The $600 Billion Club
Why Paul Krugman won't join.


Donald L. Luskin

Stop the presses! Paul Krugman, America’s most dangerous liberal pundit, has taken the nearly unheard of step of criticizing a Democrat in his latest column in the New York Times!

But don’t get too excited. The Democratic victim of Krugman’s poison word-processor is Sen. Joe Lieberman, and what earned him Krugman’s wrath was the sin of making the slightest gesture of bipartisan interest in reforming Social Security. Specifically, what Lieberman did was to agree with George W. Bush that Social Security reform should come sooner rather than later, because the system’s insolvency problem gets worse every year by about $600 billion. In Krugman’s twisted, partisan worldview, agreeing with Bush on that simple fact is “helping to spread a lie.”

Yet Lieberman and Bush — and Social Security Administration deputy commissioner James Lockhart, whom Krugman blasted in a Times column last week for the very same thing — are absolutely correct. All else equal, the long-term unfunded liability of the Social Security system gets bigger every year. That’s because that liability is like any other debt: Each year you don’t repay it, it accrues interest. In the case of Social Security’s massive $10.4 trillion debt, the interest is about $600 billion a year.

It’s all laid out in the latest annual report of the Trustees of the Social Security Trust Funds. In the somewhat opaque actuarial language of the report, “The change to the later valuation date for this report, January 1, 2004, tends to increase the measured deficit, by about $0.6 trillion.” In English: let a year go by, and the debt goes up by $600 billion.

Here’s how it works. Today’s present value of the unfunded liability of the system is $10.4 trillion. That’s the value of the assets you’d have to contribute to Social Security today to make it perfectly solvent forever. But you’d have to do it now, so that the $10.4 trillion could start earning interest immediately. If you wait a year, this system will have missed earning a year’s worth of interest. Assuming an approximately 6 percent interest rate (as the Social Security trustees did), that year will cost the system 6 percent of $10.4 trillion — or about $600 billion. It’s that simple.

Of course, other factors can crop up over a year that will change the value of the unfunded liability, too. Changing assumptions about birth rates, life expectancy, inflation, and economic growth can also make a difference. But all else equal, the unfunded liability rises each year by the interest rate.

So why, in his two most recent columns, has Krugman said the $600 billion number is “bogus” and “fake,” and why has he called it a “lie” and a “misrepresentation” when Bush, Lieberman, and Lockhart accurately quote this accurate statistic? You’d think a Princeton economics professor like Krugman could make his case by more rigorous means than name-calling. But no: not one word of explanation. Krugman merely sniffs that the trustee’s statement about the $600 billion concerned “a technical discussion of accounting issues” — which ordinary New York Times readers apparently couldn’t possibly be expected to understand — and “has nothing to do with the cost of delaying changes in the retirement program.”

Let me try to make the case that Krugman didn’t bother to make, based on conversations I’ve had with serious economists and actuaries who ask some intelligent questions about that $600 billion. I’ve heard the argument that you don’t ultimately lose $600 billion in interest earnings on $10.4 trillion by waiting a year to make up Social Security’s unfunded liability. Instead of the Social Security system earning that interest, the rest of the economy earns it. So yes, next year the liability will be $600 billion higher — but the economy will be $600 billion wealthier, so it won’t matter.

True enough. But if the point is to strengthen the Social Security system itself, the reality remains that each year we wait the system falls $600 billion deeper into the hole, requiring ever larger claims on private assets in the future. Besides, it’s easy to see why Krugman wouldn’t make the case that $600 billion in the economy is as good as $600 billion in the Social Security system. Since when has Krugman ever wanted to see one lousy dollar in private hands that could instead be sent to the government to spend on his liberal agenda?

Case in point: Krugman has written literally dozens of columns (for example, here) blasting the Bush tax cuts for leaving wealth in private hands while the government is running deficits. If Krugman pursued this line of reasoning, next thing you know he’d be a supply-sider, arguing that we should cut taxes to help the economy grow its way out of Social Security’s problems.

Another argument regarding the $600 billion is that while Social Security’s unfunded liability may indeed rise by that amount over a year, GDP and the taxable payroll base are growing, too. So the unfunded liability isn’t really growing each year when measured as a fraction of the economy rather than in raw dollars. But unless interest rates are systematically lower than economic growth rates — which would violate some pretty fundamental theories of modern macroeconomics — the unfunded liability will always grow faster than the economy. The only question is how much faster.

Besides, here again, it’s easy to see why Krugman wouldn’t dare articulate this case. Before you know it, he’d have to recant all those columns (for example, this one) in which he called budget deficits under the Bush administration “record deficits,” when in fact they were far from it when measured as a fraction of the economy and not in dollar terms.

But I suspect the real reason for Krugman’s failure to explain the $600 billion is sheer rear-guard politics. The president has been very successful, according to polls, in convincing voters that there is a profound problem with Social Security’s finances — a problem that has to be dealt with right away. He has completely steamrolled the claims by Democrats — claims that Krugman has championed — that there is no crisis.

Now it’s only (only!) a matter of bringing Democrats to the negotiating table to hammer out the specifics of reform — and as Bush said in a speech in Louisiana last week,

I believe when the people figure out we have a problem … woe to the politician who doesn’t come to the table. Woe to the person who tries to block this for partisan reasons.

So what else can the intellectual leader of the failed “there is no crisis” movement do now but resort to the tired old “Bush lied” rallying cry? Or, if that doesn’t work, how about that reliable last refuge of scoundrels — patriotism? Krugman can always, once again (for example, here), accuse Bush of desecrating the sacred legacy of Franklin D. Roosevelt.

On the other hand, here’s a different idea. Why doesn’t Krugman direct his economic talents toward trying to solve Social Security’s problems for the sake of all Americans? Krugman Truth Squad member Matthew Hoy has been running a banner on his blog for weeks, counting the days since Krugman made this promise in his January 4, 2005, column:

In the next few weeks, I’ll … suggest steps to strengthen the program.

So how about it, professor? Enough name-calling. Where are your answers? We’re waiting.

– Donald Luskin is chief investment officer of Trend Macrolytics LLC, an independent economics and investment-research firm. He welcomes your visit to his blog and your comments at [email protected].


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