Apparently they would be, if we listen to the people interviewed in an NYT piece about the impact of a surtax on incomes above $1 million proposed by President Obama. The NYT interviewed people who own small businesses that occasionally have earnings that would put them over this $1 million cutoff.
It would have been helpful if the article had reminded readers that the tax is a marginal tax so that if a business owner crosses the $1 million threshold they would only pay the tax on the income above the threshold. For businesses that just slip into this category, the additional tax burden would be trivial. It is implausible that it would have a noticeable effect on their business, even though business owners are not likely to be happy about paying the tax.
Apparently they would be, if we listen to the people interviewed in an NYT piece about the impact of a surtax on incomes above $1 million proposed by President Obama. The NYT interviewed people who own small businesses that occasionally have earnings that would put them over this $1 million cutoff.
It would have been helpful if the article had reminded readers that the tax is a marginal tax so that if a business owner crosses the $1 million threshold they would only pay the tax on the income above the threshold. For businesses that just slip into this category, the additional tax burden would be trivial. It is implausible that it would have a noticeable effect on their business, even though business owners are not likely to be happy about paying the tax.
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The basic economic facts of the last three decades are smashing down around us like a ton of bricks. The bulk of the gains from economic growth have gone to the richest 10 percent and especially the richest 1 percent. The bottom 90 percent of the population has seen little benefit from three decades in which output per worker hour nearly doubled.
So how does Bloomberg News deal with this situation? It warns us of “generational war.” It tells us that Social Security and Medicare benefits for seniors will be pitted against “investment in children, education, infrastructure and other programs.”
In this context it is important to remember that it is only possible to pit seniors against children if higher taxes on the wealthy or on Wall Street are ruled out of consideration, as Bloomberg News seems to have done. It is also necessary to rule out major cuts in the defense budget, which Bloomberg News also seems to have done. If military spending were lowered to its pre-September 11th share of GDP, we would save more than $2.5 trillion over the next decade.
To pit the young against the old it is also necessary to rule out large cuts in government payments to the pharmaceutical industry. The government is projected to spend close to $1.5 trillion on prescription drugs in the next decade that would sell for around $150 billion in a free market without government granted patent monopolies. It is also necessary to rule out freer trade in medical services that would allow people in the United States to take advantage of the more efficient health care systems elsewhere in the world. If we paid the same amount per person for our health care as did people in any other wealthy country we would be looking at huge budget surpluses in the long-term, not deficits.
It is also necessary to rule out stimulative measures, like a more expansionary Fed policy and a lower valued dollar that would make U.S. goods more competitive in the world economy. These measures would have the effect of increasing employment, improving income distribution, and also alleviating the budget deficit that the Bloomberg News folks and their selected sources are so worried about.
In other words, if Bloomberg News only allows people into the debate who exclude any other possible option to address the budget shortfall other than cutting programs for the elderly or cutting programs that benefit children (apart from a brief comment from Representative Jan Schakowsky, who suggested taxing the rich) then it is possible to make the current budget situation into a generational war. However, this is political engineering on the part of Bloomberg News, it does not reflect the reality of the situation. And it hides the most obvious conflict in the economy today, the policies that have promoted the massive upward redistribution of the last three decades.
The basic economic facts of the last three decades are smashing down around us like a ton of bricks. The bulk of the gains from economic growth have gone to the richest 10 percent and especially the richest 1 percent. The bottom 90 percent of the population has seen little benefit from three decades in which output per worker hour nearly doubled.
So how does Bloomberg News deal with this situation? It warns us of “generational war.” It tells us that Social Security and Medicare benefits for seniors will be pitted against “investment in children, education, infrastructure and other programs.”
In this context it is important to remember that it is only possible to pit seniors against children if higher taxes on the wealthy or on Wall Street are ruled out of consideration, as Bloomberg News seems to have done. It is also necessary to rule out major cuts in the defense budget, which Bloomberg News also seems to have done. If military spending were lowered to its pre-September 11th share of GDP, we would save more than $2.5 trillion over the next decade.
To pit the young against the old it is also necessary to rule out large cuts in government payments to the pharmaceutical industry. The government is projected to spend close to $1.5 trillion on prescription drugs in the next decade that would sell for around $150 billion in a free market without government granted patent monopolies. It is also necessary to rule out freer trade in medical services that would allow people in the United States to take advantage of the more efficient health care systems elsewhere in the world. If we paid the same amount per person for our health care as did people in any other wealthy country we would be looking at huge budget surpluses in the long-term, not deficits.
It is also necessary to rule out stimulative measures, like a more expansionary Fed policy and a lower valued dollar that would make U.S. goods more competitive in the world economy. These measures would have the effect of increasing employment, improving income distribution, and also alleviating the budget deficit that the Bloomberg News folks and their selected sources are so worried about.
In other words, if Bloomberg News only allows people into the debate who exclude any other possible option to address the budget shortfall other than cutting programs for the elderly or cutting programs that benefit children (apart from a brief comment from Representative Jan Schakowsky, who suggested taxing the rich) then it is possible to make the current budget situation into a generational war. However, this is political engineering on the part of Bloomberg News, it does not reflect the reality of the situation. And it hides the most obvious conflict in the economy today, the policies that have promoted the massive upward redistribution of the last three decades.
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News outlets generally like to claim a separation between their editorial pages and their news pages. The Washington Post has long ignored this distinction in pursuing its agenda for cutting Social Security; however it took a big step further in tearing down this barrier with a lead front page story that would have been excluded from most opinion pages because of all the inaccuracies it contained.
The basic premise of the story, as expressed in the headline (“the debt fallout: how Social Security went ‘cash negative’ earlier than expected”) and the first paragraph (“Last year, as a debate over the runaway national debt gathered steam in Washington, Social Security passed a treacherous milestone. It went ‘cash negative.'”) is that Social Security faces some sort of crisis because it is paying out more in benefits than it collects in taxes. [The “runaway national debt” is also a Washington Post invention. The deficits have soared in recent years because of the economic downturn following the collapse of the housing bubble. No responsible newspaper would discuss this as problem of the budget as opposed to a problem with a horribly underemployed economy.]
This “treacherous milestone” is entirely the Post’s invention, it has absolutely nothing to do with the law that governs Social Security benefit payments. Under the law, as long as there is money in the trust fund, then Social Security is able to pay full benefits. There is literally no other possible interpretation of the law.
As the article notes, the trust fund currently holds $2.6 trillion in government bonds, so it is nowhere close to being unable to pay benefits. The whole point of building up the trust fund was to help cover costs at a future date when taxes would not be sufficient to cover full benefits. Rather than posing any sort of crisis, this is exactly what had been planned when Congress last made major changes to the program in 1983 based on the recommendations of the Greenspan commission.
The article makes great efforts to confuse readers about the status of the trust fund. It tells readers:
“The $2.6 trillion Social Security trust fund will provide little relief. The government has borrowed every cent and now must raise taxes, cut spending or borrow more heavily from outside investors to keep benefit checks flowing.”
This is the same situation the government faces when Wall Street investment banker Peter Peterson or any other holder of government bonds decides to cash in their bonds when they become due. In such cases it “must raise taxes, cut spending or borrow more heavily from outside investors.” The Post’s reporters and editors should understand this fact.
The article then goes on to incorrectly accuse Senate Majority Leader Harry Reid of misrepresenting the finances of Social Security:
“In an MSNBC interview, he [Senator Reid] added: ‘Social Security does not add a single penny, not a dime, a nickel, a dollar to the budget problems we have. Never has and, for the next 30 years, it won’t do that.’
“It would have hit upper-income workers while raising benefits for the most needy, those with average lifetime earnings of less than $11,000 a year. ‘By making these relatively small changes, you make it solvent and you make it be there for people who depend on it,’” Bowles said. ‘I thought that’s what we as Democrats were supposed to be for.'”
Actually the plan put forward by Bowles and Simpson would have implied large cuts for most low-income workers who would not have met the work requirements needed for the higher benefit. The cut would have taken the form of a 0.3 percentage point reduction in the annual cost of living adjustment. This cut would be cumulative, after 15 years of retirement a beneficiary would be seeing a benefit that is roughly 4.5 percent lower as a result of the Bowles-Simpson plan. The plan also phased in an increase in the age for receiving full benefits to 69, which is also a benefit cut for lower income retirees.
For lower income retirees Social Security is the overwhelming majority of their income. This means that the benefit cut advocated by Bowles and Simpson would imply the loss of a much larger share of their income than the end of the Bush tax cuts would for the wealthy. However, the Post has never described the ending of these tax cuts as a “modest” or “small” tax increase.
It is also worth noting that “upper-income workers,” who would face benefit cuts under the Bowles-Simpson plan, are people with average earnings of more than $40,000 a year. This is not ordinarily viewed as the cutoff for upper income. In reference to the ending of the Bush tax cuts, the Post once ran a front page story questioning whether people earning $500,000 a year were wealthy. Clearly they apply a different standard to Social Security beneficiaries.
To push its line of fat and happy seniors the Post misrepresented research by Gene Steuerle on returns from Social Security taxes. At one point it told readers:
“That return is diminishing, in part because people today have paid more into the system than previous generations. But a two-earner, middle-income couple retiring this year can expect to get $913,000 in Social Security and Medicare benefits over their lifetimes, in return for $717,000 in payroll taxes.”
The trick in this picture is that the return refers to Social Security and Medicare, not just Social Security which is the topic of the article. The Steuerle paper actually has the Social Security returns shown separately in the exact same chart. Steuerle calculated that the two-earner couple referred to in the article would pay a bit less than $600,000 in taxes into the system and collect around $560,000 in benefits.
[This couple will get more back in Medicare benefits than they paid in taxes, but this is primarily because our health care costs twice as much per person as in any other wealthy country. This is a good argument for reforming the U.S. health care system but has nothing to do with the topic of the article.]
This article also repeatedly refers to the debate over cutting benefits as being an “ideological battle.” There is no evidence presented in this piece that there is any ideological issue at stake. On the one hand are hundreds of millions of workers who want to see the benefits that they paid for. On the other hand are many wealthy people, exemplified by people like Peter Peterson and Erskine Bowles, who would rather use Social Security money to keep their own taxes low or to serve other purposes.
This is a battle over who gets the money. The references to ideology just confuse the situation.
[Addendum: In a comment below, Art Dover calls my attention to another inaccuracy in the article. It asserts: “The payroll tax holiday is depriving the system of revenue.” This is not true. Under the law, Social Security is 100 percent reimbursed from general revenue for the taxes that were lost as a result of the payroll tax holiday. This is yet another fabrication by the Post in its crusade to cut Social Security.]
News outlets generally like to claim a separation between their editorial pages and their news pages. The Washington Post has long ignored this distinction in pursuing its agenda for cutting Social Security; however it took a big step further in tearing down this barrier with a lead front page story that would have been excluded from most opinion pages because of all the inaccuracies it contained.
The basic premise of the story, as expressed in the headline (“the debt fallout: how Social Security went ‘cash negative’ earlier than expected”) and the first paragraph (“Last year, as a debate over the runaway national debt gathered steam in Washington, Social Security passed a treacherous milestone. It went ‘cash negative.'”) is that Social Security faces some sort of crisis because it is paying out more in benefits than it collects in taxes. [The “runaway national debt” is also a Washington Post invention. The deficits have soared in recent years because of the economic downturn following the collapse of the housing bubble. No responsible newspaper would discuss this as problem of the budget as opposed to a problem with a horribly underemployed economy.]
This “treacherous milestone” is entirely the Post’s invention, it has absolutely nothing to do with the law that governs Social Security benefit payments. Under the law, as long as there is money in the trust fund, then Social Security is able to pay full benefits. There is literally no other possible interpretation of the law.
As the article notes, the trust fund currently holds $2.6 trillion in government bonds, so it is nowhere close to being unable to pay benefits. The whole point of building up the trust fund was to help cover costs at a future date when taxes would not be sufficient to cover full benefits. Rather than posing any sort of crisis, this is exactly what had been planned when Congress last made major changes to the program in 1983 based on the recommendations of the Greenspan commission.
The article makes great efforts to confuse readers about the status of the trust fund. It tells readers:
“The $2.6 trillion Social Security trust fund will provide little relief. The government has borrowed every cent and now must raise taxes, cut spending or borrow more heavily from outside investors to keep benefit checks flowing.”
This is the same situation the government faces when Wall Street investment banker Peter Peterson or any other holder of government bonds decides to cash in their bonds when they become due. In such cases it “must raise taxes, cut spending or borrow more heavily from outside investors.” The Post’s reporters and editors should understand this fact.
The article then goes on to incorrectly accuse Senate Majority Leader Harry Reid of misrepresenting the finances of Social Security:
“In an MSNBC interview, he [Senator Reid] added: ‘Social Security does not add a single penny, not a dime, a nickel, a dollar to the budget problems we have. Never has and, for the next 30 years, it won’t do that.’
“It would have hit upper-income workers while raising benefits for the most needy, those with average lifetime earnings of less than $11,000 a year. ‘By making these relatively small changes, you make it solvent and you make it be there for people who depend on it,’” Bowles said. ‘I thought that’s what we as Democrats were supposed to be for.'”
Actually the plan put forward by Bowles and Simpson would have implied large cuts for most low-income workers who would not have met the work requirements needed for the higher benefit. The cut would have taken the form of a 0.3 percentage point reduction in the annual cost of living adjustment. This cut would be cumulative, after 15 years of retirement a beneficiary would be seeing a benefit that is roughly 4.5 percent lower as a result of the Bowles-Simpson plan. The plan also phased in an increase in the age for receiving full benefits to 69, which is also a benefit cut for lower income retirees.
For lower income retirees Social Security is the overwhelming majority of their income. This means that the benefit cut advocated by Bowles and Simpson would imply the loss of a much larger share of their income than the end of the Bush tax cuts would for the wealthy. However, the Post has never described the ending of these tax cuts as a “modest” or “small” tax increase.
It is also worth noting that “upper-income workers,” who would face benefit cuts under the Bowles-Simpson plan, are people with average earnings of more than $40,000 a year. This is not ordinarily viewed as the cutoff for upper income. In reference to the ending of the Bush tax cuts, the Post once ran a front page story questioning whether people earning $500,000 a year were wealthy. Clearly they apply a different standard to Social Security beneficiaries.
To push its line of fat and happy seniors the Post misrepresented research by Gene Steuerle on returns from Social Security taxes. At one point it told readers:
“That return is diminishing, in part because people today have paid more into the system than previous generations. But a two-earner, middle-income couple retiring this year can expect to get $913,000 in Social Security and Medicare benefits over their lifetimes, in return for $717,000 in payroll taxes.”
The trick in this picture is that the return refers to Social Security and Medicare, not just Social Security which is the topic of the article. The Steuerle paper actually has the Social Security returns shown separately in the exact same chart. Steuerle calculated that the two-earner couple referred to in the article would pay a bit less than $600,000 in taxes into the system and collect around $560,000 in benefits.
[This couple will get more back in Medicare benefits than they paid in taxes, but this is primarily because our health care costs twice as much per person as in any other wealthy country. This is a good argument for reforming the U.S. health care system but has nothing to do with the topic of the article.]
This article also repeatedly refers to the debate over cutting benefits as being an “ideological battle.” There is no evidence presented in this piece that there is any ideological issue at stake. On the one hand are hundreds of millions of workers who want to see the benefits that they paid for. On the other hand are many wealthy people, exemplified by people like Peter Peterson and Erskine Bowles, who would rather use Social Security money to keep their own taxes low or to serve other purposes.
This is a battle over who gets the money. The references to ideology just confuse the situation.
[Addendum: In a comment below, Art Dover calls my attention to another inaccuracy in the article. It asserts: “The payroll tax holiday is depriving the system of revenue.” This is not true. Under the law, Social Security is 100 percent reimbursed from general revenue for the taxes that were lost as a result of the payroll tax holiday. This is yet another fabrication by the Post in its crusade to cut Social Security.]
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NYT Public Editor Art Brisbane took up the issue of undisclosed potential conflicts of interest by the people who write for the NYT. It is a serious discussion. Presumably it means that the NYT should inform readers of things like the fact that former head of President Clinton’s Council Of Economic Advisers, Laura Tyson, is also a board member at Morgan Stanley. It would have to do the same when it runs a column by Erskine Bowles, the former co-chair of President Obama’s deficit commission.
NYT Public Editor Art Brisbane took up the issue of undisclosed potential conflicts of interest by the people who write for the NYT. It is a serious discussion. Presumably it means that the NYT should inform readers of things like the fact that former head of President Clinton’s Council Of Economic Advisers, Laura Tyson, is also a board member at Morgan Stanley. It would have to do the same when it runs a column by Erskine Bowles, the former co-chair of President Obama’s deficit commission.
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Okay, this is a bit indulgent, but Washington Post columnist Steve Pearlstein did a piece (unfortunately buried in the business section) on the 25th anniversary of the Economic Policy Institute. I and several other CEPRites are EPI alums. The piece is worth reading not just for its praises of EPI but for a bit of recent Washington policy wonk history.
Okay, this is a bit indulgent, but Washington Post columnist Steve Pearlstein did a piece (unfortunately buried in the business section) on the 25th anniversary of the Economic Policy Institute. I and several other CEPRites are EPI alums. The piece is worth reading not just for its praises of EPI but for a bit of recent Washington policy wonk history.
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The NYT had a discussion of the Mario Draghi and the situation he faces as he prepares to take over as head of the European Central Bank (ECB). The piece does not even mention the argument that the ECB is creating a downward spiral in euro zone economies by requiring deficit reductions, which have the effect of slowing growth, which thereby causes countries to miss deficit targets. It then demands more stringent cuts.
This is the logic that led to a second recession in the United States in 1937. If Draghi maintains the path pursued by his predecessor, then the euro zone economies face a real risk of a second recession and quite possibly the collapse of the euro. It is remarkable that this issue is not addressed in this piece.
The NYT had a discussion of the Mario Draghi and the situation he faces as he prepares to take over as head of the European Central Bank (ECB). The piece does not even mention the argument that the ECB is creating a downward spiral in euro zone economies by requiring deficit reductions, which have the effect of slowing growth, which thereby causes countries to miss deficit targets. It then demands more stringent cuts.
This is the logic that led to a second recession in the United States in 1937. If Draghi maintains the path pursued by his predecessor, then the euro zone economies face a real risk of a second recession and quite possibly the collapse of the euro. It is remarkable that this issue is not addressed in this piece.
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The NYT told readers that the saving rate has fallen sharply in recent months, registering just 3.6 percent in September, down from rates of more than 5.0 percent earlier in the year. (In the pre-bubble era, the saving rate averaged more than 8.0 percent.)
The main reason for this decline was likely erratic income data. There are often erratic movements in these numbers that cannot be explained by actual developments in the economy. In the four months from January to May, a period in which the GDP data show the economy was barely growing, wage earnings reportedly increased at a 3.9 percent annual rate. By contrast, in the four months from May to September the data show that wage earnings rose at just a 0.4 percent annual rate even though the economy grew at a 2.5 percent rate in the third quarter.
This sort of sharp slowdown in wage earnings is not plausible in an economy where growth was actually accelerating. It is more likely that wages were understated in September and indeed the whole third quarter, which means that income growth would be stronger and that the savings rate would be higher.
It is also worth noting that some of the story here reflects the timing of car purchases. Car sales were depressed in the second quarter because of shortages related to the earthquake/tsunami in Japan. The third quarter sales were strong as manufacturers had big sales incentives to make up for lost ground.
The NYT told readers that the saving rate has fallen sharply in recent months, registering just 3.6 percent in September, down from rates of more than 5.0 percent earlier in the year. (In the pre-bubble era, the saving rate averaged more than 8.0 percent.)
The main reason for this decline was likely erratic income data. There are often erratic movements in these numbers that cannot be explained by actual developments in the economy. In the four months from January to May, a period in which the GDP data show the economy was barely growing, wage earnings reportedly increased at a 3.9 percent annual rate. By contrast, in the four months from May to September the data show that wage earnings rose at just a 0.4 percent annual rate even though the economy grew at a 2.5 percent rate in the third quarter.
This sort of sharp slowdown in wage earnings is not plausible in an economy where growth was actually accelerating. It is more likely that wages were understated in September and indeed the whole third quarter, which means that income growth would be stronger and that the savings rate would be higher.
It is also worth noting that some of the story here reflects the timing of car purchases. Car sales were depressed in the second quarter because of shortages related to the earthquake/tsunami in Japan. The third quarter sales were strong as manufacturers had big sales incentives to make up for lost ground.
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The WSJ ran a piece about unions having increasing difficulty attracting young members. The article noted that in 1983, 39.6 percent of union members were between the ages of 16 and 34. This figure had fallen to just 24.6 percent in 2010, a drop of 15.0 percentage points. [I should point out that the source of these numbers is my colleague at CEPR, John Schmitt. I apologize for the CEPR promotion.]
This might seem to suggest an alarming failure for unions in their ability to craft a message that is relevant to young workers. However, if we look at one additional item we would note that this group of young workers comprised 48.1 percent of total employment in December of 1983. That had fallen to 34.3 percent for September of 2011, a drop of 13.8 percentage points. In other words, the decline in the proportion of young workers in unions reflects almost entirely a drop of the share of young workers in total employment. There has been little change in the relative ability of unions to attract younger and older workers.
The WSJ ran a piece about unions having increasing difficulty attracting young members. The article noted that in 1983, 39.6 percent of union members were between the ages of 16 and 34. This figure had fallen to just 24.6 percent in 2010, a drop of 15.0 percentage points. [I should point out that the source of these numbers is my colleague at CEPR, John Schmitt. I apologize for the CEPR promotion.]
This might seem to suggest an alarming failure for unions in their ability to craft a message that is relevant to young workers. However, if we look at one additional item we would note that this group of young workers comprised 48.1 percent of total employment in December of 1983. That had fallen to 34.3 percent for September of 2011, a drop of 13.8 percentage points. In other words, the decline in the proportion of young workers in unions reflects almost entirely a drop of the share of young workers in total employment. There has been little change in the relative ability of unions to attract younger and older workers.
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The Financial Times ran a piece on Italy’s debt crisis. At one point it told readers:
“With Italy needing to roll over nearly €300bn of its €1,900bn debt mountain next year, Mr Berlusconi is under intense pressure from the EU and ECB to push ahead quickly with measures to lift the stagnating economy.”
Actually, the opposite is true. The EU has been pushing Italy to take measures to reduce its deficit, like cutting spending and raising taxes. These measures will slow growth, not increase it.
The Financial Times ran a piece on Italy’s debt crisis. At one point it told readers:
“With Italy needing to roll over nearly €300bn of its €1,900bn debt mountain next year, Mr Berlusconi is under intense pressure from the EU and ECB to push ahead quickly with measures to lift the stagnating economy.”
Actually, the opposite is true. The EU has been pushing Italy to take measures to reduce its deficit, like cutting spending and raising taxes. These measures will slow growth, not increase it.
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There was no reason why people who know economics would have expected a double dip recession, absent a meltdown in the euro zone. Unfortunately, policy debate tends to be dominated by people who don’t fall into this category, hence the discussion of a double dip.
The unfortunate result of a debate dominated by ignorance is that a terrible 3rd quarter GDP growth number is touted as better than expected. As the NYT tells us in its headline:
“U.S. Economy Picks Up Pace, Averting a Stall.”
At the economy’s 3rd quarter growth rate it will take us an infinite number of years to get back to normal levels of unemployment. There was no reason to expect the economy to stall, just like there is no reason to expect heavily armed Martians to take over earth tomorrow. There is no reason that anyone should be happy about the 3rd quarter growth data, it is awful. The fact that some economic “experts” expected worse just speaks to the state of economics.
There was no reason why people who know economics would have expected a double dip recession, absent a meltdown in the euro zone. Unfortunately, policy debate tends to be dominated by people who don’t fall into this category, hence the discussion of a double dip.
The unfortunate result of a debate dominated by ignorance is that a terrible 3rd quarter GDP growth number is touted as better than expected. As the NYT tells us in its headline:
“U.S. Economy Picks Up Pace, Averting a Stall.”
At the economy’s 3rd quarter growth rate it will take us an infinite number of years to get back to normal levels of unemployment. There was no reason to expect the economy to stall, just like there is no reason to expect heavily armed Martians to take over earth tomorrow. There is no reason that anyone should be happy about the 3rd quarter growth data, it is awful. The fact that some economic “experts” expected worse just speaks to the state of economics.
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