Thursday Reads: Fiscal Cliff Crashes into Debt Ceiling, Villagers Blame Old People….And Other News

Good Morning!!

The storm has moved into New England, but it’s mostly rain up here–very hard, windy, noisy rain. I’m very grateful it isn’t snow, but I feel for all the people down south of me who are getting hit harder. Take care, everyone!!

Yesterday Tim Geithner announced that the U.S. will hit the debt ceiling on December 31. He sent a letter (pdf) (also posted on the Treasury Department website)to Harry Reid with cc’s to other Congresscritters informing them that the Treasury can fiddle around and keep things going for at the most two months before the U.S. defaults on its debts for the first time in history.

Meanwhile, no negotiations on the “fiscal cliff” took place yesterday. John Boehner appears to have abdicated all responsibility and has announced that it’s up the the Senate to act; but Senators are in no hurry to rush back to Washington DC and clean up the House Republicans’ mess.

U.S. House of Representatives Speaker John Boehner on Wednesday urged the Senate to pass its version of legislation to avert the “fiscal cliff,” in a sign that congressional efforts to avoid a budget crisis are coming back to life days ahead of the year-end deadline.

In a statement issued by Boehner and his top lieutenants, the Republican leadership team said “the Senate must act first” to revive efforts to avert the $600 billion in automatic tax hikes and spending cuts due to be triggered on Jan. 1.

They promised that the House would weigh whatever legislation the Senate produced.

What are we paying these incompetent idiots for anyway? But of course no one is talking about cutting Congresspeople’s salaries–the pressure is all on Social Security recipients. Yesterday, Ruth Markus wrote a column in support of cutting benefits because seniors and disabled people (including disabled veterans) are getting too much money (the average SS check is $1,200 per month). She thinks everyone should gratefully embrace the Chained CPI.

Here’s how the CPI works. When taxes are being calculated, brackets, standard deductions, personal exemptions and the like are ratcheted up with inflation, protecting taxpayers from being forced to pay higher taxes for what is essentially the same amount of income they had previously.

Benefits — everything from Social Security to veterans’ benefits to federal pensions — are similarly adjusted upward to protect beneficiaries’ buying power from being relentlessly eroded.

Such indexing makes eminent sense. The difficulty — and the money-saving opportunity — arises because, in the view of most economists, the current method of calculating changes in the CPI overstates the inflation rate.

It fails to account for what economists call upper-level substitution bias, and what my mother would call plain common sense: If the price rises for a certain commodity in the basket of goods used to measure inflation, consumers will choose a cheaper alternative. In my house, when the price of beef soars, we substitute chicken.

The CPI doesn’t and, as a result, taxpayers are undercharged and beneficiaries are overpaid — a lot. The overestimate is small — less than 0.3 percentage points annually but, much like compound interest, it adds up over time.

What Marcus doesn’t seem to understand is that when your income is that low, beef and chicken are are both too expensive and you substitute peanut butter and dried beans. Except that peanut butter prices have skyrocketed–what’s the next step down, cat food?

Two economists responded to Markus. Dean Baker at the CEPR: Ruth Marcus Is Outraged by Overly Generous Social Security Checks.

Well, who can blame her? After all, we have tens of millions of seniors living high on Social Security checks averaging a bit over $1,200 a month at a time when folks like the CEOs in the Campaign to Fix the Debt are supposed to subsist on paychecks that typically come to $10 million to $20 million a year.

Anyhow, her main trick for cutting benefits is to adopt the chained consumer price index as the basis for the annual cost of living adjustment. This would have the effect of reducing benefits by 0.3 percentage points for each year of retirement. This means a beneficiary would see a 3 percent cut in benefits after 10 years, a 6 percent cut after 20 years and a 9 percent cut after 30 years. This is real money. Since Social Security is more than half the income for almost 70 percent of retirees and more than 90 percent of the income for 40 percent of retirees, the hit to the affected population would be considerably larger than the hit to the top 2 percent from ending the Bush era tax cuts.

But Marcus insists this cut must be done first and foremost in the name of accuracy, since the chained CPI is supposed to provide a better measure of the cost of living. She notes but quickly dismisses the evidence from the Bureau of Labor Statistics (BLS) consumer price index for the elderly (CPI-E), which shows that the rate of inflation seen by the elderly is somewhat higher than the overall rate of inflation.

Read Baker’s upteenth explanation of why the Chained CPI doesn’t accurately reflect spending for seniors at the link. He argues for continuing development of a CPI that takes into account that seniors spend greater proportions of their income on health care and basic necessities that can’t necessarily be replaced with cheaper substitutes.

Next, Jared Bernstein says he’s “convinced the Chained CPI is coming” and it is a benefit cut. He agrees with Baker that an elderly CPI would be a good thing, but says that Markus’ argument we should cut benefits now and deal with the injustices later makes no sense.

…as Dean notes, it would make a lot of sense to invest in a chained-weighted CPI that accounts for the notably different buying patterns of the elderly. Ruth Marcus critiques this point today but for reasons that don’t make sense to me. For example, she criticizes an elderly price index that would more heavily weight health care spending because “the burden of higher health costs falls unevenly among the elderly. Average costs are skewed upward by a minority who face very high out-of-pocket expenses…”

But a) all the commonly used price indexes use average costs and are thus “skewed” up and down when the underlying distribution is uneven, and b) there’s little question that the ‘old’ elderly—the ones most hurt by the switch to the chain-weighted measure—face high out-of-pocket medical costs.

Marcus goes on to endorse, as do we at CBPP, [immediately switching to the Chained CPI but protecting "vulnerable people from the impact"] and this is clearly the administration’s view as well—in fact, they’ve built in offsetting benefits to the poor, old elderly into their plan. That’s very important and salutary and one reason why I nervously support the switch.

But I’m more concerned than Ruth appears to be with the possibility that the current politics get us the chained CPI without the necessary protections.

It certainly looks like President Obama will go down in history as the Democrat who cut the New Deal off at the knees unless he suddenly realizes his legacy matters to him. Remember way back when Social Security was “off the table” because it doesn’t contribute to the deficit? Oh wait–that was only two weeks ago.

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