Social Security Under Attack By Media

I will repeat:

  • Social Security is NOT in financial trouble.
  • Social Security does NOT contribute in any way shape or form to the U.S. Federal government’s deficit, now or in the future. It cannot.  If anything, it has enabled a coverup of how big the real deficit has been for years.
  • News media does not critically examine any claims asserted by the big-money folks that want to abolish, cut, or destroy Social Security (see here).

Remapping Debate along with Mark Miller document how the news media mindlessly attacks and asserts that Social Security is a deficit problem even though that claim is false. In the course of explaining, they also do an excellent job of explaining how the trust fund has operated.

Kudos to Mark Miller, a contributor to Reuters’s Prism Money blog, for his post Monday morning calling out NPR, the Associated Press, and NBC’s David Gregory for perpetuating the misleading idea that Social Security is one of the key drivers of the federal deficit.

The experts who study these things believe that, thanks to the trust fund, Social Security has enough money saved up to meet its obligations for about the next 25 years.

Thanks to the energetic efforts of deficit hawks, the notion that Social Security is a leading cause of the deficit has become part of the Beltway consensus. But, as Miller — who’s been pounding this drum for some time — points out, “the consensus is wrong, and so is much of the reporting” on this topic.

Here’s the actual situation: in the early 1980s, when Social Security was facing a short-term financing crisis, a commission chaired by Alan Greenspan recommended a variety of adjustments to the program. Those tweaks, coupled with decent economic growth, resulted in a situation in which over the ensuing decades Social Security collected more money in payroll taxes than it paid out in benefits.

Rather than just put those surplus funds in a bank vault, the trustees who run the Social Security Administration took this money — it’s known as the Social Security Trust Fund — and invested it in bonds issued by the U.S. Treasury. In effect, over the course of nearly 30 years they lent money to the rest of the government. This was good for Social Security, because it made a little extra money on a very safe investment; the U.S. government, after all, doesn’t default on its debt. And it was good — or seemed good, anyway — for the rest of the government, which got in the habit, especially during the 2000s, of paying for new programs and overseas military adventures with borrowed money.

One consequence of this process is that the trust fund grew quite large: it’s now about $2.5 trillion. Another consequence is that the federal tax burden shifted away from income taxes — which are progressive, so that people who earn more money pay a higher rate — toward payroll taxes, where every worker pays a flat rate up to about $106,000 in earnings (amounts above that cap are not subject to the payroll tax, so the more money you earn, the lower your payroll tax rate is).

Today, for a variety of reasons, Social Security’s annual obligations have started to exceed payroll tax collections. (This was entirely expected, though it happened a bit earlier than anticipated thanks to the recession.) In a narrow sense, that’s a “deficit.” But what journalists and politicians usually mean by “deficit spending” is a government borrowing money to pay its bills. Social Security just needs to collect on the loans it has made. And the experts who study these things believe that, thanks to the trust fund, Social Security has enough money saved up to meet its obligations for about the next 25 years. So there is no real “Social Security deficit” over that period.

To the extent that Social Security has anything at all to do with the deficit, it is the fiscal imprudence of past White Houses and Congresses, not America’s commitment to present and future retirees, that is to blame.

What about after that point? Once the trust fund is spent, if there are no other changes to the program Social Security will continue to owe more than it collects. (As Miller notes, the fixes necessary to avoid this situation are modest, and do not have to include benefit cuts.) But even then, the trustees could not borrow money to make up the difference: by law the program, on net, can never have spent more than it has taken in. “As a result,” a recent paper from the Economic Policy Institute stated, “Social Security cannot and would not add to the federal deficit when its trust fund is exhausted.”

So where does all the deficit talk come from? The problem, of course, is that the Treasury does not have the cash on hand to repay what it borrowed from Social Security, and making good on those obligations will require cuts to other areas of the budget, more revenue from income taxes, or further deficit spending. It is this fact that leads many commentators — including some politicians who are generally supportive of Social Security — to link the program to the deficit.

But that problem wasn’t caused by Social Security, which has always operated in long-term balance and, unlike Medicare, faces very modest challenges in the fairly distant future. It was caused by a federal government that, with the exception of a portion of the Clinton years, was unprepared to fully fund federal programs through tax levels sufficient to pay the bills, and instead used borrowed funds to paper over the shortfall. To the extent that Social Security has anything at all to do with the deficit, it is the fiscal imprudence of past White Houses and Congresses, not America’s commitment to present and future retirees, that is to blame.

As Miller notes, this isn’t actually that complicated. But there’s an irony to his latest post correcting the record on this subject coming out Monday morning. That’s because President Obama’s 2012 budget proposal came out at almost exactly the same time, and the flurry of coverage it prompted included many more assertions that Social Security is one of the key drivers of the deficit.

Like this, from MarketWatch:

And some 800-pound gorillas are also missing: reducing funding demands for Social Security, Medicare and Medicaid — the source of huge projected deficits in coming years.

Or this, from Politico:

But, [Hoyer] said, they’ll insist they be coupled with reductions in the Pentagon budget and a serious attempt to rein in spending on Medicare and Social Security, two of the major reasons for the explosion in the deficit that will get worse as the baby boomers retire.

Or this, from The Washington Post:

A senior administration official said Obama’s budget request maps “a sustainable path” that would stabilize government finances in preparation for a broader debate about how to tackle the biggest drivers of future deficits: Social Security and health care for the elderly, as well as a tax code that offers more in breaks and deductions than it collects in revenue.

It looks like Miller will have more fodder for another post soon.


There Was No “Stimulus” Spending in Aggregate

One of the claims that Tea Partiers, Republicans, and conservative/neo-liberal economists have been making for some time is that “the stimulus has failed”. They conclude that Keynesian economics and economic policies are failures.  Since, like most claims of Republicans and other politicians, these assertions are usually repeated uncritically by the news media, it’s close to becoming accepted “common wisdom” that the stimulus failed.  It’s not true, though.  What happened is that Keynesian stimulus was never tried.  Yes, U.S. federal government spending temporarily increased for 2 1/2 years.  But the so-called “stimulus” bill of $780 billion passed in Feb 2009 wasn’t all a stimulus spending bill. Much of the money, approx. $380 billion IIRC, was tax cuts.  People didn’t really spend much of those tax cuts because they were paying off debt with the money. That’s not a Keynesian stimulus spending program.  Keynes pointed out that tax cuts are a weaker way of stimulating spending.

But most important is that the additional spending was over 2 1/2 years, and it was only federal spending.  It was completely offset by cuts in spending at the state and local government level.  In aggregate, there was no stimulus spending program. It’s now over anyway.  What people are doing these days is confusing the increased deficit with increased spending, ignoring the fact that the deficit is so big because tax collections are down. Tax collections are down because too many people aren’t working.  And firms won’t hire those people because nobody (including aggregate government) is spending enough.

Paul Krugman notes:

In effect, although without saying so explicitly, the Obama administration has accepted the Republican claim that stimulus failed, and should never be tried again.

What’s extraordinary about all this is that stimulus can’t have failed, because it never happened. Once you take state and local cutbacks into account, there was no surge of government spending. Here’s total (all levels) government spending over the past 10 years:


Looking at this graph, if you didn’t know there had been a “massive” stimulus, would you even have suspected that there had been any stimulus at all?

Income Inequality Widening for Both Men and Women

Income distribution changes, namely, the rich getting richer and the bottom half struggling to stay even is true for both men and women.  It is only partly explained by educational level. Mark Thoma extracts from a CBO report about how workers’ hourly compensation (wages) have changed from 1979 to 2009:

Changes in the Distribution of Workers’ Hourly Wages Between 1979 and 2009

Boeing Learns a Lesson In Theory of the Firm – Outsourcing Isn’t Always Profitable

Boeing is learning a hard lesson in what micro-economists call the “theory of the firm”.  Theory of the firm is the branch of econ that explores the question of “why do corporations exist?” and “why do they vary in size?”.  First, from the LA Times (much more at the linked article itself):

The airliner is billions of dollars over budget and about three years late. Much of the blame belongs to the company’s farming out work to suppliers around the nation and in foreign countries…

Case in point: Boeing Co. and its 787 Dreamliner.
The next-generation airliner is billions of dollars over budget and about three years late; the first paying passengers won’t be boarding until this fall, if then. Some of the delay stems from the plane’s advances in design, engineering and material, which made it harder to build. A two-month machinists strike in 2008 didn’t help.

But much of the blame belongs to the company’s quantum leap in farming out the design and manufacture of crucial components to suppliers around the nation and in foreign countries such as Italy, Sweden, China, and South Korea. Boeing’s dream was to save money. The reality is that it would have been cheaper to keep a lot of this work in-house…

Paul Krugman summarizes the relationship to some modern theory of the firm writings:

Oliver Williamson shared the 2009 Nobel mainly because of his work on a question that may seem obvious, but is much less so once you think about it: why are there so many big companies? Why not just rely on markets to coordinate activity among individuals or small firms? Why, in effect, do we have a lot of fairly large command-and-control economies embedded in our market system?

Williamson answered this in terms of the difficulties of writing complete contracts; when the tasks that need to be done are complex, so that you can’t fully specify what people should do in advance, there can be a lot of slippage and strategic behavior if you rely on market incentives; in such cases it can be better to do these things in-house, so that you can simply tell people to do something a particular way or to change their behavior.

In Boeing’s case, they outsourced far too much, only to find that they were getting parts that didn’t do what they were supposed to — and also to find that the subcontractors were seizing a lot of the rents. They discovered, in effect, that there are times when it’s better to rely on central planning than to leave things up to the market.

Obviously this isn’t always true. There’s a tradeoff. But that’s the point — and it’s this tradeoff that determines how big firms should be. Boeing has now provided a clear motivating example. Their loss, the economics profession’s gain.

Paul Walker at Anti-Dismal offers a more complete explanation of Williamson’s ideas.  And, of course, Williamson’s books, unlike many by Nobel-winning economists, are actually rather readable by non-economists.