my view you also should not have accepted help from the Economic Policy Institute, even though EPI's positions on the merits are substantially closer to mine.

Let me now turn to the economic questions….

6. Social Security and Medicare "Solvency" is not part of the Commission's Mandate.

I note from Chairman Simpson's conversation with Alex Lawson that the Commission has taken up the questions of the alleged "insolvency" of the Social Security system and of Medicare. If true, this is far outside any mandate of the Commission. Your mandate is strictly limited to matters relating to the deficit, debt-to-GDP ratio and fiscal stability of the U.S. Government as a whole. Social Security and Medicare are part of the government as a whole, so it is within your mandate to discuss those programs -- but only in that context.

To make recommendations about the matching of benefits to payroll taxes -- now or in the future -- would be totally inappropriate. Within your mandate, the levels of payroll taxes and of Social Security benefits are relevant only insofar as they influence the current and future fiscal position of the government as a whole. Their relationship to each other is not relevant. You are not a "Social Security Commission" and there is no provision in your Charter for a separate discussion of the alleged financial condition of either program taken on its own. Such discussions, if they are occurring, should be subjected to a point of order.

The usual "solvency" arguments directed at the Social Security system and at Medicare as separate entities are in any event complete nonsense. These programs are just programs, like any others, in the Federal Budget, and the Social Security and Medicare "systems" are thus fully solvent so long as the Federal Government is. Further, as explained below, under our monetary arrangements there is no "solvency" issue for the federal government as a whole. The federal government is "solvent" so long as U.S. banks are required to accept US. Government checks -- which is to say so long as there is a Federal authority in the Republic. This point has been demonstrated repeatedly in times of stress, notably during the Civil War and World War II.

7. As a Transfer Program, Social Security is Also Irrelevant to Deficit Economics.

Political discussions of "long-term fiscal sustainability" -- including in the Charter for this Commission -- make an economic error when they loosely use the word "entitlements" and suggest that supposed economic dangers of federal deficits (for instance, rising real interest rates) can be reduced by "entitlement reform." As a matter of economics, this is not true.

"Government Spending" -- as any textbook will verify -- is a component of GDP only insofar as the spending is directly on purchases of goods and services. That alone is what economists mean by the phrase "government spending." GDP is the final consumption of produced goods and services, and government is one of the major consuming sectors; the others being private business (investment) and households (consumption).

Social Security is a transfer program. It is not a spending program. A dollar "spent" on Social Security does not directly increase GDP. It merely reallocates a dollar from one potential final consumer (a taxpayer) to another (a retiree, a disabled person or a survivor). It also reallocates resources within both communities (taxpayers and beneficiaries). Specifically, benefits flow to the elderly and to survivors who do not have families that might otherwise support them, and costs are imposed on working people and other taxpayers who do not have dependents in their own families. Both types of transfer are fair and effective, greatly increasing security and reducing poverty -- which is why Social Security and Medicare are such successful programs.

Transfers of this kind are also indefinitely sustainable -- in fact there can intrinsically be no problem of sustainability with transfer programs. Apart from their effect on individual security, a true transfer program uses (by definition) no net economic resources. The only potential macroeconomic danger from "excessive" transfers is that the transfer function may be badly managed, leading to excessive total demand and to inflation. But there is no risk of this so long as the financial crisis remains uncured. Under present conditions Social Security and Medicare are bulwarks for stabilizing a total demand that would otherwise be highly deficient.

Similarly, cutting Social Security benefits, in particular, merely transfers real resources away from the elderly and toward taxpayers, and away from the poor toward those less poor. One can favor or oppose such a move on its own merits as social policy - but one cannot argue that it would save real resources that are otherwise being "consumed" by the government sector.

The conclusion to be drawn is that Social Security should in any event be off the agenda of your Commission, as it is a transfer program and not a program of public spending in the economic sense. In particular it does not use capital resources and will not drive up interest rates. This is true whether the "Social Security System" is in internal balance or not…."