Selected in the top 100 Economics Sites

Follow me on Twitter

Friday, March 18, 2011

I hate saying this but "The Hammer" gets it all wrong.

Here is why "The Hammer" is wrong. I hope I never have to say that again....

Let me try it from this angle...suppose today the government wanted to spend $500 for defense, entitlements et. al. and social security wanted to spend $500 today and $500 25 years from now. One way to finance this would be to raise $500 in general revenue through income taxes now and $500 in social security taxes now and then $500 in 25 years from social security taxes. Your tax bill (without compounding) would be $1500 total as the tax-paying public. Now suppose that the government wanted to spend $500 today and social security wanted to spend $500 today and $500 in 25 years but social security had $1000 in total revenue sitting right there, now, on their balance sheet. One thing that could be done is for social security to spend the $500 now and loan the government $500 now to pay for their spending. Look at what has now no longer have to pay the income tax bill of $500 for the general government spending since an intra-governmental transfer happened. Then in 25 years the government would raise $500 in income taxes to pay social security what it is owed. But look at the net both cases your tax bill was $1500. So from the point of view of the tax-paying is the net public debt that really matters. And it is not an empty lock box.


Anonymous said...

Hey Dr. Parker,

Did you read page 2 of the column? I don't think your logic is lost on The Hammer. The problem is that there's no money to pay back the IOUs in the lockbox, and taxpayers don't like politicians using underhanded accounting methods to force increases in future government spending. This idea of a lockbox dupes people into believing that the $1000 they are paying in taxes today will cover their entire bill - not that they will have to pay another $500 down the road due to reckless spending on Capitol Hill. Perhaps we should be discussing where $500 should be cut to pay back the IOUs rather than where it should be raised...

Hope you're doing well!

John Maury
ECU Econ - Class of 2005

Randall Parker said...

John: Can you email me at