George Bush's Leveraged Buyout of Social Security

by Stirling Newberry
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)

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(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/

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

(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/

(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/

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

(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.html