Political arguments whirl regarding the solvency of Social Security, the enduring recession, the inability of congress to pass a budget, and the monetary loans intended to postpone the collapse of Spain and Greece. The arguments don’t address the sisgnificant question. In the absence of war or pestilence, why do economic systems collapse even though the physical methods to produce food, clothing, and shelter exist unchanged?
Economics isn’t simple. It’s complex!
Contrary to classical theory, economics is not a system of instantaneous reasoned decisions made by ideal, informed producers and consumers. Economic decisions are delayed or made by humans based on hopes, fears, customs, beliefs, ego, risk, and security. With millions of independent decision-makers all interacting with each other, the economics of a country (or the world) is a very complex system. Complex systems can show unpredictable emergent behavior, including frequent small events and rare large events. Sounds like bear and bull markets, boom and bust. We live within a set of nested economic complex systems. The price of putty in Peru might affect a decision in trans-ocean shipping, which affects corn futures, which affects the demand for taxicab in Toledo. By using my credit card on the internet, I can order wine made in Transylvania sold by a mail-order store in South Korea.
We think of economics as money, but money and bank accounts aren’t real things you can eat, wear, or sleep under. Money is just a promise, a promise that you can trade for something real, like a carrot. A carrot is real. You can eat it or grow it for seed. So long as no one doubts the promises, the money system works. Banks multiply the promises, accepting your one dollar deposit while loaning five or thirty dollars to someone else. The bank promises to repay you on demand and borrowers promise to repay the bank on schedule. It works, unless many borrowers can’t keep their promises, you demand your money, and the bank closes. During the last twenty years, large investment banks (promise brokers) developed investments (called derivatives) that owned promises that owned other promises called mortgages which were promises elicited by other banks from persons whom the banks knew had no capability to keep their word. Sure enough, great aggregations of promises, called “institutions too large to fail,” failed. Expecting a downturn, producers fired workers who could then no longer pay their own promises. The economy collapsed like an avalanche in a sand pyramid when one grain of sand too many drops on top.
The physical farms, factories, tools, and roads—the things that produce real goods—didn’t disappear. The promises did. Production of real carrots could in principle continue. But hopes, fears, and expectations built on broken promises collapsed the complex system of payment, based on money.
The cheap money (low-interest promises) now offered by the federal reserve can’t get the system moving again because a broken promise leaves a memory. How do we avoid this in the future? Re-install the banking regulations that were initiated after the great depression, and then removed by the promise-brokers during the 1990’s. Regulation diminishes avalanches. And also slows bubbles of growth.
Politicians argue about a future collapse of Social Security if its funds (promises) run out. They neglect the facts. Social Security is a paper accounting system into which workers put money now, money “invested” in government bonds (promises), which theoretically will later buy real goods (carrots) for the workers when retired. In reality, the working generation has to produce most of the goods and services consumed by the retirees at the time the retired generation needs them. You can’t store carrots or medical care.
An individual person can put money in the bank and spend it later in his old age. That’s trading one small promise within a large system. The entire society cannot make a single promise that applies to everybody. For example, suppose all workers saved enough money to live for a year, and then all quit working at once for a years’ vacation. With all money and no carrots, everybody would starve.
The government bonds in which Social Security “invests” are unsecured promises, like multiple guarantees for mortgages on a single property (credit default swaps). The only way Social Security could guarantee future carrots would be to own and operate the means of production, the farms. That’s called communism. Instead, the investment firms (promise brokers) suggest we “privatize” Social Security by investing it in stocks and bonds and derivatives (more promises), enriching the brokers who arrange the sales and trades. Even corporate stocks are unsecured promises. In theory, a stockholder owns part of the company, which produces goods and services. But most stocks sell at 15 to 30 times the book value of the company, based on investors’ speculative hopes. That’s a hope that someone else will be willing to pay a higher price (a bigger promise) in the future. It’s sure not security.
So what do we do?
Stop thinking of Social Security as money in the bank for future retirement. If some minimal level of social well-being is a value (and I think it is), tax now and use the funds now to support the current beneficiaries at whatever level of benefit you choose. That’s real economics. Future working generations will have to produce the goods consumed by the future retirees, however they may account for it. You can’t store carrots for fifty years.