Mike Konczal

Roosevelt Institute Fellow

Recent Posts by Mike Konczal

  • Should President Obama Announce No Prioritizing Payments in the Debt Ceiling, or Start Minting Platinum Coins Daily?

    Jan 9, 2013Mike Konczal

    Steve Bell, Loren Adler, Shai Akabas and Brian Collins of the Bipartisan Policy Center recently put out an excellent analysis of what will happen if we breach the debt ceiling. Technically we've already breached the debt ceiling on December 31st, but Treasury has started extraordinary measures to juggle payments and borrow money. This can't go on forever, and it won't. The paper concludes that the "X date," when there is officially not enough money to pay all the bills due on that date, will occur between February 15th and March 1st.

    What's most worrisome about the report is how uncertain they are about what will happen afterward. The main possible strategy they discuss is Treasury starting a process of "prioritization," where they pick and choose what payments to make as the money comes in each day. In theory the United States wouldn't default on its debts, because it could prioritize interest payments.

    The only problem is that it isn't clear that they have the legal authority to do that. As the BPC noted in a previous blog post, there's a one-page, non-binding GAO report from the 1980s that suggests the executive branch would be able to do this. However, a long history of "impoundment," or the executive branch ignoring or disobeying spending orders, and the subsequent battles show that this is not uncontroversial.

    And as Josh Barro noted on Twitter, there are days when the Treasury couldn't make the interest payment based on the income of that day. And these are some thin margins on the day-to-day measures; if some come in higher or lower than anticipated, we might miss an interest payment even if Treasury tried to prioritize. According to BPC, the money coming in and out is "lumpy," so these risks are high. Beyond that, it isn't even clear that Treasury has the technology or processes in place to do this successfully.

    It's important to remember that the conservative think tanks argue that the government can always prioritize interest payments, so there's no risk of default if we go past the "X date." I documented this as their argument from 2011, and it still is being used. As the idea of using the debt ceiling becomes normalized in the Washington press, the idea that we can't default because the president can always prioritize the interest payment might become a form of justification for why the new normal isn't so bad.

    Should President Obama announce that if we breach the debt ceiling the government won't make any payments, including on interest, period? The downside is all on the president if he tries. If he says he can still prioritize interest payments, but there's an unknown glitch or difficulty with the day-to-day cash flows, it is a major embarrassment for the White House. And if he does start prioritizing payments, the White House could face serious political blowback from deciding who to pay. Treasury paying bondholders and military contractors but not Social Security or veteran's hospitals -- there are an infinite number of bad headlines. If Treasury is prioritizing these, even because Congress has forced it to, it is a losing proposition for the White House. And you can't lose the game if you don't play.

    The Real Problem With a Trillion Dollar Platinum Coin

    The BPC report also shows a way to operationalize the platinum coin strategy. There have been numerous write-ups of the platinum coin strategy, which would allow the Treasury to create large-denomination platinum coins to deposit at the Federal Reserve, thus keeping the government funded if it can't borrow money. Matt O'Brien sums up everything you want to know, and Interfluidity and Ryan Cooper have link roundups. The link roundups give you a sense of the critics of this strategy. BPC calls it "impractical, illegal, and/or inappropriate" (my favorite things!), while most think of it as unserious.

    I think the bigger problem of the trillion-dollar platinum coin strategy isn't the platinum but the trillion. I worry that the public will either think a trillion-dollar coin means the government is changing, in a big way, how it funds itself permanently, or that President Obama wants to bulldoze Congress on all spending authority to spend an extra trillion dollars, rather than what it is, which is a mechanism to keep spending Congress already passed going.

    Luckily, scanning the BPC daily timetables, on most individual days the deficit between money coming in and going out will be between $10 and $20 billion. (There are a few days where it will be on the order of $50 or $60 billion, however.) Here's an example:

    So, instead of a trillion-dollar coin, what if the president said, "I have a constitutionally obligated responsibility to carry out the spending Congress has authorized. I have no legal authority to prioritize payments, and the process is too risky for us to try. Therefore I will mint a $20 billion coin each day until Congress raises the debt ceiling. That is just enough to make the payments Congress has required me to make."

    It takes the trillion out of the headline. The focus is back on day-to-day spending rather than higher-level arguments about whether or not the United States government can run out of money. With actual speechwriters, the pitch could make sense to the public. And insiders watching it would understand it is the same exact thing as the trillion-dollar platinum coin. Interfluidity brought up the idea of smaller denomination platinum coins. Tying it to one-coin-a-day will help frame the discussion where it needs to be, which is Congress provoking a constitutional crisis by refusing to fund money it has already spent.

    Thoughts?

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    Steve Bell, Loren Adler, Shai Akabas and Brian Collins of the Bipartisan Policy Center recently put out an excellent analysis of what will happen if we breach the debt ceiling. Technically we've already breached the debt ceiling on December 31st, but Treasury has started extraordinary measures to juggle payments and borrow money. This can't go on forever, and it won't. The paper concludes that the "X date," when there is officially not enough money to pay all the bills due on that date, will occur between February 15th and March 1st.

    What's most worrisome about the report is how uncertain they are about what will happen afterward. The main possible strategy they discuss is Treasury starting a process of "prioritization," where they pick and choose what payments to make as the money comes in each day. In theory the United States wouldn't default on its debts, because it could prioritize interest payments.

    The only problem is that it isn't clear that they have the legal authority to do that. As the BPC noted in a previous blog post, there's a one-page, non-binding GAO report from the 1980s that suggests the executive branch would be able to do this. However, a long history of "impoundment," or the executive branch ignoring or disobeying spending orders, and the subsequent battles show that this is not uncontroversial.

    And as Josh Barro noted on Twitter, there are days when the Treasury couldn't make the interest payment based on the income of that day. And these are some thin margins on the day-to-day measures; if some come in higher or lower than anticipated, we might miss an interest payment even if Treasury tried to prioritize. According to BPC, the money coming in and out is "lumpy," so these risks are high. Beyond that, it isn't even clear that Treasury has the technology or processes in place to do this successfully.

    It's important to remember that the conservative think tanks argue that the government can always prioritize interest payments, so there's no risk of default if we go past the "X date." I documented this as their argument from 2011, and it still is being used. As the idea of using the debt ceiling becomes normalized in the Washington press, the idea that we can't default because the president can always prioritize the interest payment might become a form of justification for why the new normal isn't so bad.

    Should President Obama announce that if we breach the debt ceiling the government won't make any payments, including on interest, period? The downside is all on the president if he tries. If he says he can still prioritize interest payments, but there's an unknown glitch or difficulty with the day-to-day cash flows, it is a major embarrassment for the White House. And if he does start prioritizing payments, the White House could face serious political blowback from deciding who to pay. Treasury paying bondholders and military contractors but not Social Security or veteran's hospitals -- there are an infinite number of bad headlines. If Treasury is prioritizing these, even because Congress has forced it to, it is a losing proposition for the White House. And you can't lose the game if you don't play.

    The Real Problem With a Trillion Dollar Platinum Coin

    The BPC report also shows a way to operationalize the platinum coin strategy. There have been numerous write-ups of the platinum coin strategy, which would allow the Treasury to create large-denomination platinum coins to deposit at the Federal Reserve, thus keeping the government funded if it can't borrow money. Matt O'Brien sums up everything you want to know, and Interfluidity and Ryan Cooper have link roundups. The link roundups give you a sense of the critics of this strategy. BPC calls it "impractical, illegal, and/or inappropriate" (my favorite things!), while most think of it as unserious.

    I think the bigger problem of the trillion-dollar platinum coin strategy isn't the platinum but the trillion. I worry that the public will either think a trillion-dollar coin means the government is changing, in a big way, how it funds itself permanently, or that President Obama wants to bulldoze Congress on all spending authority to spend an extra trillion dollars, rather than what it is, which is a mechanism to keep spending Congress already passed going.

    Luckily, scanning the BPC daily timetables, on most individual days the deficit between money coming in and going out will be between $10 and $20 billion. (There are a few days where it will be on the order of $50 or $60 billion, however.) Here's an example:

    So, instead of a trillion-dollar coin, what if the president said, "I have a constitutionally obligated responsibility to carry out the spending Congress has authorized. I have no legal authority to prioritize payments, and the process is too risky for us to try. Therefore I will mint a $20 billion coin each day until Congress raises the debt ceiling. That is just enough to make the payments Congress has required me to make."

    It takes the trillion out of the headline. The focus is back on day-to-day spending rather than higher-level arguments about whether or not the United States government can run out of money. With actual speechwriters, the pitch could make sense to the public. And insiders watching it would understand it is the same exact thing as the trillion-dollar platinum coin. Interfluidity brought up the idea of smaller denomination platinum coins. Tying it to one-coin-a-day will help frame the discussion where it needs to be, which is Congress provoking a constitutional crisis by refusing to fund money it has already spent.

    Thoughts?

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  • What Was Just Watered Down in Basel's Liquidity Requirements?

    Jan 8, 2013Mike Konczal

    Let’s say you were trying to make a personal budget. We can imagine two reasonable ideas you would want to incorporate into this budget. The first is that you want to make sure you can pay your bills if your income suddenly freezes up or you suddenly need cash. You want to make sure your savings are sufficiently liquid in case there is an emergency.

    Another rule is that you want your time horizon of your debts to match what you are buying with those debts. You don’t want a 4-year mortgage and a 30-year auto loan; you want a 4-year auto loan and a 30-year mortgage. And for our purposes, you really don’t want to buy either on a credit card, since the payment terms can fluctuate so often in the short term.

    These two ideas are behind two of the additional special forms of capital requirements designed by the Basel Committee on Banking Supervision in Basel III. The first is a “Liquidity Coverage Ratio” (LCR), which is designed to make sure that a financial firm has sufficiently liquid resources to survive a crisis where financial liquidity has dried up for 30 days. The second is a “Net Stable Funding Ratio,” which is designed to complement the first rule and seeks to incentivize banks to use funds with more stable debts featuring long-term horizons.

    Basel has just introduced some changes into their final LCR rule, so let’s take a deep dive into this capital requirement rule. Before we introduce some headache-inducing acronyms, remember that the basics are simple here. Banks have a store of assets and they have obligations that they have to make. Or, at the simplest level, banks have a pile of money or things that can be turned into money and people and firms who are demanding money. So any watering down of the rule has to impact one of those two things.

    Remember that in a crisis it is hard to sell assets to get the cash you need to make your payments. Also, crucially, others will want to take out more from the bank if they are worried about the bank’s assets, like in a bank run. So both of these items are stressed in the rule to get numbers sufficient to survive a crisis. Banks would prefer to count riskier kinds of things as those safe assets, and assume that firms would want to take less in times of crisis. Each allows them to have to hold less high-quality capital.

    There are three major changes announced. The first is that the requirements will be slowly phased in each year for the next several years, fully online by 2019. This is to avoid putting additional credit stresses on the financial system right now. There's also a clarification that assets can be drawn down in times of crisis. But how will these regulations look when they are online? The other two changes are the way the actual mechanisms are calculated.

    Let’s chart out those last two changes that were just introduced:

    Originally there were just two levels of assets, level 1 and level 2. The second change is to create a new level of assets, called “Level 2B.” Level 1 is unchanged, as well as the old Level 2, which is now Level 2A. Level 2B will be no more than 15 percent of total assets, but it will include lower rated corporate debt (BBB- or above) and, more shockingly, equity shares. Equity is not what you want as a liquidity buffer, as its value will plummet and volatility will skyrocket during crises. In a crisis all correlations go to 1, and that’s especially true in a financial crisis. The fact that it might have done well in the 2008 crisis is no excuse because, as Economics of Contempt pointed out on this topic, there were massive government bailouts and interventions in the market, which is what we want to avoid.

    On the plus side, rather than just putting equities in “Level 2,” they created a separate bucket with harsher penalties. Equities will receive a 50 percent haircut toward qualifying, much larger than the 15 percent haircut Level 2A assets get.

    The third change is the lower outflow rate for liquidity facilities, corporate deposits as well as other sources of outflows. To get a sense of this, stable deposits with a serious system of deposit insurance – think of your FDIC savings account – originally had a 5 percent outflow. A bank would have to be prepared for 5 percent of its deposits to leave during this financial crisis. That has been reduced to 3 percent in the new rule.

    These changes are particularly large for liquidity facilities. Instead of the assumption that firms will go gunning for any emergency liquidity that they can find, and as such use up most of these outlines, there are much more financial-friendly outflow estimates. In fact, many of these rates have been cut by more than half, with Basel now estimating that liquidity facilities, for instance, will only be drawn down 30 percent instead of 100 percent.

    These are dramatic reductions. If they are predicated on more closely aligning with 2008 numbers, backstopping the entire liquidity of the financial markets was the whole point of the bailouts and the Federal Reserve’s emergency interventions. The numbers should be much worse in this case.

    There is finally a global rule declaring a necessary, but not sufficient, minimum level of liquidity in financial firms. Liquidity does nothing if a firm is insolvent, but it by itself can generate panics. However these rule changes almost all entirely benefit the financial system, and call for less liquidity than in the first drafts. Undercounting the liquidity facilities, as well as letting more of the HQLA consist of assets like stocks and MBS, is a major change from the previous version.

    The Basel committee notes that its Liquidity Coverage Ratio is an absolute minimum rate, and that “national authorities may require higher minimum levels of liquidity.” Authorities within the United States should take this seriously. Dodd-Frank calls on regulators to put in sufficient liquidity regulations for large financial firms. Basel III provides a baseline, but regulators could go further by themselves if necessary via their Dodd-Frank mandate. Understanding why the outflow assumptions have so dramatically changed will be one point to follow.

    Follow or contact the Rortybomb blog:

      

    Let’s say you were trying to make a personal budget. We can imagine two reasonable ideas you would want to incorporate into this budget. The first is that you want to make sure you can pay your bills if your income suddenly freezes up or you suddenly need cash. You want to make sure your savings are sufficiently liquid in case there is an emergency.

    Another rule is that you want your time horizon of your debts to match what you are buying with those debts. You don’t want a 4-year mortgage and a 30-year auto loan; you want a 4-year auto loan and a 30-year mortgage. And for our purposes, you really don’t want to buy either on a credit card, since the payment terms can fluctuate so often in the short term.

    These two ideas are behind two of the additional special forms of capital requirements designed by the Basel Committee on Banking Supervision in Basel III. The first is a “Liquidity Coverage Ratio” (LCR), which is designed to make sure that a financial firm has sufficiently liquid resources to survive a crisis where financial liquidity has dried up for 30 days. The second is a “Net Stable Funding Ratio,” which is designed to complement the first rule and seeks to incentivize banks to use funds with more stable debts featuring long-term horizons.

    Basel has just introduced some changes into their final LCR rule, so let’s take a deep dive into this capital requirement rule. Before we introduce some headache-inducing acronyms, remember that the basics are simple here. Banks have a store of assets and they have obligations that they have to make. Or, at the simplest level, banks have a pile of money or things that can be turned into money and people and firms who are demanding money. So any watering down of the rule has to impact one of those two things.

    Remember that in a crisis it is hard to sell assets to get the cash you need to make your payments. Also, crucially, others will want to take out more from the bank if they are worried about the bank’s assets, like in a bank run. So both of these items are stressed in the rule to get numbers sufficient to survive a crisis. Banks would prefer to count riskier kinds of things as those safe assets, and assume that firms would want to take less in times of crisis. Each allows them to have to hold less high-quality capital.

    There are three major changes announced. The first is that the requirements will be slowly phased in each year for the next several years, fully online by 2019. This is to avoid putting additional credit stresses on the financial system right now. There's also a clarification that assets can be drawn down in times of crisis. But how will these regulations look when they are online? The other two changes are the way the actual mechanisms are calculated.

    Let’s chart out those last two changes that were just introduced:

    Originally there were just two levels of assets, level 1 and level 2. The second change is to create a new level of assets, called “Level 2B.” Level 1 is unchanged, as well as the old Level 2, which is now Level 2A. Level 2B will be no more than 15 percent of total assets, but it will include lower rated corporate debt (BBB- or above) and, more shockingly, equity shares. Equity is not what you want as a liquidity buffer, as its value will plummet and volatility will skyrocket during crises. In a crisis all correlations go to 1, and that’s especially true in a financial crisis. The fact that it might have done well in the 2008 crisis is no excuse because, as Economics of Contempt pointed out on this topic, there were massive government bailouts and interventions in the market, which is what we want to avoid.

    On the plus side, rather than just putting equities in “Level 2,” they created a separate bucket with harsher penalties. Equities will receive a 50 percent haircut toward qualifying, much larger than the 15 percent haircut Level 2A assets get.

    The third change is the lower outflow rate for liquidity facilities, corporate deposits as well as other sources of outflows. To get a sense of this, stable deposits with a serious system of deposit insurance – think of your FDIC savings account – originally had a 5 percent outflow. A bank would have to be prepared for 5 percent of its deposits to leave during this financial crisis. That has been reduced to 3 percent in the new rule.

    These changes are particularly large for liquidity facilities. Instead of the assumption that firms will go gunning for any emergency liquidity that they can find, and as such use up most of these outlines, there are much more financial-friendly outflow estimates. In fact, many of these rates have been cut by more than half, with Basel now estimating that liquidity facilities, for instance, will only be drawn down 30 percent instead of 100 percent.

    These are dramatic reductions. If they are predicated on more closely aligning with 2008 numbers, backstopping the entire liquidity of the financial markets was the whole point of the bailouts and the Federal Reserve’s emergency interventions. The numbers should be much worse in this case.

    There is finally a global rule declaring a necessary, but not sufficient, minimum level of liquidity in financial firms. Liquidity does nothing if a firm is insolvent, but it by itself can generate panics. However these rule changes almost all entirely benefit the financial system, and call for less liquidity than in the first drafts. Undercounting the liquidity facilities, as well as letting more of the HQLA consist of assets like stocks and MBS, is a major change from the previous version.

    The Basel committee notes that its Liquidity Coverage Ratio is an absolute minimum rate, and that “national authorities may require higher minimum levels of liquidity.” Authorities within the United States should take this seriously. Dodd-Frank calls on regulators to put in sufficient liquidity regulations for large financial firms. Basel III provides a baseline, but regulators could go further by themselves if necessary via their Dodd-Frank mandate. Understanding why the outflow assumptions have so dramatically changed will be one point to follow.

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  • Rortybomb's Best of 2012 Roundup and Linkfest

    Dec 31, 2012Mike Konczal

    I want to thank everyone who has read, commented, emailed, tweeted, shared and otherwised engaged with me and this blog over the past year. Especially as I moved from the old blog to the new one here. I'm pretty happy with how 2012 went, and I hope to keep it going into 2013. Here's a recap of the best stuff I was up to in 2012 for those who would want a best of list. (Here's the equivalent list for 2011.)

    One goal for 2012 was writing some longer think pieces, and that went went pretty well. Some of my favorites were a piece on the ideology of mass incarceration for Jacobin, the death of public higher education and the Master Plan for Dissent (with Aaron Bady), a lead essay for a forum on debt reduction and the recession for Boston Review, and a piece against coupon government and for public provisioning for New America (a shorter version in Dissent here).

    The most read blog post of the year (which may be the most read thing I've written) was an animated gif explanation to the recent Jackson Hole conference on monetary policy, both here and at Business Insider. The election provided most-read posts number two and three: I wrote a post showing how Mitt Romney's 5-point economic plan was the same plan from 2008 and 2004, and I argued for a policy agenda that followed from the "you didn't build that" comment. Back when everyone was trying to figure out why the Federal Reserve wasn't being aggressive, my interview with Joe Gagnon on the Fed started a debate on the topic. I also analyzed four histories of the 47 percent meme after Mitt Romney's blunder tape.

    Personal favorite blog posts that are a little extra econ-geeky: updated my topological map of theories of the recession with latest information, an argument for why taxing capital income is fair, as well as taking apart that dubious "uncertainty index" that floats out there in the economic debates.

    At the end of the year I started contributing economic articles to the American Prospect, and you can see the list of articles here. I'm trying to build out where liberalism will evolve post-Obama, and I've written about how liberals will fight over full employment, and the future of the welfare state. The second was read widely on the right, as Bryon York went around Fox News, conservative radio and articles about how it was the liberal agenda. As he wrote, "Obama's liberal supporters do have a second-term agenda, and it is a far-reaching one. That agenda, laid out a new article in the liberal magazine the American Prospect, is enough to set off alarm bells among conservatives in Washington and around the country."

    Four things: I'm going to engage more with comments at this site, now that I have a mechanism to see when they are posted easier. Second, if you are looking to expand your magazine subscriptions in 2013, consider subscribing to some of the magazines I've had the privilege of writing for in the past year. These magazines are nurturing all kinds of new talent, and that pipeline is important for the years ahead. Third, feel free to leave a comment with some ideas, either specific to this webpage or more general, about what you'd like to see here in the year ahead. And fourth, thanks for reading and hope to see you in the new year!

    Follow or contact the Rortybomb blog:

      

    I want to thank everyone who has read, commented, emailed, tweeted, shared and otherwised engaged with me and this blog over the past year. Especially as I moved from the old blog to the new one here. I'm pretty happy with how 2012 went, and I hope to keep it going into 2013. Here's a recap of the best stuff I was up to in 2012 for those who would want a best of list. (Here's the equivalent list for 2011.)

    One goal for 2012 was writing some longer think pieces, and that went went pretty well. Some of my favorites were a piece on the ideology of mass incarceration for Jacobin, the death of public higher education and the Master Plan for Dissent (with Aaron Bady), a lead essay for a forum on debt reduction and the recession for Boston Review, and a piece against coupon government and for public provisioning for New America (a shorter version in Dissent here).

    The most read blog post of the year (which may be the most read thing I've written) was an animated gif explanation to the recent Jackson Hole conference on monetary policy, both here and at Business Insider. The election provided most-read posts number two and three: I wrote a post showing how Mitt Romney's 5-point economic plan was the same plan from 2008 and 2004, and I argued for a policy agenda that followed from the "you didn't build that" comment. Back when everyone was trying to figure out why the Federal Reserve wasn't being aggressive, my interview with Joe Gagnon on the Fed started a debate on the topic. I also analyzed four histories of the 47 percent meme after Mitt Romney's blunder tape.

    Personal favorite blog posts that are a little extra econ-geeky: updated my topological map of theories of the recession with latest information, an argument for why taxing capital income is fair, as well as taking apart that dubious "uncertainty index" that floats out there in the economic debates.

    At the end of the year I started contributing economic articles to the American Prospect, and you can see the list of articles here. I'm trying to build out where liberalism will evolve post-Obama, and I've written about how liberals will fight over full employment, and the future of the welfare state. The second was read widely on the right, as Bryon York went around Fox News, conservative radio and articles about how it was the liberal agenda. As he wrote, "Obama's liberal supporters do have a second-term agenda, and it is a far-reaching one. That agenda, laid out a new article in the liberal magazine the American Prospect, is enough to set off alarm bells among conservatives in Washington and around the country."

    Four things: I'm going to engage more with comments at this site, now that I have a mechanism to see when they are posted easier. Second, if you are looking to expand your magazine subscriptions in 2013, consider subscribing to some of the magazines I've had the privilege of writing for in the past year. These magazines are nurturing all kinds of new talent, and that pipeline is important for the years ahead. Third, feel free to leave a comment with some ideas, either specific to this webpage or more general, about what you'd like to see here in the year ahead. And fourth, thanks for reading and hope to see you in the new year!

    Follow or contact the Rortybomb blog:

      

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  • How Do the Elderly Spend Money and the Difficulty of Protecting Against Social Security Cuts

    Dec 18, 2012Mike Konczal

    Dean Baker and Doug Henwood both have good analysis on the cuts involved in chaining inflation. Since the rumored cuts to Social Security will hinge on this way of calculating inflation, I want to dig one level into the data to convey what it will mean and then look at some of the distributional impact.

    I.

    Let's start with two groups of people. The first is urban wage earners and clerical workers, one select group of the population, who purchase a representative basket of goods and services. How much does the basket of goods they purchase increase in price over time? This cost is called CPI-W, and it is currently used for adjusting Social Security benefits. The second group is all people aged 62 and over. Since the 1980s, the government has calculated the cost of goods and services for this group as well, and it is referred to as CPI-E. What do they spend money on? Here's the relative importance of major categories of spending, provided by the BLS, for each group from December 2007:

    Green is where the group spends compartively less. As we can see, the elderly spend a lot more of their (more limited) money on housing, utilities, and medical care. And as you probably know, health care costs have been rising rapidly over the past several decades. With the notable exception of college costs, the things urban wage earners spend money on haven't increased in prices as fast as what the elderly purchase. As a result, the CPI-E has increased 3.3 percent a year from 1982 to 2007, while the CPI-W has only increased 3.0 a year.

    But wait, what's this chained thing that is being proposed? Picture that in response to a price increase for one good you could substitute similar items. So if the price of chicken goes up, you could eat more beef. Or if the price of a movie went up, you would rent movies more often. This substitution effect blunts some of the price increases. As such, inflation is lower when you take this into account. It's more complicated than that, but it is a start for a definition.

    But we don't have a "chained" version of the CPI-E. And the items that the elderly purchase probably aren't impacted in the same competitive way. If the price of beer goes up, you can drink more wine; if the price of utilities go up, your options are limited. The areas where the elderly pay more don't have the same competitive pressures, and their geography is going to be more limited. We could get a chained version of the CPI-E if Congress told economists to make one. However it's likely not to have the cuts built in the same way.

    II.

    Brad Delong, who signed a letter from over 300 economist experts and social scientists organized by EPI arguing that there's no empirical basis for the COLA change, says that "Chained-CPI" is code for "let's really impoverish some women in their 90s!" This will fall on those who live the longest and rely on Social Security the most. But can we find a way to have this impact the poor less so that it doesn't fall too hard on those with the least?

    The White House is saying that there will be such a set of protections, and think tanks have proposed some, but we won't know what they'll entail until they are better reported. No matter what additional measures are proposed, it's important to understand how compressed the distribution of income is for those receiving Social Security. From the Social Security Administration, here's a chart on the importance of Social Security relative to total income by income quintile for beneficiary families over 65 years of age (Table 9.B6):

    I hate using charts that have so many percents of a percent of a percent, but this data is really important. To get a sense of what this chart is telling us, let's look at a box. From this chart, in the botom 20 percent of income, or those that make $11,417 or less, 65 percent of beneficiaries families get 90 percent of their income from Social Security. So the poorest are very dependent on Social Security, and a large cut will impact them harshly.

    But let's say we wave a policy wand and protect those in the bottom 20 percent. The problem is that the income here is very compressed, and that Social Security is a major source of income up the ladder. Even for those in the 60-80 percent of income bracket, 41 percent of their income comes from Social Security. The group around the middle, in the third quintile, have only around $20,000 a year to live on and get a majority of their income from Social Security.

    This is not a program that just helps the destitute; it provides a broad level of income security in old age for the majority of retirees. The average elderly family receiving Social Security gets 58.2 percent of their income from the program. A quarter of families get 90 percent or more of their income from Social Security. Once you leave the top income quintile, Social Security is the major source of retirement security. It is hard to see how means-testing these across-the-board cuts will be sufficient to prevent this from having a serious impact on our most vulnerable.

     

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    Dean Baker and Doug Henwood both have good analysis on the cuts involved in chaining inflation. Since the rumored cuts to Social Security will hinge on this way of calculating inflation, I want to dig one level into the data to convey what it will mean and then look at some of the distributional impact.

    I.

    Let's start with two groups of people. The first is urban wage earners and clerical workers, one select group of the population, who purchase a representative basket of goods and services. How much does the basket of goods they purchase increase in price over time? This cost is called CPI-W, and it is currently used for adjusting Social Security benefits. The second group is all people aged 62 and over. Since the 1980s, the government has calculated the cost of goods and services for this group as well, and it is referred to as CPI-E. What do they spend money on? Here's the relative importance of major categories of spending, provided by the BLS, for each group from December 2007:

    Green is where the group spends compartively less. As we can see, the elderly spend a lot more of their (more limited) money on housing, utilities, and medical care. And as you probably know, health care costs have been rising rapidly over the past several decades. With the notable exception of college costs, the things urban wage earners spend money on haven't increased in prices as fast as what the elderly purchase. As a result, the CPI-E has increased 3.3 percent a year from 1982 to 2007, while the CPI-W has only increased 3.0 a year.

    But wait, what's this chained thing that is being proposed? Picture that in response to a price increase for one good you could substitute similar items. So if the price of chicken goes up, you could eat more beef. Or if the price of a movie went up, you would rent movies more often. This substitution effect blunts some of the price increases. As such, inflation is lower when you take this into account. It's more complicated than that, but it is a start for a definition.

    But we don't have a "chained" version of the CPI-E. And the items that the elderly purchase probably aren't impacted in the same competitive way. If the price of beer goes up, you can drink more wine; if the price of utilities go up, your options are limited. The areas where the elderly pay more don't have the same competitive pressures, and their geography is going to be more limited. We could get a chained version of the CPI-E if Congress told economists to make one. However it's likely not to have the cuts built in the same way.

    II.

    Brad Delong, who signed a letter from over 300 economist experts and social scientists organized by EPI arguing that there's no empirical basis for the COLA change, says that "Chained-CPI" is code for "let's really impoverish some women in their 90s!" This will fall on those who live the longest and rely on Social Security the most. But can we find a way to have this impact the poor less so that it doesn't fall too hard on those with the least?

    The White House is saying that there will be such a set of protections, and think tanks have proposed some, but we won't know what they'll entail until they are better reported. No matter what additional measures are proposed, it's important to understand how compressed the distribution of income is for those receiving Social Security. From the Social Security Administration, here's a chart on the importance of Social Security relative to total income by income quintile for beneficiary families over 65 years of age (Table 9.B6):

    I hate using charts that have so many percents of a percent of a percent, but this data is really important. To get a sense of what this chart is telling us, let's look at a box. From this chart, in the botom 20 percent of income, or those that make $11,417 or less, 65 percent of beneficiaries families get 90 percent of their income from Social Security. So the poorest are very dependent on Social Security, and a large cut will impact them harshly.

    But let's say we wave a policy wand and protect those in the bottom 20 percent. The problem is that the income here is very compressed, and that Social Security is a major source of income up the ladder. Even for those in the 60-80 percent of income bracket, 41 percent of their income comes from Social Security. The group around the middle, in the third quintile, have only around $20,000 a year to live on and get a majority of their income from Social Security.

    This is not a program that just helps the destitute; it provides a broad level of income security in old age for the majority of retirees. The average elderly family receiving Social Security gets 58.2 percent of their income from the program. A quarter of families get 90 percent or more of their income from Social Security. Once you leave the top income quintile, Social Security is the major source of retirement security. It is hard to see how means-testing these across-the-board cuts will be sufficient to prevent this from having a serious impact on our most vulnerable.

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  • A Cost of Living Adjustment for Social Security in the Fiscal Cliff?

    Dec 17, 2012Mike Konczal

    I haven't been writing about the various trial balloons and back-and-forths in the fiscal cliff austerity phase-in negotiations. But I do want to make a comment on the latest one. From Ezra Klein, there's rumors that there will be more revenue, some extended unemployment insurance, and additional stimulus money. However, "the Democrats’ headline concession will be accepting chained-CPI, which is to say, accepting a cut to Social Security benefits." Krugman isn't sure if this is better than no deal.

    I think it's terrible, and the best way to understand it is by comparing it to the two reasons some liberals, Kevin Drum for instance, give for making a deal on Social Security. This is not my argument, but it's a useful comparison. The first reason is that by proactively changing Social Security you can secure a deal that has more revenue and fewer cuts than you would otherwise. The second reason is that by making a deal on Social Security you take the issue off the policy table. Sure, the people who think Social Security is a form of tyranny will still be after it. But all the deficit scolds will pack up and go home on the issue.

    This deal would do neither. You'd cut Social Security without putting in any new revenue. And it wouldn't be sufficient to close the long-term gap, so the issue would stay on the table. Indeed, it's obvious that Very Serious People would view this as a "downpayment" on future cuts, and require any future attempts to get more revenue for Social Security, say by raising the payroll tax cap, to involve significant additional cuts.

    From CBO's Social Security Policy Options, you can see 30 options for Social Security. 

    The CBO puts the 75-year actuarial balance deficit at 0.6 percent, and this chart shows how much of that 0.6 percent would be filled by various options. The last one, basing the cost-of-living-adjustments (COLA) on the chained CPI-U, is only 0.2, or about a third of what the deficit hawks will say is necessary. From the CBO, it would only extend the trust fund four years. There will be demands for going back to Social Security in the years ahead, and those changes will not come solely from revenue increases. That's giving up a major piece for nothing in terms of Social Security, which is a very bad deal.

    Personally, I think changing the COLA is a bad idea in general. The elderly face a higher rate of inflation since their spending is so dependent on health care, which is difficult to adjust or comparison shop for (the idea behind chaining the inflation rate). More importantly, of the three legs of the stool of retirement security - Social Security, private savings and employer savings plans - the two that aren't Social Security are struggling. Employer pensions will become less secure and less available going forward. Housing wealth was wiped out in the crash. 401(k)s appear to have been a great way to shovel tax savings to the rich, but are in no shape to take over for a lack of pensions. Median wages have dropped in the recession, and are likely to show little growth in the years ahead, which makes building private savings harder. Social Security will become more important, not less, in the decades ahead. Its benefits should be expanded, not cut.

    UPDATE: Kevin Drum has a similar conclusion on the deal.

    I haven't been writing about the various trial balloons and back-and-forths in the fiscal cliff austerity phase-in negotiations. But I do want to make a comment on the latest one. From Ezra Klein, there's rumors that there will be more revenue, some extended unemployment insurance, and additional stimulus money. However, "the Democrats’ headline concession will be accepting chained-CPI, which is to say, accepting a cut to Social Security benefits." Krugman isn't sure if this is better than no deal.

    I think it's terrible, and the best way to understand it is by comparing it to the two reasons some liberals, Kevin Drum for instance, give for making a deal on Social Security. This is not my argument, but it's a useful comparison. The first reason is that by proactively changing Social Security you can secure a deal that has more revenue and fewer cuts than you would otherwise. The second reason is that by making a deal on Social Security you take the issue off the policy table. Sure, the people who think Social Security is a form of tyranny will still be after it. But all the deficit scolds will pack up and go home on the issue.

    This deal would do neither. You'd cut Social Security without putting in any new revenue. And it wouldn't be sufficient to close the long-term gap, so the issue would stay on the table. Indeed, it's obvious that Very Serious People would view this as a "downpayment" on future cuts, and require any future attempts to get more revenue for Social Security, say by raising the payroll tax cap, to involve significant additional cuts.

    From CBO's Social Security Policy Options, you can see 30 options for Social Security. 

    The CBO puts the 75-year actuarial balance deficit at 0.6 percent, and this chart shows how much of that 0.6 percent would be filled by various options. The last one, basing the cost-of-living-adjustments (COLA) on the chained CPI-U, is only 0.2, or about a third of what the deficit hawks will say is necessary. From the CBO, it would only extend the trust fund four years. There will be demands for going back to Social Security in the years ahead, and those changes will not come solely from revenue increases. That's giving up a major piece for nothing in terms of Social Security, which is a very bad deal.

    Personally, I think changing the COLA is a bad idea in general. The elderly face a higher rate of inflation since their spending is so dependent on health care, which is difficult to adjust or comparison shop for (the idea behind chaining the inflation rate). More importantly, of the three legs of the stool of retirement security - Social Security, private savings and employer savings plans - the two that aren't Social Security are struggling. Employer pensions will become less secure and less available going forward. Housing wealth was wiped out in the crash. 401(k)s appear to have been a great way to shovel tax savings to the rich, but are in no shape to take over for a lack of pensions. Median wages have dropped in the recession, and are likely to show little growth in the years ahead, which makes building private savings harder. Social Security will become more important, not less, in the decades ahead. Its benefits should be expanded, not cut.

    UPDATE: Kevin Drum has a similar conclusion on the deal.

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