Economics Is Not For Actuaries
Wall Street Journal
January 2, 2007
Would conservatives please forget the Social Security "problem"? As Peter Drucker once wrote in these pages, "Don't solve problems, pursue opportunities." When Republicans solve "problems," they feed their failures, starve their strengths, and fritter away their remaining power in political imbroglios and special interest pork-fests.
Nothing good is going to come from political haggling over some hypothetical Social Security crisis decades in the future, when our economy will be vastly different and hugely more productive. From the completion of a worldwide fiber-optic broadband Internet to cornucopian energy and medical advances, the global economy is engaged in a siege of accelerating innovation that will unify it and enrich it increasingly as time passes. But no legislative reshuffling of taxes and spending today will enhance the economy's ability to support medical care, housing and transport for the aged in the future. That will depend not on actuarial trumpery but on the realities of productivity, technology, immigration and global trade and investment.
The key is keeping the economy open to outside investors as our population ages and as the productive center of the global economy shifts toward Asia. As Michael Milken points out, the younger workers around the globe will use their increasing savings to buy the assets of American seniors as they grow older, thus offering liquidity to our retirees, sustaining U.S. asset prices, and expanding U.S. opportunities.
Social Security can become a crisis only if we try to stop this process by insulating our aging middle class baby-boomers from the world economy -- if we raise tax rates and regulations, bash China, debauch the dollar and cripple the GOP and our defenses with delusionary spending cuts. Yet that sums up the likely grand compact, doesn't it? Higher tax rates in some covert form or other, some jerrybuilt pension scheme full of government regulations on our financial markets, new subsidies and protections for the "middle class" so-called victims of trade, and gimcrack spending cuts that end up focusing on defense.
Instead we should take the offensive. Lower tax rates will yield the additional revenues and borrowing power we need to sustain social programs for the aged for decades to come. As a pay-as-you-go transfer scheme, Social Security is currently working fine. But we have to stop driving aged workers out of employment through implicit Social Security taxes on their incomes. As a key first step, we need to reduce the payroll tax by at least a third -- at least to the degree we are pretending to build up "reserves" for the future. Lower payroll taxes will mean more jobs and income for Americans of all ages, and build up the real capabilities as opposed to the mere accounting balances of the U.S. economy. Ideally, as part of a flat tax program, we should eliminate the payroll tax altogether. Make the Democrats explain why they oppose that, not continue to posture on spending cuts, which always turn out to focus on defense. In a dangerous world, we will need more defense and spending will likely have to rise.
Bad economic policies like Europe's subsidized sloth on welfare would obviously erode our ability to supply goods and services to coming generations. Under such conditions we will have to inflate away the liabilities by debauching the currency in one way or another. Such an outcome may be unappetizing, but no conceivable compact with the Democrats today can save us from the inexorable costs of socialism tomorrow. Indeed, a compact with the Democrats will tend to cripple the necessary Republican resistance.
If we lower our tax rates on payrolls and incomes, however, we will discover that this economy in future decades can easily sustain scores of trillions of dollars of additional debt as necessary -- the entire $45 trillion of alleged social and healthcare liabilities. Investor king Ken Fisher's new book, "The Only Three Questions That Count," shows that the U.S. already commands a steadily growing, world-leading resource of some $110 trillion of assets, generating $13 trillion in GDP -- a 12% yield compared to long-term interest rates near 6%. Following the Bush tax-rate reductions on capital gains and dividends, we are already running an all-governmental surplus. Our corporations are laden with cash. Our current debt-asset ratio is suboptimally conservative.
Now we need to extend tax cuts to incomes and payrolls. The only thing that matters is pursuing the opportunities of global economic growth. Focus on that. Let Democrat accountant-economists grouse about the problem of debt and push for increases in taxes on middle-class workers.
Mr. Gilder is a senior fellow at the Discovery Institute and editor of the Gilder Technology Report.
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