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Social Security as Part of an Economic Fix

Economist Peter Diamond is not sitting on the Federal Reserve Board, thanks to GOP opposition. But, at least today, the republic’s loss is The New Republic’s gain. This week TNR.COM is running a symposium on creative economic ideas and Diamond has contributed to it.

The headline on the article is “Want to Fix the Economy? Start With Social Security.” And that will probably surprise a lot of people. The expected shortfall in Social Security represents just a small portion of the liabilities that make up our future debt burden. (Health care costs, via Medicare and Medicaid, are the real problem.) And our immediate economic problem is finding some way to boost growth and reduce unemployment. Calls to reform Social Security, right now, sound suspiciously like calls to end the program under the guise of economic recovery legislation.

But the lefty Diamond (see photo above) is no enemy of Social Security or, more generally, social insurance. He’s a longtime defender of both and has, for years, been arguing for modest reforms that would strengthen the program while minimizing pain among beneficiaries. He was a staunch opponent of efforts to privatize Social Security, by diverting funds into private investment accounts. In fact, the discrediting of that idea is one reason Diamond thinks Social Security reform makes sense now:

In some ways the current political climate makes this an especially good time to try fixing Social Security. Fixing Social Security involves some combination of raising taxes and lowering benefits, both of which are very hard to legislate until the public feels it’s facing an imminent crisis. Heightened concerns among many Americans about the long-run debt held by the public should help cultivate acceptance for changes in Social Security.

The politics of opening up Social Security, right now, are obviously very tricky. And the merits of the idea would obviously depend, in part, on whether a solution was truly balanced between tax increases and benefit reductions, as Diamond urges.

But, Diamond says, Social Security reform would ideally be part of a much broader package, one that addresses our current needs as well as our future ones:

Social Security reform--with its large contribution to the long-run debt problem—should not be seen as exclusive, but combined with the sort of large infrastructure program that could stimulate the economy. As with Social Security, there is wide agreement that we have major infrastructure needs throughout the country, and fixing now what we would otherwise need to fix later would not really add to the long-run debt level. In fact, current infrastructure spending would have a lower real cost by drawing in part on otherwise idle labor and capital as well as having a multiplier effect on unemployment.

By the way, the symposium will be running for several days. Today’s entries include essays by two more smart writers, Jim Manzi and Felix Salmon.