A couple of Krugman howlers

Every once in a while, Paul Krugman gives us the Ultimate Howlers, and today he seems to have eaten his Wheaties.

First, on Social Security, he says this:

I’ve written about this repeatedly in the past, but here it is again: Social Security is a program that is part of the federal budget, but is by law supported by a dedicated source of revenue. This means that there are two ways to look at the program’s finances: in legal terms, or as part of the broader budget picture.

In legal terms, the program is funded not just by today’s payroll taxes, but by accumulated past surpluses — the trust fund. If there’s a year when payroll receipts fall short of benefits, but there are still trillions of dollars in the trust fund, what happens is, precisely, nothing — the program has the funds it needs to operate, without need for any Congressional action.

Alternatively, you can think about Social Security as just part of the federal budget. But in that case, it’s just part of the federal budget; it doesn’t have either surpluses or deficits, no more than the defense budget.

Both views are valid, depending on what questions you’re trying to answer.

What you can’t do is insist that the trust fund is meaningless, because SS is just part of the budget, then claim that some crisis arises when receipts fall short of payments, because SS is a standalone program. (Emphasis mine)

Despite the claims by Algore when he was running for president 11 years ago that he would put SS funds in a "lockbox," there IS no "lockbox." The "trust fund" of what Krugman writes are government bonds, IOUs that only can be redeemed either by selling more bonds or with future tax revenues.

The vaunted "trust fund" is no trust fund at all. It is a piece of a fictitious Rob-Peter-to-Pay-Paul scheme that any one can recognized to be a fraud.

On another post, one about "weaponized Keynesianism" (and I actually like the phrase, which apparently was coined by Barney Frank, Krugman writes this:

The first thing to say is that liberals shouldn’t engage in mirror-image thinking, and imagine that spending we dislike somehow lacks the job-creating virtues of spending we like. Economics, as I say often, is not a morality play. As far as creating aggregate demand is concerned, spending is spending – public spending is as good as but also no better than private spending, spending on bombs is as good as spending on public parks. As I pointed out not long ago, a perceived threat of alien invasion, by getting us to spend on anti-invasion measures, would quickly restore full employment, even though the spending would be on totally useless object.

While I realize that Krugman is writing from a pure Keynesian point of view that says it is the spending and ONLY the spending that matters, it seems to me that where resources are directed DOES matter. During WWII, Americans had jobs and pockets full of money, but there was little to buy and a huge portion of the workforce was in the trenches in Europe and Asia or being shot out of the skies. Yes, the GDP was high, but Americans were not manufacturing wealth; it was destruction of wealth.

Again, I realize that Keynesians see only aggregates and that GDP making bombs is as good as GDP making bread. Frankly, I'd rather eat bread.

About that Social Security "Trust Fund"

In his column today, Paul Krugman defends Social Security and (of course) demonizes anyone who might raise any objections. As he writes, people who raise questions (he claims that would be "Conservatives"): "...hate Social Security for ideological reasons: its success undermines their claim that government is always the problem, never the solution."

Now, my sense is that we are dealing with a non sequitur, but Krugman uses those a lot. However, I'm not going to debate the merits of SS today, but rather deal with one statement that Krugman has made regarding the "trust fund." He writes:

About that math: Legally, Social Security has its own, dedicated funding, via the payroll tax (“FICA” on your pay statement). But it’s also part of the broader federal budget. This dual accounting means that there are two ways Social Security could face financial problems. First, that dedicated funding could prove inadequate, forcing the program either to cut benefits or to turn to Congress for aid. Second, Social Security costs could prove unsupportable for the federal budget as a whole.

But neither of these potential problems is a clear and present danger. Social Security has been running surpluses for the last quarter-century, banking those surpluses in a special account, the so-called trust fund. The program won’t have to turn to Congress for help or cut benefits until or unless the trust fund is exhausted, which the program’s actuaries don’t expect to happen until 2037 — and there’s a significant chance, according to their estimates, that that day will never come. (Emphasis mine)

Here is the problem: the "special account" is nothing more than short-term government paper that matures every six months. At the present time, most government debt is paid via...more government debt -- plus interest. Now, this looks nice, officially-speaking, but the problem is that the mechanism for turning this bond-laden "trust fund" into cash is for the government to sell the bonds.

Now, if I know Krugman, he would say (as would James K. Galbraith) that this is no problem, because the Federal Reserve System can buy the bonds. (He has not said this, I know, but I suspect that would be in his arsenal of answers.) In other words, the ultimate "backing" for Social Security is a glorified and "sophisticated" mechanism of printing money.

So, I would not exactly call this a sound system of "investment." My sense is that Krugman is trying to score ideological points, not promote good finance.

Paul Krugman Endorses Bernie Madoff!

In his post today, Paul Krugman unwittingly gives an endorsement of the disgraced Bernie Madoff, the Ponzi king who will die in prison, unable to spend the millions that he stole through fraudulent means. Yes, yes, I know that Krugman has not actually mentioned Madoff by name, but he does throw his considerable influence behind the financing of Social Security, which actually is the greatest Ponzi scheme in world history.

Now, before the defenders of Krugman go ballistic, I would love to ask Krugman and his followers this question: If Social Security is a legitimate funding scheme, then why is Bernie Madoff in prison? Let me further explain.

Krugman writes the following:

We went through all this at length back in 2005, but let me do this yet again.

Social Security is a government program funded by a dedicated tax. There are two ways to look at this. First, you can simply view the program as part of the general federal budget, with the the dedicated tax bit just a formality. And there’s a lot to be said for that point of view; if you take it, benefits are a federal cost, payroll taxes a source of revenue, and they don’t really have anything to do with each other.

Alternatively, you can look at Social Security on its own. And as a practical matter, this has considerable significance too; as long as Social Security still has funds in its trust fund, it doesn’t need new legislation to keep paying promised benefits.

OK, so two views, both of some use. But here’s what you can’t do: you can’t have it both ways. You can’t say that for the last 25 years, when Social Security ran surpluses, well, that didn’t mean anything, because it’s just part of the federal government — but when payroll taxes fall short of benefits, even though there’s lots of money in the trust fund, Social Security is broke.

And bear in mind what happens when payroll receipts fall short of benefits: NOTHING. No new action is required; the checks just keep going out.

Well, not exactly. The current "surpluses" from SS are borrowed by the U.S. Government to fund part of its deficit spending. Thus, the government owes the government money. While there are surpluses, the whole thing looks sound, but when there are deficits, the money needs to come from somewhere, and that will be the printing press or the Fed's application of its powers to create "money" from thin air.

If this sounds somewhat like Madoff's scheme, that is because it is Madoff with its own twist. When Bernie ran "surpluses," he paid benefits to people who already had given money to his "fund." However, at some point, the Madoff stash began to run deficits and everything went to hell after that.

Madoff, of course, could not print money, nor could he borrow from the central bank indefinitely. THAT is the only difference between SS and Madoff, period.

So, Krugman says that those who raise questions about the future of SS are "lying." No, they are not lying. They are those old-fashioned people who think that printing money is not the same thing as creating real wealth. So, who is not telling the truth here?