Jagadeesh Gokhale is back with a new book laying out a fresh doomsday scenario for Social Security. But before dipping into the Cato Institute scholar’s (and Bush appointee to the Social Security Advisory Board) latest research-and-destroy mission, it’s useful to have a look at his past record as a budget analyst and champion of a dubious accounting measure called “present value.”
In August 2003, Joe Lieberman, then in the early stages of launching a presidential bid, wrote a letter to Treasury Secretary John Snow in which he accused the administration of “stripping out” from its 2004 budget the findings of an internal Treasury paper that Snow’s predecessor Paul O’Neill had ordered up. Attempting to stake out a position as the toughest of the deficit hawks, Lieberman suggested that “this administration is trying to hide the true nature of our financial obligations from the American people in order to advance its agenda of cutting taxes indiscriminately.”
The paper was written by Gokhale, then at the Cleveland Fed, and Kent Smetters, then deputy assistant Treasury secretary for economic policy. Contrary of Lieberman’s claim, Smetters claimed it had been “for internal discussion only,” to try to help O’Neill “think about
from an economic perspective.” There was no conspiracy to suppress it, he said; the administration considered including it in the budget but then decided against it. Gokhale and Smetters revised their paper and presented it four times in Washington in May 2003, including to the American Enterprise Institute. They then published it as an AEI monograph.
What made the report such a hot item was the outsized estimates it produced for the long-term federal deficit and the method it used to arrive at the portion that derived from Social Security and Medicare. The CBO’s most recent estimate had the entire federal debt growing to $3.8 trillion by 2008. Gokhale and Smetters brushed this aside, calculating that the federal budget’s 2004 “fiscal imbalance” came to $44.2 trillion in 2003 dollars, and that this would rise to $54 trillion by 2008 if steps weren’t taken immediately to correct it. Of that, Medicare would account for $36.6 trillion and Social Security for $7 trillion. The rest of the federal budget would account for “only” $500 billion.
The $7 trillion they projected for Social Security was twice the $3.5 trillion deficit the trustees had calculated the program would generate over the next 75 years. But Gokhale and Smetters dismissed Social Security’s traditional 75-year projection, saying it was “arbitrary” and significantly understated the fiscal hole the program was digging.
They proposed replacing it with a “present value” measure in which “all future spending and revenue are not only reduced for inflation but additionally discounted by the government’s (inflation-adjusted) long-term borrowing rate. “This calculation enables us to determine how much money the government must come up with immediately to put fiscal policy on a sustainable course”: or, what it must generate in spending cuts or tax increases to do so. The advantage of their method, according to Smetters and Gokhale, was that it stretched out into “perpetuity,” covering all the – many, many – future years that the 75-year projections missed. The result would be “forward-looking,” not “backward looking,” they argued, and thus would make it harder for Congress to enact new programs that hit future generations with most of the long-term costs.
Hard-line critics were delighted by this new and more dire way of viewing Social Security and Medicare. Gokhale and Smetters had performed a “great service,” declared Olivia Mitchell of the Wharton School’s Pension Research Center, by making it possible for lawmakers to look beyond the 75-year cutoff and, perhaps, helping to educate the public about the the reality behind the federal government’s promises. Robert Inman, an economist at the Wharton School, called the paper “absolutely essential information for effective budgeting.”
http://peoplespension.infoshop.org/blogs-mu/2010/05/24/cato-premieres-its-latest-horror-show/#more-50
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