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July 2020 Budget Commentary

Once in a Lifetime?

Fiscal Year 2019-20 continues to amaze with its unprecedented budget gap.  The deficit for June was $863 billion, or just a shade below the amount for all of last year.  The federal government spent $1.1 trillion last month—the equivalent of 60-65% of the United States Gross Domestic Product (which is supposed to measure the economic output of a country).  This represents about $3350 per American, and with the spigot wide open, the rush to claim the money was widespread.  It will come as no surprise that among those taking Washington’s money were ideologues who spend their days railing against big government — the Ayn Rand Institute being the most noteworthy for its hypocrisy in this commentary’s opinion.

In any case, the deficit for this fiscal year is now $2.7 trillion but that’s water under the bridge.  The pertinent question is what happens next?  The original idea behind the CARES act was that the federal government would provide payments to keep incomes of individuals and business owners at “normal” levels for a few months while the virus was brought under control.  We are now nearing the end of that support, but COVID is still on the loose.  Will Congress and the Administration try to cover the lost income for another four months (until after the election) or longer?  One thing is for certain—no one is worrying about funding the spending; Modern Monetary Theory, or MMT, has become standard paradigm for budgetary matters.    

“Fixing” Social Security

“The Treasury Department does not initially observe a difference between payroll taxes and withheld individual income taxes.  Instead, it first allocates withheld taxes to one source or the other on the basis of estimates made in advance.  As additional information becomes available, including detailed tax return information, periodic reallocations are made to revise past allocations.”

CBO Monthly Budget Review for June 2020, pg.5

We have frequently fulminated in past commentaries about the artificial nature of the Social Security Trust Fund (SSTF).  Suffice it to say that this “trust fund” which is often presented as a stand-alone pension entity is in reality merely an accounting fiction.  This is because the payroll taxes which comprise the bulk of contributions to the SSTF are not segregated as they are paid into the Treasury; rather, as the citation above suggests, the decision of how much withholding tax actually winds up on the books of the “trust fund” is made by a committee in Washington well after the taxes have been collected.  Likewise, benefits are not paid from the SSTF but rather by the US Treasury, as tabulated in the Daily Treasury Reports.

The truth of the matter is that the balance in the SSTF—in the “lockbox” if anyone recalls that bit of rhetorical chicanery from the 1990’s—makes no difference in the cash flows of the program; in the taxes taken in and the checks sent out.  Likewise, the idea that the SSTF can “run out of money” is as ludicrous as saying that the Defense Department or Medicare or the federal government as a whole can “run out of money.”  If this coronavirus crisis has taught us anything, it’s that Congress (with the cooperation of the Federal Reserve Bank) can fund whatever it likes.  Any government that can run a monthly deficit of roughly 50% of its GDP and still have its bond yields decline is not in danger of losing its fiscal freedom.

And yet, as the corrupt Senator Geary says in Godfather II “some people have to play their little games.”  So allow us to propose a simple fix for Social Security.  Let the Treasury borrow another trillion dollars and place it on the books of the SSTF.  The fund can then turn around and lend the money to the Treasury (as it does with the rest of its assets.)  This would solve the “problem” of Social Security “going broke” for the next fifty years at least.  The deficit would increase from $26.8 trillion to $27.8 trillion, but at this juncture would anyone really notice the difference?  Let’s just call it stimulus.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.  All performance referenced is historical and is no guarantee of future results.  

Securities offered through LPL Financial, member FINRA/SIPC. Investment advice offered through Great Valley Advisor Group, a Registered Investment Advisor. Great Valley Advisor Group and Doylestown Wealth Management, Inc. are separate entities from LPL Financial.