RALEIGH – A news reporter asked me today to react to proposals to extend the tax credit for first-time homebuyers. What came immediately to mind were various colorful metaphors (as a certain time-traveling Vulcan might put it). Fortunately for JLF and me, what came to my lips were just diplomatic but firm words of opposition.
There are many reasons to be against the idea, starting with what should now be obvious: government meddling in the housing market is a policy fraught with peril. The outlook is even worse when you recall that the federal government is already massively in debt and borrowing quite literally as if there is no tomorrow. Issuing additional federal debt to encourage households to take on even more debt isn’t my idea of sensible.
It’s not just the immediate budget deficits, unconscionable as they are, that ought to worry us. Looming not so far over the horizon is the moment at which America’s biggest entitlement programs, Medicare and Social Security, will be upside down. They’ll be paying out more in benefits than they receive in earmarked tax revenue.
Actually, for Medicare Part A, which finances hospitalization, that moment is already here. It will soon arrive for the other programs. Indeed, because of unforeseen early retirements, the most-recent estimate is that as soon as next year Social Security may start paying out more benefits than it receives in payroll taxes.
After that, the deficit numbers will just keep growing bigger and bigger. The unfunded liability of Medicare and Social Security through the end of the century exceeds a mind-boggling $100 trillion. Add in the expected growth of Medicaid and other unfunded liabilities, for such items as promised health benefits for government retirees, and it becomes readily apparent that we can’t afford the current level of government services without massive tax increases that are economically and politically unthinkable.
Dreaming up new government programs, then, is a fool’s errand. That’s why Congress is currently doing it, again.
But some might charge me with overstating the fiscal challenge by ignoring the existence of Medicare and Social Security trust funds. They’d be half-right. I am ignoring the existence of the trust funds, but that’s the only way to state the fiscal challenge accurately.
Just in the past couple of days, I’ve heard a number of seemingly intelligent politicians and commentators exhibit their misunderstanding of governmental trust funds. Social Security won’t run out of money until the mid-2030s, they say, because the trust fund holds plenty of federal bonds and the Treasury has never reneged on its debt.
That’s quite simply beside the point. Creditworthiness has nothing to do with it. The federal government can’t build useful assets by issuing itself bonds. Think about it this way. If you write yourself a check or an IOU, does that make your richer? Of course not. And it doesn’t matter whether your credit is good or bad.
A federal bond is a promise to pay interest and principal in the future. There are four ways that a future federal government can satisfy that promise without simply kicking the can further down the road with more debt. First, it can raise taxes. Second, it can cut spending elsewhere to free up dollars for debt service. Third, it can sell public lands or other real assets owned by the government to free up dollars. Or fourth, it can inflate the currency to satisfy the face value of the bond, which is really just another version of the first option (a tax increase, just sneakier).
So when it comes time to finance the gap between Medicare or Social Security benefits and current revenues, the trustees can certainly cash in the special Treasury securities now in the trust funds. In order for the act to result in actual dollars paid out to beneficiaries, however, the federal government will have to cut taxes, cut spending, sell real assets, or inflate the currency.
Guess what? If the trust funds didn’t exist, Washington would have exactly the same options. That’s why, except in a strictly accounting sense, they don’t matter.
State pension funds or private trust funds have the same options when their beneficiaries need cash. But in their case, the third option – selling real assets – is a meaningful one. They own claims on the income of other entities in the form of stocks, bonds, other investments, and, yes, federal securities. They don’t just own claims on their own state’s tax revenue. That’s how real trust funds function. Washington doesn’t have them.
So to the question of whether Washington should take on even more debt, to finance new homes or health care reform or anything else, the answer is [heck] no.
Hood is president of the John Locke Foundation