Opinion

Some people have wondered about the ads appearing next to this blog, which often seem to feature the very ideas and people I’m attacking. I’m pretty sure that we’re watching algorithms at work — the ads are being placed based on keywords. Put it this way: Bill O’Reilly is probably getting a lot of ads hawking Jennifer Aniston beauty products right now.

Given the apocalyptic rhetoric we’re hearing, once again, about Social Security finances, it comes as something of a shock — even to me — to look at the actual projections in the latest Trustees’ Report. OASDI is projected to rise from 4.8 percent of GDP now to about 6 percent of GDP in 2030, and level off. That’s not trivial — but it’s not huge either.

But now I understand why the usual suspects are reviving the old switcheroo on how you think about Social Security, in which surpluses don’t count but deficits do. It’s because when you adopt either consistent view — either Social Security as a standalone budget, or as part of an integrated federal budget — it just doesn’t look like a big deal. And that’s not an acceptable answer for people who really, really want a crisis.

But actually it’s the other way around. And the fact that, to a growing extent, the less prosperous don’t live as long has important implications.

You see, the buzz increasingly suggests that the catfood deficit commission will call for a rise in the age at which people can collect full Social Security — justified by rising life expectancy.

This is a really terrible idea, for at least three reasons.

1. The retirement age has already been increased to 66, and is scheduled to rise to 67. So any further increase would mean pushing retirement back to unprecedented ages. Yes, a lot of people live to 70; how many of them are really able, easily, to work that late into life?

2. While life expectancy is rising, life expectancy at age 65 — which is what is relevant here — isn’t rising nearly as fast.

3. Finally, disparities in life expectancy have been rising sharply, with much smaller gains for disadvantaged socioeconomic groups and/or those with less education than the average. Yet these are precisely the people who depend most on Social Security.

Here’s a chart from the CBO documenting points 2 and 3:

Congressional Budget Office

The point is that raising the retirement age sounds reasonable to well-educated, highly-paid people, who can expect a long, rich life after 65. But they’re not the people who need Social Security in the first place.

Update: It turns out that the good people at EPI got there well ahead of me. They point us to this study by the Social Security Administration, which shows (Table 4) that men in the bottom half of the earnings distribution saw their life expectancy at age 65 rise only 1.1 years from 1982 to 2006. Over the same period, by the way, the retirement age — under current law — rose 8 months.

Sadly, it looks as if we’re going to have to fight the Social Security fight all over again, with the same old disingenuous arguments making the rounds. So let me return to an oldie but baddie: the there-is-no-trust-fund nonsense.

How should we think about Social Security? It’s a government program supported by a dedicated tax; like other such programs, like the highway fund, it can bank surpluses in years when the dedicated tax yields more revenue than the program’s costs, and use those banked funds to cover shortfalls in other years.

Of course, it’s also part of the general federal budget. This means that Congress always has the option either of undedicating the revenue from the payroll tax (or seizing the trust fund, which is basically undedicating past revenues), or of topping up Social Security by adding more funds. However, either of these options would amount to a political earthquake; so the program’s independent financing has real significance as a practical matter.

So there are two ways to look at Social Security. You can view it as a stand alone program, in which case payroll tax revenues and the trust fund accumulated out of those revenues are at the center of the story; or you can view it as just part of the federal budget, in which case the relative size of retirement benefits and payroll tax receipts has no special significance — benefits are just one federal expenditure, payroll taxes just one source of federal revenue.

These views aren’t contradictory; which one you want to emphasize depends on what question you’re trying to answer. If you want to know when Social Security, per se, will have a crisis, requiring either benefit cuts or new funding, you want to take the standalone view. If you want to think about the broad direction of the federal budget, you want to just fold Social Security into the total.

But here’s what you can’t legitimately do: you can’t switch views in midstream. You can’t say that Social Security is just part of the federal budget, so the trust fund is meaningless — then say that because there’s no real trust fund, Social Security is in crisis when payroll receipts fall short of benefits. Either you adopt the integrated-budget view, in which payroll taxes and retirement benefits have nothing to do with each other, or you focus on dedicated financing, in which case the trust fund has to count too.

Or to put it a bit differently: there’s no valid approach under which Social Security surpluses don’t count but Social Security deficits do.

All of which makes it alarming that the co-chair of the deficit commission is making that very claim.

Update: One more point worth making: what would we say about the financial implications of a plan to reduce Social Security outlays, say by killing off old people raising the retirement age? From the standalone point of view, it would improve the prospects of the trust fund. From the integrated view, it would reduce the prospective budget deficit. Saying that it does both things isn’t double-counting; it’s just acknowledges that there are two different criteria here. And you can be sure that if and when the deficit commission unveils its proposal to make old people eat catfood reduce future Social Security benefits, it will make precisely that claim.

Somehow, though, when it comes to Medicare cost savings under the new health reform, making that completely reasonable statement is outrageous double-counting.

Reminder to commenters: long, run-on comments will be classed as spam, regardless of content — this morning I had to delete a couple of long comments praising and defending me. (By the way, the Times does allow me to delete a comment simply because it’s an attack on the author. But I never have.)

And obscenities are no-nos at the Times.

One of the odder criticisms I get is from people accusing me of endorsing the Obama administration’s very optimistic forecasts about unemployment. What makes this strange is that during the euphoria of spring-summer 2009, when everyone was saying that we were about to see a V-shaped recovery, I was … well, let’s just look at The New Yorker from May 25, 2009:

The New Yorker

Video here.

For tomorrow’s column. Notice the helicopter operation at the end.

One recurrent complaint in comments is that I haven’t said what I would do about the long run budget deficit. Except, you know, I have:

At the moment, as you may have noticed, the U.S. government is running a large budget deficit. Much of this deficit, however, is the result of the ongoing economic crisis, which has depressed revenues and required extraordinary expenditures to rescue the financial system. As the crisis abates, things will improve. The Congressional Budget Office, in its analysis of President Obama’s budget proposals, predicts that economic recovery will reduce the annual budget deficit from about 10 percent of G.D.P. this year to about 4 percent of G.D.P. in 2014.

Unfortunately, that’s not enough. Even if the government’s annual borrowing were to stabilize at 4 percent of G.D.P., its total debt would continue to grow faster than its revenues. Furthermore, the budget office predicts that after bottoming out in 2014, the deficit will start rising again, largely because of rising health care costs.

So America has a long-run budget problem. Dealing with this problem will require, first and foremost, a real effort to bring health costs under control — without that, nothing will work. It will also require finding additional revenues and/or spending cuts. As an economic matter, this shouldn’t be hard — in particular, a modest value-added tax, say at a 5 percent rate, would go a long way toward closing the gap, while leaving overall U.S. taxes among the lowest in the advanced world.

But if we need to raise taxes and cut spending eventually, shouldn’t we start now? No, we shouldn’t.

Let me expand on the health care question a bit. We actually know quite a lot about how to hold down health care costs. We know that insurers, including Medicare, pay for a lot of procedures of dubious medical value, so that creating death panels identifying those useless procedures — and some procedures with minimal medical benefits but very high costs — can cut down significantly on expenses. We know that insurers generally don’t pay for things that improve patients’ long-term health, so if we can get the system to take a longer view there’s money to be saved. We know that fee-for-service creates perverse incentives for providers, who do too many expensive tests and procedures because they profit personally. We know that integrated health systems, like the VA or, to a lesser extent, Kaiser, have lower costs without lower quality of care.

So there’s a lot of room for fiscal improvement from the health care side. The new health reform takes some important steps in the right direction — over the hysterical objections, I might add, of self-styled deficit hawks. But much more can be done. And if we can sharply reduce “excess cost growth” in health care spending — the tendency of per recipient spending to rise faster than GDP — the whole fiscal problem will become manageable, something we can deal with by raising taxes modestly and making modest cuts elsewhere.

And if you say that I need to be more specific, the question is, compared to what? Compared to just writing down some numbers about future Medicare spending?

Jonathan Chait — yes, this time I’ve got the right TNR JC — writes about the WSJ’s contention that “Washington” is ganging up on poor Paul Ryan:

Ryan has been riding months of slobbering praise from the conservative press. I realize that doesn’t count, because “Washington” in conservative-speak is an epithet that by definition excludes conservatives.

So, working within the conservative movement’s definition of “Washington,” let us tally up the litany of Ryan’s persecution:

He was the subject of a flattering Washington Post profile about the boldness of his plan that featured no policy analysts pointing out that the Ryan plan would increase the deficit over the next decade even if its wildly implausible spending caps were implemented.

The same day he was the subject of a flattering New York Times profile that expounded the same theme and suffered from the same crippling flaw.

Then Paul Krugman wrote an opinion column pointing out some of the massively misleading or unrealistic aspects of Ryan’s alleged plan to balance the budget.

Next my friend Ted Gayer, who runs the economic department at Brookings, wrote an item defending Ryan on the grounds that he means well and deserves to be granted an extreme benefit of the doubt when judging the massive flaws in his plan.

Then Washington Post blogger Ezra Klein wrote a blog item also vouching for Ryan’s character and good faith.

Then today, the Times wrote another story about Ryan, saying he’d be the perfect person to negotiate a balanced budget with, regardless whether his plan really would balance the budget or massively increase it.

Is this really a picture of Washington ganging up on Ryan? It seems just the opposite. He is being embraced and defended by the establishment and credited with good intentions that are not at all manifest in his record or in his proposal, with one opinion columnist being the sole dissenting voice.

Clearly, the only way to make sense of this is to say that I, personally, am Washington — even though I live and work in New Jersey. You got a problem with that?

Oy. So the Times has a profile of Paul Ryan, sort of — you’ll notice that there is hardly any information about what’s actually in his plan. What we get is:

Paul Krugman, the New York Times Op-Ed columnist, recently derided Mr. Ryan as a “flimflam man,” arguing that the tax cuts in his plan would ultimately make the debt worse.

Is that remotely an adequate summary of what I said? I don’t think so. And notice, by the way, that the tax cut problem is implicitly presented as some kind of long-run issue, when the reality is that it turns the plan into a deficit-increasing venture from day one.

But what really bothered me was this:

Let’s leave aside for now the debate over the viability of the road map, which, as a practical matter, doesn’t stand a chance of being enacted as is, anyway. The more pertinent question is whether Mr. Ryan is the kind of guy who just wants to make a point — or whether his road map represents the starting point in what could be a serious negotiation about entitlements and spending.

That’s completely wrong-headed. My experience — very much based on Bush 2000 — is that a politician’s policy proposals offer the best clue to what “kind of guy” he is. Back then, all the professional political reporters were hanging out with W and reporting what a swell guy he was, while I was looking at the flimflam in his tax and Social Security plans, and reaching the conclusion that he was a scammer. Who was right?

And that’s the point with Ryan. He’s going around posing as a fiscal hawk while offering a plan whose pretense of deficit reduction in the near term depends on (a) ignoring the revenue effects of tax cuts (b) making a completely unrealistic assumption about domestic discretionary spending.

So what kind of guy is he? Based on his plan (and, since my article, on the dust clouds he’s been throwing up in an attempt to confuse the issue), he’s the kind of guy with whom you can’t have an honest discussion.

There’s an important new paper from the IMF about inflation in the face of Prolonged Large Output Gaps — yes, PLOGs. You can think of it as a careful, multi-country version of the quick-and-dirty analysis of US experience I did recently, with an assist from Tim Duy. What the analysis shows is that prolonged periods of economic weakness are, with almost no exceptions, associated with falling inflation rates.

The analysis also suggests something else, however: as the inflation rate goes toward zero, it seems to become “sticky”: in the modern world, rapid deflation doesn’t happen, and in fact slight positive inflation often persists in the face of an obviously depressed economy:

IMF

The authors discuss several possible explanations, but it does seem as if downward nominal rigidity is playing a role.

And this raises the specter what I think of as the price stability trap: suppose that it’s early 2012, the US unemployment rate is around 10 percent, and core inflation is running at 0.3 percent. The Fed should be moving heaven and earth to do something about the economy — but what you see instead is many people at the Fed, especially at the regional banks, saying “Look, we don’t have actual deflation, or anyway not much, so we’re achieving price stability. What’s the problem?”

And the slump will just go on.

There he goes again. What gets me is how unprofessional the whole thing is.

Look, if you’re a public figure of any kind, you’re going to face a lot of criticism. Much of it will seem unfair to you; some of the unfair criticism will come from people you expected to take your side; you’ll be angry, you’ll feel that people are putting their egos or their personal aggrandizement above the cause.

Welcome to reality. It’s my reality — and I’m just a professor/columnist. Someone actually in the White House has to be prepared for much more of this kind of thing — and if you don’t have a thick enough skin to take it, find another form of employment.

I’m not saying to turn the other cheek and always say something polite as a general principle; by all means lash out at your critics, if you have something to gain by doing so. Rudeness at the proper moment can serve a purpose — as I hope I’ve demonstrated over the years. But if you vent for the sake of venting; if you alienate people you’re going to need; then you’re just being stupid.

And that, I’m afraid, is what’s going on here. Rachel Maddow isn’t going to go away, or turn all meek, because the White House Press Secretary implicitly denounced her. Even more to the point, liberal critics have an audience because they’re reflecting real concerns of real people. Those concerns need addressing, if necessary in the form of explanations of why their expectations can’t be met. Denouncing the people giving voice to those real concerns as the “professional left” is both unfair and, as I’ve said, stupid.

And both the president and, more important, the country deserve better.

Has the Washington Post gone mad? asks Dean Baker, reading the Post’s latest editorial on Social Security. The answer is no: it has been mad all along.

Dean points out, correctly, that the Post’s argument here is: “In the future, Social Security might have to cut benefits. To prevent these possible future benefit cuts, we must cut future benefits.”

But this isn’t new — the same argument was rolled out in 2005.

A lot of the Beltway establishment has a thing about Social Security — in a way, by the way, they don’t have a thing about Medicare, which is a vastly more important long-run problem. No matter how much you talk logic or numbers, they’re obsessed with the idea that Social Security must be cut; as I wrote back when, somewhere back in the 90s talking tough on Social Security became a badge of seriousness, and facts just can’t make a dent in that social convention.

At the end of the new Reinhart-Rogoff paper is a graph showing total US debt — public and private — as a share of GDP:

Reinhart and Rogoff

It’s not entirely clear what the point of the graph is, although I think it’s to point out that when you look at overall debt, we’re in uncharted territory; fair enough, although a lot of that debt is owed by the financial system to itself.

But I think it’s important to look at the previous peak, in the early 30s. Here’s a closeup of that period:

Historical Statistics of the United States, Millennial Edition

So, in the aftermath of the financial crisis the government went deep into debt, and that’s what’s driving the spike, right?

Um, no. Here’s debt in dollar terms:

Historical Statistics of the United States, Millennial Edition

Debt actually fell as the economy slumped, through a combination of deleveraging and default. The ratio to GDP spiked only because GDP collapsed. Conversely, as the economy began to recover under the New Deal (before the big mistake of 1937), the debt ratio improved thanks to rising GDP, even though the nominal level of debt also rose.

What all this tells you is how important it is, in dealing with debt, to get the economy moving — and how devastating it is, even if you’re deeply frugal, if contraction and deflation rule.

So R-R have a new article in Vox that, they say, aims to “clarify matters”. I don’t feel clarified.

The original paper on debt and growth presented a stark correlation between high debt and low growth, and seemed to say that this was a causal relationship. In practice, the article has been widely used to claim that there’s a red line of 90 percent in the public debt to GDP ratio that one crosses at one’s peril.

Skeptics like me quickly questioned the causal interpretation of the correlation. We pointed out that in the case of the United States, highlighted in the original paper, the debt-growth correlation came entirely from the immediate postwar years, when growth was low thanks to postwar demobilization. We pointed out that other episodes of high debt and low growth, like Japan since the late 1990s, were arguably cases in which causation ran from collapsing growth to debt rather than the other way around.

So surely the question is how much of the correlation survives once we restrict ourselves to cases in which the causation is plausibly from debt to poor growth, rather than likely being spurious or reversed.

But R-R don’t offer any response to that question. They do give us a list of peacetime high-debt episodes:

the 1920s and 1980s to the present in Belgium,
the 1920s in France,
Greece in the 1920s,
1930s and 1990s to the present,
Ireland in the 1980s,
Italy in the 1990s,
Spain at the turn of the last century,
the UK in the interwar period and prior to the 1860s and, of course,
Japan in the past decade.

If I’m reading this right, then the postwar cases other than Japan — which I’ve argued looks like reverse causation — are Belgium, Ireland, and Italy. Are these cases enough to bear the weight now being placed on that supposed 90 percent red line?

I’m also puzzled by the way R-R deal with the reverse causation argument: they admit it can happen, but argue that causation doesn’t always run from growth to debt, but can run the other way. Isn’t that attacking a straw man?

Anyway, I come out of this with no more clarity than I had going in; I still don’t know what, if anything, the R-R data tell us about the growth effects of debt at the levels now in prospect.