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Bill Thomas Gives the Game Away

The best minds of my generation profess to being mystified by why House Ways and Means Chair Bill Thomas would declare Social Security privatization a "dead horse."

It's twisted, but not impossible to figure out. Here's the key section from the Washington Post article citing Thomas's remarks:

"Every breath that's spent on discussing that plan [the Bush privatization plan] is an attempt to lay a political ground war for the next election," Thomas said. "Save those breaths. Talk about what we need to do now that the president's plan is on the table so that we can address, in a legislative way, a solution on a bill the president could sign. That would be, I think, a positive gesture.

What Thomas was saying is exactly the point I've been trying to make: that the Bush/DeLay goal is not primarily to privatize Social Security, although they would be happy to do that if they can. Rather, the goal is to create a political dynamic over the next one to two years in which the Republicans appear the party of opportunity, ownership, dynamism, and forward thinking, while the Democrats appear to be the defenders of old, boring, inadequate safety net programs. As Gingrich said, going for the biggest privatization of Social Security has the biggest political payoff, but only if it doesn't actually become law. (If it were to become law, the global financial markets would write off our debt and we would go begging to the IMF, not an event that is likely to redound to the benefit of the party in power.)

I had some doubts about this when I made this argument a week ago, drawing on White House "resident thinker" Peter Wehner's memo to conservatives. But Thomas's comments leave no doubt. He is a prickly, stubborn, unpleasant man, but I happen to know one thing about him: He likes to legislate, not play political games. That's why he so often antagonizes his colleagues. And what he is saying here is that he knows full well that the Social Security proposal is a political game. Like Wehner, he's trying to pull them back to the zone where they might pass something. But just as Wehner's argument seemed desperate, so does Thomas's. This is not about legislating. It's about positioning. (If it all works out so well that they get Social Security privatization, that's a bonus.) And failing to recognize that game -- or at least the strong possibility that it is a game -- is a fatal mistake. Liberals might "win" on Social Security by defeating privatization, but we might easily lose the very different war of ideas.

The problem for the White House is not that they will lose the legislation. They were prepared for that. The problem is that they can't even get to the starting point of credibility on their legislation, even befor they offer it. If they can't get to the debate they want, they will lose control of the agenda, and it will disintegrate into a bunch of nutty and hugely embarassing ideas like Thomas's plan to "gender-adjust" Social Security to reduce benefits for women because they live longer. (Putting all this together, Social Security is, according to Republicans, unfair to African-Americans because they die young and too generous to widows because they live too long.) If you can remember not to panic about any of this actually becoming law, it will be highly entertaining.

This sorry game is over. The challenge for Democrats is now to drag it out, to inflict maximum pain, to drag this out at least as long as the Clinton health care debacle was drawn out.

Posted by Mark Schmitt on January 19, 2005 | Permalink

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Comments

Well, that was quick.

Posted by: Brian | Jan 19, 2005 3:33:24 AM

I understand what you're saying, but I have my doubts. The people pushing this plan, the Grover Norquists and Cato Institutes of the world, are true believers. They really want to privatize social security, and are not in it just to gain some rhetorical advantage. And Bush has never shown a willingness to back off on something he gets behind, even when prospects for success may not be great. Such as so-called "tort reform" or judicial nominees. So, this could just be head fake. And even if Thomas is being honest, I don't expect Bush to simply fold-up his tent.

P.S. Can someone please put a muzzle on Gene Sperling.

Posted by: Paleo | Jan 19, 2005 8:40:02 AM

"...the goal is to create a political dynamic over the next one to two years in which the Republicans appear the party of opportunity, ownership, dynamism, and forward thinking, while the Democrats appear to be the defenders of old, boring, inadequate safety net programs."

Well, yes. But isn't it obviously true? Why is there such a knee-jerk reaction by establishment democrats to even so much as a discussion of social security privitization? Because they didn't think of it? You tell me.

1.) How is raising taxes and cutting benefits to "Save" social security a sustainable long term strategy.

2.) How is pretending that lending the government money at a fraction of what the market could return a sound long term investment.

3.) How is believing that institutions that rise and fall based on their success wont be better managers of individuals' investment money than a government that when in a pinch raises taxes and cuts benefits.

As long Democrats continue to answer questions like these with "because anything else would benefit the wealthy", they will continue to BE the defenders of old, boring, inadequate safety net programs.


Posted by: Lloyd | Jan 19, 2005 9:40:15 AM

"This sorry game is over."

Are you sure about that? Isn't the logical pivot now to move to place a lot of income off the tax rolls? Get the Dems on the record in favor of private accounts generally, and then stick and move?

Posted by: praktike | Jan 19, 2005 10:19:32 AM

Lloyd, you seem to have been convinced that raising taxes is somehow impossible, leads to disaster, etc. The point you raise about "unsustainability" makes no sense, you have mininterpreted the meaning of that word.

Your specific points about rate of return have been debunked in numerous places on the web. Basically, after 1) fees and 2) saving the 'losers', that argument is a wash. In Britain and in Chile, the gov is trying to figure out how to bail out the losers. If you have the misfortune of retiring during one of those pesky 10-15 year bear markets that repeatedly occur in history, you're screwed. There have been no cost savings in Britain and Chile, only a mirage.

We have the lowest taxes among industrialized nations in the world. I wish taxes didn't exist. They are the price of civilized society that doesn't let the middle class suffer just because they're not all inventors, bankers, and executives.

You seem to assume that merit rules the day, that anyone who is successful deserves it, or anyone who isn't successful deserves that. Merit is important to a degree - work hard, play by the rules, and get yourself a job. But beyond that level, US Meritocracy is a fantasy. Luck plays a huge role in life. Don't confuse merit with luck.

One thing is for certain: our federal and state tax burdens are in the trough. They won't get much lower. As the population ages, as demand for health care increases, as the staples of life (college ed, health care, housing, basic services like police and security) increase...there is only one way to go.

Taxes will go up. Taxes will go up. It's as near a sure thing as possible. The only debate is where and when. I defy any thinking creature to explain that we can politically in the long run avoid having universal health coverage without raising taxes.

Posted by: Buford P. Stinkleberry | Jan 19, 2005 11:00:49 AM

I think Mark is right that the Bushies never expected to win the entire fight. However, I think they've been caught off guard by how quickly the opposition has coalesced against them and how quickly their own forces have given up the fight. They probably expected this battle to drag out for 6-9 months, at least. They would then compromise on the program they really wanted in the first place and then go out and crow about how they "Saved Social Security". And just in time for the 2006 campaign!

Posted by: Chris Andersen | Jan 19, 2005 12:41:37 PM

Do the media get any credit on this one? I have posted my fair share of cringeworthy MSM reports on the subject that witlessly parroted the White House line, but others have done a much better job of counterpointing idiocies like "we'll be flat broke from it in 20 years." There is a skepticism coming out of many corners that I don't think Bush expected. They expected to run the game like Iraq, and roll over doubts like Iraq. Media silence/agreement was a key component of pushing the war through; I think they've done a better job arresting the falsehoods on Social Security.

But it's definitely not over. The classic move in negotiating for something is always to tentatively advance something outrageous, and then look reasonable by scaling back. Gordon Liddy's first plan before bugging DNC HQ was, no lie, bombing the Brookings Institution.

Posted by: Torridjoe | Jan 19, 2005 12:58:41 PM

"The problem for the White House is not that they will lose the legislation. They were prepared for that."

Like others here, I'm not so sure this is just a "game" to set the table for the 2006 off-year elections. From my experience, the supply siders really do believe, passionately, in the free lunch. It's the central organizing principle of their philosophy, along with contempt for the flinty "root canal" politics of the Old Republican Guard.

When Gingrich, Norquist et al talk about going for maximum privatization with minimum benefit cuts, I think they're serious about the policy as well as the politics - although I'm sure the political benefits are never far from their minds. This is their best shot at pulling down the main pillar of the New Deal, and I think they want to win. But they also understand how hard it's going to be to persuade the average GOP backbenchers to touch the third rail.

They may look at this as a win/win: If privatization passes this year, they will have achieved something true conservatives have been dreaming about for the past 70 years, and to hell with the costs. But if they lose, they will have inflicted the minimum amount of political damage on their own troops. ("Hey," the Republicans might say, "we TRIED to give you a free lunch, but those dumb Democrats just wouldn't let us.") So they live to fight again.

The more interesting case is Bush (and Karl the wonder brain.) The fact that the administration is acknowledging the need for future benefit cuts could show that Mark is right: They're throwing the fight because they don't expect or even want to win it, at least not this year. They just want to keep the Dems on the defensive. (Although why they would worry about keeping such a feeble, impotent party on the defensive isn't clear to me.) But I'm more inclined to see it was a grudging compromise with economic sanity. There may be a limit to even Bush's recklessness.

But here's the thing: If Bush is going to make this the defining political fight of his second term, then he might as well hang a "lame duck" sign around his neck if he loses. Even he wins, it's going to be a very ugly victory, and extremely hazardous for the GOP troops.

That seems like an awfully high risk strategy, even for Shrub and Karl. But they're committed now. This isn't like spinning day dreams about going to Mars. The entire media-government-lobbyist complex has mobilized for war. Backing down would be a tremendous loss of face - an open admission of lame duckhood.

So I'm guessing at some point Bush and Co. will ditch economic sanity and climb on the free lunch bandwagon. It's the path of least resistance. If they're smart, they'll learn from Clinton's mistake and do it before they force the GOP House to take some votes they'll deeply regret later. But of course, if they were smart, they probably wouldn't be doing this at all.

Posted by: Billmon | Jan 19, 2005 1:02:59 PM

Sorry, lost part of that last comment. Here's the rest:

The more interesting case is Bush (and Karl the wonder brain.) The fact that the administration is acknowledging the need for future benefit cuts could show that Mark is right: They're throwing the fight because they don't expect or even want to win this year. But I’m more inclined to see it as a grudging concession to economic reality. There may be limits even to Bush’s recklessness.

But here’s the point: If Bush really is going to make Social Security privatization the defining political fight of his second term, then he might just as well hang a “lame duck” sign around his neck if he loses. Even if he wins, it’s going to be ugly, especially if he insists on both private accounts AND benefit cuts. There will be a lot of angry, scared GOP hacks going back to face the voters next year.

This seems like an awfully high risk strategy, even for Bush and Rove. But they’re committed now. This isn’t like spinning day dreams about going to Mars. The entire media-government-lobbying complex has mobilized for war. Backing down would be a tremendous loss of face – a ticket to immediate lame duckhood.

I’m guessing there will come a point where the administration jumps on the free lunch bandwagon. If they’re smart, they’ll learn from Clinton’s mistake and do it before they force the GOP House to take a lot of votes they’ll deeply regret later. But of course, if they were smart, they wouldn’t be doing this at all.

Posted by: Billmon | Jan 19, 2005 1:15:25 PM

If the GOP is trying to paint the Dems as undynamic and unwilling to change, Dems should respond by presenting a good SS reform package that's true to Dem principles without being pie in the sky. It'll never pass because Dems are in the minority, but it'll take away the GOP positioning advantage. And it'll have the benefit of being good policy aside from the politics.

Posted by: rc | Jan 19, 2005 2:52:46 PM

I would be happy if people would acknowledge that the SS is flat broke as soon as the SS tax takes in less than it pays out (2018). It is a pipe dream that the federal government can somehow honor the trillions in SS held bonds without this payout affecting the general budget (2040 number).

Posted by: james | Jan 19, 2005 4:13:57 PM

being able to pay 100% of benefits, as SS will be in 2018, means it would not, in fact, be flat broke.

As for affecting the general budget--well, we borrowed it, now we have to figure out how to pay it back. Adding $2 trillion to the gap doesn't seem like a good plan.

Posted by: Torridjoe | Jan 19, 2005 4:29:20 PM

Are you actually saying you think the US government will default on its bonds by 2018?

Yes, it will affect the general budget. The only thing that could cause the government to default on its bonds (along with most of its other obligations) would be failure to address the massive long-term budget deficit. So would you then agree that if we want to avoid SS problems in 2018 we should be focusing on that?

Posted by: Redshift | Jan 19, 2005 6:26:22 PM

In 2018, SS tax will take in less money than it is required to pay out (based on expected costs/revenue). This means it will not be able to pay 100% unless an additional source of revenue is provided (ie it goes broke that year). SS is supposed to have this additional revenue, but the feds borrowed against it. Since payment of Tbills comes out of general tax revenue funds, 2018 is the year to watch. This is why anyone saying the problem does not occur until the 2040's is not paying attention.

The baby boomers where the tax payers who got the tax break by borrowing from SS. They are also the ones looking for full SS payout. Its the Gen X'ers and later generations who are being asked to repay this bill.

Since the fed holds the iou to itself, is it possible it could forgive itself the loan?

Posted by: james | Jan 19, 2005 6:28:57 PM

No, it can't. The reason why the trust fund invests in TBills is that they're an *investment* (and a safe one.) If "the fed" (the Treasury, actually) says "you're part of the government, so we're just not going to pay the value of the bond," that's called defaulting, not "forgiving the loan."

No matter how you juggle the terminology ("IOUs," "forgiving the loan"), the only way there's a crisis in 2018 is if the trust fund's in the safest investment vehicle in the world is worthless, and I defy you to come up with such a scenario in which we don't have much bigger problems than Social Security.

To put it another way, if you assume that the money that's been built up and invested since 1983 doesn't exist, then sure, you've got a problem. Similarly, if I assume the money I've put in my IRA and 401(k) won't exist when I retire, I've got a problem. But in the real world, it does exist, and a scenario where it doesn't is by definition a false and manufactured "crisis."

Posted by: Redshift | Jan 19, 2005 6:48:18 PM

"I had some doubts about this when I made this argument a week ago..."

I still have some doubts, but you were well ahead of the curve when you posted. Right or wrong, you were first with an idea that is on the verge of becoming conventional wisdom.

And if you are right, I think it's a tremendous miscalculation on the WH's part, for the exact reason that you write:

"If they can't get to the debate they want, they will lose control of the agenda..."

Of course, if you are wrong, it's a tremendous miscalculation for other reasons.

---

I think the most likely explanation is that Bush and Rove are classical bullies. They are best when faced with weak opposition, and they are out of their league when faced with formidable opposition.

They can overwhelm Saddam's army or domestically on tax cuts. But they don't know what to do when faced with the Iraqi insurgency or domestically on Social Security.

Posted by: Petey | Jan 19, 2005 8:11:40 PM

Redshift - An IOU to yourself is not an investment. This is what the fed has done with SS every time it buys a Tbil. This is like investing in your personal 401k by writing yourself an IOU (or using the company pension fund to buy company junk bonds). The fed buying Tbils is completely different than an outside source buying Tbils.

The fed takes in anywhere between 1.1 and 2.x trillion in general revenue depending on the economy. When SS starts cashing in $100's of billions in tbils to make up its shortfall, somethings going to give. Then there is the fact the the bad budgets (even in the boom years of Clinton) are ofset by spending the SS surplus. So thats a big negative to general funds when SS hits 2018 and a second big negative when SS starts cashing in Tbils.

The fed forgives loans it makes to others all the time. Its not to far a stretch to envison the Treasury department forgiving the loan it gave to another branch of the govenment.

Posted by: james | Jan 20, 2005 2:00:27 AM

james - You can keep saying that, but it doesn't make it true. There are laws that govern the operation of the Federal Government; it's not just a big amorphous blob where money can be shuffled around on a whim. The Social Security Trust Fund buys T-Bills, just like the Bank of China. They have fixed terms, they pay off according to those terms, no matter who they're paying to, so yes, it is an investment that is no different regardless of who is buying it.

The Treasury Department cannot just say "oh, we're not going to pay those bonds." That would be against the law. Similarly, the Social Security Trustees cannot just say "we're going to throw away the trust fund and all the income it's earned for several decades." It would be illegal. To do either of these things would require passing a law to allow it. Do you honestly believe that any congressman is going to pass a law to default on Treasury bills, or to throw away the Social Security Trust Fund?

The government forgives some loans to foreign governments, which also requires passing a law to allow it. (All the time? I don't think so.) The Social Security Trust Fund doesn't "forgive loans," because that would be contrary to its purpose.

The Treasury is paying on the bonds bought by Social Security and everyone else continually, that's that "interest on the national debt" you read about. Social Security buys new bonds because it's a safe investment. When the Trust Fund is no longer in surplus (and it's a smooth transition that happens over time, not some big bang that happens in 2018), the Treasury will find other buyers for T-Bills, just like they do now for the 2/3 of T-Bills that are bought buy investors other than SS.

The only disaster scenario is for the Federal Government to continue to finance itself through massive borrowing until investors no longer have confidence that they will be repaid, and that would be a collapse for the entire Federal Government, not Social Security. I have confidence that our government will come to its senses before then, though probably not before some serious economic pain gets the idea through their thick skulls.

Posted by: Redshift | Jan 20, 2005 5:57:58 PM

Redshift - I realize that the Treasury department can not simply absolve the debt. There are laws regarding such actions. What I am poorly implying is that Congress could authorize (through new law) the Treasury department to forgive all loans to Government agencies. Baring a SCOTUS intervention for contract violation, it is theoretically possible this could be done with marginal affect on the value of US issued debt. Saying SS won’t be required to forgive loans because that is not the purpose of SS is a non factor. SS was not designed to be a loan institution to the government, and we have all seen how that turned out. This is simply pointing out that given the unique position of the fed (lender, borrower, and rule maker) it is possible. Your making the assumption that Congress won’t up a change the laws.

The Treasury is paying out on a percentage of SS debt. The effect changes when the numbers get high enough. SS (and China for that matter) have enough to ask for big money. SS will eventually go short in big numbers; that payout will hugely effect general fund spending. More to the point, it will affect the re-election of lawmakers. The whole borrowing against SS began because law makers wanted increased services without increased taxes. I find it hard to believe that a group of individuals incapable of making a slightly painful choice (reduce spending or increase taxes) will be able to stomach the hard reality (reduce spending AND increase taxes) of SS starting in 2018 and beyond.

Posted by: james | Jan 20, 2005 7:28:38 PM

James: So since the current value of the DOD trust fund is $0, you would agree that the Defense Department is broke?

Posted by: Walt Pohl | Jan 20, 2005 10:05:43 PM

James:

Could happen, but it won't. There's nothing to differentiate the T-bills that the trust fund holds from the T-bills that China or your 401k holds. Shooting any of them in the head would be a signal to everyone that holds a T-bill that it was worthless.

There's also a difference between forgiving debt that somebody owes you, and forgiving the debt that you owe somebody else. The first is an act of charity, the second is illegal and farcical.

What the course of action will be, should your proposed doomsday arrive, is to run the printing presses nonstop. A couple hundred percent of inflation would take care of those pesky debts in short order and would not require default. A lot fewer people would be as fond of dollars afterwards, but hey--it's not like it's a peso, right? Right?

Posted by: alex | Jan 21, 2005 9:32:18 AM

Walt Pohl - The Defense Department is broke. More specifically, the money congress has allotted to fight in Iraq has been spent many times over. That is why the Prez keeps going back to congress to ask for more money. Its also big reason the Fed keeps borrowing.

alex – It is a highly unlikely event. Trying to point out that the "trust fund" SS has does nothing to alleviate the cost of supporting the program once the SS tax fails to provide 100% coverage.

Posted by: james | Jan 21, 2005 4:44:37 PM

James, you are a troll.

As I have been working, I have been paying into the Social Security trust fund, more money than is required to cover the payments to the currently retired. The Social Security Administration is investing my money in U.S. government T-bills. That is fine with me. Years from now when I retire, the SSA will cash in some of those T-bills ("my money") so they can give me a modest monthly pension.

It is wrong and highly misleading to say that Social Security will be "broke" when it starts drawing upon the money it invested, especially considering it has been collecting and investing extra money precisely so it will have that money available to draw upon when needed. Even if and when Social Security's savings run out, as they may some time in the 2040-2050 time frame, Social Security won't be broke, because Americans will still be working and paying into the system. The SSA may have to adjust the level of benefits, payroll taxes, or both, but the adjustments needed are miniscule compared to what Bush is proposing.

It is illegal and immoral to suggest that the Treasury not pay back the SSA the money it invested in T-bills. That's my money we're talking about. I don't want that money to be frittered away in tax cuts for the rich investors and the corporate buddies of our corrupt politicians. I want it to go to the people who worked and paid into the system, and either got old enough to retire or got disabled, and are entitled to modest pension they can depend on.

Because Social Security is funded by payroll taxes, the people who depend the most on Social Security come from the same class (not the same generation, but the same class) as those who fund it. Working people. This means that Social Security is regressive, but it is fair, in one sense it is more than fair. The rich investors and the corporate executives who don't need Social Security also happen to pay a much smaller percentage of their income into it. They may not like Social Security or what it stands for, but they don't have much of a right to complain. The problem now with Social Security is not that it is going broke, but that it accumulated so much money in the trust fund, to pay for the boomers retirement, that the fat cats couldn't keep their hands off of it. The Social Security surplus, funded by working people, paid for one hell of a party. Well, party's over guys, and it's time to start thinking about how you're going to pay back that money you borrowed from us.

Posted by: TomB | Jan 21, 2005 11:45:55 PM

TomB -- Exactly! Isn't it funny that when there was a surplus, conservatives said "it's your money, the government should cut taxes and give it back to you," but when there are deficits, they don't say "the government gave you a big loan, it should raise taxes and make you pay it back"? I wonder why...

Posted by: Redshift | Jan 22, 2005 1:58:11 AM

Bush is by far the worst offender in terms of spending SS surplus dollars in the general budget. Clinton was the only one who ever actually let the off-budget surplus from payroll taxes get used to pay off debt--and he only did it two budgets out of his eight. Reagan and both Bushes ALWAYS used it as general budget money.

So now, as TomB notes, the money has been spent, and we've got a gap to fill. Over the next 50 years, anyway, at a cost of about 20% of the total Bush tax cuts so far, if I recall right.

Posted by: Torrid | Jan 22, 2005 11:57:01 PM