ruth marcus

Well, who can blame her? After all, we have tens of millions of seniors living high on Social Security checks averaging a bit over $1,200 a monthat a time when folks like the CEOs in the Campaign to Fix the Debt are supposed to subsist on paychecks that typically come to $10 million to $20 million a year.

Anyhow, her main trick for cutting benefits is to adopt the chained consumer price index as the basis for the annual cost of living adjustment. This would have the effect of reducing benefits by 0.3 percentage points for each year of retirement. This means a beneficiary would see a 3 percent cut in benefits after 10 years, a 6 percent cut after 20 years and a 9 percent cut after 30 years. This is real money. Since Social Security is more than half the income for almost 70 percent of retirees and more than 90 percent of the income for 40 percent of retirees, the hit to the affected population would be considerably larger than the hit to the top 2 percent from ending the Bush era tax cuts.

But Marcus insists this cut must be done first and foremost in the name of accuracy, since the chained CPI is supposed to provide a better measure of the cost of living. She notes but quickly dismisses the evidence from the Bureau of Labor Statistics (BLS) consumer price index for the elderly (CPI-E), which shows that the rate of inflation seen by the elderly is somewhat higher than the overall rate of inflation.

The problem with that is twofold. That measure is imperfect — the “E” stands for experimental. And, as the liberal Center on Budget and Policy Priorities notes, the burden of higher health costs falls unevenly among the elderly. Average costs are skewed upward by a minority who face very high out-of-pocket expenses, a problem better addressed by fixing Medicare to deal with catastrophic costs.

Actually, the “E” stands for elderly, but let’s get to the substance. First, if we are interested in accuracy then the answer would seem to be to have the BLS construct a full elderly index that tracked the actual consumption patterns of the elderly. This would cost some additional money, but we will be indexing $10 trillion in Social Security benefits over the next decade so if we want to ensure accuracy, it would seem reasonable to spend $70-$80 million to put together a full elderly index that actually tracked the consumption patterns of the elderly, looking at the specific outlets where they shopped and the items that they purchased.

It is difficult to know exactly what this would show, but it is possible that even apart from the issue of health care it would show that the elderly experience a higher rate of inflation than the population as a whole. The current index already assumes substantial amounts of substitution in response to price changes at lower levels of aggregation (e.g. different types of cell phones). If the elderly are less flexible in their shopping patterns and a less mobile population then this substitution may have the effect of understating the increase in their cost of living.

The point about health care misunderstands the way the consumer price index is calculated. The index is an average index, which weights expenditures by dollars rather than households. While the health care case may suggest that a small minority is pulling costs up, it is also likely that a small minority is pulling costs down. The vast majority of the population does not buy a new car in a given year. Yet this item, which has barely risen in cost over the last decade according to the BLS, accounts for more than 3 percent of the weight of the index.  This means that new car purchases by a small and relatively wealthy segment of the population have had the effect of reducing the measured rate of inflation over this period.

This issue arises with many other items as well. The BLS makes a point of quickly including new items (e.g. the latest cell phone or tablet computer) in the index to capture their period of most rapid price decline. Since these items will generally be expensive when they are first introduced, they will disproportionately be consumed by wealthier households and likely under-consumed by the elderly.

This provides reason to believe that the CPI understates the cost of living of the typical household and especially the typical elderly household, but Marcus is only interested in finding reasons why there might be an overstatement. There is also the obvious point with health care which is that most elderly households in most years will not have large health care expenses, but that doesn’t mean that at some point in their retirement that most elderly households will not see large health care expenses. That is the point of an index that picks up averages.

Marcus’s argument that this is:

a problem better addressed by fixing Medicare to deal with catastrophic costs,” is intriguing. When exactly do we anticipate that Congress is going to fix Medicare to deal with catastrophic costs?

The story here is pretty simple. If we want a more accurate index for adjusting Social Security benefits then we would have BLS construct a full elderly index. If the point is to cut benefits then we would do what Marcus advocates and switch to a chained CPI. That will teach those high living seniors.

Dean Baker is co-director of the Center for Economy and Policy Research. He also writes a regular blog, Beat the Press, where this post originally appeared.

Photo by Dyson under Creative Commons license

I always enjoy reading Ezra Klein’s blog. He’s an excellent writer and he does his homework. However, he really missed the story in his review of Inside Job (even though I do appreciate the favorable mention).

Ezra criticizes the movie for making the story one of corrupt economists blessing the evil doers of Wall Street:

“What’s remarkable about the financial crisis isn’t just how many people got it wrong, but how many people who got it wrong had an incentive to get it right. Journalists. Hedge funds. Independent investors. Academics. Regulators. Even traders, many of whom had most of their money tied up in their soon-to-be-worthless firms.”

This is the right point, but I think Ezra takes it in the wrong direction. Certainly all of these people were not on the take in the same way as some of the film’s heroes (i.e. former Federal Reserve Board Governor Frederick Mishkin who got paid six figures to write a report praising Iceland to the sky in 2006). However, it does not follow that they had incentive to “get it right.”
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It’s amazing what you can learn reading the Washington Post. Today its lead editorial told readers that reducing the annual cost of living adjustment for Social Security by 0.3 percentage points won’t hurt. This would come as news to most seniors who rely on Social Security for most of their income.

This 0.3 percentage point cut is cumulative. After a person has been retired for 10 years benefits would be roughly 3 percent lower than would otherwise be the case. Benefits would be almost 6 percent lower after 20 years, and almost 9 percent lower after 30 years, when most beneficiaries will be in their 90s.

The poverty rate is highest for the oldest seniors, most of whom are women living alone. Most people think cutting benefits for this group by 9 percent would hurt, thankfully we have the Washington Post to tell us otherwise.

(This is a newspaper that has run front page stories warning that raising taxes by less than 1 percent [of income] on people earning $300,000 a year would inflict real pain.)

The rationale for the benefit cut is the use of an alternative measure of inflation, the chained consumer price index, that assumes substantial substitution between consumption items in response to prices changes. The Post asserts that this index is a more accurate measure of inflation.

Actually, the Bureau of Labor Statistics has an experimental elderly index that measures the rate of change in the basket of goods and services consumed by people over age 62. This index shows that the inflation rate experienced by the elderly increases by an average of 0.3 percentage points more than the overall CPI to which Social Security benefits are indexed.

While this is an experimental index that does not track the actual purchasing patterns of the elderly (e.g. examining the specific retail outlets where they shop and the items they purchase), those who are interested in an accurate cost of living adjustment would advocate a fuller elderly index. Those who want to cut Social Security benefits advocate using the chained consumer price index, which we know will show a lower measured rate of inflation.

The Washington Post ran another front page editorial calling for cuts to Social Security. The context was a discussion of the Republicans’ "Pledge to America." The editorial complained that the plan did not include any concrete ways to deal with Social Security.

It then suggested that three ways that the Republicans should look to put the system into long-term balance: "raising the Social Security retirement age, changing the cost-of-living formula, offering personal or private accounts." The first two measures are ones that are strongly supported by the Post editorial board (hence their appearance in this front page editorial), but strongly opposed by the vast majority of the public.

Insofar as it is necessary to address a funding gap (projections from the Congressional Budget Office show the program is fully solvent for the next 29 years with no changes whatsoever), polls show that the public overwhelmingly favors raising the cap on income subject to the payroll tax. Currently, high income workers only pay the Social Security tax on their first $106,000 in wages. Polls also show that the public much prefers even an increase in the tax rate itself to the cuts pushed by the Post editorial board.

It is also worth noting that offering private accounts is not a route toward improving the program’s finances. Private accounts worsen the finances of Social Security by pulling money out of the system. This would be like a family facing budget problems deciding to buy a new car to help the situation. Private accounts may be an effective way to get fee income to Wall Street banks, but they do not help the finances of Social Security.

The article also reports on the Republicans calls for a "full accounting" of Social Security, Medicare, and Medicaid. It would have been appropriate to point out that there is already a very full accounting of these programs. The trustees of both Social Security and Medicare issue lengthy accounts of the programs’ finances each year. (The do refuse to disclose the documents that provide the basis for these projections. However, the Republicans did not imply that they would make these public.) The Congressional Budget Office does regular analysis of all three programs. The Government Accountability Office also periodically evaluates specific issues connected with these programs on request from members of Congress as does the Congressional Research Service. In addition, the Centers for Medicare and Medicaid Research does extensive analysis of Medicare and Medicaid, along with other government health care programs.

In this context, the Republican call for a "full accounting" would appear to be a quest for a pointless government bureaucracy that would duplicate work already being done. A serious news article would have called attention to the Republicans’ push for needless bureaucracy.

Most of the elite have contempt for the portion of the American population that does not have at least 6-figure incomes, however the Washington Post stands out in its willingness to express this contempt so openly. Back in the fall of 2008, when the government was crafting bailouts worth tens of millions of dollars to the likes of Robert Rubin, Lloyd Blankfein, and other well-connected Wall Street types, the Post was frothing at the idea that the government might help protect the jobs of autoworkers earning $27 an hour.

This contempt was fully visible again today when the Post ran an editorial complaining that UAW members who were employees of Delphi, GM’s former auto parts division, would get their full pensions. By contrast, the editorial complained that Delphi’s management personnel had their pension plan taken over by the Pension Benefit Guarantee Corporation (PBGC) and as a result would get just "pennies on the dollar."

We all know how infuriating it must be to the Post that ordinary working people might get pensions that can sustain a middle class living standard, but they are entitled to their class hatred. However the "pennies on the dollar" claim is more than a bit of a stretch. The PBGC guarantees a benefit of up to $4,500 a month for a worker retiring at age 65. That may be "pennies on the dollar" in Washington Post land, but it’s more than most of the rest of us can expect to live on in retirement.

It’s true that workers who retire at younger ages will likely take substantial hits on their pension, but this is more likely to be an issue for UAW members who do manual labor on the factory floor than the management personnel who hold desk jobs. The latter are certainly better positioned to work into their 60s than the former.

The Washington Post likes to run columns that are chock full of mistakes so that readers can have fun picking them apart. That is why George Will’s columns appear twice a week. Let’s have a little fun with the latest, which is an attack on President Obama’s economic agenda.

First, Will is anxious to tell readers that Democrats are telling the public that stimulus did not work because many think we need more stimulus. Actually, people who think we need more stimulus simply note that the stimulus was helpful, but not large enough for the task. According to the Congressional Budget Office, the stimulus added between 1.7 and 4.5 percent to GDP since its enactment (that’s between $240 billion and $740 billion in additional output). It also lowered the unemployment rate by between 0.7 and 1.8 percentage points.

This was not enough to fully offset the damage from the collapse of an $8 trillion housing bubble. The collapse wiped out more than $1.2 trillion in annual demand (roughly $600 billion in lost consumption and $600 billion in lost construction). By comparison, the stimulus injected about $300 billion a year into the economy in 2009 and 2010. Roughly half of this was offset by cutbacks at the state and local level. So, we were looking at a net increase government sector stimulus of $150 billion, which was being used to counteract a decline in private sector demand of $1.2 trillion.

Is anyone surprised that this was not enough? Will’s conclusion that stimulus does not work is like seeing someone throw a few buckets of water on their burning house and then telling the fire department not to waste time with their hoses, because obviously water will not be effective against the fire.

Will then goes on to tell readers that Herbert Hoover was a great supporter of fiscal stimulus. Actually, real spending did increase under Hoover, but this was primarily because of the huge deflation of the era. In any case, the facts do not support Will’s claim that:

"Real per capita federal expenditures almost doubled between 1929, Hoover’s first year as president, and 1932, his last."

Actually, real federal expenditures rose by less than 20 percent if we follow Will and take 1932 as the endpoint. If we include 1933, which was partially a Hoover budget, then the increase is still just 44.9 percent. That is substantial, but certainly not "almost doubled."

Will goes on to complain that:

"Barack Obama has self-nullifying plans for stimulating the small-business sector that creates most new jobs. He has just endorsed tax relief for such businesses but opposes extension of the Bush tax cuts for high-income filers, who include small businesses with 48 percent of that sector’s earnings."

Actually, most of the businesses whose taxes will be affected by the increase will only be trivially impacted. According to an analysis from the Congressional Joint Committee on Taxation, the average tax hit from Obama’s plan on filers earning between $200,000 and $500,000 (the overwhelming majority of the affected small business owners) is $400. It is unlikely that a tax increase of $400 will have a big effect on the investment or hiring decisions of a business netting $350,000 a year.

Therefore, the answer to question posed by Will: "does this increase anyone’s confidence?" is almost certainly that it probably has almost no impact on anyone’s confidence since it is largely irrelevant to the decisions of the vast majority of businesses.

Finally, Will ends by making a simple mistake of logic. He wants to beat up on the Cash for Clunkers program by arguing that only 1 in 6 of the cars purchases under the program were actually induced by the tax credit, as opposed to simply moving up a purchase that would have taken place anyhow.

While one may hope for a better ratio (and others have calculated higher ratios), since spending at a time of very high unemployment is essentially free, who cares? If we did not have the cash for clunkers program, fewer people would have bought more fuel efficient cars. The unemployment rate would be higher and we would be consuming more energy and emitting more greenhouse gases. How is that good?

Will also complains that Cash for Clunkers hit poor people by raising the price of used cars. While it definitely did raise the price of used cars, most poor people already own cars. This means that Cash for Clunkers raised the price of the cars they own. For poor car owners this picture is largely a wash, their next car will cost more, but they will get more money on a trade-in. First time buyers are unambiguously hurt, but this is a minority of the poor.

Most political experts believe that a strong economy favors incumbents, but the Post told readers the opposite in a front page piece that urged Democrats to embrace deficit reduction. The piece noted comments from several Democratic senatorial candidates urging budget cuts, then told readers:

"The new push for austerity could prove too little, too late for Democrats, who fear losing their majorities in both chambers of Congress. In dozens of House and Senate races, incumbent Democrats are struggling in polls, leading political analysts to raise the serious prospect of Republican takeovers in the House and even the Senate."

Of course the deficits that the country is now running are sustaining the economy. If the deficits were lower then output would be lower and unemployment would be higher. The Congressional Budget Office (CBO) recently estimated that the stimulus has reduced the unemployment rate by between 0.7 and 1.8 percentage points.

The CBO estimates imply that if the Democrats had been earlier in their push for fiscal austerity and not pushed through the stimulus, then the current unemployment rate would be between 10.3 percent and 11.4 percent. This Post piece asserts that this situation would have improved their electoral prospects in November, although it cites no one who backs up this position.

The editorial, which is not labeled as such, includes several other unsupported assertions. At one point it told readers that government spending is out of control, commenting that "Democrats vow to bring spending under control," which of course is only possible if spending is already out of control.

It also implies that the Democrats have spent recklessly commenting about their "conversion to fiscal restraint" and the difficulty of convincing voters that they are serious. Of course the only budget surpluses in the last 40 years were run with Democrats in the White House, and the largest structural deficits were run under Republican administrations, so it is a bit bizarre that the article would imply that Democrats need to convert to "fiscal restraint."

The article also told readers the country’s fiscal health is in danger and that the changes need to restore it are unpopular:

"Some fiscal hawks are skeptical that either party is willing to make the unpopular decisions necessary to restore the country to fiscal health."

The financial markets do not believe that the country’s fiscal health is in danger, otherwise they would not make long term loans to the government at interest rates below 3.0 percent. It is also not clear that the steps needed to ensure that long-term budget deficits do not become a problem are unpopular.

While source cited in the story (Robert Bixby, the director of the Concord Coalition) wants to cut Social Security, Medicare and Medicaid, it is only necessary to fix the U.S. health care system to ensure stable budgets into the indefinite future. If the United States paid the same per person health care costs as people in any other wealthy country we would face huge long-term budget surpluses rather than deficits.

The piece should have also pointed out Colorado Senator Michael Bennet’s error when he asserted that we are borrowing from China because of our budget deficit. The United States is borrowing from China because of its trade deficit, which is in turn the result of an over-valued dollar. This is an embarrassing gaffe from a senator.

It is also worth noting that this editorial did not once mention the unemployment rate. This is remarkable for a piece discussing the Democrats’ election prospects.

Confused readers may wonder based on its lead editorial complaining that supporters of Social Security: "pursue a maddening strategy of minimizing the existence of any problem and accusing those who seek solutions of trying to destroy Social Security (emphasis added)."

The piece begins by telling readers that: "THIS YEAR, for the first time since 1983, Social Security will pay out more in benefits than it receives from payroll taxes — $41 billion. This development is not an emergency, but it is a warning sign (emphasis in original)." It certainly is a warning sign. The falloff in Social Security tax revenue is a warning that the economy is seriously depressed due to the collapse of the housing bubble. Double digit unemployment leads to all sorts of problems, including the strains that it places on pension funds like Social Security.

In a sane newspaper the next sentence would be pointing out the urgent need to get back to full employment. Instead the Post tells readers:

"Too soon, this year’s anomaly will become the norm. By 2037, all the Social Security reserves will have been drained and the income flowing into the program will only be enough to pay 75 percent of scheduled benefits. If that sounds tolerable, consider that two-thirds of seniors rely on Social Security as their main source of income. The average annual benefit is $14,000. Those who care most about avoiding such painful cuts ought to be working on ways to bolster the program’s finances — and soon, when the necessary changes will be less drastic than if action is postponed."

Let’s see, it would be intolerable to have Social Security pay 75 percent of scheduled benefits in 2037, but one of the Post preferred cuts is raising the retirement age to 70,a 15 percent cut in benefits when fully phased in. So the Post thinks it would be just fine to have beneficiaries get 85 percent of scheduled benefits in 2037.

Of course doing nothing today, or for the next decade, or even the next two decades, does not imply that beneficiaries will see their benefits cuts by 25 percent in 2037. The Post may not be familiar with the way Congress works, but it tends to wait until issues require action. They would know this if they had heard about the Greenspan Commission, which was established in 1982 to deal with Social Security’s last crisis. It produced a set of fixes which is now expected to keep the program solvent for 54 years, and no one missed a check.

While it would not be desirable to wait until the system was literally facing a shortfall, as was the case when the Greenspan Commission, there is little obvious harm to waiting now in terms of the program’s finances. A Greenspan Commission size fix put in place in 2030 would leave the program fully solvent for most of the rest of the century.

There is also a very good reason for delay. The opponents of Social Security have been spending huge amounts of money deliberately promoting misinformation. Peter Peterson, the richest and most prominent opponent, has repeatedly asserted that the Social Security trust fund does not exist. This flat earth view of the program has been given respectful treatment at the highest levels of government. When Peterson put on a daylong program on the deficit in the spring both of the co-chairs of President Obama’s deficit commission took part in the program as did former President Clinton.

This massive effort to undermine confidence in the program has been largely successful. Polls show that substantial majorities of younger workers do not expect to receive their Social Security benefits.

That is not a good environment in which to debate substantial changes to the country’s most important social program. Since there are several decades until the program faces any real problems, it is entirely reasonable for those who support the program to focus on educating the public about the program’s financial health and to seek to delay any major changes until the Peterson-type misinformation campaigns have been defeated.

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, includingFalse Profits: Recovering from the Bubble Economy.

Imagine a major national newspaper that never saw an $8 trillion dollar housing bubble. Suppose its most often cited expert on the housing market was the chief economist of the National Association of Realtors, who also authored the 2006 bestseller : Why the Housing Boom Will Not Bust and How You Can Profit From It.

Yes, I’m talking about the Washington Post, which had the gall today to run a column by Jim Hoagland complaining about how “we” are passing on a bad world to our children. The “we” in the column is meant to refer to the generations currently in their 40s, 50s, and 60s, who he claims are leaving huge problems to our children.

He’s right about the problems, but he’s wrong about the “we.”

The reality is that the Washington Post and the elite clique for which it is a mouth piece have badly failed us and our children. The housing bubble was easily recognizable. The economic disaster that we are now facing could have been easily avoided if the Washington Post and its elite friends (e.g. Alan Greenspan, Robert Rubin, and Henry Paulson) were not too incompetent or corrupt to see the evidence of problems everywhere. Needless to Read the rest of this entry →