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As we move toward the fifth anniversary of the great financial crisis of 2008, people should be outraged that cutting Social Security is now on the national agenda, while taxing Wall Street is not. After all, if we take at face value the claims made back in 2008 by Fed Chairman Ben Bernanke and former Treasury Secretaries Henry Paulson and Timothy Geithner, Wall Street excesses brought the economy to the brink of collapse.

But now the Wall Street behemoths are bigger than ever and President Obama is looking to cut the Social Security benefits of retirees. That will teach the Wall Street boys to be more responsible in the future.

Most people are now familiar with President’s Obama’s proposal to cut Social Security by reducing the annual cost-of-living adjustment (COLA). While the final formula is somewhat convoluted, the net effect is to reduce benefits by an average of roughly 3.0 percent.

Since Social Security benefits account for more than 70 percent of the income of a typical retiree, this cut is more than a 2.0 percent reduction in income. By comparison, a wealthy couple earning $500,000 a year would see a hit to their after-tax income of just 0.6 percent from the tax increase that President Obama put in place last year.

While President Obama is willing to make seniors pay a price for the economic crisis, his administration is unwilling to impose any burdens on Wall Street. Specifically, it has consistently opposed a Wall Street speculation tax: effectively a sales tax on trades of stock and derivatives. The Obama administration has even used its power to try to block efforts by European countries to impose their own taxes on financial speculation.

If the idea of taxing stock trades sounds strange, it shouldn’t. The United States used to impose a tax of 0.04 percent until Wall Street lobbied to eliminate it in the mid-1960s. Many countries, including the United Kingdom, Switzerland, China, and India already impose taxes on stock trades. (more…)

The bond-rating agency Moody’s made itself famous for giving subprime mortgage backed securities triple-A ratings at the peak of the housing bubble. This made it easy for investment banks like Goldman Sachs and Morgan Stanley to sell these securities all around the world. And it allowed the housing bubble to grow ever bigger and more dangerous. And we know where that has left us.

Well, Moody’s is back. They announced plans to change the way they treat pension obligations in assessing state and local government debt.

Instead of accepting projections of pension fund returns based on the assets they hold, Moody’s wants to use a risk-free discount rate to assess pension fund liabilities. This will make public pensions seem much worse funded than the current method.

While this might seem like a nerdy and technical point, it has very real consequences. If Moody’s methodology is accepted as the basis for accounting by state and local governments then they will suddenly need large amounts of revenue to make their pensions properly funded. This will directly pit public sector workers, who are counting on the pensions they have earned, against school children, low-income families, and others who count on state supported services.

In other words, this is exactly the sort of politics that the Wall Street and the One Percent types love. No matter which side loses, they win. While public sector workers fight the people dependent on state and local services, they get to walk off with all the money.

Wall Street is expert at these sorts of accounting tricks; it is after all what they do for a living. And this is not the first time that they have played these sorts of games to advance their agenda. (more…)

Bob Kuttner has been among the country’s most visible advocates of stimulus, having written several books and numerous columns arguing the case for an aggressive program of public investment as the best way to deal with the economic crisis. His new book, Debtors’ Prison: The Politics of Austerity versus Possibility (Knopf, 2013) is his latest shot at the austerity gang.

The central theme is the morality tale around debt. The proponents of austerity insist that the debtors be forced to suffer. This is part because of the obvious moral hazard problem, if people think that debtors can get off easy, then no one will pay their debts. It is also partly appeals to our sense of morality, we want people to work hard and meet their commitments.

As Kuttner points out, there are two big problems with the debt hardliners’ agenda. First, it is often bad economics. The book goes back to the days of debtor prisons in England, pointing out that throwing debtors in jail not only was cruel to debtors and their families, it generally was not good policy from the standpoint of creditors either. Once the debtor was in prison they had little opportunity to earn back any of the money needed to repay their creditors.

Kuttner shows how this desire for punishment has played a central role in shaping attitudes toward the crises countries in the eurozone as well as underwater homeowners in the United States. This attitude has helped to prevent an effective policy response in both places. In Europe the debtor countries have seen their unemployment rates soar even as their debt to GDP ratios continue to increase. Shrinking economies have reduced tax collections and increased demands on the budget. In the United States many homeowners have ended up in foreclosure when it would have been possible to arrange principle write-downs that would have both kept them in their homes and given creditors more money. (more…)

The controversy continues to simmer around the Reinhart-Rogoff (RR) paper and the now famous Excel spreadsheet error that led to claim that debt-to-GDP ratios above 90 percent led to sharply lower growth rates. The University of Massachusetts paper that exposed this mistake has led many people to reconsider their earlier acceptance of the Reinhart-Rogoff 90 percent debt cliff.

While that is a positive development, the re-examination should go a step deeper and ask why anyone ever took their argument seriously in the first place. It’s not just the arithmetic on debt-to-GDP ratios that tripped up RR; it was the basic logic of their argument.

If we accept the RR thesis, something bad happens to countries when their debt-to-GDP ratio exceeds 90 percent, which causes them to experience prolonged periods of slow growth. It is difficult to see how this could possibly be the case since debt is only one side of a country’s balance sheet; countries also have assets. For there to be any actual relationship between debt and growth it would seem that it would have to be debt, net of assets, and growth.

The RR story, where they purport to find a relationship between debt and growth, would be like finding a relationship between household debt and future income, without considering whether or not they own a home. In the RR approach to family finances, a family with $200,000 in debt who rented their apartment would be viewed as being in the same situation as a family with a $200,000 mortgage on a house that is worth $500,000.

While the second family would have $300,000 in assets after deducting their mortgage, like the first family it would also have $200,000 in debt. And since RR only concern themselves with debt, both families would count as facing equal debt burdens.

It would of course be absurd to imagine that these two families are in the same situation financially. And it would be equally absurd to imagine that countries with similar debt burdens but different amounts of assets are in the same position. (more…)

In polite circles in the United States’ support for free trade is a bit like proper bathing habits. It is taken for granted. Only the hopelessly crude and unwashed would not support free trade.

There is some ground for this attitude. Certainly the United States has benefited enormously by being able to buy a wide range of items at lower cost from other countries. However this doesn’t mean that most people in the country have always benefited from every opening to greater trade.

And it certainly doesn’t mean that the country will benefit from everything that those in power label as “free trade.” That is the story we are seeing now as the Obama administration is pursuing two major “free trade” agreements that in fact have very little to do with free trade and are likely to hurt those without the money and power to be part of the game.

The deals in questions, the Trans-Pacific Partnership (TPP) and the U.S.–European Union “Free Trade” Agreement are both being pushed as major openings to trade that will increase growth and create jobs. In fact, eliminating trade restrictions is a relatively small part of both agreements, since most tariffs and quotas have already been sharply reduced or eliminated.

Rather, these deals are about securing regulatory gains for major corporate interests. In some cases, such as increased patent and copyright protection, these deals are 180 degrees at odds with free trade. They are about increasing protectionist barriers.

All the arguments that trade economists make against tariffs and quotas apply to patent and copyright protection. The main difference is the order of magnitude. Tariffs and quotas might raise the price of various items by 20 or 30 percent. By contrast, patent and copyright protection is likely to raise the price of protected items 2,000 percent or even 20,000 percent above the free market price. Drugs that would sell for a few dollars per prescription in a free market would sell for hundreds or even thousands of dollars when the government gives a drug company a patent monopoly.

In the case of drug patents, the costs go beyond just dollars and cents. Higher drug prices will have a direct impact on the public’s health, especially in some of the poorer countries that might end up being parties to these agreements. (more…)

The Commerce Department released data on corporate profits last week that showed the before-tax profit share in 2012 reaching its highest level since 1951. The after-tax profit share edged down by one-tenth of a percentage point from its 2011 level, but was still higher than every other year since 1930. Naturally this new information led the Very Serious People (VSP) in Washington to focus on the problems of abuses of the Social Security disability system.

If soaring profits and rising disability rates seem unrelated then you better look closer. The most obvious reason that profit shares are soaring is that high unemployment takes away workers’ bargaining power. As a result of the collapse of the housing bubble the economy is still down almost 9 million jobs from its trend growth path.

With the supply of labor continuing along its trend path and the demand for labor having fallen sharply, wages will be pushed downward. That is exactly what we have seen over the last five years as real wages have been flat or declining since 2007. This means that the gains from productivity growth over this period have gone overwhelmingly to corporate profits.

The downturn has also been the main factor behind a surge in disability rates. Prior to the downturn, disability rates were actually somewhat below the projections from the mid-90s. This changed radically when the economy collapsed in 2008. Workers who may have been able to hold jobs despite disabilities in the years before the downturn suddenly found themselves unemployed.

When there are three or four unemployed workers for every person looking for a job, anyone with a serious disability would be at a major disadvantage. As a result, the cost of the disability program increased by more than 30 percent relative to the size of taxable payroll over the years 2007 to 2012.

In short, the downturn caused by the collapse of the housing bubble was the key factor behind both soaring profits and rising disability rates. In terms of their relative importance to the economy, soaring profits swamp rising disability payments.

The difference between the after-tax profit share in 2012 and the average share in the Reagan years is 4.7 percentage points of the income generated in the corporate sector or roughly $330 billion last year. If we applied this to a 10-year budget window, as is the fashion in Washington, this growth in the profit share would be equivalent to a $5 trillion tax on the nation’s workers. (more…)

There are few areas where the corruption of the national media is more apparent than in its treatment of Social Security. Most of the elite media have made it clear in both their opinion and news pages that they want to see benefits cut. In keeping with this position they highlight the views of political figures who push cuts to the program, treating them as responsible, while those who oppose cuts are ignored or mocked.

This pattern of coverage was clearly on display last weekend. Both the New York Times and Washington Post decided to ignore the Senate’s passage by voice vote of the Sanders Amendment. This was an amendment to the budget put forward by Vermont Senator Bernie Sanders that puts the Senate on record as opposing the switch to the chained CPI as the basis for the annual Social Security cost-of-living adjustment (COLA).

Switching the basis for the COLA to the chained CPI is one of the most beloved policies of the Washington elite. The idea is that it would reduce scheduled benefits for retirees by 0.3 percentage points annually. This amounts to a cut of 3 percent after 10 years, 6 percent after 20 years, and 9 percent after 30 years.

If a typical retiree lives to collect benefits for 20 years the average cut in benefits over their retirement ends up being around 3 percent. This is a much bigger hit to the typical retiree, who relies on Social Security for more than two-thirds of their income, than the tax increases put into law this year were to the typical rich person. (more…)

The Wall Street gang must really be partying these days. Profits and bonuses are as high as ever as these super-rich takers were able to use trillions of dollars of below-market government loans to get themselves through the crisis they created. The rest of the country is still struggling with high unemployment, stagnant wages, underwater mortgages and hollowed out retirement accounts, but life is good again on Wall Street.

Their world must have gotten even brighter last week when Attorney General Eric Holder told the Senate Judiciary Committee that the Justice Department may have to restrain its prosecutors in dealing with the big banks because it has to consider the possibility that a prosecution could lead to financial instability. Not only can the big banks count on taxpayer bailouts when they need them; it turns out that they can share profits with drug dealers with impunity. (The case immediately at hand involved money laundered for the Mexican drug cartel.) And who says that times are bad?

It’s hard to know where to begin with this one. First off, we should not assume that just because the Justice Department says it is concerned about financial instability that this is the real reason that they are not prosecuting a big bank. There is precedent for being less than honest about such issues.

When Enron was about to collapse in 2002 as its illegal dealings became public, former Treasury Secretary Robert Rubin, who was at the time a top Citigroup executive, called a former aide at Treasury. He asked him to intervene with the bond rating agencies to get them to delay downgrading Enron’s debt. Citigroup owned several hundred million dollars in Enron debt at the time. If Rubin had gotten this delay Citigroup would have been able to dump much of this debt on suckers before the price collapsed.

The Treasury official refused. When the matter became public, Robert Rubin claimed that he was concerned about instability in financial markets. (more…)

The most striking feature of the U.S. economy over the last three decades has been the upward redistribution of income. The top 1.0 percent of households has managed to pocket the vast majority of gains over this period. That is a sharp contrast with the three decades immediately following World War II when the benefits of much more rapid growth were broadly shared.

This pattern of growth might lead people to question the policies that have led to this upward redistribution (e.g. trade policy, labor policy, monetary policy, and anti-trust policy). In order to prevent such questioning and to further the process of upward redistribution many wealthy people have sought to focus public attention on programs that benefit the middle class and/or poor.

Peter Peterson, the Wall Street investment banker, has been most visible in this effort, committing over $1 billion of his fortune for this purpose. Recently he enlisted a group of CEOs in his organization, Fix the Debt, which quite explicitly hopes to divert concerns over income inequality into concerns over generational inequality. It argues that programs like Social Security and Medicare, whose direct beneficiaries are disproportionately elderly, are taking resources from the young.

It is easy to show the absurdity of this position. The amount of money that the young stand to lose from the upward redistribution of income is an order of magnitude larger than whatever hit to their after-tax income they might face due to the continuing drop in the ratio of workers to retirees. Also, older people generally have families. This means that when we cut the Social Security or Medicare benefits of middle and lower income beneficiaries we are often creating a gap that will be filled from the income of their children.

Nonetheless, when you have a billion dollars to throw around, you will have plenty of people willing to argue absurd positions. Therefore it is not surprising to see the Fix the Debt crew and various other Peterson derivative organizations pushing the line about generational conflict, but what is NPR’s excuse?

It ran a piece under the headline “Old Triumph Over Young in Federal Spending and Sequester Makes It Worse.” While the piece does include comments from supporters of Social Security and Medicare, the basic framing of the piece is just wrong. It tells listeners:

“But while it’s true that cutting a dollar in Social Security won’t send that dollar straight to the Head Start account, such programs are inevitably competing at a time of limited federal resources.”

Is that a fact? This statement is asserting that the amount of federal resources is fixed regardless of what we do with the money. In other words, the idea is that the money we get from Social Security and Medicare taxes is independent of what we pay out for these programs.

That could be true, but that is a very strong assertion. Would we still be able to take 12.4 percent out of workers’ paychecks for Social Security (combining employer and employees’ contirbutions) even if we shut down Social Security altogether? My guess is no, but NPR told listeners that the amount of money we collect for Social Security and Medicare is fixed regardless of what we do with it. (more…)

In societies across the globe, men demonstrate their manhood in different ways. There are many wonderful tracts on the topic. However, in the culture of Washington, D.C., the best way to demonstrate your manhood is to express your willingness to cut Medicare and Social Security. There is no better way to be admitted into the club of the Very Serious People.

This is the reason that we saw White House spokesman Jay Carney tell a press conference last week that Barack Obama is a macho man. He told the reporters that President Obama is still willing to cut Social Security benefits by using the Chained CPI as the basis for the annual cost-of-living adjustment (COLA). This willingness to cut the benefits of retirees establishes President Obama as a serious person in elite Washington circles.

While most of the D.C. insiders probably don’t understand the Chained CPI, everyone else should recognize that this technical fix amounts to a serious cut in benefits. It reduces benefits compared with the current schedule by 0.3 percent annually. This adds up over time. After someone has been getting benefits for 10 years, the cut in annual benefits is 3 percent. After 20 years, people would be seeing a benefit that is 6 percent lower, and after 30 years their benefit would be reduced by 9 percent. (AARP has a nice calculator that shows how much retirees can expect to lose from the Chained CPI.)

We can debate whether the Chained CPI benefit cut should be viewed as “large,” but there is no debate that Chained CPI cut is a bigger hit to the typical retiree than the ending of the Bush tax cuts were to the typical high-end earner. Social Security provides more than half of the income for almost 70 percent of retirees. This means that the 3 percent cut in Social Security benefits amounts to a reduction in their income of more than 1.5 percent.

By contrast, if a wealthy couple has an income of $500,000 a year. As a result of President Obama’s tax increases, they would be paying an addition 3 percentage points in taxes, or $3,000, on the income above $400,000. That comes to just 0.6 percent of their income. (more…)