The Called Ball Didn't Fall: Bush Tax Cuts an Objective Failure

Reality is an inconvenient thing sometimes. In the polarized atmosphere of today's politics, reality is often hard to come by. Everyone has their spin, their set of facts and warping of same. Because of this, no one trusts what the other side is saying, and perhaps rightly so. That's why I like to get back to basics and simply rely on hard primary data that no one can dispute or question. So when a friend in another forum claimed that the Bush administration's tax cuts actually worked to foster economic growth and raise tax receipts (as reported by USA Today), I thought it was time to look at the facts.

When playing pool, the way players prevent one another from benefiting from lucky shots is to require each player to call what shot he/she is trying to make. If it happens, then fine. If something else happens, like the wrong ball falling into the wrong pocket, it doesn't count. The President's budget message to Congress each January is the fiscal politics version of calling your shots, though the administration would like us to forget this.

Each year the President's budget message contains five year projections of where the administration thinks revenues, spending and deficits will be. These projections are based upon the enactment of whatever tax and spending plan the President proposes with the message. So if a President suggests a bold new tax cut for example, the predicted effects of that tax cut are built into the numbers. What that means is that revisiting those numbers afterwards tells us if the predictions actually happened the way they predicted.

These numbers distill all of the spin, all the arguments, loaded catchphrases and sales slogans down to mathematical objective reality. In this case the numbers are produced and are sourced from the administration itself in a audited and vetted procedure that no one of either party has questioned for decades. So no one on either side of the aisle should be able to quibble with them.

In January 2002, after 9/11 and President Bush's first round of tax cuts, the administration suggested the rest of their major tax cuts and predicted a swift economic rebound. 9/11 was blamed for the deterioration of Federal finances leading to a $106 billion deficit projected in 2002, the first since 1997. Enacting the Bush plan for 2002 would

"...boost 2002 GDP growth by 0.5 percent and lead to the creation of 300,000 more jobs. The Administration has built its economic forecasts around the assumption that an economic stimulus package will be enacted."

Those forecasts led to projects that by FY2004, economic growth would have been such to generate $2,175 billion in revenues. Offsetting that was $2,189 billion in spending, or a deficit of only $14 billion. Don't take my word for it. The Bush administration figures here are at the OMB's website in Excel, and Lotus 123.

Well 2004 has come and gone. The speeches are all done, the beans all counted. Here then is the REAL "No-Spin Zone". The final report on spending in 2004 comes to us in the President's budget message in January 2005. Bush reported that revenues came in at $1,880 billion, while spending was $2,292 billion.

Let's review. Actual revenues were $295 billion less than what the administration predicted would be the result of their economic growth and tax plan. They were off by almost 14%. They called their shot. The called ball didn't fall in the called pocket. Not even close. The period between prediction and outcome started AFTER 9/11 and ended BEFORE Katrina, so no excuses can be given for unforeseen events.

Now, Keynesian economics posits that raising deficit spending can sometimes jumpstart economic growth. Could any spending restraint by the administration have dampened growth during this time? Hardly. Bush administration projections called for them spending $2,189 billion a year by FY2004. Actual spending came in $103 billion MORE than what they had promised to do. No restraint there. The called ball didn't fall. Not even close.

So what of my friend who pointed to state government revenues as proof the tax cuts were working? Well, the Center for Budget and Policy Priorities looks at state government finances closer than any other public source I know. Their data suggests that this area is subject to immense political spin. Turns out State government finances are still in fiscal crisis, though deficits are beginning to shrink. In other words, the growth we are seeing now merely is catching up from the fall those revenues took in recent years. Further, many states are "decoupling" various tax deduction items found in Federal tax codes, a stealth tax increase raising state taxes without fanfare or much notice.

In other words, while state tax revenues might be rising, they signify nothing but an accidental ball falling into the pocket, uncalled by any player. It's just not relevant to answering the question of whether Bush's tax cuts are working. The called ball didn't fall. End of story.

Feds Were Not Always This Incompetent: The Response to Hurricane Marilyn

Will wonders never cease? A friend of mine pointed me to an article in the National Review criticizing the Bush Administration's response to Katrina. They were pretty enthusiastic. Unfortunately, they were blaming bureaucracy in general, as if the notion of a government agency included incompetence by definition, wrapping it up with: "Unfortunately, there is not much that can be done to make bureaucracy less bureaucratic."

You can excuse the NatReview for feeling this way. After all, conservatives spend all their time when they're out of power complaining how government doesn't work. Then when in power they spend all their time proving the point.

There is a way to make government work though. You have to want it to work. You have to give a damn about the mission you're about. Then, all things can be possible.

I was looking around to find out how well the Feds have responded to previous hurricanes and came across this excellent resource at the Quick Response Program and the Natural Hazards Center of the University of Colorado. That center reminded me of an excellent test case measuring the response of the Bush I and Clinton administrations to similar situations. In 1989
the Bush administration spearheaded relief efforts in the US Virgin Islands following Hurricane Hugo, while the Clinton administration relied on many of the same personnel and resources to respond to Hurricane Marilyn's USVI destruction six years later.

Quick Response Report #82 , written by Betty Hearn Morrow and A. Kathleen Ragsdale of the International Hurricane Center of Florida International University, reported on the response to Marilyn, with specific reference to comparing that response to Hugo. The Hugo response was very unsatisfactory:

"In the aftermath of Hurricane Hugo, many St. Croix residents had expressed anger that the first federal planes to finally arrive several days after the storm carried troops armed with guns, not food and water, in what many felt was an overreaction to earlier looting reports (Morrow, 1992). There was a strong racial tone to the perception of many that the U.S. troops had arrived to protect white tourists from black locals, not to provide disaster assistance to the U.S. citizens of St. Croix, most of whom were people of color."

The notion that a majority Black community had to wait several days for Federal relief efforts to arrive should have a familiar ring to it for anyone following the controversy of Federal response to Katrina in New Orleans. Even so, was that just a function of the remoteness of the Virgin Islands and the difficulty in mobilizing a large relief effort? Apparently not, as the Clinton administration's response to Marilyn was quite different:

"In anticipation of their need, a number of FEMA disaster specialists had been sent to St. Thomas before Hurricane Marilyn's landfall. By daybreak on September 16, relief supplies and personnel had already begun arriving (FEMA, 1995e). This was the first deployment of the new Federal Interagency/State Field Assessment Team designed to provide quick and technically accurate early damage assessments. According to their reports, St. Thomas received the heaviest impact - 80% of the homes were damaged, 40% were uninhabitable, and 20-30% of the businesses were destroyed (FEMA, 1995b, 1995c)...

"Within one week after the storm, FEMA had directed close to 60 strategic missions transporting more than 1,500 emergency personnel and 1.3 million tons of essential cargo, including food, water, and plastic sheeting for roofs (FEMA, 1995a). Federal Coordinating Officer Dennis Kwiatkowski was quoted as saying, "We are pulling out all the stops in getting supplies down here to make recovery happen" (FEMA, 1995e). Five distribution sites were being operated by the Virgin Islands Territorial Emergency Management Agency (VITEMA) on St. Thomas. More than 2,100 federal agency personnel had been deployed. Four contracts had been awarded for immediate housing repairs. Dive teams had begun assessing infrastructural damage to the area's harbors and Navy Seabees had begun structural repairs to public buildings. Military and security forces included about 500 Army, Air Force, and Navy personnel, 500 National Guardsmen, and 500 federal law enforcement personnel (FEMA, 1995d). All major roads had been cleared, the St. Thomas airport was open for visual flight operations using a mobile air traffic control tower, and the St. Thomas Hospital was operational using generators for power."

So all of this happened "within one week", meaning that much of the work was already done on the ground in the time that the Federal Katrina responders took to glom onto the fact that they needed to respond at all.

Was the vastly quicker response to Katrina due to a much more talented force on the ground? No, most of the people involved were also involved with Hugo's response and could compare the two:

"Indeed one veteran FEMA reservist made these unsolicited remarks: "One thing that is noteworthy for your study, is that we seem to have had more active Army with weapons at Hugo. Here we have an adequate supply of federal marshals and they're doing a good job, but they [the military] were much more noticeable at Hugo. He had been one of the first FEMA workers to be sent to St. Croix after Hugo, which he attributed to having a military background. Yet, he stated, "I never felt one iota threatened on St. Croix . . . Other than the tension involved with going through one of these things [a hurricane], I found the people very helpful and honest." He had driven his rental car all over the island and was often helped when he lost his way. There was a general feeling that the atmosphere was more relaxed on St. Thomas
and, yet, the recovery process was going a lot faster than it had six years earlier on St. Croix."

So the Bush I Administration waited several days before getting help to the victims of Hurricane Hugo. When help arrived the first response was to send in the army to stop looting.

The Clinton administration responded much quicker, with humanitarian disaster relief in position in real time, offering much faster response to a devastating situation in St. Thomas. Because help was already there, looting by desperate people never happened.

Fast forward to Bush II's administration, which reverted to Bush I's pathetic too late and a dollar short response to Hugo. Once again the main initial concern was sending in the troops to stop looting, instead of disaster relief efforts. Once again help comes days too late.

The difference in these situations is that the Clinton administration WANTED to use government to make a difference for people. It's part and parcel to the Democratic Party ideology. The Republicans on the other hand have since Reagan wanted to shrink government down to a size small enough so that he could "drown it in a bathtub", as Grover Norquist famously said.

In a recent blog post I opined that right wingers were not qualified to run government, because their incompetence sprang from the simple fact that they hate their jobs, preferring to drown their jobs in a bathtub rather than execute them to the best of their ability. That blog post went up months ago. Unfortunately, Katrina just added a deadly exclamation point to the argument.

Hurricane Katrina: When the Alarm Bells Ring, Bush Hits the Snooze Button

At first blush it seems unfair to lay the disaster of Hurricane Katrina on George Bush's doorstep. After all, who can stop hurricanes from going wherever they want to go? However, the Bush administration, and the longer term policies of those who support the Bush administration, have a lot to do with how bad the carnage and destruction really are.

Failed: Protecting New Orleans from Flooding
First off, those levees did not have to have been breached. The Army Corps of Engineers has been working on shoring them up for some time, but they've been hampered by budget cuts through the years. The Southern Louisiana Urban Flood Control Project was started in 1995 under the Clinton administration. Over the years about $500 million of an estimated needed $750 million was spent shoring up levees. Under Bush, the money to complete the project was diverted in 2003, by pressures resulting from the Iraq war and the need for tax cuts for the rich.

Again, from Editor and Publisher:

"On June 8, 2004, Walter Maestri, emergency management chief for Jefferson Parish, Louisiana; told the Times-Picayune: "It appears that the money has been moved in the president's budget to handle homeland security and the war in Iraq, and I suppose that's the price we pay. Nobody locally is happy that the levees can't be finished, and we are doing everything we can to make the case that this is a security issue for us."

Failed: Redirecting the National Guard Away from the Scene
Speaking of the war in Iraq, are you wondering why the government emergency response so far has been so tepid? While not denigrating the heroic efforts of those that ARE on the scene, I'm sure they would be a lot happier if so much of the Louisiana and Mississippi National Guard was there helping, instead of helplessly watching from Iraq.

Failed: Abandoning the Gulf Coast Poor
Lots of questions abound concerning why so many people didn't leave New Orleans beforehand. Well maybe that's because that the population of New Orleans is desperately poor and unable to hop into their handy Hummers or Esplanades to truck their way out to their summer homes. That might also explain the looting. When the infrastructure of civilization collapses all around you, you still have to eat, change the baby, take your medicine and survive.

New Orleans had a poverty rate in excess of 34% before the Bush administration came to town. Since then, the national poverty rate has climbed each and every year . Had there been a continuation of the Clinton administration's economic policies towards poverty, which reduced poverty by the largest degree in 30 years, it is likely that fewer people in New Orleans would have been in such vulnerable straits when Katrina hit. I tried to check New Orleans specific figures, but for some strange reason the New Orleans municipal web server isn't responding.

Failed: Where's the Proactive Government Response?
Speaking of all of that, there's a lot of talk about how ill-prepared the government response was, from the New York Times, "Waiting for a Leader" down to one citizen talking to the Chicago Sun Times comparing Fidel Castro's response to hurricane preparations versus the U.S. response.

"I detest Fidel Castro, but I will tell you this. When a hurricane is approaching Cuba, Castro has set up a system to bus everybody out of harm's way before disaster hits.

"We knew the hurricane was going to hit New Orleans and Mississippi hard. Why didn't we send buses in to get the poor people out before disaster hit? We spend millions on recovery and rescue AFTERWARDS . . . when we could have alleviated so much death BEFORE?"

The New Orleans Times-Picayune said on Tuesday:

"No one can say they didn't see it coming. ... Now in the wake of one of the worst storms ever, serious questions are being asked about the lack of preparation."

But of course, there's more. Turns out that on July 24 of this year, the Times-Picayune reported that government plans for evacuation of the poor began and ended with a DVD distributed throughout the city with the message that the poor were on their own if they needed to evacuate: From that Times-Picayune story (courtesy of Attytood at the Philadelphia Daily News)

"City, state and federal emergency officials are preparing to give the poorest of New Orleans' poor a historically blunt message: In the event of a major hurricane, you're on your own."

Keep this callous laissez faire attitude in mind when you peruse this excellent Katrina timeline.

Failed: Combating Global Warming and the Increasing Ferocity of Hurricanes
And finally, the big 800 pound elephant in the room. Fact is that just last month scientists at MIT nailed the connection between the increasing ferocity of hurricanes with global warming, specifically oceanic water temperatures. Years of global warming denial by Bush administration partisans and oil industry paid hacks have meant billions of tons of carbon dioxide warming the Earth that could have been ameliorated by now. Had we gotten to work on ratifying and implementing the Kyoto Treaty when we should have, that category 5 hurricane might have been a category 4 or 3 hurricane. That, as the people in the Gulf States are now painfully aware, makes a huge difference.

A concerned citizenry needs to respond. Over at the new NewOrleansJustice blog, there's a handy reference reminding us what the Constitutional duties of government officials are, naming names of those in charge of this unfolding catastrophe.

Today's Right Wingers are Unqualified for Government Service

Here's a challenge: Can anyone mention a single policy of George W. Bush's since he was installed as President that actually worked as advertised at the time? Anything? In any area?

Ever wonder why this question is so tough? I think the answer is so obvious that no one notices it: Modern Republican ideology hates government. When Ronald Reagan was President, he proclaimed that government wasn't for solving problems, government WAS the problem. When his budget director David Stockman wrote his famous mea culpa a few years later, he made it clear that "Reaganomics" was not a coherent economic plan, but merely a calculated scheme to "starve" government of resources to be able to do anything. Conservative boss Grover Norquist famously quipped that he wanted to shrink government down to a size small enough so that he could "drown it in a bathtub"

Can you think of any reason why anyone should expect success or even competence from anyone who hates the career endeavor they are in? Would you expect competence from a medical doctor who scoffs at the Hippocratic oath and thinks modern medical procedures are overkill and hooey? Would you entrust your home renovations to an electrician who thinks that building codes are evil and unnecessary? Would you trust your child's education to a teacher who wants to drown them in a bathtub?

Of course not.

Is there any reason why we should even expect competence from people who hate their jobs? When George Bush was running for President, he appeared to be blissfully unaware of basic matters of civics. Like castigating his opponents for wanting to run Social Security "like it's some kind of federal program". And it continues: From the President we hear that the Social Security Trust Fund is composed of "just IOU's", blissfully unaware that by describing Treasury Bonds as such, he violated the Constitution's 14th Amendment, an impeachable offense.

Once in power the right wing's incompetence continued of course. Allowing 9/11 to happen by aggressive neglect, at best. Demolishing the surplus and creating the largest deficits known to U.S. history. Putting the brakes on economic growth and jobs. Dismantling environmental protections. Rolling back the rights of working Americans. Demanding huge goals in education and refusing to fund the implementation of them. Trashing virtually every international treaty in operation. Bobbling the war in Afghanistan and turning it into the largest opium source in the world while allowing the Taliban back in to reorganize. Trashing our civil liberties. Manipulating our national science institutions for the benefit of corporate greed or weird religious extremist ends. And the final insult, the trumped up lies that enabled a totally fumbled, incompetently planned war on Iraq.

These are not the actions of a group who cares about government, about civics, about the health of the body politic and about America itself. These are the actions of the teacher who wants to drown kids in a bathtub, or a surgeon who thinks the Hippocratic Oath is nonsense.

A corollary to this idea is the fact that those who support the right side of the aisle share their leaders' distaste for all things government. Whether that distaste comes from personal convictions or the steady propaganda drip of the right wing media machine is subject to debate. Whatever the case is, no one can expect a person to devote much time learning about what is distasteful to him or her. So it should come as no surprise that those who have a distaste for government are those who know the least about its workings, policies and decisions. In the field, the ignorance of the workings of government by conservatives are way too numerous to mention. One characteristic example though is found in the rant of an otherwise apparently accomplished and intelligent blogger who recently argued that the U.S. Post Office would do far better if it relied not on taxes, but on user fees. This guy was apparently unaware that the USPS already does run on user fees. They're called "stamps".

The incompetent are leading the country with the support and grace of the ignorant. Be afraid. Be very afraid. People who hate what they do aren't qualified to remain in the profession they hate. Do them, and us, a favor and get them into another career path now!

The Biggest Reason to Protect Social Security

George Orwell once said: "We have now sunk to a depth at which re-statement of the obvious is the first duty of intelligent men." In our continuing series on Social Security, I decided to skip to the last myth to be busted:

Myth #6: Social Security is a drag on the economy. (Reality: Social Security has been a mighty engine for U.S. economic growth in several different ways.)

This is because in all of the excellent mobilization going on out there on telling the truth about Social Security, few are talking about perhaps the most fundamental reason of all not to tamper with the program. Fact is, Social Security is a critical piece of our society's economic infrastructure put into place to make the boom and bust business cycle smoother and more predictable. This in turn makes our economy safer, more productive and the most secure place on the planet for someone to do business.

De-emphasizing Social Security and the rest of the social safety net may have a stunning and more than a little frightening effect on the entire macro economy. To see it, let's do what Orwell suggests and look at restating the obvious. In this case we remind ourselves why the Social Security system was enacted in the first place.

When President Franklin Roosevelt signed the Social Security Act in 1935, he explained to the American people exactly what the bill was designed to do:

"It is a structure intended to lessen the force of possible future depressions. It will act as a protection to future Administrations against the necessity of going deeply into debt to furnish relief to the needy. The law will flatten out the peaks and valleys of deflation and of inflation. It is, in short, a law that will take care of human needs and at the same time provide for the United States an economic structure of vastly greater soundness." (Statement on Signing the Social Security Act August 14, 1935, Franklin Roosevelt, accessed at the FDR Library)

So Social Security is more than just a social program but also an integral part of managing the United States macro economy. The concept is pure Keynesian economics at it's best. If you ensure that a higher proportion of the population has buying power regardless of where you are in the boom or bust business cycle, you will lessen the severity of the bust, without having much of an effect on the boom.

It's just common sense. Take two local merchants. One merchant is located in a place where only 5% of the town can afford his products when times are bad. The other merchant lives in a place where 30% of the town can afford his products when times are bad. Which merchant is worse off? Which businessman can afford to hire more people, pay more taxes and contribute more to his community, helping to jump start a bad economy that much quicker?

A strong guaranteed Social Security and the rest of the social safety net ensured that no matter what, more people could afford to participate in the economy than if those programs weren't there. Then, as those dollars recycle through the economy changing hands at a fast pace, a 'multiplier effect' takes over and jump starts the economy quicker, lessening the impact of bad times and lengthening the life of good times.

Has it worked? You bet. Due to the stabilizing effects that President Roosevelt described, the severity of the ups and downs of the business cycle substantially lessened after Social Security was put in place. The United States was buffeted by extreme booms and busts throughout the 19th century up through the Great Depression, as shown on this chart.



While you can visually see how the jagged lines smoothed out especially after World War II, the business cycle smoothed out on a statistical basis as well. Before Social Security was enacted, the standard deviation of annual economic growth stood at 0.59 and after Social Security was enacted the standard deviation dropped to 0.44, indicating lower volatility. Taking the upheaval of World War II out of the equation drops post war standard deviation of annual growth to 0.24. This means that economic growth became more predictable and the business cycle of boom and bust became less painful for the society, just as Roosevelt had predicted. At the same time, the economy grew at a faster pace. In the seven decades before Social Security, average annual GDP growth stood at 3.4%. After Social Security was enacted, average annual growth rose to 3.86%. While that seems a small difference, it represents additional trillions in our economy today than otherwise might have been. (Data derived from L. Johnston and S.H. Williamson, "The Annual Real and Nominal GDP for the United States, 1789 Present." Accessed at Economic History Services, March 2004, http://www.eh.net/hmit/gdp/)

So what happens when the "economic structure of vastly greater soundness" is tampered with or eliminated? Especially if those doing the tampering show little ability to implement economic policies that perform as expected? Well, it's not much of a stretch to imagine that business cycles, both up and down, will become more pronounced, more unpredictable and harder to control. It's also not a stretch to imagine that overall economic growth might slow back down to pre-New Deal levels.

Don't let them destroy Social Security. We have only one macro economy to lose.

How to Create A Crisis Out of Thin Air: Cooking the Social Security Numbers

Now let’s see. If I wanted to create a scenario where the long term collapse of Social Security would happen, how would I have to construct my economic models to predict such a collapse?

Well since good economic growth will keep the system solvent for the next century or so, I’d have to erase that average annual 3.3% real GDP growth the USA worked hard to earn over the last 40 years. What would do it? So, we’ll just slice GDP growth by 12% now and see how that looks on the spreadsheet. When that didn’t do the job, we’ll just keep on slashing it until over time annual GDP growth is just about half as much as it is today.

But how do we justify that? Well we’ll just slice 10% off the nation’s fertility rate, and then slash the productivity growth rate we enjoy today by over 50% over time. Now despite the fact that the Center for Immigration Studies estimates that 1.3 million immigrants settle in the country each year, let’s just magically reduce that by 30% over time as well. Let’s see what else...?

Oh yes! We’ll just hike up assumed inflation by 17%, from (2.3% today to 2.8% over time). Will people notice that inflation will hardly increase if our economic growth rate is heading the other way? Who cares? Nobody reads these reports beyond the executive summary anyway.

For good measure, we can assume that future unemployment rates will be 10% above the current 10 year average rate of 5.05%. We’ll be safe with THAT assumption, since the Bush administration is doing such a lovely job making that come true.

Well, let’s press F9 and recalculate this spreadsheet and see what we’ve got. Woo hoo! We did it! We now have projected that Social Security will have to pay out more benefits than it has in it's bank account or takes in with taxes 37 years from now! What’s that you say? That’s happened several times before (14 times before, according to the SSA) and the sky didn’t fall? OK, so we present it to the public as 2042 is the year when Social Security will "be flat broke"!

Now what do we do with the other projection we started from? You know, the one with the economic assumptions pretty much in line with what reality has been showing for the last few decades or so? The one that shows that Social Security never runs out of money over the entire time we study, even if we do absolutely nothing to change the system? (See Option I in the Trustee’s Graph below.)

Figure IV.B3.--Long-Range OASI and DI Trust Fund Ratios
[Assets as a percentage of annual expenditures]
from The 2004 OASDI Trustees Report



I know! We’ll call the projection with the realistic assumptions the optimistic "low cost" projection. Then we’ll call our doctored pessimistic version the "intermediate cost" version. We’ll go back to the drawing board and slash immigration rates another 18%, hike up unemployment rates another 18%, drop our fertility rate another 13%, hike up inflation yet another 35%, and lower GDP another big chunk by imagining two recessions and a longer term reduction in GDP growth by another 25%.

Never mind that sustained slow growth and two recessions with simultaneous sustained increased inflation is virtually impossible. What’s important is the first arbitrarily pessimistic scenario will look moderate by comparison. That "intermediate" projection will be the one pundits will use to point to the troubles of Social Security. Even progressives will buy into the idea that we’ll have to do SOMETHING to ‘fix’ Social Security. And that something will happen now, when the right wingers still have control over every branch of government and thus ensure that whatever change happens will be to the right wingers’ liking.

This scenario is not a conjecture. This is exactly what’s happened. The numbers used above come directly from the 2004 Social Security Trustees Report everyone is misquoting and their little noticed chapters describing how they constructed their scenarios. My argument is not necessarily with the policy wonks producing the Trustees’ Report. Sound financial managers can and should examine worst case scenarios in projecting the long term health of funds they are stewards for. My argument is with the politicization of the reports, morphing worst case scenarios into inevitable crises. No one does that unless (1) they are too incompetent to know what they are reading, or (2) they wish to deliberately lie to the public. Either is an impeachable offense in my opinion. Don’t let them destroy Social Security.

A Side Note on the Insanity of Right Wing Politics...

Reflecting the seriousness and sober reflection undertaken by the right wing on Social Security, a coalition of conservative groups known collectively as the Arlington Group, is telling Karl Rove that they won't go along with the administration's Social Security destruction plans unless the Bush administration puts just as much emphasis on banning gay marriages.

Huh?

Never mind the total cognitive disconnect and non-relationship between state civil marriage laws and the Social Security program. Look at what our conservative guardians of family values are really saying here:

"Let's make a deal. We'll help push for the Federal Government to take away trillions of future retirement benefits for us and our families in return for you pushing to let the Federal Government dictate who we can and can't marry."

These people don't need a voice in government. They need a soft room and the kindly attention of a very large and compassionate medical staff.

It's a Social Program, Not a 401(k)!!

Number three in a continuing series.

Myth #4: Social Security is a pension or an insurance plan. (Reality: Social Security is a social program, the only social program that is so well funded and secure that it will not need a dime of additional Federal taxes for decades.)

We often hear of Social Security as a pension plan or an insurance plan. Comparing Social Security to private employer pension plans gives rise to a number of misleading and alarming observations about Social Security’s desirability. First and foremost is the charge that the individual worker gets a bad investment deal out of the system. My favorite barking mad Libertarian P.J. O’Rourke offers the typical argument:

"And if we're age twenty-four to sixty-two, we can expect a return of between -0.34 percent and -1.7 percent, and might be better off leaving the money in our old jeans and going through the closet when we retire."

Then there’s the "Ponzi Scheme" charge, named after the famous swindler who offered big dividends to investors, paid for by the investment of newer investors. Here’s O’Rourke again in the same article:

"Charles Ponzi made a profit on this, and so does the U.S. government. Social Security payroll-tax receipts have always been greater than Social Security benefit payments and will continue to be until about 2013, when the baby-boom sucker pool retires. The federal government has taken this surplus revenue, spent it and given the Social Security trust-fund IOUs in return."

(SIDE NOTE: I urge people to read O’Rourke’s article. See how many logical fallacies and statements of objective falsehood you can find. I’ve found 37 so far.)

These arguments would be more persuasive if Social Security was in fact a pension or insurance plan or a 401(k). But it's not any of those. It’s not a personal investment. It’s a government social program that happens to be funded largely through a special levy of payroll tax. Don’t believe me? I don’t blame%2

More Social Security Myth Busting

Today we debunk a couple more myths surrounding Social Security. We can tackle Myth #2 and Myth #3 at the same time, as they are two different facets of the same misconception. (Myth #1 and the introduction to this topic is here.) First though here’s a tip of the hat to a wonderful resource on the myths of the Social Security debate at the Center for Economic and Policy Research. These guys have it nailed.

Now for today’s myth busting. Here they are:

Myth #2: The Social Security Trust Funds don't really exist except as an accounting fiction. (Reality: The Trust Funds are definitely real, with real assets far above the credit quality and safety of any bank or insurance company in the world.)

Myth #3: Politicians often "raid" the Trust Funds to pay for other Federal budget needs. (Reality: The Trust Funds pay for no other programs except what they are charged to do. Not a penny has been spent from their operating budgets for any other program ...ever.)

To understand what’s really happening, you have to look at the basic structure of the Trust Funds. There are four of them, two related to Social Security and two related to Medicare. Here are the definitions of each from the 2004 SSA Trustees Report:

Trust Fund:
Separate accounts in the United States Treasury in which are deposited the taxes received under the Federal Insurance Contributions Act, the Self-Employment Contributions Act, contributions resulting from coverage of State and local government employees; any sums received under the financial interchange with the railroad retirement account; voluntary hospital and medical insurance premiums; and transfers of Federal general revenues. Funds not withdrawn for current monthly or service benefits, the financial interchange, and administrative expenses are invested in interest-bearing Federal securities, as required by law; the interest earned is also deposited in the trust funds.

• Old-Age and Survivors Insurance (OASI). The trust fund used for paying monthly benefits to retired-worker (old-age) beneficiaries and their spouses and children and to survivors of deceased insured workers.
• Disability Insurance (DI). The trust fund used for paying monthly benefits to disabled-worker beneficiaries and their spouses and children and for providing rehabilitation services to the disabled.
• Hospital Insurance (HI). The trust fund used for paying part of the costs of inpatient hospital services and related care for aged and disabled individuals who meet the eligibility requirements. Also known as Medicare Part A.
• Supplementary Medical Insurance (SMI). The Medicare trust fund composed of the Part B Account, the Part D Account, and the Transitional Assistance Account. The Part B Account pays for a portion of the costs of physicians' services, outpatient hospital services, and other related medical and health services for voluntarily enrolled aged and disabled individuals. The Part D Account pays private plans to provide prescription drug coverage, beginning in 2006. The Transitional Assistance Account pays for transitional assistance under the prescription drug card program in 2004 and 2005.

So the OASI and DI Trust Funds are what we know as Social Security. Now look at the definition above, which says:

"Funds not withdrawn for current monthly or service benefits, the financial interchange, and administrative expenses are invested in interest-bearing Federal securities, as required by law; the interest earned is also deposited in the trust funds."

This is the source of the confusion. What happens is that a portion of the collected FICA from our paychecks gets paid out in current benefits. Another portion (about 6/10ths of a penny per dollar) pays for administration of the program. Some is left over to be saved for the time when the baby boomers retire in large numbers, meaning more benefits will be paid out than taxes collected at that time. That leftover is invested in Treasury bonds, very similar to the bonds that your bank is required to hold to back up your savings and checking, or the same type that insurance companies hold to back up their assets.

Looking at Myth #2, that the Trust Funds are an accounting fiction, this is only true if you forget everything you ever learned about accounting and banking. The Trust Funds are administered as totally separate accounts, not commingled with any other Treasury funds, in an identical fashion that your checking account is held separate from all other checking accounts at your bank. Now in actual fact your checking account is not in a separate location physically separated from all other checking accounts, but it is a really existing, separate thing that you can, well, take to the bank. The Trust Funds are held separate in the exact same way.

You can see this reflected in President Bush’s latest budget message from the Office of Management & Budget. There are historical tables that show the performance of the budget going back decades. They clearly show the Trust funds as "off budget" items separate from the "on-budget", the operating budget of the government. Beyond the PDF version, there are also Excel spreadsheets of those historical tables. Take a look, for example, at Table 1.1 Summary of Receipts, Outlays, and Surpluses or Deficits (-): 1789-2009 to see what I mean.

The other important fact here is that since the Trust Funds' surplus is 100% exclusively invested in Treasury securities, that portfolio is by definition the safest and most secure portfolio in the world. No bank, insurance company, company pension fund, 401(k), mutual fund, separate account, foundation or endowment can even come close to the creditworthiness of a 100% riskless Treasury portfolio. Nor can it be duplicated anywhere else. For even if a financial institution decided to invest only in publicly available Treasuries, said institution would either have to accept low short term interest rates or a measure of long term market risk. Only the SSA Funds qualify for the best of both worlds. The class of Treasury securities they own enjoy long term interest rates, with the ability to redeem the bonds at any time for full face value.

This is like going to your bank and demanding that they give you the interest rate of their 10 year CD while giving you complete checking account access to any or all of the CD without penalty for early withdrawal. Riskless savings does not get better than that. No wonder the Republicans want to get out from under that deal!

Turning to Myth #3, that politicians regularly dip into the Trust Funds to fund other government operations, again this is a misunderstanding of how money and markets work. The Trust Funds are required to invest their surplus in riskless securities. The only riskless securities there are in the US are Treasury Bonds. So when the operating Federal budget runs red ink, the Treasury department creates Treasury bonds for investors to buy. The proceeds of those sales fund Federal deficit spending. The SSA Trust Funds are investors in those Treasuries, no different from any bank, brokerage house, mutual fund or insurance company that might be buying those riskless securities. So indirectly, the SSA surplus DOES fund our operating deficits to a limited extent, by virtue of their investing in Treasury bonds. But since they are independent legal entities, it is no more correct to say that politicians are "raiding" the SSA Trust funds than it would be to say that politicians are "raiding" the assets of a government bond mutual fund.

The language used by politicians of "raiding" the Trust Funds, or the opposite "placing Social Security in a lockbox" are colorful phrases that convey emotional messages rather than fact. The real issue behind the language is that many economists are worried what will happen to the economy when Social Security stops being a net buyer of Treasury bonds and starts redeeming them if the Federal government is still running a huge annual deficit and a huge national debt. The solution put into place by President Clinton was to return to significant surpluses in the Federal operating budget and pay down the national debt to the point where the Treasury bonds redeemed by the SSA program were the only debt service that the Federal government had to worry about. This program was succeeding to such a degree that by 2001, Fed Chair Alan Greenspan was actually discussing how the world of finance would operate if the Trust Funds were the only holders of U.S. Treasuries.

The failure of the Bush administration to continue on this path raises anew the specter of the Federal government triggering a huge inflationary crisis paying off a huge national debt service AND SSA obligation with inflated dollars off the printing press, OR with Treasury bonds that yield very high interest rates to attract the creditors necessary to absorb all the debt.

So in typical Republican fashion, instead of opting for fiscal austerity to clean up one’s own house, the administration in Washington is looking for ways to weasel out of the SSA obligation once and for all. This is like a family approaching the need to pay for their kid’s college tuition down the road with a plan to convince the kids to go to a state school or learn a blue collar trade instead of saving up for the bills. It’s disgusting. We shouldn’t let them get away with destroying Social Security.

Dispelling Social Security Myths

Oh boy, here we go again.

The alarm bells about the long term safety of Social Security have started anew. After basically keeping mum on the subject in the campaign, the Bush Administration is emboldened by their 51% victory to try once again to "fix" Social Security.

Nowhere in political discourse is there more deliberate misinformation than in the Social Security debate. Nowhere is it more obvious that politicians on both sides have a fundamental misunderstanding on the basic facts of the issue. It's more than a little scary. So over time, I'm going to lend my small effort to dispel some of the more important myths about Social Security. After we're done, it should be plain to see what to do about the system: Leave it alone!

Here are the topics I'll be addressing:

Myth #1: Social Security is in trouble and will go bankrupt when all those baby boomers retire. Therefore we must fix it before that happens. (Reality: Social Security won't run out of funds at all -- ever -- if we simply maintain the level of economic growth we are experiencing right now.)

Myth #2: The Social Security Trust Funds don't really exist except as an accounting fiction. (Reality: The Trust Funds are definitely real, with real assets far above the credit quality and safety of any bank or insurance company in the world.)

Myth #3: Politicians often "raid" the Trust Funds to pay for other Federal budget needs. (Reality: The Trust Funds pay for no other programs except what they are charged to do. Not a penny has been spent from their operating budgets for any other program ...ever.)

Myth #4: Social Security is a pension or an insurance plan. (Reality: Social Security is a social program, the only social program that is so well funded and secure that it will not need a dime of additional Federal taxes for decades.)

Myth #5: Medicare is broken and needs to be fixed. (Reality: It is the nation's health care system that needs to be fixed, not Medicare.)

Myth #6: Social Security is a drag on the economy. (Reality: Social Security has been a mighty engine for U.S. economic growth in several different ways.)

And now to begin with #1:

Myth #1: Social Security is in trouble and will go bankrupt when all those baby boomers retire. Therefore we must fix it before that happens.

Here of course, the term "fix" is to be used in the same context as "fixing" your pet. For Social Security does not need to be saved. It is not broken. Why do I say that Social Security isn't in trouble when every talking head and pundit talks about Social Security's crisis 24/7?

You've all heard the argument. The massive number of baby boomers will all retire in a short while, leaving fewer and fewer workers to support more and more retirees in the SS system until it all goes bankrupt in a few decades. In the latest Social Security Trustees Report, the Trustees have crunched their numbers and forecasted when that day will come:

"Despite these cash-flow deficits, beginning in 2018, redemption of trust fund assets will allow continuation of full benefit payments on a timely basis until 2042, when the trust funds will become exhausted."

How do they arrive at this scenario? The Trustees use computer models simulating the U.S. economy, fertility and immigration rates, inflation, interest rates and so forth. Then they run three simulations based on pessimistic, optimistic and intermediate assumptions of average levels for all of these factors. The intermediate model is the one picked for the press releases, being the Social Security Trustees best estimate of things to come. Sounds reasonable so far.

However, the devil is in the details. Any computer simulation is only as good as the assumptions you enter. In this case however, the assumptions are too pessimistic. Here you can find the assumptions used in 2004's projections.

Now I'm no expert on fertility rates and such, but I can say for sure that the range of total productivity rates assumed by the modeling are too conservative. The best case scenario calls for 1.9% productivity growth. The worst case calls for 1.3% and the intermediate projection is 1.6% per year.

The problem is that average annual productivity growth over the last 50 years is 2.16%. That's right, not even the most optimistic scenario examined by Social Security so much as assumes the same productivity growth rate we've enjoyed for 50 years. (Caveat: I'm using output per hour for non-farm businesses, the standard measure of productivity provided by the Bureau of Labor Statistics. Here's where you can construct the table. The Social Security Trustees explain that they do not use this commonly accepted measure in their projections. Rather they use an unpublished compilation of man/hour statistics provided to them by the BLS. Therefore their work is not easily duplicated.)

This assumption has a huge impact on the health of the trust funds. Less productivity growth means lower economic growth, which means fewer jobs and/or lower salaries paying into the system over the years, meaning the Trust Funds fall short sooner rather than later. And, as noted above, the Trust Funds run out of excess cash in 2042 under their 1.6% growth scenario.

What this also means is that for each year productivity grows more than 1.6%, the Trust Funds will look healthier than they did the year before as additional growth not predicted by the models would be booked in to the new projections. And sure enough, that's exactly what's happened.

Looking at the history of these projections, we see continual readjustments forward as we continue to grow more than the Trustees are calculating.

In 2003, after a lackluster 2002, the Trustees predicted 2042 as well to be the day the Trust Funds run dry: "Despite these cash-flow deficits, trust fund interest earnings and assets will allow continuation of full benefit payments until 2042, when the trust funds will be exhausted."
In 2002's Report, the year was 2041: "...asset redemptions begin to reduce the size of the combined trust funds in 2027, and the assets of the combined OASI and DI Trust Funds are exhausted in 2041."

In 2001's Report, the deadline was set at 2038: "...asset redemptions begin to reduce the size of the combined trust funds in 2025, and the assets of the combined OASI and DI Trust Funds are exhausted in 2038."

In 2000's Report, the deadline was 2037: "The combined OASI and DI Trust Funds would become exhausted in 2037 without corrective legislation."

And in 1999's Report the day of reckoning comes in 2034: "The combined OASI and DI Trust Funds would become exhausted in 2034 without corrective legislation."

In 1998 the Trust Funds were to go broke in 2032: "The combined OASI and DI Trust Funds would become exhausted in 2032 without corrective legislation."

And in 1997 the Trust Funds were to go dry in 2029: "The combined OASI and DI Trust Funds would become exhausted in 2029 without corrective legislation."

So, the Social Security doomsayers were screaming in 1997: "It's going to go broke in 32 years unless we do something!" Today, the doomsayers are screaming "It's going to go broke in 38 years unless we do something!"

Well, we've done nothing in the intervening time. No drastic reform. No overhaul. No additional cash infusion. Simply by growing GDP and productivity at the pace we've been doing for decades grows us out of the problem. Seven years of average growth bought us an additional 13 years before the Trust Funds would go broke.

This then is the fix for Social Security: maintaining a reasonable pro-growth economy which grows productivity. The Trustees Report "optimistic" scenario shows that if we maintain productivity growth of 1.9%, the Trust Funds never run out of money for the entire 75 year period studied. (Caveat #2: Yes there are other factors besides Productivity in the optimistic model, some controllable by legislation. For example, immigration assumptions are a net inflow of 900,000 per year. Yet the INS estimates that 13.5 million immigrants came to this country in the 90's, legal and illegal. Bring them all in the Social Security system and we've expanded the total per year beyond Social Security's most optimistic estimates without changing the actual number of immigrants at all.)

Now some may argue that we should plan for the most pessimistic scenarios and assume the worst will happen - in this case that productivity growth will somehow slow by 25% or more. That's a fine argument, except that if productivity was going to slow down to that drastic a degree, the LAST thing you would want to do is invest in the stock market, which depends on ever increasing productivity. So the notion of privatizing Social Security to cash in on stock market growth makes no sense however you look at it. If we have decent enough growth to make stock market investments look attractive, the Social Security system will be secure and in no need of change. If economic conditions were to be bad enough to endanger Social Security, then stock market investments should fare even worse.

While politicians themselves may be clueless, any professional policy wonk in Washington knows these facts. The political manipulation of the Trust Funds' conservative estimates are well known inside the beltway. The people scaring you into thinking Social Security won't be there for you when you retire, UNLESS they get their way to alter the system in a FUBAR kind of way, are people who know they are lying to you. They are lying to you because they know they can't get rid of the Social Security program in honest debate due to the program's popularity. So they lie to you, saying it's a flawed system bound to fail unless they "rescue" it. Don't let them do it. Don't let them hijack Social Security and destroy the most successful social program in the history of the Republic.