December 30, 2004


What transition costs? (Robert Novak, December 30, 2004, Townhall)

In the more than 41 years that I have been writing columns, nothing has generated more unfavorable comment from conservatives than my Dec. 6 report on Republican Sen. Lindsey Graham's Social Security plan. He would finance the transition costs for private Social Security accounts by raising payroll taxes. Of all the outraged critics from the Right who contacted me, economist Larry Hunter had the most pungent rebuttal: "There are no transition costs."

If that is so, I asked Hunter, can you write me a one-page explanation to buttress your remarkable claim? Nearly a month later, he gave me three single-spaced typewritten pages plus four colored graphs. Actually, they portray an increase in federal expenditures forced by private accounts -- that is, transition costs. Hunter's point: There would be no long-term net transition costs. Doing nothing will cost much more, beginning as early as 35 years from now. (Hunter's analysis will be published by the Institute for Policy Innovation.)

That amounts to no real transition costs. The problem with this argument is that we are talking about red ink far into the future when nearly everybody now debating the issue will be dead.

Isn't that the point--such debt never has to be repaid. The Brits haven't paid for the Napoleonic War yet--hasn't seemed to do much harm.

Posted by Orrin Judd at December 30, 2004 9:25 AM

This is one of those nice, antirationalist facets of human life. Borrowing indefinitely only works if we don't think about it, and always earnestly intend to pay the debt back.

Posted by: David Cohen at December 30, 2004 9:59 AM

A percent of our present day taxes are paying interest on debt accumulated by the FDR generation. If what you are saying, "Isn't that the point--such debt never has to be repaid" is true then you are saying their will be no bad effects from welching on that obligation today.

Not, I think.

Posted by: h-man at December 30, 2004 10:06 AM

To be technically accurate, the debt does have to be re-paid, but the re-payment is made with borrowed funds. Ergo, the British did pay their Napoleonic War debt, but have not eliminated the debt burden that they incurred. That strategy only works as long as people are willing to keep lending you money to cover your existing debts. The way to keep them wanting to lend you money is to always have a vibrant economy that persuades the lender that the money will be re-paid.

Posted by: Brandon at December 30, 2004 10:35 AM


There never have been.

Posted by: oj at December 30, 2004 10:40 AM


The most interesting aspect of that is too look at the reverse angle replay--such desire for debt forces good government.

Posted by: oj at December 30, 2004 11:03 AM

True, and I believe that was Alexander Hamilton's argument back in the 1780's. However, desire for debt doesn't always force good government in the short term, any quick look at our southern neighbors would reveal that.

Posted by: Brandon at December 30, 2004 12:09 PM


Actually the salient fact is that loans to those states have to come from places like the World Bank rather than their own citizens.

Posted by: oj at December 30, 2004 1:28 PM

Hunter's point is correct. If you can defer your costs far enough into the future, they essentially disappear as a function of your economic growth and the time value of money.

Posted by: Bart at December 30, 2004 4:45 PM


Posted by: Jeff Guinn at December 30, 2004 8:32 PM