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.
OOPS! HE DID IT AGAIN
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
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.
SLICING THE SALAMI
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
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
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
THE MONEY PIT
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
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.
BAD HEIR DAY
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.
HITTING THE TRIFECTA
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
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
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
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.
THE PIG IN THE PYTHON
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
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
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
A RETIREMENT FABLE
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
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
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.
NO GOOD DEED
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
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
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,
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 ...
2016 AND ALL THAT
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
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
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
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.
SINS OF COMMISSION
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
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
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
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.