Baseball Crank
Covering the Front and Back Pages of the Newspaper
August 17, 2010
POLITICS: Does Paul Krugman Understand Finance?

When it comes to the 'framing' of public discourse on entitlements, Paul Krugman is accustomed to writing columns that are more about issuing commands than making arguments; he has railed in the past even against President Obama for admitting that yes, we do have a problem paying for the explosive present and future growth of entitlements. But even for this genre of "there is no crisis" column, his latest is a head-scratcher:

Social Security's attackers claim that they're concerned about the program's financial future. But their math doesn't add up...

About that math: Legally, Social Security has its own, dedicated funding, via the payroll tax ("FICA" on your pay statement). But it's also part of the broader federal budget. This dual accounting means that there are two ways Social Security could face financial problems. First, that dedicated funding could prove inadequate, forcing the program either to cut benefits or to turn to Congress for aid. Second, Social Security costs could prove unsupportable for the federal budget as a whole.

So far, so good; it is a fact that Social Security keeps an independent set of books, and also a fact that if it runs out of money from those books, it will turn to the general federal budget for assistance. Although his second point is just another way of restating the consequences of the first, i.e., what happens to the general federal budget when Social Security comes knocking for aid. As I'll explain in a second, that's not a hypothetical; because of the nature of the trust fund, it's about to start happening.

But neither of these potential problems is a clear and present danger. Social Security has been running surpluses for the last quarter-century, banking those surpluses in a special account, the so-called trust fund. The program won't have to turn to Congress for help or cut benefits until or unless the trust fund is exhausted, which the program's actuaries don't expect to happen until 2037 - and there's a significant chance, according to their estimates, that that day will never come.

...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.

Actually, it's Krugman who is trying to have it both ways here; I leave to the reader whether the Nobel Prize winning economist is actually this ignorant of basic finance or whether he is yet again attempting to deliberately mislead his readers. As Krugman himself notes, the program has run an operating surplus in the past, which is coming to an end. In the near future, Social Security begins running an operating deficit, which requires it to draw down its 'savings' in the "trust fund."

But what are those savings? The problem, as I have explained previously, is that the trust fund's only assets are IOUs from the federal government. If we stay for the moment with the fiction of treating Social Security as indeed an independent entity, that means that for years it's been lending money to Congress that was used to prop up the budget at no real economic cost (it's not like the federal government needed to lay out money to pay interest on those debts - all it did was make accounting notations). Whereas now, Social Security will begin asking for its money back - and all of a sudden Congress in one fell swoop both loses a cost-free source of funds and has to start laying out cash from the general budget to repay those debts so that Social Security can make payments to beneficiaries. That's not "aid," it's precisely how the trust fund mechanism is designed to work. And it's going to take a ferocious bite out of the budget. Saying this is not a problem for Congress is like saying your fortunes haven't taken a turn for the worse when your interest-only mortgage suddenly starts requiring principal payments, or when you've been borrowing from a loan shark and spending the money for living expenses and suddenly have to start repaying him. Basically, Congress took the money and spent it, and now it has to tighten its belt to repay it. You'd go broke very quickly trying to follow Prof. Krugman's financial advice.

Krugman pooh-poohs the size of that bite, saying that "an aging population will eventually (over the course of the next 20 years) cause the cost of paying Social Security benefits to rise from its current 4.8 percent of G.D.P. to about 6 percent of G.D.P." - which is another way of saying that it will increase 25% even if we buy his numbers (and bear in mind that while we can project trends on a general level, any projection that goes 20 years out is worthless - we can estimate what benefits we'll owe based on demographics, but there's no way to accurately predict GDP growth that far out) and even if we ignore the loss of a cost-free source of funds. Krugman's reliance on speculation that the trust fund may never run out is just pure hot air, and his analysis overlooks half the problem. For some perspective, in Fiscal 2010, interest on the federal debt is 1.3% of GDP - if you assume that the cost of paying benefits rises by 1.2% of GDP and that's all funded by Congress repaying its debts to the trust fund, all else being equal, you've doubled the cost of interest on debt. And this is before we even get into the question of whether we can grow payrolls as fast as we would like so as to avoid an even worse shortfall from FICA receipts.

If you look at Social Security as just part of the federal budget, the whole trust fund accounting business reveals itself as an even more obvious sham. IOUs you write yourself are really an "I owe me." A corporation that wrote itself IOUs backed only by its general credit and housed them in a special purpose vehicle with no other assets couldn't legitimately count those IOUs as an asset - that is, to oversimplify, one of the things that got Enron in trouble. But Krugman seems to think the Enron model works just fine for Uncle Sam, who needn't worry about his future expenses because he's been saving up all of those IOUs...from himself.

One way or another, Social Security's operating deficit will be paid for not by any store of savings set aside for a rainy day, but by money that you and me and our kids and grandkids earn in the future. Don't let Paul Krugman tell you otherwise.

Posted by Baseball Crank at 12:18 PM | Politics 2010 | Comments (27) | TrackBack (0)

Well, he is, as James Taranto writes, "former Enron Advisor Paul Krugman..."

Posted by: Giacomo at August 17, 2010 11:49 PM

No, he's not ignorant of that fact. His argument is better explained here:

I've been following him a bit in the past few months just to see what all the fuss is about. You can slam him for being a liberal in terms of his spending priorities and some of the rhetoric he uses, but in terms of economics, I haven't seen anything disingenuous or totally wrong.

Posted by: MVH at August 18, 2010 7:38 AM

MVH... your link just rehashes what Crank already addressed. Krugman is no longer an economist, as he's ventured to the realm of political ideologue.

Posted by: AgentW at August 18, 2010 8:09 AM

Krugman earned his Nobel for his work on international trade and not fiscal/tax economics and/or policy. His thoughts/opinions on Social Security are not based in fact but are instead based on the Liberal misconcenption that money grows on trees. But hey, enjoy the trainwreck as it unfolds, because it's going to be a doosy!

Posted by: Tom at August 18, 2010 9:58 AM

agent W:

Try this one then:

A quote:

"But the privatizers won’t take yes for an answer when it comes to the sustainability of Social Security. Their answer to the pretty good numbers is to say that the trust fund is meaningless, because it’s invested in U.S. government bonds. They aren’t really saying that government bonds are worthless; their point is that the whole notion of a separate budget for Social Security is a fiction. And if that’s true, the idea that one part of the government can have a positive trust fund while the government as a whole is in debt does become strange.

But there are two problems with their position.

The lesser problem is that if you say that there is no link between the payroll tax and future Social Security benefits – which is what denying the reality of the trust fund amounts to – then Greenspan and company pulled a fast one back in the 1980s: they sold a regressive tax switch, raising taxes on workers while cutting them on the wealthy, on false pretenses. More broadly, we’re breaking a major promise if we now, after 20 years of high payroll taxes to pay for Social Security’s future, declare that it was all a little joke on the public.

The bigger problem for those who want to see a crisis in Social Security’s future is this: if Social Security is just part of the federal budget, with no budget or trust fund of its own, then, well, it’s just part of the federal budget: there can’t be a Social Security crisis. All you can have is a general budget crisis. Rising Social Security benefit payments might be one reason for that crisis, but it’s hard to make the case that it will be central.

But those who insist that we face a Social Security crisis want to have it both ways. Having invoked the concept of a unified budget to reject the existence of a trust fund, they refuse to accept the implications of that unified budget going forward. Instead, having changed the rules to make the trust fund meaningless, they want to change the rules back around 15 years from now: today, when the payroll tax takes in more revenue than SS benefits, they say that’s meaningless, but when – in 2018 or later – benefits start to exceed the payroll tax, why, that’s a crisis. Huh?"


Look at the second sentence - he is clearly not ignorant of the fact that the trust fund is essentially gov't bonds. He's essentially saying that because the assets from social security were used for general budget expenses during the surplus years, social security should be viewed as general budget expense for years where the social security is at a deficit. Or if you are going to treat it as a standalone program, you have to acknowledge that it did run a surplus, and Congress chose to spend that surplus rather than save it.

This isn't a terribly controversial argument, and I'm surprised it's getting this much attention. His argument, as far as I'm concerned, is beside the point. We need to reduce federal spending across the board going into the future, and social security will have to be one of them.

Posted by: MVH at August 18, 2010 10:13 AM

Oh, I recognize it's more likely than not that Krugman knows what he's talking about, but that just means this column was deliberately deceitful.

Anyway, in neither of those does he really square up to the fact that the program is making the turn to become a net drag on the budget in a major way, and that has a significant impact on the budget.

I don't disagree at all that Congress was irresponsible in using SS as a piggy bank and spending it. I don't think that's a defense of the program because that's how it was designed. Saying "don't blame Social Security" ignores the fact that the same people were writing the rules for SS as for the rest of the budget.

Posted by: Crank at August 18, 2010 10:33 AM

I don't think it's deceitful - the whole point of his argument is that when viewed as a general budget expense, social security is no greater a crisis than an equivalent increase in defense spending. He's not denying it's a problem; he's just putting it in a different perspective. Look what he says above:

"All you can have is a general budget crisis. Rising Social Security benefit payments might be one reason for that crisis, but it’s hard to make the case that it will be central."

I see nothing deceitful about this, even if I think it's beside the point.

Posted by: MVH at August 18, 2010 10:55 AM

Defense spending, or any other form of discretionary spending, doesn't rise on autopilot, and is subject to an annual appropriations process. It's not the same at all.

Posted by: Crank at August 18, 2010 11:00 AM

Krugman is worth a laugh every day.

One of my favorite websites:

Posted by: son of cronus at August 18, 2010 11:50 AM


Yes - that would be my counterargument to Krugman as well - defense doesn't rise on autopilot. We are in complete agreement. His likely response, and the larger point of his posts would be as follows: Republicans were -already willing- to spend the equivalent amount on defense spending under Bush, so call it a problem if you want but don't call it a "crisis."

All of this I would call an intelligent debate.
This is my problem with the right's critique of Krugman. What I expect to see are criticisms of his caricatures of republicans as "heartless" and otherwise, and sure, you can have plenty of disagreements with his neo-Keynesian approach, but a lot of this stuff goes too far. The right too easily dismisses his economics as being solely motivated by politics. At least on the subject of economics and economic theory, he is no hack, and he has not, as far as I've seen, been misleading or disingenuous, and I would have no hesitation calling him out on it.

Posted by: MVH at August 18, 2010 12:27 PM

Krugman's argument as quoted by MVH are total bunk.

The first one - then Greenspan pulled a fast one - is an argument by authority (if Greenspan said it, it must be true? - no Greenspan was a player in the general deception).

His second argument (if Social Security has not trust fund then it is a general budget crisis) is bunk on two levels. First, if you look at the projected increase in Social Security liabilities, it is quite easy to make that case that it is central. Second, it doesn't address the point. The point is that the Social Security trust fund is a fantasy that just generates worthless paper in a drawer. Concede the point or argue with it. What he does instead is say: well, if we concede the point it doesn't have the consequences that you say it does. That is a separate argument. The consequences don't affect the proposition that the Social Security Trust Fund is a fraud.

What liberals do here (Krugman especially, compare what he wrote about Social Security in the 90's to the 2000's) is they play both ends, whatever works for their argument.

Privatize social security? But social security is a pay-go system, it has not assets, and when you privatize it it costs huge sums of money!

Social Security is about to run out of money? Social Security has a huge trust fund that will last until well past the year 2050.

You can't have both, but liberals argue both all the time. That is the great thing about Enron-like accounting gimicks - it is easy to fool the rationally ignorant.

Posted by: Nobody at August 18, 2010 12:56 PM

So W's tax cuts for the rich, which he pushed through because we were running a surplus, was actually stolen money from the Social security fund (replaced with worthless IOUs--wait 'til the Chinese find out we can't pay our IOUs).
Seems like an easy fix. Make the rich pay back the money that was wrongly given to them, because it was actually stolen money W had no right to give them.
I know your problem, Crank. It's not the deficits. It's not the spending. It's the spending on helping all American citizens, and not just the ones who are connected.
Another easy fix is to have the same magical fairies who pay for the wars pick-up the tab for Social Security as well.

Posted by: Berto at August 18, 2010 1:13 PM

MVH, your lengthy quote from Krugman serves quite well as an example of the pettiness of his mind. Yes, he is a gifted economist, but his refusal to ever treat opposing arguments with good faith makes him a failure as a debater.

Let me parse just one of the quotes you provided:

"... if you say that there is no link between the payroll tax and future Social Security benefits – which is what denying the reality of the trust fund amounts to – then Greenspan and company pulled a fast one back in the 1980s: they sold a regressive tax switch, raising taxes on workers while cutting them on the wealthy, on false pretenses."

This sounds sophisticated but it essentially boils down to an ad hominem. He is writing, "I will concede a point to my opponents if they concede that they are evil." Having Alan Greenspan to kick is just a bonus. Yet this is a bad faith argument. While Greenspan chaired the 1983 reform comissions, he didn't pass the amendments -- they were passed by a Congress in which the Democrats held a substantial majority in the House. And neither Greenspan nor that Congress voted in the next 30 years of Federal Budgets that exhausted the fund.

Also note the rhetorical gamesmanship. The question of whether or not the link between the payroll tax and future benefits exists or is maintainable could be argued on its merits. Krugman prefers not to debate the idea, but to sneer at the supposed ill-motives of his opponents.

(The "and company" phrase is a lovely touch, is it not? You can just imagine the evil libertarians planning their nefarious schemes in a smoke-filled room. In fact, the 1983 commission was bipartisan and included such notables as Senator Daniel Patrick Moynihan and AFL-CIO President Lane Kirkland.)

This is sadly typical and it explains why Krugman is so unpersuasive outside of the circle of his doe-eyed admirers.

Posted by: Henry at August 18, 2010 2:04 PM

Regarding my quote from Krugman, I did not cite that for his arguments against privatization, but only to show that he knows the trust fund is IOU's and to clarify his argument Crank discusses.

As for his rhetoric, you can criticize him all you want. Frankly, I find it annoying, and it really detracts from his economic analysis. He shouldn't need to write like your average college blogger.

Posted by: MVH at August 19, 2010 12:17 PM

MVH, I agree with you. I really used to enjoy reading his columns in Slate and when he got the New York Times gig I had high hopes.

Posted by: Henry at August 19, 2010 11:44 PM

"...Seems like an easy fix. Make the rich pay back the money that was wrongly given to them, because it was actually stolen money W had no right to give them..."

*Given* to them??? Stolen??? You don't recognize whose money it is to begin with? I mean, in reality, and not progglodyte fantasy land.


Posted by: Rick at August 20, 2010 8:55 PM

Krugman is becoming the Michael Mann of economics.

Posted by: stan at August 21, 2010 2:56 PM

How are things out in Rickland (Population 1)?
Back here in the US (the community we live in), things are getting tougher. Seems that while the citizenry was paying into a Social Security Trust Fund to assure they won't retire into poverty, our President was stealing that money and handing it off to the richest 1%---enabling them to enjoy the benefits of living in a community, while not actually paying their fair share.
We're working on a fix but, of course, we still have enablers like Crank carrying water for the rich and connected and their legalized game of 3-card Monte.
Cordially from the US...

Posted by: Berto at August 23, 2010 2:48 PM


There are a number of good arguments to be made in favor of letting the Bush tax cuts expire for the highest income tax brackets. None of them are in your posts.

Stating that Bush stole money from the Social Security trust fund and gave it to the rich is a ridiculous argument. The SS trust fund has been spent by the government for years by both parties and for all kinds of purposes.

Posted by: MVH at August 24, 2010 11:33 AM

How is that a ridiculous statement? He took money from the account (as others did), then claimed that because we were running a surplus we should cut taxes for the rich. Where do you think that "surplus" came from?
Analogy: You pay an accountant to handle your money. He gets a bonus if he can save you an additional $10K a year. For the past 5 years he has saved you over $10K, so you paid him his bonuses.
This year your house burnt down, and you realized your accountant hadn't insured your home. Instead he used the insurance money to pay your other bills, which made it look like you had saved $10K so he could get the bonuses. How is that not stealing?

Posted by: Berto at August 24, 2010 12:12 PM

It's ridiculous because you know very well that SS assets were folded into the general budget and treated just like other tax revenues. There was no conscious effort to "steal" social security revenues to pay for tax cuts. You are accusing Bush of having a nefarious motive when obviously there was none. It's politically slanted, and you know it.

Posted by: MVH at August 24, 2010 1:08 PM

So the whole increase in FICA rates was a scam pulled by Reagan and not W. Is that your argument?
Let's just agree to never let conservatives near the Treasury ever again. Their fiscal policies have been a disaster EVERY TIME they've been tried.

Posted by: Berto at August 24, 2010 1:47 PM

Considering that Bush's tax credits slashed taxes for the poor as well as the rich, the theft appears to be general.

See here (second bullet point):

The populace picked its own pocket.

Posted by: Henry at August 24, 2010 3:12 PM

Considering most of those tax cuts went to the richest of the rich, that might be a good place to find the revenue needed to run the country.

Posted by: Berto at August 26, 2010 10:35 AM


We really can't agree because I do not believe that Republican fiscal policies has been a disaster every time they've been tried. My position has been that their fiscal policies are no better than than Democrats, despite their arguments to the contrary. The Reagan-Republican formula of tax cuts and raising government military spending via borrowing (and it seems they've never met a military spending bill they didn't like) is no answer to our fiscal problems, but neither is increasing spending and raising taxes.

The Republican-Democrat debate over fiscal policy has been a little silly. I really doubt that a Republican fiscal policy program would have acheived any better - or worse - results at this point and time.

If you read Cianfrocca's take on Krugman and Obama, his chief objection has been that the stimulus went to government employees rather than the private sector (a claim that is somewhat overgeneralized - as governments also spend money in the private sector), which does not mean that it has not saved jobs.

Sure, you could have cut business taxes too, which would have been a form of stimulus as well, but Republicans have oversold that approach - they have put too much emphasis on the incentives for hiring that businesses would have had, given that the overall level of demand has plummeted for just about everything.

The key question you ask yourself about stimulus - whether through tax breaks, spending, etc - is whether or not you believe deflation/depression is serious risk. If the answer is yes, and monetary policy has reached its limits, then some form - any form - of government stimulus is appropriate.

Posted by: MVH at August 27, 2010 10:41 AM

I'm just going off the record of conservative policies, and I see disaster every time (1880s, 1920s, 1980s, 2000s).
Agree with you about Reagan. His trickle-down policy has been shown to be nothing but a fantasy (lowest tax rates on the rich in our history led to a huge gap between the richest of the rich and the remainder of the citizenry AND it still led to a financial meltdown).
There were plenty of tax cuts in Obama's stimulus package. That was part of the problem (the other being the stimulus wasn't large enough for the size of the problem). The rich aren't going to start new companies and hire plenty of workers, just because they got a tax break. They'll only do so if there is demand.
Government stimulus is appropriate. Pumping funds into infrastructure, alternative energy solutions, and other programs that could provide long-term benefits to the citizens is the still the best plan. It puts people to work, puts money in their pockets, and leads to demand needed to get the private sector hiring again.
For the past 30 years, we've seen the rich get the bulk of economic largesse. Now that the shit has hit the fan, look where they want to solve the economic problem: on the backs of the poor and working class.
Screw 'em. If they believe for the good of the country we all have to make sacrifices, then fine---they can go first.

Posted by: Berto at August 27, 2010 2:30 PM

Well, we differ in many respects, Berto. I don't blame Republicans for the rich getting richer - that has more to do with executive compensation, which is a whole other ball of wax, and also increasingly fierce international competition for labor, which has driven down blue collar wages relative to the rich. I tend to think executive compensation - and the effective removal of risk for poor performance - has gotten completely out-of-hand, and from a PR standpoint, this makes it hard for them to fight union wage demands with a lot of credibility. But I don't think that federal tax policy should be the means to fix that - ensuring that at the very least, these low-wage countries aren't competing unfairly, is the way to start.

I also don't think that federal tax policy - nor the purpose of the government - is to make the rich more equal to the poor. While I don't want the US economy to go the way of Latin America - very wealthy elite with masses of poor - the US government can't remove incentives to work by having an overly generous safety net. I believe in a progressive tax system because frankly, the rich have more to spare, but I don't take it much farther than that. Also, keep in mind that the rich pay an enormous percentage of federal taxes already.

Also, I don't buy into the argument that the Republicans want to solve the economic problem "on the backs of the poor." Republicans want to make sure the private finance industry, which is the lifeblood of the economy, starts working again. This may leave a bad taste in the mouth, given their role in this crisis, but the contraction of private credit is as big of a problem as lack of demand.

*Some* government spending is OK, especially when it addresses the raw inputs of our economy, such as infrastructure. I don't jump on the alt energy bandwagon - it will help but it will never be a big part of the solution. If the government wants to give modest tax breaks, fine, but it shouldn't be propping it up. Like it or not, we need more nuclear plants, for one.

Posted by: MVH at August 27, 2010 3:27 PM
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