Fiscal Imprudence, Distributive Injustice: the $250 per Social Security Annuitant Plan--Posner
In October, the President announced that $13 billion (some commentators believe a more accurate estimate is $14 billion) of the $787 billion stimulus package enacted this past February would be used to pay every social security annuitant $250 in 2010, ostensibly to "compensate" for the fact that there will no cost of living (inflation) increase in social security benefits. The social security COLA for year t is based on the increase in the Consumer Price Index between the end of the third quarter of t - 1 and the end of the third quarter of t -2. (t is 2010, t - 1 2009, and t - 2 2008.) There will be no cost of living increase in 2010 for the excellent reason that as of the end of the third quarter of this year (September 30, 2009), the cost of living had fallen 1.3 percent from the end of the third quarter of 2008. Social security has a ratchet: benefits increase when the cost of living increases but do not decrease when the cost of living decreases. There is thus nothing to "compensate" social security annuitants for; on the contrary, they will be receiving a windfall in 2010 by virtue of the increase in their real (as distinct from nominal) benefits: their 2010 benefits will buy more.
Transfer payments, moreover, are a poor device for fiscal stimulus. The idea of a fiscal stimulus as an anti-depression device is to increase employment and by doing so restore business and consumer confidence; we are seeing today how high and rising unemployment is sapping that confidence and retarding recovery from the current depression (and it is a depression, not the "Great Recession" as some are calling it, though that's an issue for another day).
Transfer payments are at two removes from putting unemployed people to work. The amount of the transfer that is saved by the recipient in a savings account or other safe haven is (by definition) not spent, and so does not increase demand and therefore supply and therefore employment. And the amount of the transfer that is spent is spent at a store or other retail outlet to purchase a good that has already been produced. It is buying from inventory. Only when the store's inventory falls to a level at which the store has to order a new supply of goods from the manufacturer is there any stimulation of production, and thus of hiring; and of course the stimulation may not be of production by an industry, or in an area, of high unemployment. The dive that the economy took in the wake of the September 2008 financial collapse was unanticipated, and as a result sellers found themselves with excess inventories; until they were worked down, production would remain depressed. In sum, the effect of a transfer payment on employment may therefore be nil.
Apart from its inefficiency as a contribution to the recovery, largesse for the elderly--whose medical expenses, paid for largely by the taxpayer under the Medicare program--are threatening to bankrupt the country, sends the wrong signal: the signal of fiscal profligacy.
Lawrence Summers, the brilliant economist who heads the National Economic Council in the White House, has publicly endorsed the $250 dollar gift to social security recipients. He claims that it corrects an "anomaly." The anomaly he points is that social security recipients received only one $250 stimulus check this year and will receive no cost of living increase next year, whereas the tax benefits in the stimulus plan will be paid next year as well as this year. But social security annuitants received a 5.8 percent cost of living increase this year, whereas few workers received as large a wage increase; and they will be receiving a real as distinct from nominal increase in benefits next year. The only "anomaly" in the picture is the cynical provision of a windfall to a group that has suffered less from the depression than persons of working age, a group whose only claim to a $250 Christmas gift paid for by the federal taxpayer is that it votes more heavily than the young.
What's $13 billion at a time when trillions are spent casually? The real significance of the measure is the insight it gives into the Administration's apparent indifference to fiscal prudence. And not just the Administration. The political parties play leapfrog when it comes to spending--each trying to outdo the other in generosity to powerful voting blocs, and specifically to the elderly--the recipients of enormous social security and Medicare benefits, courtesy of the federal taxpayer. The costs of both the Medicare and social security programs are increasing rapidly as the population ages, and as the population ages the voting power of the elderly increases, placing additional pressure on a budget already disproportionately devoted to supporting the least economically productive members of society. (As a septuagenarian, I claim the right to make politically incorrect remarks about the elderly. Moreover, I am speaking of the average; many elderly people are hard-working and productive.)