Social Security, the Financial Crisis & Modern Monetary Theory

Randall Wray, one of the leading lights of Modern Monetary Theory, has responded at length to some of my critiques.

His response actually demonstrates one of my critical points: MMT is too complacent about the harm government inflicts. In what follows, I’ll show how Wray’s view of Social Security as “credit bank accounts” leaves him with a myopia when it comes to the behavioral effects of the Social Security program. Then I'll show how this same myopia effects how MMT tends to view the financial crisis.

Wray is absolutely mystified anyone could regard Social Security as harmful.

“Does Carney really believe that crediting the bank account of some 90-year-old widow so that she can afford to live a more-or-less dignified life on Social Security is ‘economically damaging’?” Wray asks.

Of course, if this were all we were doing with the Social Security program, I would not regard this as harmful at all. But we’re not talking about crediting the bank account of “some 90-year-old widow” when we discuss Social Security. We’re talking about a comprehensive system of taxing working people and making payments to people over the age of 65.

This system has long been known to be destructive. Everywhere such a system has been put in place, the population diminishes, investment in human capital shrinks, and private savings contract.

I'll let Allan Carlson of The Howard Center for Family, Religion & Society in Rockford, Ill. explain:

America received its first warning of this problem back in 1940. The Cassandra in question was Gunnar Myrdal, a Social Demo-cratic economist from Sweden. The venue was the Godkin Lectures at Harvard University. His title: Population: A Problem for Democracy.

Myrdal argued that all pay-as-you-go public pension systems rested on a fundamental contradiction. Before the creation of such systems, parents depended on their own children as their ultimate “safety net,” their true insurance. If other forms of savings and asset accumulation failed, the adult children would be there to provide financial support, shelter, or care. This created a strong incentive for having children.

However, a public pay-as-you-go system reversed the incentives. Pensions were now provided by the government as a right. Children were still needed to make the system work in the future. However, Social Security represented the socialization of the private insurance value of children. Pension benefits were now tied to work and salary; not family size. Childless workers received the same pensions as workers who had spent much of their income to raise large families. This created a perverse incentive: the rational, income-maximizing individual would now have no children at all. As he or she would reason: Let others spend money on raising children who will grow up to be taxed to pay for my retirement. Economists label this the “free rider” problem. Myrdal called this contradiction “the burning core” of the population problem.

This has led to a real problem faced by our society: how will we produce enough to keep our elderly population living a more-or-less dignified life, as we climb from 21.2 older dependent people per 100 people of working age to 34.3 per 100—and all the way up to 42.1? (I’m using statistics from a 2006 government report you canread here.)