By Dan Kervick

Stephanie Kelton interviews L. Randall Wray in the excellent new podcast series from New Economic Perspectives. The initial part of their discussion deals with the Fed, the “taper” and the inadequacies of monetary policy in dealing with the problems of unemployment and aggregate demand shortfalls. They then turn to a lengthy discussion of the three legs of the stool for retirement security: pensions, private savings and Social Security. Wray makes the point that defined-benefit pension programs have become decreasingly viable as developed economies have changed demographically, and that private savings were devastated by the 2008 financial meltdown and remain at risk as the potential for further financial crises looms. That leaves Social Security, which is under political attack in Washington by the likes of Pete Peterson and his acolytes in both parties.

Wray and Kelton both clearly bring out the point that it is illusory to think that we can provide for our citizens’ future retirements simply by stashing away money, whether in private plans or public plans. What is crucial is that we intelligently invest real resources in creating the real assets that will support the whole population in the future: the young, workers and retirees alike. Focusing on monetary saving, and draining even more dollars from the economy to build up accounting balances in the Social Security trust fund, can actually damage our capacity to support future retirees by running afoul of the paradox of thrift. Excess monetary saving in the present means that we fall short of the public and private investment spending we need to carry out now to sustain and build prosperity for future generations. Wray also makes the point that public investment is particularly important when we are dealing with the long time scales involved in making social decisions about provisioning the future.

Unfortunately, contemporary Washington seems blind to all this. It often seems to me that beltway politicians are especially prone to the mistake behavioral economists call “money illusion”: the tendency to confuse real, non-monetary values and assets with the nominal tools used to measure and manipulate those values and assets. As a result, the politicians engage in obsessive and contentious bean-counting with the Social Security trust fund as a substitute for attending to their primary duty to develop the economy and lay a strong foundation for future prosperity.

Cross-posted from Rugged Egalitarianism

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