When the Fed creates money, a credit on its books, it also creates loans to banks, a debit on its books. So money is not a floating IOU. It is matched by assets.
Social Security proceeds are being used to offset lower income taxes–that was part of the 1986 tax “reform” designed by Alan Greenspan. It made the whole system more regressive.
There’s real investment and there’s paper investment. One hopes that proceeds of paper investments–stocks, bonds, savings deposits–get translated into real productive investment, especially investment in “human capital”. The fundamental issue is the quality of the investments. (My grandmother kept racehorses, nominally a real investment, but actually pure consumption.)
Some government investment is highly productive: urban infrastructure (not bridges to nowhere), public education, public health, police and courts–the services normally provided by state and local governments. At the federal level, social safety nets starting with Social Security. Supposedly national defense, but as an investment, that’s a big loser these days–except for Haliburton and Bechtel.
I don’t think government wants to be running banks or insurance companies, but it should regulate them because the opportunities for fraud are huge and the consequences potentially or actually disastrous. In the 2008 crisis, I think the government should have taken over the big banks, forced a haircut on the bondholders, and sold off viable pieces as quickly as possible.
At present, the Fed holds a huge inventory of toxic waste, which it is keeping off the markets to avoid further depressing real estate prices. That’s not productive investment! In fact it heads us towards Japan-style stagnation by keeping the zombies alive.
Enough
EDITOR’S RESPONSE: Nothing above contradicts our thesis. Unless the government were to purchase real assets that could be later sold, future generations will have to share their productivity with recipients of Social Security if future payments are not sufficient to pay for expenditures.
This is a strong argument for tearing down the border controls between Mexico and the USA to enable young people to immigrate and help pay for the retirement of our aging population. This is what many European nations with low birth rates have done despite the resulting changes to their nations’ cultures.
