Does the Cato Institute Understand How Government Debt Works?

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Tuesday, 15 June 2010 13:46

Sunday, the Cato Institute's Michael Tanner wrote, "[T]he Trust Fund contains no actual assets. The government bonds it holds are simply a form of IOU, a measure of how much money the government owes the system. It says nothing about where the government will get the money to pay back those IOUs."

This is no less true for any other government bond. When billionaires like investment banker Pete Peterson buy government bonds, nothing is said about where the government will get the money to pay back Pete Peterson.

At the same time, it is doubtful that Peterson views his bonds as mere IOUs, but rather purchased with the understanding that the government would pay him back later with interest. Similarly, for 27 years Social Security taxes paid for both current beneficiaries and government bonds with the understanding the bond money would be paid back later, with interest.

Tanner continues, "Even if Congress can find a way to redeem the bonds..." implying that the government is likely to default on some or all of this debt. If the government is faced with the possibility of default, there is nothing special about the bonds held in the Trust Fund that would make them more vulnerable to default than any other bond. Tanner could instill the same fear in Pete Peterson, Goldman Sachs, or any other holder of government debt.

Finally, Tanner asserts that "Thanks to the economic downturn, Social Security is running a temporary cash-flow deficit." While payroll tax receipts have been low on account of high unemployment, Tanner's assertion is incorrect. Social Security paid out more than it received in February and March because its income is not evenly credited on a monthly basis. To say that Social Security is running a cash-flow deficit is like saying that I am running a cash-flow deficit because I haven't been paid since the end of May.