Overhangs and hangovers

When Mikhail Gorbachev came to power in the Soviet Union, US economists warned him about the ‘overhang’ of billions of ‘useless’ unused rubles, otherwise known as the savings of millions of hard-working Soviet citizens, who had entrusted their earnings to the state banks. So Gorbachev ruined his domestic reputation by confiscating people’s bank savings and introducing a currency conversion that demonetized the cash of anyone who did not trust the banks. Even more so than closing the vodka distilleries, it made him unelectable ever after.

Worse, it failed to stop the hyper-inflation and probably facilitated the ensuing massive looting and transfer of wealth to the kleptocrats. Reading the words of some commentators on the US deficit now, one suspects they may be planning something similar.

Ever since Senator Daniel Moynihan ‘saved’ Social Security by increasing the percentage of income paid on contributions, the system changed to one of backdoor revenue raising. The billions taken from employees and employers go into a fund that promptly buys Treasury bonds with them.

Congress treats these bonds differently from those the Treasury sells to domestic and foreign investors. It does not include them in its deficit calculations, let alone in the much-vaunted debt ceiling.

And with the new spirit in Washington there are growing signs of people there wanting to do a Gorbachev on the Social Security and Medicare funds. After all, it is a massive overhang. The Social Security Trust Fund has risen from almost nothing to more than $2 tn in the last decade, and it has all been spent by successive Congresses – especially those that claim the fund is going bankrupt.

Of course, stealing voters’ savings is not generally a winning electoral strategy, as House Budget Committee chairman Paul Ryan is now discovering with his tentative attempt to dip into the Medicare fund. Perhaps we can introduce him to apples falling and Newton sometime. In the meantime, old Gorby might have had a point. By one of those cosmic coincidences, American corporations now also have some $2 tn in cash reserves – three times the so-called stimulus package that oozed its way through Washington.

Corporate executives could distribute these reserves in dividends, special or otherwise. They could spend them on investment, R&D or employment, which would certainly help revive the US economy. Indeed, they could even boost salaries. But companies prefer to sit on their war chests, relishing the feel of all those resources while the economy stagnates.

Such observations lead to speculation. If Washington were to confiscate all corporate cash surpluses above a reasonable amount for corporate expansion and replace them with long-term federal bonds, it could soften the blow by diverting the proceeds into a development fund devoted to long-term work-generating infrastructure investment and R&D, or to low-interest loans to entrepreneurs who actually want to invest in productive enterprises.

Now how might that play with the American voters?

This article appeared in the August print edition of IR magazine.