Monthly Archives: December 2015

The Unintended Downside of Nondiscrimination

This week, two Oregon bakers (the Kleins) finally paid damages to a lesbian couple (the Bowman-Cryers) after discriminating against them. For the uninitiated, this story actually dates back to 2013 and the facts of the case are pretty straightforward. Basically, the Kleins refused to bake a wedding cake for the Bowman-Cryers, and they specifically cited their Christian beliefs as the reason for denying service. That is, the Klein’s version of Christianity thinks same-sex relationships are morally wrong, and thus they did not want to bake a cake for a same-sex wedding. In response, the Bowman-Cryers filed a nondiscrimination complaint against the business, and ultimately the court sided with the couple and ordered the Kleins to pay $135,000 in damages in 2015. The situation quickly escalated after the initial complaint was filed, but it is important to note that the court’s decision to award damages was based solely on the initial act of denying service. Upon receiving the judgment, the bakers refused to pay the damages, but now this week they paid the balance off in full. This latest development is why this story is back in the news.

Although the payment development is not terribly interesting by itself, the broader issue of nondiscrimination legislation is an important one. In this case, it’s pretty easy to predict that the commentary will break down along ideological lines. Conservatives will cite this case as further proof of the government’s war on Christianity and an attack on religious freedom. Liberals will likely cite it as a victory for gay and lesbian rights. If you agree that discriminating against people based on their sexual orientation is absurd, it may be tempting to join with liberals in celebration on this one. But we must remember that it is always tempting to applaud government coercion when it is used against your opponents. The important question here isn’t whether we prefer the views of gay people or the views of religious conservatives. The real question is whether we want government coercion being used to force any private citizen to provide a service against their will.

That’s the focus of our piece today: Should we support anti-discrimination laws like the one in this case?

To answer this question, it is useful to consider the logical possibilities of these nondiscrimination laws. Specifically, we’re going to concern ourselves only with laws that prevent discrimination by businesses that provide public accommodation (like hotels, restaurants, grocery stores, etc.), and we’ll stick with the bakery example for our thought experiments. Also, note that the analysis and opinions expressed here wouldn’t apply to the Kim Davis marriage license situation in Kentucky because she was acting as an agent of the government, which can’t have religious beliefs, rather than as a private citizen.

So under Oregon law, discrimination is deemed unlawful if it occurs on any of the following protected characteristics, which are known as protected classes. The items in bold are the only ones that are recognized under Federal law:

  • Race / color
  • National origin
  • Sex (includes gender, pregnancy and sexual harassment)
  • Sexual orientation
  • Religion
  • Retaliation for opposing an unlawful employment practice
  • Association with a member of a protected class
  • Age
  • Marital status
  • Physical/Mental disability
  • Injured workers
  • Family relationship
Now in the case that we’re discussing, it’s easy to favor the nondiscrimination law if you are sympathetic to the cause of gay rights. But we must realize that the tables could readily be reversed in ways we might not be as comfortable with. Let’s take a look at some examples.
For the first example, assume that there’s a bakery in Oregon that is owned by an African-American man. The local leader of the Ku Klux Klan comes in and asks for a cake to serve at the coronation of the new wizard-leader-guy. (And yes, the KKK is still a thing.) Given the KKK’s history of violent racism against Black people, our bakery owner understandably might not want to bake them a cake. But there’s a problem there because the KKK has started to brand itself as a religion. Thus, the bakery owner technically could not turn down the KKK’s business because of its religion. If he did, he would be guilty of unlawful discrimination and could be fined. I know what you’re thinking. No one really thinks the KKK is a religion. But we should note that the barrier to establishing a religion, at least for tax purposes, is comically low. Of course, it’s impossible to know whether the KKK would actually succeed in a discrimination complaint in this circumstance, but at least according to the letter of the law, it’s a very real possibility.
Next, let’s assume there’s a bakery in Oregon that is owned by a gay married couple. A fundamentalist Christian comes into the store and requests a cake for their annual “Pray Away the Gay” camp graduation, which is a bit odd, since the camp has never had any graduates. Nevertheless, our Christian friend suffers from incurable optimism and is sure the camp will be a success this year. He wants a well-decorated cake to help celebrate the occasion. The bakery owners in this case, understandably want no part of this deal. They actually both came from religious backgrounds and suffered tremendous personal trauma when they came out to their families. But since religion is a protected class, the bakers’ hands are tied. They have to provide the cake or risk violating the nondiscrimination laws and paying damages.
Finally, let’s assume there’s a bakery in Oregon that is owned by a Hispanic lady. Once a week, like clockwork, there’s an Arab gentleman who comes to the shop and tries to hit on the owner. He’s never successful in this goal, and he’s a bit of a jerk about it. This week, he comes in at the normal time and wants to buy a large order of muffins. Given his history, the owner declines the business for fear of encouraging him. This has nothing to do with the fact that he happens to be an Arab; he’s just been a nuisance and she wants to exercise her right to refuse service accordingly, hoping he’ll get the hint. Unfortunately, the man takes this very badly. And to try to get revenge, he files a discrimination complaint alleging that the owner refused service because he is of Arab descent. Of course, the facts in this case clearly don’t support his claim, but that doesn’t automatically mean he won’t win. After all, even the people that really are guilty of discriminating on race or religion, probably have the good sense to claim there was actually a different, legal basis for their discrimination. So maybe he’ll win, and maybe not. Even in the best case scenario though, the owner will likely have to spend some time and money trying to defeat the discrimination claim, even though it has no legitimacy.
Of course, the above hypotheticals were cherry-picked to be worst case scenarios. But if you support the nondiscrimination law in the actual Oregon bakery case, then you are also supporting the possibility of the first two scenarios being a reality. Any decent person would probably object to them, but you can’t count on the government to only enforce nondiscrimination laws when they hurt the types of people you dislike and benefit the groups you are sympathetic to. It doesn’t work like that. Government coercion is a blunt instrument, and once it is unleashed, there’s no way to know exactly who will get targeted. And if you think I’m just being hyperbolic here, then you should consider these actual examples of nondiscrimination laws being used in unexpected ways:
Interestingly, these last two incidents happen to match my hypotheticals almost exactly (though I promise I didn’t know anything about them beforehand). In the final analysis, it’s not just a possibility that nondiscrimination laws will be used in preposterous ways; indeed, it’s already happened. So before we sign on to nondiscrimination laws as a panacea for creating tolerance, we need to consider all the consequences that follow.
Additionally, we should note that the likely and actual “abuse” of discrimination laws is not the main reason to oppose such laws. The definition of abuse depends entirely on what groups you are sympathetic to, and that’s a big problem. The main reason to oppose these laws is that the government shouldn’t be in the business of coercing private individuals to conduct trade against their will. We don’t have to like it, but people have a right to be bigots as long as they are not violent. So it shouldn’t matter why someone chooses to refuse service–whether it’s because they’re racist or sexist or just don’t like your choice of shoes. Their refusal to provide service is still a peaceful act, and the government should not have the power to force them to perform a service. 
Finally, consider what would happen if the Oregon bakers continued to refuse to pay the couple the damages awarded. It’s not clear that it could have escalated all the way to criminal contempt, but the bakers could have at least had their assets seized to fulfill the debt. Regardless of whether you agree with their position or not, it’s hard to see how it is just that someone could lose their house for refusing to bake a cake. But that’s the world that nondiscrimination laws like this make possible, and it’s a world that also rewards frivolous lawsuits by the KKK.

Defending Free Speech from National Security Advocates

Today we’re recommending a great piece by Glenn Greenwald at The Intercept on free speech. Greenwald writes about the latest efforts to formally limit the free speech protections enshrined in the First Amendment. And naturally, the push to restrict free speech is bipartisan and it’s being done in the name of fighting terrorism.

In the article, Greenwald reminds us that the prospect of curtailing free speech was written off as a crazy idea by nearly everyone as recently as 2006. And then he proceeds to explain why we should defend the existing protections on political speech that were set forth by Supreme Court in 1969. As currently understood, free speech that advocates (or justifies) the use of force is protected in the US unless it is advocating imminent force. So I’m allowed to say in casual conversation or on this blog that we should beat up the notorious That Guy. But if I was at the head of an Angry Mob in front of That Guy’s house, and I made the same call for violence, that would be illegal since it would be an immediate threat to That Guy’s personal security. This is how it works, and this is how it should be.

At first blush, it may seem that we shouldn’t tolerate anyone advocating the use of force. But if we applied that concept uniformly, upwards of 90% of the presidential debates thus far would probably need to be banned as well. As Americans, we hear politicians talk about using force against other people and countries all the time. Is it conceivable that this would be outlawed? No, of course not. Instead, it would be applied selectively. Greenwald highlights the absurdity of this notion beautifully (emphasis in original):

There are millions of people in the world who believe and argue that the U.S. has been supporting tyranny and bringing violence to predominantly Muslim countries for decades as a means of dominating that region, and that return violence is not only justifiable but necessary to stop it (just as there are millions of westerners who believe and argue that they must bring more violence to the countries of that region). In particular, it’s astonishing to watch Americans – whose favorite political debate is deciding which country should be bombed next or which individuals should be next assassinated – propose changes to the First Amendment to make it a crime for others to justify (not engage in, but merely justify) the use of violence in what they argue is valid self-defense.

You can check out the full article here:

Those Demanding Free Speech Limits to Fight ISIS Pose a Greater Threat to U.S. Than ISIS

Iran Takes Another Step Towards Implementing Nuclear Deal

Today, we have a welcome bit of good news out of Iran. At Antiwar.com today, Jason Ditz is reporting that Iran has shipped the vast majority of its remaining enriched uranium stockpile to Russia, where it will be converted before being sent back to Iran. The conversion process transforms the uranium into a form that can only be used for energy production and not for the production of nuclear weapons. Thus, by sending the majority of its stockpile to Russia, Iran is severely limiting any capability to move towards a nuclear weapon. And by complying with the terms of the nuclear deal so quickly, Iran is hoping to also expedite the relief from international sanctions. In short, this is really a win for everyone.

Lest anyone should be confused, we should hasten to point out that there is no solid evidence that the Iranians were actually trying to develop a nuclear weapon at any time in recent history. Even the intelligence community concluded that it couldn’t find evidence of a weapons program after 2003, and other authors have credibly contended that in fact, the Iranians never pursued such a program because it was deemed forbidden under Islamic law. Wherever the truth lies here, there is no basis for the presumption of Iranian guilt employed by Western media when discussing this topic. This latest step towards compliance offers further evidence that the Iranian aspirations were peaceful in nature. Of course, it remains to be seen whether the US will keep up its end of the deal and lift sanctions, but Iran appears to be doing everything it can to comply with the deal.

And given the general tide of chaos sweeping over much of the Middle East, it’s nice to know that with at least one country, we are moving away from war and towards peace. Let’s hope this trend can continue.

The Rand Paul Divide

One of the more interesting political questions this campaign season has been whether libertarian should support Rand Paul. Granted, I realize this probably isn’t a question that most Americans have grappled with since most Americans don’t identify as anything like a libertarian. But within the general libertarian movement, however you define that, this has been a major issue. And in the aftermath of a strong debate performance by Rand in the most recent event, this question is very relevant.
There are good points on both sides of this question and they are worth discussing, but we should emphasize that there is still a lot of common ground here. And in a movement as small as the libertarian / limited government one, it’s critical to avoid divisions whenever possible. So let’s begin with the common ground. (Also, I should note that I’m using the term libertarian in the general sense, rather than to refer to the Libertarian Party.)
When libertarians criticize Rand Paul, that does not imply they think a different Republican or Democratic candidate is better. I can’t speak for all of them, but I think most would acknowledge that Rand is the best (or if you prefer, the least bad) candidate remaining in either major political party. Fair enough. But saying someone is the best option, and saying they are a good option are entirely different statements. If you prioritize foreign policy issues, I think one can make an argument that Obama was a far superior candidate to John McCain, who has apparently never seen a country he didn’t want to (try to) bomb into democracy. But that doesn’t mean Obama was a good candidate on foreign policy; it basically just means he was less likely to start a nuclear war. Similarly, even if one concedes that Rand is the best option available, it does not therefore follow that you should be a vigorous supporter. That may be the appropriate response, but it is not necessarily so. Again, try the analogy out on the 2008 general election, and the point is obvious. Indeed, it doesn’t even matter if you think Obama or McCain was less awful; the point is that that determination probably was not sufficient to convert you into a champion for that candidate.
Now let’s move on to the more detailed arguments.
At the core of this debate is a question of effectiveness. Virtually everyone in this movement has the same goal I think: namely, we’d like to see a pro-peace, pro-liberty candidate get elected to the highest office as soon as possible. The problem is there aren’t enough libertarians and peaceniks in America to make this a conceivable outcome at present. Two competing solutions are offered to solve this problem. Either you can try to convey the principled message and persuade the American people that peaceful, libertarian solutions are the best ones (the Principles Approach), or you can try to trick the American people into accidentally electing a decent person for a change (the Pander Approach). Ron Paul’s presidential campaigns largely embodied the first approach; Rand Paul has taken the second. Let’s examine Rand’s approach first.
So in order to dupe the American people, Rand needs to act like a conservative, take the standard conservative line on most issues, and use the same standard talking points to win over the Republican voters (less government, Ronald Reagan, look at my red tie, etc.). Meanwhile, he’ll take a real stand on a few liberty / foreign policy issues, to signal to everyone who’s paying attention that he’s actually legitimate without totally blowing his cover. And then when he takes a bad position because it’s fashionable for Republicans (against the Iran Deal for instance), the pro-Rand camp will just say that he’s doing what he has to do.
This argument is superficially appealing, and I would even go so far as to say it was worth trying. But I think this election cycle so far has proved that this strategy isn’t effective, especially this year. In an election cycle where all the Republicans are competing to see who can be the most horrible on virtually every foreign policy and civil liberties issue, Rand (thankfully) wasn’t able to keep up. But his efforts in that direction simultaneously prevented him from differentiating himself in any other way. In short, it seems we can say with some confidence the strategy didn’t work. He narrowly made the main stage in the most recent debate, and his positive reception in the debates has been directly proportional to how strongly he expressed libertarian principles and emulated Ron. No one even noticed his presence in the first rounds when he tried to play the conventional conservative; but it was hard to miss him in the last two debates.
Another issue with this theory is, what if it worked? Say that somehow Rand Paul really was able to get elected by running effectively undercover. If he got into office on day 1 and tried to implement radical libertarian policies, he would clearly get impeached. And then there’d be no popular support to defend him from it. Maybe he’d get to write an executive order or two, but it’s hard to see how he’d get any further than that. It’s true that politicians abandon their campaign promises all the time without consequences (cough, closing Guantanamo, ending the War in Afghanistan, etc.), but that’s because the politically connected are in favor of the policies they pursue instead. This is a key point. If one tried to implement a policy that directly contradicted their campaign rhetoric and the wishes of the political elite, they would not last long. It’s very difficult to conceive of any other outcome.
By contrast, Ron Paul took the Principles Approach and stuck to his libertarian roots on essentially every issue. The packaging might have varied slightly, but the core ideas were there. He was unafraid to tell Americans the truth as he saw it on everything, even the taboo issues of foreign policy blowback and the Federal Reserve. We have Ron Paul to thank for the fact that these concepts are even kind of in the mainstream political discussion at this point. And while it’s true that he didn’t win either election, he still inspired countless numbers of people to become politically aware and embrace the message of peace and free markets (including yours truly). The value of this is difficult to overstate, even if it did not have immediate practical implications.
Ultimately, the relative merits of these approaches seems to be answered empirically. Around this same time during Ron Paul’s 2012 campaign, he was actually leading in Iowa with 23%.  Meanwhile, Rand’s support in Iowa was just 1% on December 23rd. And yes, part of this is likely due to the fact that 2016 has a bigger field, but that’s clearly not a sufficient explanation. Even on its own terms, the Pander Approach seemingly employed by the Rand campaign has not worked. The goal was to broaden the support base, and in fact, it did the opposite.
This debate is occasionally framed as a trade-off between practical short-term solutions to increase the chances of winning elections (the Pander Approach) and a longer-term campaign to win the American people over to the ideas of libertarianism (the Principles Approach). What the results from 2012 and the primary season thus far indicate, however, is that there is no trade-off at all. Unless the polls are completely wrong or something dramatically changes, the Principles Approach appears to produce better results from a short-term and long-term perspective. That doesn’t mean the Rand campaign should be ostracized for trying it out; it simply means that we should adjust present and future tactics accordingly. Based on the last debate, and some recent posts by the campaign, there have been some signs that they are making changes along these lines.
A final note on this subject relates to the question of branding. As mentioned in the beginning of this piece, many people point out that Rand Paul is clearly the most libertarian candidate in the race and conclude that he therefore deserves the support of libertarians. While this may seem compelling on its face, it’s not. And by support, I presently mean something beyond just quietly voting in the primary such as donating, volunteering, endorsing the campaign, brow-beating disinterested friends, etc.
The trouble is that there is a real risk diluting a message too much. Think of it this way. What if I say to you, I’m a Christian, but I don’t believe in abstinence, I don’t think any part of the Bible should be interpreted literally, I don’t think the Ten Commandments are a big deal, etc?* At some point, if I’ve listed enough heresies / disagreements with the label I’ve adopted, a reasonable person might respond by saying, so what you mean is that you’re not a Christian. So too, if a candidate deviates enough from what libertarians believe, there’s a point at which continuing to use the libertarian label to describe that person is confusing and counterproductive. With Ron Paul, it was easy to explain to people that he’s a libertarian on everything except immigration. But with Rand, one has to say, well he’s a libertarian, but he opposed the diplomatic deal with Iran, supports the appalling actions of Israel, wants to have some kind of intervention against ISIS, wants to increase military spending, etc. There’s no objective way to say exactly where the line is, and reasonable people can disagree on whether promoting Rand Paul as a messenger of libertarian-ish ideas is helpful or not. But it’s clear that Rand flirts with this line in a way that Ron Paul did not, and it should be equally clear that the principle of “least bad” is not and should not be sufficient to command vehement support from libertarian-leaning people.
*As you probably suspected, I’m not religious and I’m not entirely confident that the items I listed are appropriately taboo or heretical. Hopefully, they were close enough to give you the general idea.

Tolerance for War Crimes is Bipartisan

Today, we’re recommending an article by Stephen Zunes at Antiwar.com, which reminds us that leading politicians in both parties are on board for indiscriminate violence against civilians, as long as the violence is done by the right people. The Republican candidates are unique in their outspokenness on the subject, but their position is unfortunately far from abnormal. The article also places the discussion in the context of accepted international law. Check it out here:

Republican Candidates Defend Killing Civilians To Fight Terrorism – and So Do Democrats

What To Do About Social Security

In our two previous posts, we showed that Social Security is a type of Ponzi scheme and that the system’s current trajectory is clearly unsustainable. In this article, we will now turn our attention to possible solutions.

In this discussion, we will endeavor to focus on general principles rather than minute details. I recognize that no one cares, and no one should care, what precise level I think payroll tax rates should be or what the retirement age should be or anything else that specific. (Conveniently, I also have no interest in doing the research and math necessary to define details that would work.) Instead, we’ll be interested to explain the features that would make up a good plan, and those features that we should want to avoid.

We should also note for any libertarian-types that may read this, that we’re taking for granted the fact that some form of taxation will exist. There are interesting and compelling arguments that can be made against taxation on a purely philosophical level, but we’re nowhere near the point where those arguments have a chance politically. Thus, it is still useful and necessary to discuss the relative merits of possible alternatives. We are not trying to define a perfect system; now and always, we are just trying to define a system that sucks less.

With those disclaimers out, let’s begin by noting the key elements of the present system (and we’ll focus on the old-age benefits). The exact eligibility rules are stupidly complicated, but this gives you the general idea:

  • Individuals over the retirement age (which ranges from 65 to 67 depending on when you were born) are generally eligible to claim Social Security benefits.
  • The amount of benefits one actually gets varies based on a few different factors, but the average monthly benefit in November 2015 for a retired worker was $1,340.
  • These benefits are indexed to a metric that measures inflation, so that the benefits theoretically rise at the same rate as overall prices. (In economist-speak, we would say that the real (inflation-adjusted) wages are designed to remain constant over time.)
  • The benefits are financed by payroll taxes collected from wages. The relevant payroll tax rate for Social Security is 12.4% in total (6.2% directly out of your paycheck which you see, and a matching 6.2% that is paid by your employer).
  • Wages over and above $118,500 (in 2015 and 2016) are exempt from taxation. The idea is that people that make more than that probably won’t need Social Security and so shouldn’t be required to pay a tax on all of their wages.
Now that we have the general outline, let’s begin by discussing some of the bad solutions.
 

Immediate Abolition of Social Security

No one likes Ponzi schemes or payroll taxes, so the simplest solution to the Social Security shortfall might be to just end it as soon as possible. Under such a system, we could either let the Social Security Administration use its current $2.8T reserves to pay down benefits for a while until it runs out. Or we could cut off benefits immediately and let those reserves be used to combat the rest of the government’s deficit. Either way, the ultimate outcome is the same. Many of the 43 million people that depend on Social Security retirement benefits will be abruptly and unexpectedly cut off in short order.

Now it’s difficult to know exactly how many of these people truly need the benefits and who just collects because it’s available. But it seems safe to assume that a significant number of seniors are entirely dependent on this income. Cutting them off would be devastating to them and likely destabilizing to our country general. Indeed, it’s tough to imagine the precise consequences of millions of people losing a key income source virtually overnight. But it would not be good. Moreover, it would obviously be politically impossible. Any politician that managed to pass such a scheme would be quickly voted out by those 43 million in the next election, and the policy would be undone anyway.

Just as important, the current beneficiaries didn’t do anything to deserve that fate. To be eligible, they paid money into the system for multiple years and that was paid out to older generations. It may not be fair to force the Millennials and Generation Xers to subsidize the Baby Boomers, but then it wasn’t fair that the Baby Boomers had to subsidize the previous generations either. This is the problem of the system’s design; someone was always going to be left holding the bag. But even if we set aside the practical consideration of what would happen if millions lost their income source, it does not seem just to force one particular generation to suffer all the consequences of a failed policy.

Privatize the System

As a general rule, the competitive free market system is capable of providing goods and services at a higher quality and lower cost than the government. You don’t need to believe this is universally true to acknowledge that it is generally true. No one thinks the Post Office would do a better job than Apple or Google at making smart phones, and people are unlikely to choose the state-subsidized Amtrak over a bus or plane, even on purely economic grounds. Indeed, Amtrak is really a wonderful case because the government has somehow managed to make moving people along the ground with minimal friction, consistently more expensive and dangerous than flying those same people through the air. How this could possibly be so is difficult to fathom.

But I digress. The point is that we accept the general idea the free market tends to produce more efficient outcomes than the government. Thus, when people propose that a current function of government be privatized, this often sounds like a good idea. And it may be. But all too often, privatization schemes really just amount to the government choosing to benefit particular private interests at the expense of everyone else. So-called privatizing of Social Security is one example of this.

When people refer to privatization, they are most likely referring to a setup similar to 401(k) plans. Instead of paying to the Social Security slush fund, workers would start contributing to an account that is specifically for them. This solves the wealth transfer / Ponzi scheme aspect of the present system, which is a good thing. But the problem is that then the government would inevitably prescribe rules for how these funds could be invested, just as they have for 401(k) plans. So, if you’re lucky, you’d get to choose between a small handful of mutual funds invested in equities or bonds. And these funds would invariably be managed by the big investment firms. This would artificially cause more money to flow into the stock and bond markets, driving prices higher than they would otherwise be. Additionally, it’s a gift to the Wall Street firms who get to take a cut out of the money you have invested in their mutual funds, and which you can’t avoid. So while owning your money is an improvement, restraining your freedom to use that money and giving a handout to Wall Street should be opposed.

Some people recognize the problem of giving more handouts to the Wall Street firms and have proposed an alternative privatization solution. Economist Lawrence Kotlikoff, who has written extensively on Social Security, has proposed one such plan. Under his solution, individuals would be required to pay 8% of their wages to a dedicated account. Then this account would be automatically invested in a diversified market portfolio determined by the government, thereby cutting out Wall Street. The problem is that now you have no choice in how your money is invested at all; you’re just counting on the government’s computer algorithm to do a good job. But, as if acknowledging this flaw, the plan has a built-in solution for this as well: the government just guarantees a minimum return. That is, if the investments didn’t produce enough profits, the government will step in to increase it.

In this system, we still have more money artificially being forced into the stock and bonds markets, distorting prices. And now the government is guaranteeing returns. So at the end of the day, even though the system is theoretically privatized, all taxpayers are once again on the hook to transfer wealth to others. The system would work fine if prices were generally rising. But if the economy tanks, the system would be in just as much trouble as the current Social Security system is now. Thus, it’s hard to see how this is a good solution.

Just Increase the Payroll Tax

In yesterday’s post, we noted that the projected shortfalls in Social Security could be remedied if an immediate 31% payroll tax hike (from 12.4% in total to about 16.3%) was imposed on working Americans. On the surface, this doesn’t seem incredibly bad. But remember, this doesn’t resolve the underlying problem with Social Security. It’s still an inter-generational wealth transfer and politicians will still have powerful incentives to let the system become insolvent again.

Perhaps a more important objection, however, is that the payroll tax is a really awful device. You see, a common understanding in economics is that if you tax something, you’ll get less of it. Tax cigarettes, and people will smoke less. Tax alcohol and less alcohol will be consumed. Tax the payroll, and you get fewer jobs. This is intuitive, because the payroll tax directly increases how much an employer has to spend to get the same amount of labor. For instance, if a would-be employee expects their take-home pay to be $938 a week, the employer has to pay $1,062 / week just for the salary and Social Security taxes. This example uses a gross pay on the paycheck of $1,000. The employer would pay 6.2% or $62 directly to the Social Security Administration, and the employee would see 6.2% or $62 come out of their gross paycheck. And that’s just for Social Security, before income taxes, or Medicare taxes. If the payroll tax didn’t exist, the employer might pay their employee the full $1,062 or they might keep the savings and be that much closer to affording another worker. Either way, it’s easy to see how the payroll tax increases the cost of hiring and paying workers.

Another problem with the Social Security payroll tax is that it’s not progressive at all. If a homeless guy gets a job and starts making $500 a month, he would pay the same rate as I do on my salary as a financial analyst. Some may agree with this setup, but I find it difficult to say that people at that level of desperation should be required to support the government. When it comes to income taxes, the same homeless guy wouldn’t be required to pay anything. But the payroll tax is the ultimate blunt instrument, and no one is allowed to escape its effects.

The combination of these issues, the evils of payroll taxes in general and the particular evils of our current payroll tax, makes it difficult to advocate for simply increasing the rate. If the payroll tax is already bad and the Social Security system is broken, it naturally follows that we shouldn’t proceed by doubling down on both.

Solutions to Support

Having discussed the flaws of several popular solutions, we can proceed to define the characteristics and features of a reform plan worthy of support.

Here are some of the key guidelines for an optimal solution:

  • Gradual – the solution should be implemented slowly over time to avoid causing abrupt hardships
  • Shared burden – No individual group is to blame for the current problem, and no existing group has disproportionately benefited. Thus, the cost of the solution should be borne by all parties.
  • Voluntary investing – the government should not force individuals to save or invest in a particular way. Individuals should be allowed to make financial decisions for themselves.
  • No corporate handouts – Individual private firms should not benefit directly based on the policy that is adopted.
  • Avoid Ponzi schemes – Ponzi schemes, especially political ones, are inherently unsustainable. In the long-term, such structures should be phased out to put the government (and the individuals) on a more sound financial footing
  • Simple – The Social Security system is notoriously complex and therefore wasteful.
  • Tax incentives matter – The current payroll tax directly discourages hiring. Most other forms of taxation are far more benign and should be preferred.
Based on those priorities, we believe the ideal solutions will contain some combination of the following features, which were inspired in large part by the proposal offered by DownsizeDC, a think tank that is oddly good on almost every issue. Anyway, here are some possible features:

Social Security Opt-out
Steps need to be taken to reduce the future liabilities of the Social Security system. However, it’s unlikely that they can be reduced enough for the system to meet its obligations without collecting taxes from the people in the workforce today. However, working Americans should be given the option to opt-out of receiving Social Security benefits in the future in exchange for having a lower payroll tax rate now. Given the choice between a tax cut today and promised payments from the US government many years in the future, few people would be foolish enough to choose the second option.

This is the most important feature of the plan because it creates a mechanism to gradually phase out the Social Security retirement system in a voluntary way. It also presents a way to reduce the harms done by the payroll tax in the short-term.

Means-tested benefits

Social Security is not intended to be a government-backed investment product. It was implemented during the Great Depression to protect those citizens that were perceived as particularly vulnerable. In keeping with this spirit, and given that cuts must be made somewhere, the ideal solution should consider reducing or eliminating benefits to wealthier individuals that can support themselves without Social Security income.*

Of course, some may argue that this would make Social Security a “bad deal” for rich people that paid taxes for many years and now receive limited benefits, if any. But this is the nature of a Ponzi scheme; each subsequent participant tends to get a worse outcome than the one that preceded them. And to call Social Security “a deal” is somewhat misleading in the first place. No individual chose to be a part of Social Security, and there was no bargaining involved. It must be reiterated that Social Security is not a government-sponsored annuity product that anyone volunteered for; it is a wealth transfer program created by law in which everyone is required to participate. That some people benefit at the expense of others is inherent in the system’s design. It’s a “bad deal” for some precisely because it was never a deal to begin with. The purpose of reforming the system is to limit these harmful effects as much as possible.

Increasing the retirement age

When the Social Security system was implemented, the US life expectancy was considerably shorter than it is today. This is part of the reason it’s in financial straits. Thus, a solution to reduce the future liabilities of the system is to phase in further increases to the retirement age before benefits start. This increase should be phased in gradually on a go-forward basis to limit the harm done to recent retirees and others on the brink of retirement, who have made long-term plans based on the current rules.

Cut Federal spending
Wasteful government spending in other areas can be reduced to further shore-up the system and possibly enhance the degree of the opt-out provision. While cutting spending is always difficult, presenting cuts as necessary to protect Social Security should give proposals a fighting chance.

Alternative taxation forms
As discussed above, most other forms of taxation would be preferable to the negative effects of payroll taxes. Eliminating special deductions and/or loopholes in the income tax code, imposing property taxes, or creating national sales tax would all likely be better alternatives to the payroll tax, even if they were revenue neutral. This isn’t essential for reforming the system, but since Social Security relies on payroll taxes, it’s worth considering.

Don’t Replace Social Security

As we have seen, it is important to avoid replacing Social Security with a “privatized” solution that seeks to achieve the same purpose. Americans should not be coerced into saving for the future or investing in a particular way. By phasing out the Social Security retirement system and replacing it with nothing, individuals will be given greater control over their money, Wall Street interests won’t reap any special benefits, and we will eliminate the need for any kind of federal bureaucracy to track or enforce savings. Replacing it with nothing is the prudent solution.

Ultimately, there are no easy solutions to the Social Security problem, but some solutions are clearly superior to others. Regardless of what part of the political spectrum you come from, no one wants to see handouts to investment banks or more false promises from the government. And the next time this issue comes up, hopefully this discussion will help all of us distinguish serious proposals from politics as usual.

*At first blush, it may seem that the same reasoning deployed to justify means-testing could be used to justify disproportionate taxation on the rich. We won’t get into the details of income taxation in this article, but for now, it is important to point out that reducing government benefits is fundamentally different from confiscating more wealth through taxes. The net effect on the individual looks similar , but the underlying logic varies significantly. Assuming no fraud or theft was committed, income taxes take money from an individual that they have earned by providing value to other people, either employers or customers. Thus, if we increase the tax rate on higher-income individuals, we are simultaneously punishing them for providing value to others and reducing their incentive to do so.

By contrast, entitlement benefits from the government have not been earned. It’s true that Social Security recipients paid into the system previously, but this fact alone tells us very little. We pay taxes for all kinds of things that we never directly benefit from, and for many things that actually harm us (for example, our foreign policy). That is the nature of all taxation, and it is why voluntary exchanges in the marketplace are preferable wherever possible. Ultimately, the purpose of the Social Security system and tax was to provide for vulnerable members of society. And just as it would be a scandal if Warren Buffett was on food stamps, it is reasonable to consider reducing benefits to retirees that are financially secure.

Is Social Security a Problem?

In a previous post, we determined that Social Security bears striking similarities to a Ponzi scheme. While this may be regrettable, the mere fact that the system is a Ponzi scheme doesn’t give us much guidance on how to move forward. Besides, we accept all manner of seemingly absurd policies that are passed by the government (a Freedom Act that curtails personal liberty, a Bank Secrecy Act that requires banks to keep fewer things secret from the government, a War on Terror that has created more terrorists, etc.). So even if we grant that Social Security is a Ponzi scheme, perhaps it is not unreasonable to ask whether that’s really a big problem. That will be the topic of today’s post. (And since I can’t keep myself to any kind of reasonable word limit on this subject, tomorrow we’ll actually discuss possible solutions.)

So, is Social Security a Problem?

Most people probably know that America is experiencing a major demographic shift as its most prolific generation reaches retirement. The unfortunately named Baby Boomers generation includes everyone born between 1946 and 1965 and included 76 million births compared to just 55 million births for the Generation Xers. (And no, I’m not sure who decided to start the alphabetical generations at X. But it was during the Cold War so I assume everyone figured we weren’t going to make it to name Z.) Anyway, this population disparity between the Baby Boomers and the generations that followed naturally creates issues for programs like Social Security and Medicare that rely on taxes from younger working Americans to pay benefits to elderly Americans. And that’s what we’re starting to see.

Before we discuss the numbers, it’s important to recognize that a system like this is destined to be unsustainable when it’s administered by politicians. If you had to say what single thing politicians are the worst at, planning for the future is probably near the top of that list. It’s an obvious point perhaps, but the only time horizon that matters to them is the next election. Raising taxes to pay for future liabilities is going to be extremely unpopular right now. Failing to pay Grandpa a Social Security check in 10 years will be deeply unpopular too, but not for, well, 10 years. By then, you might not even be in office. And even if you wanted to do the right thing, you’d have to make the tax hike case to your voters and mention actuarial estimates and the discount rate and… yawn. Nope, that’s a recipe for losing a primary. So we don’t raise taxes. And 5 years later, when the crisis is much closer, the required tax increases will be even harder to implement. And so the cycle continues. Completely predictable, and destined for failure.

By and large, this is where we’re at with Social Security. For a while now, it’s actually been earning surpluses as the taxes collected specifically for Social Security exceed the benefits paid out. But when this happens, the Social Security Trust is required to immediately give that money to the federal government in exchange for a special type of government bond. So technically, the Social Security Trust is owed about $2.8 trillion by the federal government. But since that federal government continues to run deficits every year and only pays debt off by borrowing more, this $2.8 trillion isn’t totally a sure thing. If the US had to rapidly increase its borrowings in a given year to start paying this back for Social Security benefits, it’s not clear how the markets would react, but there’s certainly some risk involved.

For the sake of argument, however, let’s assume the $2.8 trillion in intergovernmental debt is rock solid. Unfortunately, that only buys us a few more years of being able to pay the promised amounts. Currently, the overall Social Security system is not running at a deficit; taxes collected and interest income on the debt exceed the benefits being paid out. But by 2019, the Social Security Administration is projecting that the benefits paid will start to exceed all revenue sources. At this point, the system will have to begin calling in its debt from the federal government. This deficit will widen as more people retire, gradually exhausting the current $2.8 trillion in IOU’s that it can redeem for cash. Experts disagree on exactly when it will be completely bankrupt, but the Social Security Administration itself thinks it will be around 2034. It’s not a question of whether the system is unsustainable, it’s just a question of when it will collapse.

Now if that situation sounds a little odd to you, it’s probably because the government follows special accounting rules. We alluded to this point in our previous post, but it bears repeating. In accounting, there’s a concept of contingent (or uncertain) liabilities. For instance, if a company gets sued for its product failing, there’s a chance that it will have to pay out damages. Depending on how likely it is that the company will lose the case (and how certain the amounts involved are), it may need to show a debt on the books. Certainly, if the company has already lost the case and just hasn’t paid yet, it would be required to show that it owes the money since, well, it does. It works essentially the same way for pensions. If the Company has legally committed to paying out the amounts, they have to account for them at present value. Think about how absurd the system would be if it worked any other way. If companies weren’t required to show pension liabilities on their books, you would soon see every start-up company offering lucrative pensions and lower starting salaries. It would appear as if they had very low expenses and low debt to help them attract investors, but in reality, they are about to become the start-up version of Detroit. And yet, this is precisely what the government is allowed to do. The government doesn’t account for future liabilities in its official debt statistics.*

If you’ll forgive another analogy, this is also akin to forgetting to mention your mortgage when you apply for credit. And if some distrusting lender was to ask about your mortgage, you could brush it off. Don’t worry man, I don’t have to pay it off for thirty years. I don’t know about you, but my finances would look great if I was able to count my house but not the mortgage that goes with it. And indeed, when you hear someone refer to the national debt, this is the equivalent of what they’re referring to: they listed their credit cards but forgot the mortgage.

When we sweep aside the accounting charade and consider what Social Security’s financial position would be under grown-up rules, we find that it has $25.8 trillion in unfunded liabilities if the system continues indefinitely under it’s current rules. The immediate action required to shore up the system would be a 33% payroll tax increase on all Americans, from 12.4% of all wages up to around 16.3% for the foreseeable future. Although that’s pretty harsh, it is doable. But with each passing year of political inaction, the cost of catching up becomes steeper. And with the system so close to collapse and so expensive to preserve, it’s worth asking whether we should keep it all. We’ll take that question up tomorrow.

*This article makes the point that Social Security benefits are slightly different from pensions because the government has no legal obligation to pay them. It can summarily declare that benefits will stop tomorrow, and no one could do anything about it. However, as a practical matter, Social Security benefits are basically sacrosanct at this point and politicians treat them as such. So while it couldn’t force the US into a Detroit bankruptcy situation, it’s still a disaster in waiting for all involved.

Is Social Security a Ponzi Scheme?

If you follow politics at all, you probably hear this Ponzi scheme label come up from time-to-time. Conservatives use it to criticize the Social Security system and liberals mention it to note the apparent unseriousness of the conservative position. Most recently, we saw Hillary Clinton deploy this tactic in her closing remarks at Saturday’s Democratic debate:

Social Security, which Republicans call a Ponzi scheme, may face privatization.

It’s pretty transparent what’s going on here. By noting the Republicans’ seemingly hyperbolic position on the subject, one can dismiss any criticism as just the usual partisan bickering. But given that the Social Security system is currently unsustainable, this is a subject that needs criticism and debate. And since most people are probably intrinsically opposed to Ponzi schemes (or virtually anything described as a scheme, for that matter), it’s worth asking the question:

Is Social Security a Ponzi scheme?

Of course, to answer this, we must begin by defining precisely what a Ponzi scheme is. For the uninitiated, Ponzi schemes refer a general type of fraudulent investment management setup. The most famous of these recently was the Bernie Madoff scandal. The details of the schemes can vary somewhat, but here are a few of the essential characteristics as described by Wikipedia:

  • Returns – The investors are promised unusually high returns
  • Source of returns – Old investors get paid out using money invested by the new investors. That is, instead of making a return on profitable investments, there is simply a redistribution of money from new investors to the older investors.
  • Misleading financials – To keep up appearances, false financial statements are generated and shared with the investors.
  • Cause of failure – If there aren’t enough new investors coming in, the scheme falls apart, and all remaining investors in the fund realize their money is gone.
With these criteria in mind, we can replace “investors” with “taxpayers”, and we find striking similarities. Let’s tick them off:
  • Returns – The taxpayers are promised an income that is sufficient to support them indefinitely after they retire.
  • Source of returns – The old taxpayers’ income is provided almost exclusively out of payments collected from new taxpayers.
  • Misleading financials – The government doesn’t apply the same kind of accounting logic that companies have to when accounting for future liabilities. That is to say, if General Motors accounted for its pension liabilities in the same way the government accounts for Social Security pensions, their CFO would be guilty of defrauding investors. As a result of these unique accounting practices, the national debt figures that usually get cited are deeply misleading.
  • Cause of failure – As more and more Baby Boomers reach retirement and start withdrawing money from the system, there aren’t enough new workers to finance them at current tax rates.
So is Social Security a Ponzi scheme? The answer is a resounding yes.

 

But it’s also true that you could say something similar about virtually any wealth redistribution program organized by the government. The only real difference about Social Security is that almost everyone expects to benefit from it in the future, whereas not everyone expects, say, to go on food stamps. Unfortunately, determining that it is a Ponzi scheme isn’t all that helpful. It’s not going to immediately persuade committed liberals to withdraw their support for it, and it’s not going to give conservatives a silver bullet to solve the problem.

 

But it’s clear that there is a problem, and it seems to be a case where the simple answers aren’t necessarily the best ones. Tomorrow, we’ll discuss the crisis facing Social Security in more detail.

US Sees Rise in Anti-Muslim Violence

It should go without saying that the perceived threat of terrorism is dramatically overstated. In terms of probability, the average American citizen is more likely to be killed by virtually any other threat you can name than terrorism. Indeed, if we were to dedicated a comparable amount of time and anxiety to the other threats (like driving a car, taking prescription drugs, being obese, etc.), we would not have time for anything else. If you think about this for a second, you’ll know this is true. (But if you want to see just how true it is, I’d recommend this absurdly thorough article that did several comparisons for us.)

Given that the real risk of terrorism for Americans is incredibly small, it is obviously quite silly that anyone presents “radical Islam” as an existential threat. It is not. And we can quibble about whether that’s because our law enforcement agencies are so effective or because the Atlantic Ocean exists or because it’s actually pretty difficult to convince a person to become a martyr. I have my preferred explanation, but let’s set that issue aside. Whatever the reason, the fact remains that the threat is preposterously small from a probability standpoint.
Unfortunately, reminding the American people that terrorism is not a big deal is not politically palatable. And yes, Obama has sort of tried to do this in his last few speeches, but he never commits. His narrative boils down to this: Yes, ISIL is a real and significant threat, but our noble drones and law enforcement agencies have us covered. That’s very different than saying this entire threat is being blown utterly out of proportion by irresponsible media outlets and politicians. He’s not going to do that, precisely because he’s one of those irresponsible politicians. Maybe not as committed as most, but he definitely gets an invite to their Christmas party. So calling them out would get awkward fast.
But I digress. The point here is that no major politician or pundit is willing to explain just how overstated the threat of so-called Islamic terrorism truly is. This creates a space for fear-mongering politicians to hype the threat even more and thoroughly vilify Islam. Occasionally, they are slightly careful. For example, Sen. Cruz added a surprising degree of nuance in one of his responses in the GOP debate to clarify that we are not fighting a war against Islam in general.* But nuance is never what sticks, and many folks are happy to forego such “political correctness” entirely to make a stronger case. The end result is that the American people are increasingly fearful and hateful toward Muslims in general. Trump has probably done the most to normalize these anti-Muslim sentiments recently, but as we discussed recently, he’s had plenty of help.
Now it seems we are starting to see the sad results of the rise in anti-Muslim sentiment. American Muslims and mosques are now routinely experiencing abuse ranging from threats to vandalism to assault and even arson. These actions are appalling and unjust, but entirely predictable. Interestingly, they also show how opposing sets of radicals so often mirror each other’s behavior. In the present case, both sides are engaged in collective punishment. Islamic radicals tend to be primarily inspired by the interventionist foreign policies of Western governments (France, US, UK, etc.). And in attacking Western civilians, these terrorists are effectively blaming random civilians for the actions of their government, regardless of the civilian’s participation or their actual views on war. Similarly, radical Islamophobes in America and elsewhere blame all Muslims for the actions carried out by a handful of people that self-identify as Muslims. Even though the terrorists are roundly denounced by the broader Muslim community, the nominal association (but they’re both called Muslims!) is apparently enough to direct violence against all of them. The justification is the same; only the targets and tactics differ. 
At The Intercept this week, Glenn Greenwald has a solid story that aggregates some of the most recent attacks and threats against the Muslim community. And since you probably won’t see any of these dominate the 24-hour news cycle, it’s worth taking a look.
*In case you’re interested, here’s the Cruz quote: “It’s not a war on a faith; it’s a war on a political and theocratic ideology that seeks to murder us.”

The Problem with Christie’s Terror Narrative

At this point, Governor Chris Christie no longer appears to be a relevant contender for the Republican Presidential nomination. According to the most recent polls as of Wednesday, he had just 4% support nationwide and 0% in Iowa. Given his lackluster performance in the recent presidential debate, which was notable primarily for his eagerness to start an armed conflict with Russia, there’s happily no reason to think that he’ll re-emerge. This is certainly a good thing. Christie essentially represents the pure fear and war play within the Republican party, and we should wish him as much failure as possible in his campaign accordingly.

With all that said, one of his remarks during the debate is still worth calling attention to and correcting. Even if he no longer has a chance, the narrative he’s trying to sell is still dominant for many voters. And that narrative consists of two key things which are contradictory, but somehow still simultaneously believed:

*The US government has successfully defended America against terror attacks, and its actions are necessary to continue to keep us safe.
*The US government lacks the surveillance powers needed to keep us safe, and that’s the only reason any attacks get through.

See the problem there? On the one hand, people are asked to believe heroic figures like Christie have caught and prosecuted many terrorists that would do us harm. On the other, people are reminded that we are deeply vulnerable because we don’t have the tools to catch terrorists. And while the American people don’t seem to like Christie as the vehicle for these ideas, they haven’t rejected the ideas themselves.

In reality, the themes expressed above can be reconciled by the ugly truth that most of the “terrorists” prosecuted since 9/11 were elaborate sting operations. In most cases, the authorities had paid informants that were actively trying to persuade otherwise peaceful people to committing violent acts of terrorism. And the persuasion usually involves significant logistical support from the informant to plan the attack. In other words, most of the time, the FBI is just solving terror plots they themselves created. It’s a waste of tax money that doesn’t make anyone safer and it ruins innocent people’s lives.

In Tuesday’s debate, Christie highlighted his involvement in some of these counterterrorism cases as a means to show his experience on terrorism. Unfortunately, one of the cases he explicitly cited by name, the Fort Dix case, is a perfect example of how counterterrorism shouldn’t be done. For most of the defendants involved, it was simple entrapment. And the only thing they were actually guilty of was buying illegal guns, which conservatives aren’t supposed to care about anyway. But because they were prominently accused of terrorism and there was video evidence of them at an American shooting range, that was enough to convince a jury to put them away for life in prison. Christie built his political career partly by celebrating this injustice as a key achievement.

In case you’re unfamiliar with this story, I recommend checking out the long-form write-up on this story from The Intercept. People have abandoned Christie as a candidate for a long time, but they need to abandon his ideas as well.