11/29/2012 12:21 pm ET

Fiscal Cliff Primer: Should Obama Take Advice From Regulator Who Missed Bear Stearns And Madoff?


Former SEC Chairman Chris Cox and former Rep. Bill Archer (R-Texas) penned a recent Wall Street Journal op-ed claiming that the total U.S. debt isn't the oft-cited $16 trillion figure, but a much, much scarier $86.8 trillion.

Cox and Archer reach this staggering $86.8 trillion figure by adding the existing $16 trillion in debts the nation has already accrued to all of the future obligations that Medicare and Social Security will ever have. The time figure that accountants use for this statistic is actually referred to as "the infinite horizon." It sounds like a huge number because comparing future obligations through infinity is a lot scarier than just looking at the actual debts the U.S. has accrued. Over the course of 60 or 70 years, small problems can snowball into what seem like disasters. Modest adjustments -- say, lifting the payroll cap on Social Security taxes so that wealthy people with income above $110,100 a year pay more into the program -- could solve many of the problems.

There isn't much to this analysis, which is why investors haven't been panicking about the solvency of the U.S. government. Interest rates on U.S. Treasury bonds -- the metric the market uses to measure the riskiness of American debt -- are at historic lows.

The type of projections on which Cox and Archer rely are notoriously inaccurate. They depend very heavily on assumptions about economic growth and inflation, which are never reliable over the course of several decades. Investors and policymakers usually choose to focus on more meaningful, less terrifying statistics when they analyze Social Security and Medicare. At the end of 2011, Social Security enjoyed a $2.7 trillion surplus -- enough to last through 2033 -- while Medicare was sitting on about $325 billion, enough to last to 2024.

Medicare does have long-term solvency issues, because the U.S. has the highest health care costs in the world. As a percentage of the economy, the U.S. pays about double what the U.K. does. The cost per person is about 50 percent more than it is in Canada. Reining in the price of health care could cut Medicare costs without slashing benefits for seniors.

Cox doesn't have a great record of fiscal stewardship. As chairman of the SEC, he was ultimately responsible for regulating Bear Stearns and Lehman Brothers, both of which collapsed on his watch. Cox, days ahead the Bear Stearns collapse, was saying that he was comfortable with the levels of available capital on Wall Street; and while the Federal Reserve and U.S. Treasury Department worked out a bailout for Bear, Cox attended a birthday party. Toward the end of his tenure, it became clear that his agency had botched the Bernie Madoff Ponzi scheme, ignoring the mess even after a whistle-blower provided the SEC with a mountain of evidence that Madoff was breaking the law.

The crash of 2008 triggered a terrible recession that blew a massive hole in America's balance sheet. Cox doesn't bear sole responsibility for the financial crisis, but his predictions of an impending crisis are undermined by his inability to predict the one that actually happened.



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