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Friday, September 19, 2008

Clueless crisis conclusion

One misguided meme now spreading is that the present financial crisis proves that converting any part of Social Security to private accounts would have been folly:

Here's something that really ought to grab everyone's attention: McCain supports George W. Bush's idea of channeling at least some Social Security funds into "personal accounts" that individuals would invest on Wall Street. Some of that money would have been entrusted to firms such as Bear Stearns (failed), Lehman Brothers (failed) and Merrill Lynch (sold at a fire sale). Imagine what this crisis would be like if Americans' Social Security benefits were evaporating along with their housing values and their 401(k) accounts.

What such criticism fails to grasp is that Social Security, Medicare and other entitlements are long-term threats to the U.S. government's solvency. It's the Treasury and the Fed that right now are stabilizing failing financial institutions. Their ability to do that over time is in doubt, precisely because of the massive entitlement liabilities borne by the U.S. government. And U.S. bonds as a safe haven only work if there is certainty about the government's ability to pay back.

Entitlement reform is needed to put the government on a sounder fiscal basis so it can deal with, among other things, financial crises. If there's one terrible idea that should not be allowed to come out of the current financial crisis, it's that business as usual in entitlements is fine.

UPDATE 9/20, 3:05PM: Obama repeats the meme.

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