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Posts Tagged ‘Paul Krugman’

Rejoice For The Stimulus Project Called Hurricane Sandy!

In Economy, Job Creation, Obama Administration on November 2, 2012 at 8:06 pm

Do you believe in stimulus programs?  Do you believe jobs are created by the government?  Are you Keynesian?  Are you voting for Barack Obama?

If so, rejoice!  Hurricane Sandy is a massive stimulus program.  Set aside the civilian deaths for a moment and focus on the government and private sector spending.

Think of Sandy as a $60 billion dollar injection of stimulus. [1]

In one watery swoop, Sally sept into millions of tight-fisted consumers’ wallets.  A frugal Congress can’t stop government spending via FEMA.  “Fannie Mae and Freddie Mac said they will offer help to borrowers whose homes were damaged or destroyed.” [1] 

Deductibles and out-of-pocket expenses to fix broken windows will rev up the metropolitan New York economy.  Think of all the drywall and generators sold by Home Depot.  Surely, pump makers like Britain’s Andrew Sykes Group are busy.  Ruined cars must be replaced, employing autoworkers in Japan and the USA. 

NYC looters [2] act as stimuli, forcing small businesses to restock.  Retailers who love a few dozen TVs and smartphones in a robbery have to replace their electronic inventory.   This creates jobs, doesn’t it?  Even if the products are made abroad, Americans are employed in the ports, on the railroads and at the trucking firms that bring in the replacement wide-screen plasmas.  The looters might even be 99%’s, taking from 1% retailers.

The rebuilding money comes from the federal government, consumers and insurance companies.  Isn’t it good to raid greedy insurance companies?

But does Mother Nature’s destruction of a 2011 Impala actually help us?  The 2012 Impala replacement comes from a combination of an insurance company’s settlement plus a consumer’s deductible.  Is that money free? 

The illustrious French economist Frederic Bastiat addressed the Lindsay Lohan-like thinking behind the above “Sandy stimulus” in his classic  “That Which Is Seen, and That Which Is Not Seen.” [3]   Bastiat looked at the example of the shopkeeper, whose window is broken by someone.  The Obama-Krugman view is that broken windows are very good.  The shopkeeper spends six francs to purchase a window; someone is paid to install it.  The window seller and the window installer receive those francs which they then spend elsewhere in the economy, say for beer and fishing rods, employing even more.  The broken window bonanza flows through the economy, creating what the Keynesians call a “multiplier effect”.  A single dollar spent fixing a window broken by a vandal might become $5 as it filters through the world economy.

The strange conclusion becomes that the economy really needs more broken windows.  Vandals are heroes.  Bastiat saw through that twisted logic, writing about the unseen effects, namely the things the shopkeeper would have spent the six francs on something else, which would have the same multiplicative effect on the economy.  The difference would be a net increase in the economy.  Instead of ending with a replacement window no different from the previous pane, at a cost of six francs, the shopkeeper would have bought something else.

As our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way, which this accident has prevented. [3]

Let us take a view of industry in general, as affected by this circumstance. The window being broken, the glazier’s trade is encouraged to the amount of six francs: this is that which is seen.

If the window had not been broken, the shoemaker’s trade (or some other) would have been encouraged to the amount of six francs: this is that which is not seen.

And if that which is not seen is taken into consideration, because it is a negative fact, as well as that which is seen, because it is a positive fact, it will be understood that neither industry in general, nor the sum total of national labor, is affected, whether windows are broken or not.

The Keynesian fallacy rests on an idea of huge amounts of savings, selfishly unspent, that could be employing someone.  In the USA of 2012, most everyone is leveraged.  The US government is $16 Trillion in debt, with no hope of repayment.  Consumers are struggling to make ends meet, many deep in debt.  Tens of millions of homeowners’ mortgages are as underwater as the Queens-Midtown Tunnel.  Insurance money is not free, it comes from somewhere.  Property insurers will liquidate their stock and bond holdings to pay Sandy claims, slicing money from the economic system.  They will replenish those reserves by reducing dividends, which takes money out of the economy, and by raising insurance premiums, which also grabs cash from the economy.

Sandy is not really a Stimulus project for the US economy.  It’s an economic calamity just as it’s a humanitarian crisis.

[1] http://business.time.com/2012/10/31/hurricane-sandy-estimated-to-cost-60-billion/

[2] http://news.yahoo.com/blogs/abc-blogs/looters-arrested-post-superstorm-spree-182401079–abc-news-savings-and-investment.html

[3] http://mises.org/daily/3804/The-Broken-Window

###

Jimmy Hoffa & Tea Party Zombies Game “Take Out” Civility

In Koch Industries, New York Times, Paul Krugman, Political Rhetoric on September 8, 2011 at 12:16 am

Screen shot of "Tea Party Zombies Must Die" game

Was it not just eight months ago, after Tuscon, people on the Left decried “eliminationist rhetoric” and the military technology common in many political campaigns?   

It was.   So where are those New York Times columnists today? 

There is a double standard in the silence from the Left about an online video game called “Tea Party Zombies Must Die”, featuring prominent Tea Party members such as Sarah Palin, Mike Huckabee, Newt Gingrich, Michele Bachmann and even the Koch Brothers.  The gamer is instructed to kill each Tea Party member with weapons like a gun or a crossbar.  [1] [2]  In January, Paul Krugman opined, “It’s true that the shooter in Arizona appears to have been mentally troubled. But that doesn’t mean that his act can or should be treated as an isolated event, having nothing to do with the national climate.” [3]

US Rep. Andre Carson (D-IN) said Tea Party Members of Congress want to see blacks lynched and “hanging on a tree”.  [4]  Let us refresh ourselves of the January words of Paul Krugman: “Where’s that toxic rhetoric coming from? Let’s not make a false pretense of balance: it’s coming, overwhelmingly, from the right. It’s hard to imagine a Democratic member of Congress urging constituents to be “armed and dangerous” without being ostracized” [3]  The Times’ Matt Bai wrote,  “the problem would seem to rest with the political leaders who pander to the margins of the margins, employing whatever words seem likely to win them contributions or TV time, with little regard for the consequences. ” [5]

I provided many other recent examples of uncivil Left-wing rhetoric in my recent post: https://econscius.wordpress.com/2011/08/03/giffords-the-era-of-civility-bidens-terrorists/.

President Obama just attended a Labor Day rally where James Hoffa, head of the Teamsters Union, said:

“We’ve got to keep an eye on the battle that we face — a war on workers. And you see it everywhere. It is the tea party.  And there’s only one way to beat and win that war — the one thing about working people is, we like a good fight.”

President Obama, this is your army, we are ready to march.  But everybody here’s got to vote. If we go back, and keep the eye on the prize, let’s take these son-of-a-bitches out.” [6] [7]

Much has been made about the historic Teamster-Mafia connection and the fact James Hoffa’s father was reportedly “taken out” by the Mob.  Whether “we like a good fight” and “let’s take these son-of-a-bitches out” is intended as speaking purely of elections or not, it is ironic this is akin to the sort of Republican militaristic rhetoric like “take back our country” or “targeted” races that left-wingers like Krugman used to say would cause political murder.  Yet, when a prominent Labor leader makes these sorts of statements, neither the President nor his Press Secretary will raise a word against the violent imagery.
 
Again, let us refer to Krugman in January: “So will the Arizona massacre make our discourse less toxic? It’s really up to G.O.P. leaders. Will they accept the reality of what’s happening to America, and take a stand against eliminationist rhetoric? Or will they try to dismiss the massacre as the mere act of a deranged individual, and go on as before?” [3]
 
I ask Mr. Krugman, will he stand up against “eliminationist rhetoric” when it comes from the Left? 
 
The silence is deafening. 

Do you disagree?  Feel free to post your comments below.

[1] http://www.cbsnews.com/8301-503544_162-20102619-503544.html

[2] http://www.nydailynews.com/news/politics/2011/09/07/2011-09-07_tea_party_zombies_must_die_video_game_gives_political_groups_enemies_a_virtual_b.html

[3] http://www.nytimes.com/2011/01/10/opinion/10krugman.html?_r=1&scp=2&sq=giffords%20shooting%20rhetoric&st=cse

[4] http://www.politico.com/news/stories/0811/62396.html 

[5] http://www.nytimes.com/2011/01/09/us/politics/09bai.html?scp=5&sq=giffords%20shooting%20rhetoric&st=cse

[6] http://www.politico.com/news/stories/0911/62795.html

[7] http://www.politico.com/news/stories/0911/62661.html#ixzz1XKWKVZxdl

[8] http://www.nytimes.com/2011/01/09/us/politics/09capital.html?scp=9&sq=giffords%20shooting%20rhetoric&st=cse p

Picture of Jimmy and James Hoffa from Wikipedia Commons.

Stellar Texas Job Growth in Above Average Wage Cities

In Job Creation, Oil, Texas on September 3, 2011 at 1:53 am
 

Texas Major MSA Population Growth (Outer Ring) & Job Growth (Inner Ring)

The graph above shows how the Dallas, Houston, San Antonio and Austin metropolitan areas account for the vast majority of Texas population growth and job growth in the past decade.  The entire rest of the state is in the olive shading.  This fact exposes a common and untrue claim about Texas job growth, namely that is is adding a lot of jobs but they are low wage.  Dallas, Houston and Austin all have wage levels that are above both the Texas and US averages.

Average Wages and wage growth 2001-10 are shown in the chart below.  Texas is a little behind the US average but actually made up a little of the gap.  We see the aforementioned average 2010 wages in three of the four big metro areas are above both Texas and US averages.  As we just saw above, the bulk of Texas job creation, 509,560 of 860,740 total new jobs, took place in just those three cities.  San Antonio is not far behind ($39,410 average) and with its low cost of living and absence of state income tax; San Antonio accounted for another 130,940 of the 860,740 total.

US & Texas Average Wages in 2001 plus Wage Growth to 2010

 
How does Texas job growth compare to US job growth?  The next chart shows us how impressive the 860,740 jobs created in Texas was.  The United States total was a loss of <883,250>.  When we remove Texas from the USA total (for statistical purposes, not political secession!), we see the non-Texas US total was really a loss of <1.7> million jobs.  The chart below also shows how geographically diverse the Texas job growth was; all four of the large metropolitan areas as well as the fifth largest city, El Paso and the border cities of Laredo and Brownsville-Harlingen far outpaced overall US job growth.
 
This dispersion of job growth is also found in other, smaller Texas MSAs, too:
 

McAllen-Mission 32%
Victoria 32%
Killeen-Temple 24%
Bryan-College Station 21%
Abilene 15%
Corpus Christi 12%
Waco 5%
Beaumont-Port Arthur 2%
Sherman-Denison -3%
   
Chart by Author  
Source: BLS OES, MSA data 2001 vs. 2010  
 

A criticism of Texas job growth made by Paul Krugman is that Texas is a “still energy-heavy economy”. [2]   Oil and gas are actually a small percentage of Texas jobs, however.  “Mining, which encompasses oil and gas, employs only 2.1 percent of the Texas population – a surprising statistic for those unfamiliar with Texas economics.” [3]  It is true some support jobs, for example teachers and restaurant workers, are indirectly employed by supporting the 2.1% directly involved in mining, but Mr. Krugman overstates the case.  It is also true Texas is not the only state with mineral wealth.  Some states with oil such as California and New York have been less diligent about developing their resources than states like Texas, Louisiana, North Dakota and Pennsylvania have.   This impacts jobs. 

The dispersion of job growth also proves false the claims Texas job growth is all energy.  Houston, Beaumont and Corpus Christi are along the oil intensive Gulf Coast but are not exclusively energy, anyway (e.g. SYSCO Foodservice, headquartered in Houston).  Dallas, Austin and San Antonio have more varied, non-energy economies.  Dallas, the largest metro in Texas, is a major white-collar corporate center.  Austin, home of Dell Computer and many chip companies, is a major technology and Venture Capital hub.   The Rio Valley cities are agricultural centers with strong Mexican border trade.  San Antonio is “Military City USA” with low paid soldiers as well as many white-collar back office functions, logistics, tourism and skilled manufacturing (e.g. new Toyota and Caterpillar plants).

Dallas, Austin and San Antonio certainly help account for the fact education, healthcare and professional and business services, account for 26 percent of all jobs in Texas. [3]  Dallas Federal Reserve Bank CEO Richard Fisher pointed out, “Non-agricultural employment growth in Texas has compounded at an annual rate of 1.95 percent over 21 ½ years; that of California at 0.57 percent and New York at 0.19 percent.” Mr. Fisher noted in the period of June 2009-2011, Texas had accounted for 49.9% of net new jobs created in the United States. [3] 

So where are the low wage Texas jobs some pundits keep talking about?  They are not in the four big metropolitan areas, but instead are found in rural areas and smaller communities, many of which have been poor since before the US annexed Texas.  This is hardly unique, however, as there are poor rural areas and declining small cities in upstate New York, downstate Illinois, interior California, etc.  I am unaware of any state that has solved this disparity.  In fact, other high wage metro areas are not located far from much lower wage, economically depressed cities in their own states, e.g. San Francisco ($59,820 avg. wage) vs. Fresno ($41,100) and Merced ($39,080) or New York City ($55,080) vs. Buffalo ($42,010) and Binghamton ($41,260). 

I think another important point is how the direction of Texas wages is up and has, for decades, been slowly but surely closing in on national averages.  There is something disingenuous about comparing the higher average wage levels in declining northern small cities with traditionally poor, but upcoming Texas cities.  Rochester was the birthplace of Kodak.  Buffalo was a very prosperous port and manufacturing city.  Carrier invented air conditioning in Syracuse.  The somewhat higher residual wages in some of these Rust Belt cities do not go as far due to taxes and living costs and their long term unemployment and wage trends are typically not at all promising.  Would you rather build your future in Buffalo or San Antonio? 

Another factor in Texas wages is the unfortunate fact that racial minority groups are lower-income in America.  Whites are a minority in Texas.  I should emphasize I do not believe there are any innate differences, simply differences in culture, role models, difficulties with English as a second language, etc.  Metro San Antonio is majority Latino.  High wage metro Houston is 41% Latino.  It would appear the Texas economy is doing something right for many Hispanics in these cities.  Many of the below average wage areas in the Rio Valley are almost exclusively Latino, such as Hidalgo County, home of McAllen ($32,470 avg. wage), which is 91% Latino, and Webb County, home of Laredo ($33,580 avg. wage), which is 96% Latino.

In conclusion, the data shows Texas job growth far exceeded the nation in 2001-2010 and the Texas job growth was concentrated in metropolitan areas with above average wages.  This disproves the claims Texas is simply creating low wage jobs.  There are low wage jobs in Texas, many in South Texas agriculture have been there in more or less the same form for centuries, but it takes some clever mental jujitsu to look at the actual record of Texas and not see the huge growth in population and in jobs in above average wage cities. 

Texas Longhorn logo.svg

[1] Data sources: 2001 US and Texas employment data:

http://www.bls.gov/oes/2001/oes_00al.htm and http://www.bls.gov/oes/2001/oes_tx.htm#b00-0000; 2010 US and Texas employment data:  Texas $42,220, US average $44,410

http://www.bls.gov/oes/current/oes_tx.htm#00-0000 and http://www.bls.gov/oes/current/oes_nat.htm#00-0000

 2001 MSA employment data:

http://www.bls.gov/oes/2001/oes_0640.htm#otherlinks, 2010 MSA employment data: http://www.bls.gov/oes/current/oes_32900.htm#00-0000, 2000 & 2010 Census data by MSA: http://en.wikipedia.org/wiki/List_of_United_States_metropolitan_areas and State Census data: http://www.census.gov/popfinder/

[2] http://seattletimes.nwsource.com/html/opinion/2015919308_krugman16.html

[3] http://www.christianpost.com/news/dallas-fed-ceo-defends-texas-job-growth-warns-politicians-over-criticism-of-bernanke-54419/

Paul Krugman, Can You Spare the Chutzpah?

In American Recovery & Reinvestment Act (Stimulus), Federal Deficit, Government Spending, Obama Administration, Standard & Poor's USA Downgrade on August 8, 2011 at 9:42 pm

Paul Krugman today mocks Standard & Poor’s downgrade of the United States credit rating and accesses blame for the rating cut. [1]   Mr. Krugman says, “And please, let’s not have the usual declarations that both sides are at fault.  Our problems are almost entirely one-sided.” 

I held my breath a moment… wouldn’t this be the perfect place for Mr. Krugman to own up to his long advocacy of even larger deficit spending?  Alas, there’s no humility from Mr. Krugman, only chutzpah. [2]

Mr. Krugman predictably blames the “extremist right” and goes about making light of S&P.  Apparently it was the “extremist right” that demanded a trillion-dollar Stimulus program, Obama’s payroll tax cuts and the creation and continuous expansion of myriad other government spending programs the past 70 years?  Even the most cursory look at the history of the Public Debt shows neither party is blameless, but Mr. Krugman is too partisan.

Be that as it may, it is true S&P was too generous with ratings in the run-up to the financial crisis of 2008 and there is an argument S&P was late to drop the USA’s rating in 2011.  But Mr. Krugman shows chutzpah in making light of the rating drop to “AA-“.  I assume Mr. Krugman understands what rating systems are all about.  The top rating of “AAA” is intended for only the most pristine credits.  “AA+” is a good rating, just not as good as “AAA”.  The USA would have to drop another nine notches to “BB+” to be in speculative (so-called “junk”) territory.  The ratings scale works down to “C” and “D” (default).   Any honest person will admit the financial position of the United States has weakened and the country is not as creditworthy as it once was.  An “AA+” credit is still expected to repay the debt but is a bit riskier than an “AAA” credit.

Mr. Krugman is intelligent but occasionally careless.  Consider his statement: “It’s true that we’re building up debt, on which we’ll eventually have to pay interest.”  Eventually?  While rates are low today, we are paying plenty of interest.   US government interest expense was $414 billion in Fiscal 2010. [3]  Then again, this is the same Paul Krugman who also writes of “a trillion here or a trillion there” like a trillion is inconsequential.  In the rarefied spending air of a massive deficit advocate like Mr. Krugman, perhaps $414 billion is hardly anything at all.  After all, it rounds down to $0 Trillion.

Mr. Krugman said the 2009 Stimulus program was too small and he actually criticized the Obama Administration for its supposedly punctilious policies.  In his own words:

“The good news is that the American Recovery and Reinvestment Act, a k a the Obama stimulus plan, is working just about the way textbook macroeconomics said it would …  The truth, which is that the stimulus was too little of a good thing.” [4]

“it was obvious from the beginning [Obama’s Stimulus] was too small.” [5]

“Those of us who say that the stimulus was too small are often accused of after-the-fact rationalization: you said this would work, but now that it hasn’t, you’re just saying it wasn’t big enough. The quick answer to that accusation is that people like me said that the stimulus was too small in advance” [6]

“myself included, actually argued that the plan was too small and too cautious …. for the inadequate size of the stimulus plan” [7]

“[the Obama Stimulus] wouldn’t have been enough to fill the looming hole in the U.S. economy” [8]

Mr. Krugman got less deficit “Stimulus” spending than he had demanded, meaning he favored even greater debts than we actually have now.  But he has the chutzpah to ignore his own culpability and instead blames the messenger (S&P) and then blames the downgrade on, of all people, the Tea Party Republicans!  This is the same Tea Party caucus who has held partial power in the US House for a mere seven months and actually advocates cutting the deficit more than either Democrats or traditional Republicans.  Such chutzpah, Mr. Krugman!

 

[1] http://www.nytimes.com/2011/08/08/opinion/credibility-chutzpah-and-debt.html?_r=2&src=me&ref=general

[2] For the benefit of those not familiar with chutzpah: “Chutzpah (pronounced /ˈhʊtspə/) is the quality of audacity, for good or for bad, but it is generally used negatively. The word derives from the Hebrew word ḥuṣpâ (חֻצְפָּה), meaning “insolence”, “audacity”, and “impertinence” http://en.wikipedia.org/wiki/Chutzpah

[3] http://treasurydirect.gov/govt/reports/ir/ir_expense.htm

[4] http://www.nytimes.com/2009/11/02/opinion/02krugman.html

[5] http://blogs.abcnews.com/george/2010/09/krugman-spend-more-tax-less-almost.html

[6]  http://krugman.blogs.nytimes.com/2010/07/28/how-did-we-know-the-stimulus-was-too-small/

[7] http://www.nytimes.com/2009/03/09/opinion/09krugman.html

[8]  http://www.nytimes.com/2009/02/09/opinion/09krugman.html?ref=paulkrugman

Pictures from wikipedia commons.

Giffords, The Era of Civility & Biden’s “Terrorists”

In First Amendment, Gabrielle Giffords, Joe Biden, Political Rhetoric, Secret Service on August 3, 2011 at 8:57 am

US Representative Gabrielle Giffords returned to the US House Monday night to cast her vote for the Debt Ceiling deal.  Cheers to Representative Giffords for her impressive recovery and my sincerest hope it continues. 

What is ironic about this, though, is even as Ms. Giffords made this public step we are all rooting for, the controversy over the same Debt Ceiling bill marked the absolute end of the “era of civility.”   The new “civility” was supposed to be the one positive thing that came out of the Arizona tragedy that killed six and nearly claimed Rep. Giffords’ life. 

The Giffords shooting was instantly chalked up by folks like Paul Krugman to supposedly strong political rhetoric [1], talk radio and ‘gun-sights’ imagery. [2]   In the event, we now know the shooter was mentally deranged and apolitical. [3] [4] [5]   Nevertheless, many left-leaning and mainstream media commentators decided that even if the mentally ill shooter was not motivated by talk radio or Sarah Palin’s website, surely it was a “teachable moment”.  Someone else might someday be inflamed to murder by heated rhetoric; to be safe, we should usher in an era of civility when people talk nicer about their political enemies and give up military and gun metaphors. 

I am all for treating everyone – including one’s political opponents – with respect and aim to do so here.  That said, evidence that American political rhetoric causes political murder is scanty.  Freedom of speech is precious and the First Amendment was established specifically for difficult speech rather than middle of the road talk that offends none.  I wondered if those who demanded a new “civility” from the Right were serious or simply trying to score cheap political points.

Not many months later, speaking of the new era of civility is like speaking of the Paleozoic era – it is ancient history.

In recent days, the Debt Ceiling controversy has had leading columnists like Paul Krugman using the very same types of militaristic rhetoric they initially claimed caused the Arizona shooting.  Krugman called Republicans “hostage takers” and others called Republicans “terrorists” [6] [7].  Republicans were said to “hijack” the country, were “holding a gun to our heads” [10], want the country to fail, etc.   There was a racial tinge to Andrew Sullivan’s Debt Ceiling commentary calling the GOP the “party of the Confederacy.” [11]

No less a personage than Rep. Debbie Wasserman Schultz (D-FL), chair of the Democratic National Committee, “said Wednesday that House Republicans are trying to impose “dictatorship” through their tactics in the debt-ceiling negotiations” [8]  What happened to the new civility?  Might someone take all this talk of hostages, guns, terrorists, hijacking, hating America and dictators and do something rash?  Wasn’t that supposed to be the lesson of January’s tragedy in Arizona?

Vice President Joe Biden reportedly agreed with US Rep. Doyle (D-PA) when Doyle said, “ We have negotiated with terrorists,” according to sources in the room. “This small group of terrorists have made it impossible to spend any money.”  [9]   

Interestingly, at least one arm of the government is not finding it “impossible to spend” freely.  The Secret Service is paying Joe Biden rent for the privilege of using his guest cottage.  And what is the Secret Service using the Biden guest house for?  To guard Joe Biden.  “Records show Mr Biden has collected more than $13,000 since April on the cottage in Greenville, a wealthy Wilmington suburb, and is eligible for up to $66,000 before the contract expires in 2013.” [12] [13]

Some might suggest it is unseemly, in an era of trillion-dollar deficits, for the Vice President to collect $2,200 a month in rent from the Secret Service for guarding him… but would it be uncivil to say so?
 

 

[1] http://krugman.blogs.nytimes.com/2011/01/08/assassination-attempt-in-arizona/

[2] An example of left-wing blog blaming conservative ‘violent imagery’ : http://www.alternet.org/news/149488/yes,_jared_loughner’s_act_was_political/

[3] http://www.csmonitor.com/USA/Politics/2011/0112/As-portrait-of-Jared-Loughner-sharpens-vitriol-blame-fades

[4] http://wwwhttp://www.tnr.com/article/politics/81485/how-the-media-botched-the-arizona-shooting.nytimes.com/2011/01/12/us/12loughner.html?pagewanted=2&_r=2&hp

[5] http://www.azcentral.com/news/articles/2011/01/12/20110112gabrielle-giffords-jared-loughner-warning-signs.html

[6] http://www.nydailynews.com/opinions/2011/07/29/2011-07-29_republicans_holding_our_countrys_economy_hostage_during_debt_standoff.html

[7] http://www.businessinsider.com/republicans-are-economic-terrorists-2011-7

[8] http://www.politico.com/news/stories/0711/60080

[9] http://www.politico.com/news/stories/0811/60421.html#ixzz1Tsd0mw17 

[10] “Now they’re holding a gun to our heads to pay it down?” http://www.guardian.co.uk/commentisfree/cifamerica/2011/jul/28/debt-ceiling-republicans

[11] http://andrewsullivan.thedailybeast.com/2011/07/americas-cold-civil-war.html

[13] http://www.washingtontimes.com/news/2011/jul/31/biden-charging-secret-service-cottage-rental/

No Check For Grandma? Where’s the Social Security Trust Fund?

In Economy, Obama Administration, Social Security on July 18, 2011 at 3:39 am

President Obama is threatening Social Security checks may not go out in August because of his dispute with Congress over raising the Debt Ceiling. 

As pointed out in yesterday’s Wall Street Journal editorial page, how can this be possible when Social Security has a Trust Fund? [1] The Social Security Administration (“SSA”) website reports an impressive Trust Fund balance of $2,669,215,081 as of June 30, 2011 [2].   What happened to your money?

Haven’t we been told by the editors of the New York Times, Paul Krugman and others that the Trust Fund is solid as a rock and people are “peddling nonsense” to imply otherwise? 

Back in 2005, the New York Times said:

“At a recent press conference, Mr. Bush exaggerated the timing of the system’s shortfall by saying that Social Security would cross the “line into red” in 2018…. If you had a trust fund to pay your bills when your income fell short, would you consider yourself insolvent?”

“In suggesting that 2018 is doomsyear, [Bush] is reinforcing a false impression that the trust fund is a worthless pile of I.O.U.’s – as detractors of Social Security so often claim.” [3]

Just last year, the Times’ strongly opinionated columnist Paul Krugman opined:

“So where do claims of crisis come from? To a large extent they rely on bad-faith accounting. In particular, they rely on an exercise in three-card monte in which the surpluses Social Security has been running for a quarter-century don’t count — because hey, the program doesn’t have any independent existence; it’s just part of the general federal budget — while future Social Security deficits are unacceptable — because hey, the program has to stand on its own.”

“It would be easy to dismiss this bait-and-switch as obvious nonsense, except for one thing: many influential people — including Alan Simpson, co-chairman of the president’s deficit commission — are peddling this nonsense.” [4]

How can Mr. Krugman and the New York Times editors square their confidence in the strength of the SSA Trust Fund against President Obama’s “I cannot guarantee that those checks go out on August 3”?   Is the President just playing a game or is the Trust Fund really empty?

The possible absence of Social Security checks results from an unusual structure.  If you have a private sector pension or 401(k), your retirement funds are set aside in a segregated account and the funds are invested in stocks and bonds. 

The Federal Government receives payroll and regular taxes every day and makes accounting entries for Social Security receipts vs. Social Security payouts.  SSA built up an excess of payroll tax receipts over payouts as working Baby Boomers paid in for decades.  This accounting entry comprises the Trust Funds. [5]

The issue with August’s Social Security checks is the Trust Fund is not invested like a normal pension.  Every dollar of Trust Fund surplus is invested in US Treasury obligations, meaning the Trust Fund was already spent for the general use of the Federal Government. [6]  Despite New York Times claims to the contrary, the SSA Trust Fund holds $2.7 Trillion in IOUs.

US government debt has traditionally been such a safe IOU it was called the “risk-free asset” back when I took Finance classes.   Still, even before the current Debt Ceiling controversy, trillion Dollar annual deficits led ratings agencies like Standard & Poor’s in May 2009 to issue warnings about a possible downgrade of US debt. [7]  

Grandma’s Social Security check could be held up not only in August but again in the future after the current Debt Ceiling crisis is settled.  The SSA Trust Fund is simply a very large claimant on future tax receipts of the US Treasury.  The New York Times misunderstood how safe the Trust Fund supposedly is as we now have the spectacle of an American President threatening Social Security payments may not be made on account of the supposedly separate matter of the federal budget deficit.  There is no lockbox; there is no firewall between Social Security and the overall budget.  SSA is not quite “separate”; it is linked to the overall fiscal health of the US government.

Ida May Fuller with the first Social Security check. Source: Wikipedia Commons.

[1] pg. A12, 7/16/11 print edition or http://online.wsj.com/article/SB10001424052702304521304576446250270069780.html?KEYWORDS=trust+fund

[2] http://www.ssa.gov/cgi-bin/investheld.cgi

[3] http://www.nytimes.com/2005/01/10/opinion/10mon1.html?ex=1263099600&en=24a380642da9ba1b&ei=5090&partner=rssuserland

[4] http://www.nytimes.com/2010/08/16/opinion/16krugman.html?adxnnl=1&adxnnlx=1310953732-DNwzINppkFOQn5GdGjvUXQ

[5] Technically there are two Trust Funds: Old Age Survivor (retirement) and Disability.

[6]  http://www.ssa.gov/oact/progdata/fundFAQ.html#n1

[7] http://www.huffingtonpost.com/2009/05/27/moodys-us-governments-aaa_n_208298.html