The Interesting Political Economy of the Social Security Tax Cut
By David Henderson
My Hoover colleague Paul Gregory has an interesting op/ed on how things would look if the media treated Republican congressmen the way they treat Democrats. He takes a New York Times story and rewrites it the way people who oppose the extension of unemployment benefits and of the payroll tax cut would like it to be reported. His piece is worth reading.
It got me thinking more about something I had been wondering about: the interesting political economy of the recent bill. Recall that most Republicans were hesitant to renew the cut in the employee’s portion of the Social Security tax and the extension of unemployment benefits to 99 weeks, the latter of which I called, on John Stossel’s show, “positively French.” Most Democrats were on the other side.
Start with the extension of unemployment benefits. What is one of Barack Obama’s major problems right now, a problem that will make it harder for him to be re-elected? The high unemployment rate. What is one of the contributors to the high unemployment rate? Extended unemployment benefits. It’s true that many Keynesians believe extending the benefits would increase aggregate demand. But even they have to admit the negative incentive effect of paying people to be unemployed. I guess they believe that the first effect outweighs the second. I don’t. Of course, if you agree with these Keynesians, you won’t find this interesting.
So if the disincentive effect outweighs the aggregate demand effect, the net result of a program that Obama strongly supports is a higher unemployment rate that would make it harder for Obama to be re-elected.
Now to the Social Security tax cut. In his rewritten news story, Gregory writes:
Economists warn that the extension of a temporary payroll tax cut threatens Social Security and saps strength from a fragile recovery. Republicans, intimidated by populist attacks from the Democrat left, agreed on Friday to the extension by voice vote in Congress.
The tax cut extension means that the social security trust fund will receive $159 billion less in 2011, causing it to run a deficit for a second straight year. The Social Security trust fund deficit will be paid from the general fund of the Treasury. “This pretty much ends the claim that Social Security is self-financing or that it doesn’t contribute to the budget deficit,” says Andrew Biggs, a resident scholar at the non-partisan American Enterprise Institute and a former deputy commissioner of the Social Security Administration.
Why is this interesting? When I talk about Social Security with people over age 60, many of them believe that there’s a trust fund there, with lots of dollars in it, that they “contributed” to. Some even believe that the government has a special account with their name on it. They believe, in essence, that they have a property right to those benefits. Of course, not only is there no account with their name on it, but also there is no trust fund with actual money in it. I think, though, that the trust-fund belief is one of the main barriers to getting rid of, if only in slow motion, Social Security. As Biggs points out in the quote above, it will be increasingly hard to maintain that Social Security is self-financing. In other words, it will be increasingly clear to everyone that Social Security is a welfare program that takes tax revenue from current taxpayers. That fact will undercut the case for Social Security as a contractual obligation.
This means that Republicans, who tend to be more critical of Social Security, should like the de-linking of Social Security tax payments and benefits. They don’t like it.
And, as noted, if Obama buys my reasoning about the effect of unemployment benefits, he should have wanted the benefits not to be extended to 99 weeks. But he wanted benefits extended.