Security Flaws


Republican privatization plans are more than a threat to Social Security -- they're a threat to national security.

By Paul Starr
Issue Date: 01.04.05

Republican plans to privatize social security raise two different security questions. One is the impact on the retirement security of workers if they become dependent on the stock market for their basic livelihood in old age. The other concerns the nation’s security if, as news reports indicate, the Republicans decide that rather than raise taxes, the government will borrow the money to finance the shift to private accounts.

The Congressional Budget Office already projects a federal deficit of $2.3 trillion over the next 10 years. Making the Bush tax cuts permanent, as the president urges, would add another $1.9 trillion. But the total of $4.2 trillion is a low estimate because it allows for no adjustment for population growth and inflation in discretionary programs, not to mention future costs in Iraq or other wars. Borrowing the funds for Social Security privatization would raise deficits by $2 trillion more.

From whom will we borrow the money? These days about three-fifths of the federal deficit is being financed by foreign countries, much of it by their central banks. Currently, Japan is holding $720 billion in U.S. treasuries; China, $174 billion. If the Bush proposal were enacted without tax increases, the federal government would go deeper into debt to foreign countries to enable workers to speculate on the stock market.

I pause here to reminisce over the days when “conservatism” had something to do with prudence and when Republicans saw themselves as guardians of sound finance. There is also the peculiar matter of our growing dependence on China. Before September 11 and the preoccupation with Islamic terrorism, the specter that haunted the minds of some conservative intellectuals was the emergence of China as a global rival. No one in the Bush administration, however, seems to mind that we rely increasingly on China not only for cheap goods at Wal-Mart but also for the money to cover the federal deficit. Irony does not begin to describe the prospect of privatizing Social Security with billions borrowed from what used to be known as “Red China” (a “red state” in an obsolete sense that older readers will recall).

A recent report that China might be trimming back its purchases of Treasury bonds briefly gave the currency markets the jitters, pushing down the dollar. If China were to begin unloading its dollar assets, it could send the dollar into a free fall, forcing up U.S. interest rates and potentially bringing on a deep recession. Given China’s dependence on exports to the United States and its hoard of Treasury bonds, no one expects Beijing to bring about a dollar collapse deliberately. But a collapse could occur nonetheless.

For while the federal deficit has been soaring, so has the U.S. trade deficit. At an estimated $665 billion this year, the current account deficit amounts to 5.7 percent of the U.S. gross domestic product and is forecast to reach 7 percent of the GDP in 2006 -- more than 50 percent higher than its previous historic peak. Third World countries with deficits like these soon find themselves under the supervision of the International Monetary Fund. The United States is more fortunate, but we, too, face a reckoning.

When Americans consume more than they produce, other countries accumulate dollar assets -- because they believe the dollar is likely to hold its value. That confidence is the basis of the dollar’s status as the world’s reserve currency. Altogether, foreigners’ dollar assets are worth an estimated $11 trillion; as The Economist recently pointed out, the United States has, in effect, been able to write trillions of dollars in checks that the rest of the world hasn’t cashed. We ought to be keen on keeping this privilege.

In the past three years, however, the value of the dollar has fallen 35 percent against the euro, and some analysts expect a further fall of 30 percent. A weak dollar benefits American industry by making our products cheaper abroad (though it hurts consumers by making imported goods more costly). The big danger is a loss of international confidence in the dollar that would jeopardize its position as the world’s reserve currency, leading foreigners to cash those outstanding checks and sending long-term interest rates in the United States sharply higher (with severe effects, for example, on home purchases, likely bursting the bubble in the real-estate market).

With the federal and trade deficits both headed toward unprecedented levels, we are already on a dangerous path. Economic policy shouldn’t be pushing us further down that road. Borrowing to the hilt to finance stock-market investments isn’t a good idea for individuals. It doesn’t make any sense for the nation, either.

Paul Starr is co-editor of The American Prospect.

Copyright © 2005 by The American Prospect, Inc. Preferred Citation: Paul Starr, "Security Flaws", The American Prospect Online, Dec 20, 2004. This article may not be resold, reprinted, or redistributed for compensation of any kind without prior written permission from the author. Direct questions about permissions to permissions@prospect.org.