Fuzzy Math

excerpted from the book

The Great Unraveling

Losing our way in the new century

by Paul Krugman

WW Norton, 2003, hardcover

... There's an obvious similarity between the Bush tax cut of 2001 and the Reagan tax cut 20 years earlier. But the politics were quite different this time around, and much scarier. I'm not an admirer of Reagan, but at least he presented his plan honestly: he didn't deny that he was proposing big tax cuts for the rich, and didn't hide the fact that his tax cuts looked affordable only if you accepted his supply-side economic theories. When Bush proposed a similar plan, however, he misrepresented everything about it: He pretended that it was a tax cut mainly for the middle class, and he claimed that it would fit easily within a responsible budget. It took only a bit of homework to show that both claims were just plain untrue-but for some reason almost nobody in the media was willing to do that homework.

In the early months of the 2000 campaign I had trouble believing what was happening. Was the presidential candidate of a major political party really lying, blatantly, about the content of his own program? Were the media really letting him get away with it? He was, and they were.

Bush has pulled the largest bait-and-switch operation in history. First he described a budget-busting tax cut, which delivered the bulk of its benefits to the very affluent, as a modest plan to return unneeded revenue to ordinary families. Then, when the red ink began flowing in torrents, he wrapped himself and his policies in the flag, blaming deficits on evil terrorists and forces beyond his control. (As an economist I understood what was going on, and tried to explain it in my column. Critics called me a Cassandra, and they were right-for though nobody believed Cassandra's prophecies, they did come true... the selling of the Bush tax cut-the tricks, evasions, and outright lies that he used first to sell his campaign on the election trail, then to pass it through Congress. A subtext of that story is the failure of the institutions and individuals who should have protected the public interest. The press failed, disastrously, to explain the issues; Bush was allowed to get away with incredibly blatant lies about the budget. And men who had cast themselves as guardians of fiscal probity threw away their supposed principles; most notably, Alan Greenspan, high priest of fiscal discipline during the Clinton years, tied himself into intellectual knots to lend support to the thoroughly irresponsible Bush tax cut.

Apologists for the Bush administration tell us that by historical standards the federal government's debt isn't that big relative to the economy, and the current budget deficit, while unprecedented in dollar terms, also isn't that exceptional compared with the size of the economy. But such historical comparisons are deeply misleading: the administration's policies are ruinously irresponsible, setting us up for a huge crisis in the not too distant future. Why? Because we are only a few years from B-Day: the day on which the baby boomers start retiring.

The U.S. government is best viewed as a big insurance company that also happens to have an army. The giant retirement programs-Social Security and Medicare-already dominate the federal budget; they'll become much more expensive a decade from now. If we have to pay those bills, and also pay interest on a big national debt, something will have to give. So now would be a good time to run surpluses and pay off the federal debt. It's hard to imagine a worse time to be running huge deficits.

... One of these years, and probably sooner than you think, the financial markets will look at the situation, and realize that the U.S. government has made inconsistent promises-promises of benefits to future retirees, repayment to those who buy its debt, and tax rates far below what is necessary to pay for all of it. Something will have to give, and it won't be pretty. In fact, I think the United States is setting itself up for a Latin American-style financial crisis, in which fears that the government will try to resolve its dilemma by inflating away its debt cause interest rates to soar.

October 1, 2000

It's confession season on the financial news. With many companies admitting that profits won't measure up to market expectations, programs like CNN's Moneyline have become painful to watch: night after night executives squirm as interviewers grill them about why earnings fell short of estimates. Needless to say, honest accounting is a given. After all, the interviewers do their homework-they would pounce on any obviously wrong numbers.

But I guess some people get special treatment.

I really, truly wasn't planning to write any more columns about George W. Bush's arithmetic. But his performance on Moneyline last Wednesday was just mind-blowing. I had to download a transcript to convince myself that I had really heard him correctly. It was as if Mr. Bush's aides had prepared him with a memo saying: "You've said some things on the stump that weren't true. Your mission, in the few minutes you have, is to repeat all of those things. Don't speak in generalities-give specific false numbers. That'll show them!"

First, Mr. Bush talked about the budget-"There's about $4.6 trillion of surplus projected," he declared, which is true, even if the projections are dubious. He then went on to say: "I want some of the money, nearly a trillion, to go to projects like prescription drugs for seniors. Money to strengthen the military to keep the peace. I've got some views about education around the world. I want to-you know, I've got some money in there for the environment."

Nearly a trillion? The budget statement released by the candidate's campaign three weeks ago shows total spending on new projects of $474.6 billion-less than half a trillion. Mr. Bush presumably wants to convey the sense that he's a compassionate guy who really cares about education, the environment and all that. But that doesn't excuse claiming to spend twice as much on these good things as the number given in his own budget.

He continued: "But there's still a quarter unspent, about $1.3 trillion [the size of Mr. Bush's tax cut]. I think we ought to send it back to the people who pay the bills." Alas, 4 times 1.3 is 5.2, not 4.6-and anyway, the full budget cost of that tax cut, including interest, is $1.6 trillion, more than a third of the projected surplus.

Next came Social Security. Here a bit of explanation is needed. The reason Social Security is in trouble is that the system has a large "hole"-basically a hidden debt-because previous generations of retirees were paid benefits out of the contributions of younger workers. That hole also means that you can't justify privatizing Social Security-which Mr. Bush advocates-by comparing the rate of return that an individual could get by investing in government bonds and the implied rate of return on his Social Security contributions. That comparison ignores a multi-trillion-dollar debt that somebody has to pay.

Mr. Bush, wasting no time, went straight to that bogus comparison. "But the safest of all safe-of about 4 percent [a reference to government bonds]-is twice what they get in the Social Security trust today."

Is there any way to explain away Mr. Bush's remarks-three major self-serving misstatements in the course of only a couple of minutes? Not that I can see. We're not talking questionable economic analysis here, just facts: what Mr. Bush said to that national television audience simply wasn't true.

What is really striking here is the silence of the media - those "liberal media" conservatives complain about. Moneyline would never let a C.E.O. get away with claiming to spend twice as much on research as the sum announced in the company's own press release. But when Mr. Bush declared that he would spend twice as much on new programs as the sum announced by his own campaign, the interviewer said nothing-and nobody else picked up on it.

As I said, I don't want to keep writing about this. But reporters seem to be too busy chasing rats and dogs to look at what the candidates say about their actual policy proposals. So someone has to point out that in an interview intended to showcase his economic program, Mr. Bush did it again: he vastly exaggerated his spending plans, greatly understated the cost of his tax cut and misrepresented the issues on Social Security.

February 11, 2001

The selling of George W. Bush's tax cut relies heavily on salami tactics-slicing away opposition a bit at a time. To understand how fundamentally misleading that sales pitch is, we must look at the whole salami.

Basically, there are three federal taxes on individuals. The payroll tax, which is levied at a flat rate of 15.3 percent of income up to a maximum of almost $70,000, is the main tax paid by about four out of five families. The income tax is less than 10 percent of income for most families, but it rises to around 30 percent of the income of million-dollar earners. And the inheritance tax, which applies only to estates of more than $675,000 (twice that for couples), is a tax on only the very well off: a mere 2 percent of estates pay any tax, and most of the tax is paid by a few thousand multimillion-dollar estates each year.

Now for the salami tactics.

Conservatives who decry the burden of taxes always include the payroll tax in their calculations. And when arguing for tax cuts, the administration starts with numbers that include the whole salami. Again and again we hear about that projected surplus of $5.6 trillion. You shouldn't believe that projection, but for what it's worth more than half of it (the more credible half) comes from Social Security arid Medicare-programs financed by payroll taxes.

When it comes to tax cuts, however, Mr. Bush's people ignore the payroll tax-that is, they propose no cut in the tax that is most of what most families pay, while demanding a large cut in the income tax, which falls mainly on the affluent. And they want to eliminate the inheritance tax, which is overwhelmingly a tax on the downright wealthy.

By proposing to eliminate a tax that falls entirely on the rich, to cut a tax that falls mainly on the well off, but to ignore the main tax paid by most people, the administration has made a deliberate decision to tilt tax relief strongly toward the top of the scale. Families earning $50,000 per year would on average get a tax break of about $800 annually; families earning $1 million would get about $50,000. Yes, well-off families currently pay a higher share of their income in taxes-but not that much higher. And no, it's not "class warfare" to point out that the tax cut disproportionately benefits the very, very affluent.

Now you could try to justify tax cuts tilted toward the top by claiming that a rising tide lifts all boats, and that cutting taxes on the rich will make the economy grow faster. But that is not the case that the administration is making-perhaps because given the extraordinary boom of the Clinton years, it's hard to claim that excessive taxes have been a drag on economic growth.

Instead, the administration pretends that it is offering broad tax relief for working families. Last week Treasury Secretary Paul O'Neill declared that the plan "would focus on helping those people who are close to the low-income and middle-income brackets," adding that "it would affect every American that currently pays taxes." This statement isn't technically a lie: "close to" need not actually mean "in," and "affect" need not mean that a family's taxes are actually reduced. But one has to say that Mr. O'Neill, whom the press has portrayed as a straight talker, is learning his new trade very quickly.

The pretense that this is a populist tax cut is aided by careful slicing of that salami. The Bush people love to point out that families in the lower brackets will see a greater proportional reduction in their income taxes than those in the top bracket; they hope you won't notice that the main burden on such families is not the income tax but the payroll tax, which will not be cut, and that the children of the wealthy will receive large additional tax relief from the elimination of the inheritance tax.

Those staged events with "tax families" slice the salami even thinner, carefully avoiding any reference to the major beneficiaries. The only high-income taxpayer, and the only likely inheritor of a taxable estate, ever mentioned at these events is Mr. Bush himself.

Otto von Bismarck is supposed to have declared that "people will sleep better not knowing how their sausage and politics are made." Mr. Bush no doubt agrees; he hopes that the American people won't look too closely either at the composition of the tax salami or at how he proposes to slice it.

March i8, 2001

... Last May, when George W. Bush was claiming that he planned only a trillion-dollar tax cut-remember the routine with the dollar bills?-independent experts estimated the actual 10-year budget cost of his tax plan at close to $2 trillion. They also warned that under Mr. Bush's plan a hitherto obscure aspect of the tax code, the alternative minimum tax, would become a major issue-and resolving that issue would sharply increase the cost of the plan.

Sure enough, earlier this month the bipartisan Congressional Joint Tax Committee estimated that Mr. Bush's proposal would reduce revenues over the next decade by $2.2 trillion. And the J.T.C. also produced some shocking estimates about the alternative minimum tax.

Most people have never heard of this tax, which was supposed to prevent the wealthy from avoiding taxes but ends up mainly affecting upper-middle-income families with lots of deductions. When the tax kicks in, it's infuriating; you've carefully calculated everything, then you discover that you have to do another calculation, and you end up owing a lot more. But right now this happens to only 1.5 percent of taxpayers. The J.T.C. concluded, however, that under the Bush plan this number would rise to one-third of taxpayers. Without question the law will be changed so that this doesn't happen-but the fix will add at least $300 billion to the cost of the plan.

So the "trillion-dollar tax cut" has become $2.5 trillion and counting-which means that Mr. Bush can pay for initiatives like missile defense and prescription drug coverage only by raiding Social Security and Medicare.

Last week Tommy Thompson, secretary of health and human services, tried to allay suspicions about such a raid by offering his personal assurance that the money Medicare has been accumulating to care for the baby boomers will not be diverted into other uses-even though Mr. Bush includes that money in his "contingency fund." But Mr. Thompson admitted that it isn't really up to him-and the administration's allies in the Senate blocked a measure that would have made Mr. Thompson's promise binding. Somehow I'm not reassured.

The latest news is that Mr. Bush wants additional tax cuts this year to stimulate the economy; he has apparently just realized that cuts that will take 10 years to phase in won't do anything to increase spending today. This will add hundreds of billions to the budget cost of his plan. You might think that he would admit that this increases the cost of his tax cut, and perhaps that he would offer to scale back those future tax cuts. Not a chance: administration officials claim that tax cuts this year don't affect their arithmetic because their budget is for 2002 through 2011, so what happens this year doesn't count. I am not making this up.

The important point is that the estimated cost of the tax cut hasn't exploded because of new information; it has exploded because the original estimates were simply dishonest. Mr. Bush knew from the start that he was misleading the public about the budget impact of his proposals, just as he knows that he is misleading people now about whose taxes will be cut and by how much.

May 30, 2001

... The Bush tax plan was always peculiar: in order to hide the true budget impact, its authors delayed many of the biggest tax cuts until late into the 10-year planning period; repeal of the estate tax, in particular, was put off to 2010. But even that left the books insufficiently cooked, so last week the conferees added a "sunset" clause, officially causing the whole bill to expire, and tax rates to bounce back to 2000 levels, at the beginning of 2011.

So in the law as now written, heirs to great wealth face the following situation: If your ailing mother passes away on Dec. 30, 2010, you inherit her estate tax-free. But if she makes it to Jan. 1, 2011, half the estate will be taxed away. That creates some interesting incentives. Maybe they should have called it the Throw Momma from the Train Act of 2001.

That's by no means the only weird element in the tax bill. Almost as bizarre is the sudden tax increase for upper-middle-income families scheduled for the end of 2004. Anyone who has been following the tax debate-in particular via the extremely informative Web site of the Center on Budget and Policy Priorities-knows that the alternative minimum tax [A.M.T.] is a major land mine lurking in the road ahead. Under the tax bill just passed, the number of taxpayers subject to this tax will balloon from 1.5 million to more than 36 million, with the result that many people-typically well-off but not rich families who already pay high state and local taxes-will find the tax cut they thought they were getting snatched away.

So why not fix the law? Because that would raise the budget impact of the tax cut by hundreds of billions of dollars. Still, the conferees felt they had to do something; so they included a partial fix for the A.M.T. problem. But even that partial fix, if maintained over the whole decade, would have made the tax cut too big to fit the budget resolution. So guess what? The A.M.T. fix is scheduled to expire in 2004, which means that according to the law millions of families will face a sudden large tax increase.

In short, the tax bill is a joke. But if the administration has its way, the joke is on us. For the bill is absurd by design. The administration, knowing that its tax cut wouldn't fit into any responsible budget, pushed through a bill that contains the things it wanted most-big tax cuts for the very, very rich-and used whatever accounting gimmicks it could find to make the overall budget impact seem smaller than it is. The idea is that when the absurdities become apparent-when mobs of angry junior vice presidents from New Jersey start demonstrating against the A.M.T., or when elderly multimillionaires develop a suspiciously high rate of fatal accidents-Congress will always respond with further tax cuts. And if the result of all those tax cuts is to prevent the government from ever providing the things Mr. Bush promised during the campaign, like prescription drug coverage under Medicare or increased aid to education-well, that was also part of the plan.

December 7, 2001

Earlier this year Mr. Bush used projections of vast budget surpluses to push through a huge, 10-year tax cut. Most of that tax cut went to people with incomes of more than $200,000 per year. Now Mr. Daniels tells us that the budget-not just the budget outside Social Security, but the whole enchilada-will be in deficit through 2004. Since the administration's phony budget math ("fuzzy" just doesn't cut it at this point) gets phonier the further you go into the future, this means that we have effectively returned to a state of permanent deficit.

However, with television busy reporting from the caves of Tora Bora, this revelation-which shows that the tax cut was sold on utterly false premises-wasn't even considered headline news.

Administration officials insist that the economic slowdown and the war on terror, not the tax cut, are responsible for the red ink. But this is flatly untrue: anti-terror spending is a minor factor, and the persistence of projected deficits into the indefinite future tells us that it's not caused by the recession either.

Anyway, they're missing the point. Opponents of the administration's plan always warned that it was foolish to lock in a giant tax cut on the basis of hypothetical surplus projections. They urged, to no avail, that we wait to see the actual budget results. Now their warnings have proved prophetic-and ordinary Americans will suffer because they were ignored.

The administration now says that the tax cut was necessary to fight the current recession. But nobody is questioning the $40 billion in rebates actually paid out so far, and few would complain about another round of temporary tax cuts for the year ahead. It's the huge further tax cuts that will take place after 2002-tax cuts that are now the law of the land-that are the problem. But we're supposed to accept those future cuts as a fait accompli. Hey, Mr. Bush hit the trifecta.

Meanwhile, the return of budget deficits has real, nasty consequences. Prescription drug insurance is, of course, dead. Bolstering Social Security? Don't be silly: payroll tax receipts are being used neither to acquire assets nor to pay down federal debt; instead, they are subsidizing deficits in the rest of the government.

And austerity rules, even in areas you might have thought were of the highest priority. Money to rebuild New York? Sorry, no. The government's own experts say we need $3 billion to guard against bioterrorism? Cut the number in half. Tax cuts are more important.

Meanwhile, state and local governments, savaged both by recession and by new security expenses, are firing teachers and slashing services. How about some revenue-sharing from the Feds? Never mind.

Whenever they were asked, voters said that the "compassionate" parts of Mr. Bush's campaign promises-securing Social Security, providing more money for prescription drugs and education-were more important to them than tax cuts. But they were assured that there was enough money for everything. Those assurances were false-but the tax cut is sacrosanct, while the rest is expendable.

Mr. Bush could try to undo some of the damage, by canceling future tax cuts for the top income bracket. Instead, he wants to accelerate those cuts. That's the moral equivalent of the big bonuses Enron gave to executives just days before it went bankrupt.

Horse racing is a zero-sum game; so, it seems, is budget politics. Mr. Bush hit the trifecta; the great majority of Americans lost, big time.

The events of Sept. 11 shocked and horrified the nation; they also presented the Bush administration with a golden opportunity to bury its previous misdeeds. Has more than $4 trillion of projected surplus suddenly evaporated into thin air? Pay no attention to the tax cut: it's all because of the war on terrorism.

In short, the administration's strategy is to prevent criticism of what amounts to a fiscal debacle by wrapping its budget in the flag.

June 21, 2000

... The "financial" problem is how to pay for Social Security. This problem is a legacy of Social Security's pay-as-you-go past: because the baby boomers' contributions were used to provide generous benefits to earlier generations, there isn't enough money in the system to pay the benefits promised to the boomers themselves. The good news is that solving this financial problem isn't all that difficult. Despite the apocalyptic rhetoric you sometimes hear, affordable injections of money would allow the system to run untroubled for at least 50 more years. It's just a matter of facing up to facts.

The "real" problem is that in a few decades the age lion of the U.S. as a whole will look like that of Florida today. How will a relatively small number of workers be able to produce enough both to live well themselves and to provide the huge population of retirees with the standard of living it expects?

This problem is much harder to solve. The only answer other than allowing large-scale immigration-is to make tomorrow's workers as productive as possible. We can hope for a technological fix; with smart enough machines, who needs workers? But a responsible government would meanwhile try to ensure that national savings-public plus private-are high, so that future workers are well equipped with capital and not burdened with large foreign debts.

Alas, the campaign seems to be revolving around a quite different issue: the perception that Americans get too low a return on their contributions to Social Security. I've explained in earlier columns) the implicit return on Social Security contributions is low only because today's workers are in effect being taxed to pay the system's debts from the past. You may not like that, just as you may not like the fact that 15 percent of your federal tax dollar goes to pay interest on a debt mainly run up in the 80's and early 90's. But in both cases the debts are a fact of life.

Yet the salesmanship surrounding George W Bush's Social Security plan is all about the meaningless contrast between the returns that an unburdened individual can get on investments and the implicit return that a very-much-burdened Social Security system can offer.

... Mr Bush has said nothing about how much he plans to reduce benefits in return for allowing workers to invest their contributions elsewhere, let alone how he will deal with the overhang of obligations from the past. All he offers are magic asterisks: "details to be provided later." My guess is that if and when Mr. Bush finally does provide the details, the size of the proposed benefit cuts will start a political firestorm, forcing him to use general revenue to rescue Social Security after all.

And where will the money come from? Remember that Mr. Bush is also proposing huge tax cuts. Aside from eliminating a surplus that might have been used to help Social Security, those cuts will encourage the nation as a whole to consume more and save less, exactly the opposite of what an aging society should be doing.

October 11, 2000

... For the first generation of beneficiaries, Social Security was a great deal. They had not been obliged to pay in when young, yet got the benefits anyway. But subsequent generations misunderstood the system. They thought of their required contributions as investments, though they really were tax payments, needed to pay benefits to their parents' generation. And they imagined that they could get higher returns investing that money in the market.

So eventually an ambitious politician came along, declaring: "It's your money! I trust the people, not the government!" He said he would let workers invest half their contributions themselves. When critics tried to point out that this money had already been promised to older citizens (whose own contributions had been used to pay benefits to the previous generation of retirees), they were drowned out by chants of "No fuzzy numbers!" And so the scheme was put into effect.

And the next year Social Security went broke. Without enough money coming in, retirees could not be paid their promised benefits.

I wish I could say that this fable oversimplifies this year's Social Security debate in some important way. But it really is that simple, and George W. Bush's proposal-which calls for putting part of Social Security contributions into individual accounts, without any replacement for the diverted funds -- really is that irresponsible. Because Americans live more than two years, the drama will take longer to play out. Social Security won't go broke for about 30 years, so the victims will be those who are currently middle-aged, not those who are already retired. But the crisis will come much sooner, as the pending disaster becomes obvious.

Mr. Bush has made an important political discovery. Really big misstatements, it turns out, cannot be effectively challenged, because voters can't believe that a man who seems so likable would do that sort of thing.

... there is a good case for Social Security reform - if we are prepared to pay the price. The current system in effect promises today's workers that future generations will take care of them, just as they are taking care of today's retirees. As a Bush adviser, Martin Feldstein, has pointed out, this makes people feel richer than they really are, leading them to consume too much and save too little.

But to fix this problem would take a lot of money-money to pay off the system's existing obligations. Or to put it differently (making the same point from a different angle): Since the problem with Social Security is that it makes people feel artificially rich, any real reform has to make them feel poorer. But that, of course, is not what Mr. Bush is selling.

... What is certain is that Mr. Bush's actual Social Security proposal would bankrupt the system.

November 5, 2000

... Until the 1980's Social Security had been run on a pure pay-as-you-go basis: just about all of each year's tax receipts were used to pay current benefits. But by 1980 it was already clear that, beginning some 30 years later, this system would run into big trouble. The baby boomers are the villains: once the boomers start to retire, the number of workers paying into Social Security will plateau, while the number of retirees the system must support will soar. Right now there are about 3.4 workers for every retiree; by 2030 there will be only two. So a pay-as-you-go system would be forced into drastic tax increases, drastic benefit cuts, or both.

What Congress did in the 1980's was to raise Social Security taxes-a moderate increase, two percentage points-in order to ward off much more severe consequences later. In the runup to the demographic crisis the system would build up a large reserve, postponing the day of reckoning, perhaps even putting it off entirely. It may not be a permanent solution, but it has given us a lot of breathing room. The system can run as is until at least 2037; modest additional measures could easily extend its life to 2050 and beyond.

But any political action that takes such a long view risks being undermined by later politicians, who will be tempted to raid the cookie jar. Which brings us to the current dispute.

George W. Bush wants to rescind that two-point tax increase. True, he doesn't propose to give it back in cash, but he wants to put it into personal accounts, which would belong mainly to young workers and therefore be unavailable to support the currently middle-aged workers that reserve was supposed to protect. And?

For surely there must be an "and." If the money that was supposed to provide benefits to the baby boomers is being used for another purpose, we have to do something else-cut benefits, transfer in additional money from other sources, something. Right?

But Mr. Bush has never finished his sentence. His ads continue to proclaim that he will put Social Security on a sound financial footing-but his proposal does nothing, literally nothing, to shore up the system's finances. It doesn't even try. This isn't even a debatable issue-there are no measures to debate.

I'm not sure why the press corps has done such a bad job of making this clear. Maybe reporters just don't dare say that the governor has no clothes, that a key proposal by the man who may well be president contains no measures that even try to do what he claims that proposal will do.

Even now most coverage makes excuses for Mr. Bush's non-plan, saying that it doesn't threaten the benefits of today's retirees because there is still enough money to maintain benefits at current levels for 20 years or so. But that's moving the goal posts. The whole demand for reform of Social Security has been driven by charges that the system is unsustainable in the long run-now, suddenly, we're supposed to accept a "reform" that actually cuts the system's remaining life by 14 years?

Anyway, what do you think would really happen? Would the Social Security Administration really continue to pay full benefits for the next two decades-then suddenly, one day, make an announcement: "Sorry, folks, the money's all gone. We're cutting benefits 40 percent, effective immediately"? The reality is that the pressure to cut benefits would begin as soon as the diversion of taxes into individual accounts was put into effect ...

July 22, 2001

I knew that the commission on Social Security reform appointed by George W. Bush would produce a slanted report, one designed to bully Congress into privatizing the system. But the draft report released last week is sheer, mean-spirited nonsense.

The commission, in an attempt to sow panic, claims that Social Security is in imminent peril-that the system will be in crisis as soon as 2016. That's wildly at odds with the standard projection, which says that Social Security reserves will last until 2038. And even that projection is based on quite pessimistic assumptions about future economic growth and hence future payroll tax receipts. If you use more optimistic assumptions-say, the assumptions in the budget forecasts that were used to justify Mr. Bush's tax cut-the system will still be financially sound in 2075.

So how did the commission reach its pessimistic conclusion? Through a truly Orwellian exercise in doublethink-the art of believing two mutually contradictory things at the same time.

It's true that in 2016, according to (pessimistic) projections, benefit payments will start to exceed payroll tax receipts. By then, however, the Social Security system will have accumulated a multitrillion-dollar "trust fund." Just as a private pension fund uses earnings on its assets to pay benefits, the Social Security system can use earnings from this trust fund to pay benefits. And that trust fund will extend the life of the system for decades, perhaps indefinitely.

But the commission declares that these accumulated assets aren't "real," and don't count as resources available to pay future benefits. Why? Because they are invested in government bonds-perfectly good assets when they are accumulated by private pension funds but worthless, says the commission, when accumulated by a government agency.

Does this make any sense? There is a school of thought that says that Social Security shouldn't have a separate budget, that Social Security receipts should be regarded simply as part of general revenue, and outlays as part of general expenditure. But in that case it's hard to see why we should get worked up about 2016: who cares if the payroll tax, which is only one of many taxes, collects less money than the government spends on retirement benefits, which are only one of many government expenses? Social Security benefits can be paid out of the general budget-a transfer of revenue that is clearly justified if payroll tax receipts have meanwhile been used to pay off the national debt, releasing large sums that would otherwise have been consumed by interest payments.

Alternatively, you could say that for political reasons it's important that Social Security have its own separate account. But in that case, we should count government bonds in the trust fund as real assets, just as we would if Social Security were a private pension fund...

So the commission is trying to have it both ways. When Social Security runs surpluses, it doesn't get any credit because it's just part of the government. But when it runs deficits, Social Security is on its own. This twisted logic in effect expropriates all of the extra money workers have paid into the system since 1983,(when Senator Daniel Patrick Moynihan, among others, pushed through an increase in payroll taxes-an increase whose purpose was to build up the trust fund that the commission, co-chaired by Mr. Moynihan, now says isn't real. )

And how big will the Social Security deficit be once the trust fund has been expropriated? The commission says 37 percent of payroll tax receipts, which sounds immense; but that's only about 2 percent of GDP. That's an interesting number: it's about what the federal government now pays in interest on its debt, the debt that Social Security surpluses are being used to pay off.

Oh, and there's another budget item that's about the same size as the putative Social Security shortfall: the Bush tax cut, which will eventually reduce revenue by about 1.7 percent of GDP.

July 25, 2001

... The Social Security system has been running surpluses since 1983, when the payroll tax was increased in order to build up a trust fund out of which future benefits could be paid. These surpluses could have been invested in stocks or corporate bonds, but it seemed safer and less problematic to buy U.S. government debt instead. The system now has $1.2 trillion in its rapidly growing trust fund. But the commission says that the government bonds in that trust fund aren't real assets.

... Every dollar that the Social Security system puts in government bonds-as opposed to investing in other assets, such as corporate bonds-is a dollar that the federal government doesn't have to borrow from other sources. If the Social Security trust fund hadn't used its accumulated surpluses to buy $1.2 trillion in government bonds, the government would have had to borrow those funds elsewhere. Arid instead of crediting the trust fund with $65 billion in interest this year, the government would have had to cough up at least that much extra in actual, cash interest payments to private bondholders. So the trust fund makes a real contribution to the federal budget. Doesn't that make it a real asset?

Because the trust fund has been used to pay off debt, it reduces the amount the government spends on debt service, and makes it easier to pay benefits to retirees. Still, it's true that when the Social Security system starts cashing in its i.o.u.'s the federal government will have to have higher taxes and/or lower spending than it would if it could simply renege on its promises. But are we actually, as the commission claims, talking about a crushing burden?

Here's some arithmetic: If we had 2040 demographics today (48 retirees per 100 workers, instead of the current 30), Social Security benefit payments this year would exceed payroll tax receipts by about $180 billion. That sounds like a lot. But it so happens that if the Bush tax cut passed two months ago (your nephew's new yacht) were fully phased in today, it would reduce revenue this year by about $170 billion.

Yesterday the ever more partisan Alan Greenspan-who, 18 years ago, led the commission that increased payroll taxes and thus created the Social Security surplus-told a Senate hearing that the Bush tax cut was "quite modest." Well, if it's a modest tax cut, then the sums Social Security will need to cover its cash shortfall are also modest. You can't have it both ways.

But having it both ways-what George Orwell called doublethink-is what this commission report is all about. We're supposed to believe that Social Security surpluses are meaningless, because it's all one budget, but that Social Security deficits are a terrible thing, because the program must stand on its own. We're supposed to believe that $170 billion a year is a modest sum if it's a tax cut for the affluent, but that it's an insupportable burden on the budget if it's an obligation to retirees.

And we're supposed to listen seriously to the recommendations of a commission that has just issued a biased, internally inconsistent and intellectually dishonest report.

March 19, 2002

Sunday's front-page story in The Times on doctors who shun patients with Medicare may have been alarming enough; it seems that recent cuts in Medicare payments are inducing many doctors to avoid treating Medicare recipients at all. But this is just the beginning of a struggle that will soon dominate American politics.

Think of it as the collision between an irresistible force (the growing cost of health care) and an immovable object (the determination of America's conservative movement to downsize government). For the moment the Bush administration and its allies still won't admit that there is any conflict between their promises to retirees and their small-government ideology. But we're already past the stage where this conflict can be hidden with fudged numbers. The effort to live within unrealistically low targets for Medicare expenses has already translated into unrealistically low payments to health-care providers. And it gets worse from here.

Why do health-care costs keep on rising? It's not because doctors and hospitals are greedy; it's because of medical progress. More and more conditions that once lay beyond doctors' reach can now be treated, adding years to the lives of patients and greatly increasing the quality of those years-but at ever greater expense. A triple coronary bypass does a lot more for you than a nice bedside manner, but it costs a lot more, too.

During the 1990's the upward trend in health-care costs seemed to level off. But it's now clear that this was a one-time cost squeeze due to the shift to H.M.O.'s. Now medical costs have resumed their upward march.

If medicine were purely a private matter, medical progress would pose no more of a dilemma than, say, progress in home entertainment systems. But in fact the United States, like every advanced country, treats essential health care as a right, not a privilege. Our Medicare/Medicaid combination provides this right somewhat haphazardly; still, the intent of our system is that nobody should be denied life-saving treatment for lack of funds.

Why don't we just leave medical care up to individuals? Basically, even in the United States there are limits to how much inequality the public is prepared to tolerate. It's one thing if the rich can afford bigger houses or fancier vacations than ordinary families; Americans accept such differences cheerfully. But a society in which rich people get their medical problems solved, while ordinary people die from them, is too harsh even for us.

And so we have Medicare and Medicaid. And the public overwhelmingly supports the extension of Medicare to include prescription drugs, for the same reason: it seems wrong to most Americans that drugs that make a big difference to people's lives should be available only to those wealthy enough to pay for those drugs out of pocket. Including drug coverage in Medicare is not so much a matter of extending the program as of remaining true to its original intent.

But meeting the public's expectations for medical care-that is, ensuring that every American, and in particular every retired American, gets essential care-will require a lot of government spending. And the conservative movement in general, and the Bush administration in particular, are not prepared to make the money available; after all, government spending must ultimately be paid for with taxes.

Yet they dare not say openly that they are prepared to deny essential health care to those who cannot afford it. So what can they do?

The Bush administration is still trying to fake it; the budget proposal it released last month had health-care economists rubbing their eyes. It assumed a far lower rate of growth in Medicare expenses than anyone else thinks plausible-over all, it budgeted $300 billion less over the next decade than the nonpartisan Congressional Budget Office projects will be needed. And it also repeated the implausible claim that we can have prescription drug insurance on the cheap-setting aside half or less what others think such a program will cost.

But we have already reached the point at which we must either come up with more money or deny health care to retirees. The moral of Sunday's story is that Medicare payments have already been squeezed beyond their limits, to the point where recipients can't find doctors willing to take them. Something will have to give, and soon.

After September 11 ... the Bush administration ... treated terrorism as a partisan political opportunity. Few things I have written have generated as much hate mail as the columns in which I accused the administration of exploiting September 11 for political gain, of wrapping itself in the flag while it sought weakened environmental regulation, tax cuts for corporations and the rich, and above all an upper hand in the midterm election. But .... began within hours after the attack-and gradually it became apparent, not just to me but to a growing number of other observers, that we had some very unscrupulous people running the country. Every administration contains its share of cynical political operators-without them, even the best man has no chance of achieving high office. But this administration seems to have nothing but cynical political operators, who use national tragedy for political gain, don't even try to come to grips with real problems, and figure that someone else will clean up the mess they leave behind.

So how did we end up being ruled by these people? ... the dirty not-so-secret secret of recent American politics: the increasing manipulation of the media and the political process by lavishly funded right-wing groups. Yes, Virginia, there is a vast right-wing conspiracy. It's not even especially hidden: anyone with a modem and some spare time can inform himself about the network of institutions that systematically harass prominent liberals and bully news sources that don't toe the line.

Paul Krugman page

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