Krugman’s Third Rail
The Truth Squad retires some Social Security myths.


Donald L. Luskin

My e-mail has been flooded with messages from legions of National Review Online readers, encouraging the work of the Krugman Truth Squad. Thanks to all of you who have said “keep up the good work!”

One clever reader wrote, “Krugman should stick to just misunderstanding economics. Misunderstanding geopolitical issues is reaching too far for any one man.” Well said, and in his latest New York Times column published Friday, Krugman has gone back to what he does best — misunderstand economics.

For the Krugman Truth Squad, that presents a special challenge. Economics is Krugman’s Tora Bora — he hides in the caves and he knows the terrain very well. So stay close as we venture in country.

Krugman’s Friday column smears President Bush for the forecasted budget deficits supposedly caused by his tax cuts — the cuts already enacted in 2001, and the larger ones still pending. Krugman’s story hook is a study published Wednesday by the Center on Budget and Policy Priorities. The study compares the 75-year actuarial shortfalls of Social Security and Medicare to the 75-year revenue loss from Bush’s tax-cuts. Here’s how Krugman summarizes it:

. . . the estimated actuarial deficit of Social Security over the next 75 years is $3.5 trillion, and that of Medicare is $6.2 trillion. . . . the present value of the revenue that will be lost because of the Bush tax cuts — those that have already taken place, together with those that have been proposed — using the same economic assumptions that underlie those Medicare and Social Security projections. . . . comes to $12 trillion to $14 trillion — more than the Social Security and Medicare shortfalls combined. . . . that revenue would have been more than enough to ‘top up’ Social Security and Medicare, allowing them to operate without benefit cuts for the next 75 years.

. . . Without those tax cuts, the problems of an aging population might well have been manageable; with them, nothing short of an economic miracle can save us from a fiscal crisis.

Get it? If it weren’t for Bush’s tax cuts, there would be no problems with Social Security or Medicare.

Krugman turns this wild claim into an anti-Bush smear through several forms of innuendo that suggest an administration cover-up. For instance, he claims — with no substantiation whatsoever — that “The administration has tried to deny this conclusion, inventing strange new principles of accounting in the process.”

But let’s set the baseless innuendo aside and get to work. First, who is this Center on Budget and Policy Priorities that Krugman cites as an authority on these complex and controversial matters? Well, it turns out they are a liberal policy advocacy group. Of course Krugman doesn’t honestly label them as such — he doesn’t label them at all — but even a cursory once-over of their web site reveals where they’re coming from.

Krugman Truth Squad member Tom Maguire of Just One Minute pointed out that the first of the study’s three authors is Peter R. Orszag, a senior fellow at the Brookings Institution, the well-known left-tilted think tank. Orszag’s other credentials include a stint at UC Berkeley (not exactly a bastion of conservatism), and various senior roles on Bill Clinton’s economic team spanning four of that administration’s eight years.

Now let’s look at the findings of the study. Like most political statements on economic issues, the study is little more than an exercise in making forecasts that are superficially defensible as objective, but are in fact skewed by arbitrary assumptions chosen to ensure the desired result. I suppose we could say the study is challenged by questionable methodology. Or we could just say it’s a pack of lies.

In estimating the actuarial shortfall in Social Security and Medicare, the study uses figures calculated by the programs’ trustees in their most recent annual report. These calculations drastically underestimate the deficits in these programs because they give them credit for the principle value and anticipated interest earned from the Treasury bonds in the programs’ trust funds — the so-called “lockbox.”

But as Krugman Truth Squad member Matthew Hoy pointed out on, the true and far greater value of the deficit will only become obvious in 15 years when present payroll-tax revenues will not be enough to meet present benefit payments. Then, “When the government actually has to start redeeming those bonds in the ‘lockbox,’” Hoy wrote, “that money has to come from somewhere. Unfortunately for the American people, that somewhere is the general fund, which pays for interstate highways, the military, and various pork programs . . . ”

This is true because the bonds in the trust fund are nothing but promises from one unit of government to pay another unit of government. To count these bonds, or the interest on them, as an “asset” of the programs would be the precise equivalent of writing a check to yourself and depositing it in your own checking account. It’s a worthless exercise.

Now let’s turn to the study’s claims about the tax revenues that would be lost under the Bush tax cuts. As Krugman Truth Squad member David Hogberg pointed out on Cornfield Commentary, the study estimates revenue losses just like the Congressional Budget Office — unrealistically and with bias. Hogberg wrote,

. . . agencies like the CBO rely on the largely discredited method of “static analysis,” which assumes that tax cuts have no effect on economic behavior. It assumes that if the government cuts taxes by $1 million, it will cost the government exactly $1million.

The problem with static scoring is that people react to incentives. If they get to keep more of their income from activities like working and investing, then they will engage in more of those activities.

An increase in economic activity would at least partially offset any revenue loss. Failure to consider this element is especially important when measuring the revenue loss from the elimination of double taxation on dividend income — a centerpiece of Bush’s current tax-cut proposal. By creating marginal after-tax incentives for capital investment, labor is rendered more productive and wages subject to income tax should be expected to rise. So, dividend tax revenues may fall, but income-tax revenues may well more than compensate.

You don’t need to be a die-hard supply-sider to see this point; you don’t have to believe that tax cuts always and completely “pay for themselves” in economic growth. But the study takes an equally extreme opposite position — that government can raise and lower taxes at will, and that workers and investors will never alter their behavior in response.

The study both understates the deficits in Social Security and Medicare and overstates the revenue losses from the Bush tax cuts. But when Krugman suggests that the lost revenue ought to be used to “top up” Social Security, he introduces one of the biggest lies of all when it comes to Social Security.

Krugman completely overlooks the fact that Social Security right now — at its current level of tax inputs and benefit outputs — already dictates a near-zero annual rate of return for the millions of younger workers now entering the system. If a Wall Street firm was marketing an investment this bad, making the kinds of claims that the Social Security system makes to describe how wonderful it is, Eliot Spitzer would be all over them.

When Krugman suggests “topping up,” he really means throwing more tax dollars at Social Security. In the end it doesn’t matter whether those tax dollars are obtained by raising the payroll tax or by not implementing the Bush tax cuts. The result will always be the same: More money will get stuffed into the front end of the Social Security pipeline, but the same trickle will still come out the other end. That will take today’s near-zero rate of return and drive it all the way into the negative zone.

For Krugman to cite this study as authoritative is an example of the garbage-in-garbage-out principle as applied to punditry. A third party source comes up with a subjective “conclusion,” the pundit subjectively chooses to cite it, and — presto! — two subjective things are suddenly turned into one seemingly objective thing.

But having one guy write it and another guy cite it doesn’t make it objective. And it certainly doesn’t make it the truth.