Did Congress Really Raid Social Security?

Reading Time: 8 minutes

One of the more common theories as to why Social Security is facing a huge long-term cash shortfall is that lawmakers in Congress have pilfered cash from the program and never returned it.

This idea goes all the way back to 1968, when then-President Lyndon B. Johnson made a change to how the federal budget would be presented. Prior to 1974, before Congress had an independent budgeting process, the President’s Commission on Budget Concepts had three separate budgets, all of which had differing deficits. To simplify things, Johnson called for Social Security and its trust funds to be included in the annual federal budget.

In 1983, the Reagan administration voted to undo this change and once again remove Social Security from the federal budgeting process. This was done to ensure that changes made to the program are done solely on the merits of the program, and not to balance the federal budget.

Where the idea comes into play that Congress stole from Social Security is, during this 1968 to 1990 period (1990 is when Social Security was completely off-budget again), it’s believed that lawmakers commingled Social Security’s asset reserves (i.e., its aggregate annual net-cash surpluses built up since inception) with its General Fund to pay for wars and other line items. The belief among some folks is that Congress has stolen trillions of dollars from Social Security, and that if this money were simply returned to the program, it wouldn’t be in such dire financial shape.

But the real surprise, upon digging deeper, is that Congress hasn’t stolen a dime from Social Security.

The truth about Social Security’s Trust Funds and Congress

There are two important aspects of the incorrect notion that lawmakers stole from Social Security which need to be addressed.

First of all, there’s the period between 1968 and 1990, which is believed to be when Congress pilfered America’s top social program. What needs to be understood here is that, while Social Security’s two trusts (the Old Age and Survivors Insurance Trust and Disability Insurance Trust) and its asset reserves were technically “on-budget,” funding for Social Security and payouts remained entirely separate entities from the federal government’s General Fund. In plainer English, think of money within Social Security’s sphere as being completely untouchable by other money in the federal budget. This means at no point over this 22-year period where Social Security was on-budget did a dime of Social Security income, benefits, or asset reserves get commingled with the federal government’s General Fund.

The second thing to realize here is that Social Security’s asset reserves are required by law to be invested into special-issue bonds and, to a far lesser extent, certificates of indebtedness. I’m going to repeat that, in case you were skimming. Social Security $2.9 trillion in net-cash surpluses that have been built up over time aren’t allowed to sit in a bank vault collecting dust. They’re required to be invested in bonds by law.

Are these bonds sold by the federal government? Yes. But this doesn’t equate to stealing. Rather, the federal government is borrowing capital that would otherwise be losing money to inflation and paying interest into the Social Security program on its borrowing. Yes, you read that correctly. Not only is every cent the federal government has borrowed from Social Security accounted for, but the government is paying interest into Social Security, thereby improving the health of the program. In 2018, $83 billion in interest income was collected by Social Security. If the folks who believe that Congress stole from Social Security got their way, and the federal government repaid every cent it borrowed, Social Security would have lost out on this $83 billion in interest income in 2018.

Want to blame something? Blame congressional inaction

If you yearn to point the blame for Social Security’s imminent cash shortfall on Congress, go right ahead. Just make sure you’re blaming lawmakers for the right issue.

What Congress hasn’t done is steal from Social Security. However, lawmakers have known of the program’s shortcomings since 1985, and have yet to find a middle-ground solution to fix it. If you want to point the finger at lawmakers, do so because bountiful solutions exist, but political hubris appears to be getting in the way.

As you probably know, Democrats and Republicans each have a primary fix for Social Security that works. Democrats wants to see the payroll tax earnings cap raised or eliminated, which would require the well-to-do to pay more into the program. Meanwhile, Republicans favor a gradual increase to the full retirement age, which would lead to a reduction in long-term outlays from Social Security. Although both solutions get the job done, neither has the votes to pass in the Senate.

Perhaps even more baffling, the perceived weakness of each solution is perfectly addressed by their opposition. For instance, the GOP’s plan to reduce outlays takes decades before lower expenditures are realized. This is remedied by the Democrats’ plan to immediately boost tax revenue. Comparatively, the Republicans’ plan helps to tackle lower birth rates, rising longevity, and lower net-immigration rates that the Democrats’ solution fails to account for.

If you want to blame Congress for something, let it be their lack of action to resolve the program’s imminent cash shortfall when so many solutions are on the table.

Can We Avoid an Economic Depression?

Reading Time: 18 minutes

blank

While the media, speculative scientist, world governments, conspiracy theorist and just about anybody that is seeking 15 minutes of fame have all been shouting from the rooftops that we are going into another “Great Depression” and want the general public to believe that we are going to live as depicted in these pictures, I’d like to remind everyone that the hard times we are facing now due to the covid-19 virus is not the same as what was going on ninety-one years ago in 1929 when the stock market crashed.

As a matter of fact, there is absolutely nothing that could be in comparison between the year 2020 and the year 1929. I’ve written about this before in a post, but I wanted to elaborate more with this post as I, like millions of others around the world are inundated to an extreme about how “we’re all gonna die.”

The “Roaring 20’s” or sometimes called “The Jazz age”.

The 1920’s was a decade of exciting social changes and profound cultural conflicts. For many Americans, the growth of cities, the rise of a consumer culture, the surge of mass entertainment, and the so-called “revolution in morals and manners” represented liberation from the restrictions of the country’s Victorian past. Sexual mores, gender roles, hair styles, and dress all changed profoundly during the 1920’s.

It was a decade of prosperity and dissipation, of jazz bands, bootleggers, raccoon coats, bathtub gin, flappers, flagpole sitters and marathon dancers. It was, in the popular view, the Roaring 20’s. When the younger generation rebelled against traditional taboos while their elders engaged in an orgy of speculation. But the 1920’s was also a decade of bitter cultural conflicts, pitting religious liberals against fundamentalists, native Americans against immigrants and rural provincials against urban cosmopolitans. The roaring 20’s was a time of change for the United States in all aspects of the word “change” itself. A time of change that spun out of control like an asteroid slamming into planet earth. It was, a decade of excitement.

The Great Depression was the worst economic downturn in the history of the industrialized world, lasting from 1929 to 1939. It began after the stock market crash in October of 1929, which sent Wall Street into a panic and wiped out millions of investors. Over the next several years, consumer spending and investment dropped, causing steep declines in industrial output and unemployment as failing companies laid off workers. By 1933, when the Great Depression reached its lowest point, some 15 million Americans were unemployed and nearly half the country’s banks had failed.

The stock market, centered at the New York Stock Exchange on Wall Street in New York City, was the scene of reckless speculation, where everyone from millionaire tycoons to cooks and janitors poured their savings into stocks. As a result, the stock market underwent rapid expansion, reaching its peak in August 1929.

By then, production had already declined and unemployment had risen, leaving stock prices much higher than their actual value. Additionally, wages at that time were low, consumer debt was proliferating and the agricultural sector of the economy was struggling due to drought, falling food prices and banks had an excess of large loans that could not be liquidated.

Of all the droughts that have occurred in the United States, the drought events of the 1930’s are widely considered to be the “drought of record” for the nation. The 1930’s drought is often referred to as if it were one episode, but it was actually several distinct events occurring in such rapid succession that the affected regions were not able to recover before another drought began. The term “Dust Bowl” was coined in 1935 when an AP reporter, Robert Geiger, used it to describe the drought affected south central United States in the aftermath of horrific dust storms. Although it technically refers to the western third of Kansas, southeastern Colorado, the Oklahoma Panhandle, the northern two-thirds of the Texas Panhandle, and northeastern New Mexico, the Dust Bowl has come to symbolize the hardships of the entire nation during the 1930’s.

The American economy entered a mild recession during the summer of 1929, as consumer spending slowed and unsold goods began to pile up, which in turn slowed factory production. All the while, stock prices continued to rise and by the fall of that year had reached astronomical levels that could not be justified by expected future earnings.

On October 24, 1929, as nervous investors began selling overpriced shares en masses, the stock market crash that some had feared, happened at last. A record 12.9 million shares were traded that day, known as “Black Thursday”.

Five days later, on October 29 or “Black Tuesday,” some 16 million shares were traded after another wave of panic swept Wall Street. Millions of shares ended up worthless; those investors who had bought stocks “on margin” with borrowed money were wiped out completely.

As consumer confidence vanished in the wake of the stock market crash, the downturn in spending and investment led factories and other businesses to slow down production and begin firing their workers. For those who were lucky enough to remain employed – wages fell as there were no employment laws at the time to prevent employers from reducing wages – and buying power decreased.

Many Americans forced to buy on credit fell into debt and the number of foreclosures and repossessions of farms, houses and automobiles climbed steadily. The global adherence to the gold standard, which joined countries around the world in a fixed currency exchange, helped spread economic woes from the United States throughout the world, especially in Europe.

Despite assurances from President Herbert Hoover and other leaders that the crisis would run its course, matters continued to get worse over the next three years. By 1930, four million Americans looking for work could not find it. That number climbed to six million in 1931.

Meanwhile, the country’s industrial production had dropped by half. Bread lines, soup kitchens and rising numbers of homeless people became more and more common in America’s towns and cities. Farmers couldn’t afford to harvest their crops and were forced to leave them rotting in the fields while people elsewhere starved.

In the fall of 1930, the first of four waves of banking panics began. As large numbers of investors lost confidence in the solvency of their banks and demanded deposits in cash, forcing banks to liquidate loans in order to supplement their insufficient cash reserves on hand. Bank runs swept the United States again in the spring and fall of 1931 and the fall of 1932. By early 1933 thousands of banks had closed their doors.

In the face of this dire situation, Hoover’s administration tried supporting failing banks and other institutions with government loans. The idea was that the banks in turn would loan to businesses, which would be able to hire back their employees. Hoover, who had formerly served as U.S. secretary of commerce, believed that the government should not directly intervene in the economy and that it did not have the responsibility to create jobs or provide economic relief for its citizens.

In 1932, with the country mired in the depths of the Great Depression and some 15 million people – more than 20 percent of the U.S. population at the time – unemployed, the country was in deep despair.

In November of 1932, Franklin D. Roosevelt won an overwhelming victory in the presidential election. By Inauguration Day on March 4, 1933, every U.S. state had ordered all remaining banks to close at the end of the fourth wave of banking panics. The U.S. Treasury didn’t have enough cash to pay all government workers. Nonetheless, Roosevelt projected a calm energy and optimism, famously declaring “the only thing we have to fear is fear itself”.

Roosevelt took immediate action to address the country’s economic woes. First announcing a four-day “bank holiday” – As a side note. The laws that govern the banking industry state that a bank may not be closed for more than three days at a time – during which all banks would close so that Congress could pass reform legislation and reopen those banks determined to be sound. He also began addressing the public directly over the radio in a series of talks. These “fireside chats” went a long way towards restoring public confidence. During Roosevelt’s first 100 days in office, his administration passed legislation that aimed to stabilize industrial and agricultural production, create jobs and stimulate recovery.

In addition, Roosevelt sought to reform the financial system, creating the Federal Deposit Insurance Corporation (FDIC) to protect depositors’ accounts and the Securities and Exchange Commission (SEC) to regulate the stock market to prevent abuses of the kind that led to the 1929 crash. Among the programs and institutions of the “New Deal” that aided in recovery from the Great Depression were the Tennessee Valley Authority (TVA), which built dams and hydroelectric projects to control flooding and provide electric power to the impoverished Tennessee Valley region and the Works Progress Administration (WPA), a permanent jobs program that employed 8.5 million people from 1935 to 1943.

When the Great Depression began, the United States was the only industrialized country in the world without some form of unemployment insurance or social security. In 1935, Congress passed the Social Security Act, which for the first time provided Americans with unemployment, disability and pensions for old age.

After showing early signs of recovery beginning in the spring of 1933, the economy continued to improve throughout the next three years, during which time real Gross Domestic Product (GDP) grew at an average rate of 9 percent per year.

Another sharp recession hit in 1937, caused in part by the Federal Reserve’s decision to increase its requirements for money in reserve. Though the economy began improving again in 1938, this second severe downfall reversed many of the gains in production and employment and prolonged the effects of the Great Depression through the end of the 1930’s decade.

Depression-era hardships had fueled the rise of extremist political movements in various European countries. Most notably, that of Adolf Hitler’s Nazi regime in Germany. German aggression led war to break out in Europe in 1939 and the WPA turned its attention to strengthening the military infrastructure of the United States, even as the country maintained its neutrality.

There was one group of Americans who actually gained jobs during the Great Depression. Women. From 1930 to 1940, the number of employed women in the United States rose 24 percent from 10.5 million to 13 million. Though they had been steadily entering the workforce for decades, the financial pressures of the Great Depression drove women to seek employment in ever greater numbers as male breadwinners lost their jobs. The 22 percent decline in marriage rates between 1929 and 1939 also created an increase in single women in search of employment.

Women during the Great Depression had a strong advocate in First Lady Eleanor Roosevelt, who lobbied her husband for more women in office, like Secretary of Labor Frances Perkins, the first woman to ever hold a cabinet position. Jobs that were available to women paid less, but were more stable during the banking crisis than the traditional nursing, teaching and domestic work. They were supplanted by an increase in secretarial roles in FDR’s rapidly expanding government. But there was a catch. Over 25 percent of the National Recovery Administration’s wage codes set lower wages for women. Jobs created under the WPA confined women to fields like sewing and nursing that paid less than the roles reserved for men. It should also be noted that the traditional roles and values of a household were for the husband to provide for the family and the wife to stay at home, caring for the children.

Married women faced an additional hurdle. By 1940, 26 states had placed restrictions known as marriage bars on their employment. As working wives were perceived as taking away jobs from able-bodied men. Even if, in practice, they were occupying jobs men would not want and doing them for far less pay.

With Roosevelt’s decision to support Britain and France in the struggle against Germany, defense manufacturing geared up, producing more and more private sector jobs.

The Japanese attack on Pearl Harbor on December 7, 1941 led to America’s entry into World War II. The nation’s factories went back into full production mode. This expanding industrial production, as well as widespread enrollment beginning in 1942, reduced the unemployment rate to below its depression level. The Great Depression had ended at last. The United States now turned its attention to the global conflict of World War II.

As we can see. There is absolutely nothing that could compare the year of 2020 to the year of 1929.

The Bailout

Reading Time: 8 minutes

blank

What seems to be in the American memory almost daily of recent is “we have to save the American auto industry from collapsing.” Despite the auto industry having been bailed out a number of times in the past.

Recently, President Trump is quoted as saying on twitter “If GM doesn’t want to keep their jobs in the United States, they should pay back the $11.2 billion bailout that was funded by the American taxpayer.”

Stemming from a decision by the automaker to close four plants in the United States. As I and any American tax payer would agree, it was our – the tax payers – money that they received and squandered without remorse while making very bad decisions in the corporate office.

You see. General Motors has had a very tumultuous past of excessive spending – top management corporate jets and other perks worth billions – without gains for that spending. As anybody in any business would be able to tell you first hand, you cannot spend what you do not have or are projected with certainty to make in near future profits.

The U.S. government’s $80.7 billion bailout of the auto industry lasted between December 2008 and December 2014. The U.S. Department of the Treasury used funds from the Troubled Asset Relief Program. In the end, taxpayers lost $10.2 billion.

On November 18, 2008, auto execs flew to Washington to plead for an additional $25 billion in TARP funds. Congress had already agreed to lend $25 billion from a program to develop energy-efficient vehicles.

Congress refused the automakers’ request. Senate Majority Leader Harry Reid said the Big Three should return with “A responsible plan that gives us a realistic chance to get the needed votes.” It didn’t help that the public’s opinion of the automakers three CEOs flew to DC in corporate jets.

Opponents said GM and Chrysler brought their near-bankruptcy on themselves. They didn’t retool for an energy-efficient era. They should have cut production, jobs, and dealerships years earlier. Columnist David Brooks said, “If these companies are not allowed to go bankrupt now, they never will be.”

On December 3, 2008, the automakers returned with a larger request. They needed $34 billion. $18 billion for GM, $7 billion for Chrysler, and $9 billion for Ford. This time, Ford’s CEO drove to DC.

The Big Three automakers asked Congress for help similar to the bank bailout. They warned that General Motors Company and Chrysler LLC faced bankruptcy and the loss of 1 million jobs. The Ford Motor Company didn’t need the funds since it had already cut costs. But it asked to be included so it wouldn’t suffer by competing with companies who already had government subsidies.

The Treasury Department lent money and bought stock ownership in GM and Chrysler. It provided incentives to spur new car purchases. In effect, the government nationalized GM and Chrysler just as it did Fannie Mae, Freddie Mac, and the American International Group.

The auto industry received nearly $81 billion from taxpayer money to be able to remain afloat. The auto industry did not remain competitive in the market, often prioritizing selling inefficient gas-usage vehicles. They also used tactics reminiscent of the housing crash, where they would finance loans with no money down.

Here’s the bailout breakdown. It shows what the government invested. It then shows what Treasury sold the shares for, including what it received in its debt repayment. It then calculates the taxpayer’s profit or loss.

Company

Invested

Sold For

Profit/Loss

Bailout Ended

GM

$51.0 Bil

$39.7 Bil

-$11.3 Bil

Dec. 9, 2013

GMAC

$17.2 Bil

$19.6 Bil

+$2.4 Bil

Dec. 18, 2014

Chrysler

$12.5 Bil

$11.2 Bil

-$1.3 Bil

May 11, 2011

Total

$80.7 Bil

$70.5 Bil

-$10.2 Bil

Ford Credit received its bailout from the Term Asset-Backed Securities Loan Facility, not TARP. That was a government program for auto, student, and other consumer loans.

The federal government took over GM and Chrysler in March 2009. It fired GM CEO Rick Wagoner and required Chrysler to merge with Italy’s Fiat S.p.A. The Obama administration used the take-over to set new auto efficiency standards. That improved air quality and forced U.S. automakers to be more competitive against Japanese and German firms.

Chrysler entered bankruptcy on April 30, 2009. GM followed on June 1. By the end of July, they emerged from bankruptcy reorganization. GM became two separate companies and spun off GMAC into Allied Financial. Chrysler became a brand owned mostly by Fiat. The Treasury Department began selling off its ownership of GM in 2010. Chrysler paid off the last of its loans by 2011.

On December 18, 2014, the Treasury Department ended the bailout. That’s when it sold its last remaining shares of Ally Financial, formerly known as General Motors Acceptance Corporation. It had bought them for $17.2 billion to infuse cash into the failing GM subsidiary. The Treasury Department sold the shares for $19.6 billion, making a $2.4 billion profit for taxpayers.

If there had been no bailout, Ford, Toyota, and Honda would have picked up even more market share. Since they had U.S. plants, they would have increased jobs for Americans once the recession was over. The loss of GM would be like the loss of Pan Am, TWA, and other companies that had a strong American heritage but lost their competitiveness. It would have perhaps tugged at the heartstrings of America but not really hurt the economy. As a result, the auto industry bailout was not critical to the U.S. economy, like the rescue of AIG or the banking system.