[Mb-civic] Greed is Good

[Michael Butler]

    George Bush's Leveraged Buyout of Social Security
    By Stirling Newberry
    t r u t h o u t | Perspective

    Tuesday 15 March 2005

    In reading the new Richard Parker biography of John Kenneth
Galbraith,(1) it becomes clear that while others may have dazzled with
equations, John Kenneth Galbraith chose, instead, to become the wisest of
economists. He has spent his career, not laying out arguments about that
metaphysical creature "the rational economic actor," but looking at how
people actually make decisions. He is also among the most quotable of
writers: he quipped "financial genius is leverage and a rising market." By
"leverage" he means the ability to borrow to invest, or more often
speculate, in stocks. When stocks are rising generally, borrowing cheaply
and investing in the rise of the market seems as sure a thing as there is.

    It was this sure thinking that lead to the bust of Long Term Capital
Management in September of 1998. The market stalled, and a trillion-dollar
bet went wrong.(2) The Federal Reserve was called in to prevent the markets
from imploding under the unraveling of "financial genius" failing. Of
course, anyone who had read Galbraith would know that it had to fail:
eventually the money or the market would run out of map.

    We are being treated now to the spectacle of the fall of the House of
Enron, in which the executives are offering the "Yes, I am, I am an idiot"
defense,(3) and the world's largest insurer is facing a shake-up because of
probes into whether it inflated its figures.(4) But inflating figures is
business as usual; in my career in business I found several cases of not
merely "aggressive accounting," but outright manipulation of the databases
that really tell people what a company is worth - not merely among small
dot-com companies, but in large companies run by people who were worth, on
paper, more than a billion dollars. During the rising market, one must not
only prove one can do what one says, but that things are going better than
already outrageously high expectations.

    But what many observers of Bush's tenure in office have not understood
is that we now have a government run the same way: like a company on the
make, trying to bamboozle its share holders and creditors just to keep the
game going. That is how business works at the top: get control of the board
- 51% will do - and then put your plan into operation. It could involve a
hostile takeover, or a leveraged buyout, or selling off divisions, or
entering a new line of business. Then comes the hard part, waiting for it to
pay off - because often that payoff never comes, or comes much later than
expected. The job of a CEO is then to herald every green leaf as the sign of
coming spring, even if it was glued on and spray-painted by the army of
consultants he has hired. He must, above all else, convince the share
holders to "stay the course" and the lenders to continue to hand money over,
no matter what.

    And when that fails, the time comes to cook the books. Or come up with a
new scheme for borrowing. Or both. As we know, the first Bush plan was a
hostile takeover of Iraq, his goal from day one,(5) which has not produced
the promised economic results.(6) And that is in which we are now: the plan
for Bush's second term in the White House was simple - a leveraged buyout of
Social Security. He's hoping for some financial genius in borrowing public
money and dumping it into the stock market. It seems, to him, like a sure
thing.

    The key to a leveraged buyout is to borrow money, and then pay it back
by chopping apart the company to be purchased. This kind of "LBO" was very
popular in the 1980s, and is based on a simple idea: if there is money
there, why not get it now? And that is precisely what Bush proposed:
borrowing a vast sum of money, and then extracting value from the Social
Security system by cutting benefits. The future retirees would pay for the
cost of creating "private accounts," by getting less from the FICA taxes
that they paid. The people who would be sure winners would be the stock
brokers and companies who, in the present, would get the money flowing in
from people's contributions to "private accounts" right now.

    The beauty of this plan, even if an ugly kind of beauty, is that while
merely cutting benefits can be reversed by a later, saner, Congress -
borrowing and private accounts can't. Even though private accounts do little
to nothing for fixing the problem, or less than nothing, they become a
weight that is hard to reverse.

    Paul Krugman sees that the public mood has turned, and worries about
cooking the books in his most recent Op-Ed for the New York Times.(7) It
might seem that this attempt has been thwarted, that the American public has
turned sharply against "private retirement accounts," simply because they
realize that they aren't going to get the benefits now, and they are sure to
pay the taxes no matter what happens. The public understands that they get
the risk, no matter what the reward.

    This, however, misses the other part of how business works: when you
need to get control of a company, create a sense of crisis. Normally
business is nothing happening all at once: people go about their jobs, do
what they need to do, and hope that, at the end of the week, there is
another to make payroll. Making anything happen is a maze of checks and
balances, approvals, meetings, and signatures, and even the smallest
decision can require approval of higher-ups. To get something to happen now,
you need to create a sense of impending crisis, disaster waiting behind the
bend, so that panicked shareholders will vote absolute power, with
absolutely no reason, to whoever says he is in charge.

    We saw this with Iraq in 2002 and early 2003, where even the State of
the Union address became a conduit for delivering scare tactics about
Saddam's atomic bomb, and the American public was convinced that Osama bin
Saddam was out to get them. It worked, America marched to war, and even
Wesley Clark, a former general, was aghast at how the process had become
"cockeyed." September 11th was a very thick book of blank checks, and the
freely flowing money helped the US bounce back, momentarily, from the 2001
recession. But instead of pushing for total recovery, where people would be
hired back, Bush blocked the kinds of stimulus bills that would normally
have been passed, and played on the sense of economic, military and social
crisis to push America towards the option that he, and those who backed him,
had in mind.

    Now let us look at the present: just as with Iraq, the first attempts at
pushing America into the Social Security LBO have failed(8) - just as
attempts to rattle sabers about Iraq failed in early 2001, and attempts to
blame the anthrax attack on Iraq failed in late 2001. But we haven't
repealed the business cycle, and many are, in fact, worried that the current
stalled stock market could lead to a sharp drop in share prices. There will
be another recession, sooner or later, and when that happens, Bush will be
on the television saying that the problem is that bond holders and others
have lost faith in America because of the "Social Security Crisis."

    Now this is not in the least the case. The real problem in the US is
that we have slashed government revenues, and kept spending, much of it for
Iraq, very, very, very high. If there is a crisis of confidence in America,
it is not in the question of how to meet benefit levels in 2060, but in how
we are going to pay the debt service on the national debt, when interest
rates are rising. But just as with Iraq, Bush has never let the facts being
against him make any difference.(9)

    According to the rosiest of predictions - from the White House's Office
of Management and Budget - the interest paid on the national debt is going
to rise in 66% between 2003 and 2008, in real terms.(10) That is the
interest on what the Federal Government is borrowing - and that's real
money, not inflated money. We will owe, as our national debt, 40% of
everything made or sold in the US. That, not some distant question of Social
Security Benefits, is what worries bond holders. To put it another way, we
are going to be paying as much in increased interest costs every year as the
cost of the war in Iraq. Or if you want to think about it another way, the
interest on the debt is going to be more than 10% of the total Federal
Budget. If you ask a credit agency, someone spending 10% of their total
gross income on debt service is not a good candidate for a loan.

    This is the real crisis - and in politics, it isn't whether you win or
lose, it is how you place the blame. Right now, the Republicans are saying
over and over again that there is a crisis, and they are going to blame
Social Security. You can take that to the bank. This is why it is not a good
idea to make compromises now just to quiet the Republicans, because
appeasement doesn't work. They aren't making noise to get something small,
but to grab a big chunk of the future revenues of America. It is also time,
for everyone who wants to see Social Security work, to push back, and hard,
on the real crisis: the borrow and squander policies that are slowing
America's economy and the growth of real wages.

    Or as Max Sawicky(11) says, "No deals with dipsticks."(12)

(1) The Galbraith biography website is here:
http://www.johnkennethgalbraith.com/

(2) A sobering case study on the collapse can be found here:
http://www.erisk.com/Learning/CaseStudies/ref_case_ltcm.asp

(3) Andrew Leonard reviews Kurt Eichenwald's book on Enron here:
http://www.salon.com/books/review/2005/03/15/eichenwald/index.html

(4) The Financial Times reports:
http://news.ft.com/cms/s/6855b5e2-9499-11d9-8dd3-00000e2511c8.html

(5) Bush's people were meeting on this starting in early 2001:
http://scoop.agonist.org/archives/015920.html

(6) In 2002, many thought that "a successful outcome" in Iraq would improve
the world economy, echoing sentiments from Bush's council on economic
advisors. An example of the thinking of that time can be seen here:
http://www.iie.com/publications/pb/pb02-9.pdf

(7) Krugman's piece is here:
http://www.nytimes.com/2005/03/15/opinion/15krugman.html

(8) The Washington Post reports that "support for Bush on Social Security
wanes": http://www.washingtonpost.com/wp-dyn/articles/A33028-2005Mar14.html

(9) Dean Baker and David Rosnick go over the facts on Social Security here:
http://www.cepr.net/publications/facts_social_security.htm

(10) The gory details are here, particularly in table 6.1, on page 121:
http://www.whitehouse.gov/omb/budget/fy2005/pdf/hist.pdf

(11) Max is a noted labor economist and one of those grouchy but quotable
types who is respected because he is so often on the mark:
http://maxspeak.org/mt/archives/001204.html

(12) An economist writing under the nom de guerre "Pro-Growth Liberal" has
been busy debunking the day-to-day fabrications of the right wing for some
time. He has some very interesting observations here:
http://angrybear.blogspot.com/2005/03/is-social-security-trust-fund-worth.ht
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