My, how Social Security has changed and become so costly and unsustainable.

How Social Security has changed from the days of FDR it's creator. That's pointed out in this column by Robert Samuelson.  He thinks FDR wouldn't be supportive of all that Society Security has become today.

Would Franklin Roosevelt approve of Social Security? The question seems absurd. After all, Social Security is considered the New Deal’s signature achievement. It distributes nearly $800 billion a year to 56 million retirees, survivors and disabled beneficiaries. On average, retired workers and spouses receive $1,839 a month — money vital to the well-being of millions. Roosevelt would surely be proud of this, and yet he might also have reservations. Social Security has evolved into something he never intended and actively opposed.

It has become what was then called “the dole” and is now known as “welfare.” This forgotten history clarifies why America’s budget problems are so intractable.

FDR didn't support the "pay as you go" of  today's workers paying for today's retirees.

When Roosevelt proposed Social Security in 1935, he envisioned a contributory pension plan. Workers’ payroll taxes (“contributions”) would be saved and used to pay their retirement benefits. Initially, before workers had time to pay into the system, there would be temporary subsidies. But Roosevelt rejected Social Security as a “pay-as-you-go” system that channeled the taxes of today’s workers to pay today’s retirees. That, he believed, would saddle future generations with huge debts — or higher taxes — as the number of retirees expanded.

Discovering that the original draft wasn’t a contributory pension, Roosevelt ordered it rewritten and complained to Frances Perkins, his labor secretary: “This is the same old dole under another name. It is almost dishonest to build up an accumulated deficit for the Congress . . . to meet.”

That changed however in the 1940s and 50s.  

But Roosevelt’s vision didn’t prevail. In the 1940s and early 1950s, Congress gradually switched Social Security to a pay-as-you-go system. Interestingly, a coalition of liberals and conservatives pushed the change. Liberals wanted higher benefits, which — with few retirees then — existing taxes could support. Conservatives disliked the huge surpluses the government would accumulate under a contributory plan.

All this is well-told in Sylvester Schieber’s “The Predictable Surprise: The Unraveling of the U.S. Retirement System.” Schieber probably knows more about American retirement programs than anyone. He has advised the Social Security system, consulted with private firms and written widely on the subject. His book shows how today’s “entitlement” psychology dates to Social Security’s muddled beginnings.

He notes that Americans falsely think they have a right to social security benefits because they earned it.  It's their money they're getting back.

Millions of Americans believe (falsely) that their payroll taxes have been segregated to pay for their benefits and that, therefore, they “earned” these benefits. To reduce them would be to take something that is rightfully theirs. Indeed, Roosevelt — believing he had created a contributory program — said exactly that:

“We put those payroll contributions there so as to give the contributors a legal, moral and political right to collect their pensions. . . . No damn politician can ever scrap my Social Security program.”

What we have is a vast welfare program grafted onto the rhetoric and psychology of a contributory pension. The result is entitlement. Unsurprisingly, AARP’s advertising slogan is “You’ve earned a say” on Social Security. The trouble is that contributions weren’t saved. They went to past beneficiaries. The $2.6 trillion in the Social Security trust fund at year-end 2010 sounds like a lot but equals slightly more than three years of benefits.

The problem is the current system isn't sustainable.

With favorable demographics, contradictions were bearable. Early Social Security beneficiaries received huge windfalls. A one-earner couple with average wages retiring at 65 in 1960 received lifetime benefits equal to nearly 14 times their payroll taxes, even if those taxes had been saved and invested (which they weren’t), calculate Eugene Steuerle and Stephanie Rennane of the Urban Institute.

But now, demographics are unfriendly. In 1960, there were five workers per recipient; today, there are three, and by 2025 the ratio will approach two. Roosevelt’s fear has materialized. Paying all benefits requires higher taxes, cuts in other programs or large deficits. Indeed, the burden has increased, because it now includes Medicare, which is also viewed as an entitlement.

Although new recipients have paid payroll taxes higher and longer than their predecessors, their benefits still exceed taxes paid even assuming (again, fictitiously) that they had been invested. A two-earner couple with average wages retiring in 2010 would receive lifetime Social Security and Medicare benefits worth $906,000 compared with taxes of $704,000, estimate Steuerle and Rennane.

By all rights, we should ask: Who among the elderly need benefits? How much? At what age? If Social Security and Medicare were considered “welfare” — something the nation does for its collective good — these questions would be easier. We would tailor programs to meet national needs. But entitlements are viewed as a higher-order moral claim, owed individuals based on past performance. So a huge part of government spending moves off-limits to intelligent discussion.

We can only imagine how Roosevelt would view this. He consistently advocated a fully funded Social Security and used his second veto on a 1942 tax bill that delayed higher payroll taxes. But Congress overrode the veto, and Roosevelt was preoccupied by World War II.

Heading for a crash -- Congress, Obama and out of control spending

At a time of incredible financial and economic uncertainty, President Obama presented to Congress and the American people a very bold plan for the future of America -- finding a cure for cancer, universal health care, free education and a host of other things. Of course the question is how to pay for it all. Well, raise taxes and continue to pile up debt through more government spending. Of course, recent Republican presidents and republican Congresses were guilty of deficit spending, but it's breathtaking what President Obama and the democrat Congress are proposing and doing, especially at a time of great instability.

My take is their policies will only make a bad situation worse and result in even greater financial and economic distress.I think we're seeing the confluence of at least two things which will create the perfect economic storm. One, is the economic and financial crisis brought on by greed, corrupt and people living beyond their means. People, corporations and the government have been living beyond their means, on borrowed money, and that's merely coming home to roost.

And two, faulty ideas and understanding of what to do about the financial and economic problem. Instead of seeing part of what's happening as a necessary correction to living beyond our means and cleaning up bad debt, economic and financial policy makers think all that they need to do is pump more money into the economy to keep the good times rolling. Thus, we see a very loose money supply and very low interest rates in hopes of warding off a collapse and keep things rolling along.

And now in Washington, DC the politicians in charge, Obama, Reid and Pelosi and their advisers have drunk deeply at the well of Keynesian economic theory which says government spending is what's necessary to jump start the economy and get things flying once again. The result a $1.75 trillion dollar deficit with more to come. And out of a desire to mitigate the deficit, Obama is proposing significant tax increases on the wealthy - those making over $250,000 a year - which will only discourage small business owners from expanding their businesses and creating jobs. In other words, Obama and the Keynesian economists are looking back to FDR as their example both for spending and raising taxes. The actually result then and now will be a prolonged period of economic crisis rather than a shorter one. The Great Depression went on for over a decade. It had a period of seeming recovery but quickly lapsed back into a depression with high unemployment and a dropping stock market. Punitive tax increases were imposed on the wealthy and companies by FDR which only retarded economic growth. So too today. What they didn't have then which we do now is have significant debt issues which will only worsen the wrong moves by policy makers and give us much less room for maneuvering.

Moving towards an universal health care system will be costly and mean rationing of health care and diminution of quality of care. Climate legislation will be costly to business and do little or nothing for the environment. I sense the liberals are seeking to pass all their agenda and spending items now as quickly as possible, "while the gittin's good."

I think Keynesian ideas about government stimulus have given Congressional liberals the justification for indulging themselves at precisely the time when we can least afford to be indulging ourselves. All it means is the economic problems we see now are only a foretaste of things to come.

Things may recover briefly in terms of a stock market run up but we will be "paying later" in a big way.

Obama wants to "bend" history towards his vision of the future and embrace FDR pragmatism. The result? Loss of personal and economic freedom.

A recent column by liberal E.J. Dionne reveals a number of things about Obama which don't bode well for our nation's economic recovery. It also points to Obama's view of himself as the mover and shaper of our nation's future; a disconcerting feature considering Obama flawed moral and ethical vision and failure to understand what's actually happening with our financial crisis.

E.J. point out that

Barack Obama senses that he's in the middle of a hurricane whose gale-force winds could blow history his way.

More striking was his sense that fate has handed him opportunities few presidents ever get, and that his test will be whether he makes good use of his chance to bend history at one of its "inflection points."

"Leadership at those moments can help determine which direction that wave of change goes," he said. "I think it's very hard ... for any single individual or politician to unleash historical momentum on its own. But I think when that historical wave is there, I think you can help guide it."

Asked if this were one of those moments, he replied, flatly, "yes." That may make the situation "scary sometimes," but it should also "make people determined and excited." Maybe that explains his good mood.

The only question is where he wants to lead or "bend history." If it's his liberal vision, it will mean loss of freedom, both personal and economic. A nation saddled with incredible debt, health care rationing, and abortion and homosexuality more deeply embedded in our social fabric. No one can say President Obama has gotten us into this mess. The only question is whether he will only more deeply embed us in the mess we've been moving towards.

Obama is devoted to "FDR-style pragmatism."

"Yet Obama's purpose on Friday was not to play at being a philosopher of history, but to stress his devotion to FDR-style pragmatism. "We will do what works," he said, reprising his administration's theme song. That "will require re-evaluation" and "some experimentation -- if that doesn't work then you do something else."

What clearly didn't work well was Treasury Secretary Tim Geithner's effort last week to lay out the administration's bank rescue plan. Obama offered no apologies. He argued that Geithner will keep working on an approach "over the next weeks, months, probably through the end of the year" because there is no "painless, quick fix here."

The problem with this devotion to FDR's pragmatism is it led to a lengthening of the 1930s depression by a number of years. FDR wasted a lot of money on a lot of government programs which didn't work. In Obama's case he has already driven through a stimulus package which by all accounts won't provide much stimulus for the economy and when it does it will be years out. What it most certainly will do is expand our nation's debt load dramatically.

Obama at the same time says he wants to chip away at our enormous long term budget deficit.

There are many such balancing acts in Obama's world. He knows he has to spend a lot of money now, but insists he wants to "chip away at our enormous long-term budget deficit." He wants to get the "ball rolling" on health care reform because, while it "may cost money on the front end," it can "save enormous money on the back end."

How can he possibly reduce our debt load without cutting government spending? Is he willing to give up universal health care? Is he willing to cut back social security benefits? Cut back defense spending at a time when the world is becoming increasingly more dangerous and he's about to embark on a build up of troops in Afghanistan which has all the earmarks of a long term, protracted conflict. He may actually believe his rhetoric that he wants to cut our deficit, but his liberal vision for more government makes that an impossibility. (Unless he thinks he can raise taxes astronomically which will only further harm the economy.)

As we enter what may well be another depressionary period or at least something more than a generic recession, President Obama is not sure how we should get through it.

Who's responsible for our financial crisis? The government says Stanford economist.

I've been listening to "The Forgotten Man" by Amity Shlaes, a history of the Great Depression 1930s era. What's happening today sadly sounds like a rerun of what happened in the 1930s.

I'm up to the 1934s and FDR's New Deal which was really just an amalgam of unrelated and uncoordinated government activities instituted in response to the economic crisis and based on the "progressive" ideology which guided FDR and his advisers. They really didn't know what they were doing. FDR's policies were really just an extension and massive expansion of Hoover's after the crash of 1929.

At a point, when things weren't turning around, the Roosevelt Administration went looking for scapegoats, particularly business leaders.

Here's a link to an interesting analysis of our financial crisis by a Stanford professor John B. Taylor who outlines missteps made by the Bush Administration and the Fed over the past several years.

My research shows that government actions and interventions -- not any inherent failure or instability of the private economy -- caused, prolonged and dramatically worsened the crisis.

The classic explanation of financial crises is that they are caused by excesses -- frequently monetary excesses -- which lead to a boom and an inevitable bust. This crisis was no different: A housing boom followed by a bust led to defaults, the implosion of mortgages and mortgage-related securities at financial institutions, and resulting financial turmoil.

Monetary excesses were the main cause of the boom. The Fed held its target interest rate, especially in 2003-2005, well below known monetary guidelines that say what good policy should be based on historical experience. Keeping interest rates on the track that worked well in the past two decades, rather than keeping rates so low, would have prevented the boom and the bust. Researchers at the Organization for Economic Cooperation and Development have provided corroborating evidence from other countries: The greater the degree of monetary excess in a country, the larger was the housing boom.

The effects of the boom and bust were amplified by several complicating factors including the use of subprime and adjustable-rate mortgages, which led to excessive risk taking. There is also evidence the excessive risk taking was encouraged by the excessively low interest rates. Delinquency rates and foreclosure rates are inversely related to housing price inflation. These rates declined rapidly during the years housing prices rose rapidly, likely throwing mortgage underwriting programs off track and misleading many people.

Adjustable-rate, subprime and other mortgages were packed into mortgage-backed securities of great complexity. Rating agencies underestimated the risk of these securities, either because of a lack of competition, poor accountability, or most likely the inherent difficulty in assessing risk due to the complexity.

Other government actions were at play: The government-sponsored enterprises Fannie Mae and Freddie Mac were encouraged to expand and buy mortgage-backed securities, including those formed with the risky subprime mortgages.

Government action also helped prolong the crisis. Consider that the financial crisis became acute on Aug. 9 and 10, 2007, when money-market interest rates rose dramatically. Interest rate spreads, such as the difference between three-month and overnight interbank loans, jumped to unprecedented levels.

Diagnosing the reason for this sudden increase was essential for determining what type of policy response was appropriate. If liquidity was the problem, then providing more liquidity by making borrowing easier at the Federal Reserve discount window, or opening new windows or facilities, would be appropriate. But if counterparty risk was behind the sudden rise in money-market interest rates, then a direct focus on the quality and transparency of the bank's balance sheets would be appropriate.

Early on, policy makers misdiagnosed the crisis as one of liquidity, and prescribed the wrong treatment.

The government distorted sound money practices in an effort to keep the economy chugging along. Those actions and then ones in response to the financial crisis have only deepened the crisis we're facing.

Seeing what's happening with the Obama mega-billion economic stimulus bill looks like something the "progressives" would have done during the Roosevelt Administration. Lots of pork, social spending and efforts to further regulate and control society and the economy.

Then as today, the Keynesian economists were in the driving seat in terms of influencing government policy. The whole rationale behind the stimulus bill is that government spending is necessary to jump start the economy. Lot's of observers say that won't happen and will only add to the debt burden facing our government and society.

Getting it right doesn't like look like it's in the cards for the foreseeable future.

Another great depression?

That's the title of a column by conservative economist Thomas Sowell.

He notes that a lot of people are looking at President-elect Obama as the next FDR who will bring us out of our current deep economic recession. Yet he warns that FDR's policies which were fundamentally extensions of Hoovers, which only made matters worse.

Then as now people blame the free market system for the financial problems were facing and therefore call for significant government intervention.

The prevailing view in many quarters is that the stock market crash of 1929 was a failure of the free market that led to massive unemployment in the 1930s— and that it was intervention of Roosevelt's New Deal policies that rescued the economy.

It is such a good story that it seems a pity to spoil it with facts. Yet there is something to be said for not repeating the catastrophes of the past.

When employment began to rise after the 1929 crash, that's when government stepped in to try and prevent the loss of jobs by increasing tariffs to protect US jobs. This only made things much, much worse. Sowell cites two economist who tracked unemployment during that time.

The Vedder and Gallaway statistics allow us to follow unemployment month by month. They put the unemployment rate at 5 percent in November 1929, a month after the stock market crash. It hit 9 percent in December— but then began a generally downward trend, subsiding to 6.3 percent in June 1930.

That was when the Smoot-Hawley tariffs were passed, against the advice of economists across the country, who warned of dire consequences.

Five months after the Smoot-Hawley tariffs, the unemployment rate hit double digits for the first time in the 1930s.

This was more than a year after the stock market crash. Moreover, the unemployment rate rose to even higher levels under both Presidents Herbert Hoover and Franklin D. Roosevelt, both of whom intervened in the economy on an unprecedented scale.

Before the Great Depression, it was not considered to be the business of the federal government to try to get the economy out of a depression. But the Smoot-Hawley tariff— designed to save American jobs by restricting imports— was one of Hoover's interventions, followed by even bigger interventions by FDR.

Today, Obama is already talking about the government trying to create 2.5 million new jobs. It has to be asked is it better for government to create jobs or for the private sector? I think definitely the latter. And will Obama give in to protectionist calls? That remains to be seen.

It will also be interesting whether Obama continues the interventionist policies of George Bush who helped nationalize part of our financial system. If he does, he'll not only have his Hoover foil but also an example to build on.

As Sowell concludes:

Barack Obama already has his Herbert Hoover to blame for any and all disasters that his policies create: George W. Bush.

Will Obama simply push a rewarmed version of the "New Deal?"

President-elect Obama did an excellent job of selling "change" to the American people during the last election. What wasn't always so clear was what that "change" would look like. He did talk about raising taxes on the wealthy, redistributing wealth as a good thing, giving lower income Americans a refundable tax credit, and moving towards universal health care.

In reality, he was only advocating further advances along the lines of the "New Deal" programs of FDR which means more government, more taxes and more regulation of various areas of human life.

Will the current financial crisis be used as a pretext for advancing this agenda just as FDR did the New Deal in the 1930s? Is this another case of history repeating itself? Amity Shlaes, author of a recent book on the Great Depression, suggests that's just might be what happens in this New York Post op/ed piece.

She writes:

THE trouble with new financial crises is that they provide pretexts for implementing old social agendas. As the president-elect's new chief of staff, Rahm Emanuel, said recently, "never allow a crisis to go to waste."

Consider President Franklin Roosevelt's New Deal, which President-elect Barack Obama invokes when he talks of "a defining moment." Like Obama today, FDR was inaugurated into trouble. He wisely addressed the financial crisis through the steps that we learned about in school. He signed deposit insurance into law, reassuring savers. He created the Securities and Exchange Commission, making the stock market more transparent and consistent. He soothed our grandparents via his radio Fireside Chats. This was the FDR we love.

But FDR also used the crisis mood to push through an unprecedented program of reforms that progressives had been hoping to put in place for years. Sen. George Norris of Nebraska, for example, had for decades argued that utilities should be in the public, not the private, sector. As far back as the early '20s, Norris wanted to build a big power project on Tennessee River. He wanted the government - and not the Ford Motor Company, which was drawing up such plans - to be in charge. FDR made Norris' progressive dream a reality by creating the publicly owned Tennessee Valley Authority. Washington won out, but it wasn't clear its power served the South down the decades.

Will Obama attempt to do the same thing?

The Obama administration isn't likely to advocate a new NRA. But President-elect Obama may go along with Democrats in Congress as they push other old social agendas. They, like the early-'30s Democrats, now have the ugly snapshot of capitalism for which they longed.

Foremost on their reform agenda, as in 1993, will be health insurance. Indeed, we are practically guaranteed a "healthcarization" of our financial crisis, even though health care and mortgage-backed securities have little to do with one another. "Nationalization" used to be a scare word. But the easy nationalization of the giant AIG makes the nationalization of private health care suddenly seem possible.

A Democratic Washington also will likely legislate the fondest wish of private-sector unions - the famous "card-check" legislation that will deprive workers of the chance to cast an anonymous vote on shop unionization. This, in turn, will put upward pressure on wages that workplaces can't afford.

The greater danger is that the public-sector unions, with support of Democrats, will push up their own pay aggressively. Behind the GM crisis is the crisis of state and city budgets - which the demands of AFSCME, the public-sector union, will only exacerbate.

President-elect Obama creates an opening for such demands when he says, as he did recently, that everything about the last four years was wrong. Everything? Sure, the financial crisis needs addressing. But government health care and card check don't have much to do with mortgage crises.

So remember what's really be going on: Voters want change - Obama's campaign message. But the Democratic Party is widening the definition of change by the hour. And the crisis? It's just a pretext.

If Obama does push New Deal approaches we can expect greater economic difficulties in the form of a much longer recession if not depression or maybe more likely, the return of inflation. The latter resulting from an unwillingess to confront our nation's unwillingness to live within our means.