Allen W. Smith sees dangers in the US government handling of the economy, especially servicing the burgeoning debt (much of it going overseas) and the plundering of the social security funds. People need to be aware; therefore, he promotes economic literacy among the general public. For 30 years he was an economics professor at Eastern Illinois University. His resume includes authorship of many books on making economics comprehensible, including Understanding Inflation and Unemployment and Understanding Economics.
Smith’s latest book is The Big Lie: How Our Government Hoodwinked the Public, Emptied the S.S. Fund, and caused The Great Economic Collapse (Frostproof, Florida: Ironwood Publications, 2009). In The Big Lie, Smith attacks the depletion of the social security fund by Democrats and Republicans, lying about the state of government finances, and the irresponsible tax cuts of Republican administrations.
“The big lie,” according to the professor, is the common belief that social security payroll taxes all go into a trust fund to provide benefits for future retirees. Smith says that once the current month’s benefits are paid out of the current month’s payroll tax revenue, all surplus social security revenue goes into the general fund and is spent on other government programs. Smith sees this as a ripoff of everyone who pays FICA taxes. He also objects to the fact that the trust fund contains no real assets.
The ramifications are stark.
I interviewed Smith about some of the issues he raises in The Big Lie, a very readable and informative book.
Kim Petersen: You write that the Treasury has “stolen” money from social security for current operating expenses and replaced it with “worthless” IOUs? But how worthless are the IOUs? Even if the IOUs have no open-market value, could the government default on its own IOUs without causing currency flight?
Allen W. Smith: The IOUs in the trust fund are completely different from any other government certificates. They are not real bonds in any meaningful sense of the term. They are a gimmick, created by the government in an effort to fool the public into believing that Social Security funds are invested in Treasury bonds, when, in fact, they have not been invested in anything. Money can be saved and invested, but it is not possible to both spend and invest money. Once the money is spent, there is nothing left to invest. Every dollar of the $2.5 trillion that is supposed to be in the trust fund has been spent to fund tax cuts, wars, and other government programs. Since none of the surplus Social Security revenue has been saved, none of it has been invested in anything.
What gives the special-issue IOUs the allusion of being real is that printed on the face of each of these documents are the words, “Backed by the full faith and credit of the United States Government.” The problem is that no provisions have been made for repayment of any of the Social Security funds. Given the deceptive practices that the government has already engaged in with regard to Social Security, it is hard to have faith that the government will repay the funds, and given the fact that some foreign lenders are already expressing concern about lending additional funds to the U.S., the credit of the United States government is not nearly as strong as it once was.
Most of the public debt is in the form of public issue marketable Treasury bonds that can be bought and sold in the open market at will. These bonds are as good as gold, so investors who hold such bonds have nothing to worry about. The government could never default on any of these marketable bonds without creating panic in the financial markets and causing currency to be withdrawn by foreign investors. Therefore, we can be absolutely sure that the government will never default on any of its public issue marketable Treasury bonds.
The special issue IOUs in the trust fund are a different matter. The government could declare the Social Security debt “null and void” at any time. Foreign investors might frown on such action, but, since it would not directly affect them, I think they would just view it as a domestic issue between the U.S. government and its citizens. Obviously such an act would be politically unpopular with the American people. But would it be any more unpopular than massive increases in taxes in order to repay the Social Security money? That is exactly what it boils down to. It will take enormous tax increases in the future in order to raise enough money to repay the $2.5 trillion of surplus Social Security revenue that the government has looted over the last 25 years. Unless the American people, and the Congress, support such tax hikes, the government will have no choice but to default on its debt to Social Security.
KP: You also state the spending of social security funds is illegal. How can the Budget Enforcement Act of 1990 be … enforced?
AW: The Social Security trust fund was always supposed to be kept separate from the general operating budget, but it was not until passage of the Budget Enforcement Act of 1990 that there was an actual federal law prohibiting commingling the two funds. Section 13301 of that law strictly prohibited commingling Social Security funds with the general operating budget. Senator Ernest Hollings, who sponsored the legislation, thought that by making it illegal for the Congress and the president to include Social Security funds in their budget calculations the deliberate deception of the public would come to an end. But he was wrong. President George H.W. Bush and members of Congress got over this tiny hurdle by simply ignoring the law. Obviously, additional legislation with strong enforcement teeth is needed.
KP: Given the damage to the economy, why doesn’t president Barack Obama reverse the GW Bush tax cuts to the rich to restore lost revenue? Similarly, why doesn’t Obama reinstate the Glass-Steagall Act? Why doesn’t Obama re-regulate the banks? I ask noting that the Wall Street Journal still favors supply-side economics (“The Deficit Commission Trap,” 29 December 2009) and blames job losses and the surging deficit on previous tax increases.
AW: It is preposterous for the Wall Street Journal to blame job losses and the surging deficit on previous tax increases. It was the tax cuts under President Reagan and President George W. Bush that led to the exploding deficits and skyrocketing national debt. Tax cuts, without corresponding cuts in government spending, lead to deficits in the same way that spending increases, without corresponding tax increases, lead to deficits.
The pattern of recent history is clear. The Reagan tax cuts of 1981 were followed by a quadrupling of the national debt, from $1 trillion to $4 trillion, during the next 12 years. This was followed by Clinton’s deficit-reduction package which included both spending cuts and higher taxes. After 38 consecutive years of budget deficits, the government experienced small surpluses in the last two years of the Clinton administration. This was followed by the George W. Bush tax cuts that led to runaway deficits and a national debt today of more than $12 trillion.
The Bush tax cuts will expire at the end of 2010 if no action is taken to extend them, and the Obama administration has made it clear that they will not be extended. Obama might have pushed legislation to reverse the tax cuts earlier if it had not been for the severe recession the nation is now experiencing.
Re-regulation of the banking industry is absolutely necessary, and I think legislation to do so, including reinstatement the Glass-Steagall Act, will be enacted into law before the end of 2010.
KP: You write that the servicing of the US national debt reached $1 billion a day in 2000 (on $5.6 trillion debt). You forecast a debt of $20 trillion in 2019. You say that there is little likelihood the debt will ever be repaid. Obviously you do not foresee the US raising enough revenue again. Why?
AW: Given the fact that the national debt has risen from $1 trillion in 1981 to more than $12 trillion today, I think that the best we can hope for is to stop the hemorrhaging and hold the debt level steady. It is going to require major tax increases and spending cuts just to accomplish that. It will be hard to get public support for the policies necessary to just stop the growth in the debt. I don’t believe that any generation in the future will be willing to pay higher taxes to pay back the debt accumulated by a previous generation.
Presidents Ronald Reagan and George W. Bush misled the public into believing they could have their cake and eat it too. Instead of calling on the American people to make major sacrifices in terms of government services, in order to make tax cuts affordable, both Reagan and Bush claimed that taxes could be cut without having to make major cuts in government spending. The net result was the astronomical deficits. There has been a strong anti-tax movement in the United States ever since Ronald Reagan convinced the public that tax increases are just about the most evil thing government could possibly do and that tax cuts are virtuous and the solution to almost all economic problems.
In every war, since the war of 1812, a temporary war tax has been imposed on the American people. Such war taxes are based on the belief that if we are going to ask some Americans to shed their blood for the good of the country, then everyone should make some sacrifices. Even during the Vietnam War, taxes were raised to help pay for the war.
Despite the history of shared sacrifice, President George W. Bush, not only refused to raise taxes to pay for an elective war that he almost shoved down the throats of the American people, but he also pushed through two major tax cuts to reward a select group of Americans at the same time that other Americans were sacrificing their lives for America. The total costs of the wars in Afghanistan and Iraq should have been paid for, from the very beginning, by a war tax that would have expired only when the wars ended. I believe that President Obama should immediately call for a war tax to fund the ongoing wars. I also believe that the past costs of these two wars should be recovered by a tax that would gradually raise enough money to pay the bill that Bush refused to call on the American people to pay.
Our all-volunteer military, especially during today’s high unemployment, results in many young men and women being economically forced to join the service in order to have a job. It also allows the more affluent to avoid military service if they wish to do so. The very idea of giving tax cuts primarily to the affluent, at a time when many less-affluent Americans are shedding their blood for the country, is extremely repugnant to me.
KP: You see a need for an independent, non-partisan National Economic Advisory Council. Is the non-partisanship of such a president-appointed council not dubious given the non-partisanship of the similarly appointed supreme court. You say “it would tend to force the government to pursue responsible economic policies.” I wonder how influential such a body would be given that “Nobel” prize winning economists such as Joseph Stiglitz and Paul Krugman were seemingly brushed aside by the GW Bush administration and given the corporate media’s (e.g., Wall Street Journal) fondness for supply-side economics?
AW: Economic illiteracy is widespread in this country, not only among the less educated, but also among many highly educated professionals, who managed to get through college without taking even an introductory course in economics. President George W. Bush and various members of Congress have demonstrated their economic illiteracy over and over by their public statements. I think that it is highly unlikely that President Bush could pass even the most basic economic literacy test. Yet he turned his back on the advice of top economists without the public, in general, ever knowing that he was engaging in economic malpractice. The type of National Economic Advisory Council that I envision would issue press releases on a regular basis, and be available to members of Congress at all times. Their role would be strictly advisory, but they could serve as “whistle blowers” at times.
KP: Why do you feel that debt to foreigners is dangerous? Don’t most countries seek foreign investment?
AW: I don’t think that debt to foreigners is dangerous per se. However, I do believe that excessive debt of the magnitude that the United States government now has is extremely dangerous, no matter to whom it is owed. When a nation approaches the limits of its credit worthiness, that portion of its debt held by foreigners is more dangerous than the portion owed to its own citizens. It is hard to get tough with your banker, and one of our biggest bankers is China. I believe that national security issues come into play when one of your biggest creditors also has the potential to be an adversary.
KP: Do you find that people are complicit in their country’s indebtedness or are they merely victims of economic “illiteracy”?
AW: Most individuals have so many financial problems of their own that they don’t focus much on the problems of the government. They count on their elected officials to do what is right, and they don’t see themselves as having a responsibility to monitor those officials.
I believe that there has been enough news coverage of the deficits and the national debt that most Americans realize there is a problem. However, I don’t think many Americans have any idea of the magnitude of the problem. With the national debt rising from $1 trillion in 1981 to $12 trillion in 2009, the best way for individuals to understand what a burden it is on the nation is to ask themselves whether or not they would have been able to increase their personal debt twelve-fold during the same period.
KP: You surmise that the GW Bush tax cuts were part of a plan to ruin the finances of the US government to force dismantlement of social security. Given that you mention the dishonesty of both Democratic and Republican administrations in depicting budgetary deficit-surplus, does this reflect a goal of both parties?
AW: No. I don’t think both political parties want to dismantle government programs. I do think that both parties want to change the role that government plays in providing services to the public. However, the Republicans want to reduce the role of government in the economy, whereas the Democrats believe that government should play a bigger role in providing services as reflected in their current efforts to reform the health care system
There is little doubt that both Reagan and Bush wanted to reduce both the size and scope of the federal government, and I think their tax cuts were at least partly intended to starve government revenue to such an extent that programs would have to be cut. Reagan even used the analogy of forcing a child to spend less by cutting the child’s allowance when arguing for his proposed tax cuts. He seemed to think that, by reducing government revenue, government would have to spend less. But it did not work out that way. Reagan was very critical of what he called the Democrats “tax and spend” policy. But Reagan’s policy can be aptly described as a “borrow and spend” policy.
KP: There appears to be an aversion by the political duopoly to socialism. But is this not hypocritical given that the military, NASA, education, policing, fire protection, etc. — the internet, telecommunications — are socialistic?
AW: The world’s major economies are all some combination of market economies and command economies. In market economies, such as those of the United States, Canada, and Japan, most of the means of production are privately owned, and basic economic decisions are usually made through a system of freely operating markets. In command economies, such as China, most of the means of production are owned by the government, and basic economic decisions are usually made by government officials through an elaborate system of planning.
In reality, there are no examples of pure market economies or pure command economies. All major economies are mixed economies where both the government and private enterprise play active roles. For example, China is predominantly a command economy, but both markets and private enterprise play some role in the economy.
On the other hand, the United States is predominantly a market economy with private enterprise, and a system of markets, playing the major role in economic activity. However, there has never been a time in American history when the government did not play an active role in the economy. To my knowledge, no sane person has ever seriously proposed turning national defense responsibilities over to the private sector.
In some industries, there is enough competition for the markets to work without any government interference. For example, the fast food industry may require some government oversight to make sure the food they sell is safe for the public. But, beyond that responsibility, there is no need for the government to attempt to regulate prices or the quality of services. There is so much competition that firms will not survive unless they maintain high quality and low prices. Such markets are self-regulating because of the fierce competition.
However, in many industries, such as the pharmaceutical industry, patents and other barriers to entry, make it impossible for competition alone to bring about results that are in the public interest. If there is not sufficient competition in an industry to ensure reasonable prices and to prevent exorbitant profits, the government must play a regulatory role.
How much government involvement should there be in the American economy? I believe that Abraham Lincoln provided an excellent answer to that question a long time ago. Lincoln said, “The government should do for the people only those things that the people cannot do for themselves or cannot do as well for themselves.”
Obviously, the people cannot provide for their own national defense, and it would be difficult for the private sector to provide a comprehensive national highway system that met the needs of all Americans. There would be a tendency to overbuild those routes that were most profitable and neglect more remote areas where roads are necessary but not profitable.
Private enterprise has not succeeded in delivering affordable, universal health care to the American public, and it will never do so. The profit motive works well in some industries, but when it comes to life and death issues and human suffering, there is a need to consider such concepts as compassion and fairness, as well as costs. Despite much corruption and other negative factors, the American government is still a government “of the people, by the people, and for the people.” As such, it should be responsive to the needs of the people. Every time conservatives want to block a program that tends to benefit the poor, at some cost to the wealthy, they bring out the big guns and call it “socialism.” That is a bunch of bunk. Universal health care is no more socialism than the armed forces of the United States’ of America. It is just “doing for the people what they cannot do, or cannot do as well, for themselves.”
KP: You avoid the capitalism-socialism debate but indicate sympathy for Keynesianism. Given the inherent tensions in capitalism, do you think Keynesianism over the long run is tenable?
AW: No thinking person, who is well educated in the field of economics, would advocate either pure capitalism or pure socialism. The reason that there are no examples of either in the real world is that neither one works very well in its pure form.
In my opinion, a market economy does a better job of making the most efficient use of productive resources than a command economy. In other words, given the same quantity of productive resources, a market economy will produce more goods and services than a command economy. However, a pure market economy will distribute those goods and services to the public strictly on the basis of dollar votes. The more dollars you have, the more goods and services you get. If you have no dollars, you get no goods and services.
There is nothing necessarily equitable or fair about the way a pure market economy distributes goods and services. Those people who have the most dollars are not necessarily the people who have worked the hardest or are the most deserving of the goods and services. Therefore, it is necessary for the public at large, through their government, to deal with the equity questions. For example, should a person have to die just because he or she does not have enough money to pay for medical treatment? The equity question is usually dealt with through tax policy, which affects the distribution of income. Those people who do not believe that the government should modify income distribution through tax policy usually have a double standard. They are opposed to any policy that transfers income from rich to poor, but they strongly support the Reagan and Bush tax cuts which transferred income from the poor and middle class to the very wealthy.
I view Keynesianism as a body of sound economic principles based on the original theories of John Maynard Keynes and the modification of these theories by Keynesian economists over the years. I do not view it as a political system or philosophy. In terms of the capitalism vs. socialism debate, I advocate a mixed model that is much closer to capitalism than it is to socialism in economic terms, but one which incorporates the concept of social justice as a major goal. I do not advocate equality of income or wealth, but I emphatically endorse equality of opportunity. We all know that the circumstances of birth give some people an enormous advantage while others are extremely disadvantaged. In the race of life, the most important race that anyone will ever participate in, some people begin the race at the starting line like in other races. However, those born into privilege, power, and wealth, have a gigantic head start over the other participants, while those born with mental, physical, economic, and other handicaps begin life far behind the starting line.
It is not possible to give everyone an equal start in life, but I advocate taking actions that will narrow the gap between the advantaged and disadvantaged as much as possible. The American dream is supposed to be available to everyone, and I believe that equality of opportunity is essential to making that happen. I have no problem with people who begin life on the starting line reaping the rewards of hard work and success. But I do have a major problem with people born into wealth, privilege and power using that wealth and power to gain high political office. What are the chances that George W. Bush would have become president if he had been born into a middle-class working family? How many Americans, who were capable of becoming a much better president than Bush turned out to be, were denied that chance because of the lack of equality of opportunity in the United States of America? I don’t see how anyone could oppose the concept of equality of opportunity on ethical grounds. Yet, money and power play a major role in determining who gets elected to public office in this country, and who gets elected determines whether or not we will have reforms that lead to greater equality of opportunity.
KP: Obviously capitalism does not and can not exist in a pure form. The recent economic meltdown evinces that even capitalists have to be protected from market forces by socialism. I am unaware of any successful capitalist society — given that an important measure of success is that all members of society are looked after and the wealth is distributed fairly and equitably.
I am not sure how you would define “pure socialism,” but I submit it can exist and has existed. For example, the prestige and subsistence economies of the Pacific Northwest Original Peoples was socialism that colonialists sought to destroy. Karl Polyani, in his book The Great Transformation, described the market economy as an “extreme artificiality.” He held that the economy is bound up in the social relationships of humans.
It may be that people well educated in economics (excepting Polyani) are advocating something that the masses of people do not clamor for (or have been conditioned to clamor for): the greater production of goods and services.
AS: All economies are a mix of some “capitalism” and some “socialism.” The actual mix in a particular economy should be decided by the people. In a true democracy, the people would determine what combination of private enterprise and government involvement in the economy should prevail.
Most people think of the United States of America as a democracy, and some would call it a pure democracy. However, the American government does not fit the dictionary definition of democracy. Webster’s dictionary defines democracy as, “government in which the people hold the ruling power either directly or through elected representatives.”
Webster’s defines plutocracy as “government by the wealthy.” Although most Americans have never heard of this term, the United States government, as it operates today, is closer to plutocracy than it is to democracy. Wealthy people in the United States do try to influence or control government, and they have been very successful at times in the past. The tax cuts enacted under President George W. Bush were not good for the nation or for the majority of the American people. However, they were very good for those 2.7 million Americans who make up the highest-income one percent of the population. The evidence is clear that, over the past 25 years, the lowest-income 80 percent of the population has been losing ground to the highest-income 20 percent, and mostly to the top one percent. If we had true democracy, and an informed electorate, how could the richest 20 percent impose their will over the other 80 percent?
The concentration of wealth, privilege, and power in the hands of the elite is the greatest threat of all to the future of American democracy. In an effort to please the wealthy, and hold on to their financial support, our government has passed special legislation that is favorable to the wealthy but harmful to the public in general and to the future of America. We must have major campaign reform that will prevent the wealthy from buying public office or political favors from elected officials. We must rescue America from plutocracy and return it to the treasured democracy that our founding fathers envisioned.
With the current makeup of the Congress, and with Obama’s mandate from the electorate to bring real change to America, I believe we are in a better position today to accomplish true campaign reform than ever before. America must not allow this opportunity to be lost. The only way we can ever have “government of the people, by the people, and for the people,” is to make it illegal for anyone to buy political office. Democracy is based on the principle of one person, one vote. Plutocracy is based on the principle of using wealth to purchase votes and political power.
We need a system where the candidate with the best qualifications, including the power of persuasion, has the best chance of winning. We need to prohibit the spending of massive amounts of money to wage negative campaigns. Competing candidates should be limited to the same amount of campaign spending as their opponents. In short, we need a system where you have to earn your votes with high qualification, hard work, and the powers of persuasion. I don’t believe that buying your way into political office the way that George W. Bush and many other candidates for various offices have done, is compatible with the American dream.