Republicans Hate Government Programs that Work because they Prove them Wrong

Elderly-Pensioners-I’m always bemused by conversations with government-hating Republicans because the assumption is that the private sector always does it better and government programs aren’t–by definition–cost or service efficient.   As you know, I’m an economist by training.  This puts me in the category of people that look specifically for things that minimize costs and maximize output because economics is chiefly concerned with helping society allocate scarce resources to the most efficient use.  So, I examine each product or service and look at the various characteristics and look for signs of market vitality or market failure.

It becomes obvious fairly quickly that the government is actually best at doing some things and that in some markets, the government must interfere to guarantee an efficient outcome.  This totally goes against the ideological bent of those that just want to drown government in their golden bath tubs.  This is because they’re really not looking for the best outcomes for the market or for the society.  They’re looking to set up a zero-sum game where they get as much as possible because most of them have been set up into positions where they can do so through no attributes of their own.  This means that others get less by no fault of their own which goes without consideration. No one also discusses the aspect that it comes from “no fault of their own” because it goes against the “these people are weak and dependent” canard that the advantaged like to push.  Most so-called ‘free-market champions’ don’t like efficient, competitive markets because these markets produce efficient outcomes.  The advantaged really prefer markets that they can game so they get more than an efficient market would allocate.

I’ve spent some time in the past describing situations where it’s really impossible for the market to work without some government interference.  Usually, these markets are full of risks like  information asymmetry and moral hazard.  Actually, I think most of you recognize those terms because I use them so much.  Essentially, any market can be gamed if the demand or supply of that market exhibits pretty specific characteristics.  We’ve known these characteristics for a very long time.  They are no secret.  The markets that function the least efficiently when left alone are markets where the pricing mechanism doesn’t work because it’s for a good or service that is hard to price. Many times there’s the risk of unknown or hidden information where there are a lot of third parties that step in to provide expert information because the buyers can’t navigate the markets by themselves.

Any market where there are information brokers or ‘insurance’ or ‘maintenance’ plans usually indicates a good or a service where the buyers are in a weak position of knowing what’s going on and have to pay others to negotiate the risk for them. This also makes them vulnerable to scams. Financial markets are rife with that kind of situation.  So are markets where it’s hard to get the service or good because it’s so pricey, rare, or technical and not many people can afford it.  Some of the things that many countries offer through government provision are health insurance or service, education and scientific research, public safety, and old age and disability insurance.  We’ve found–through careful study–that government provision of many of these things is cheapest and most efficient because placing every one in one market eliminates these risks.  These programs have come under increasing attack in the US by the current nuts in the Republican Party and a bunch of sold-out Democrats. That’s because there are profits to be made from re-introducing the risk into the market.

The attacks on government provision are never based on the efficacy of the programs themselves.  Almost every one can see that programs like Soup_Kitchens_2Head Start and Social Security do exactly what they’re supposed to do.  In most places–including the states where I grew up–public education works so well that the demand for private education is fairly limited.  But, rather than look at what’s right with the public schools in Minnesota or Nebraska or North Dakota, Louisiana Governor Jindal turns to a private providers.  We’ve had that now for about 7 years and the school district in New Orleans filled with private charters has no better outcomes than it did before privatization.  The experiment is already shown to be failing but still, the push is on. Similarly, if you would turn retirement funds completely over to Wall Street, chances are you’d have the same kinds of miserable failures that characterize most 401K plans. One of the biggest problems is fee churning where people pay exorbitant fees that drain their returns and principle despite fund performance. Such is profit-driven third party provision.

So, I could spend some more virtual ink on the documented failures of  these many privatization schemes for goods and services where the academic studies document the failures and the press and the politicians ignore the stylized facts.  Instead, I want to share Josh Barro’s excellent article explaining why we should be expanding Social Security--one of these highly successful programs–rather than quietly watch the program be strangled by greedy ideologues. He’s provided wonky graphs and numbers.  I’m showing you photos of elderly poverty during the Great Depression.  Elder poverty was vast at that time.  Social Security changed that.  So, why strangle something that works so well?  Take a look at those pictures because if these folks get away with dismantling the program, those situations will return.  What kind of burden will that leave to our children or will they just gently step over all the sick and dying old people in the streets who haven’t been taken in by their still struggling relatives?

With everyone in Washington experiencing sea-bass-induced euphoria, we’re talking again about a “grand bargain” to replace the sequestration and shrink the federal budget deficit. And that means we’re talking about using the chained consumer-price index, a lower and more accurate inflation measure, to modestly raise taxes and cut Social Security benefits over time.

Back in December, I wrote that applying chained CPI to Social Security is the wrong solution to our budget problems: It’s just a way of dressingiYhcYKXlJ1gs up a cut to retirement benefits at a time when retirement insecurity is rising. Despite its problems, Social Security is the best-functioning component of the U.S.’s retirement-saving system. Instead of cutting, the federal government should be expanding its role in retirement saving.

I’m always struck when people talk about Social Security as “just” an insurance program, when it’s in fact the most important retirement-saving vehicle. The chart below, adapted from a 2012 paper by Boston College Professor Alicia Munnell, shows the financial situation of a “typical” pre-retirement household. These are the mean holdings of a household in the middle net worth decile among households headed by people age 55 to 64.

Okay, I had to give into my inner wonk and put in one graph.  As you can see, most older Americans are or will be highly reliant on their Social Security Savings.  I would also like to remind a few people that folks of my age were told if we went along and paid all of our working incomes into Ronald Reagan’s big FICA tax increase, our Social Security benefit would be safe. So, how does it feel to watch these folks ready and able to pull the rug out from under those folks especially after most of their investments and home prices have not really recovered since the Great Recession of 2007.

Keep in mind, that most folks nearing or at retirement rely on bonds which are paying nearly historically low rates of interest and will continue to do so for some time because of Fed policy to keep interest rates low.  You are told to shift your funds away from equities and into bonds as you close in on retirement.  Anyone that followed that advice for their 401ks or 403bs is probably looking at a pretty grim situation.  The same Fed Policy that is stimulating all those grand stock market surges and corporate profits is killing most older adults and retired folks’  retirement savings portfolios.  And, that implies some that they have them.  Large number of studies say that a lot of folks do not have any kind of retirement benefit or savings outside of their homes and social security.  So, you can see that I’m really not kidding when I envision kids either having to take their grandparents into their homes or endure stepping over them in the streets.  Social Security is the program that keeps the elderly independent, fed, and alive.  Or, as Barro puts it more succinctly:

Social Security is dominant: Forty-nine percent of this household’s wealth is in the form of the expectation of drawing government benefits in the future. The next largest slice, 23 percent, is accrued benefits in traditional pension plans. But that figure is skewed by a handful of workers who are lucky enough to participate in such plans; as of 2010, only 14 percent of U.S. workers were earning benefits in such a plan.

Private saving for retirement is woeful. This typical near-retirement household has just $42,000 in retirement accounts and $18,300 in other financial assets. For most Americans, Social Security isn’t augmenting private saving; private saving is (just barely) augmenting Social Security.

And as both home equity and stocks were battered over the last few years, retirement insecurity worsened. Munnell and her colleagues estimate that as of 2010, 53 percent of American households were on track to be more than 10 percent below the amount of assets they would need at age 65 to maintain their standard of living in retirement, up from 44 percent in 2007.

There are many ways to enhance Social Security.  Barrow mentions three of them.  But, as he points out, none of those are the default option of the Beltway crowd.

The default assumption in Washington is that Social Security needs to be cut to fix our long-term budget problems. But it’s really a question of priorities. Social Security is, by definition, an efficient program: About 98 percent of its costs go out in the form of benefit checks, which the beneficiaries spend on whatever they value most. If we raise taxes on the people who would gain from increased benefits and cut in areas like Medicare, where the government buys a lot of things we don’t really need, we can afford to augment the federal role in retirement saving and alleviate the problem of retirement insecurity.

See that?  We’re talking about an efficient government program.  But, again, that seems to just fly in the face of the current Republican party’s–and more than a few Democratic enablers–110912_great_depression_ap_328desire to recreate Mississippi in every possible place in America.  They don’t want any example of  government programs that work well because that doesn’t fit in with their 100% privatization schemes that increase their personal wealth and the wealth of their plutocrat overlords.  The most sad thing is that the most successful public programs are those that provide security to the most vulnerable populations; poor children and the elderly.  So, granny and baby-starving Republicans are literally hurting the least among us to do the bidding of their corporate plantation masters who seem to never, ever get enough.

It’s obviously not about what works and what doesn’t or what’s an efficient use of tax payer money and what’s not.  It’s about enriching the few at the cost of the many while using outright lies and distortions to confuse the issue.  We don’t need to socialize many things in order to achieve an efficient economy.  Indeed, there are many markets that would operate better without government interference to subsidize the suppliers.  But, you rarely hear any one talk about removing the many market-killing examples of corporate welfare.  Instead, you only hear about sinking the government programs that are efficient and provide a modicum of safety to the least among us.  I think a lot of it is because it outrages their sensibilities to see themselves be proved so hugely wrong time and time again.  Government subsidies to corporations are seen as enabling the free market even when they do the very opposite. But, political decision makers create or make programs inefficient to support their world views.  This makes the ridiculous attacks on Social Security and Head Start even more spurious. What really kills me is the number of pundits that would rather spout platitudes pushed in their mouths by their delusional overlords than find studies like Munnell’s that prove them so very wrong.  At least a few of them–like Josh Barro at Bloomberg who is also the son of one of the gods of economics–takes the time to do a little research. Now, if some of that research would only reach the President’s desk.


Senator Bernie Sanders Introduces Bill to Apply Payroll Tax to High Incomes

Bernie-Sanders

I’m sure most of the corporate media will ignore this, but Senator Bernie Sanders today introduced a bill to “strengthen Social Security” by applying payroll taxes to all income–including from self-empoyment–to people earning more than $250,000 annually. So far I’ve only seen this reported by one national media outlet.

The Hill:

Sanders and other liberals are concerned Obama may strike a deficit-reduction deal with Republicans that would reduce Social Security benefits by adopting a less generous way of adjusting benefits for inflation.

Sanders on Thursday introduced legislation co-sponsored by Senate Majority Leader Harry Reid (D-Nev.) to raise payroll taxes on the wealthy to extend the solvency of Social Security.
Democratic Sens. Barbara Boxer (Calif.), Amy Klobuchar (Minn.), Sheldon Whitehouse (R.I.), Al Franken (Minn.) and Richard Blumenthal (Conn.) have co-sponsored the bill as well.

Representative Peter De Fazio is introducing a companion bill in the House.

“Social Security is facing an unprecedented attack from those who either want to privatize it completely or who want to make substantial cuts,” said Sanders at a press conference. “The argument being used to cut Social Security is that because we have a significant deficit problem and a $16.6 trillion national debt, we just can’t afford to maintain Social Security benefits.

“This argument is false. Social Security, because it is funded by the payroll tax, not the U.S. Treasury, has not contributed one nickel to our deficit,” he said.

Sanders estimates switching to a chained-CPI formula for determining benefits for Social Security would result in the average 65 year old living on about $15,000 a year receiving $650 less each year when they turn 75 and $1,000 less a year when they turn 85.

The bill is supported by (PDF) “The Strengthen Social Security Campaign, comprised of more than 320 organization throughout the country representing more than 50 million Americans, including the National Committee to Preserve Social Security and Medicare; AFL-CIO; United Steelworkers; Alliance for Retired Americans; Social Security Work; Campaign for Community Change; The Arc.”

The AARP announced yesterday that it is going to be running ads

If you haven’t read the op-ed by Thomas Edsall (The War on Entitlements) in today’s New York Times, I hope you will take the time to do so now. Thanks to RalphB for posting the link on the morning thread! Here’s the introduction:

The debate over reform of Social Security and Medicare is taking place in a vacuum, without adequate consideration of fundamental facts.

These facts include the following: Two-thirds of Americans who are over the age of 65 depend on an average annual Social Security benefit of $15,168.36 for at least half of their income.

Currently, earned income in excess of $113,700 is entirely exempt from the 6.2 percent payroll tax that funds Social Security benefits (employers pay a matching 6.2 percent). 5.2 percent of working Americans make more than $113,700 a year. Simply by eliminating the payroll tax earnings cap — and thus ending this regressive exemption for the top 5.2 percent of earners — would, according to the Congressional Budget Office, solve the financial crisis facing the Social Security system.

Gore vidal quote

So why don’t we talk about raising or eliminating the cap – a measure that has strong popular, though not elite, support?

I think we all know the answer to that question, don’t we?


Jay Carney: “Technical” Social Security Cuts Still On The Table

Obama social security cuts

Jay Carney was sent out today to mouth Obama’s slimy weasel words at the daily press briefing:

Q [Johnathan Karl, ABC] What about reducing the annual cost of living increases for Social Security recipients?

MR. CARNEY: Again, as part of a big deal, part of a comprehensive package that reduces our deficit and achieves that $4-trillion goal that was set out by so many people in and outside of government a number of years ago, he would consider that the hard choice that includes the so-called chain CPI, in fact, he put that on the table in his proposal, but not in a cherry-picked or piecemeal way. That’s got to be part of a comprehensive package that asks that the burden be shared; that we don’t, as some in Congress want, ask seniors to bear the burden of further deficit reduction alone, or middle-class families who are struggling to send their kids to college, or parents of children who are disabled who rely on programs to help them get through….

Q But I just want to be clear what you said at the beginning of that answer, which is the President….as part of an overall balanced approach, he does not rule out effectively reducing benefits for Social Security recipients?

MR. CARNEY: He has put forward a technical change as part of a big deal — and it’s on the table — that he put forward to the Speaker of the House. The Speaker of the House, by the way, walked away from that deal even though it met the Republicans halfway on revenues and halfway on spending cuts and included some tough decisions by the President on entitlements. The Speaker walked away from that deal.

But as part of that deal, the technical change in the so-called CPI is possible in his own offer as part of a big deal.

Excuse me? Cutting Social Security benefits by means of the Chained CPI is NOT a “technical change.” Once again, Bernie Sanders explains what is really going on: Chained CPI: An economic, moral disaster.

How many candidates for Congress last year won on the following platform?

1. That Social Security cost-of-living adjustments are too generous. Social Security should be cut over the next two decades by more than $1,000 a year for 85-year-old widows living on $1,200 a month.

2. That benefits earned by disabled veterans as a result of losing their arms, legs or eyesight in Iraq and Afghanistan are too generous. Disabled veterans’ benefits should be cut over the next 15 years by more than $1,400 a year.

3. That working families and the middle class don’t pay enough in taxes. We need to enact an across-the-board tax increase that disproportionately hurts workers making between $30,000 and $40,000 a year.
Answer: None.

And yet all of these things will happen if Congress changes the way inflation is calculated by switching to a consumer price index (CPI) designed to lower cost-of-living adjustments….Wall Street billionaires and other supporters claim that changing the consumer price index is a “minor tweak.” Tell that to the millions of senior citizens trying to survive on just $14,000 a year whose Social Security benefits would be cut overall by $112 billion during the next decade.

Average 65-year-olds would get $650 a year less in benefits when they turn 75 and see a $1,000 a year cut when they turn 85.

obamafingerscrossed

Earlier, in response to an earlier question by Jonathan Karl, Carney supposedly took raising the eligibility age for Medicare off the table.

But why should we believe him? Sure enough Beltway Bob interprets the weasel words for us. On raising the Medicare age:

the cutoff for Medicare eligibility age has been under consideration repeatedly, giving health-care experts more time to run the numbers and parse their results. Their conclusion, essentially, was that raising the Medicare eligibility age is counterproductive: It cuts the deficit but raises national health spending as it moves seniors to more expensive insurance options. Some in the White House are simply more skeptical of the policy than they were two years ago.

BUT…

The White House wants more revenues, and they want to get them through tax reform. But they’re not going to get $1 trillion in newer revenues. They’re hoping, at best, for another $600 billion or so. But that’s not enough for the administration to take the hit on the Medicare eligibility age. So they’re making their base happy and taking it off the table.

Does that mean it’s really off the table? Well, if Boehner went to the White House tomorrow and offered $1 trillion in new revenues, half of which would come via a carbon tax, in return for Medicare eligibility, I’m pretty certain the White House would hear him out. But the White House is pretty sure Boehner’s not going to offer that deal.

Digby has an update on possible “changes” to Medicare.

Here’s your Village in action. We have Ben White, POLITICO Chief Economic Correspondent, declaring on twitter that the White House offer to cut Social Security just isn’t going to get the job done:

If all WH has in return for another tax increase is superlative CPI I really don’t see any deal materializing.
— Ben White (@morningmoneyben) February 11, 2013

Ok fine, he’s just being a typical jaded and “savvy” Politico reporter. Why, of course, anyone who’s anyone knows that simply destroying Social security won’t be enough.

But look at how the White House immediately responds:

@morningmoneyben Remember we have an offer on the table that includes CPI, but also inclues Medicare changes and spending cuts

— Dan Pfeiffer (@pfeiffer44) February 11, 2013
@morningmoneyben R’s have no offer on the table, no plan, and no longer agree with their previous position that tax refom can reduce deficit
— Dan Pfeiffer (@pfeiffer44) February 11, 2013

See? We really do want to cut Social Security but that’s not all! We also want to “change” medicare and cut more spending. Really! We just dying to enact more austerity and we’re willing to do it as far as the eye can see! Those Republicans won’t even agree to tax reform, (which everyone knows means that we’re going to lower corporate rates.)

Ok, how about if we agree to slash funding for education and Veteran’s health care? Would you give us credit then? How about if we agree to ritualistically kill Big Bird on national TV? Then will you believe that we’re Grown-ups? CAN’T YOU SEE THAT WE ARE THE GROWN-UPS!!!! Why won’t you give us credit for being grown-ups ? We try so hard….

Read the rest of Digby’s post for her review of yesterday’s Sunday House of Pain with Dancin’ Dave.

Have I mentioned lately how much I fucking hate these fucking mealy-mouthed granny starvers? (h/t Mike Malloy) If we’re really lucky, and John Boehner is as stupid as he looks and sounds, Ben White’s prediction will be correct and there won’t be a “big deal.” Assuming Obama doesn’t get down on he knees and beg the Republicans to cut Social Security anyway, that is.


Monday Reads

baby new yearHappy New Year’s Eve!!

Congress continues to drag us down its path of dysfunction.  This headline from Lindsey Graham should win him a congressional hearing for sedition.

But in an interview on Fox News Sunday this morning, Sen. Lindsey Graham (R-SC) threatened to oppose this must-pass bill unless Social Security benefits are taken away from millions of future retirees:
I’m not going to raise the debt ceiling unless we get serious about keeping the country from becoming Greece, saving Social Security and Medicare [sic]. So here’s what i would like: meaningful entitlement reform — not to turn Social Security into private accounts, not to take a voucher approach to Medicare — but, adjust the age for Social Security, CPI changes and means testing and look beyond the ten-year window. I cannot in good conscience raise the debt ceiling without addressing the long term debt problems of this country and I will not.

Unbelievable. We continue to see a series of really ridiculous memes spouted by the right. These included dragging Social Security into the debt crisis when it has nothing to do with the Federal budget, deficit or debt other than it is a primary investor in Treasury bills and bonds. We also continue hear about our country going the way of Greece or going bankrupt. We have the reserve currency of the world, a huge country filled with taxable assets and treasury bills and bonds under high demand. How many times do I have to call shenanigans on these cretins?

Graham isn’t the only republican willing to take the debt ceiling hostage to raise the age of social security. 

Two Republican senators want to use the threat of an economic meltdown to raise the retirement age and cut Medicare. Sens. Bob Corker (R-TN) and Lamar Alexander (R-TN)  introduced a plan today that would raise the federal debt limit by $1 trillion in exchange for $1 trillion in cuts to Medicare, Medicaid, and Social Security, as The Hill reported:

The Corker-Alexander dollar-for-dollar plan has several components.

It would structurally reform Medicare by creating competing private options giving seniors greater choice of healthcare plans. It would not, however, cap Medicare spending.

The plan would also give states more flexibility to manage Medicaid programs and prevent states from “gaming the federal share of the program with state tax charges.”

It would gradually raise the Social Security retirement age and use the “chained CPI” formula to calculate cost-of-living adjustments, curbing the growing cost of benefits.

In exchange, it would direct the debt limit be increased by the same amount as the savings generated from entitlement reform.

The U.S. will hit its debt limit  on or around December 31st. The Treasury Department estimates that, using extraordinary measures, it could avoid default for another two months or so. Allowing the U.S. to default on its debt via not raising the debt ceiling could cause a complete financial meltdown. The 2011 debt ceiling debacle — during which House Republicans nearly pushed the country into a default due to their intransigence on taxes — cost the country  about $19 billion in higher interest payments and  at least one million jobs.

So, here’s an interesting bit of history on its way to the British Museum.

The largest Viking ship ever found, a 118 foot troop carrier, is to go on display at the British museum 1,000 years after it helped King Canute control the seas of northern Europe.

The long boat, known as Roskilde 6 because it was part of a batch found in the Danish city, is slowly being dried out in giant steel tanks.

Once it is stabilised and fitted to a steel frame, it will travel to Britain to go on display at the British museum where it will be a star attraction at an exhibition.

The warship was discovered by chance in 1996 at Roskilde as the local ship museum was being extended.

It is believed it was deliberately sunk along with other ships to narrow the fjord and protect the approach to the former capital of Denmark.

It was an incredible example of ship technology in its day and would have taken up to 30,000 hours to build.

Once again, I agree with Paul Krugman who says that deficit reduction really isn’t the Republican goal in all of these fiscal cliff talks.  All we’d have to do is go back to the Eisenhower tax rates and we’d solve the problem pretty quickly which is why I hate it whenever I hear an idiot talk about bankrupting grandchildren’s future.  Again, World War 2 didn’t depress the 1950s or 1960s did it?  That level of debt and high, high tax rates didn’t bring about a second great depression.

Evan Soltas of Wonkblog and Joe Weisenthal of Business Insider both make the same point, in more detail, that I tried to make in my series on ONE TRILLION DOLLARS: the current budget deficit is overwhelmingly the result of the depressed economy, and it’s not clear that we have a structural budget problem at all, let alone the fundamental mismatch between what we want and what we’re willing to pay for that people like to claim exists.

Bush should’ve never been allowed to run two wars for decades without making people pay for it.

India’s outrage grows over the instances of gang rape and the death of one 23 year old woman.  Police are preparing arrest warrants in the case and will charge india protestssix men with murder.

The trial of the six, who allegedly assaulted the physiotherapy student in the back of a bus on Dec. 16, will start after police file charge documents on Jan. 3, Delhi police spokesman Rajan Bhagat said by phone today.

An Air India plane brought the woman’s body back from Singapore and it was cremated today, the Press Trust of India reported. Demonstrators gathered at the Jantar Mantar, an 18th- century observatory and traditional rallying point, demanding speedy punishment for the alleged rapists while some held placards calling for them to receive the death penalty.

Thousands joined protests and candlelit vigils to mark the death yesterday. Some protesters held placards calling for the improved treatment of women in India as they congregated in Mumbai, Hyderabad and Bangalore. Others braved the cold winter’s evening in New Delhi to carry candles or meet in quiet prayer.

So, that’s my offerings today.  What’s on your reading and blogging list today?


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

cat.rain

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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