Washington Post reporter Lori Montgomery’s recent  article on Social Security’s finances has been the subject of blistering critiques by Dean Baker, Paul Krugman, and others who rightly point out that her opinions belong on the editorial page, not the front page. But Social Security’s finances have also tripped up more even-handed observers. To help the genuinely perplexed, here’s a primer on Social Security and the federal deficit (for a more in-depth discussion, go here).  A follow-up blog post will look at the impact of the recession and explain the meaning of Social Security’s primary (or “cash-flow”) deficit.

Does running a deficit mean you’re piling up debt?

Not necessarily. You can be rich as Croesus and still be running a deficit. All it means is that you’re spending more than you’re taking in over a specified period, whether by borrowing or drawing down savings.

Is Social Security running a deficit?

No. Social Security is running a surplus. Its combined revenue sources – payroll taxes, interest from the trust fund, and earmarked income taxes on some Social Security benefits – are still larger than benefit payments. The trust fund, which currently has $2.6 trillion dollars, is projected to grow to around $3.7 trillion in 2022. But once Social Security starts drawing down the principle in the trust fund to help pay for the Baby Boomer retirement, Social Security will be running a deficit. Also, as will be explained at greater length in our second blog post, Social Security is currently running a primary deficit, which means it would be running a deficit absent the interest on the trust fund.

Is drawing down the trust fund a bad thing?

No, that’s what it’s there for. Social Security is structured as a pay-as-you-go program, with current benefits mostly paid out of the revenue from current payroll taxes. With steady population growth, the trust fund would only need enough to handle normal cash flow, like a checking account.  However, for nearly a generation significant savings were built up in the trust fund and are now there to handle the demographic “bulge” of the Baby Boomers’ retirement. The fact that Social Security will tap the trust fund to help pay for the Boomers only comes as a surprise to people like Alan Simpson.

Can Social Security contribute to the federal deficit?

It can, if you’re looking at a unified federal budget. By law, Social Security isn’t considered part of the federal budget since it has dedicated funding. But it can be useful to consider the federal government as a whole, including off-budget programs like Social Security. If you do, Social Security’s surplus or deficit contributes to the unified federal budget surplus or deficit.

Can Social Security contribute to the federal debt?

No. Social Security is prevented by law from borrowing—it can only draw down savings in the trust fund. Since Social Security must operate in long-term balance, it can’t contribute to the federal debt over time. This is true whether you consider Social Security as part of a unified federal budget or as a stand-alone program.Read more

I apologize for continuing to harp on this Rick Perry study, but I just can’t help myself. As I mentioned in an earlier post, the first thing that really jumps out at you is the breathtaking intellectual dishonesty. But beyond its complete inconsistency with Perry’s ideology and professed objectives, the analysis simply doesn’t make sense. Here are a few examples:

1) GDP growth is impossibly high: Remember that Heritage Foundation analysis of the House Republican 2012 Budget, the one that predicted economic growth and unemployment at levels most economists considered impossible? Well, John Dunham and Associates’ (JDA) projections underpinning the analysis of Perry’s tax plan are even more impossibly higher! The Heritage analysis found that the average annual real growth rate from 2014-2020 would be about 3.1 percent. JDA is predicting that under Perry’s plan, it would be 5.3 percent. Reality’s overrated anyway, right?

2) Double counting: The analysis claims that “overall income is based on growth in nominal GDP and population (pg. 4).” See the problem here? Yeah, that’s right, nominal GDP already takes into account population growth. We checked their numbers, and it does appear they grew income by both GDP and population, so it doesn’t seem to be just a typo.

3) Other weird stuff: Check out the qualified dividends forecast from Table 2 of the analysis. From 2016-2019 dividends grow at an average 12.6 percent, including 13.2 percent in 2017, 14.0 percent in 2018, and 8.2 percent in 2019. And then 2020? Whoops. According to this forecast, qualified dividends in 2020 will be exactly the same as in 2019, to the dollar. Same thing with 2011 and 2012. The chance that that’s not a mistake is about zero.

4) Optional or mandatory?: It is unclear whether JDA modeled an optional flat tax or a mandatory flat tax as a replacement for the current income tax. The campaign maintains that JDA did model optionality. But their stated methodology does not mention how they modeled which taxpayers would choose which system, and their description of the proposal—”a 20 percent flat rate for both personal income taxes and corporate income taxes”—also makes no mention of having a choice between the current system and the new system.

We contacted the Perry campaign in regards to these numerous errors and omissions, but have yet to hear back. These aren’t minor problems – the entire analysis is suspect and the Perry campaign should retract these numbers.

At EPI’s 25^th anniversary celebration last night, we presented an award to Paul Krugman. (You know, because he’s short on credentials and really could use some professional validation.)  Harry Hanbury produced a very candid video about him for us, and it’s well worth seeing – it’s not just a hymn of praise, it actually has a great narrative arc.

MORE: Multimedia on EPI at 25

I think the only thing I’d add that the video didn’t emphasize (because it was made for people, not economists) is just how inspiring Krugman’s work is for economists who are actually trying to make sense of the real world. Nobody else so consistently reaches back for the tools that we’re all taught in grad schools (many of which he built, it bears saying) – tools like graphs and equations and models that often seem dry and abstract – and holds them up against developments in the real world to see what they actually can and can’t explain. He runs with the things that are useful and (often pretty brutally) discards the things that aren’t. For those of us who got into the economics business to understand the world around us, his work is an inspiration.

Krugman’s acceptance speech

[pro-player width=’540′ height=’304′ type=’video’ image=’http://www.epi.org/files/2011/Krugman_Award.png’]http://www.youtube.com/watch?v=-pKRBLdG1eA[/pro-player]

A clear trend is developing among the economic plans of the GOP presidential hopefuls: shift the burden of taxation from upper-income to lower-income households. Yesterday, the Tax Policy Center released an analysis concluding that Texas Gov. Rick Perry’s plan would cut taxes on high-income households, raise taxes on low- and middle-income households, and produce bigger deficits. The gist of Perry’s plan is to add an optional federal income tax to the current code: a flat 20 percent tax on (almost all) income less personal exemptions, charitable giving, home mortgage interest, state and local taxes, and all capital gains and dividends income (aptly dubbed an “Alternative Maximum Tax” by Howard Gleckman).

Those earning more than $1 million would see their average tax bill fall by more than half, a tax break of $496,000 in 2015 alone, relative to current policy. The highest income 0.1 percent of households (with income above $2.8 million) would see a tax break of over $1.5 million—even more egregious than the mammoth tax cut they would receive under Herman Cain’s “999” plan.

Meanwhile, Perry’s plan appears to let the Bush-era tax cuts expire in 2013, meaning that lower-income households would lose their expanded earned income tax credit, child tax credit, and the 10 percent bracket. (The John Dunham and Associates analysis for the Perry campaign uses a current law baseline and TPC also concluded that the Bush-era tax cuts would expire on schedule.) The Bush-era tax cuts were regressive and disproportionately benefited upper-income households, but a fraction of these tax cuts have gone to lower- and middle-class households; Perry would effectively do away with these tax cuts while giving higher-income households an even bigger tax cut. This would mean an average tax increase of over $400 for households earning between $20,000 and $40,000. Although this may appear at odds with Perry’s anti-tax ideology, higher taxes for the poor and middle class is in fact entirely consistent with his misleading rhetoric lambasting the “injustice” that nearly half of households don’t pay federal income taxes.

The chart below depicts TPC’s analysis of effective tax rates by cash income level under Perry’s plan versus current policy. On average, households with income under $50,000 see a tax hike. Above this level, tax cuts balloon as income rises. Millionaires would be left paying a lower effective tax rate than a middle class family earning between $50,000 and $75,000. This completely violates the idea of a progressive tax code and the Buffett Rule.

Click to enlarge

The natural result of modestly raising taxes on working families while slashing taxes for upper-income households is hemorrhaging revenue: this is not about “shared sacrifice” or the budget deficit. As my colleague Ethan Pollack points out, the Perry campaign relies on highly dishonest dynamic scoring to claim their tax code produces more revenue. Official budget scorekeepers incorporate behavioral responses but not dynamic growth effects into tax policy analysis, because research shows growth effects are generally small and can break either way depending on how tax cuts are financed (see this CBPP overview of dynamic scoring). TPC’s static model shows Perry’s plan losing $995 billion relative to current law, a decrease of 27 percent, in calendar year 2015 alone ($570 billion relative to the inadequate levels projected under current policy).

Working households would get hammered again when that additional revenue loss is financed with draconian spending cuts, as required by the balanced budget amendment and spending cap component of Perry’s economic plan. This is merely a plan to dismantle government and refund all the savings, plus some of working families’ disposable income, to upper-income households.

I’ve been reading through Rick Perry’s official analysis of his tax plan (scored by John Dunham and Associates), and hoo boy, it’s a doozy. Difficult to know where to begin.

The intellectual dishonesty is breath-taking. The basic conservative argument that tax cuts increase economic growth goes like this: tax cuts for the rich results in more capital formation, which fuels greater productivity and higher economic growth. In other words, supply-side growth with demand catching up. It’s a pretty ridiculous model in the face of huge demand shortages, but hey, at least it’s a model.

But as Matt Rognlie points out, the model that Rick Perry used is very different, and in fact has a lot more in common with traditional Keynesian demand-side economic models than conservative supply-side models. In fact, this economic model (called IMPLAN) is usually used to justify government public works projects, such as sports stadiums, because this model shows that the economy can be significantly improved through government spending.

Wait, what?  Rick Perry’s using an economic model that shows that government spending helps the economy? That’s right, partner. In fact, the IMPLAN model (which we’re decently familiar with at EPI) will actually show that spending cuts reduce demand more than tax cuts boost it (because a portion of the tax cuts are saved), so the net effect is likely negative. And to be clear, JDA did assume that the plan would cut spending by the same amount as the revenue loss (page 7, footnote 7).

So how did the analysis show a positive economic impact? Simple: they assumed the spending cuts, but didn’t model them, despite the fact that it’s logically inconsistent to claim that tax cuts have an effect on demand but spending cuts don’t. The only reason they got a positive economic impact was because they did not model the entire plan. Had they, it’s pretty clear that the analysis would have shown that Perry’s overall budget plan—tax cuts paired with offsetting spending cuts—would, on net, hurt jobs and economic growth.

Here’s something really scary for Halloween: the plan being pushed in the budget super committee by Alice Rivlin, Alan Simpson and Erskine Bowles to cut Social Security benefits by changing the way inflation is measured. Any member of Congress who goes along with this plan will deservedly be as popular as a vampire at a blood drive.

Retirees living on Social Security are mostly just scraping by. The average retirement benefit is only about $14,000 a year in 2009, and most retirees depend on Social Security for half or more of their incomes. Knowing how tight their budgets are (and their proclivity for voting), Democrats and Republicans alike have promised not to cut the benefits of people nearing retirement, not to mention the benefits of people who have already retired. Yet the only way the inflation measure can reduce the deficit over the next 10 years is by cutting Social Security cost-of-living adjustments for current and near retirees.

The members of Congress who want to make this benefit cut don’t want to admit they’re breaking their promises to retirees. So they disguise the cuts as a technical change—an improvement in the cost-of-living measure. That’s hogwash. The alternative index they propose for the Social Security COLA is not an improvement over the current measure; it’s almost certainly a worse indicator of the rising cost of living faced by seniors. And there’s nothing technical about its expected effect on retirees’ checks. The COLA reductions it will cause will cost the average retiree about $1,700 a year by 2031.

Social Security’s annual cost-of-living adjustment is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W. Ironically, the CPI-W measures changes in the cost of living for workers, excluding retirees and other Social Security recipients who aren’t in the labor force. This measure doesn’t accurately reflect the cost of living for seniors. Seniors have experienced higher inflation because they spend a greater share of their incomes on out-of-pocket medical expenses, and health costs have risen faster than overall inflation in recent decades. An index that specifically tracks the cost of living of seniors has risen roughly 0.27 percentage points faster per year than the CPI-W.

The rationale for the change the super committee is contemplating is that the current price index overstates inflation because it doesn’t fully account for the ability of consumers to change their buying habits in response to price changes. In other words, if the price of oranges goes up, people will buy more apples and fewer oranges, and this change isn’t fully reflected in the CPI-W even though the consumption “basket” evolves over time to put more weight on apples and less on oranges.

The problem with this argument is that it doesn’t look at the growth in the costs actual retirees face over time. Not only are seniors harder hit by escalating medical costs than the working-age population, but since they have roughly half the household incomes, they spend a greater share on necessities like rent and utilities. It’s likely that the CPI change advocated in the super committee will understate inflation in the goods and services the elderly mostly purchase, and it may actually overstate their ability to change consumption habits in response to price changes. No one disputes that it will lead to benefit cuts that start small but compound over time.

Benefit cuts are justly unpopular across the political spectrum—especially cuts that affect retirees and near-retirees. But Republican members of Congress have a double problem. The CPI change would affect income taxes, too – not just Social Security and veterans’ benefits. How does anyone who took a no-tax-increase pledge defend voting for a “technical change” that will raise $72 billion in taxes by 2021 on tens of millions of Americans? They might be tempted, since there will be nearly $2 of Social Security cuts for every $1 of increased tax revenue. But at the end of the day a vote for the CPI change will feed the disgust of Tea Party types as much as progressives and liberals.

Former Secretary of Labor Ray Marshall released his new book, Value-Added Immigration: Lessons for the United States from Canada, Australia, and the United Kingdom, at a forum at EPI this morning. The book examines the employment-based immigration policies of the principal immigration-receiving countries and contrasts their data and evidence-based policy development with our own very partisan policy making, which has been governed by ideology and interest group advantage rather than a rational examination of the national interest.

Marshall made clear at this morning’s forum that a realistic hope for progress depends on putting one federal agency in charge, gathering data for informed decision-making, and committing ourselves to pursuit of a high value-added immigration policy, rather than simply a pursuit of cheap labor.  Unlike Australia and Canada, which track the experience of immigrants in longitudinal studies and adjust their policies to improve outcomes, the United States does not even know how many “temporary” non-immigrant workers are legally in the U.S., let alone how they are faring.

Marshall was joined on a panel by three distinguished researchers: Philip Martin of the University of California, Davis, one of the nation’s foremost experts on agricultural economics and labor migration; Michael S. Teitelbaum of the Alfred P. Sloan Foundation and Harvard Law School, a demographer and expert on STEM education and immigration; and Ron Hira, of the Rochester Institute of Technology, an expert on the offshoring of IT work and the relationship between our non-immigrant visa programs and the health of the domestic engineering and computer science workforces.

Martin and Teitelbaum, like Secretary Marshall, praised the flexibility of the Australian and Canadian systems and their use of rational, objective point systems to determine the admission of skilled immigrants. Each also praised the U.K.’s Migration Advisory Committee for its collection and use of very extensive labor shortage statistics, its use of “bottoms up” information from local businesses, unions and government sources, and its non-partisan method of researching, reporting, and analyzing whether importing workers is the sensible way to solve particular problems.  All three commenters agreed with Marshall that the current state of immigration and labor market data in the U.S. is far inferior to that in the countries studied and inadequate to the task of informing the policy debate.

Value Added Immigration: Lessons for the United States from Canada, Australia, and the United Kingdom, is available from EPI for $15.95.

GDP grew at 2.5 percent in the third quarter – and that seems to be about the growth rate to expect for the next year (which will be an improvement from the 1.6 percent growth that has characterized the most recent 12 months). This is, as we’ve noted, insufficient to drive down the 9.1 percent unemployment rate.

It is, however, worth remembering just why there are so many unemployed workers in the country: the depth and length of the Great Recession, caused by the bursting housing bubble (and perhaps amplified by the corresponding financial crisis). The unemployment rate is slightly down and employment growth since the recession ended in the middle of 2009 is actually roughly in-line with the recoveries we’ve seen in the past two decades (following the 1990 and 2001 recessions). Further, to the degree that the current recovery is slightly under-performing these previous two, it’s in the hemorrhaging of public sector jobs.

So why is unemployment so much higher today compared to nine quarters after these two other recessions ended? Because the output losses (and hence corresponding job-losses) suffered during the Great Recession were so much larger – meaning that we have a much larger overhang of economic slack (both unemployed workers and idle factories) to put back to work.

The figure below shows GDP declines during the Great Recession compared to these previous two recessions, as well as GDP gains nine quarters into recovery for the Great Recession and the previous recessions.

Click to enlarge

As we’ve also observed before, recoveries from recessions happened much more quickly in the years prior to 1990, reflecting in part that monetary policy was much more effective in driving recoveries pre-1990 (since it was generally monetary policy tightness that caused these recessions, monetary loosening could hence lead to rapid recovery).

So, focusing for a second on just those recessions that have happened in the two decades (give or take a year), we see something clear – this recovery lags the average by 1.1 percent of GDP, but the hole left by the recession was larger by an average of 4.5 percent of GDP, meaning roughly that it was the difference in the losses caused by the recession that explain 80 percent of why unemployment is so high relative to its pre-recession level.

So while it’s true that we slightly lag the pace of post-1990s’ recoveries, it is clear that what really explains why so many more workers and so much more capital remains idle today compared to recoveries past is just how ferocious the preceding recession was.

Does this leave today’s policymakers off the hook? No – they should do more. The past is the past and just because a problem is inherited doesn’t mean it shouldn’t or can’t be solved. Clearly in retrospect not enough was done to boost the economy following the 1990 and 2001 recessions (some speculative reasons why are here). And clearly there is more we can do now to boost the sluggish demand growth that is the main cause of today’s economy operating below potential.

But, it is worth remembering where the problem came from. As we get further and further from the Great Recession, the temptation is great to act as if citing it as the root cause of today’s problems is just unseemly dwelling on the past and dodging blame. But, really, it does matter how it all started.

Rick Perry’s out with his tax plan, and while he might be winning the “who can pander to their base the most” award—beating out strong efforts by Mitt Romney and Herman Cain—his proposal proves to be an utter disaster for the economy and the middle class.

On the tax side, the plan would do the following:

• Replace the graduated income tax with an optional 20 percent flat rate with a slightly broader base
• Slash the corporate tax by almost half
• Abolish the estate tax
• Enact a temporary repatriation holiday
• Eliminate taxes on capital gains and dividends
• Raise the personal exemption for households to $12,500 per person

Perry makes two basic claims about his plan. First, he says that the “net benefit will be more money in Americans’ pockets.” For corporations and high-income households, that’s certainly true, even though their tax rates are already at historic lows. But it does that by shifting the tax burden onto middle- and low-income households, whose incomes have actually fallen over the last decade.

Second, he claims that his plan will simplify the tax code, so simple that you can “file your taxes on a postcard.” Yet his tax code is optional, meaning that millions of households will have to do their taxes twice to see under which code they should file (and if they think they might be subject to the Alternative Minimum Tax, they’ll have to do their taxes three times!).  Layering another tax code over the current one makes filing taxes more complicated, not less.

From Flickr Creative Commons by Gage Skidmore

Now, it’s certainly the case that the tax code is too complex.  But it’s telling that his proposal doesn’t even attempt to tackle the issue of unfairness, which has sparked protests across the country. Most people hear that Warren Buffet pays a lower tax rate than his secretary and conclude that he should be taxed at a higher rate, one more comparable to middle-class workers. Rick Perry, however, thinks his taxes should be cut even further.

And how does he pay for these tax cuts? No surprise here: massive cuts to the social safety net and public investments. He’d raise the Social Security retirement age, potentially raise the Medicare eligibility age, eliminate all the expanded health insurance coverage in the Affordable Care Act, and take an axe to non-defense discretionary spending, which has already been slashed by the Budget Control Act.

It’s the basic conservative approach to budget and tax policy: (1) pretend that you care about deficits, (2) give huge tax cuts to corporations and the top 1 percent, and (3) slash the very programs that people depend on because now we “can’t afford them.” The rich get richer, and even more risk and cost is pushed onto the middle- and low-income households that can least bear the burden. Perry may call this tax plan “fair.” but I don’t think that word means what he thinks it means.

So this Halloween season, the middle class might want to skip Perry’s house, because for them he’s got no treats, only cruel, cruel tricks.

Nonresidential investment has been growing rapidly for quite some time – seven straight quarters averaging 10.5 percent growth. We have noted before that this provides powerful evidence that business fear of future regulatory uncertainty seems to be an odd explanation of sluggish economic growth – businesses are, in fact, actually spending pretty quickly during the recovery.

Is it a puzzle that nonresidential investment is coming on two years of rapid growth, yet employment growth remains sluggish? After all, if businesses seem fine in taking on new machines, why aren’t they fine in taking on new staff?

I’d argue the answer to these questions are ‘not really’ and ‘read on.’

First, it’s worth remembering that nonresidential investment just isn’t that big a part of the overall economy – it has averaged 11.1 percent of GDP since 1995 and sits at 10.3 percent today. While it’s nice that it’s performing well, it just doesn’t have enough heft by itself to drive overall trends in either output or employment growth. Contrast this with consumer spending sitting at about 70 percent or more of total GDP.

Second, nonresidential investment is hugely cyclical – from the last quarter of 2007 to its trough in the second quarter of 2009, it fell by 22.4 percent – or about 2.5 times farther than the drop in employment. Today, despite its good growth for nearly two years, it remains well below trend. In fact, Thursday’s report on third quarter GDP shows that the simple level of nonresidential investment remains nearly 8 percent below its pre-recession peak. So, it’s been growing very well for a while now, but it fell extraordinarily far during the recession.

Third, it’s important to remember that, like job-growth, investment has to grow just to keep overall economic slack stable. So, we need roughly 100,000 jobs each month just to keep the unemployment rate stable while absorbing new labor market entrants. And, we need 8 percent of GDP to be invested each year just to keep the overall capital stock from shrinking through depreciation that occurs in the private business sector.

Lastly, it’s worth asking whether investment is now so high after seven straight quarters of growth that it is threatening to change the economy’s capital/labor ratio in an appreciable way. That is, firms invest so that each worker has a useful bundle of capital to work with – one that hopefully grows over time and makes each worker more productive. If investment per worker begins rising well above trend, this could mean that output is just becoming more capital-intensive for some unspecified reason or that firms will have to start soon hiring to stabilize this ratio.

Neither seems particularly likely – investment per worker remains below its 2007 level even as employment shrank over that period. And this means that it remains well below what a simple extrapolation of the pre-recession trend would argue.

Click to enlarge

In short, the trend in nonresidential investment is nice, but it won’t by itself bring about a robust recovery. More importantly, it mostly represents simply an ongoing climb out of a steep, recession-induced hole (which should sound familiar) combined with an attempt to run ahead of simple depreciation. And this trend certainly presents no puzzle in that it’s not being accompanied by more rapid hiring.