A recent “Spreadsheet Scandal” has rocked the economics world. It also seems to have eliminated the last remaining technical argument in support of the President’s “chained CPI” Social Security cut.
Not weakened it. Eliminated it.
I believe the President proposed the chained CPI in good faith. I don't know if the same can be said about his campaign pledges on that subject, but I think he genuinely believed these cuts were needed. I think his economic advisors thought they were doing the right thing by proposing them. And I think that this now-discredited spreadsheet helped convince them.
Why do I think so? Because I had a run-in with the President’s top economic official on this very subject back in 2010, and his position seemed to be strongly influenced by that spreadsheet and the economists who created it.
I hadn’t thought about that exchange for a long time. But last night I was catching up on this scandal when it struck me:
That’s why they’re doing this.
I first learned of the Administration’s plans to cut Social Security in a deep-background briefing which a “Senior Administration Official” held for a small group of writers in August of 2010.
I honored the “deep background” (no quotes or names) commitment, but Mike Allen of Politico did not. Allen wrote that the unnamed Official believes that “action on Social Security … demonstrates the ability to begin to affect the long-run deficits … strengthens the odds of a political consensus behind other spending cuts or tax increases … (and) would establish more CREDIBILITY with the MARKETS.”
Some of the other attendees were outraged at what they considered Allen’s unfair reporting. Tim Fernholz said Allen failed to note that the Official had cited Paul Krugman. (More about that shortly.) But the shift-key-abusing Allen was right on this one.
Then the Washington Post revealed that the unnamed official was Treasury Secretary Tim Geithner. Several other attendees did the same. So much for “deep background” …
Those Social Security comments were part of a heated exchange with me. It took place after we were told that some form of Social Security cut was likely, probably after a “bipartisan” recommendation from the Simpson/Bowles Deficit Commission.
What if the Commission deadlocks? I asked.
Then the recommendation will come from a bipartisan subgroup, came the answer. If we can’t get that we’ll get a bipartisan recommendation from the two co-chairs themselves. (That’s what eventually happened.)
I asked why they wanted these cuts. Because the international markets want them, was the reply. But the international bond markets love US government debt right now, I said.
That’s when things got heated.
Social Security adds to government debt, said the (as yet unnamed) official.
But, I said, the Social Security Act forbids it from drawing down on general funds and adding to the debt. It’s a debtor, not a …
He cut me off. Even your hero agrees with me, he said.
Paul Krugman. Your hero Krugman agrees that Social Security spending is categorized as government spending.
He’s talking on a macro level, I began. But –
The Official cut me off again, turned away and said, Next question.
The 90 Percent Solution
Here’s why that exchange matters: The most powerful economic official said in 2010 that a Democratic President needed to cut Social Security, even though it doesn’t contribute to Federal debt, because Social Security payments are classified on the books as “government spending.”
That troubled him because of a policy panic fueled in large part by that now-discredited spreadsheet. That spreadsheet didn't distinguish between "trust fund" expenditures like Social Security and other forms of spending and debt. It said that things fall apart when aggregate "government debt" crossed a certain line.That would presumably make that nation a poor place to invest, which was the source of Geithner’s concern.
Those conclusions came from a paper published earlier that year by Carmen Reinhart and Ken Rogoff. Reinhart and Rogoff argued that one number represented a kind of tipping point beyond which government debt became a destructive drag on the entire economy.
That number was 90 percent. Once the ratio of government debt to annual GDP reaches or passes it, wrote Reinhart and Rogoff, the economy shrinks. What bond investor in his right mind would invest in a government whose economy is about to shrink?
No wonder the Treasury Secretary was concerned. At the time of our meeting, the Federal debt was 100 percent - and rising.
But they were wrong. Thomas Herndon, Michael Ash, and Robert Pollin analyzed their original Excel spreadsheet and discovered a simple and significant calculation error. When it was corrected, the 90 percent number became meaningless. Not just misinterpreted, as many people felt Reinhart and Rogoff had done at the time, but meaningless.
Paul Krugman – my “hero” - has a good writeup on this. Mike Konczal has an excellent overview. There’s more, including what appears to be some cherry-picking of information to support their thesis, but the bottom line is: The 90 percent red-line means nothing. Nothing happens when it’s crossed.
For the anti-government austerity crowd, however, the 2010 Reinhart/Rogoff paper was the right argument at the right time. They ignored economists like Josh Bivens, John Irons, and Dean Baker, who expressed doubts.
The new findings by Herndon, Ash, and Pollin are a very important story. I followed it with great interest, but didn’t think I had anything to add to it.
Then I remembered that Senior Administration Official.
Article of Faith
He was looking at figures which showed Federal debt well above that "red line" - and going up, not down.
That’s panic time, if you believe Reinhart and Rogoff. I didn’t then, and I certainly don’t now. But the Administration did. I can imagine where that led them.
Social Security self-funded payments don’t contribute to that debt, but it's a very big program. This year’s outlays will come to nearly 5 percent of our total GDP. And the Federal government owes the Social Security Trust Fund (and therefore all its current and future recipients) more than two trillion dollars.
If you’re panicked over government debt and genuinely believe it will eventually sink the entire economy, you’ll want to cut those large Social Security payments. You’ll want to do everything you can to reassure investors that you’re addressing the debt, and you'll want to start with the big numbers first.
If you're up above the Reinhart/Rogoff "red line," where terror sets in, you'll want to raid the Social Security Trust Fund too. (To be fair, the Administration never explicitly said that it would, but that’s what behind all those “they’re only IOUs” arguments.) If the Trust Fund’s money is used to pay down other debt, you can panic a little less.
And you’ll do all of this with the firm conviction that you’re acting in the country’s best interests.
That Treasury Department meeting took place August 2010, eight months after the “90 percent” figure was published. It had already become an article of faith in Washington DC.
Math as Mantra – and Absolution
But why did it catch on?
The alien-hunting Agent Mulder on The X-Files had a poster which read, “I Want to Believe.” In the policy world, numbers can take on a magical aura. They can make ideologically-driven decisions look like the unbiased conclusions of wise technocrats. Your conscience need trouble you no longer, however harsh your deeds. It's no longer your fault.
The numbers told you to do it.
Reinhart and Rogoff offered the policy world a magic number which absolved them of responsibility or sin. A typical reaction came from Peter Orszag, who was President Obama’s Director of the Office of Management at the time. “I don’t think it’s too much of an exaggeration to say that everything follows from missing the call on Reinhart-Rogoff,” said Orszag in 2011. “I didn’t realize we were in a Reinhart-Rogoff situation until 2010.”
We now know that Reinhart and Rogoff offered myth, not math. And today the whole world’s in a “Reinhart-Rogoff situation” as it suffers the financial after-effects of their negligent numerology.
(Well, not the whole world. Orszag became “Vice Chairman of Corporate and Investment Banking, Chairman of the Public Sector Group, and Chairman of the Financial Strategy and Solutions Group” at the bailed-out megabank Citigroup. Sounds like a pretty austerity-proof gig.)
Among the Believers
If you believe in Reinhart and Rogoff’s magic number, you'll come to believe that Social Security is unsustainable. You’ll think that its legal protections are merely an inconvenience. You’ll eventually conclude that the government must welsh on its debt to the Social Security Trust Fund – and to all of its future beneficiaries - to prevent a catastrophe.
You'll oppose lifting the payroll tax cap to shore up Social Security, even though it fixes most actuarial problems, because that doesn't address the Reinhart/Rogoff number. Neither does a financial transaction tax.
You'll oppose increasing benefits and raising taxes for everyone, too, even though voters across the political spectrum say they're willing to pay more in return for better benefits. But that doesn't move the 90 percent "red line" either.
You'll have very little patience for arguing with economic writers you perceive as left-wing and "ideological." You'll think to yourself, Hasn't this guy read Reinhart and Rogoff? And you'll turn away. Among the “147 people” you know, the people you really know, you’d get a lot of support and praise for hanging tough against these diatribes from uninformed outsiders.
You’ll tell yourself that the people giving you a hard time don’t understand: You’re doing it for them. You’ll tell yourself it’s hard to be a leader, hard to make the tough choices, hard to take the heat for doing the right thing.
A lot of people will say it for you, too, over cocktails or a good meal. Al Simpson will say it. Pete Peterson will say it. Bill Clinton will say it. The defense contractors and too-big-to-fail bank CEOs behind Fix the Debt will say it.
They’ll all say it. You'll believe it. If …
If you believe in Reinhart and Rogoff’s number. But it's been disproved. What now?
A Test of Character
I don’t think the President and his advisors have been acting out of undiluted cynicism and venality. I think they believed these cuts were needed. I think they were swayed by the pro-austerity biases of the people in their social bubble, then seduced by Reinhart and Rogoff’s bad math.
But Europe's experience has proved that austerity doesn’t grow economies. It hurts them. We now know that austerity increases, rather than reducing, government deficits in times like these. New studies like the Bureau of Labor Statistics' "CPI-E" indicate that that the chained CPI is a move in the wrong direction. And now Herndon et al. have conclusively disproved Reinhart and Rogoff’s findings.
There's nothing left.
One could argue that the Senior Administration Official's argument was only partly based on Reinhart and Rogoff. But The Official was fixated on lower debt as a percentage of GDP. That's pure Reinhart/Rogoff. And we now know they gave the world bad information. It's clear that their inaccurate paper fueled and amplified a debt panic among leaders and advisors in both parties, and helped turn the tide in favor of austerity.
This new revelation undercuts the last remaining technical argument in favor of the chained-CPI benefit cut (which also includes a middle-class tax hike.) The White House and this President now face a test of character: Will they change their position in the face of new information?
That's a question only they can answer.
Postscript: How Should a Naked Economist Behave?
I initially felt both sympathy and empathy toward Reinhart and Rogof, despite their arguments. If you’ve ever calculated large numbers for a living you'll know what I mean. They're living your worst fear, the one that fuels a flop-sweat feeling in the pit of your stomach: Did I get the math right? Did I double-check the figures enough?
It’s like those children’s nightmares where they show up in school and then realize that they’re naked.
But there’s a protocol for this sort of nakedness. You acknowledge your error immediately, and then work on correcting you error’s impact on your corporation, your organization or your community (which, in Reinhart and Rogoff’s case, is pretty much the entire planet).
Bu, as Krugman points out, they responded instead with disingenuous arguments that reflect very poorly on themselves. Meanwhile, the story has exploded around the world’s economic circles: “How an Excel error fueled panic over the Federal debt,” wrote Michael Hiltzik in the Los Angeles Times.
Reinhart and Rogoff should do what others in their position usually do: Own up and make things right. Think of it as a debt - one they owe their profession, their country, and their world. It’s what they should have done immediately.
They can still do it. The White House can do it too. It's not too late - yet.