Martin L. Gross

First of three articles
published in the Washington Times

 There was a time when political lies were restricted to verbiage. American politicians, the masters of high-flown rhetoric, have promised to "save" Social Security (the mysterious "lockbox"), no longer raise taxes ("read my lips"), and provide cheap, effective health insurance for all. (Remember Hillary Clinton?) And most important, all of this at minimal cost.

 We citizens are the perennial, everlasting, original suckers. We've never really learned to cut through rhetoric to find the truth. I had hoped that after 40 years of foggery, we were finally getting the hang of it. Then suddenly our politicians outwitted us again by opening a second front: the arithmetic lie.

 Now, that's something we're infinitely not equipped to handle. If you recall, in a recent international contest, American high schoolers came out 19th out of 21 nations in math. Apparently, that is a failing that extends all the way up the line, from voters to even the honest if mathematically challenged politicians.

 The newest arithmetic twist involves a lie masquerading as both a "surplus" and a "lockbox." It goes something like this: Social Security will be protected by ensuring that the FICA taxes we pay (12.4 percent of the payroll) are put aside for those who will need it most — the Boomers when they start to come on line beginning in 2008, then heavily in 2013. The "surplus," we are told will be used to "strengthen" Social Security.

 As someone with some background in math — having addressed the American Statistical Association, testified five times before the U.S. House of Representatives and the U.S. Senate on budget and spending, even having eked out an "A" in college calculus, I develop crippling stomach secretions when I listen to the politicians' carefully constructed math lies.

 The arithmetic reality is quite simple, and it's the exact opposite of what politicians are telling us. The so-called budget "surplus" that is supposed to "save" Social Security is almost entirely (80 percent) excess FICA-Social Security taxes taken by politicians and immediately spent in the general fund for everyone except the aged and disabled. The Social Security "fund" is then given IOUs in return. That debt, in a twist of math the non-governmental world has yet to master, is counted as cash. As the federal budget calls those IOUs, it is "debt securities held as assets." (That's quite a trick, much like counting your mortgage debt as cash on your back financial statement, a gimmick that will quickly land you in the clink.)

 That idea of debt as surplus is an arithmetic fantasy, unless it takes place in Washington, where this new, new, new math is created by legislation.

 The true arithmetic is quite simple. In 1983, the FICA taxes were raised 25 percent in order to save funds to pay the retiring boomers 25 years later. This created an enormous FICA surplus. In 2000, for example, Social Security took in $566 million, including accrued interest, and paid out only $410 billion. That left a Social Security surplus of $156 billion. In addition, the Medicare fund also had a surplus of $25 billion. What happened to that $181 billion? Sad to say, as part of the phony "unified budget," it was put into the general fund and spend on whatever — welfare, tanks, fat retirement funds for the members of Congress.

 What happened after that? The Social Security "fund" (actually only a bookkeeping item) got bonds for $181 billion, IOUs that are now sitting there with no idea of how to redeem them when the time comes. So far, since 1983, $105 trillion has been taken from the Social Security money meant for the aged and disabled, but spent, spent, spent instead.

 By the year 2015, when less money will be coming into FICA than going out, there will be $4 trillion of misappropriated money from Social Security that is gone, gone, gone, replaced by IOUs. That figure rises to $6 trillion by 2025 with no way to pay the Boomers except by raising taxes or lowering benefits — the ultimate result of the federal Ponzi scheme.

 I call the Social Security money "misappropriated," but in such a profile in courage, Sen. Ernest ("Fritz") Hollings, South Carolina Democrat, says the truth: that it is "looted." As he says: "For everyone crying 'Save Social Security,' the first order of business is to stop destroying it by looting the fund."

 This idea also came to Sen. Daniel Patrick Moynihan, New York Democrat, and Sen. Robert Kerrey, Nebraska Democrat, who introduced a bill, S 21, which would cut Social Security free from the general fund so the money couldn't be touched. This is much like Al Gore's favorite "lockbox," part of another arithmetic lie since it has two insolvable problems.

 One is that S 21 has been bottled up in the Senate Finance Committee since January 1999 with no chance of passing. The second, more insidious problem is that if FICA cash is no longer "looted" and spent in the general fund, then 80 percent of the president's supposed $237 billion "surplus" automatically disappears. It will be hard to strengthen Social Security by using a surplus made up mainly of IOUs. Not only that, but then the presidential candidates will loose the FICA candy store with which to promise goodies to the gullible voters.

 It might help if citizens went back to school to study arithmetic. But not really, so long as there are politicians who now understand that if the big lie of rhetoric falls, there's always " 'rithmetic" with which to fool the voters.

Martin L. Gross is the author of three New York Times best sellers on the federal government. His latest is "Government Racket 2000: All New Washington Waste From A to Z," an original paperback published by Harper Collins.

The Surplus Hoax

by Hans F. Sennholz, Professor of Economics

at Grove City College,

adjunct scholar of the Mises Institute.

The ever-growing budget surplus of the U.S. Government is exciting the spending instincts of most politicians. It stirs their passions and encourages them to find and concoct new spending programs that will tap into the surplus.

In defense of their position and income, most politicians are ever eager to take as much money as possible from taxpayers so that they may buy the favors of the voters. They wax eloquent about the great benefits of spending but fall silent about the costs and consequences of taxation. Most of them may even engage in the art of fiscal legerdemain which turns a tax into a benefit and a deficit into a surplus. The budget surpluses of the Clinton Administration are current examples of such deception.

A budget reflects a president's aspirations and hopes, his wishful thinking as well as his philosophy of politics. It's a mixture of financial planning and political campaigning in which fiscal legerdemain knows no limitations of party or time. The federal budget surpluses since 1998 are no exception to the rule. They obscure significant federal expenditures through bookkeeping gimmickry, such as borrowing new money to pay off old loans and calling it "debt reduction."

Imagine a corporation suffering losses and being deep in debt. In order to boost its stock prices and the bonuses of its officers, the corporation quietly borrows funds in the bond market and uses them not only to cover its losses but also to retire some corporate stock and thereby bid up its price. And imagine the management boasting of profits and surpluses. But that's what the Clinton Administration has been doing with alacrity and brazenness. It suffers sizeable budget deficits, increasing the national debt by hundreds of billions of dollars, but uses trust funds to meet expenditures and then boasts of surpluses which excites the spending predilection of politicians in both parties.

If a corporation executive were to engage in such deceit, the Commissioners of the Securities and Exchange Commission (SEC), who are supposed to promote full public disclosure and protect the investing public against malpractice in the securities markets, would intervene with severity; when a president of the United States and his appointees engage in similar practices, all his men fall silent.

The surplus deception is clearly discernible in the statistics of national debt. While the spenders are boasting about surpluses, the national debt is rising year after year. In 1998, the first year of the legerdemain surplus, it rose from $5.413 trillion to $5.526 trillion, due to a deficit of $112.9 billion. Since then it has risen to $5.643 trillion today, October 15, 2000, with another deficit of $117 billion.

The federal government spends Social Security money and other trust funds which constitute obligations to present and future recipients. It consumes them and thereby incurs obligations as binding as those to the owners of savings bonds. Yet, the Treasury treats them as revenue and hails them for generating surpluses. If a private banker were to treat trust fund deposits as income and profit, he would face criminal charges.

In the coming years, the trust fund surpluses are estimated to grow significantly, inviting ever more fiscal legerdemain.

   Estimates of Trust Fund Surpluses
   (In billions of dollars)

   1998 $ 99.195
   1999 123.690
   2000 147.834
   2001 159.639
   2002 172.002
   2003 184.318
   2004 194.618
   2005 213.654
The Congressional Budget Office (CBO), which is the research arm of Congress, is rather pessimistic about future trust fund surpluses. It warns of lurking deficits in the distant future. Within a decade the members of the baby-boom generation will retire and put financial strains on Social Security and Medicare. The number of beneficiaries will soar as will the cost of health care due to advances in medical technology.

CBO estimates that federal total spending on retirement and health programs will more than double, rising from 7.5 percent of gross domestic product (GDP)in 1999 to more than 16.7 percent in 2040. Deficits are expected to reappear in 2020 and climb to 9.5 percent of GDP by 2040. CBO suggests that structural reforms are needed, no matter how politically difficult they may be. Without such reforms the trust fund deficits together with the Treasury deficits would soar to record levels.

The present trust fund surpluses do affect the capital markets in a favorable manner, which most critics do not care to mention. Whenever government suffers a budget deficit, it drains the capital market of valuable liquid funds, which otherwise would have produced capital investments or private consumption; and it raises interest rates and crowds out private activity. Trust fund surpluses offset the ill effects of Treasury deficits. Whenever the surpluses exceed the deficits, they even provide productive capital as Treasury obligations are retired. But, no matter how advantageous the trust fund surpluses may be for the capital market, they constitute tax exactions that reduce the income and level of living of taxpayers.

The Treasury's dependence on trust fund revenue is visible also in the shift of the national debt from the hands of individual and institutional investors to the coffers of federal trust funds, that is, from marketable obligations to non- marketable IOUs. The Treasury calls it "debt reduction"; it actually is mere "debt shifting" from bill and bond holders to Social Security claimants. During the past two years, the marketables declined by some $223 billion while the non-marketables rose by more than $450 billion, the balance representing new debt. At this time, the marketable debt of some $3 trillion still surpasses the non-marketable debt of of $2.6 trillion.

President Clinton proposes to devote the entire Social Security surplus to reduce and finally eliminate the Treasury debt held by the public. He reasons that "creating a debt-free United States will eliminate debt service costs and result in substantial interest savings."(The Budget for Fiscal Year 2001, p. 36). He obviously infers and wants us to believe that "debt shifting" is "debt reduction," that the U.S. Treasury will be debt-free when the Social Security Administration holds all its debt, and that this shift will result in substantial interest savings. The President palpably engages in the art of legerdemain which turns debt shifting into debt reduction, a huge national debt into freedom from debt, and interest payments payable to the Social Security Administration into interest savings.

The "Miscellaneous Receipts" of the Treasury are legerdemain revenues created by the U.S. Congress. They consist primarily of the net earnings of the Federal Reserve System. In fiscal 1998 and 1999 the System deposited $32.658 and $34.929 billion respectively with the Treasury; in fiscal 2000 they are estimated to exceed $37 billion.

The Budget document unfortunately does not reveal that the System financed massive U.S. government expenditures by purchasing $507 billion of U.S. Treasury securities with money it printed; the Treasury then paid an interest of more than $30 billion to the Fed, which then returned the funds to the Treasury as "Miscellaneous Receipts." In short, one government agency, the Fed, now prints money at minimal costs; another agency, the U.S. Treasury, spends it, but pays an interest to the Fed, which then returns the funds to the Treasury. (Federal Reserve Bulletin, October 2000, p. A5, A26) If a corporation were to engage in such practices, its officers would soon be languishing in federal penitentiaries.

Such machinations obviously build on the power of the Federal Reserve System to print legal-tender money which every American is forced to accept. Having grown accustomed to this force, most Americans no longer question it although it is the very essence of wrongdoing. The power to print money and force it on the people is the power to engage in inflation, which is one of the political evils of our time.

The money thus printed, the Federal Reserve notes, constitute "high-powered money" and as such serve as the base for multiple credit expansion of M1, M2, and M3, which continually erode the purchasing power of the American dollar. Throughout the years, the $507 billion of Treasury securities bought by the Fed not only enriched the Treasury directly, but also indirectly provided annual depreciation gains on the Treasury debt of $5.6 trillion. At an inflation rate of just 3 percent, those gains amount to some $168 billion annually; the U.S. Budget makes no mention of them.

Whoever takes office in 2001 is likely to make short shrift of any and all trust-fund surpluses. If we add his budget proposals to the expenditure growth of the last three years, when spending on domestic programs increased an average of 5.5 percent a year, the future deficits may soar to the lofty levels of the 1980s. Moreover, the remarkable rise in federal revenues in recent years, which flowed from the feverish boom on Wall Street and greatly boosted capital gains tax receipts, is bound to come to an end. When economic activity declines and unemployment rises, most politicians are likely to go into overdrive spending. After all, they always delight in seeking to amuse, coax, and engage the fancy of the electorate.

From McGuffy's Fourth Reader, published in 1838

Ludicrous Account of English Taxes.


 Permit me to inform you, my friends, what are the inevitable consequences of being too fond of glory. Taxes -- upon every article which enters into the mouth, or covers the back, or is placed under the foot -- taxes upon everything which it is pleasant to see, hear, feel, smell, or taste -- taxes upon warmth, light, and locomotion -- taxes on everything on earth, and in the waters under the earth -- on everything that comes from abroad, or is grown at home -- taxes on the raw material -- taxes on every fresh value that is added to it by the industry of man -- taxes on the sauce which pampers man's appetite, and the drug which restores him to health -- on the ermine which decorates the judge, and the rope which hangs the criminal -- on the poor man's salt, and the rich man's spice -- on the brass nails of the coffin, and the ribbons of the bride -- at bed or board, couchant or levant, we must pay.

The school boy whips his taxed top -- the beardless youth manages his taxed horse, with a taxed bridle on a taxed road. The dying Englishman, pouring his medicine which has paid seven per cent, into a spoon which has paid fifteen percent -- flings himself back upon his chintz bed which has paid twenty-two per cent -- makes his will on an eight pound stamp, and expires in the arms of an apothecary, who has paid a license of a hundred pounds for the privilege of putting him to death.

His whole property is then immediately taxed from two to ten per cent. Besides the probate, large fees are demanded for burying him in the chancel. His virtues are handed down to posterity on taxed marble, and he is then gathered to his fathers -- to be taxed no more.

In addition to all this, the habit of dealing with large sums will make the government avaricious and profuse. The system itself will infallibly generate the base vermin of spies and informers, and a still more pestilent race of political tools and retainers, of the meanest and most odious description, while the prodigious patronage, which the collecting of this splendid revenue will throw into the hands of the government, will invest it in so vast an influence, and hold out such means and temptations to corruption, as all the virtue and public spirit, even of republicans, will be unable to resist.