Political Hay

Rick Santorum, Bad Economist

Shortsightedness can leave you thinking like a Democrat.

By 1.18.12

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During Monday's Republican debate (transcript) in Myrtle Beach, SC, former Speaker of the House Newt Gingrich offered a bold vision for allowing Americans to voluntarily contribute the "employee portion" of their Social Security payroll taxes into personal investment accounts, while the "employer portion" would continue to be paid into the Social Security Trust Fund -- a fund that only Al "Lockbox" Gore and Congressman Xavier Becerra (D-CA) think actually holds anything like real money.

Gingrich made accurate and important points that such a change would hugely benefit the country:

Now, what does it do? It gets the government out of telling you when to retire. It gets the government out of picking winners and losers. You save — it makes every American an investor when they first go to work. They all have a buildup of an estate, which you do not get in the current system.

And the estimate by Martin Feldstein at Harvard, who was Reagan's chief counsel and economic advisors, was you actually reduce wealth inequality in America by 50 percent over the next generation because everybody becomes a saver and an investor and you have a universal investing nation.

Former Senator Rick Santorum responded:

[T]here's nobody for the last 15 years that's been more in favor of personal savings accounts than I have for Social Security. But we were doing that when we had a surplus in Social Security. We are now running a deficit in Social Security. We are now running a huge deficit in this country.

Under Congressman Gingrich's proposals, if he's right, that 95 percent of younger workers taken, there will be hundreds of billions of dollars in increased debt, hundreds of billions of more debt being put on the books, which we can't simply — we're going to be borrowing money from China to fund these accounts, which is wrong. I'm for those accounts, but first we have to get our fiscal house in order, balance this budget and then create the opportunity that Newt wants. But the idea of doing that now, is fiscal insanity.

Santorum is epitomizing what Frederic Bastiat would have called "a bad economist." In his seminal 1848 essay on the difference between the bad economist, who considers only "that which is seen," and the good economist who "takes into account… those effects that must be foreseen," Bastiat presaged Monday's battle between Santorum, who didn't offer a vision past tomorrow, and Gingrich, who reminded us that whatever his other faults he remains the deepest thinker on the podium:

Yet this difference is tremendous; for it almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa. Whence it follows that the bad economist pursues a small present good that will be followed by a great evil to come, while the good economist pursues a great good to come, at the risk of a small present evil.

It's true: The United States has a huge budget deficit and debt. Some of that is already due to Social Security because its payout requirements now exceed its income from payroll taxes. It's about to get much worse.

According to USA Today, based on the 2011 Social Security and Medicare Trustees Annual Report:

Social Security's long-term shortfall grows about $1.2 trillion annually — a sign of an imbalance between the number of young workers and older beneficiaries, according to the Social Security trustees' annual reports. The $21.4 trillion unfunded liability represents the difference between all taxes that will be paid and all benefits received over the lifetimes of everyone in the system now — workers and beneficiaries alike. This is the measure corporations and insurance companies use to assess financial adequacy of their retirement programs.

The number differs from the $6.5 trillion, 75-year shortfall that Congress uses to assess Social Security's health. Congress's 75-year figure is smaller because it counts taxes collected from future workers -- those toiling from 2050 to 2085, for example -- but doesn't count the benefits they will get in the 76th year and beyond.

In addition, Congress reduces its estimate of Social Security's shortfall by counting the $2.6 trillion in IOUs the government has issued to the program's trust fund. However, the government's audited books, issued by the Treasury Department, don't count that money as having any value to the federal government because it is a debt the government has issued to itself -- like paying off a car loan with a credit card.

In other words, if you believe Newt Gingrich's math -- and Santorum didn't challenge it -- that his plan of allowing voluntary personal accounts would make Social Security solvent in the long run, then Santorum is worried about a relatively paltry (by President Obama's spending standards) couple hundred billion dollars of additional annual deficit for some number of years in order to save as much as $20 trillion over the long term.

And like all bad economists (including Keynesians and Democrats), Santorum ignored the massively pro-growth aspects of Gingrich's proposal: The multi-trillion dollar increase in privately saved wealth will provide a major adrenalin boost to the American (and world) economy, causing increased employment and GDP growth, translating into higher tax revenues that will offset at least part of the increased deficit that a "static" model would predict.

Santorum makes another major mistake, subject to the same criticism some have made of Republican attacks on Romney's Bain Capital: he's using an argument that we would expect from, and that should be left to, Democrats.

Democrats are deeply antithetical to anything that would increase the number of Americans who have a financial interest in understanding government regulation, intervention, spending, and taxation. They are, as economist Don Luskin puts it, part of the real political conspiracy, namely the coordinated effort by the left to keep you poor and stupid.

Do you think the nation would have tolerated Dodd-Frank if another 10 or 20 or 50 million people of voting age suddenly realized that federal regulation actually impacted them rather than just "the one percent"? How about cap-and-trade, or the out-of-control NLRB, FCC, or EPA? How about Obamacare? No, a nation of investors is a nation without a Democratic majority and don't think Nancy Pelosi and friends don't know it.

If Rick Santorum were as much a free-market capitalist as he claims to be, he would, rather than making Obama's arguments for him, be championing Newt's personal Social Security account plan while pressing the Speaker a little harder on details of how to deal with the short-term budget impact of increasing long-term economic liberty and national fiscal solvency. It is a trade manifestly worth making, bad economists notwithstanding.

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About the Author
Ross Kaminsky is a self-employed trader and investor and is a senior fellow of the Heartland Institute. He is the host of The Ross Kaminsky Show on Denver's NewsRadio 850 KOA on Saturday mornings from 6 AM to 9 AM. You can reach Ross by e-mail at rossputin(at)rossputin(dot)com.