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Soothing the Spirits of the Restless Bond Market

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Dean Baker
The Guardian Unlimited, June 21, 2010

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The deficit hawks have been pushing the line in recent months that we have to make cuts in Social Security, along with some revenue increases, in order to reassure the bond markets about the creditworthiness of the U.S. government. According to this argument, by taking tough steps (i.e. cutting Social Security benefits) we will have shown the bond markets that we are prepared to do what is necessary to keep our budget deficits within manageable levels.

There is some reason to question the merits of this argument. First off, the deficit hawks don’t have an especially good track record in the insight category. Not one person among the leading crusaders was able to see the $8 trillion housing bubble that wrecked the economy. If they couldn’t see something so huge that was right in front of their faces, we might wonder about their ability to ascertain anything as amorphous as the sentiment of actors in bond markets.

Furthermore, the fixation on Social Security is peculiar. The Congressional Budget Office shows the program can pay all future benefits through the year 2044 with no changes whatsoever. Even after that date the shortfalls are relatively minor. If we instituted a fix in 2030 that is comparable to the one put in place in 1983 it would leave the program fully solvent out to the 22nd century.

Furthermore, cutting benefits for near retirees (workers in their late 40s and 50s) seems cruel and unwarranted. These people paid for their benefits through decades of work. Also, this cohort has seen most of the wealth that they did manage to accumulate destroyed with the collapse of the housing bubble and the plunge in the stock market. The bulk of this cohort will therefore be relying on Social Security for the overwhelming majority of their retirement income.

For these reasons, the determination to cut Social Security has the feeling of the class bullies telling the rest of us that we have beat up the weakest kid in the class in order to be admitted to the club. That may be the way things work in Washington, but this doesn’t mean it is right.

If the issue is assuaging the bond markets by convincing them that we are prepared to take tough choices to limit long-term deficits, let’s put a few other items on the table. For item number one: How about a financial speculation tax? Wouldn’t the bond markets be impressed by seeing Congress crack down on the Wall Street hot shots whose recklessness helped fueled the housing bubble? That one would show real courage given the power of Goldman Sachs-Citigroup gang.

As a second item, Congress could go after the pharmaceutical industry. By 2020 we are projected to be spending almost $500 billion a year on prescription drugs. We pay close to twice as much for our drugs as people in other wealthy countries and about 10 times as much as the drugs would cost if they could be sold in competitive market without government patent monopolies. Suppose Congress decided to pay for the clinical testing of drugs directly and then allowed all new drugs to be sold as generics. This could save taxpayers hundreds of billions of dollars a year. Wouldn’t the bond markets be impressed by seeing Congress stand up to the pharmaceutical industry?

As a third item, suppose Congress revisited plans for a public insurance option. The Congressional Budget Office projected that this would save over $100 billion by 2020 and certainly much more in future decades. Wouldn’t the bond markets be impressed if Congress stood up to the insurance industry?

These are three clear ways in which Congress can take big steps towards reducing long-term budget deficits by standing up to powerful interest groups. In each case Congress would be reducing the deficit in ways that would likely make most people better off, not worse off. If bringing the long-term deficit into line is the issue, all three of these measures should be at the top of everyone’s list.

Remarkably, the leading budget hawks never discuss these measures when they push their deficit-cutting agenda. Somehow we are supposed to believe that cutting Social Security will do the trick with the markets, even though this will hurt tens of millions of people who actually need the money.

If the budget hawks had a track record of knowing about the economy or financial markets then perhaps we should take them seriously, but they don’t. Therefore we should just view them as people who want to cut Social Security and are putting out some nonsense to rationalize beating up on retirees.

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The End of Loser Liberalism: Making Markets Progressive. He also has a blog, "Beat the Press," where he discusses the media's coverage of economic issues.