TCS Daily

The Philosopher King

By James K. Glassman - March 4, 2004 12:00 AM

Alan Greenspan, who turns 78 on March 6, ends his fourth four-year term as chairman of the Fed on June 20. It would be great if he could stick around, if not in his current job, then as Philosopher King.

The United States needs a king with Socratic qualities (the ability to keep "in mind the perfect pattern of justice, beauty and truth") to tackle the serious economic crisis we face.

The crisis isn't outsourcing -- although, if politicians who want to thwart global trade get their way, the U.S. could be plunged into another prolonged depression, as we were by protectionism in the 1930s.

The real crisis is the federal deficit, specifically, the rising tide of entitlement spending -- on Social Security, Medicare and Medicaid -- which threatens to engulf the entire economy.

The reason we may need a king is that politicians of both parties are afraid to tackle the crisis, because resolving it means revising the lavish promises they made but can't keep.

Enter the Philosopher King. He's unlike politicians, who, as Plato wrote, "live not by leading public opinion, but by pandering to it." Voters can't remove him. He speaks his mind.

In powerful testimony to the House Budget Committee on Feb. 25, Greenspan said that, while "the economy is off to a strong start in 2004," Congress must act "as soon as possible" to rein in the deficit. "The dimension of the challenge is enormous." Our standard of living is at stake.

In 2003, the U.S. government spent $375 billion more than it raised. In 2005, the White House expects a deficit of $521 billion, an average of about $5,000 per family. As the economy gains strength and defense spending levels off, the deficit should fall, but that's temporary. Baby Boomers start retiring in 2011, and the deficit quickly spins out of control.

The Congressional Budget Office laid it all out in a scary report in December. Right now, the federal debt to the public -- that is, the money the U.S. owes to cover all the accumulated deficits -- totals a manageable 40 percent of GDP, our yearly output. Under one CBO scenario, if entitlement spending rises at current rates, the debt balloons to 126 percent of GDP by 2030 "and continues to grow steadily thereafter." This is a disaster, and it's getting closer every minute.

The Bush tax cuts, which helped stimulate the economy at a critical time, aren't the culprit. To raise taxes would pose "significant risks to economic growth and the revenue base," Greenspan said.

The trouble is demographic. Social Security was established at a time when average life expectancy at birth was 62 and benefits began at 65. Now, life expectancy is 77, and you can begin drawing checks at 62. It's a double whammy because, as the population ages, there are fewer workers to provide them with benefits. Currently, there are three workers per Medicare recipient; in 2025, there will be just two and a quarter, and they will be supporting far greater benefits, thanks in part to last year's legislation.

What to do? Greenspan suggests raising the retirement age for Social Security and trimming inflationary increases in benefits. Medicare is far more daunting.

We need to keep our promises to current retirees, but others must be told: "The government will help the poor, but it can't provide everyone with the benefits of the past. You must do part of the job yourself, through savings."

Self-reliance is in our blood, but better public policy is needed too. The tax code has to encourage savings -- an objective that would also increase economic stability by making us less vulnerable to foreign governments that finance much of our trade deficit.

The new Medicare law takes a good first step with Health Savings Accounts. President Bush wants broader IRA-like accounts, too, as part of his "ownership society." But both approaches need to be bolder. We should also cut incentives to borrow by reducing the home mortgage deduction. And, by the way, the U.S. desperately needs productive immigrants to help fund our old people.

While 47 percent of 18-to-34-year-olds believe in flying saucers, only 9 percent believe they'll get their scheduled Social Security payments. Much of the rest of the nation, however, is living in a fool's paradise. That's why we're lucky to have a Philosopher King like Alan Greenspan to bring us closer to reality.


TCS Daily Archives