Krugman and Krugman and Social Security

Ruth Marcus of the Washington Post launches an angry attack on Paul Krugman's recent column on Social Security, which accused Barack Obama of being played for a sucker on the issue.

The argument has two equally dishonest components. The first is to
deny that Social Security faces a daunting financing problem -- one
that will be much easier to fix (and less onerous for the low-income
retirees that the head-in-the-sanders purport to care about) sooner
rather than later. The second is to mischaracterize the arguments of
those who advocate responsible action, accusing them of hyping the
system's woes.

One prominent practitioner of this misguided approach is New York Times columnist Paul Krugman.
"Inside the Beltway, doomsaying about Social Security -- declaring that
the program as we know it can't survive the onslaught of retiring baby
boomers -- is regarded as a sort of badge of seriousness, a way of
showing how statesmanlike and tough-minded you are," Krugman wrote last week. "In fact, the whole Beltway obsession with the fiscal burden of an aging population is misguided."

Somebody should introduce Paul Krugman to . . . Paul Krugman.

"[A] decade from now the population served by those programs [Social Security and Medicare]
will explode. . . . Because of those facts, merely balancing the
federal budget would be a deeply irresponsible policy -- because that
would leave us unprepared for the demographic deluge, with no
alternative once it arrives except to raise taxes and slash benefits." (July 11, 2001)

[and so on]...

In addition to this fiscal amnesia, Krugman misrepresents responsible voices in the debate.

First, he quoted a new paper by Congressional Budget Office
Director Peter Orszag and CBO analyst Philip Ellis. Notwithstanding
"all the attention paid to demographic challenges," they conclude, "our
country's financial health will in fact be determined primarily by the
growth rate of per capita health care costs."

True, but Krugman
omits any mention of Orszag's latest book, inconveniently titled
"Saving Social Security." Orszag and co-author Peter Diamond wrote that
"Social Security's projected financial difficulties are real and that
addressing those difficulties sooner rather than later would make
sensible reforms easier and more likely."

Paul Krugman replies on his blog, under the headline, "They hate me! They really hate me!":

What I was arguing then was not that Social Security itself was in
crisis, but that the rest of the government budget should be run
responsibly — basically, that the lockbox should be honored. As I
explained later,

Four years ago, I and many other economists urged
policymakers to think about the future cost of Social Security
benefits, not because we thought there was anything wrong with Social
Security itself, but because we regarded the future costs as a
compelling reason not to cut taxes even if the overall budget was in
surplus.

As for what I wrote in 1996: the world looked very different then. On one side, Social Security projections were much more pessimistic
than they are now, basically because the projections assumed that the
1973-1995 era of very slow productivity growth would go on forever. On
the other side, the 90s were the era of the great pause
in health expenditures, the (it turned out) brief era in which the rise
of managed care stabilized health spending as a share of GDP. So
Medicare and Medicaid looked less important as sources of fiscal
problems than they do now.

John Maynard Keynes is supposed to have said, “When circumstances change, I change my opinion. What do you do?”

I think Paul's rebuttal is correct, so far as the "circumstances" are concerned. But the circumstances are of course not the only thing to have changed since he opined on this topic in the past. His modes of analysis and expression have changed too, and radically, in ways that often seem calculated to obscure the fact that he is one of the four or five most brilliant economists of his generation. This is not incompetence or inadvertence on his part; it appears to be a conscientious choice. He wants to fuel the rage of the administration's opponents more than he wants to help people think through the arguments. He feels that this now serves the greater good. Bush and his people are too wicked for dispassionate analysis, he believes; there will be time for Seriousness later.

In my view, for what little it may be worth, this is a disservice to Paul's own remarkable talents as well as to the greater good. But this is a complaint which, by now, he has heard a thousand times.

Below the fold is my own view of the Social Security "crisis".

Barack Obama has upset a lot of Democrats by bringing social security back into presidential politics. Paul Krugman of The New York Times is leading the charge. In Mr Krugman’s view, following the administration’s clumsy and aborted effort to reform the system – Democrats would say destroy it – leaving well alone makes best political sense. Mr Obama, sounding like a fiscal conservative, warns that retiring baby boomers are pushing the programme into the red and something must be done. He is, says Mr Krugman, being played for a fool.

Mr Obama’s fix, other things equal, ought to appeal to Democrats. He wants to raise or even abolish the upper earnings limit for the social security tax, at present just under $100,000. This would add six percentage points to the top marginal tax rate, even before you add in the promised unwinding of the Bush administration’s tax cuts. In a televised Democratic candidates debate, Hillary Clinton distanced herself from this “trillion dollar” tax increase on the “middle class”. Mr Obama underlined his point by saying that only the richest 7 per cent of taxpayers would be affected, and that is not the middle class.

We will see how this plays out. Democrats who would generally be in favour of unwinding the Bush tax cuts, abolishing the earnings ceiling on the social security tax and finding a few other ways to raise taxes on the rich, are mainly concerned to keep reform of social security off the agenda. It does not need fixing, they say, it is not broken. Any deviation from that gives Republicans an opening to renew their assault on one of America’s finest social-policy achievements. Why go there?

On an important point, they are right: no great fiscal crisis lies in wait for social security. On present policies, the retirement of the baby boomers is going to push the programme into a gently increasing deficit over the next few decades, but tweaks will be enough to deal with it. The worsening of the balance of outlays over revenues between 2005 and the middle of this century is on the order of 2 per cent of gross domestic product. Some mixture of a higher retirement age (desirable in any case, since people are living longer) and a small increase in the tax rate would be more than enough to mend things. No need, Mr Obama, for an additional sharp increase in marginal tax rates for the high-paid.

A fiscal crisis is indeed looming over the next few decades – but its cause is Medicare, not social security. For the US, the real fiscal enemy is not the ageing of the population, but the relentless rise in healthcare costs. The Congressional Budget Office recently reported that, on present trends, federal spending on Medicare (for the elderly) and Medicaid (for the poor) will rise from less than 5 per cent of GDP now to 20 per cent of GDP by 2050. Only about 2.5 percentage points of that increase is due to demographics; the rest is due to health-cost inflation, which is persistently much higher than inflation overall.

From a fiscal point of view, then, the Bush administration’s focus on social security reform was both ill-conceived and, no doubt, deliberately misleading. But that does not mean that social security reform is a bad idea, or even one that Democrats should not embrace. The case for it has little to do with fiscal arithmetic and everything to do with what George W. Bush has called “the ownership society”.

Private saving in the US is roughly zero. Given every incentive by a lunatic tax system, households have borrowed to the hilt and relied on house-price inflation to provide capital to support them in retirement. Those bets are going bad at the moment. Many Americans, especially the least well off, are going to be much more tightly squeezed after they retire than they expect. Social security gives them a base that should not be jeopardised – but for many of the not-rich, with few other resources to draw down, it is not enough. Politicians should be asking themselves how best to encourage more saving – and Democrats should co-opt “the ownership society” as a slogan of their own. So simple: just rebrand it “ownership for all”.

A big theme of Democratic thinking is the need to spread the benefits of capitalism more broadly. Middle-class anxiety is real. Support for liberal trade is collapsing. The answer, Democrats say, is shared prosperity: the rewards of globalisation should go not just to the shareholder class, but to workers too. Quite right. But does this spreading have to be mediated exclusively through higher taxes and higher spending on welfare programmes? Is there not a good liberal case for widening the shareholder class as well?

For genuine social security reformers, that is the real prize. Shore up the system for the least well-off, to be sure, and make the safety net more secure. Then add a new layer, through partial privatisation, of wider participation in equity ownership. Properly conceived, this is a programme for empowering the less well-off, supporting their financial independence and widening access to the benefits of capitalism. No doubt, Republicans have a self-interested tactical reason to support the idea: more shareholders might nudge the electorate their way. But is the Democrats’ equal and opposite reason for denouncing the idea any more noble or public-spirited?