In Which I Sort of Agree With Paul Krugman

Paul Krugman writes:

Brad DeLong has some fun with Megan McArdle acting as if using present values to compare costs at different dates were some weird leftist idea. But it actually gets funnier: she asserts that the only reason the two numbers look even remotely similar is that they're using a present value calculation and a very long time frame
which is right, but not in the way she thinks: if you use a shorter time frame, say 25 years, there isn't any Social Security shortfall at all!

There's also the bit about how the government doesn't really have any mechanism to save except for, you know, running smaller deficits so that it doesn't run up as much debt.

But there's an issue here a lot broader than Ms. McArdle, involving time horizons and the convenient way they shift among those on the right.

The basic position here is that people on the right favor high-end tax cuts that will worsen the deficit, while at the same time demanding both immediate fiscal austerity and cuts to Social Security, in the name of deficit reduction.

They justify their tax cuts/austerity position by arguing that what's important is holding down current deficit numbers, never mind the 10-year outlook.
Meanwhile, they declare that it's urgent that we act now to lock in cuts in Social Security benefits that won't take place for decades.

Why, it's almost as if they're grabbing any argument at hand to justify spending cuts for the middle class and tax cuts for the rich, regardless of the inconsistency.

Had Paul Krugman read the blog, he would have noted that I made this very observation about Social Security! Sort of. Since there is, in fact, a Social Security shortfall right now. At least from the point of view of the US federal unified budget--which is, of course, the only context in which comparing the Bush tax cuts to Social Security makes sense. Since the Bush tax cuts won't cost the Social Security administration anything!

(Sorry--the exclamation points seem to be contagious)

But of course, in the short term, the cost of the Bush tax cuts is much larger than the cost of the gap between Social Security intakes and outflows. Presumably, the CBPP chose to compare the long term because that's what we're most worried about--not what happens between now and 2020. Unfortunately, they chose a method that most heavily weights . . . what happens between now and 2020.

He would also have noted what I pointed out--that paying down debt now, with current yields at much less than 4% does not generate enough revenue to cover the Social Security shortfall later. They only seem equivalent in the CBPP's graph because the CBPP used a discount rate much higher than the yield on treasuries--5.25%. In the private sector, this sort of discounting is standard; it helps account for opportunity cost and risk--and it also allows corporations to see what sorts of yield they need to generate in order to cover cash outflows in later years.

It doesn't make a lot of sense to me to use this sort of discount rate in this instance; the US government is not going to go out of business, its customer base is almost literally captive, it doesn't have alternative higher-yielding financial instruments into which it can plug the money, and the Social Security cash flows are about the most predictable financial streams on the planet.

Finance people use these sorts of calculations because it's the best way to compare cash flows which vary over time. But government has a very good alternative which is not available to the private sector: expressing future cash flows as a percentage of GDP. When we use this method, we see that for every decade except 2020--the decade for which I think we all just agreed we are least concerned about Social Security--there is a wide and growing gap between the revenues we gain by repealing the Bush tax cuts, and the revenues we need to find to cover Social Security benefits.

I also agree with Krugman, the CBPP, and the CFRB that Republicans are hypocritical about tax cuts and Social Security. Not any more hypocritical than those on the left who insist on pretending that there is a trust fund which can somehow, in the context of the unified federal budget, cover the shortfall in Social Security revenues. Nor more hypocritical than those on the left who wish to extend the Bush tax cuts for those making under $250,000, and then blame the Republicans for their lack of fiscal responsibility, when the overwhelming majority of the cost of the tax cuts comes from those which benefit people making under $250,000--as if the budget deficit were offering some sort of discount for social justice.

But still, ludicrously hypocritical.

All the Bush tax cuts should be repealed, and we should get serious about the budget deficit. Unfortunately, I don't think that this sort of comparison has aided us in that process.