Paul Krugman’s columns and blogs are a great source of insight on the economy and the budget, but he does occasionally make mistakes. He is guilty of one today, when he used a very misleading graph on the sources of the budget deficits in his blog.
There are two major problems with the graph. First, it begins in 2009. This might lead readers to believe that large budget deficits had been an ongoing problem. That is not true. The deficit was just 1.2 percent of GDP in 2007 and was projected to remain low until the collapse of the housing market sent the economy plummeting in 2008.
The other problem is that it shows the deficit in nominal dollars rather than as a share of GDP. This conceals the fact that the deficit was projected to be about half as large as a share of GDP in 2019 as it was in 2009. While the deficit projected for 2019 would still be too large to sustain indefinitely, by not expressing the deficit relative to the size of the economy, readers are likely to exaggerate the extent of the problem it would pose.
A graph that gives a better picture of the problem of the budget deficit in relation to the economy would look like the one below. The point is that the collapse of the economy gave us large deficits. Even with the wars and the Bush tax cuts to the rich, the deficits would still have been manageable had the economy not collapsed.
Source: Congressional Budget Office.
Paul Krugman’s columns and blogs are a great source of insight on the economy and the budget, but he does occasionally make mistakes. He is guilty of one today, when he used a very misleading graph on the sources of the budget deficits in his blog.
There are two major problems with the graph. First, it begins in 2009. This might lead readers to believe that large budget deficits had been an ongoing problem. That is not true. The deficit was just 1.2 percent of GDP in 2007 and was projected to remain low until the collapse of the housing market sent the economy plummeting in 2008.
The other problem is that it shows the deficit in nominal dollars rather than as a share of GDP. This conceals the fact that the deficit was projected to be about half as large as a share of GDP in 2019 as it was in 2009. While the deficit projected for 2019 would still be too large to sustain indefinitely, by not expressing the deficit relative to the size of the economy, readers are likely to exaggerate the extent of the problem it would pose.
A graph that gives a better picture of the problem of the budget deficit in relation to the economy would look like the one below. The point is that the collapse of the economy gave us large deficits. Even with the wars and the Bush tax cuts to the rich, the deficits would still have been manageable had the economy not collapsed.
Source: Congressional Budget Office.
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Washington Post columnist Charles Lane is angry with Ben Bernanke and the Federal Reserve Board. He is upset because the Fed is not working to advance his agenda of cutting Social Security and Medicare by raising interest rates and putting more pressure on Congress.
Lane tells readers:
“With the U.S. economy still reeling from the Great Recession, the Fed has been trying to stimulate economic growth by holding down interest rates, and it has pledged to keep doing so through mid-2015. It does this in large part by buying up government debt. Partly as a result, the United States was able to issue $4 trillion in new debt from 2009 through 2011, while keeping net interest costs at or below 1.5 percent of gross domestic product.
“It’s perfectly consistent with the Fed’s mandate. And it sounds like a great deal for the government, too. According to more than a few economists, pundits and politicians, Congress should seize the opportunity to borrow and spend on growth-enhancing investments such as infrastructure.
“However, in a properly functioning economy, rising government borrowing costs can play a useful role: Specifically, they are the market’s way of warning government that its debts are unsustainable.
Muffle that signal, as the Fed’s policy is doing now, and politicians are less able to guess right about how much time they really have to fix fiscal policy and to feel less pressure to do so.”
Actually the market is doing exactly what it is supposed to be doing. Interest rates are extraordinarily low now because of the massive amount of excess resources in the economy. The low interest rates are a way to encourage spending. In fact, if anything the goal would be to have lower real interest rates, but this can only be done by having a higher rate of inflation.
Lane is upset that the markets don’t seem to accept his view that budget deficits are unsustainable. Of course the only reason that budget deficits are large today is because the economy collapsed. In 2008, before it recognized the hit to the economy caused by the collapse of the housing bubble, the Congressional Budget Office projected that deficits would be less than 2.0 percent of GDP through the middle of the decade even without the expiration of the Bush tax cuts.
Source: Congressional Budget Office.
In short, the real story here is that Charles Lane is unhappy that the financial markets and the Fed won’t join in his drive to cut Social Security and Medicare.
Washington Post columnist Charles Lane is angry with Ben Bernanke and the Federal Reserve Board. He is upset because the Fed is not working to advance his agenda of cutting Social Security and Medicare by raising interest rates and putting more pressure on Congress.
Lane tells readers:
“With the U.S. economy still reeling from the Great Recession, the Fed has been trying to stimulate economic growth by holding down interest rates, and it has pledged to keep doing so through mid-2015. It does this in large part by buying up government debt. Partly as a result, the United States was able to issue $4 trillion in new debt from 2009 through 2011, while keeping net interest costs at or below 1.5 percent of gross domestic product.
“It’s perfectly consistent with the Fed’s mandate. And it sounds like a great deal for the government, too. According to more than a few economists, pundits and politicians, Congress should seize the opportunity to borrow and spend on growth-enhancing investments such as infrastructure.
“However, in a properly functioning economy, rising government borrowing costs can play a useful role: Specifically, they are the market’s way of warning government that its debts are unsustainable.
Muffle that signal, as the Fed’s policy is doing now, and politicians are less able to guess right about how much time they really have to fix fiscal policy and to feel less pressure to do so.”
Actually the market is doing exactly what it is supposed to be doing. Interest rates are extraordinarily low now because of the massive amount of excess resources in the economy. The low interest rates are a way to encourage spending. In fact, if anything the goal would be to have lower real interest rates, but this can only be done by having a higher rate of inflation.
Lane is upset that the markets don’t seem to accept his view that budget deficits are unsustainable. Of course the only reason that budget deficits are large today is because the economy collapsed. In 2008, before it recognized the hit to the economy caused by the collapse of the housing bubble, the Congressional Budget Office projected that deficits would be less than 2.0 percent of GDP through the middle of the decade even without the expiration of the Bush tax cuts.
Source: Congressional Budget Office.
In short, the real story here is that Charles Lane is unhappy that the financial markets and the Fed won’t join in his drive to cut Social Security and Medicare.
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Europe has an enormous problem of youth unemployment, this is not really disputable. The NYT ran a major article on the topic that focused on the situation in France. It told readers:
“This is a ‘floating generation,’ made worse by the euro crisis, and its plight is widely seen as a failure of the system: an elitist educational tradition that does not integrate graduates into the work force, a rigid labor market that is hard to enter, and a tax system that makes it expensive for companies to hire full-time employees and both difficult and expensive to lay them off.”
When facts about the world are “widely seen,” readers should get nervous. People see these facts, we want names.
The point is a serious one. This piece highlights the problems of the education system in France and other countries and blames them for high youth unemployment and underemployment. While there are undoubtedly serious problems with these educational systems (as with most systems), these problems did not suddenly get much worse in the last 5 years. The reason for the scary youth employment/unemployment data cited in this piece is the economic collapse in 2008 and the decision by the European Central Bank (ECB) to push austerity as a response. The policies of the ECB bear far more responsibility for the dire state of the labor market for youth in France and the rest of Europe than problems with the education system.
It is also worth noting that the French unemployment data tend to overstate youth unemployment. College students are given stipends, so most do not work, unlike in the United States. Therefore the youth labor force is much smaller in France. This means that if the same share of youth are unemployed it would translate into a much higher unemployment rate in France.
Europe has an enormous problem of youth unemployment, this is not really disputable. The NYT ran a major article on the topic that focused on the situation in France. It told readers:
“This is a ‘floating generation,’ made worse by the euro crisis, and its plight is widely seen as a failure of the system: an elitist educational tradition that does not integrate graduates into the work force, a rigid labor market that is hard to enter, and a tax system that makes it expensive for companies to hire full-time employees and both difficult and expensive to lay them off.”
When facts about the world are “widely seen,” readers should get nervous. People see these facts, we want names.
The point is a serious one. This piece highlights the problems of the education system in France and other countries and blames them for high youth unemployment and underemployment. While there are undoubtedly serious problems with these educational systems (as with most systems), these problems did not suddenly get much worse in the last 5 years. The reason for the scary youth employment/unemployment data cited in this piece is the economic collapse in 2008 and the decision by the European Central Bank (ECB) to push austerity as a response. The policies of the ECB bear far more responsibility for the dire state of the labor market for youth in France and the rest of Europe than problems with the education system.
It is also worth noting that the French unemployment data tend to overstate youth unemployment. College students are given stipends, so most do not work, unlike in the United States. Therefore the youth labor force is much smaller in France. This means that if the same share of youth are unemployed it would translate into a much higher unemployment rate in France.
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The NYT had an excellent piece detailing the process whereby corporate subsidies are dished out in Texas. It reports that the subsidies come to around $19 billion a year. This is approximately $2,200 per household. As the piece points out, the incentives have been handed out with little apparent regard to the number or quality of jobs created. As a result, there is little evidence that the incentives have had benefits for most Texans.
The piece is part of a series on state subsidies for corporations. The first piece ran yesterday.
The NYT had an excellent piece detailing the process whereby corporate subsidies are dished out in Texas. It reports that the subsidies come to around $19 billion a year. This is approximately $2,200 per household. As the piece points out, the incentives have been handed out with little apparent regard to the number or quality of jobs created. As a result, there is little evidence that the incentives have had benefits for most Texans.
The piece is part of a series on state subsidies for corporations. The first piece ran yesterday.
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The Post neglected to point out that Senator Lindsey Graham, a Republican often cited on budget issues, is apparently badly confused about the basics of the budget. A Post piece quoted Graham as saying:
“This offer doesn’t remotely deal with entitlement reform in a way to save Medicare, Medicaid and Social Security from imminent bankruptcy.”
This statement is absurd on its face. Medicaid is paid out of general revenue, it makes no more sense to say that Medicaid faces bankruptcy than to say that the Commerce Department faces bankruptcy. While the same is true of Medicare Part B and Part D, the Hospital Insurance portion of the program (Part A) is funded by a trust fund with a designated revenue source that is first projected to face a shortfall in 2024. If the projections prove correct, at that point it would lack sufficient revenue to pay full benefits.
While this would be a problem, it is worth noting that, contrary to the criticisms made by Graham in the piece, President Obama’s reforms have extended the projected solvency of the program from 2016 to 2024. They have also eliminated more than two-thirds of the projected 75-year shortfall.
In the case of Social Security, the projections from the Congressional Budget Office show that the program can pay all scheduled benefits through the year 2035 with no changes whatsoever. Even after that date it would be able to pay close to 80 percent of scheduled benefits for the rest of the century, leaving future beneficiaries with benefits that considerably exceed those of current retirees.
The Post should have pointed out that what Graham asserted was nonsense, since many readers may not have recognized this fact. Actually, this astounding gaffe should have been the focus of the piece, since Graham is often treated by the media as an expert on the budget. It is probably worth noting that Graham typically presents views on the budget that are similar to the Post’s editors.
The Post neglected to point out that Senator Lindsey Graham, a Republican often cited on budget issues, is apparently badly confused about the basics of the budget. A Post piece quoted Graham as saying:
“This offer doesn’t remotely deal with entitlement reform in a way to save Medicare, Medicaid and Social Security from imminent bankruptcy.”
This statement is absurd on its face. Medicaid is paid out of general revenue, it makes no more sense to say that Medicaid faces bankruptcy than to say that the Commerce Department faces bankruptcy. While the same is true of Medicare Part B and Part D, the Hospital Insurance portion of the program (Part A) is funded by a trust fund with a designated revenue source that is first projected to face a shortfall in 2024. If the projections prove correct, at that point it would lack sufficient revenue to pay full benefits.
While this would be a problem, it is worth noting that, contrary to the criticisms made by Graham in the piece, President Obama’s reforms have extended the projected solvency of the program from 2016 to 2024. They have also eliminated more than two-thirds of the projected 75-year shortfall.
In the case of Social Security, the projections from the Congressional Budget Office show that the program can pay all scheduled benefits through the year 2035 with no changes whatsoever. Even after that date it would be able to pay close to 80 percent of scheduled benefits for the rest of the century, leaving future beneficiaries with benefits that considerably exceed those of current retirees.
The Post should have pointed out that what Graham asserted was nonsense, since many readers may not have recognized this fact. Actually, this astounding gaffe should have been the focus of the piece, since Graham is often treated by the media as an expert on the budget. It is probably worth noting that Graham typically presents views on the budget that are similar to the Post’s editors.
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The Washington Post told readers:
“both sides agree that as a principle, keeping tax rates low while eliminating deductions is better than increasing tax rates.”
While this is true as a general principle, the preference for lower rates is considerably more complex than the statement implies. In almost any scenario of trading off lower rates for fewer deductions, the very wealthy end up ahead. Not everyone views this as desirable.
Also, the limiting of deductions is likely to pose problems for higher tax states, which could effectively count on the federal government to provide somewhat of a subsidy by lessening the impact of state and local taxes on high income taxpayers. In addition, one of the largest deductions is for charitable contributions. There is not agreement that limiting this deduction would be an appropriate trade off for lower tax rates.
The Washington Post told readers:
“both sides agree that as a principle, keeping tax rates low while eliminating deductions is better than increasing tax rates.”
While this is true as a general principle, the preference for lower rates is considerably more complex than the statement implies. In almost any scenario of trading off lower rates for fewer deductions, the very wealthy end up ahead. Not everyone views this as desirable.
Also, the limiting of deductions is likely to pose problems for higher tax states, which could effectively count on the federal government to provide somewhat of a subsidy by lessening the impact of state and local taxes on high income taxpayers. In addition, one of the largest deductions is for charitable contributions. There is not agreement that limiting this deduction would be an appropriate trade off for lower tax rates.
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That is the implication of his column decrying the falling birthrate in the United States and other wealthy countries . Douthat seems to believe that we face some terrible fate if the population of the United States stagnates or even declines.
People who follow the news probably would see things differently. Given the urgent need to reduce greenhouse gas emissions to slow global warming, the prospect of a smaller population should be seen as a huge bonanza. The story is quite simple, if we have 20 percent fewer people, we should expect our emissions of greenhouse gases to be roughly 20 percent less. Since the U.S. ranks near the top in terms of emissions per person, slower U.S. population growth is especially important to the world.
While some have made a big deal out of the projected decline in the ratio of workers to retiree, those familair with arithmetic know that the impact of even low rates of productivity growth swamps the impact of a lower ratio of workers to retirees.
Source: Author’s calculations.
It is unfortunate if financial insecurity discourages people who want children from having them, but from the standpoint of economy and the country, a smaller population should be seen as good news.
That is the implication of his column decrying the falling birthrate in the United States and other wealthy countries . Douthat seems to believe that we face some terrible fate if the population of the United States stagnates or even declines.
People who follow the news probably would see things differently. Given the urgent need to reduce greenhouse gas emissions to slow global warming, the prospect of a smaller population should be seen as a huge bonanza. The story is quite simple, if we have 20 percent fewer people, we should expect our emissions of greenhouse gases to be roughly 20 percent less. Since the U.S. ranks near the top in terms of emissions per person, slower U.S. population growth is especially important to the world.
While some have made a big deal out of the projected decline in the ratio of workers to retiree, those familair with arithmetic know that the impact of even low rates of productivity growth swamps the impact of a lower ratio of workers to retirees.
Source: Author’s calculations.
It is unfortunate if financial insecurity discourages people who want children from having them, but from the standpoint of economy and the country, a smaller population should be seen as good news.
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For some reason media fact checkers get especially irate by political figures when they make the entirely true claim that Social Security does not contribute to the budget deficit (e.g. here and here). The Post’s Glenn Kessler gives a comparatively thoughtful comment in his Post column, but still comes down on the side of the adds to the deficit folks. The bottom line for Kessler is that Social Security is using interest on the government bonds it holds to pay for benefits.
This is true, but lots of people use interest on government bonds to pay for things. For example, if Peter Peterson used $5 million in interest on government bonds he held to finance the start up of his Campaign to Fix the Debt would it be accurate to say that he had contributed to the deficit? I suspect that most of the facto checkers would say that it is not.
Under the law, the trust fund is supposed to be treated as a bondholder like any other bondholder. This meant, for example, that the $2.7 trillion in debt held by the Social Security trust fund was included as part of the debt covered by the ceiling when the deadlock over its increase brought the country to the brink of default in the summer of 2011.
If we view the bonds held by the trust fund as they are defined in law, then it makes no more sense to say that spending the interest or principal from these bonds contributes to the deficit than the spending of interest or principal by any other bondholder. Since this money is already owed by the government to the trust fund, spending from the trust fund simply changes the identity of the owner of the debt, just as if Peterson were to sell his bonds to someone else. People may not like the law governing the trust funds, but that does not make someone wrong for talking about Social Security and its trust fund as they are defined under the law.
There is another point that deserves attention in Kessler’s piece. At one point he praises Senator Dick Durbin (the perp whose comment provided the basis for the piece) for having:
“acknowledged that Social Security’s long-term financing is an important issue that cannot be deferred.”
This implies that it is necessary to deal with Social Security’s financing now. That claim is clearly false. If we waited a decade before taking any action, the projections from the Social Security trustees indicate that the program could be kept fully solvent through the rest of the century by phasing in tax increases and benefit cuts comparable to those put in place by the Greenspan commission in 1983. While many people may want the country to deal with Social Security’s long-term financing problems now, there certainly is no reason that the issue cannot be deferred.
And there are good arguments as to why deferring major decisions might be desirable. For example, thanks to the efforts of the Peterson types and the overall poor state of media reporting on the issue, polls consistently show that the vast majority of young people believe that they will not see their Social Security checks when they retire. This is a completely false belief according to all current projections, howver it is likely to color their attitudes towards changes in the program. It would be desirable to have any major reworking of the program carried through in an environment in which the public was better informed about the true state of the program’s finances.
Another important fact arguing for delay is that the Social Security trustees project that real wages will grow by more than 20 percent over the next decade. This contrasts to three decades in which most workers have seen almost no wage growth. If the trustees projections prove accurate then the public might be much more inclined to tax away some of their future wage growth to support higher benefits than would be the case at present.
Whether or not one agrees with these reasons for delaying action on the program, it is simply wrong to assert that action cannot be deferred. This is simply a judgement that it is better to not defer action, not a statement of fact.
For some reason media fact checkers get especially irate by political figures when they make the entirely true claim that Social Security does not contribute to the budget deficit (e.g. here and here). The Post’s Glenn Kessler gives a comparatively thoughtful comment in his Post column, but still comes down on the side of the adds to the deficit folks. The bottom line for Kessler is that Social Security is using interest on the government bonds it holds to pay for benefits.
This is true, but lots of people use interest on government bonds to pay for things. For example, if Peter Peterson used $5 million in interest on government bonds he held to finance the start up of his Campaign to Fix the Debt would it be accurate to say that he had contributed to the deficit? I suspect that most of the facto checkers would say that it is not.
Under the law, the trust fund is supposed to be treated as a bondholder like any other bondholder. This meant, for example, that the $2.7 trillion in debt held by the Social Security trust fund was included as part of the debt covered by the ceiling when the deadlock over its increase brought the country to the brink of default in the summer of 2011.
If we view the bonds held by the trust fund as they are defined in law, then it makes no more sense to say that spending the interest or principal from these bonds contributes to the deficit than the spending of interest or principal by any other bondholder. Since this money is already owed by the government to the trust fund, spending from the trust fund simply changes the identity of the owner of the debt, just as if Peterson were to sell his bonds to someone else. People may not like the law governing the trust funds, but that does not make someone wrong for talking about Social Security and its trust fund as they are defined under the law.
There is another point that deserves attention in Kessler’s piece. At one point he praises Senator Dick Durbin (the perp whose comment provided the basis for the piece) for having:
“acknowledged that Social Security’s long-term financing is an important issue that cannot be deferred.”
This implies that it is necessary to deal with Social Security’s financing now. That claim is clearly false. If we waited a decade before taking any action, the projections from the Social Security trustees indicate that the program could be kept fully solvent through the rest of the century by phasing in tax increases and benefit cuts comparable to those put in place by the Greenspan commission in 1983. While many people may want the country to deal with Social Security’s long-term financing problems now, there certainly is no reason that the issue cannot be deferred.
And there are good arguments as to why deferring major decisions might be desirable. For example, thanks to the efforts of the Peterson types and the overall poor state of media reporting on the issue, polls consistently show that the vast majority of young people believe that they will not see their Social Security checks when they retire. This is a completely false belief according to all current projections, howver it is likely to color their attitudes towards changes in the program. It would be desirable to have any major reworking of the program carried through in an environment in which the public was better informed about the true state of the program’s finances.
Another important fact arguing for delay is that the Social Security trustees project that real wages will grow by more than 20 percent over the next decade. This contrasts to three decades in which most workers have seen almost no wage growth. If the trustees projections prove accurate then the public might be much more inclined to tax away some of their future wage growth to support higher benefits than would be the case at present.
Whether or not one agrees with these reasons for delaying action on the program, it is simply wrong to assert that action cannot be deferred. This is simply a judgement that it is better to not defer action, not a statement of fact.
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A NYT editorial today argued that helping out underwater homeowners is essential to the recovery. This does not make any sense as can be seen with simple arithmetic.
There are roughly 11 million underwater homeowners. Suppose that eliminatiing all of their underwater debt caused them to increase spending by an average of $10,000 per family per year. This would be a very substantial increase in spending for a group that has a median income of close to $70,000. Depending on the whether we use the Core Logic estimate of underwater equity ($700 billion) or the Zillow estimate ($1.1 trillion), it would imply a wealth effect of between 10 and 15 cents on the dollar, which is roughly 2-3 times conventional estimates of the wealth effect.
Even in this case, the increase in spending would still come to just $110 billion a year. Assuming a multiplier on this spending of 1.5 that get us to $165 billion in additional output or a bit more than one-sixth of the gap between potential and actual GDP. That’s helpful, but far from getting us back to full employment. And given that the actual impact is more likely to be about half of this size, it’s pretty hard to come up with a story where underwater homeowners provide the key to recovery.
In fact, consumers are spending at an unusually high rate relative to their disposable income. It is just lower than during the consumption boom years at the peak of the housing bubble.
Source: Bureau of Economic Aanlysis.
There are still good reasons for helping underwater homeowners, as I’ve long argued. But this is not what is holding back the recovery.
A NYT editorial today argued that helping out underwater homeowners is essential to the recovery. This does not make any sense as can be seen with simple arithmetic.
There are roughly 11 million underwater homeowners. Suppose that eliminatiing all of their underwater debt caused them to increase spending by an average of $10,000 per family per year. This would be a very substantial increase in spending for a group that has a median income of close to $70,000. Depending on the whether we use the Core Logic estimate of underwater equity ($700 billion) or the Zillow estimate ($1.1 trillion), it would imply a wealth effect of between 10 and 15 cents on the dollar, which is roughly 2-3 times conventional estimates of the wealth effect.
Even in this case, the increase in spending would still come to just $110 billion a year. Assuming a multiplier on this spending of 1.5 that get us to $165 billion in additional output or a bit more than one-sixth of the gap between potential and actual GDP. That’s helpful, but far from getting us back to full employment. And given that the actual impact is more likely to be about half of this size, it’s pretty hard to come up with a story where underwater homeowners provide the key to recovery.
In fact, consumers are spending at an unusually high rate relative to their disposable income. It is just lower than during the consumption boom years at the peak of the housing bubble.
Source: Bureau of Economic Aanlysis.
There are still good reasons for helping underwater homeowners, as I’ve long argued. But this is not what is holding back the recovery.
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