THE KANSAS CITY STAR

September 1, 2001, Saturday METROPOLITAN EDITION

SECTION: BUSINESS; Pg. C1 ;JERRY HEASTER

Untangling government perplexities

by JERRY HEASTER

If a long holiday weekend is at hand, it must be time for Uncle Fearless to dip into the ol' mailbag and let the readers do the heavy lifting. First up is a reader with a question about Treasuries.

"How is it that U.S. Treasury securities are considered the safest of investments while the Social Security trust fund IOUs are considered less trustworthy? Aren't they both unfunded liabilities of the U.S. Treasury, and therefore of U.S. taxpayers?"

Dear Curious: The key to evaluating Treasuries held by the investing public and those parked in various trust funds is your perception of political integrity. The publicly held marketable Treasuries never would be allowed to go into default because it would plunge the global financial system into chaos and ruin political careers. The Treasury debt held by trust funds such as Social Security, however, is "all in the family," so to speak, because we "owe it to ourselves." If the need to redeem the trust fund debt 25 to 30 years hence becomes too great an economic burden, any decision not to fully honor these obligations could be finessed politically.

Since they're not market instruments, default wouldn't risk devastating the world financial system. This seems unthinkable now, but those who trust their elected leaders to always keep faith with the citizenry do so at their own risk.

Speaking of life's vagaries, how about that Federal Reserve?

"When do Fed rate cuts no longer serve as a viable option for attempting to stimulate the economy? How low can the Fed go without getting into trouble?"

Dear Wondering: In the postwar era, recessions have gotten shorter and expansions longer. There are many reasons for this, but most economists would agree that the Federal Reserve's use of monetary policy to lower interest rates has been a significant factor. Declining interest rates encourage borrowing by consumers and businesses, which spurs consumption and capital investment. By traditional monetarist yardsticks it's still too early to determine how effective the Fed's current round of easing will prove.

Testimony to the pervasive force government has become in our lives is yet another question about things federal.

"In all the recent (discussion) about (Medicare paying for prescription drugs), including thou's, I have seen no comments about the need for means testings to obtain drug coverage. I don't think anybody has a problem with government-provided drugs for the indigent, but I think it's a crime to ask my kids to finance (Medicare drug coverage) for me, J. Heaster (and) Bill Gates."

Dear Conflicted: While it's nice to be considered in the same socioeconomic company as Bill Gates, this isn't as simple a moral question as you imply. If you want to means-test prescription drugs, why not means-test open heart surgeries and hip replacements, et cetera, et al? The problem is that the practice of medicine is moving increasingly from procedures to medications. Medicare coverage should reflect this change, not ignore it. Means testing of entitlements for older Americans might be worth discussing, but reforms should avoid making winners of some and losers of others in an arbitrary or capricious manner.

Keep them cards and letters comin', hear?

Jerry Heaster's column appears Wednesday, Friday, Saturday and Sunday. To reach him, write the business desk at 1729 Grand Blvd., Kansas City MO 64108; call (816) 234-4297; or send e-mail tojheaster@kcstar.com.