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No COLA - Bernanke gets Trumped?   Bruce Krasting  on Zero Hedge

Social Security announced that there will be no increase in benefit levels for another year. The reason? Deflation. Based on the Cost of Living index no increase in checks is justified. You might get an argument on that from the 60+% of the beneficiaries whose primary source of income is SS. This will impact the macro economic picture.


SSA will pay ~$700b in benefits this year. 3% of that comes to $21b. That is a pretty important number. Most of the SS checks are spent. Little of it is saved, so this will impact consumption on a nearly 1 to 1 basis. $21b is 1/4% of our GDP (includes multiplier). Poof!

Does this matter? Sure it does. Economists who forecast growth will have to knock down their numbers by at least ¼% as a result. There would have been some multiplier affect from the extra spending, now there won't be any. Between the cummulative impact of two years of no increases and the multiplier this could be a drag on GDP by 1/2% for 2011 versus what has been assumed.

We don't know what Ben B will do in a few weeks, but we can sort of guess about what is coming. It will be a longer-term commitment to acquire Treasury bonds. The high-end estimates are about $100b per month for a year. Something over a trillion in all. Using those kinds of numbers, I have seen estimates that the impact will be a positive to GDP to the tune of a lousy ½%.

So, the same effect as pumping $1.2trillion in QE into the economy can be had by providing a 3% Cost of Living Adjustment to Social Security checks, which would only cost $27 billion! So does the inability to change the requirements for an SS COLA stem from ideological blindness, from comitment to an agenda or from both? How can $1.2 trillion in QE be better for the financial integrity of the USA, etc., etc., etc, than a fiscal policy of deficit spending of a mere $27 trillion. Especially when spending the $27 billion is more likely to work?

A cynic might suggest that $1.2 trillion in QE would provide a larger and more opaque bonus pool for the executives of the TBTFs than would a mere $27 billion in deficit spending. Plus, Congress and the president would have to own providing a 3% COLA, while they can continue to rail at the Fed for QE and score more points with the ignorant electorate.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Oct 12th, 2010 at 03:45:07 PM EST
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