Economics and the mid-life crisis have much in common: Both dwell on foregone opportunities

C'est la vie; c'est la guerre; c'est la pomme de terre . . . . . . . . . . . . . email: jpalmer at uwo dot ca

. . . . . . . . . . .Richard Posner should be awarded the next Nobel Prize in Economics . . . . . . . . . . . .

Tuesday, January 11, 2005

Social Security, the U.S. Federal Gubmnt Deficit, and the Supply of Lendable Funds

Many economists are concerned about the expected growing drain on the U.S. Social Security Trust Fund over the next 20-30 years (see Tyler Cowen here, see ColdSpringsShop's Stephen Karlson here, and Ben Muse here, for example). This concern is the main force driving calls for reform of the Social Security System.

In a recent posting, "Is There a Social Security 'Crisis'?", Donald Luskin (who typically [though somewhat understandably] seems to have a perpetual bee up his butt about Paul Krugman) points out that once the surplus in the Social Security Trust Fund stops growing, the result will be that the fund will stop buying so many gubmnt bills and bonds, which will reduce the supply of lendable funds on the market:
But then in 2009, just 5 years from now, the surplus will start to shrink. In 2009 it will fall to $103.7 billion, and in that year the federal government will have to go to the capital markets to raise $4.3 billion that it didn't have to raise the year before. That's not a lot of money in the grand governmental scheme of things nowadays. But it's an important turning point for Social Security -- it's the year the crisis begins.
It could very well be that even before 2009, the slowdown in the rate of growth of the surplus will be a harbinger of what Donald Luskin is writing about. The continued, gradual reduction in the supply of lendable funds will likely have only negligible effects in any one year, but the accumulated withdrawal of over $100 billion from the financial markets could have an important impact on interest rates, investment, and economic growth.

I expect that those who worry only about the direct impact on real output see less cause for concern if they ignore this effect.
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