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Is Peter Peterson a Major Driver of the Country's Debt?

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Tuesday, 12 July 2011 07:17

Let's imagine that Wall Street investment banker and long-time Social Security foe Peter Peterson had $1 billion in government bonds (also known as "IOUs"). Suppose that he decided to sell them. According to Glenn Kessler, the Washington Post's fact checker, this would create a burden for the U.S. government.

This sale of bonds would displace other bonds that the United States might want to sell in the financial market. This would lead to higher interest rates on U.S. debt. Therefore Mr. Peterson is contributing to our deficit problem.

That may seem more than a little silly to readers, which it is. Yet, this is the same way in which Kessler says that Social Security will be creating a fiscal burden. The program has bought $2.6 trillion in government bonds which are part of the $14.3 trillion debt subject to the debt ceiling. It will be relying on the interest from these bonds to pay for some benefits for the next decade, just as Mr. Peterson may use interest from government bonds that he holds to pay for his living expenses or funding his anti-Social Security agenda.

After 2022 the program will begin selling off its bonds. This will have the same effect on the market as if Mr. Peterson were selling his bonds. In Peterson's case he will directly sell his bond into the market, in the case of the Social Security program it will sell a bond to the government which will have to get the money by selling a new bond in the market (unless it raised taxes or cut spending to cover the price of the bonds).

Kessler also gets wrong the baseline for the projected longer-term shortfall for Social Security. After 2036 the program is projected to only have enough money to pay a bit less than 80 percent of scheduled benefits. However, if the law is never changed, then the program would only pay the benefits that could be financed through incoming Social Security tax revenue. The general fund would not be tapped to cover the shortfall.

Of course Congress could change the law, but budget debates usually start from the law as written, not as some individual might imagine it will be changed in the future. In this sense, it is 100 percent accurate to say that Social Security does not now nor will it in the future contribute to the deficit. Congress could change the law so at some point it does contribute to the deficit, but that is just a guessing game, not the current reality.

Comments (5)Add Comment
say again?
written by David, July 12, 2011 7:55
Why is the Treasury selling an admittedly "new" bond (to retire the non-traded bond held by SocSec) NOT different from selling from inventory of debt held by the public. It seems like a different situation to me, one that increases supply rather than a transaction that simply tests the market price.
Say Again?
written by bobbyp, July 12, 2011 8:57
David,
You seem to be unfamiliar with the concept of supply and demand. Everybody knows these bonds are there. They are routinely included in the outstanding national debt. This is called "supply". Buyers of bonds know they are there and make offers accordingly. This is known as "demand".

Swapping the "special bonds" held by the Trust Fund for "regular bonds" does not increase the "supply" of bonds.
Wait, what?
written by Matt, July 12, 2011 9:18
Wait, why is SS selling off bonds after 2022? Don't they simply reach maturity?
Bonds and burdens.
written by Ralph Musgrave, July 12, 2011 11:47

I normally agree with Dean Baker, but not this time. When Social Security sells bonds, it will do so in order to enable the consumption of real resources (e.g. food, housing or medical treatment for the elderly). Assuming the economy is at capacity, that consumption is only possible given reduced consumption somewhere else: e.g. less government spending on something. And to call that a “burden for the US government” is a reasonable description. Alternatively, taxes could be raised so as to reduce private sector consumption, in which case the burden falls directly on the private sector.

A similar point applies to America’s most vociferous economic illiterate, Peter Peterson. If he sells bonds, it would most likely be to enable him to consume resources in some fashion, e.g. funding the election expenses of his favoured politicans. Alternatively he might invest the money in property say, but that would boost the price of property would induced builders to erect more office blocks etc, which in turn involves the consumption of resources.
...
written by Calgacus, July 13, 2011 4:28
Ralph:America’s most vociferous economic illiterate, Peter Peterson I don't think he is an illiterate, but someone who knows every word he says is a lie. As Nixon's Commerce Secretary, he was one of the designers of the USA's floating fiat currency ending the Bretton Woods system.

The US economy has been run far below capacity, so extra SS spending would probably be a benefit, not a burden. If at capacity, whether its inflationary effect is taxed away or not, the real burden always falls outside the government.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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