Friday, October 17, 2003
RETURN OF THE LOOMING CRISIS
You know that Krugman has penned something really awful when he begins by quoting a Nobel Prize winner in economics. Note to Paul: It’s usually not a good idea to start your columns with a Fruedian slip. And awful it is: Even though his ludicrous claim that the budget deficit will lead to a financial meltdown (a la Argentina) here in the U.S. was thoroughly discredited, he goes right back at it. To quote Tom Arnold, “Ballsy! Stupid, but ballsy!”
Krugman criticizes the President because he,
insists that there's no problem, that economic growth will solve everything painlessly. And that puts those who want to stop the looting — which should include anyone who wants this country to avoid a Latin-American-style fiscal crisis, somewhere down the road — in a difficult position. Faced with a what-me-worry president, how do you avoid sounding like a dour party pooper?
The better question is how do you avoid sounding like a blathering fool? Surely by now Paul Krugman must be aware of this chart from the Joint Economic Committee showing that the “weak economy and estimate changes” are responsible for 53% of the deficit. I suspect he has, because later in the column he notes:
Purists will raise two objections. The first is that an incomplete rollback of the Bush tax cuts won't be enough to restore long-run solvency. In fact, even a full rollback wouldn't be enough.
And how is it possible that he would have missed the recent news from the Congressional Budget Office that they had previously overestimated the size of the deficit by $25 billion? He didn’t miss it; like all evidence that doesn’t fit with his Bush-is-taking-us-to-hell-in-a-handbasket theory, he just ignores it.
But when there is no evidence to support a theory, he refers to it as though it were carved-in-stone truth:
With startling speed, we've blown right through the usual concerns about budget deficits — about their effects on interest rates and economic growth — and into a range where the very solvency of the federal government is at stake.
Uh, Paul, in the 1980s we had large deficits and high economic growth with low interest rates. In the 1990s we had low deficits with high economic growth and low interest rates. Such a pattern means that, basically, there is no correlation between the phenomena.
What’s even more instructive is to examine why Krugman advocates only a partial rollback of the Bush tax cut—i.e., rollback tax cuts for the wealthy, but not for the middle class:
Still, those who want to restore fiscal sanity probably need to frame their proposals in a way that neutralizes some of the administration's demagoguery. In particular, they probably shouldn't propose a rollback of all of the Bush tax cuts.
Here's why: while the central thrust of both the 2001 and the 2003 tax cuts was to cut taxes on the wealthy, the bills also included provisions that provided fairly large tax cuts to some — but only some — middle-income families. Chief among these were child tax credits and a "cutout" that reduced the tax rate on some income to 10 percent from 15 percent.
These middle-class tax cuts were designed to create a "sweet spot" that would allow the administration to point to "typical" families that received big tax cuts. If a middle-income family had two or more children 17 or younger, and an income just high enough to take full advantage of the provisions, it did get a significant tax cut. And such families played a big role in selling the overall package.
You mean the tax cuts did help at least some of the middle class, and helped them in a big way? Where on earth would I have gotten the idea that the tax cuts didn’t help the middle class? I’m sure you can guess:
By now you've probably read a lot about the economics of the administration's plan; all the criticisms are true. The plan has nothing to do with stimulus, since less than a dime on the dollar will arrive in the next year. Its benefits are almost ludicrously tilted toward the very, very affluent. (Exercise for readers: Explain how the administration can claim that the average family receives a $1,083 tax cut, when 80 percent of families will receive less than $1,000, most less than $300.)
Now that Krugman wants to sell a political strategy, he has to concede that “some—but only some” middle class folks got a tax cut. Also note how vague Krugman wording is. It is a “significant” tax cut, but he doesn’t specify how significant. And it is only for those families with “an income just high enough”, although he doesn’t say how high that is.
The fact that Krugman is so vague is more than sufficient reason to be suspicious. My suspicions seemed to be confirmed when I went to tax calculator at TurboTax. I entered married filing jointly with 2 kids, one worker earning $30,000, the other $10,000, and contriubting $1,000 a year to an IRA. Everything else was left at zero. According to the calculator, that family went from having a tax liability of $928 to getting a tax rebate of $105. That is a differece of $1,033. For a family of four with a “just high enough” income of $40,000, I’d say that’s pretty “significant.”
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Thursday, October 16, 2003
MORE ON SOCIAL SECURITY
My new column at the American Prowler.
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CUBS—A SILVER LINING
Believe it or not, I can find a little something good in the Cubs losing. First, let me establish that I was rooting for the Cubs in the NLCS. I really want a team to beat the puss-wad Marlins after they beat my beloved San Francisco Giants. Now, I’ll have to root for the American league team, possibly the—ugh, gasp, puke—Yankees. GO BOSOX!
Second, like many Americans, I love an underdog. And is there any greater underdog in all of professional sports than the Cubs? The longest suffering team and their fans finally breaking through—what a great story that would have been. Sorry to say, the Cubs ran into what is probably the hottest team in baseball. They also fell prey to Dusty Baker’s biggest weakness, his inability, at times, to pull a pitcher until it is too late. Baker managed the Giants for ten years; trust me on this.
Okay, so what is the good in the Cubs’ loss? I won’t have to see the following phrase in liberal editorials that endorse the Democratic candidate for President next year: “Yes, Dean [or Kerry, or whoever] may be a long shot against Bush. But if the Cubs can win the pennant…” As the election nears, I’m sure I’ll be reading all manner of undiluted crap. Because of the Cubs’ loss, that, thankfully, won’t be part of it.
(My apologies to all Cubs fans.)
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SEND YOUR MONEY TO DES MOINES—PLEASE!
The title of this editorial from the Des Moines Register denouncing more state budget cuts is headlined “Enough!” Allow me to translate: “Please raise taxes! If you don’t, the government will have to spend even less! WAAAAAHHHHH!!!!!”
If you think I’m exaggerating, then read this passage:
Another factor is cuts in income-tax rates enacted in the late "90s when the economy was hot. In short, Iowa has less-than-expected income to tax and lower taxes applied to that income.
Yep, our taxes are too low! That passage is written by someone who doesn’t understand the principle of “If you tax something more, you get less of it. If you tax something less, you get more of it.” Higher taxes on income since 1998—when the tax cut took effect—would mean we’d have even less income to tax today.
But tax cuts are not the problem. The real problem, which does not find its way into the editorial (surprise, surprise) is spending. From Fiscal Year 1994 to 2001 (the last budget before the current crisis began) spending on the General Fund portion of the budget grew 19.8% faster than inflation. Even with the cuts in the last two budget years, spending is still up 5.7% over inflation. And if we look at total spending (the General Fund plus the Non-General Fund) spending is up over inflation 23.7% from 1994-2001, and 14.9% from 1994-2003.
And, of course, we can never cut education:
Public schools are not in a mood to make more cuts on top of two years of bare-bones budgets and layoffs. And students at the state universities have seen tuition steadily grow at the same time the universities cut expenses. Let's not forget the community colleges, either. And, while education gets a lot of sympathy, there are the cities and counties that will see state aid drop, too, on top of dramatic cuts in state aid last session.
Bare-bones budgets? Well, let’s have another look at the numbers. Total state spending on education from FY 1994-2001 grew 21.4% faster than inflation. The cuts of the last two years have left it at a still healthy 9.7% above inflation. Furthermore, enrollment in Iowa’s primary and secondary schools has dropped 3.6% since 1997. In short, Iowans are spending more money on fewer students.
Thus, there is still plenty of room to cut spending. Yet in the minds of the Register editorialists government never has enough money. Hang on to your wallets, my friends.
P.S. I sent the Register a letter to the editor. We'll see if they print it.
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Wednesday, October 15, 2003
JUST A REMINDER
I'll be on the radio this morning discussing my new Social Security Study.
At 8am I'll be on KYKY, 1150 AM, with Maxine Seileman.
At 10am I'll be on WHO, 1040 AM, on the Mickelson in the Morning program.
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THE ECONOMY IS IMPROVING—NOTHING TO TALK ABOUT
That’s how I read Krugman’s column yesterday. Earnings are up, profits are up, productivity is up, and the last picture in the puzzle, job creation, may be just about to fall in place. Thus, Krugman can’t use the economy cudgel to beat the Bush tax cut anymore.
So, revert to Plan B: “The Deficit Crisis”! It’s coming to a first-world nation near you! Beware!
According to Krugman:
And there's one thing I can't help noticing: a third world country with America's recent numbers — its huge budget and trade deficits, its growing reliance on short-term borrowing from the rest of the world — would definitely be on the watch list.
Uh, yes, but we aren’t a third world nation, are we? I know that Krugman thinks Bush is putting us on the fast track to a Banana Republic, but that doesn’t make it so.
Next,
I'm not the only one thinking that. Lehman Brothers has a mathematical model known as Damocles that it calls "an early warning system to identify the likelihood of countries entering into financial crises." Developing nations are looking pretty safe these days. But applying the same model to some advanced countries "would set Damocles' alarm bells ringing." Lehman's press release adds, "Most conspicuous of these threats is the United States."
However, the next paragraph in that press release reads:
Lehman Brothers cautions that Damocles cannot be used alone to grasp a country’s full financial picture. “Damocles should be used but not abused. This is a useful starting point to determine a country’s vulnerability, but it must be embedded in a broader analysis that takes into account critical complexities like non-economic events and contagion to make a full assessment,” said Subbaraman some advanced countries "would set Damocles' alarm bells ringing."
Perhaps what Lehman Brothers means is that you have to take into account the fact that about 50% of the deficit today is caused by an economic slowdown. It follows, then, that a healthy economy will reduce the deficit. So much for that looming crisis. (Oh, and the link I provide to back up that 50% claim is from one of Krugman’s favorites, the Center on Budget and Policy Priorities.)
Last, I noted this bit in Krugman’s column:
But at a certain point we'll have a Wile E. Coyote moment. For those not familiar with the Road Runner cartoons, Mr. Coyote had a habit of running off cliffs and taking several steps on thin air before noticing that there was nothing underneath his feet. Only then would he plunge.
Well, I guess Krugman isn’t foolishly assuming that his readers know things anymore.
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BUSH HAS AN EDUCATION PROBLEM—ACCORDING TO THE MEDIA
Scrappleface has a great takedown on this article in the Washington Post about how the education issue will supposedly hurt Bush in 2004.
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THREE DAYS OF THE HAMMER
Yes, Tom Delay is an S.O.B. But for conservatives, he’s our S.O.B.
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Tuesday, October 14, 2003
CORNHEAD ON THE RADIO
I'll be on the radio tomorrow discussing my new Social Security Study.
At 8am I'll be on KYKY, 1150 AM, with Maxine Seileman.
At 10am I'll be on WHO, 1040 AM, on the Mickelson in the Morning program.
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SOCIAL SECURITY REFORM AND UNION HOUSEHOLDS IN IOWA
Today I am happy to announce that the think tank I work for, Public Interest Institute, is releasing a study I have authored entitled “Social Security Reform and Union Households in Iowa.” And I am so glad that it is out—if you even undertake a study like this, you’ll know why.
Part of the inspiration for it came from unions in the U.S., which are some of the biggest critics of Social Security reform. They often claim a reform involving personal retirement accounts (PRAs) will result in huge benefit cuts for Social Security recipients. My study takes that to task by examining how union households in Iowa would fare under a system of Social Security with PRAs.
My study modeled the PRAs on three reform plans: the 4% Plan modeled on Plan 2 of the President’s Commission to Strengthen Social Security which allows workers to invest 4% of their payroll up to $1,000 in a PRA; the 2.5% Plan modeled on the plan authored by Representative Nick Smith of Michigan that allows workers to invest 2.5% of payroll in a PRA with additional funds being put in PRAs of low-income workers; and the 3%-Bond Plan modeled on the plan authored by former Cato Institute Scholar Andrew Biggs which allows workers to invest 3% of payroll in their PRAs with an additional 2% being invested in government bonds. The study examined what the PRAs would return when invested in both funds from Fidelity, a well-respected investment firm, and the Thrift Savings Plan, the retirement program for Federal employees.
The study examined both 25-year-old and 35-year-old union households at six different income levels. The key tables in the study appear on pages 11 and 13. Overall, you can see that both households would fare, on average, much better under a system of PRAs. Here’s just one example: A low-income ($9,000 annually) union household in Iowa, age 25, fares much better under a system of PRAs. Under the 4% Plan, the household would net an average of $423 more in monthly benefits over what Social Security promises; it would $377 more under the 2.5% Plan, and $256 more under the 3%-Bond Plan.
Each plan had its own “offset” rate. The offset rate is the interest rate used to determine how much your traditional Social Security benefit will be reduced, in exchange for exercising the option of a PRA, when you retire. For the 4% Plan, the offset rate is 2%, which means that what you put into your PRA is compounded at an annual rate of 2% over the lifetime of the account. To do better than Social Security, your PRA only has to have an average rate of higher than 2%. The 2.5% Plan has a higher offset rate, of 3.7%, while the 3%-Bond Plan has progressive offset rates, with the average being about 3%.
I bring this up to point out one of the strengths of my study: I biased it in favor or what Social Security promises to pay. Here’s how it worked. First, I estimated the Social Security benefit of a household—we’ll use the $9,000 example—using the Social Security calculator at the Social Security Administration’s website. In the case of the household making $9,000, it was $366 per month, adjusted for inflation. I then reduced that amount based on what the Social Security Trustees Report says Social Security system will be able to pay, which is 73% by 2042. Thus, I reduced the benefit by 27%, which yields $267. I then took the amount that was in the PRA based on the offset rate, and put that into an annuity calculator. In the case of the Smith Plan, the monthly offset rate was $120, adjusting for inflation. That further reduces the benefit to $147. Thus, the amount invested in the PRA is going to have to yield more than $219 monthly, or almost 60% of the promised Social Security benefit, for the household to be better off. Yet, most of the funds I looked at did exceed that amount. For example, the C Fund—one of the funds available to Federal employees under the Thrift Savings Plan—yielded $860 in monthly benefit under the 2.5% Plan, far exceeding the $219 need to match what Social Security promises. That $860 is then added to the reduced benefit of $147, to yield $1007 in monthly benefits.
Finally, I have to note that this is not a free lunch. To shore up the Social Security in the near term will require transfers of revenue from the general fund portion of the Federal budget. However, it is less expensive to go this route than to pursue one of the other alternatives, such as large benefit cuts or big increases in the payroll tax. And unlike the other alternatives, reform offers taxpayers something more for their money.
P.S. I also need to acknowledge the organization For Our Grandchildren, who helped make this study possible. If you can, go to their website and sign up for their email ist.
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HE DIDN’T SAY IT WAS ‘IMMINENT’
In the wake of David Kay’s preliminary WMD report, the media has been spreading the fiction that President Bush said the threat from Iraq was imminent. The idea being, of course, that if we haven’t found WMDs, then the threat couldn’t have been imminent; thus, Bush was wrong or (as some probably want to imply) he lied.
But this is from Bush’s State of the Union speech:
Some have said we must not act until the threat is imminent. Since when have terrorists and tyrants announced their intentions, politely putting us on notice before they strike? If this threat is permitted to fully and suddenly emerge, all actions, all words, and all recriminations would come too late. Trusting in the sanity and restraint of Saddam Hussein is not a strategy, and it is not an option.
A number of bloggers have been all over this, especially Andrew Sullivan. Here’s his post on a FrontLine episode; there is more in this link (scroll up and down).
Meanwhile, Don Luskin has compiled a number of quotes from Democrats (with the aid of Snopes.com and J.R. Whipple). Also, Hoystory puts the smackdown on Senator Jay Rockefeller.
Finally, Andrew Sullivan notes that the blogosphere’s calling the media on this may be hitting home. He links to an NY Times editorial on the Kay report, and notes that they did not use the word imminent. Small progress, perhaps, but babysteps are better than no steps at all.
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A REAL PIECE OF (GENETICALLY ENGINEERED) WORK
The New York Times op-ed page is upset that poor nations don’t have more access to genetically modified food. Nothing wrong with that.
But look at who they blame: the technology, foreign governments, and the companies that produced the technology.
Hmmm…is there anyone missing from that list? Maybe, oh I dunno, environmentalists?
Perhaps next time the Times can let those who spread the “Frankencorn” nonsense share some of the blame.
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Monday, October 13, 2003
NOVAK DOESN’T MATTER—NO WAIT!
Jay Caruso notes some serious flip-flopping on the Wilson-Plame scandal.
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ARE VOTERS STUPID?
My new column at the American Prowler.
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