The Democrats have responded to Bush’s Social Security plans in the way that Democrats always do – by demanding higher taxes. Given that higher taxes are the Democrats’ preferred cure for everything from hangnails to terrorism, it’s not surprising that they went this route.

However, when the Investor’s Business Daily crunched the numbers, they found that the Democrats’ tax hike wouldn’t solve Social Security’s problems:

The Democratic plan — more like talking points — would let one-third of the Bush tax cuts expire and devote those funds to Social Security. But the program would still turn cash-flow negative in 2023, an Investor’s Business Daily analysis found. That’s just six years after Social Security’s annual benefits are now expected to eclipse its tax revenue.

At that point, general taxpayer revenue would be needed to redeem trillions worth of trust fund bonds.

Massachusetts Institute of Technology Professor Peter Diamond, co-author of the most prominent liberal solvency plan, isn’t against using estate tax revenues for Social Security. But his preferred fix wouldn’t rely on scaling back any Bush tax cuts.

A plan that did so would make Social Security dependent on general tax revenue, Diamond says. That would be “such a break from tradition that it didn’t seem suitable for a compromise,” he said.

Not only would the Democrats’ plan not work, but it ignores the macroeconomic consequences of raising taxes, which would create less incentives for investment and harm the economy. Thanks to the Bush tax cuts, tax revenues were larger than expected this quarter, especially taxes derived from capital gains — all things that were cut under the Bush tax cuts. Cutting capital gains and dividend taxes encouraged more workers to invest, they earned more money on their investments and the aggregate effect was to raise revenues. It’s exactly the sort of thing that supply-side economists like Arther Laffer or Milton Friedman would have predicted. Raising taxes might increase revenue in the short term, but over the long term tax revenues would be depressed.

The Democrats never outgrew their tax-and-spend past, and the Democrat’s laughable Social Security plan only demonstrates how profoundly unserious they are about fixing the nation’s problems. Given that the Democrats have offered petulance rather than policy for years now, it’s no wonder that the GOP is the majority party in this country.

Megan McArdle has an excellent post on why the Social Security Trust Fund isn’t really a trust fund:

It’s time for another argument with liberal defenders of social security who argue that the social security trust fund is too real, because it’s got government bonds that have the Treasury secretary’s signature right on them! Any attempt to say that it isn’t real is a scurrilous attack on the sacred person of our government, denying that Our Fine American Politicians can be relied upon to pay their IOUs.

This is reductionism at it’s worst. In case anyone thought it was in any doubt, I do, in fact, believe that there are bonds, and that the government will note the interest rates on those bonds in its account books. But the failure to understand that there is a difference between IOUs written to yourself, and IOUs written to someone else, strikes me as willfully obtuse. Upon even a moment’s reflection, it’s obvious that the trust fund does not exist in the way that its proponents are claiming — as a guarantee of benefits — because the bonds are not obligations to Social Security beneficiaries. They are obligations to the Social Security Administration. And the Social Security administration has no legal obligation to turn the accounting entry representing interest payments from the federal government into cash. According to the supreme court, Americans have no property right in their social security benefits, as they would as creditors of an underfunded private sector pension plan.

She then offers an example of why the Social Security “trust fund” wouldn’t even remotely pass muster if it were a private-sector system:

Moreover, liberals understand this difference very well. If some conservative jackass proposed a plan to, say, let companies top up their underfunded pension plans by stuffing them with their own bonds, liberals would be justifiably outraged, because that’s not funding the pension plan; it’s promising to fund it at some later date, provided there’s money around to do so. When it’s companies doing these sorts of things, liberals understand very well why such “trust funds” aren’t, in any meaningful sense, real.

Of course, the US government is less likely to fold than a company is. On the other hand, if a company issued bonds like those, it would at least have to record the size of the liability on the financial statements it issues to its shareholders. Why we don’t demand that sort of accounting from our government, I’ll never know.

The Social Security Trust Fund isn’t like a T-Bill or another federal bond. In the latter case, Uncle Sam is making a promise to pay you a set amount. The Social Security Trust Fund doesn’t work that way. As McArdle points out, the bonds in the Trust Fund aren’t paid to recipients, they can only be redeemed by the Social Security Administration.. Flemming v. Nestor already extablished that there is absolutely no legal guarantee to Social Security benefits. Social Security could be legislated out of existence, and the money in the “trust fund” would simply be “paid back”by the SSA to the federal government (ie the obligations inherent in them would basically be wiped off the books). It’s a convenient legal fiction, and it’s essentially meaningless in real financial terms.

Social Security might as well be a religion to the left, they’re as dogmatic about it as any Jesuit. They’re even willing to simply make up figures to denigrate private accounts.

The facts of the case remain. Social Security will start going into the hole in 2017, and by that time it will be far too late to reform the system without painful cuts. The only way to put Social Security in a real “lockbox” is to ensure that the government cannot touch the assets designated for beneficiaries. The only way to do that is to get it out of the hands of government. Hoping that the mythical Social Security Trust Fund will save us from the impending fiscal crisis is about like hoping Superman will swoop to the rescue – it simply isn’t going to happen.

Matthew Yglesias, who’s normally one of the more level-headed writers of the lefty Blogosphere has a simple message on estate taxes: "f*ck the small businessman". At least he’s honest about Democratic tax policy.

Of course, what Yglesias (and most of the Democratic Party) still don’t get is that small business represents 97.9% of all employers. Small businesses employ 50% of all American workers. Small businesses are as integral to the American economy as they ever were. Perhaps Mr. Yglesias would prefer that everyone worked at Wal-Mart or some megacorporation instead?

Yglesias then gives another excellent reason why the estate tax should be repealed permanently:

Here you are, you inherit a store worth $X. You owe $Y in taxes, with Y being less than X. So you are “forced” to sell the store, and accept “only” $X-Y as your inheritance. Note that X is a figure in the millions, and Y a small proportion of X. This is a very good problem to have, abstracting away from the fact that someone you love has probably died and this is probably a bigger concern of yours that the tax bill. This is, in other words, a non-problem. The government ought, perhaps, to facilitate some kind of lending arrangement so that people who prefer to keep the store and pay the tax down over time out of operating revenues can do so.

First of all, that argument is economically ignorant. Y isn’t a “small proportion” of X, it was 55% before the estate tax-phase out. In 2011, it goes back to 55% unless Congress acts to end it permanently. Let’s say you’re a small business owner who gets a 10% return every year. Taxation reduces those earnings to 5% per year. You drop dead of a heart attack. Now the inheritors of your business have to pay 55% of the value of that business to the government. It would take 11 years to pay off that debt — but of course, Uncle Sam wants that check right now. You can’t just give Uncle Sam the keys to the business, they want a check, and they want it now. You could go to the bank and get a loan, but then every cent you make in the store ends up going to the loan officer, and not back into the business. If your cash flow dips, you’re in default.

All Yglesias’ plan would do is make the government the lender instead of the bank. The business would still be in hock for quite some time, and they wouldn’t be able to reinvest in their business for at least 11 years.

What does that mean? At the very minimum it means Johnny the stockroom boy and Jan the bookkeeper won’t get a raise — and chances are it means that both are out of a job, along with everyone else who’s employed by that small business. The business will go under, and another small business is lost. If people want to know why Wal-Mart can take over a small town, it’s partially thanks to a regulatory climate that does exactly what Yglesias would like it to do – f*ck the small businessman. Small businesses are the backbone of the economy, and the liberals seem to have no qualms about screwing them over.

For all this much-vaunted liberal compassion, if you’re not one of the groups that the left deems worthy of special consideration, they’re perfectly fine with utterly screwing you over. Of course, small businessmen aren’t the only ones who’d be getting f*cked — so would be people who work for them, their customers, the people who make a living supplying them with the things they need, and society at large.

The estate tax is an extremely destructive tax because it gives incentives to shield income from taxation (which takes time and resources better spend on wages and business growth) or to simply spend it all before you die so that Uncle Sam can’t take his half. The estate tax is a wasteful and stupid tax that screws far more productive members of society than does the ultra-rich. The Hilton family can afford to pay armies of lawyers and accountants to ensure that Paris gets enough cash to whore around America for a few decades. Ma and Pa of Ma and Pa’s Family Store don’t have that luxury, nor should they be forced to do so. The estate tax repeal should be made permanent.

OK, so there really isn’t such a thing as a free lunch, but you can get the brilliant Economics in One Lesson as a free PDF download thanks to the Foundation for Economic Education. Despite dating from 1952, the book is still as relevant today as it was back then in debunking some of the most common myths about economics — myths which sadly still persist today on both sides of every economic argument.

George Will comes up with one of the best ideas for education reform I’ve seen in some time: mandate that 65% of all educational spending actually goes to the classroom:

Nationally, 61.5 percent of education operational budgets reach the classrooms. Why make a fuss about 3.5 percent? Because it amounts to $13 billion. Only four states (Utah, Tennessee, New York, Maine) spend at least 65 percent of their budgets in classrooms. Fifteen states spend less than 60 percent. The worst jurisdiction — Washington, D.C., of course — spends less than 50 percent.

Under the 65 percent rule, Arizona, which spends 56.8 percent in classrooms, could use its $451 million transfer to classrooms to buy 1.5 million computers or to hire 11,275 teachers. California (61.7 percent) could use its $1.5 billion transfer to buy 5 million computers or to hire 37,500 teachers. Illinois (59.5 percent) would transfer $906 million to classrooms (3 million computers or 22,650 new teachers). To see how much money would flow into your state’s classrooms, go to firstclasseducation.org.

The bigget impediment to quality education in this country isn’t a lack of spending, we spend a considerable amount of education — it’s an entrenched and arrogant bureaucracy, corrupt and wasteful unions, and a severe lack of reform. A common-sense solution like ensuring that a large majority of school funds actually go to schools is one that can have a transformative effect on education. It only makes sense that money that is earmarked on educating kids should be spent on educating kids, not padding the salaries of some administrative flack that only sees a student when they pay one to mow their lawn. Bureaucracies do not educate kids, teachers do, and teachers should have first priority over educational funds.

Ed Morrisey writes about New York City’s private retirement accounts program that replaces Social Security and has delivered a consistantly higher rate of return than Social Security. Meanwhile, the city of Galveston, Texas also has a similar system that has produced similar results. As Judge Roy Holbrooke of Galveston notes:

In today’s debate about whether to partially privatize Social Security, the Galveston County plan is sometimes demagogued. But our experience should be judged factually and fairly, not emotionally, politically or on the basis of hearsay. We sought a secure, risk-free alternative to the Social Security system, and it has worked very well for nearly a quarter-century. Our retirees have prospered, and our working people have had the security of generous disability and accidental death benefits.

Most important, we didn’t force our children and grandchildren to be unduly taxed and burdened for our retirement care while these fine young people are struggling to raise and provide for their own families.

The cities of New York and Galveston have both been able to opt out of Social Security for their workers (thanks to a loophole that was closed in 1983 – those cities and others were allowed to grandfather in their programs) and have used private retirement accounts to provide greater benefits for everyone. Such systems can and will work just as well on a national level, provided that Congress has the fortitude to pass these badly needed reforms.

On a philosophical level, Social Security reform restores the program to what it should be. Congress should not have the right to spend money that is earmarked for the retirement of American citizens. Yet that’s precisely what has been done for years. The Social Security system does not have the assets to cover its liabilities. Beginning very soon the Trust Fund will begin to be depleted. Eventually it will be gone. Congress will have to go back and take more money from our pockets in order just to keep their heads above water.

Yet for two and a half decades New York and Galveston have been providing their workers with a better system. Congress can’t spend the money in your private account. They can’t steal from your retirement like they can under the current system. So long as Congress holds the key to the “lockbox” they’ll find a way to spend the money. Private accounts give workers more choices to do with their money, gives them a far higher rate of return than the current system ever could, and keeps Congress’ grubby little hands off our retirements. If these programs are good enough for Galveston and New York, why aren’t they good enough for the rest of America?

Via Ann Althouse comes this interesting factoid from P.J. O’Rourke:

Then there is the cost, which is–obviously–$52 billion. Less obviously, there’s all the money spent locally keeping local mass transit systems operating. The Heritage Foundation says, “There isn’t a single light rail transit system in America in which fares paid by the passengers cover the cost of their own rides.” Heritage cites the Minneapolis “Hiawatha” light rail line, soon to be completed with $107 million from the transportation bill. Heritage estimates that the total expense for each ride on the Hiawatha will be $19. Commuting to work will cost $8,550 a year. If the commuter is earning minimum wage, this leaves about $1,000 a year for food, shelter and clothing. Or, if the city picks up the tab, it could have leased a BMW X-5 SUV for the commuter at about the same price.

The traffic in the Cities is terrible, which is par for the course for a region of almost 3 million people. However, the Hiawatha boondoogle shows that mass transit only works if it’s done right — the city would have been better off to just expand and renovate the existing bus services rather than throw millions of taxpayer dollars for a boondoogle project that’s done little to nothing to ameliorate the traffic situation in the Twin Cities.

UPDATE: On the other hand, perhaps Minnesota can follow the North Dakotan model for transportation. It would certainly be cheaper, and the Legislature already provides us a plentiful supply of jackasses…

Personally, I would have just taken the Beemer…

Federal Reserve Chairman Alan Greenspan is supporting the Administration plan to reform Social Security through private accounts, arguing in testimony before Congress that the only way of dealing with the retirement of the baby boom generation is to increase personal savings:

“We need, in effect, to make the phantom ‘lockboxes’ around the trust fund real,” Greenspan said in testimony Tuesday before the Senate’s Special Committee On Aging.

As the system is now, the surplus that has been paid into Social Security over the past 20 years has been treated as part of the general budget and has already been spent by the U.S. Treasury.

If the accounts, as proposed by President Bush are created, workers would be allowed to divert up to a third of the payroll taxes they and their employers pay into Social Security and invest the money instead. That money would belong to them and be unavailable for the government to spend.

“The major attraction of personal or private accounts is that they can be constructed to be truly segregated from the unified budget,” Greenspan said in his testimony.

Of course, the usual suspects continue to naively insist that there is no crisis, either insinuating that Bill Clinton was a liar in the late 1990s or George W. Bush magically cured Social Security sometime in his first term. The argument that nothing needs to be done about Social Security doesn’t even pass the smell test. Insisting that we can simply wait until the system crashes is beyond naive — at that point the Treasury is going to have to pull $12 trillion in new revenue just to tread water. That sort of thing is hardly sensible.

The only way to fix the system is to completely reform it. Sen. Chuck Hagel’s reform package strikes me as one of the most reasonable, and he has the facts and the figures to back up his assertions. A combination of indexing benefits based on life expectancy, tweaking early retirement benefits, raising the retirement age by one year, and private accounts will make the system solvent for future generations. Hagel also gives us exactly what funds would be included in the system and what the rates of return on those funds are. By using the existing Federal Thrift Savings Plan funds, Hagel utilizes a proven system with an extremely low overhead. Most importantly, Hagel’s plan would not involve an increase in taxes, although raising or removing the income cap on Social Security taxation could be a reasonable addition to the plan.

The Democrats, however, continue to stick their heads in the sand and can’t quite seem to admit that there’s a problem. Given that only a quarter of the American people support the concept that we should leave Social Security alone, that position is as idiotic politically as it is economically. Something has to be done to fix the system — and the Democrats are systematically pissing away any chance they would have had to have a seat at the table. The Democrats are walking straight into another trap by following the path of obstructionism yet again, and the results are likely to be the same.

The Social Security system is inherently flawed. Taking money out of the economy reduces investment growth and weakens the overall economy. Private accounts will put a portion of those funds back into productive use, raising the economy overall. The current system is not sustainable. The Democratic insistance that it is stable is just a rhetorical ploy – the Democrats cannot tolerate anything which reduces the power of the federal government. The fact that the current system will pass on debts that dwarf anything we’ve ever seen before doesn’t matter to the Democrats — the only debts that matter to them are the ones that can be tied to their Ahab-like fixation on President Bush. Anything that reduces people’s dependence on the federal teat weakens the Democratic power base. The Democrats’ naive unwillingness to recognize the problem ensures that they are completely unable to even consider valid solutions for it — fortunately it appears that the Administration will hold firm in their promise to reform Social Security for future generations.

Josh Trevino has a scathing rebuke of the new bankruptcy bill in Congress. I’m inclined to agree with him — the bill is nothing more than a handout to the banking industry that will hurt consumers and the American economy.

Furthermore, this bill will hurt rather than help corporations over the long run. Extending credit to everyone and anyone is a piss-poor business decision. The banking companies are shooting themselves in the foot by making credit idiotically easy to get and giving credit card offers to anyone who can fog a mirror. Such actions are entirely counterproductive and against the rules of smart business practice.

This bill should be killed, and those members of the GOP who are supporting it should be ashamed. Supporting a vigorous system of American capitalism is fine. Reducing red tape is fine. Changing the rules to benefit the few at the expense of the many is most certainly not.