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Lesson for Reporters: Social Security Does NOT Add to the Budget Deficit Print
Monday, 13 August 2012 04:41

Associated Press decided to use a "Fact Check" to wrongly tell readers that Social Security adds to the budget deficit. The piece acts as though Social Security's impact on the budget is somewhat mysterious, with supporters of the program, like Representative Xavier Becerra and Senator Bernie Sanders, being confused into thinking that the program doesn't add to the deficit, even though it really does.

There actually is not much mystery here to those familiar with government budget documents. There are two different measures of the deficit. There is the unified budget deficit, which adds in the payroll taxes collected for Social Security, just like any other source of revenue, and treats the benefits paid out by Social Security just like any other expenditure. In this measure, Social Security will add to the deficit in any year in which its benefit payments exceed its tax collections. (This is the case, even if the fund still has a surplus due to the interest it collects on the government bonds it holds, although it means that Social Security is contributing to the deficit because it is spending some of the interest it has earned.)

However there is also the on-budget deficit, which reflects the fact that Social Security is not supposed to be counted as part of the budget. This mysterious budget can be found in just about every single budget document the government publishes (e.g. here, Summary Table 1), saving arithmetically challenged reporters the need to subtract out Social Security taxes and spending from the unified budget. (The on-budget deficit also corresponds to the debt subject to the legal limit, which has played such a prominent role recently.)

Under the law, Social Security cannot possibly contribute to the on-budget deficit. It can only spend money that has been collected from the designated payroll tax or from the investment of past surpluses. (The money from general revenue to make up for the temporary payroll tax cut the last two years is an exception to this rule.) If benefit payments exceed current revenue and the money available in the trust fund, as the Congressional Budget Office projects will happen in 2038, then Social Security would not be able to pay full scheduled benefits. It could not force the government to increase its deficit.

It is incredible that a "fact check" failed to note the on-budget budget. This is obviously what Becerra and Sanders were referring to when they said that Social Security does not contribute to the deficit. Reporters who write on Social Security should be familiar with it.

This fact check also included some gratuitous editorializing on the deficit. It told readers:

"The issue [whether Social Security contributes to the deficit] is important because the federal government's annual deficit already exceeds $1 trillion, making any more borrowing tough to swallow."

It is not clear why the article considers more borrowing difficult to swallow. The financial markets have a very different view since investors are willing to lend the U.S. government money at extremely low interest rates. The reason why the government is running large deficits is because private sector spending plunged following the collapse of the housing bubble. Those who want to see the economy grow more rapidly are likely to prefer more government spending and larger deficits, since there is no other way to make up the shortfall in demand. Associated Press should leave editorializing like this in its opinion pieces.

Robert Samuelson Goes to Bat for Paul Ryan: Strikes Out Print
Monday, 13 August 2012 03:50

Governor Romney's decision to select Paul Ryan as his running mate has condemned the country to 90 days of ridiculous news stories and columns about a choice on the size and role of government. The debate is silly because its explicit assumption is that Paul Ryan wants a small role for government. There is no evidence to support this assertion.

The impact of the government on the economy goes far beyond the amount that it taxes and spends. The way in which structures markets has a far more important impact on the economy. For example, government granted patent monpolies for prescription drugs raise the price the country pays for its medicine by close to $270 billion a year (1.8 percent of GDP). This is every bit as much a big government intervention into the economy as if the government raised taxes by this amount. The total cost of all the monopolies that the government grants as "intellectual property" could run as high as $1 trillion year, or roughly a quarter of federal spending.

The government structures the economy in many other ways as well. The implicit "too big to fail" insurance that it gives to the largest banks is a transfer of more than $60 billion a year to their executives and shareholders by some estimates.

The selective protectionism in trade policy, which deliberately puts manufacturing workers in direct competition with low-paid workers in the developing world, while leaving highly paid professionals like doctors and lawyers largely protected, has the effect of redistributing an enormous amount of income upward. And the Federal Reserve Board's policy of raising interest rates to increase unemployment among less-educated workers, and thereby depress their wages, as a way to keep inflation at its 2.0 percent target also has an enormous impact on the distribution of income and the economy.

It is incredibly misleading to restrict a discussion of the government's role in the economy to its tax and spending policies. These policies are at least moderately redistributive, but they don't come close to offsetting the impact of upwardly redistributional policies that the government imposes when it structures the market. (This is the topic of my non-copyright protected book, The End of Loser Liberalism: Making Markets Progressive.)



Projected Social Security Shortfall Dwarfed by Wage Growth Print
Sunday, 12 August 2012 09:19

That could have been the headline of a Boston Globe article on the size of the projected Social Security shortfall if the paper had not decided to use its news section to scare readers about the state of Social Security. In keeping with this effort, the headline of a recent article read:

"Social Security surplus dwarfed by future deficits."

The article then gave a series of numbers which could only be intended to scare readers since it is extremely unlikely that even 0.1 percent of the Globe's readers have any idea what they mean.

"The projected shortfall in 2033 is $623 billion, according to the trustees’ latest report. It reaches $1 trillion in 2045 and nearly $7 trillion in 2086, the end of a 75-year period used by Social Security’s number crunchers because it covers the retirement years of just about everyone working today."

To make sense of these numbers it would be necessary to know how large the economy is projected to be in 2033, 2045, and 2086. GDP in these years is projected to be approximately $41 trillion, $72 trillion, and $440 trillion. Providing these GDP numbers would have allowed readers to put these projected deficit figures in some context.

If the Globe was interested in conveying information instead of pushing its agenda for cutting benefits it might have told readers that the tax increase needed to keep the system fully funded over its 75-year planning horizon is just over 5 percent of projected wage growth for the next 30 years. (This is using the Social Security trustees projections. It would be less than 4 percent of projected wage growth using the projections from the Congressional Budget Office.)

While many readers would point out that most workers have not been seeing wage growth in recent decades, that complaint would highlight the absurdity of the Globe's piece. The upward redistribution of income over the last three decades has done far more to hurt the living standards of ordinary workers than any possible tax increases associated with Social Security.

In fact, it is one of the main reasons that the system is projected to face a shortfall. If the income distribution had remained constant at its 1983 level (the last time the program was adjusted), the projected shortfall would be roughly half of its current size, since much more income would be subject to the Social Security tax.

Going forward, the impact of the distribution of future productivity gains on workers' standard of living will swamp the impact of any possible tax increases used to fund the Social Security program. Obviously the Globe has decided to use its news section to divert the public's attention from this obvious point. Instead it is pushing for cuts in Social Security benefits.

The Ryan Budget's Savings Come From Shutting Down the Federal Government Print
Sunday, 12 August 2012 07:35

The Washington Post seriously misled readers in an article on the Ryan budget. It asserted:

"The Congressional Budget Office [CBO] estimates that it [the Ryan Budget] would not bring the federal books into balance until around 2040. And most of its savings come from the long-term restructuring of entitlement programs."

Actually, in percentage terms by far the biggest savings in the Ryan budget comes from essentially shutting down the federal government, except for Social Security, health care programs and the military. The CBO analysis of his budget [Table 2] shows that all other areas of federal spending falls to 4.75 percent of GDP by 2040 and 3.75 percent of GDP by 2050.

Military spending is currently more than 4.0 percent of GDP and Representative Ryan has indicated that he wants to keep spending at its current levels or raise it. This means that under the Ryan Budget, by 2040 there will be almost no money left for national parks, education, the State Department, the Food and Drug Aministration, federal courts and all the other activities currently supported by the federal government. By 2050 there will be no money left for these activities. The Post has seriously misrepresented Representative Ryan's agenda by not pointing out thus fact to readers.

The article also misled readers by repeatedly referring to a report from the Bowles-Simpson commission. There was not report from the commission. A commission report required the support of 14 of the 18 members of the commission as is clearly stated in its by-laws. No plan received the necessary support to be approved by the commission. The report noted in this piece should be indentified as the report of the commission's co-chairs, Morgan Stanley director Erskine Bowles and former Senator Alan Simpson.

Obama's Campaign Never Heard About the Housing Bubble Print
Saturday, 11 August 2012 16:43

Those wondering why the Obama administration has not been more aggressive in pushing for stimulus got their answer today in a Washington Post article on the selection of Representative Paul Ryan as Mitt Romney's running mate. The article includes a statement by Jim Messina, the head of President Obama's re-election campaign:

Messina attacked Ryan by saying:

"As a member of Congress, Ryan rubber-stamped the reckless Bush economic policies that exploded our deficit and crashed our economy. Now the Romney-Ryan ticket would take us back by repeating the same, catastrophic mistakes.”

Actually, the economic policies that "exploded our deficit" helped the economy to grow. The deficit had come to down to sustainable levels by 2007. The economy crashed in 2008 because the housing bubble, which had been left to grow unchecked, collapsed and brought the economy down with it. While Bush, along with the Greenspan-Bernanke Fed, can be blamed for ignoring the growth of the housing bubble, it is blatantly absurd to blame the economic collapse on the deficit.

Presumably Messina has some knowledge of this recent economic history. That means that he is fabricating a story to attack his political opponent. Alternatively, he is completely clueless about the economy and President Obama has given his top campaign position to a person astoundingly ignorant about the economy. Either way, the Post should have corrected Messina's statement for readers who may have been misled.

Representative Ryan Has Been Unwilling to Say Which Tax Deductions He Would End Print
Saturday, 11 August 2012 14:50

A NYT piece praised Representative Ryan's willingness to specify the items in the budget that he would cut to meet his deficit targets. (Actually, according to the Congressional Budget Office's analysis of his proposal it would eliminate just about everything in the federal budget by 2040, except Social Security, Medicare, Medicaid, and the Defense Department.) However the piece did not point out that Representative Ryan, like Governor Romney, has refused to identify the tax deductions he would eliminate to make up for his proposed reductions in tax rates.

In order to raise anywhere near the revenue he claims, Representative Ryan would have to eliminate the deductions for mortgage interest, property taxes, state and local income taxes, employer provided health insurance and just about every other deduction that benefits lower and middle income taxpayers. For some reason, both candidates have been unwilling to acknowledge this fact.

NYT Flunks Labor Law 101: In the United States Workers Can be Fired Anytime the Boss Wants Print
Saturday, 11 August 2012 08:28

A NYT article on efforts to change Italy's labor laws contrasted the protections for Italian workers with those for workers in the United States. It told of the lengthy legal process that an employer had to follow to fire a worker who he alleged had been caught stealing with the situation in the United States:

"By contrast, a private sector employer in the United States could have terminated the worker as soon as a theft was detected, unless a union contract was involved or antidiscrimination laws were violated."

Actually, a private sector employer can terminate a worker who it thinks is stealing, even if they never caught the worker. In fact, they can fire the worker just because they think they are the type of person who might steal or just because they don't like him or her. Workers who are not protected by union contracts or civil service guidelines can be fired any time for any reason that does not violate anti-discrimination laws.

The one exception to this rule is the state of Montana. Montana has just cause dismissal, which means that employers must have a reason for firing a worker.

[Addendum: It would have been appropriate to speak to a union representative or at least someone other than an employer to get their perspective on this issue. The folks at the NYT apparently are under the impression that employers always tell the truth. In fact, this is sometimes not the case.]

Yahoo Assigns Arithmetic Challenged Team to Cover Social Security Print
Thursday, 09 August 2012 20:15

There have been numerous stories about how workers don't have the necessary skills for the available jobs. There is little evidence of this in the data. Wages are not rising rapidly in any major occupational grouping. If employers could not find workers with the necessary skills then they should be raising wages to pull away the limited group of qualified workers from competitors, unless of course the employers were too incompetent to understand that higher wages are necessary to attract workers.

Anyhow, Yahoo clearly has trouble attracting staff with the necessary skills in arithmetic and logic, since it ran a piece on Social Security which contained major errors in one or both. The piece recounts the story of Mary Ann Sorrentino, a woman who spent a career in relatively low-paying jobs, but nonetheless managed to save and invest successfully and thereby accumulate a substantial amount to support her retirement.

It then tells readers:

"Now nearly 70, Sorrentino says her mother's admonitions saved her -- especially considering that Social Security, that very American of safety nets, hasn't quite panned out the way many had hoped. She dubs them the "reality-challenged," referring to those who have long paid into the Social Security kitty with a blind belief they'll see their investments, and perhaps more, kindly returned to them by the federal government.

That dream has soured, says an Associated Press study this week. The average American who retires now will receive less Social Security money than what he contributed over a working life. There are variables (retirement age and income level are two big ones), but for many, it's clear: Social Security, she ain't what she used to be."

Just about every assertion in this piece is wrong. In fact, the statements are sufficiently inaccurate to be libelous. If Yahoo had mischaracterized a private corporation like Goldman Sachs or Morgan Stanley the same way, it is likely that it would be facing a serious lawsuit.

In fact, the study cited by Associated Press (Associated Press did not do a study) did not indicate that Social Security is paying out less than planned. The last cut in benefits was put into law 29 years. This means that if workers had looked at benefits they had been promised at any date since those cuts, they would be seeing exactly the benefits that they expected. The only "reality-challenged" folks in this story are those at Yahoo who apparently did not know this fact.

Also, the study showed that most workers would in fact get more than the standard return on the money they put into Social Security. It is only the top quarter or so of wage earners who could expect to get somewhat less than a normal return on the money they invested in Social Security. (Yahoo's concern for these relatively well off workers is ironic, since the Bowles-Simpson plan, which is enthusiastically supported by most of the Washington establishment, calls for further cuts to these workers' benefits.)

The Yahoo piece also badly misleads readers about the financial condition of Social Security. It told readers of a small business owner who doesn't expect to retire until 2039:

"and that Social Security, according to the Congressional Budget Office, could be bone-dry by 2040."

Actually the Congressional Budget Office does not say that Social Security could be bone-dry by 2040. Its projections show that it will only have enough revenue at that point to pay about 80 percent of scheduled benefits. However, the payable benefit projected for 2040 would still be larger than the average benefit that retirees receive today.

That would be the case if Congress never took any steps to address the projected shortfall. The additional funding needed to pay the full scheduled benefit would be roughly equal to half of the cost of the war in Iraq at its peak. It is likely that a voting population that has a substantially higher share of retirees than we do at present would insist that Congress find the funding to maintain full scheduled benefits.

Yahoo has been having serious management and financial problems in recent years. If this article is typical of its reporting it is a virtual certainty that the company will be out of business long before Social Security faces any real financial problems.

The "Clean Development Mechanism" Can Be Gamed: Who Could Have Known? Print
Thursday, 09 August 2012 04:26

The NYT has an article on how companies in the developing world have increased production of coolants that contribute to global warming in order to get credits for destroying them. This is the outcome of some of the perverse incentives created by the Clean Development Mechanism in the Kyoto agreement.

This sort of gaming was predictable and predicted at the time. The basic problem was that there was no well-developed baseline against which to assign credits to ensure that money was only paid in situations where it actually led to emissions reductions.

The article included a comment from David Doniger, a member of the "who could have known crowd" who is cited as an expert:

"'I was a climate negotiator, and no one had this in mind,' said David Doniger of the Natural Resources Defense Council. 'It turns out you get nearly 100 times more from credits than it costs to do it. It turned the economics of the business on its head.'"

It would have been worth mentioning that Doniger is wrong, people did have this in mind. It was just the case that the people in positions of authority, and who were cited as experts on the topic, apparently did not understand that this sort of gaming would inevitably result from the deal they crafted.

Eduardo Porter Is Badly Confused About Free Trade and Protectionism Print
Tuesday, 07 August 2012 21:19

NYT columnist Eduardo Porter seriously misrepresents the issues in the trade debate in his column today. First of all, he misrepresents recent trade deals by referring them as "free trade" agreements.

While advocates of these trade pacts like to call them "free trade" agreements in the same way that President Reagan wanted to call the MX missile the "Peacekeeper", that doesn't make the assertion accurate. A major part of all the trade deals the United States has negotiated over the last two decades has been provisions that require stronger patent and copyright protection in our trading partners. 

Patent and copyright protection is a form of protectionism; it is not free trade. In fact, patent and copyright protection are extremely inefficient forms of protectionism that lead to far higher prices and much greater economic distortions that the types of trade protection that typically concern policymakers.

While tariffs or quotas rarely raise the price of a protected product by more 20 or 30 percent, patent and copyright protection raise the price of the protected items by many thousand percent. In the case of prescription drugs, patent protection raises the price of drugs that would sell for $5-$10 a prescription in a free market to hundreds or even thousands of dollars per prescription. The total gap between patent protected drug prices that we pay and their free market price is in the neighborhood of $270 billion a year.  

As economic theory predicts, this sort of interference in the market leads to rent-seeking behavior by drug companies that make the economic distortions even larger. In fact, the NYT has run numerous articles on efforts by drug companies to market drugs for inappropriate uses or to conceal evidence their drugs are ineffective or even harmful. (Here's the NYT's latest installment in its series on abuses caused by patent monopolies in prescription drugs. And yes, there are other ways to finance prescription drug research.) These are exactly the sort of abuses that economic theory predicts would result from this sort of government granted monopoly.



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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.