Tag: Paul Krugman

A Birthday Gift from Paul Krugman

I turn 41 this summer (thank you for the condolences). Along with the well wishes of family and friends, I received an unexpected gift from NY Times writer Paul Krugman: this column in which he bashes people who are critical of Social Security in its current form or who worry about its ability to deliver expected benefits.

At first glance, the column hardly seems like a gift: it’s long on pointless insults, short on thoughtful discussion, and misleading. But it offers such a poor defense of the Social Security status quo that I suspect readers will be more skeptical of the program after seeing the column, not less. Hence, Krugman’s gift.

He writes:

Social Security has been running surpluses for the last quarter-century, banking those surpluses in a special account, the so-called trust fund. The program won’t have to turn to Congress for help or cut benefits until or unless the trust fund is exhausted, which the program’s actuaries don’t expect to happen until 2037 — and there’s a significant chance, according to their estimates, that that day will never come.

OK, 2037 — no worries. Except that, as I said, I turn 41 this summer, which means I’ll turn 67 and qualify for full Social Security benefits in mid-2036. The very next year, the Social Security trust fund will be exhausted, according to the “intermediate” scenario contained in the most recent Social Security Trustees Report, available here (see Section IV-B and Appendix E). The program will still pay out some benefits — but less than 3/4s of what it now promises. So what happens then? That’s not a good question if you’re my age or younger.

But suppose you’re not my age or younger. Suppose you’re 10 years older than me, and will have collected 10 years of benefits by 2037. Don’t feel smug — you’ll be asking “So what happens next?” when you’re 77. That’s not a good question at your age, either. 

In fairness to Krugman, the Trustees Report considers different Social Security cost scenarios, the most optimistic of which projects that the trust fund will not be fully exhausted over the 75-year period the report considers. Krugman says there’s “a significant chance” this will be the case, but my (admittedly quick) skim of the report suggests it’s more just “a chance.”

One quick aside about the 2037 exhaustion date: when Krugman wrote this column in 2005, the Trustees’ intermediate scenario projected that the trust fund would last until 2042. In five years’ time, that date has grown 10 years closer. Not good.

Krugman writes that, if the trust fund does run out, Social Security can maintain its benefits using money transferred into the program by Congress from elsewhere in the federal budget. In fact, Congress will have to direct money from elsewhere to Social Security much earlier than 2037. Under the Trustees’ intermediate scenario, beginning in 2018 the amount of money Social Security pays out in old-age benefits each year will be greater than what the public pension program takes in in payroll taxes. (The Disability Insurance component of Social Security is in even worse shape, according to the Trustees, such that the program overall will go in the red in 2015.) To cover the difference, Congress will have to begin paying off the treasury bonds that currently comprise Social Security’s trust fund in order to provide the promised benefits. (In fact, Congress will have to do that this year because, as a product of the recession, Social Security obligations are greater than revenues. Hopefully, the economy will rebound and give the program a few years’ respite before transfers become an annual necessity, though the pessimistic scenario predicts no such respite.)

Krugman is unconcerned by these transfers, dismissing those who worry about them as engaging in “three-card monte.” His column doesn’t acknowledge that these transfers would need to occur at a time when Congress will be scrambling to cover other growing costs: similar deficits in Medicare, obligations to the ever-growing federal debt, and Medicaid’s increasing burden on federal and state governments. I worry that future taxpayers will not be amenable to having so much of their tax money directed to retirees (who refused to reform Social Security when they could have done so at relatively lower cost) rather than to government services for current taxpayers.

Krugman ends the column criticizing the proposal to reduce Social Security’s cost by raising the age at which retirees become eligible for full benefits. As part of an adjustment that began in 2002, retirees must now wait until age 66 to receive full benefits; beginning in 2021, the age requirement will slowly be raised until it reaches 67 in 2027. (Retirees will still be able to take reduced benefits at 62.) Some have suggested raising the full-benefit age to 70. Krugman says that would be unfair:

America is becoming an increasingly unequal society — and the growing disparities extend to matters of life and death. Life expectancy at age 65 has risen a lot at the top of the income distribution, but much less for lower-income workers. And remember, the retirement age is already scheduled to rise under current law. So let’s beat back this unnecessary, unfair and — let’s not mince words — cruel attack on working Americans.

There is something to what Krugman says. From 1980 to 2000, life expectancy at birth for the poorest decile (i.e., 10%) of the U.S. population increased from 73.0 years to 74.7 years, while life expectancy for the wealthiest decile increased from 75.8 years to 79.2 years. (The disparity in life expectancy between the top and bottom decile groups does decline to 1.6 years at age 65, which is up from 0.3 years in 1980. H/T to Dr. Daniel Coyne at the Washington University in St. Louis School of Medicine.)

But inequality in Social Security benefits would exist whether the eligibility age is 65, 66, or 70. Because Americans are required to participate in Social Security, and because all Americans become eligible for full retirement benefits for the rest of their lives at a single threshold age, then the longer-lived wealthy will receive more in benefits than the shorter-lived poor no matter what that threshold is. This is the product of having a one-size-for-all public pension plan (with lousy benefits). The way to address this inequality problem is through Social Security choice.

As I wrote at the beginning, Krugman’s column should leave thoughtful and informed readers more concerned about Social Security, not less. He couldn’t have given me a better present.

Paul Krugman on Carter and Reagan: Wrong Again

Measured in constant 2005 dollars, real federal revenues rose from $968.4 billion in 1970 to $1,197.6 billion in 1980 and to $1508.7 billion in 1990.   In other words, the cumulative real revenue gain was 23.7% under the high and rising tax rates of the 1970s, and 26% under the dramatic reduction in tax rates of the 1980s.

Paul Krugman recently looked at these same figures through his logarithmic Kaleidoscope, and concluded that “the revenue track under Reagan … is exactly what you would expect to see if supply-side economics were just plain wrong: revenues are permanently reduced relative to what they would otherwise have been.”

Financial Times columnist Martin Wolf was so awed by Krugman’s creative artwork that he imagined “the theory that cuts would pay for themselves has proved altogether wrong.”

Notice that Krugman starts his trend with 1970, which was a year of recession and falling revenue.  If he had instead measured real revenue growth between the cyclical peaks of 1969 and 1979, the overall increase would have dropped to 19.5%.  Note too that Krugman ends his trend with 1981 rather than 1980, while suggesting 1981 was part of the glorious Carter years:

The Carter years, contrary to legend, were not a period of economic stagnation and falling revenue because high tax rates were strangling the economy; there was a nasty recession starting in 1979, largely thanks to an oil shock, but overall growth was respectable.

The comment is strange.  There was no recession in 1979, nasty or otherwise.  And non-energy inflation topped 11 percent that year – before oil prices peaked in early 1980.

The continually accelerating inflation during the Carter years, 1977 to 1980, pushed more and more families into higher and higher tax brackets.  It also resulted in brutal taxation of illusory, nominal capital gains and ephemeral inventory profits.   As a percentage of GDP, federal taxes soared from 17.1% of GDP in 1976 to 19% in 1980 and 19.6% in 1981.   Does that really look like a sustainable trend that President Reagan interrupted for no good reason?

Paul Ryan’s Roadmap, and the Difference between Costs and Spending

Rep. Paul Ryan (R-WI) ably defends his “Roadmap for America’s Future” in today’s Washington Post.  He doesn’t mention Paul Krugman’s attacks thereon, nor should he.  (To read why, consult The Atlantic’s Megan McArdle and Ted Gayer of the Tax Policy Center.)

I haven’t officially weighed in on the health-care aspects of the Roadmap, but hope to do so in the near future.  For the moment, I’ll use Ryan’s oped to stress a distinction that is crucial to thinking clearly about health care costs.

Ryan writes of the dangers of an un-reformed Medicare program (emphasis added):

Under an ever-expansive, all-consuming central government, costs will be contained with Washington’s heavy hand imposing price controls, slashing benefits and arbitrarily rationing seniors’ care.

While those forms of government rationing may reduce spending, that’s not the same as reducing costs.  On the contrary, those rationing measures may increase health care costs.

Suppose Medicare set its prices for hip and knee replacements so low that no medical-device manufacturer would provide the hardware and no surgeon would perform the procedures.  Medicare spending on hip and knee replacements would fall.  But costs may rise: more seniors would be walking around — or not walking around — in severe pain.  Pain and reduced mobility are costs, even if they don’t show up in the federal budget or household budgets.  (Indeed, those costs would be so severe that overall Medicare spending could rise as seniors bought more wheelchairs, sought treatment for pressure sores, etc.).  This is the main reason conservatives criticize Canada’s Medicare system and the British National Health Service: reducing health care spending often increases costs.

I therefore request universal compliance with Cannon’s First Rule of Economic Literacy: Never say costs when you mean spending.

When Keynesians Attack, Part II

I’m still dealing with the statist echo chamber, having been hit with two additional attacks for the supposed sin of endorsing Reaganomics over Obamanomics (my responses to the other attacks can be found here and here). Some guy at the Atlantic Monthly named Steve Benen issued a critique focusing on the timing of the recession and recovery in Reagan’s first term. He reproduces a Krugman chart (see below) and also adds his own commentary.

Reagan’s first big tax cut was signed in August 1981. Over the next year or so, unemployment went from just over 7% to just under 11%. In September 1982, Reagan raised taxes, and unemployment fell soon after. We’re all aware, of course, of the correlation/causation dynamic, but as Krugman noted in January, “[U]nemployment, which had been stable until Reagan cut taxes, soared during the 15 months that followed the tax cut; it didn’t start falling until Reagan backtracked and raised taxes.”

This argument is absurd since the recession in the early 1980s was largely the inevitable result of the Federal Reserve’s misguided monetary policy. And I would be stunned if this view wasn’t shared by 90 percent-plus of economists. So it is rather silly to say the recession was caused by tax cuts and the recovery was triggered by tax increases.

But even if we magically assume monetary policy was perfect, Benen’s argument is wrong. I don’t want to repeat myself, so I’ll just call attention to my previous blog post which explained that it is critically important to look at when tax cuts (and increases) are implemented, not when they are enacted. The data is hardly exact, because I haven’t seen good research on the annual impact of bracket creep, but there was not much net tax relief during Reagan’s first couple of years because the tax cuts were phased in over several years and other taxes were going up. So the recession actually began when taxes were flat (or perhaps even rising) and the recovery began when the economy was receiving a net tax cut. That being said, I’m not arguing that the Reagan tax cuts ended the recession. They probably helped, to be sure, but we should do good tax policy to improve long-run growth, not because of some misguided effort to fine-tune short-run growth.

The second attack comes from some blog called Econospeak, where my newest fan wrote:

I’m scratching my head here as I thought the standard pseudo-supply-side line was that the deficit exploded in the 1980’s because government spending exploded. OK, the truth is that the ratio of Federal spending to GDP neither increased nor decreased during this period. Real tax revenues per capita fell which is why the deficit rose but this notion that the burden of government fell is not factually based.

Those are some interesting points, and I might respond to them if I wanted to open a new conversation, but they’re not germane to what I said. In my original post (the one he was attacking), I commented on the “burden of government” rather than the “burden of government spending.” I’m a fiscal policy economist, so I’m tempted to claim that the sun rises and sets based on what’s happening to taxes and spending, but such factors are just two of the many policies that influence economic performance. And with regard to my assertion that Reagan reduced the “burden of government,” I’ll defer to the rankings put together for the Economic Freedom of the World Index. The score for the United States improved from 8.03 to 8.38 between 1980 and 1990 (my guess is that it peaked in 1988, but they only have data for every five years). The folks on the left may be unhappy about it, but it is completely accurate to say Reagan reduced the burden of government. And while we don’t yet have data for the Obama years, there’s a 99 percent likelihood that America’s score will decline.

This is not a partisan argument, by the way. The Economic Freedom of the World chart shows that America’s score improved during the Clinton years, particularly his second term. And the data also shows that the U.S. score dropped during the Bush years. This is why I wrote a column back in 2007 advocating Clintonomics over Bushonomics. Partisan affiliation is not what matters. If we want more prosperity, the key is shrinking the burden of government.

Last but not least, I try to make these arguments to the folks watching MSNBC.

When Keynesians Attack

If I was organized enough to send Christmas cards, I would take Richard Rahn off my list. I do one blog post to call attention to his Washington Times column and it seems like everybody in the world wants to jump down my throat. I already dismissed Paul Krugman’s rant and responded to Ezra Klein’s reasonable criticism. Now it’s time to address Derek Thompson’s critique on the Atlantic’s site.

At the risk of re-stating someone else’s argument, Thompson’s central theme seems to be that there are many factors that determine economic performance and that it is unwise to make bold pronouncements about Policy A causing Result B. If that’s what Thompson is saying, I very much agree (and if it’s not what he’s trying to say, then I apologize, though I still agree with the sentiment). That’s why I referred to Reagan decreasing the burden of government and Obama increasing the burden of government — I wanted to capture all the policy changes that were taking place, including taxation, spending, monetary policy, regulation, etc. Yes, the flagship policies (tax reduction for Reagan and so-called stimulus for Obama) were important, but other factors obviously are part of the equation.

The biggest caveat, however, is that one should always be reluctant to make sweeping claims about what caused the economy to do X or Y in a given year. Economists are terrible forecasters, and we’re not even very proficient when it comes to hindsight analysis about short-run economic fluctuations. Indeed, the one part of my original post that causes me a bit of regret is that I took the lazy route and inserted an image of the chart from Richard’s column. Excerpting some of his analysis would have been a better approach, particularly since I much prefer to focus on the impact of policies on long-run growth and competitiveness (which is what I did in my New York Post column from earlier this week  and also why I’m reluctant to embrace Art Laffer’s warning of major economic problems in 2011).

But a blog post is no fun if you just indicate where you and a critic have common ground, so let me identify four disagreements that I have with Thompson’s post:

(1) To reinforce his warning about making excessive claims about different recessions/recoveries, Thompson pointed out that someone could claim that Reagan’s recovery was associated with the 1982 TEFRA tax hike. I’ve actually run across people who think this is a legitimate argument, so it’s worth taking a moment to explain why it isn’t true.

When analyzing the impact of tax policy changes, it’s important to look at when tax changes were implemented, not when they were enacted (data on annual tax rates available here). Reagan’s Economic Recovery Tax Act was enacted in 1981, but the lower tax rates weren’t fully implemented until 1984. This makes it a bit of a challenge to pinpoint when the economy actually received a net tax cut. The tax burden may have actually increased in 1981, since the parts of the Reagan tax cuts that took effect that year were offset by the impact of bracket creep (the tax code was not indexed to protect against inflation until the mid-1980s). There was a bigger tax rate reduction in 1982, but there was still bracket creep, as well as previously-legislated payroll tax increases (enacted during the Carter years). TEFRA also was enacted in 1982, which largely focused on undoing some of the business tax relief in Reagan’s 1981 plan. People have argued whether the repeal of promised tax relief is the same as a tax increase, but that’s not terribly important for this analysis. What does matter is that the tax burden did not fall much (if at all) in Reagan’s first year and might not have changed too much in 1982.

In 1983, by contrast, it’s fairly safe to say the next stage of tax rate reductions was substantially larger than any concomitant tax increases. That doesn’t mean, of course, that one should attribute all changes in growth to what’s happening to the tax code. But it does suggest that it is a bit misleading to talk about tax cuts in 1981 and tax increases in 1983.

One final point: The main insight of supply-side economics is that changes in the overall tax burden are not as important as changes in the tax structure. As such, it’s also important to look at which taxes were going up and which ones were decreasing. This is why Reagan’s 1981 tax plan compares so favorably with Bush’s 2001 tax plan (which was filled with tax credits and other policies that had little or no impact on incentives for productive behavior).

(2) In addition to wondering whether one could argue that higher taxes triggered the Reagan boom, Thompson also speculates whether it might be possible to blame the tax cuts in Obama’s stimulus for the economy’s subsequent sub-par performance. There are two problems with that hypothesis. First, a substantial share of the tax cuts in the so-called stimulus were actually new spending being laundered through the tax code (see footnote 3 of this Joint Committee on Taxation publication). To the extent that the provisions represented real tax relief, they were much more akin to Bush’s non–supply side 2001 tax cuts and a far cry from the marginal tax-rate reductions enacted in 1981 and 2003. And since even big tax cuts have little or no impact on the economy if incentives to engage in productive behavior are unaffected, there is no reason to blame (or credit) Obama’s tax provisions for anything.

(3) Why doesn’t anyone care that the Federal Reserve almost always is responsible for serious recessions? This isn’t a critique of Thompson’s post since he doesn’t address monetary policy from this angle, but if we go down the list of serious economic hiccups in recent history (1974-75, 1980-82, and 2008-09), bad monetary policy inevitably is a major cause. In short, the Fed periodically engages in easy-money policy. This causes malinvestment and/or inflation, and a recession seems to be an unavoidable consequence. Yet the Fed seems to dodge any serious blame. At some point, one hopes that policy makers (especially Fed governors) will learn that easy-money policies such as artificially low interest rates are not a smart approach.

(4) Thompson writes, “Is Mitchell really saying that $140 billion on Medicaid, firefighters, teachers, and infrastructure projects are costing the economy five percentage points of economic growth?” No, I’m not saying that and didn’t say that, but I have been saying for quite some time that taking money out of the economy’s left pocket and putting it in the economy’s right pockets doesn’t magically increase prosperity. And to the extent money is borrowed from private capital markets and diverted to inefficient and counter-productive programs, the net impact on the economy is negative. Thompson also writes that, “Our unemployment picture is a little more complicated than ‘Oh my god, Obama is killing jobs by taking over the states’ Medicaid burden!’” Since I’m not aware of anybody who’s made that argument, I’m not sure how to respond. That being said, jobs will be killed by having Washington take over state Medicaid budgets. Such a move would lead to a net increase in the burden of government spending, and that additional spending would divert resources from the productive sector of the economy.

The moral of the story, though, is to let Richard Rahn publicize his own work.

Responding to Paul Krugman and Ezra Klein

I seem to have touched a raw nerve with my post earlier today on my International Liberty blog,  comparing Reagan and Obama on how well the economy performed coming out of recession. Both Ezra Klein and Paul Krugman have denounced my analysis (actually, they denounced me approving of Richard Rahn’s analysis, but that’s a trivial detail). Krugman responded by asserting that Reaganomics was irrelevant (I’m not kidding) to what happened in the 1980s. Klein’s response was more substantive, so let’s focus on his argument. He begins by stating that the recent recession and the downturn of the early 1980s were different creatures. My argument was about how strongly the economy rebounded, however, not the length, severity, causes, and characteristics of each recession. But Klein then cites Rogoff and Reinhardt to argue that recoveries from financial crises tend to be less impressive than recoveries from normal recessions.

That’s certainly a fair argument. I haven’t read the Rogoff-Reinhardt book, but their hypothesis seems reasonable, so let’s accept it for purposes of this discussion. Should we therefore grade Obama on a curve? Perhaps, but it’s also true that deep recessions usually are followed by more robust recoveries. And since the recent downturn was more severe than the the one in the early 1980s, shouldn’t we be experiencing some additional growth to offset the tepidness associated with a financial crisis?

I doubt we’ll ever know how to appropriately measure all of these factors, but I don’t think that matters. I suspect Krugman and Klein are not particularly upset about Richard Rahn’s comparisons of recessions and recoveries. The real argument is whether Reagan did the right thing by reducing the burden of government and whether Obama is doing the wrong thing by heading in the opposite direction and making America more like France or Greece. In other words, the fundamental issue is whether we should have big government or small government. I think the Obama Administration, by making government bigger, is repeating many of the mistakes of the Bush Administration. Krugman and Klein almost certainly disagree.

Paul Krugman and Regime Uncertainty

Paul Krugman dismisses concerns that the Obama administration’s fiscal and regulatory policies are fostering uncertainty in the business community, and thus inhibiting job growth and an economic recovery.

My Cato colleagues and I have been citing this “regime uncertainty” for a while now, and it is gaining mainstream acceptance as evidenced by a recent Washington Post editorial.

I have pointed to surveys of small businesses conducted by the National Federation of Independent Business. The businesses surveyed continually cite the combination of government taxes and regulations as their “single most important problem.”

However, Krugman looks at the NFIB’s most recent survey and comes away with a different conclusion:

Or read through the latest survey of small business trends by the National Federation for Independent Business, an advocacy group. The commentary at the front of the report is largely a diatribe against government — “Washington is applying leeches and performing blood-letting as a cure” — and you might naïvely imagine that this diatribe reflects what the surveyed businesses said. But while a few businesses declared that the political climate was deterring expansion, they were vastly outnumbered by those citing a poor economy.

This is the chart from the survey that Krugman is referencing:

Considering the depth and length of the recession, the fact that “economic condition” is the runaway leader isn’t surprising. But I wonder how many of the businesses citing “economic conditions” are happy with the “political climate.” I doubt very many. Notice that zero respondents said that the political climate was a “good time” to expand. Couple that with the plurality who said this isn’t a good time to expand due to economic conditions and you get an indictment of the administration’s interventionist policies that Krugman has supported.

Krugman continues:

The charts at the back of the report, showing trends in business perceptions of their “most important problem,” are even more revealing. It turns out that business is less concerned about taxes and regulation than during the 1990s, an era of booming investment. Concerns about poor sales, on the other hand, have surged. The weak economy, not fear about government actions, is what’s holding investment down.

Interestingly, Krugman ignores the chart that immediately precedes the trends in business perceptions: the “single most important problem” respondents currently face. It is definitely more revealing:

Thirty percent of respondents said their single most important problem is “Poor Sales.” “Taxes” and “Government Regulations and Red Tape” come in second and third place at 22 percent and 13 percent respectively. Combining the two, the biggest problem facing small businesses according to respondents is government.

Krugman waves the government problem away by pointing out that taxes and regulations ranked higher in the 1990s when the economy was strong. However, he ignores the trend. Concern about taxes and regulations trended lower as the 1990s moved into the 2000s, but have been trending higher in the last couple of years.

Take a look at the trend chart that includes taxes:

The tax outlook improved as the Clinton and Bush administrations cut taxes and the federal budget was brought under control. Rising tax concerns could be explained by future expectations of higher taxes to pay for Bush and Obama’s profligacy. Additionally, states have been raising taxes during the recession to make up for budget shortfalls. Future expectations of higher taxes to pay for the unfunded liabilities of state and local employee benefits could also be a consideration.

Also note how much higher taxes rank than financing. Yet, it seems that most media outlets believe credit unavailability is the chief problem facing businesses. Indeed, the president has been pushing a $30 billion package to increase lending to small businesses. But businesses don’t need more subsidized credit backed by taxpayers — they need relief from the president’s agenda.