http://sfgate.com/cgi-bin/article.cgi?file=/c/a/2005/06/05/ING9QD1E5Q1.DTLSan Francisco seems an unlikely home for the man who in 1962 first proposed the privatization of Social Security.
Asked why he dwells in liberalism's den, Milton Friedman, 92, the Nobel laureate economist and father of modern conservatism, didn't skip a beat.
"Not much competition here," he quipped.
"The people I see in the Safeway don't go around yelling, 'I'm a left wing Democrat,' even if they are," he said. "This is a very nice city to live in."
Living atop Nob Hill for the past 28 years with his wife and collaborator, Rose, who fell in love with the city as a young woman, Friedman is considered perhaps the most influential economist since John Maynard Keynes.
Keynes, the British economist whose ideas propelled the New Deal, was to Republicans what Friedman, son of poor Jewish Brooklyn immigrants from the Austro-Hungarian Empire, is to Democrats: a font of heresy.
It was Friedman who in 1962, with the publication of "Capitalism and Freedom," first proposed the abolition of Social Security, not because it was going bankrupt, but because he considered it immoral.
"We may wish to help poor people," he wrote. "Is there any justification for helping people whether they are poor or not because they happen to be a certain age?"
President Bush's proposal to incorporate private accounts in the giant retirement program is easily traced to Friedman.
"He's the originator of it and all the discussion can be traced back to him," said the Cato Institute's Michael Tanner, a leading advocate of partial privatization.
"I've always been opposed to Social Security," Friedman said in a recent interview at his home in San Francisco. "I think it's a very unethical program. "
Friedman's work clearly influenced Harvard economist Martin Feldstein, now the chief intellectual force behind privatization, said Thomas Saving, a recent Social Security trustee. Feldstein, often mentioned as a likely candidate to replace Federal Reserve chairman Alan Greenspan, cites Friedman in his article on the subject in the American Economic Review.
"He's the guy who got people asking the question," Saving said, "because at the time it was a question you couldn't ask."
The late Arizona Republican Sen. Barry Goldwater, whom Friedman advised, found that out in 1964 when he suggested during his presidential campaign that Social Security be made voluntary.
Goldwater was pilloried, not only by editorial pages but his own party. He lost in a landslide to Democratic President Lyndon Johnson, who went on to create Medicare, the big health care program for the elderly, in 1965.
Friedman calls Social Security, created by President Franklin Roosevelt in 1935, a Ponzi game.
Charles Ponzi was the 1920s Boston swindler who collected money from "investors" to whom he paid out large "profits" from the proceeds of later investors. The scheme inevitably collapses when there are not enough new entrants to pay earlier ones.
That Social Security operates on a similar basis is not really in dispute. Paul Samuelson, who won his Nobel Prize in economics six years before Friedman and shared a Newsweek column with him in the 1960s, called Social Security "a Ponzi scheme that works."
"The beauty about social insurance is that it is actuarially unsound," Samuelson wrote in an oft-quoted 1967 column. "Everyone who reaches retirement age is given benefit privileges that far exceed anything he has paid in ... A growing nation is the greatest Ponzi game ever contrived."
Today, 38 years after Samuelson wrote this, the number of people collecting benefits is about to rise steeply as Baby Boomers retire, reversing the flow of the system's finances. And it is Friedman's intellectual framework that now reigns at the White House.
"Everybody goes around talking about the problems created by the declining number of workers per retiree," he said. "How come life insurance companies aren't in any problem?"
The question is quintessential Friedman: simple, accessible and formidable.
Life insurance companies take premium payments and invest them in factories and buildings and other income-producing assets, Friedman said. These accumulate in a growing fund that can then pay benefits. Social Security, by contrast, operates pay-as-you-go, collecting payroll taxes from workers that immediately go to pay retirees.
The biggest misconception about the program, he argues, is that workers believe it works like insurance, with the government depositing taxes in a trust fund.
"I've always thought it disgraceful that the government should be essentially lying about what it was doing," he said.
"How did you ever get the Democrats, who supposedly were in favor of progressive taxation, to pass a tax that is biased against low-income people - - which is on income up to a maximum and no more?" he asked, referring to the $90,000 ceiling on which Social Security taxes are levied. "Only by clothing it in this idea that it's not really a tax, it's an insurance payment."
Asked why, if Social Security is so terrible, it is the most popular government program in American history, Friedman replied, "Well, because why does a Ponzi game work? It's easy to understand why it's popular. So far, on the average, retirees have gotten more out of the system than they put into it. "
What about the fact that Social Security has reduced poverty among the elderly?
"Well," he replied, "what it has done is transfer a lot of income from the young to the old. It is certainly true it has made the old people of the United States the best treated old people in the world."
But why is that a bad thing? "Oh," he replied. "It's not a bad thing for them, but what about the young?"
Friedman supported Bush's first-term candidacy, but he is more accurately libertarian than conservative and not a reliable Bush ally.
Progress in his goal of rolling back the role of government, he said, is "being greatly threatened, unfortunately, by this notion that the U.S. has a mission to promote democracy around the world," a big Bush objective.
"War is a friend of the state," Friedman said. It is always expensive, requiring higher taxes, and, "In time of war, government will take powers and do things that it would not ordinarily do."
He also said it was no coincidence that budget surpluses appeared during the Clinton administration, when a Democratic president faced a Republican Congress.
"There were no big spending programs during the Clinton administration," he said. "As a result, government spending tended to stay down, the economy grew like mad, taxes went up, spending did not, and lo and behold, the deficit was turned into a surplus."
The problem now, he said, is that Republicans control both ends of Washington.
"There's no question if we're holding down spending, a Democratic president and a Republican House and Senate is the proper combination."
He calls himself an innate optimist, despite the unpopularity of many of his ideas.
When he moved to San Francisco in the 1970s, the city was debating rent control, he recalled. So he wrote a letter to The Chronicle saying, "Anybody who has examined the evidence about the effects of rent control, and still votes for it, is either a knave or a fool."
What happened? "They immediately passed it," he laughed.
