from Follow the Money

Optimist or Ostrich?

November 20, 2004

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For those who want dispassionate economic analysis devoid of politics, read no further. Wait for my next dollar post. This is a center-left response to the Lexington column in this week’s Economist. It claimed the Republicans generally, and W specifically, won not by playing to people’s fears but by capturing their optimistic dreams. W was the optimist both demographically, capturing the votes of fast growing exurbia in the sunbelt (Houston, Atlanta, Phoenix, central valley of CA), and with his policy proposals, notably his call for partial privatization of social security.

I have three problems with this argument 1: While partial privatization and a policy that gives tax advantages to individual health care savings accounts while taking away the tax advantages now given to group health insurance plans arguably reflect an "optimistic" assessment of the ability of individuals to manage risk, they reflect a deeply pessimistic view about our capacity to do things together. They dismiss the values that spring from Bill Clinton’s observation that "we are all in this together." Don’t count on the government to insure you against the worst risks that come with old age. Don’t count on any company to insure you against massive medical expenses. Etc. That is not necessarily an optimistic vision.

2: It now it is an article of faith for many that Social Security is bankrupt, and is an act of courage to try to fix social security. The substance behind this assertion is a cash flow deficit in the social security system of @ 1.5% of GDP after 2042, which translates into an actuarial deficit on a 75 year basis. But until 2017, social security is projected to run a cash flow SURPLUS, unlike the rest of the government, and to be building up assets, unlike the rest of the government, which is running up debt. Social security is adding to its assets to the tune of $180 billion plus a year right now. Moreover, many proposed reforms would accelerate the onset of a cash flow deficit in social security and increase the overall fiscal deficit to fund transition costs. I would argue that focusing on relatively small cash flow deficits in social securty after 2042, while largely ignoring the 3.5% of GDP fiscal deficit (@ 5% of GDP without social security’s cash flow surplus) and the now more than 5% of GDP trade deficit -- is the work of an ostrich -- not the work of an optimist. We cannot obviously afford to run up the deficit and our debt to fund the transition costs of partial privatization right now.

3: The argument that Bush got the vote of the "optimist" demographic in the 2004 election is interesting. But the fast growing, "optimistic" sectors of the economy recently have often been those sectors that benefit most from unusually low interest rates -- the blue city in a blue state hedge fund industry as well as the red suburbs and exurbs in red states house building industry (not to mention the consumer credit industry). But if you think -- as I do -- that the US won’t be able to export debt to the tune of $700 billion plus annually to fund a consumer and housing driven economy and will have to start exporting more goods and less debt to pay for its imports, then a new set of sectors are likely to expand in the future. Today’s optimistic sectors may be tomorrow’s Ohio, and vice versa. Basing your electoral future on an exurbia now prospering on the back of cheap credit might not be the best forward looking bet ...

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