Tape 176 - Social security and tax egalitarianism

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Interviewer	Welcome once again	0:05
	as MIT professor Paul Samuelson	0:06
	discusses the current economic scene.	0:08
	This series is produced by	0:10
	Instructional Dynamics Incorporated.	0:12
	Professor Samuelson, now that we're	0:15
	in April, the tax bill is signed,	0:16
	what is the outlook from here?	0:18
Paul	Will he sign, won't he sign?	0:24
	That was the question that the country was waiting to hear.	0:27
	As most people thought, the President decided	0:33
	not to veto the tax bill.	0:37
	As most people thought, in signing the bill,	0:39
	the President expressed his dissatisfactions with it.	0:43
	For one thing, he had asked for 16 billions	0:49
	and he received 22 billions	0:51
	of tax stimulus	0:56
	that I think is an understatement of the amount	0:58
	of fiscal stimulus that is on the way	1:00
	and whether or not the President should have wanted	1:03
	the extra stimulus, it, I suppose, could not	1:07
	but help him to put	1:12
	warning on congress	1:17
	that having spent more than he said,	1:20
	they would be responsible for any excess in	1:23
	inflation, which might follow.	1:28
	Moreover, he used the occasion, of course,	1:30
	that goes without saying, to stress	1:34
	the importance to him of our not increasing	1:38
	government expenditures.	1:42
	What the effects of the tax bill will be	1:48
	now requires some patient waiting.	1:51
	Most of the fashionable forecasters,	1:56
	I hesitate to call them experts, wanted the bill.	2:00
	They had the, their forecasts,	2:05
	which called for the economy reaching bottom	2:09
	and beginning to turn up before the middle of the year.	2:14
	Those forecasts were premised upon	2:17
	the President's signing something like	2:20
	the tax bill that he did sign.	2:22
	As far as I know, they have had no reason to	2:26
	change their opinions.	2:29
	We've had on the Eastern seaboard signs of spring,	2:32
	crocuses have been out.	2:36
	Unfortunately, there's no good name for...	2:39
	Well we have a good name for Indian summer,	2:44
	but there's no good name for the return of winter	2:45
	and that's what we've had in terms of the climate,	2:50
	but it's not clear that there's been any	2:55
	deterioration in the	2:58
	economy beyond	3:02
	what was confidently expected by the forecasters	3:03
	who think that the upturn is very near indeed.	3:09
	There have been a few straws in the wind	3:16
	which suggest that the rate at which	3:18
	we were sliding downward was perhaps	3:21
	at its maximum shortly after the turn of the year,	3:24
	say, in January.	3:28
	The rebates of course improved the automobile sales.	3:31
	We even had a month in which the leading indicators,	3:35
	those that were available, were showing	3:41
	on an aggregate basis, a small uptick.	3:45
	It was a very small uptick and it followed seven months	3:50
	of a rather strong downtick.	3:53
	But for those who wish a straw	3:56
	upon which to hope, this provided one.	4:00
	I may have mentioned that the paperboard,	4:06
	which is used in everything and is therefore	4:09
	kind of a bellwether of activity,	4:12
	that paperboard began to behave a little bit better	4:15
	after its decline last autumn	4:23
	and into the new year.	4:27
	However, that little bit better	4:31
	has turned out to be not quite	4:32
	that good and we really are basing the	4:35
	debt, and that is all it is, a debt,	4:43
	of an upturn upon things to come.	4:46
	Things has yet not unseen.	4:51
	We did begin to have a little inventory	4:55
	decumulation in real terms, it is thought, in January.	4:58
	Presumably, the major forecasters	5:05
	think that that process continued in February and in March.	5:07
	They think that a few more months of that	5:13
	process will be enough	5:16
	so that coupled with	5:19
	the strength in final demand,	5:21
	the letting up of the rate of inventory	5:24
	decumulation will contribute to an upturn.	5:29
	But of course, most of all, its policy	5:34
	upon which the same when forecasters are basing their case.	5:38
	It's the fiscal stimulus, which is considerable,	5:45
	which will be lumped into	5:49
	a fairly short period of time,	5:51
	say from May to Thanksgiving,	5:53
	and with	5:58
	not long but variable lags,	6:01
	this temporary splash of income	6:05
	will in some measure, it is believed, be spent.	6:08
	And with inventory decumulation	6:14
	at its worst behind the system,	6:17
	at that time, all the forces of momentum	6:19
	you might say the dominoes will begin to	6:24
	stand upright in a chain and mutually	6:27
	reinforcing a process which we call economic recovery.	6:32
	Whether or not we have the strong the fourth quarter,	6:40
	which most of the fashionable forecasters are predicting,	6:44
	I think must depend rather crucially	6:48
	upon what happens to the housing rebound,	6:52
	what happens to the automobile industry.	6:56
	Where the automobile industry is concerned	7:00
	I think within the laugh of the gods,	7:02
	I think the strength of that demand	7:04
	for each level of income	7:10
	must depend upon exogenous factors	7:12
	of consumer's mood,	7:16
	consumer's attitudes towards the new models,	7:19
	the energy,	7:24
	psychology.	7:27
	However, in the case of housing,	7:30
	what the federal reserve board does,	7:32
	what the open market committee does,	7:36
	in terms of getting the money supply expanding again,	7:38
	that will be the important consideration.	7:43
	A listener has asked my opinion	7:48
	about the several moves in congress	7:51
	to have congress itself	7:55
	intervene	8:00
	in calling the shots for the federal reserve.	8:02
	And now both houses of congress have passed the resolution	8:06
	calling upon the federal reserve	8:10
	to report to the congress	8:12
	its intentions	8:16
	with respect to money and credit aggregates	8:18
	in the period ahead.	8:21
	Undoubtedly, this is not a bill, which	8:24
	Dr. Burns would most wish for...	8:30
	If he had his choice.	8:37
	But, I think it's a good bill.	8:40
	I think that Dr. Burns and the federal reserve can	8:42
	live with it and more than that	8:46
	since the whole Darwinian process of evolution	8:50
	was not for the purpose of making the life	8:53
	of the central banker an easy one.	8:55
	I think that the behavior of monetary policy	8:58
	may be marginally better under the new	9:03
	rules than under the old.	9:08
	But, this is a...	9:11
	A matter of some complexity.	9:14
	And I could marshal arguments on both sides	9:18
	of the case and it would be a question of	9:21
	fine judgment and subsequent experience	9:24
	as to how one	9:27
	will end up appraising	9:29
	the counterarguments.	9:31
	Let me put it this way,	9:36
	the federal reserve was becoming so unpopular	9:38
	for the tourniquet,	9:43
	which it was holding on the real money supply.	9:46
	This last many quarters that there was considerable	9:50
	danger from its viewpoint	9:55
	that its autonomy would be reached	9:57
	in a more serious way than this particular resolution	10:00
	or any of the successful efforts in congress	10:05
	have yet to indicated.	10:08
	Well, let me...	10:12
	Speak then about some other problems.	10:17
	A listener had asked me whether the	10:21
	social security system is in good or bad shape.	10:24
	He has been hearing rumors that	10:29
	its about to go bankrupt.	10:33
	Those rumors, like the rumors of the death	10:37
	of Mark Twain, are sightly premature.	10:41
	What is the case is that if the present	10:46
	plan, program, of financing	10:52
	of tax rate	10:58
	scheduled increases in the late 1970s	11:00
	and the early 1980s were to	11:05
	stay as they are on the books,	11:09
	and if the presently	11:12
	expected and proposed	11:16
	changes in benefits, including the indexing	11:19
	of the payments of Social Security	11:24
	to the Social Security recipients,	11:27
	if those stay the same then according to the best estimates	11:30
	that one can make about population trends	11:36
	and about trends in the level of income and of prices,	11:38
	the so-called	11:45
	trust reserve fund	11:48
	of the federal reserve, of the Social Security	11:50
	system, will begin to zero out	11:54
	and go into the red.	11:59
	And therefore it will be necessary to	12:02
	pay the social security recipients	12:08
	out of some kind of general tax revenues.	12:10
	Or what is very much the same thing,	12:14
	out of some changes in	12:16
	the scheduled	12:20
	employment taxes that are used to finance Social Security.	12:22
	Those are not sac or sanct.	12:26
	Those have not reached their limits.	12:29
	Moreover, this 1980 date	12:32
	at which the trust fund	12:36
	may on a bookkeeping basis	12:39
	zero out,	12:43
	is not an unexpected phenomenon.	12:45
	Long ago indeed, essentially	12:49
	40 years ago,	12:53
	when the Social Security system was set up in 1935	12:55
	to begin operations in 1937	13:02
	de facto,	13:07
	a decision was made to disregard the advice	13:09
	of the private insurance actuaries	13:14
	who were making their proposals.	13:18
	And not to put the Social Security program	13:20
	on an actuarily funded basis.	13:24
	So although there were plans at the beginning,	13:28
	scale down I may hasten to add,	13:34
	very, very soon for a sizeable trust fund to accumulate.	13:36
	All this based upon the assumption that the initial	13:43
	stipends, which even at the time looked to many of us	13:48
	to be pitifully low and which in retrospect	13:54
	looked almost advisory even for	13:58
	the price level	14:02
	which prevailed in 1937 and in the years	14:03
	before World War Two.	14:07
	Even if those rates had	14:11
	kept in existence,	14:15
	even if we had had no inflation,	14:17
	even if we had no increase in the real income	14:18
	of the typical citizen, which he wants	14:22
	his elderly colleagues to also in some part enjoy,	14:26
	in which he wants himself in some part to enjoy	14:31
	when he becomes a retired citizen.	14:35
	Even if we disregard of all that,	14:43
	the sizable trust fund which	14:47
	it was planned would accumulate	14:51
	was nowhere near the size that a	14:54
	properly actuarily funded	14:59
	non-governmental pension insurance plan	15:06
	would have had to have to be declared actuarily sound	15:10
	by a member of the accredited actuary associations.	15:15
	You know that	15:23
	pensions are a fairly new thing	15:27
	as far as most of the population is concerned.	15:30
	When the Social Security Act was put into effect,	15:34
	we had surveys to show that most people die broke.	15:37
	And it wasn't that they lived affluently.	15:42
	And just at the moment of death	15:46
	when sending for the spiritual advisor	15:51
	or the estate tax lawyer, they ran out of money.	15:54
	They lived miserably	15:58
	in the retirement years.	16:02
	Those were still the days of the compact family.	16:06
	And very often perforce parents and grandparents	16:10
	lived with	16:16
	the younger family.	16:19
	And so you had a non-actuarily funded	16:21
	Social Security based on the family compact.	16:24
	I took care of my parents	16:30
	in the expectation	16:34
	that my children would take care	16:35
	of their parents, namely of me.	16:37
	I recall in driving through the Swiss countryside	16:41
	seeing the farmer or peasant farm arrangement	16:46
	in which	16:51
	the active farmer lives in the	16:54
	sizeable part of the house.	16:58
	But attached to it is sort of a	17:02
	dowager wing.	17:06
	I can't call it a cottage, a wing.	17:08
	And when the farmer's first born son,	17:11
	I suppose,	17:16
	comes of age and when he gets married,	17:19
	he moves into that wing.	17:23
	But then, as the major farmer becomes a little bit older,	17:27
	and before he becomes useless and retired citizen	17:33
	on the production	17:38
	farm, there's a switch.	17:41
	The first born son is beginning to have children,	17:45
	he needs the space.	17:48
	The other children in the family have	17:50
	grown up, they have left the nest.	17:53
	So the young family had moved into the major part	17:59
	and the older person moves into the what I've called,	18:05
	not the Swiss expression, the dowager wing.	18:10
	Well pretty much something like that	18:14
	perforce had to be the	18:17
	rule of the road	18:20
	which governed American life back in earlier times.	18:21
	But of course, in modern industrial times,	18:27
	and particularly in the Great Depression,	18:30
	against the background of which the	18:33
	Social Security Act was put into effect.	18:36
	We were late.	18:39
	It was Bismark who was buying off Marxism socialism	18:41
	by pension plans and other welfare state devices	18:46
	really from the last part of the 19th century on.	18:51
	It was Gladston who began to put in pensions	18:56
	who revived the income tax which had prevailed	19:02
	in the Napoleonic war period.	19:07
	It was finally in 1909 and in 1911	19:10
	Lloyd George of the Liberal party,	19:14
	not the Conservatory party,	19:16
	who instituted a more thoroughgoing reforms.	19:20
	Well the US was behind in these matters.	19:25
	By the way, I call these reforms	19:29
	because I reveal my value judgment	19:32
	that I think that this is a move in the right direction.	19:35
	It's a move which I think the vast majority of us	19:41
	realizing that any one of us might come into destitution.	19:46
	Wish willingly	19:50
	to rule upon ourselves.	19:54
	It's a mutual insurance system,	19:57
	not something imposed upon us by a few bureaucrats.	20:01
	This is my way of looking at the problem.	20:06
	And not something	20:08
	put upon us	20:12
	by some demagogue populist	20:14
	leaders	20:18
	appealing to the envy and the base motives of the,	20:19
	half of the population with the lowest income.	20:26
	Now, I don't for a moment wish to underestimate	20:30
	the importance of precisely those forces.	20:34
	You must expect a statesman to be responsive	20:38
	in a democracy to the vast preponderance	20:43
	in the number of people.	20:46
	And so one man's populist is another man's statesman.	20:48
	Furthermore, why should we expect	20:53
	in the textbooks of	20:57
	Adam Smith and John Stuart Mill	21:01
	and Alfred Marshall and	21:03
	modern textbooks	21:07
	whose names I will not mention,	21:09
	why should we expect selfish,	21:12
	calculating behavior in the way people spend their money,	21:16
	in the way people seek to maximize opportunity,	21:21
	in the way they conduct their business affairs,	21:26
	and in the way that corporate management	21:30
	prudently conducts its efficient operations,	21:32
	and the charges, the price, which permits	21:37
	of, as they would put it, adequate dividends	21:41
	which permits of reinvested funds in a growing economy.	21:45
	Why should that benthamite	21:50
	calculus	21:53
	of rationality	21:55
	apply in our day-to-day life	21:57
	and be applauded	22:01
	by economists without it occurring to them	22:04
	that in political life, that same	22:08
	enlightened self-interest will lead	22:13
	to class coalitions	22:17
	that will function	22:20
	in order to serve as a mutual, reinsuring	22:22
	mechanism.	22:27
	And as a matter of fact, as	22:28
	some would put it, a leveling mechanism,	22:32
	or as others would put it, a movement	22:36
	towards greater Egalitarianism.	22:39
	Indeed, I commend to your attention	22:42
	the book by John Rawls, the Harvard philosopher,	22:45
	on A Theory of Justice.	22:50
	He stresses something which has been in my mind	22:54
	for a long time and	22:58
	which I	23:01
	analyzed in some detail on the occasion of the 60th birthday	23:04
	of a great modern economist Abba Lerner.	23:09
	Professor Meridist now from the University	23:14
	of California Berkeley, now I believe at	23:18
	Queens University in the city	23:21
	of New York.	23:25
-	[Professor Meridist] If all of us were	23:29
	conscious of the vicissitudes	23:33
	and the uncertainties of income,	23:35
	in the life that we are going to pursue,	23:39
	even let us say on the day we're born	23:42
	or on the day that we're born as 21 year-olds	23:45
	as voting citizens, perhaps it's moved on	23:48
	in these rapidly maturing days to 18.	23:52
	If we all had reason to think that	23:57
	in the income pyramid we might by chance	24:03
	end up anywhere, then to the degree	24:08
	that we realize that,	24:13
	we would, by unanimous vote, impose upon ourselves	24:14
	willingly a social compact in which you would not only have	24:20
	progressive taxation, but you would have	24:25
	very highly progressive taxation.	24:28
	So highly progressive as to constitute	24:31
	according to the arithmetic of the mathematical theorem,	24:34
	complete Egalitarianism.	24:39
	Now, of course, many of us have reason to	24:40
	know that we were born with a silver spoon	24:45
	in our mouths or a	24:47
	silver brain in our heads	24:52
	or silver muscles in our arms,	24:54
	so we want so joyfully out of non-altruism	24:57
	and turn it into that.	25:02
	We also know that in the world as we have it	25:05
	who your parents were is very important	25:09
	in terms of what kid of education you get,	25:12
	what kind of neighborhood you live in,	25:14
	what kind of attitude you have, and so forth.	25:15
	But...	25:21
	But of course, we'll tamper, and the theorem says that	25:25
	this complete Egalitarianism to the degree	25:30
	that we realize that	25:33
	incentives to work,	25:37
	to take risks, can be distorted	25:39
	in a dead-weight loss fashion to the benefit of nobody	25:43
	By such complete Egalitarianism.	25:47
	And so we live in some kind of uneasy compromise.	25:50
	I should have mentioned, because	25:54
	I believe Tom Wicker of the New York Times	25:57
	has said this and some others,	25:59
	that	26:02
	the tax cut which we received	26:04
	was of an extremely Egalitarian type.	26:07
	For one thing, an element of the	26:13
	negative income tax entered in.	26:14
	Every Social Security recipient will receive	26:17
	a check that's an actual cash	26:21
	payment.	26:25
	For another, although the more you	26:27
	pay in taxes, the higher your income is	26:32
	the more you pay in taxes, the more you get back,	26:35
	that's only true at the beginning.	26:38
	And people who have a lot less income than I have	26:40
	will get back more than I will.	26:45
	And the amount in which I will get back,	26:48
	I don't say this by way of complaint,	26:50
	quite the contrary, I approve of it,	26:51
	the amount I get back is a dry 300 dollars.	26:56
	So what you had is a	26:59
	tax	27:02
	change,	27:03
	a marginal alteration, which is much more Egalitarian,	27:04
	I think that's probably the better word to use	27:07
	than progressive, than the tax system itself,	27:10
	leaving us with the system	27:15
	which is slightly more Egalitarian.	27:16
	Well now to go back onto Social Security,	27:19
	there are some minor defects	27:23
	in the way the system is indexed.	27:26
	There's a report which makes this clear	27:30
	by both committees of congress,	27:32
	the Shao report.	27:37
	Shao is a...	27:40
	Is a chairman, it's a Chinese name,	27:44
	is also the W. Allen Wallace committee Report	27:47
	to the nation and they all indicate	27:52
	that we must take account of the fall	27:55
	in the birth rate which has taken place	27:58
	and which with some confidence we know	28:02
	will continue in comparison with earlier extrapolations.	28:05
	And we must correct this indexing.	28:09
	This indexing does not overpay	28:11
	the people who are retired and run Social Security,	28:14
	it just keeps them absolutely protected.	28:16
	But the way the formula is advised,	28:18
	it does over-adjust	28:22
	the incomes	28:25
	of those who are in their last periods	28:27
	of working life and are still working.	28:29
	With these changes, will the system	28:33
	be given a complete bill of good health?	28:35
	I think so, but that bill of good health does involve	28:39
	financing a lot of future Social Security	28:44
	out of general tax revenues,	28:47
	which on another occasion I shall argue is a good thing.	28:50
Narrator	If you have any comments	28:57
	or questions for Professor Samuelson,	28:58
	address them to Instructional Dynamics Incorporated	29:00
	450 East Ohio Street, Chigago, IL	29:03
	60611.	29:07

Item Info

Title:

Tape 176 - Social security and tax egalitarianism

Date:

1975

Contributor:

Samuelson, Paul A. (Paul Anthony), 1915-2009

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Paul A. Samuelson papers, 1933-2010 and undated

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Paul A. Samuelson papers, 1933-2010

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Economics Cassette Series: Paul Samuelson

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Tape 176 - Social security and tax egalitarianism

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