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October 31, 2011

Our Brain-Damaged Elites, Part 3,947: Walter Russell Mead

What causes more brain damage: (1) having your umbilical cord tightly wrapped around your neck for twelve minutes as you're being born, or (2) being one of the people who runs the United States? Based on the way we've been lurching from debacle to catastrophe to cataclysm, I'm going to have to go with #2.

Walter Russell Mead is a truly talented writer who somehow went from writing a funny book about how Henry Kissinger lies all the time to becoming the Henry A. Kissinger Senior Fellow for U.S. Foreign Policy at the Council on Foreign Relations. Today he got extremely excited about the millionth hacktastic Washington Post article about Social Security:


The Washington Post has finally laid it out: Social Security is a Ponzi scheme, not a prudent savings program.

That “trust fund” is a myth, an accounting trick. Note that if the money had been invested in stocks or other assets, the government could now be selling those assets to cover the Social Security costs...

While quacking disingenuously about a valuable ‘trust fund’, the government has already spent the payroll taxes you and your employers paid to provide security in your future. The money is gone, exchanged for Treasury IOUs. It really was a Ponzi scheme, and the bill really is coming due.

Of all the dumb things our elite dumbasses say about Social Security, this may be the dumbest of all.

Let's imagine two different worlds:

1. In MeadWorld, the government invests excess payroll taxes in stocks.

What happens when the Social Security trust fund needs money in MeadWorld? The government sells some of its Verizon stock to somebody, takes the cash and sends it to Social Security recipients.

2. In this world, the government invests excess payroll taxes in government bonds.

What happens when the Social Security trust fund needs to be redeemed in this world? The government raises taxes slightly on Social Security-hating billionaire (and former Chairman of the Council on Foreign Relations) Pete Peterson. Peterson sells some of his Verizon stock to somebody to pay his taxes, and the government takes the cash and sends it to Social Security recipients.

What's the difference between these two scenarios? ONE EXTRA STEP IN THE PROCESS.* Likewise, in both scenarios, the money from the excess payroll taxes gets spent in the same year it comes in—in MeadWorld, it's spent by the person who sold the Verizon stock to the government, while in this world it was spent by the government itself.

All that said, Mead does have a genuinely profound point, although it's exactly the opposite of the one he thinks he's making:

From a certain perspective, it's true that the Social Security trust fund is a myth—not because it's invested in government bonds, but because it's impossible for societies to collectively "save" in the same way that individuals do. When a 30-year-old saves for retirement, it's because they want to be able to eat food and drive a car 40 years from now. However, they don't can a bunch of tomatoes, buy three Ford Fiestas, and hide it all in a cave somewhere so they can go get it again in 2051. Instead, they buy pieces of paper called stocks or bonds, or pay payroll taxes, which gives them a claim on a share of the food and cars produced in 2051.

So any attempt by society overall to "save" like this is a myth. Any attempt by society to "save" in this way is simply, as Mead puts it, "government IOU’s to itself." That's because any money society overall "saves" in 2011 is going to be spent in 2011. And any food eaten in 2051 has to be grown in 2051. The people working at any moment in history have to produce enough to provide for both themselves and the people who aren't working—which includes not just children and retirees but rich people who live off their investments, such as Pete Peterson.

Specifically regarding Social Security, we're currently transferring about 4.2% of U.S. gross domestic product from current workers to retirees. To pay promised benefits, this will have to increase to 6.2% in 2035 and then decline to 6.0% in 2050 and remain there. (See the 2011 Trustees Report for details.) Those are the only numbers that matter, not what the trust fund was "invested" in.

And this is simply not a problem for a rich society like the U.S. The economy continually grows more productive—95.8% (100-4.2) of today's economy is a lot smaller than 93.8% (100-6.2) of the economy of 2035. So people working in 2035 can produce enough for all the promised Social Security benefits and still be much richer than workers today.

Moreover, an increase in the amount of the economy we "spend" on Social Security isn't a crisis. It's exactly what you'd expect a society to do as it gets more productive: use some of that productivity to work less.

But if the Social Security trust fund isn't an "investment" in the way individuals own investments, what it is? It's an agreement.

Social Security is largely a direct transfer from today's workers to today's retirees: workers pay their payroll tax, and that money is mailed out to Social Security beneficiaries.

But payroll taxes, which fall regressively on working people, were raised in 1983 above the amount needed for 1983's retirees—and it was the excess from those higher taxes that, ever since, bought the government bonds in the trust fund. At exactly the same time in the eighties, income taxes, which fall progressively on the richest people in the U.S., were slashed.

So the agreement embodied in the trust fund was that when working people from the Baby Boom began to retire, the cost of their Social Security wouldn't fall solely on younger working people via regressive payroll taxes—instead, it would also fall on the richest people, either via higher taxes or by borrowing more from them. Again, this is neither a crisis nor unjust, especially in a society with massive income inequality.

Thus, if we declare the trust fund null and void, it would constitute the greatest theft in the history of the world. Essentially America's richest people would have stolen $2.6 trillion from the America's working people. That's why Pete Peterson hates Social Security so much: he wants that money. That's why he hired Walter Russell Mead.

But—if societies overall can't "save" in the way individuals save, they absolutely can save in another way: by working to make their future citizens more productive. If America is making sure today's children have enough to eat, we're saving for the future. If we're getting all of today's children a great education, if we're building a high-quality, long-lasting infrastructure, if we're pouring money into scientific research, we're saving for the future. That's why it's so unbelievably stupid to cut back on health, education, infrastructure and science today so as not to create a "burden" on our children in the future. The only burden will be if we DO cut back.

FINALLY: If you meet anyone who believes what Walter Russell Mead does about Social Security, you should feel comfortable literally betting your life that they were also completely certain Iraq had terrifying Weapons of Mass Destruction. Here's Mead:

I supported the US invasion. I supported it originally because I believed Secretary of State Colin Powell’s assertion that Iraq had an active WMD program. (I felt that some of the Bush appointees were capable of stretching the evidence, but Powell over the years had convinced me that he was a sober and serious person on whose judgment it was safe to rely.)

Here's more of Mead's pre-war perspicacity, on the cost of war:

Doom spinners...prophesy ruin. Relax...war with Iraq is a one-time expense -- an expense, incidentally, that even at $200 billion will increase our $6.3 trillion national debt only about 3%...Moreover, the high-end estimates are probably wrong.

In the same article, Mead learnedly explained that, in a post-war worst case scenario, the cost of oil might temporarily rise as high as $42/barrel.

So Mead is, functionally-speaking, brain-damaged. But it's not his fault personally. It's just that power makes people stupid.


*Of course, it's actually not quite that simple—for instance, U.S. business would freak the fuck out if the Social Security trust fund sunk $2.6 trillion into stocks. That would be about 20% of the total stock market capitalization, and would give U.S. citizens collectively a controlling interest in just about every publicly-traded corporation in the country. Corporate America would never have allowed Mead's preferred scenario to unfold.

—Jonathan Schwarz

Posted at October 31, 2011 01:09 AM

Pension funds that invest in stocks are usually run by the same inbred twits who vote each other on corporate boards. You think Wallstreet would object to 2,6 Trillion $ of other people's money?

Posted by: generic at October 31, 2011 02:26 AM

It is all part of the 1% - 99% phenomenon. All the rest is dictum until we at least get to 50% - 50% as a replacement of 1% - 99% ...

Posted by: Dredd at October 31, 2011 08:35 AM

Joe Heller

True story, Word of Honor:
Joseph Heller, an important and funny writer
now dead,
and I were at a party given by a billionaire
on Shelter Island.
I said, "Joe, how does it make you feel
to know that our host only yesterday
may have made more money
than your novel 'Catch-22'
has earned in its entire history?"
And Joe said, "I've got something he can never have."
And I said, "What on earth could that be, Joe?"
And Joe said, "The knowledge that I've got enough."
Not bad! Rest in peace!"

--Kurt Vonnegut

The New Yorker, May 16th, 2005

Posted by: mistah 'MICFiC' charley, ph.d. at October 31, 2011 10:23 AM

The ONLY thing a thief can't steal is---enough.

Posted by: Mike Meyer at October 31, 2011 11:13 AM

Mead himself doesn't have much power, though, does he? He sold himself to people who do, which is another thing that makes people stupid.

Posted by: Duncan at October 31, 2011 12:04 PM

'Powell over the years had convinced me that he was a sober and serious person on whose judgment it was safe to rely.' Sweet Jeebus.

Posted by: Cleotis at October 31, 2011 12:18 PM

Jon, if I were Peterson and my plan all along was to raid the SS trust fund, then my first move would have been to create the SS trust fund in the first place. I mean, seems to me the thing was created for the specific purpose of being pillaged by moneyed interests!

Consider my scheme. Any employee who pays payroll taxes collects an IOU from the government which they can redeem when they retire. Any surplus gets added to general revenue. Period.

I don't see why my scheme is any different from the current one, except for the hugely important difference that it has no Trust Fund for Wall Street to put its greasy paws into.

I know diddly squat about the history of SS, and I may be way off base, but to build a Trust Fund with no firewall around it is the perfect political ploy to steal workers' compensations on a massive scale. Who came up with that sick idea?

Posted by: bobs at October 31, 2011 03:54 PM

You left out the fact that the market acts like it trusts these "IOUs" more than stocks. (Eg, the official downgrading of US credit led people to buy more Treasury bonds.) Does Mead consider himself smarter than the free market? Or does he believe in a targeted default on debt held by the poor and elderly?

Posted by: hf at October 31, 2011 04:18 PM

Powell, the guy who got his career started by helping to cover up My Lai = totally trustworthy. Yep.

Posted by: Blupp at October 31, 2011 07:49 PM

bobs: The Trust Fund was created by the Social Security Act.(easily found online) Until the Reagan Increase in FICA TAX the fund was small and not really worth wallstreet's efforts to go after as there were other fish to fry. But NOW 30 years later with wallstreet swimming in sewage, well????

Posted by: Mike Meyer at October 31, 2011 08:34 PM

Thanks Mike. But I wonder, why was a Trust Fund created by investing in Treasury bonds? That investment counts toward government debt so what's the point? Why can't the government just draw from its general revenue if payroll taxes are not enough. Until now the government could always raise the debt ceiling so those IOUs would always be honored. And anyway the Fed can always buy Treasuries when cash is needed.

I get Jon's point that it is not a Ponzi scheme, but I wonder if it was designed to look like one. So that Peterson and his ilk could say: "Hey this is a Ponzi scheme! Time to privatize it." And people going "Oh yeah, it sure looks like a Ponzi scheme... A government trust fund consisting of IOUs to itself..." The optics look crooked.

Posted by: bobs at October 31, 2011 09:11 PM

I believe people in the various states want to stay part of the USA now ultimately because they are getting money from it, or will be.

Someone should point this out to the knuckleheads. If they end Social Security, state secession after secession would happen and, eventually, DC would be all by itself with no states at all. Which would be simultaneously terrible, and also the funniest thing ever.

Oh, and pensions are why people only have two childen. No pension -> third-world here we come. Why do they think there basically aren't any 2nd world countries?

Posted by: HM at November 1, 2011 12:17 AM

Occupy The Railway ....

I'm talking about "Freight" not "Rapid Transit".

80 Percent of all goods move across North America by railway.

Railways pass through the center of every major city. It would be very easy to do. In addition; those citizens living in rural areas (not cities) would be able to particpate more easily.

It should be made clear that with each beating of a protester would mean an hour delay in freight being transported across the contintent.

Railways are private property .... but it is not against the law to cross over the tracks ..... slowly.

I would think that just the threat to occupy the railway would in itself cause significant delays because of the safety precautions necessitated by the railway companies.

The shareholders of rail stock will be severely affected.


Posted by: calm at November 1, 2011 04:28 AM

bobs: Social Security IS merely an INCOME TAX. Its just that YOU recieve a refund when 65 yrs old. The Social Security Act DEMANDS that ANY funds recieved each day that are NOT spent on clients and daily opperation MUST be lent to the Treasury on a daily basis, midnight to midnight DC time.(ex:if SS collects $100.00 TODAY and sends out or spends $25.00 then $75.00 is loaned to the Treasury in the form of buying T-bills,TODAY, which garner interest so its called investing)
The Social Security Administration IS SEPARATE from the Treasury Dept.

Posted by: Mike Meyer at November 1, 2011 07:31 AM

Calm: Trains will kill YOU.
ON Oct 5 2011 at 3:55 pm at the point where Wire Mountain road bridge crosses the tracks ON CAMP PENDELTON MARINE BASE my younger brother, Nelson Dickey Meyer, was struck and KILLED by an Amtrack passenger train. He was a HOMELESS VETERAN, 54 years old.

Trains WILL kill YOU. They don't stop easily, the AMTRACK that killed my brother didn't stop at all or even honk its horn.

Posted by: Mike Meyer at November 1, 2011 07:44 AM

@Mike Meyer -

So sorry for your loss.


Posted by: Aaron Datesman at November 1, 2011 11:44 AM

Same from me, Mike.

Posted by: Jonathan Schwarz at November 1, 2011 12:32 PM

Mike Meyer: My condolences.

Posted by: mistah charley, ph.d. at November 1, 2011 12:34 PM

Aaron Datesman/Jonathan Schwarz/mistah charlie ph.d.: THANK YOU ALL for YOUR kind words.

Some ideas are good and very positive. OWS is an excellent idea, as is occupying ALL the other cities and occupying organizations like the police and military. Trying to stop trains by blocking intersections doesn't seem to be a good idea IMHO. If one were to desire to stop rail traffic then the place to go is the rail yards themselves BEFORE that train starts rolling. Once the machine is rolling then trying to block it will either get the protesters killed or injured or the train crew themselves are in danger of the same. Train crews are part of the 99% too.

Posted by: Mike Meyerl at November 1, 2011 01:12 PM

I am so sorry, Mike. My deepest condolences to you and your family.

Posted by: bobs at November 1, 2011 04:08 PM

My heart felt condolences to you and your family Mike. You and your family are in my thoughts today.

Posted by: Rupa Shah at November 1, 2011 04:22 PM

bobs & Rupa Shah: THANK YOU also.
Like many soldiers my brother left the service extremely angry, 180 degrees from the happy-go-lucky kid he was before he enlisted. He wasn't angry at the military, just angry about everything else. He couldn't/wouldn't let it go. He spent the rest of his life living on the street. The street finally got him and that's the way it is. He's not the first and only one living that story, that life, certainly not the last.

Posted by: Mike Meyer at November 1, 2011 06:13 PM

Would Wall Street object?

Maybe. What if the Government decided to use the voting power of being everybody's biggest stockholder to say, limit compensation to no more than the President makes?

Posted by: Downpuppy at November 2, 2011 07:00 PM

Deepest condolences, Mike. I think of my own dead brother often and even talk to him from time to time (though I try not to move my lips). I hope your grief ages into something that adds to your life.

Posted by: N E at November 2, 2011 08:04 PM

I'm so old that I can remember when Walter Russell Mead wrote interesting and original things -- he was often wrong, but he made one think and understand the world a little differently. For the past dozen years or so, he is just dull and unoriginal as well as wrong.

Posted by: Ben at November 2, 2011 08:53 PM


Posted by: Mike Meyer at November 3, 2011 04:37 PM