Sunday, June 26, 2011

Guaranteed Social Security benefits is a myth

Published in The Tennessean, Sunday, June 26, 2011

by Richard J. Grant

One evening some years ago, I went to a restaurant with a famous actor. As we entered, and were about to pass the crowded bar, he turned to me and said, “Watch this, I can be anybody I want to be.”

I am reminded of this when observing how politicians can make Social Security appear to be anything they want it to be. When seeking support for the program, they tout it as a freestanding, self-financing, off-budget pension program. But when they need to use the Social Security “surplus” to reduce the federal government's budget deficits, it has been convenient to include the program within the total budget.

When the original law passed in 1935, Social Security was presented in different ways to different audiences. It is a myth that there was public demand at the time for a compulsory, government-run, old-age pension program. Public opinion at the time was not much different with regard to Social Security than it was in 2010 with regard to health-care reform and passage of the Patient Protection and Affordable Care Act.

To gain public acceptance for Social Security, it was sold as an old-age “insurance” program, not a welfare program. Although compulsory, the payroll taxes were referred to as “premiums” or “contributions.” But in the face of a Supreme Court challenge, the presentation had to change.

Too direct a connection between the tax and benefits within the same act put the legislation in conflict with the Constitution, particularly the 10th Amendment. All use of such terms as “insurance” and “benefits” was deliberately avoided while the case was pending before the courts. But as soon as the act's constitutionality was upheld by the U.S. Supreme Court, the publicly acceptable sales language returned.

We see parallels in the marketing of the health-care reform bill to members of Congress and their constituents in 2010 versus the language used to fend off court challenges in 2011. To make the political sale, the Obama administration insisted that the individual mandate provision, which requires the purchase of medical insurance or the payment of a fine, was not a tax. But forcing citizens to purchase such a product is unconstitutional, so in the face of court challenges the administration now insists that the individual mandate really is a tax.

Many citizens believe that they have a right to Social Security benefits because they have “paid in” to the system – and plenty of politicians pander to this belief. Certainly, under the present law there is a menu of benefits and a set of criteria by which an individual may qualify. But this is not a contractual right. As affirmed by the U.S. Supreme Court in the 1960 case, Flemming v. Nestor, Congress can change or eliminate Social Security benefits at any time without consideration to those who have paid the payroll taxes. FICA is a tax, not a “contribution.”

Since 1939, Social Security has been a pay-as-you-go system. This enabled politicians to grant benefits, but to levy taxes that were too low to fully fund the program. It has also enabled politicians to use program surpluses to finance other programs in the federal budget.

The “trust fund” exists only to give statutory authority for payment of Social Security benefits without an appropriation from Congress. But in the political world, it can be anything we want it to be.


Richard J. Grant is a professor of finance and economics at Lipscomb University and a senior fellow at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2011

Sunday, June 19, 2011

It's not economy that's fragile; it's our freedom

Published in The Tennessean, Sunday, June 19, 2011

by Richard J. Grant

Is the economy made of glass? We keep hearing how “fragile” it is.

There has long been a tendency to think of the economy as an almost physical, machine-like entity. We still sometimes hear economists refer to “pump priming,” as if the government is needed to inject the initial income into the system to get it flowing. Or perhaps they see the economy as some kind of an organism that just can't rouse itself without some centrally directed “stimulus.”

We think of a machine as needing some kind of control panel or driver's seat. If it is an organism, then we want to put it on a leash. Someone must control it and direct it.

Such a vision of the world either ignores or downplays the role of real, autonomous people. Never mind that the real-world economy is an ever-changing network of a multitude of individuals, each seeking their own purposes. Never mind that these individuals will tend to prosper when they cooperate with one another and learn that conflict and power-seeking lead to relative decline. Such a vision cannot comprehend that a prosperous order can emerge spontaneously without a central planner at the economic control panel.

Earthly experience with attempts at such central planning has been unsatisfactory, to put it mildly. The concentration of power that is necessarily sought by the planners will be used to “do good” as the planners see it. But what is “good” for the planners is not necessarily good for everyone else. Even a benevolent despot cannot possibly know the needs and desires of millions of people, let alone act on such knowledge.

This is why the greatest nations in history have been those in which individuals and their close communities have found themselves relatively free to pursue their own livelihoods. People tend to work around any obstacles, including those imposed by other people. What we call “markets” have always emerged in some form, whether within or outside the laws that have been decreed.

In free countries – those with limited governments and the freest markets – the greatest value is found in voluntary production and cooperation. Political power is of little personal economic value to an individual or his supporters in a free country.

Rivalry for political power is most intense, and takes on its greatest personal economic significance, in those countries that are least-free or are moving in that direction. As the power of governmental leaders grows, the market for lobbyists and political influence grows as well. Increasingly, it pays to devote time and resources to acquiring wealth through political means rather than through productive private-market trade.

In a free country we would care little who the president is, provided that he conducts himself in a dignified manner, is a competent administrator, and can manage the national defense. The president would not have the power to “radically transform” the country, nor would he have the power to transfer wealth from one group arbitrarily to another. Donations to his election campaign would be commensurately small.

In a free country we would not suffer from the illusion that our economy is “fragile.” Our experience would show us that our economy is not a thing in itself but a very real reflection of our virtues and social relations. It is our freedom that is fragile.


Richard J. Grant is a professor of finance and economics at Lipscomb University and a senior fellow at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2011

Sunday, June 12, 2011

Government wastes money on 'creating jobs'

A shortened version was published in The Tennessean, Sunday, June 12, 2011

by Richard J. Grant

Whenever a president or governor announces that he is going to focus on “creating jobs,” we have reason to worry. Our state and federal governments have grown way beyond the size where any additional government job is likely to contribute more to society than it costs.

It is not an insult to President Barack Obama to say that he cannot create jobs. He can't and we shouldn't expect him to. He can, however, “make work.” Unfortunately, that is what he has done by driving up regulatory and tax-compliance costs, and creating much uncertainty about future policy. That is why the unemployment rate has remained so high for so long and has risen in the past two months to 9.1 percent.

The political need for government office-holders to seem important to voters is sufficient to explain the growth of government intervention. An ideological bent toward bigger government simply makes this worse.

We don't need government to create jobs; there is already plenty of work to do. A job is created whenever a least one of us takes action in an attempt to satisfy a need or desire. We have an endless supply of desires, so we really do have an endless supply of work.

The more thoughtful and quick we are in our work, the more needs we can satisfy each day. If we can reduce the amount of resources we use to satisfy a particular need, then we have more resources to achieve other goals and to improve quality. We can produce more, provide better products, and serve more people.

Politicians who make work for us get all this backwards. This is why government job-creation programs invariably, if not obviously, fail. They lose sight of the real objectives and the real costs.

When Senate majority leader Harry Reid succeeded in diverting taxpayer dollars to fund “cowboy poetry” festivals in Nevada, he also succeeded in taking from you dollars that you devoted part of your life to earn, and that you might have used to invest in your business, or to pay for college, or to pay for a car or gas. Even when the government expenditures are less-obviously wasteful, they are more often than not expenditures on something that you would not have used those dollars to buy. Because of this, part of your work is wasted. To get what you want you have to work longer.

These past few years, our governments have spent or lent trillions of dollars in the hope of saving or creating jobs. In the face of this, the unemployment rate continued to rise, fell slightly, and is now rising again. Whatever number of jobs has been created, it has not kept up with population growth. The amount of government dollars spent per “job created” has been greater than the salary or value of each of these jobs. This means that the government has been wasting people’s time and resources.

Real job creation is a product of thoughtful investment and voluntary cooperation. Government is helpful when it respects private property, protects individuals from real coercion, and assists in the enforcement of contracts. But government destroys jobs when it taxes away capital, subsidizes unprofitable companies, imposes labor law that raises the cost of hiring, and then prevents the company from moving to a better location.


Richard J. Grant is a professor of finance and economics at Lipscomb University and a senior fellow at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2011

Sunday, June 05, 2011

Germany ties its nuclear hand behind its back

A shortened version was published in The Tennessean, Sunday, June 5, 2011

by Richard J. Grant

A thousand years ago, Mongol invaders displaced the Song Dynasty, which shifted toward the south coast of China. This brought a new commercial and strategic interest in the development of sea travel. By 1132, the Emperor had established a permanent navy and devoted resources to maritime engineering. Knowledge grew, as did the number and sizes of the increasingly sophisticated sailing vessels.

By the 15th century, Chinese traders and the navy operated huge fleets of several hundred ocean-going vessels. But with the Ming Dynasty, which began around 1368, the traditionalist, Confucian bureaucracy grew in power and influence. After the death of the adventurous Emperor Zhu Di in 1424, the Chinese became increasingly bureaucratized and inward looking. The maritime expeditions by the great fleets soon came to an end. An imperial decree restricted Chinese ships to coastal waters and individuals were forbidden to travel abroad.

In the early 16th century, restrictions were placed on ship sizes and eventually the building of ocean-going vessels was forbidden. With this loss of purpose, Chinese shipyards lost the capacity to build the great ships – and knowledge of their specifications and construction died out. This, and the Confucian disdain for commerce, left the Chinese vulnerable to piracy and foreign naval powers. By the time the Portuguese trading ships arrived, the Chinese empire was already in decline.

Five hundred years later we have ships that are powered by nuclear reactors. The U.S. Navy has been one of the world's leaders in the use of nuclear energy, particularly in the application of small-reactor technology. These applications, especially in submarines, brought tremendous strategic advantages.

Energy expenditure is essential to life. The harnessing of nuclear energy, although first achieved during wartime, has enhanced our lives in a growing range of civilian applications. Since the first known man-made fission reactions in 1942, knowledge has expanded and enabled us to recognize and enjoy the benefits of a clean, energy-dense power source.

By freeing-up other resources, the development of nuclear power has increased our standard of living and has continued a centuries-long trend away from carbon-dense energy sources. People have always preferred cleaner and more-economical modes of living. And in the freest societies we were best able to apply our minds to such goals and to act on our discoveries. The same rule of law that gives us this freedom will, when applied rationally, protect us from careless use.

One hundred years ago, Germany was renowned as the place to go for training in science and technology. Repressive governments and periods of conflict caused many Germans, including some top scientists, to depart for freer lands. Knowledge and know-how were lost, at least temporarily, to those other lands.

Today Germany gets almost 23 percent of its electrical-energy supply from nuclear power. German utilities were planning to add nuclear capacity. But that was before a tsunami hit Japan and damaged the Fukushima nuclear plant.

Popular German understanding of nuclear matters is such that polls show 70 percent of the populace opposing the use of nuclear power. Chancellor Angela Merkel, who probably knows better, has announced that all 17 of Germany's nuclear reactors will be closed by 2022.

Germans will pay more while waiting for salvation through wind and solar energy. They will lose their nuclear engineers to other lands and vocations. They will also increase their dependence on Russian oil and gas.


Richard J. Grant is a professor of finance and economics at Lipscomb University and a senior fellow at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2011