Good News on the Deficit Makes Social Security Cuts Even Worse

Apr 12, 2013Jeff Madrick

The deficit is already shrinking rapidly, and Social Security won't add much to it anyway.

The deficit is already shrinking rapidly, and Social Security won't add much to it anyway.

The reason President Obama's proposal to cut Social Security benefits is tragic is that it is simply not necessary. His plan is to use a different method to compute how much benefits are raised to offset inflation. But Social Security will add very little to federal spending over the next 30 to 40 years. As a proportion of national income (GDP), It will rise from 5 percent to 6 percent. At the same time, retirees are set to get much less money from their pensions because so many were forced to depend on 401(k)s and defined contribution plans rather than traditional pensions with defined benefits.

But a new report from Goldman Sachs economists puts the Obama decision in an even harsher light. The federal deficit is coming down rapidly on its own. In a piece entitled, “The Rapidly Shrinking Federal Deficit,” Goldman notes that the deficit averaged 4.5 percent of GDP in the first calendar quarter, compared to 10.1 percent in fiscal year 2009. The reasons are faster economic growth, higher taxes, and reduced government spending. 

More importantly, Goldman thinks the deficit will fall to 3 percent or so over the next two years, mostly because business and households will begin spending again. They think so-called deleveraging—that is, paying back debt—is coming to an end.

And here’s some additional good news: deglobalization! McKinsey reports that deglobalization has plagued the world since the financial crisis. The cross-border flows of capital are down sharply. The good news, McKinsey admits, is that they probably should be. Such border flows were often hot capital, financing speculation more than long-term investment. Now foreign direct investment, usually stable investment in business, is a much higher proportion of capital flows.  

And financial deepening—the proportion of GDP that is in debt and stocks--is also down. What sticks out like a  sore thumb is that the financial deepening of the preceding two and a half decades—which was huge--went far less to households and business than is to be expected. Even McKinsey says this is astonishing, because what else is finance supposed to do but supply funds to individuals and businesses? Instead, an enormous proportion went to finance itself—that is, financial firms borrowed at dramatically higher rates. And an awful lot of that must have gone into speculative activities, especially highly risky mortgage securities. From my point of view, this financialization was the disease created by the triumphalism of globalization. Globalization, to be sure, had benefits, but they were overshadowed by the financial instability of capital flows, which grew enormously since Ronald Reagan was president.

McKinsey warns that this deglobalization of finance could go too far. As noted, cross-border flows, especially long-term investments, can be highly benefical for world growth. But for me, it is now welcome. 

Roosevelt Institute Senior Fellow Jeff Madrick is the Director of the Roosevelt Institute’s Rediscovering Government initiative and author of Age of Greed

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Mapping Out the Arguments Against Chained CPI

Apr 9, 2013Mike Konczal

Reports started coming in late last week that President Obama’s budget, to be released early tomorrow, will include a change to the cost-of-living adjustment (COLA) for Social Security. Specifically, it will adopt a “chained CPI” (consumer price index) measure.

Many people have been writing stories about why this is a bad idea. I want to generalize them into four major categories of critique of moving to a chained CPI (with one aside). As you read stories about the pros and cons of this change in the weeks ahead, hopefully this guide can provide some background.

Accuracy, or Lack Thereof

Economists like the idea of chained CPI because they think it’s more representative of how people behave when they substitute among goods. In this story, we have been over-correcting for inflation in the past decades.

However, as a letter from EPI, signed by 300 economists and social insurance experts, explains, it is just as likely as we are under-correcting. EPI notes "it is just as likely that the current COLA fails to keep up with rising costs confronting elderly and disabled beneficiaries." The current adjustment is based on an index of workers excluding retirees.

If you look into the data, the elderly spend a lot more of their limited money on housing, utilities, and medical care. Health care costs have been rising rapidly over the past several decades, and it is difficult to substitute on other necessary, fixed-price goods like utilities. With the notable exception of college costs, the things urban wage earners spend money on haven't increased in price as quickly as what the elderly purchase. As a result, the CPI-E (the index tailored to the elderly) has increased 3.3 percent a year from 1982 to 2007, while the CPI-W (tailored to wage earners) has only increased 3 percent a year. Definitionally, through the way it is calculated, chained CPI-W will always be lower than CPI-W. [Edit: This will almost certainly be lower, but it isn't definitionally true.]

As Dean Baker has noted, if accuracy were the only motive for changing COLA, it would be relatively easy to get a full, chained version of the index of prices faced by the elderly and use that. That has not been proposed.

Hedging Unexpected Longevity

Another argument is that this is a relatively small cut, or that a slower rate of growth shouldn’t really be thought of as a cut. But there’s a big problem with this.

There are many nice things about the design of Social Security, but one of them is that it is a form of insurance against the downsides of living longer than expected. Let’s say you retire at 65, believe you’ll live to 85, and save enough to make it to 88 just in case. And then you live to 92. Are those last five years absolutely miserable, with your savings completely depleted and an inability to earn market wages except through begging and charity? No, because my man Franklin Delano Roosevelt and Social Security got your back. Social Security helps hedge against two risks that are very difficult to manage: when you were born (and thus the years into which you’ll retire) and how long you’ll live.

Notice how chained CPI cuts, though. In the same way that compounding interest grows quickly over time because you get interest on what you’ve saved, a lower cost-of-living adjustment creates a lower baseline for future adjustments, so the cuts grow over time.

This means that the real cuts come from people who happen to live the longest. Which is precisely one of the risks Social Security is meant to combat. This is one reason why women, who live longer than men, are much more at risk from these chained CPI cuts.

Aside: Can’t We Balance the Downside?

You’ll notice liberals who support moving to chained CPI have complicated “swallow a bird to catch the spider who’s catching the fly” policy proposals to go along with it. If we swallow Obama’s chained CPI proposal, we’ll need to swallow an age “bump” to catch chained CPI from falling heavily on the very old. But after we swallow the age bump, we’ll need to swallow some sort of exemption for Supplemental Security Income to catch the fact that the change would still fall heavily on the initial benefit level for the poorest elderly and disabled people. And so on.

Doing all these fixes, of course, eliminates much of the savings that people are hoping to get. And it is unlikely that these clever ways of balancing the worst effects of the change will get even a single Republican vote. And of course, in spite of all this effort, Republicans could still call out the president for proposing to cut Social Security.

Neither Grand nor a Bargain

You’ll hear arguments that a Grand Bargain is necessary, so it’s better to bring Social Security into long-term balance now, with Democrats at the helm, than in the future, when there will be less time and an uncertain governance coalition. You can get fewer cuts and more revenue than you would otherwise and take the issue off the table for the foreseeable future to concentrate on other priorities.

But if that’s your idea, then this is a terrible deal and sets a terrible precedent, because this deal would accomplish none of your goals. 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, the deficit hawks would probably be emboldened, viewing 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.

We Need to Expand Social Security

As Michael Lind, Joshua Freedman, and Steven Hill of the New America Foundation, along with Robert Hiltonsmith of Demos, expertly document, Social Security should be expanded in the years ahead, not cut.

Retirement security is meant to be a three-legged stool of Social Security, private savings, and employer pensions. The last two legs of that stool have been collapsing in the past few decades, and there is no reason to believe that this will change in the near future. 401(k)s have been a boon for the rich to avoid taxes and save money that they’d be saving anyway, while it isn’t clear that average Americans have saved enough to offset declining 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. There isn't a ton to cut - even the middle income quintile of retirees, making only around $20,000 a year, get 62 percent of their income from Social Security.

There are many ways to boost Social Security, and the New America paper introduces one. But as the authors note, “[a]ny strategy that expands the reliable and efficient public share of retirement security in America would be an improvement over today’s system, which is biased toward the affluent and skewed toward private savings.” And the best way to do programs is to build out programs that already work well.

Any other stories out there that require a new category?

Follow or contact the Rortybomb blog:

  

 

Reports started coming in late last week that President Obama’s budget, to be released early tomorrow, will include a change to the cost-of-living adjustment (COLA) for Social Security. Specifically, it will adopt a “chained CPI” (consumer price index) measure.

Many people have been writing stories about why this is a bad idea. I want to generalize them into four major categories of critique of moving to a chained CPI (with one aside). As you read stories about the pros and cons of this change in the weeks ahead, hopefully this guide can provide some background.

Accuracy, or Lack Thereof

Economists like the idea of chained CPI because they think it’s more representative of how people behave when they substitute among goods. In this story, we have been over-correcting for inflation in the past decades.

However, as a letter from EPI, signed by 300 economists and social insurance experts, explains, it is just as likely as we are under-correcting. EPI notes "it is just as likely that the current COLA fails to keep up with rising costs confronting elderly and disabled beneficiaries." The current adjustment is based on an index of workers excluding retirees.

If you look into the data, the elderly spend a lot more of their limited money on housing, utilities, and medical care. Health care costs have been rising rapidly over the past several decades, and it is difficult to substitute on other necessary, fixed-price goods like utilities. With the notable exception of college costs, the things urban wage earners spend money on haven't increased in price as quickly as what the elderly purchase. As a result, the CPI-E (the index tailored to the elderly) has increased 3.3 percent a year from 1982 to 2007, while the CPI-W (tailored to wage earners) has only increased 3 percent a year. Definitionally, through the way it is calculated, chained CPI-W will always be lower than CPI-W. [Edit: This will almost certainly be lower, but it isn't definitionally true.]

As Dean Baker has noted, if accuracy were the only motive for changing COLA, it would be relatively easy to get a full, chained version of the index of prices faced by the elderly and use that. That has not been proposed.

Hedging Unexpected Longevity

Another argument is that this is a relatively small cut, or that a slower rate of growth shouldn’t really be thought of as a cut. But there’s a big problem with this.

There are many nice things about the design of Social Security, but one of them is that it is a form of insurance against the downsides of living longer than expected. Let’s say you retire at 65, believe you’ll live to 85, and save enough to make it to 88 just in case. And then you live to 92. Are those last five years absolutely miserable, with your savings completely depleted and an inability to earn market wages except through begging and charity? No, because my man Franklin Delano Roosevelt and Social Security got your back. Social Security helps hedge against two risks that are very difficult to manage: when you were born (and thus the years into which you’ll retire) and how long you’ll live.

Notice how chained CPI cuts, though. In the same way that compounding interest grows quickly over time because you get interest on what you’ve saved, a lower cost-of-living adjustment creates a lower baseline for future adjustments, so the cuts grow over time.

This means that the real cuts come from people who happen to live the longest. Which is precisely one of the risks Social Security is meant to combat. This is one reason why women, who live longer than men, are much more at risk from these chained CPI cuts.

Aside: Can’t We Balance the Downside?

You’ll notice liberals who support moving to chained CPI have complicated “swallow a bird to catch the spider who’s catching the fly” policy proposals to go along with it. If we swallow Obama’s chained CPI proposal, we’ll need to swallow an age “bump” to catch chained CPI from falling heavily on the very old. But after we swallow the age bump, we’ll need to swallow some sort of exemption for Supplemental Security Income to catch the fact that the change would still fall heavily on the initial benefit level for the poorest elderly and disabled people. And so on.

Doing all these fixes, of course, eliminates much of the savings that people are hoping to get. And it is unlikely that these clever ways of balancing the worst effects of the change will get even a single Republican vote. And of course, in spite of all this effort, Republicans could still call out the president for proposing to cut Social Security.

Neither Grand nor a Bargain

You’ll hear arguments that a Grand Bargain is necessary, so it’s better to bring Social Security into long-term balance now, with Democrats at the helm, than in the future, when there will be less time and an uncertain governance coalition. You can get fewer cuts and more revenue than you would otherwise and take the issue off the table for the foreseeable future to concentrate on other priorities.

But if that’s your idea, then this is a terrible deal and sets a terrible precedent, because this deal would accomplish none of your goals. 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, the deficit hawks would probably be emboldened, viewing 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.

We Need to Expand Social Security

As Michael Lind, Joshua Freedman, and Steven Hill of the New America Foundation, along with Robert Hiltonsmith of Demos, expertly document, Social Security should be expanded in the years ahead, not cut.

Retirement security is meant to be a three-legged stool of Social Security, private savings, and employer pensions. The last two legs of that stool have been collapsing in the past few decades, and there is no reason to believe that this will change in the near future. 401(k)s have been a boon for the rich to avoid taxes and save money that they’d be saving anyway, while it isn’t clear that average Americans have saved enough to offset declining 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. There isn't a ton to cut - even the middle income quintile of retirees, making only around $20,000 a year, get 62 percent of their income from Social Security.

There are many ways to boost Social Security, and the New America paper introduces one. But as the authors note, “[a]ny strategy that expands the reliable and efficient public share of retirement security in America would be an improvement over today’s system, which is biased toward the affluent and skewed toward private savings.” And the best way to do programs is to build out programs that already work well.

Any other stories out there that require a new category?

Follow or contact the Rortybomb blog:

  

 

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Why the GOP’s Efforts to Reach Out to Women Are Doomed to Fail

Mar 20, 2013Andrea Flynn

Why should women vote for a party that's actively working against their needs and interests?

Why should women vote for a party that's actively working against their needs and interests?

On Monday, the GOP released a report detailing its "Growth and Opportunity Project," a new initiative that explores reasons for the party’s November defeat and posits strategies for winning future elections. If it wasn’t evident before, it is now abundantly clear that the Republican establishment officially attributes its November loss to a failure in style, not substance. The 100-page report details the party’s inability to effectively communicate its policies and priorities to women, immigrants, young people, and people of color. It largely ignores the possibility that what motivated the majority of American voters, and in particular women, to give President Obama a second term was an aversion to the GOP’s outdated vision for the nation.

Acknowledging that Obama won the single women’s vote by a “whopping 36 percent,” the report’s authors suggest ways the party can be more inclusive of this critical voting bloc: Making a better effort to listen to female voters; fighting against the Democratic rhetoric against the “so-called War on Women"; doing a better job communicating the GOP’s policies and employing female spokespeople to do it; and using Women’s History Month to “remind voters of the Republican’s Party historical role in advancing the women’s rights movement.”

I’m glad they specified “historical” role in advancing the women’s rights movement, given that their current role seems squarely focused on rolling back women’s rights. It’s encouraging that GOP strategists in Washington want to spend more time listening to women voters, but there is no indication that Republican lawmakers will respond to that feedback. As Rachel Maddow said on her program this week, while Beltway leaders are “preaching about how to appear more reasonable to the women folk among us,” Republican governance has become a competition – a race – “to see who can get the most extreme the fastest.”

And a race it is.

This week Andrew Jenkins of RH Reality Check reported on some of the most recent Republican efforts to chip away at women’s access to care:

Arkansas just passed a bill banning abortions after 12 weeks of pregnancy, while South Dakota just passed a bill to expand its 72-hour waiting period, which was already one of the longest in the country, in a state with only one abortion clinic. The North Dakota Senate just approved a ban on abortions after six-weeks of pregnancy, the most restrictive in the country. And in Kansas, a state House committee just passed a 70-page bill that defines life at fertilization and requires that physicians lie to their patients.

That’s not all.

Republicans in Texas remain hard at work leading national efforts in steamrolling access to women’s health care. Previous budget cuts and funding restrictions have already closed more than 50 clinics and are making it more difficult, if not impossible, for nearly 200,000 women to access care. Last week the Texas Senate Education Committee moved a bill forward that would ban Planned Parenthood and other organizations from providing sexuality education in schools, and the governor recently promised to advance a 20-week abortion ban.

In Wisconsin, four Planned Parenthood clinics closed as a result of a GOP-led ban that prevents the organization and other clinics from receiving state funds. In Oklahoma, a major Planned Parenthood facility closed after the state’s department of health cut off funding through the WIC program, forcing low-income women to go elsewhere to obtain vouchers for themselves and their children. Last month, Republicans in Michigan introduced a bill that would require women to get a vaginal ultrasound at least two hours before obtaining an abortion.

Mississippi is about to close its only abortion clinic thanks to a requirement that abortion doctors have admitting privileges at a local hospital (and local hospitals’ refusal to grant those privileges) – a move the Republican governor has applauded as being the first step in ending abortion in that state.  Earlier this year, a Republican (female!) representative in New Mexico proposed legislation that would have allowed for women who terminated pregnancies resulting from rape to be charged with a felony for tampering with evidence. (She promptly rescinded and then proposed a new bill that would instead charge abortion providers with facilitating the destruction of evidence.)

The new GOP report also suggested that Republicans “talk about people and families, not just numbers and statistics.” In releasing his 2014 budget proposal last week, Paul Ryan certainly provided an interesting perspective into how the GOP proposes taking care of women and families. According to the National Women’s Law Center (NWLC), the Ryan budget includes significant reductions for “child care and Head Start, K-12 education and Pell grants, job training, civil rights enforcement, women’s preventive health care, domestic violence prevention and more.” It would dismantle Medicaid, Medicare, and the food stamp program. It would repeal the Affordable Care Act (ACA), denying nearly 15 million women access to affordable health insurance and Medicaid and forcing women to pay more for prescription drugs, including family planning. As NWLC pointed out, repealing the ACA would “allow insurance companies to continue charging women higher premiums than men, deny coverage to women with so-called pre-existing conditions like domestic violence, and refuse to cover maternity care.”

The ACA is certainly providing fertile ground for GOP lawmakers to show how much they care about women. Twenty states now restrict abortion coverage in health insurance plans that will be offered through the insurance exchanges, and 18 states restrict abortion coverage in insurance plans for public employees. Nearly all of those states are Republican-led. Additionally, 14 Republican governors have reported they will not participate in the Medicaid expansion programs that are a critical part of the ACA, denying access to a broad range of health services to millions of women.

On top of all this, 22 Republican Senators and 138 Republican members of the House voted last month against the Violence Against Women Act, a critical piece of legislation that provides assistance to victims of domestic and sexual violence.

In their report, the GOP strategists recommended developing training programs in messaging, communications, and recruiting that address the best ways to communicate with women. “Our candidates, spokespeople and staff need to use language that addresses concerns that are on women’s minds in order to let them know we are fighting for them,” they state. Given the abovementioned pieces of legislation, the GOP will be hard-pressed to convince women the party is fighting for them. It’s patronizing to think that using different language, new messaging, and female spokespersons will convince women to support a party that is so clearly working against their best interests. Women are smart enough to know that a party that calls itself home to lawmakers relentlessly fighting to chip away at family planning and abortion access, food stamps, affordable health care, education, civil rights, and a social safety net providing tenuous stability to millions of marginalized individuals is not a party committed to truly understanding or addressing their priorities.

Maybe next year the GOP will attempt a more earnest effort at celebrating Women's History Month. Although, by that time, their state leaders might have alienated half the women in the country, and it will be too late. 

Andrea Flynn is a Fellow at the Roosevelt Institute. She researches and writes about access to reproductive health care in the United States and globally.

 

Portrait of woman covering her ears via Shutterstock.com.

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Christie and Cuomo's Minimum Wage Politics Highlight Different Economic Visions

Feb 5, 2013Richard Kirsch

Cuomo's minimum wage proposal is better for working families, but the debate needs to be broader.

Cuomo's minimum wage proposal is better for working families, but the debate needs to be broader.

Two potential candidates for president in 2016, New Jersey Governor Chris Christie and New York Governor Andrew Cuomo, have taken opposing positions on raising the minimum wage in their states. The debate between the two governors draws a sharp distinction between competing economic visions: trickle-down vs. middle-out economics. At the same time, it also shows how limited the current debate is when it comes to dealing with what’s needed to meet the needs of working families and, in doing so, change the direction of economic policy.

In late January, New Jersey Governor Chris Christie vetoed a small increase in the minimum wage, from the current federal minimum of $7.25 an hour to $8.50 an hour. Christie said that raising the minimum wage would “jeopardize New Jersey’s economic progress.” Christie based his opposition on concerns about small business, although two out of three low-wage workers are employed by corporations with over 100 employees.

Across the Hudson, New York Governor Cuomo argued just the opposite in his State of the State address. Cuomo made the economic case for how putting more money into people’s pockets by raising the minimum wage will move New York’s economy forward:

Increasing the minimum wage leads to greater economic growth. Low-income individuals spend a larger percentage of their income than higher-income earners and salary increases in low wage occupations lead to increased demand for goods and services. Empirical evidence suggests that an increase of $1 in the minimum wage generates approximately $3,000 in household spending per year. Increased household spending will increase demand for goods and help businesses grow, thereby creating more jobs for New Yorkers.

That’s a positive change from a year ago, when Cuomo raised the same concerns as Christie after New York Assembly Speaker Sheldon Silver first put forth the minimum wage proposal. But by the end of the 2012 legislative session, Cuomo had warmed to the proposal, which in both states is supported by more than 80 percent of voters. This year, he has made it a top legislative objective, the first plank in what he calls a “progressive agenda.”

While Cuomo’s support is very welcome, the governor’s own words provide strong evidence that the small hike in the minimum wage he has proposed, to $8.75 an hour, will still far short of what a family needs for the basics in life. In his State of the State address, he explained:

The current minimum wage is unlivable. It's only $14,616. The annual cost of gasoline is $1,200. The annual cost of electricity is $1,300. The annual cost of auto insurance is $1,400. The annual cost of groceries is $6,500. The annual cost of childcare is $10,000. The annual cost of housing is $15,000 on a minimum wage of $14,000. My friends, it does not add up. Nineteen other states have raised the minimum wage; we propose raising the minimum wage to $8.75 an hour. It's the right thing to do. It's the fair thing to do. It is long overdue. We should have done it last year. Let's do it this year.

Despite his passionate plea, the governor’s facts underscore the distance between his proposal and what it would take for a family to meet its essential needs. That figure is available from Wider Opportunities for Women through their Basic Economic Security Table (BEST), which measures by state and county the income a working adult requires to meet his or her basic needs without public assistance.

The BEST number for New York, using the entirely unlikely assumption that a worker has health benefits on the job, is $19.89 for a single worker and about the same for a two-worker family with two children. A single working parent with two children would need to make $36.23 an hour to have a basic living standard. The importance of Medicaid and the Affordable Care Act coverage provisions, which will start in 2014, is underscored by how much higher the hourly wage would need to be in the much more likely scenario that low-wage workers have no health benefits at work. For example, without benefits, a single person would need to earn $25.63 to meet basic needs and a single parent with two children would need $50.72.

A minimum wage that comes close to meeting to a family’s basic needs is both a question of morality and of economic policy. The underlying moral value is that all work has dignity and a full-time worker should earn at least enough to provide basic supports for themselves and their family: housing, food, transportation, child care, health care, personal and household items, and a bit to pus aside for emergencies and retirement (5 percent in the BEST budget). I’d add that a basic budget should include enough to save for higher education and a simple vacation, but those aren’t in the basic BEST calculation.

The economic policy is founded on the premise that by putting money in the pockets of people to meet at least the basics, you make working families the engine of the economy. People who can educate their children, support and care for their families, and shop in their communities move the economy forward. Nick Hannauer and Eric Liu call this “middle-out” economics, the conditions that allow both middle-class consumers and the businesses that depend on them to thrive in a virtuous cycle of increasing prosperity for all. It is at the core of why Nobel laureate Joseph Stiglitz believes that decreasing inequality is the key to economic progress. Cuomo makes the same argument, along with a much more modest proposal, which Republicans in the State Senate are resisting.

But as long as we are stuck in the politics of the immediately possible, our economy will remain stuck in low gear. To jump-start this conversation, Hanauer and Liu are proposing a federal minimum wage of $15. As Liu told me, “At a time of record corporate profits and record low wages (as shares of GDP), if poor and lower middle-class people are paid more they can buy more, and when they buy more, businesses sell more and can hire more. It infuses demand into the economy in a way that will circulate many times over. The best case for a big increase in the minimum wage is that it's great for business and prosperity.”

Meanwhile, in the realm of the immediate politics, reformers in New Jersey are planning to put a minimum wage referendum on the ballot next fall, when Christie is running for reelection as governor. Cuomo has included his minimum wage hike proposal in the New York State budget, improving the chances that it will become law. Both governors like to be seen as gutsy populists. But only Cuomo is standing for an economics based on the little guy and gal. 

Richard Kirsch is a Senior Fellow at the Roosevelt Institute, a Senior Adviser to USAction, and the author of Fighting for Our Health. He was National Campaign Manager of Health Care for America Now during the legislative battle to pass reform.

 

Chris Christie image via Shutterstock.com.

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How Has the Liberal Project Fared Under President Obama?

Jan 22, 2013Mike Konczal

After President Obama's inaugural address yesterday -- “one of the most expansively progressive Inaugural Addresses in decades," as President Clinton's former speechwriter told Greg Sargent -- many are looking at the liberal project from the point of view of what was accomplished in the first term as well as what is possible in the second. Paul Krugman makes one version of this argument in The Big Deal, arguing, "as the second term begins [liberals should] find grounds for a lot of (qualified) satisfaction." Elias Isquith, Ned Resnikoff, and Jamelle Bouie discussed the health of the liberal project, especially the fate of social insurance, last month.

People will be engaging with these questions for the foreseeable future, starting in the next few weeks and continuing for a generation of scholars. I'm not sure if I have good answers, but I do have good questions. I've created a generalizable framework of what the component parts of the modern, domestic liberal project are so I can map how they've fared in the first term and what the challenges for each are going ahead. Liberalism is a project of freedom, of course. But by mapping it into component parts of managing the macroeconomy, a mixed economy, a strong regulatory state, and a system of social insurance, allows us to chart progress and retreat.

I'm going to address where I think these issues stand in the current debate among liberals, so it'll have a "on the one hand and also the other hand" dynamic. (The framework might seem ad hoc, but it could be built from theoretical grounds [1].) 

Managing the Macroeconomy

Goals: Taming the business cycle, Keynesian demand management, full employment.

The first term began with the worst downturn since the Great Depression, and normal monetary policy was immediately put in check. The mass unemployment of the past several years has thrown this Keynesian project into complete disarray. It hasn't helped that voters no longer think that the government is capable of doing much here, which is an unfortunate side effect of the weak response.

There's already been an extensive debate about what could have been done to generate more stimulus early on in the administration instead of pivoting away to deficit reduction. After the GOP took the House in 2010, there were two initiatives to try and meet the GOP halfway on stimulus. There was the approach of trying to propose stimulus the GOP would potentially support, like the American Jobs Bill. Remember that Congressional address in which the president said "pass this jobs bill" over and over? There was also the approach of seeking Grand Bargains for additional stimulus. This involved exchanging, say, Social Security cuts for infrastructure spending and some tax revenue. For better or worse, but mostly better, this failed because Republicans refuse to raise taxes.

But this all means that we are still stuck with high unemployment rates for the foreseeable future. It is unlikely that there will be stimulus in the second term; we should hope that some of the harsher cuts, like the sequestration, are postponed while the economy is weak.

Investing in the Mixed Economy

Goals: Creating the conditions for long-term growth, investing in public goods, protecting the public sector.

In addition to managing the short-term economy, there's also the issue of setting the stage for longer-term growth. This is necessarily a grab-bag category, overlapping with the other categories, but it is useful to distinguish it from short-term unemployment. Michael Grunwald's excellent book The New New Deal revived the extensive investment in energy and other innovations that were part of the stimulus. Preventing the mass firesale and collapse of the auto industry were crucial as well.

But there's been a decline in primary and secondary education investment driven by the states, as well as a large decrease in the number of government employees. That's largely the focus of states. At the federal level, investments in infrastructure, research and development, and education, all crucial to building longer-term prosperity, are at risk. Through the Budget Control Act and upcoming sequestration, President Obama and Congress have cut non-defense discretionary spending in order to balance the medium-term debt-to-GDP ratio. As EPI's Ethan Pollack notes, it is difficult to cut here without threatening long-term prosperity.

The stimulus brought a large wave of investment, but that could be more than cancelled out by both collapsing state budgets and long-term austerity and cuts.

Social Insurance

Goals: Sharing risks from poverty, large declines in income, and health problems.

The obvious win over the past four years is Obamacare. Universal health care was the missing piece in the safety net, and efforts to try and tackle this problem have failed every 20 years going back a century. It also survived the Supreme Court, making it the law of the land.

Democratic Senator Tom Harkin called Obamacare a “starter home," which could be generous. The biggest fear I have is that when the government turns it on in 2013, it is viewed as a costly disaster. It isn't clear that Medicare costs would then be lowered and the whole idea of government health-care could be tossed overboard. The damage could be greater than just Obamacare itself. Greg Anrig worries that states can still sabotage the exchanges. Sarah Kliff has an overview on Obamacare implementation over the next four years.

The defeat of Romney and Ryan means that the conservative plans to voucherize Medicare, privatize Social Security, and block-grant everything that's not bolted to the floor is off the table, perhaps for a while. What's possible in the next few years is means-testing the programs, raising their eligibility age, and otherwise reducing benefits. The administration's proposed willingness to raise the eligibility age for retirement programs in exchange for non-social insurance related goals, like stimulus, is bad news on this frontier.

Much rides on Obamacare's success, both bending the cost curve of healthcare to fix the long-term deficit and the credibility of government more broadly.

Regulatory State

Goals: Creating rules for the marketplace that check market failures and power.

The failure to tackle climate change will be remembered as the biggest problem of President Obama's first term. He was largely silent on the issue while a bill went through Senate, though has gotten louder on the topic recently, including in the Inaugural.

Dodd-Frank consolidated regulators, added powers necessary to rationalize the derivatives market, and created a beefed-up consumer regulator. It didn't break up the banks and the Volcker Rule is very much uncertain. It's fair to say it gives regulators a lot of powers they should have had going into 2008 and checks some of the larger deregulations and market failures of the 2000s. There's a remaining sense, however, that Wall Street is outside of the normal accountability mechanisms of the state.

It's probably too early to tell how much reform was jettisoned through Cass Sunstein, the "ambivalent regulator" in charge of OIRA. But my sense is that there were genuine liberals in regulatory agencies pushing strong reform at places like the EPA and the NLRB.

Carbon is still a major threat, though it looks like the President will make a major push in his second term on the issue. There's a growing bipartisan argument for breaking up the Too Big To Fail banks, which, even if it doesn't turn into law, could put additional pressure on how financial elites have become detached from the normal modes of accountability and law.

What's your take? This framework is obviously missing international and civil libertarian projects. There is the escalation of war in Afghanistan, as well as the larger deployment of drones to more theaters, both of which are major problems. The embrace of the legacy of torture is a betrayal of civil liberties. Congress will eventually need to step up and check the power of the executive branch, yet they seem just as bad as the administration.

[1] If you want a more theoretical treatment on one way to get to this mapping, John Rawls proposed four "branches" of government in a Theory of Justice that loosely map onto these categories. The allocation branch works like the regulatory state, the stabilization branch as managing the macroeconomy, and the transfer branch for social insurance.

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After President Obama's inaugural address yesterday -- “one of the most expansively progressive Inaugural Addresses in decades," as President Clinton's former speechwriter told Greg Sargent -- many are looking at the liberal project from the point of view of what was accomplished in the first term as well as what is possible in the second. Paul Krugman makes one version of this argument in The Big Deal, arguing, "as the second term begins [liberals should] find grounds for a lot of (qualified) satisfaction." Elias Isquith, Ned Resnikoff, and Jamelle Bouie discussed the health of the liberal project, especially the fate of social insurance, last month.

People will be engaging with these questions for the foreseeable future, starting in the next few weeks and continuing for a generation of scholars. I'm not sure if I have good answers, but I do have good questions. I've created a generalizable framework of what the component parts of the modern, domestic liberal project are so I can map how they've fared in the first term and what the challenges for each are going ahead. Liberalism is a project of freedom, of course. But by mapping it into component parts of managing the macroeconomy, a mixed economy, a strong regulatory state, and a system of social insurance, allows us to chart progress and retreat.

I'm going to address where I think these issues stand in the current debate among liberals, so it'll have a "on the one hand and also the other hand" dynamic. (The framework might seem ad hoc, but it could be built from theoretical grounds [1].) 

Managing the Macroeconomy

Goals: Taming the business cycle, Keynesian demand management, full employment.

The first term began with the worst downturn since the Great Depression, and normal monetary policy was immediately put in check. The mass unemployment of the past several years has thrown this Keynesian project into complete disarray. It hasn't helped that voters no longer think that the government is capable of doing much here, which is an unfortunate side effect of the weak response.

There's already been an extensive debate about what could have been done to generate more stimulus early on in the administration instead of pivoting away to deficit reduction. After the GOP took the House in 2010, there were two initiatives to try and meet the GOP halfway on stimulus. There was the approach of trying to propose stimulus the GOP would potentially support, like the American Jobs Bill. Remember that Congressional address in which the president said "pass this jobs bill" over and over? There was also the approach of seeking Grand Bargains for additional stimulus. This involved exchanging, say, Social Security cuts for infrastructure spending and some tax revenue. For better or worse, but mostly better, this failed because Republicans refuse to raise taxes.

But this all means that we are still stuck with high unemployment rates for the foreseeable future. It is unlikely that there will be stimulus in the second term; we should hope that some of the harsher cuts, like the sequestration, are postponed while the economy is weak.

Investing in the Mixed Economy

Goals: Creating the conditions for long-term growth, investing in public goods, protecting the public sector.

In addition to managing the short-term economy, there's also the issue of setting the stage for longer-term growth. This is necessarily a grab-bag category, overlapping with the other categories, but it is useful to distinguish it from short-term unemployment. Michael Grunwald's excellent book The New New Deal revived the extensive investment in energy and other innovations that were part of the stimulus. Preventing the mass firesale and collapse of the auto industry were crucial as well.

But there's been a decline in primary and secondary education investment driven by the states, as well as a large decrease in the number of government employees. That's largely the focus of states. At the federal level, investments in infrastructure, research and development, and education, all crucial to building longer-term prosperity, are at risk. Through the Budget Control Act and upcoming sequestration, President Obama and Congress have cut non-defense discretionary spending in order to balance the medium-term debt-to-GDP ratio. As EPI's Ethan Pollack notes, it is difficult to cut here without threatening long-term prosperity.

The stimulus brought a large wave of investment, but that could be more than cancelled out by both collapsing state budgets and long-term austerity and cuts.

Social Insurance

Goals: Sharing risks from poverty, large declines in income, and health problems.

The obvious win over the past four years is Obamacare. Universal health care was the missing piece in the safety net, and efforts to try and tackle this problem have failed every 20 years going back a century. It also survived the Supreme Court, making it the law of the land.

Democratic Senator Tom Harkin called Obamacare a “starter home," which could be generous. The biggest fear I have is that when the government turns it on in 2013, it is viewed as a costly disaster. It isn't clear that Medicare costs would then be lowered and the whole idea of government health-care could be tossed overboard. The damage could be greater than just Obamacare itself. Greg Anrig worries that states can still sabotage the exchanges. Sarah Kliff has an overview on Obamacare implementation over the next four years.

The defeat of Romney and Ryan means that the conservative plans to voucherize Medicare, privatize Social Security, and block-grant everything that's not bolted to the floor is off the table, perhaps for a while. What's possible in the next few years is means-testing the programs, raising their eligibility age, and otherwise reducing benefits. The administration's proposed willingness to raise the eligibility age for retirement programs in exchange for non-social insurance related goals, like stimulus, is bad news on this frontier.

Much rides on Obamacare's success, both bending the cost curve of healthcare to fix the long-term deficit and the credibility of government more broadly.

Regulatory State

Goals: Creating rules for the marketplace that check market failures and power.

The failure to tackle climate change will be remembered as the biggest problem of President Obama's first term. He was largely silent on the issue while a bill went through Senate, though has gotten louder on the topic recently, including in the Inaugural.

Dodd-Frank consolidated regulators, added powers necessary to rationalize the derivatives market, and created a beefed-up consumer regulator. It didn't break up the banks and the Volcker Rule is very much uncertain. It's fair to say it gives regulators a lot of powers they should have had going into 2008 and checks some of the larger deregulations and market failures of the 2000s. There's a remaining sense, however, that Wall Street is outside of the normal accountability mechanisms of the state.

It's probably too early to tell how much reform was jettisoned through Cass Sunstein, the "ambivalent regulator" in charge of OIRA. But my sense is that there were genuine liberals in regulatory agencies pushing strong reform at places like the EPA and the NLRB.

Carbon is still a major threat, though it looks like the President will make a major push in his second term on the issue. There's a growing bipartisan argument for breaking up the Too Big To Fail banks, which, even if it doesn't turn into law, could put additional pressure on how financial elites have become detached from the normal modes of accountability and law.

What's your take? This framework is obviously missing international and civil libertarian projects. There is the escalation of war in Afghanistan, as well as the larger deployment of drones to more theaters, both of which are major problems. The embrace of the legacy of torture is a betrayal of civil liberties. Congress will eventually need to step up and check the power of the executive branch, yet they seem just as bad as the administration.

[1] If you want a more theoretical treatment on one way to get to this mapping, John Rawls proposed four "branches" of government in a Theory of Justice that loosely map onto these categories. The allocation branch works like the regulatory state, the stabilization branch as managing the macroeconomy, and the transfer branch for social insurance.

Follow or contact the Rortybomb blog:

  
 
President Obama image via Shutterstock.com.

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Two Inaugurals, Two Messages: From Mushiness to a Clear, Progressive Vision

Jan 22, 2013Richard Kirsch

President Obama's second inaugural moved past a vague message of compromise and charted a progressive course toward the future.

Four years ago, I stood in the cold listening to President Obama’s first inaugural address. I remember it leaving me cold. This year, in the warmth of my den, the president’s clear projection of progressive values as core American values warmed my heart.

President Obama's second inaugural moved past a vague message of compromise and charted a progressive course toward the future.

Four years ago, I stood in the cold listening to President Obama’s first inaugural address. I remember it leaving me cold. This year, in the warmth of my den, the president’s clear projection of progressive values as core American values warmed my heart.

I just looked back at Obama’s first inaugural address to see why I found it so disappointing. The speech starts by acknowledging the crisis of 2008, with the economy collapsing and war raging. As required, the president says that America is up to the challenge. The address includes a short list of progressive points on the economy, climate change, and the role of government. But these are interspersed with acknowledgments of the validity of conservative arguments. There is no unifying, values-based narrative or vision.

What a difference from yesterday's address, which starts with the promise of the Declaration of Independence – we are created equal in the pursuit of life, liberty and happiness – and then unabashedly extends that to the struggle for civil rights, which Obama has often shied away from being seen as championing. He grounds our 200-year history “through blood drawn by lash, and blood drawn by sword," reminding us that "no union…could survive half-slave, and half-free.”

From there, the president charges directly to the historic role of government in building our physical and human capital. And unlike four years ago – when he first trumpeted the role of free markets and then noted the need for regulation – he says unambiguously, “Together, we discovered that a free market only thrives when there are rules to ensure competition and fair play” and that “a great nation must care for the vulnerable and protect people from life’s worst hazards and misfortunes.”

Even when the president recognizes values shared by progressives and conservatives – skepticism that about central authority and the importance of initiative and personal responsibility – he quickly affirms that “preserving our individual freedoms ultimately requires collective action.” To meet the future, the president says, will take the kind of things government does – educate children, invest in infrastructure – declaring, “Now more than ever, we must do these things together, as one nation and one people.”

From there he makes it clear that our economic success is undermined when “a few do very well and growing many barely make it.” Instead, "America’s prosperity must rest upon the broad shoulders of a rising middle class. We know that America thrives when every person can find independence and pride in their work, when the wages of honest labor will liberate families from the brink of hardship.”

Obama then begins to build a bridge linking the dignity of the individual with the collective, which he expands as his address progresses. The first span of the bridge is to connect the prospects of a “little girl born into the bleakest poverty” with freedom and equality “not just in the eyes of God, but also in our own.” He continues to build the bridge, insisting that in updating government programs, we should aim to “reward the effort and determination of every single American.” He then makes it clear that this includes keeping the “commitments we make to each other through Medicare and Medicaid and Social Security,” which “strengthen us” and “do not make us a nation of takers. They free us to take the risks that make this nation great.”

The president then puts forth a values-based linkage of government's role in tackling climate change, refuting climate deniers and linking addressing climate change to our “economic vitality” and natural “national treasure.”

Reaching to a preacher’s eloquence, the president affirms that he is not leaving anyone behind in our national journey. The cadences of “our mothers and daughters can earn a living equal to their efforts," “our gay brothers and sisters are treated like anyone else under the law,” “no citizen is forced to wait for hours to exercise the right to vote,” “immigrants who still see America as a land of opportunity,” and “children from the streets of Detroit to the hills of Appalachia to the quiet lanes of Newtown” resound with the voice and spirit of Dr. King. The president has built a bridge that links individual initiative and responsibility to oneself and each other with a values-driven role of government that unites our diversity on the American journey.

Progressives need to pay close attention to another bridge Barack Obama has built here. He has integrated often separate strains: identity politics and the politics of government playing a key role in building an economy based on equal opportunity. The more we link those, the more we will create a story about America that commands a lasting majority.

No progressive story of America would be complete without putting movement at its core, which the president does forcefully in his alliterative embracing of “Seneca Falls and Selma and Stonewall.” Notably, these reminders come at the end of his discussion of our role in the world, as he links American movements to Dr. King’s proclamation that our individual freedom is inextricably bound to the freedom of every soul on earth.

He doesn’t leave the call for action in the past. His concluding paragraphs clarify that “You and I, as citizens, have the power to set this country’s course.”

The president will need lots of help setting that course over the next four years; surely he’ll be tested to keep to it himself. Our job is to do everything we can to assist him.

Richard Kirsch is a Senior Fellow at the Roosevelt Institute, a Senior Adviser to USAction, and the author of Fighting for Our Health. He was National Campaign Manager of Health Care for America Now during the legislative battle to pass reform.

 

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To Reduce the Deficit, End Redistribution to the Rich

Jan 2, 2013Joe Landry

Instead of cutting aid to the poor, the president and Congress should focus on reforming costly tax expenditures.

Instead of cutting aid to the poor, the president and Congress should focus on reforming costly tax expenditures.

While we often hear critics decrying the redistributive effects of American social spending, government aid does not always benefit households of limited means. Often, aid looks more like a million-dollar vacation home or a luxury health insurance plan than housing vouchers and food stamps. American social spending is more complex than a simple redistribution from high- to low-income households. Over time, the country’s tax and transfer system has adopted provisions that reward specific high-income households. These programs contribute to deficit growth and detract from spending targeted at alleviating poverty among working families.

The most generous social welfare programs are currently administered through the tax code. A list of itemized deductions on households’ income tax returns serves as the only indication of these benefits. Income tax deductions, exclusions, deferrals, and credits, known collectively as “tax expenditures,” amount to more than $1 trillion of federal spending (according to estimates by the Tax Policy Center), not including lower tax rates on capital gains and dividends to encourage investment.

Tax expenditures are the functional equivalent of direct spending. Consider two households with identical incomes of $200,000. Household A purchases a home with a mortgage. Household B rents an apartment. Household A likely receives $5,000-10,000 (depending on mortgage size and APR) through the mortgage interest deduction when filing taxes. Household B receives $0. This, in effect, is a subsidy for homeownership. If the IRS collected taxes without any exclusions or deductions and then distributed payments to those who purchased mortgages, we would most likely categorize this disbursement as a form of direct spending.

Beyond simply diminishing revenues, tax expenditures disproportionately favor high-earning households, thereby reducing progressivity of federal income taxes. One reason for this imbalance is that high-income households have relatively high marginal income tax rates. Consider the exclusion of $10,000 of earned income for two individuals. Taxpayer A is taxed at a rate of 20 percent. Taxpayer B is taxed at a rate of 35 percent. Excluding $10,000 means removing this sum from taxable income. Decreasing taxable income by $10,000 for both of these individuals will yield $2,000 for Taxpayer A and  $3,500 for Taxpayer B. Thus, two taxpayers who engage in identical behavior receive disparate rewards because of income differences.

High-earning households are also more likely to engage in behaviors incentivized through the tax code. This means that, in addition to gaining more from each dollar deducted from tax obligations, high-earning households also deduct more than their middle- and low-income peers. Having more resources, the top 20 percent of households are more likely to purchase homes and contribute to retirement savings plans than households in the bottom 20 percent. They are more likely to hold jobs that offer employer-provided health insurance. Further magnifying the divide, high-income households on average possess more expensive employer-provided health insurance. In subsidizing purchases of homes, retirement plans, and health insurance for all households, tax expenditures disproportionately assist those originally more likely to engage in these behaviors. Consequently, high-income households are in better positions to take advantage of tax deductions.

So if tax expenditures waste essential potential revenues on affluent households, why are they so difficult to reform? General support for simplifying the tax code is not difficult to find. What is difficult, however, is reducing or eliminating particular benefits that households already possess. Tax expenditure reform would be tantamount to a tax hike on households that itemize deductions. For this reason, politicians enthusiastic about tax code simplification become reticent when faced with the task of eliminating specific loopholes.

The first step to simplifying the tax code successfully is treating tax expenditures as spending. This distinction demands that Congress scrutinize expenditures to the same degree that it scrutinizes antipoverty spending. Congress should consider whether particular deductions or exclusions successfully incentivize a desired behavior. Further, it should assess whether social rewards from altered behavior exceed revenue lost. For example, it would be difficult to argue that any social gain from deducting mortgage interest on second homes for families earning more than $250,000 exceeds revenues lost. By simultaneously reducing revenues for means-tested entitlements and subsidizing home purchases of wealthy taxpayers, such a provision merely exacerbates income and wealth inequality. This provision is not worth revenue losses that it engenders.

While tax expenditures for high-income families would not survive this level of scrutiny, some expenditures for low-income families achieve desirable ends. This social value justifies revenues lost. For example, the Earned Income Tax Credit (EITC) supports low-wage workers with supplemental income, reducing the poverty rate for these workers and their families. EITC successfully incentivizes work, achieving a valuable social aim and warranting a degree of spending. Other existing expenditures might also be continued for lower- and middle-income households. For example, Congress might continue the mortgage interest deduction for low- and middle-income households on the margin of being able to afford homeownership. But Congress should only adopt such extensions if a clear argument can be made that social gains exceed revenues lost.

As President Obama and congressional leaders continue to negotiate long-term deficit reduction, the first programs that they trim should be those subsidizing high-income households. More than any other social spending category, tax expenditures for high-income households constitute frivolous spending. Both presidential candidates in 2012 supported reducing tax expenditures for high-income families. Governor Romney suggested setting a maximum deduction, while President Obama proposed setting deductions at lower tax rates. Each of these plans would limit tax expenditures for high-income households to some extent. In order to further decrease tax expenditures’ regressive effects, these proposals could be combined with reforms that target payments toward lower- and middle-income households. This would include restricting the mortgage interest deduction to primary residences and limiting exclusions for luxury health insurance beyond provisions already included in the Affordable Care Act.

Now it is time for the president and Congress to fulfill their promise to simplify the tax code, beginning with those at the top of the income scale. While tax expenditure reform for high-income households will not solve our fiscal problems single handedly, it represents an essential path forward for reducing the deficit without exacerbating the economic hardship of low-income Americans.

Joe Landry is a member of the Roosevelt Institute | Campus Network and a senior at Washington and Lee University in Lexington, VA, majoring in American History and minoring in Poverty and Human Capability Studies. This summer, he worked with Dr. Harlan Beckley, Director of the Shepherd Poverty Program at W&L, researching the historical and comparative context of current American social spending. Their research can be found here.

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President Obama: Stay Progressive in the Fiscal Showdown Talks

Dec 18, 2012Richard Kirsch

President Obama must remember the message of election night and back away from cutting Social Security benefits.

President Obama must remember the message of election night and back away from cutting Social Security benefits.

That didn’t last nearly as long as I had hoped. I put on my Obama baseball cap – the one I picked up from a street vendor walking to the inauguration four years ago – a few weeks before the November election. I’ve worn it every day since, to both celebrate his victory and cheer on the president for keeping to a progressive promise in the fiscal negotiations. Part of that promise was telling the DesMoines Register that Social Security benefits should not be cut. But it looks like my cap is going back on the shelf if reports that Obama is willing to cut Social Security benefits prove to be true.

There are three things to keep in mind about the president agreeing to cuts in Social Security benefits. The first is that Social Security’s benefits are slim, while retirement savings for most Americans are even thinner. The second is that if we are going to address Social Security’s eventual shortfall, there’s a simple progressive alternative to cutting benefits. The third is that this concession is giving in to the corporate deficit hawks, each of  whom has huge personal retirement accounts. Let’s take them – very briefly – one at a time.

Social Security is what American seniors survive on. As Dean Baker reports, “The median income of people over age 65 is less than $20,000 a year. Nearly 70 percent of the elderly rely on Social Security benefits for more than half of their income and nearly 40 percent rely on Social Security for more than 90 percent of their income. These benefits average less than $15,000 a year.”

And most people don’t have savings to fall back on. Half of Americans have less than $10,000 in savings and nearly half of baby boomers are at risk of not having enough savings to pay for basic necessities and health care.

Point number two is if you are going to tackle the eventual Social Security shortfall – which has nothing to do with the fiscal talks since Social Security doesn’t contribute a dime to the deficit – there is a simple, progressive alternative to cutting benefits. Lifting the cap on payments into Social Security for income of greater than $110,100 would only impact 6 percent of wage earners and would extend the life of the trust fund for almost 75 years.

Finally, let’s look at the corporate CEOs who blithely talk cuts in Social Security, like Goldman Sach’s CEO Lloyd Blankfein, who told CBS News, "You're going to have to do something, undoubtedly, to lower people's expectations of what they're going to get." It’s easy for a guy who has $12 million in retirement assets to dismiss a cut in benefits of $1,000 and more as just lowered expectations. Other CEOs leading the campaign to cut benefits include Honeywell’s David Cote, with $78 million in his retirement account, and GE’s Jeffrey Immelt, with $55 million stashed away for his later years.

Hopefully the president will back away from cutting Social Security benefits. If not, we need Democratic leaders like Senate Majority Leader Harry Reid to keep to his pledge to keep Social Security out of the fiscal talks. And if a fiscal package with the cuts is presented, Democrats in both houses should offer an amendment, substituting lifting the cap on 6 percent of upper-income Americans for cutting benefits for all our retirees. That’s the kind of choice we need Congress to face.

But Mr. President, let’s not get to that choice: I really like wearing my Obama cap. 

Richard Kirsch is a Senior Fellow at the Roosevelt Institute, a Senior Adviser to USAction, and the author of Fighting for Our Health. He was National Campaign Manager of Health Care for America Now during the legislative battle to pass reform.

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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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