Here's Brenner's translation of the DeGaulle quotation, then the original French:

"'It needs no explanation that France will never accept at any point that more or less totalitarian states, and bureaucrats associated with such new states, who are not quite responsible, not quite consistent, will decide on laws that France should follow.' [The UN is a] 'stage for irrelevant discussion, to sensationalize, and blackmail."

"Il va de soi qu'a aucun prix la France n'accepterait qu'un conjoction d'Etats plus ao moins totalitaires et professionnels dela dictature et d'etats tous nouveaux venus, plus ou moins responsables, plus au moins consistents, lui dictenet sa loi.' [L'ONU etait] 'une tribune derisoire pour les discours a sensation, des surencheres et les pires menaces."

One clever reader wrote, "Krugman should stick to just misunderstanding economics. Misunderstanding geopolitical issues is reaching too far for any one man." Indeed, and in his latest New York Times column published Friday, that's just what Paul Krugman is doing -- he's gone back to what he's really good at: misunderstanding economics.

For the Krugman Truth Squad, that presents a special challenge. Economics is Krugman's Tora Bora caves -- it's dark in there, he knows the terrain very well, and there are lots of places where he can hide. So stay close behind us today as we venture into the depths. Don't worry, we'll find him.

Krugman's Friday column smears President Bush for the forecasted budget deficits supposedly caused by his tax-cuts -- the cuts already enacted in 2001, and the bigger ones still pending. Krugman's story hook is a study published Wednesday by the Center on Budget and Policy Priorities. The study compares the 75-year actuarial shortfalls of Social Security and Medicare to the 75-year revenue loss from Bush's tax-cuts. Here's how Krugman summarizes it:

"...the estimated actuarial deficit of Social Security over the next 75 years is $3.5 trillion, and that of Medicare is $6.2 trillion. ...the present value of the revenue that will be lost because of the Bush tax cuts — those that have already taken place, together with those that have been proposed — using the same economic assumptions that underlie those Medicare and Social Security projections. ...comes to $12 trillion to $14 trillion — more than the Social Security and Medicare shortfalls combined. ...that revenue would have been more than enough to 'top up' Social Security and Medicare, allowing them to operate without benefit cuts for the next 75 years.

"...Without those tax cuts, the problems of an aging population might well have been manageable; with them, nothing short of an economic miracle can save us from a fiscal crisis."

Get it? If it weren't for Bush's tax cuts, then there would be no problems with Social Security or Medicare -- and probably no heartbreak of psoriasis, either.

Krugman makes this wild claim into an anti-Bush smear through several forms of innuendo suggesting an administration cover-up. For instance, he claims with no substantiation whatsoever that "The administration has tried to deny this conclusion, inventing strange new principles of accounting in the process."

But let’s set the baseless innuendo aside, and let the Krugman Truth Squad to get to work. First, just who is this Center on Budget and Policy Priorities that Krugman cites as an authority on these complex and controversial matters? Well, what do you know… it turns out that they are a liberal policy advocacy group. Of course Krugman doesn't honestly label them as such -- he doesn't label them at all -- but even a cursory once-over of their web site reveals where they're coming from.

Tom Maguire of Just One Minute pointed out to me that the first of the study's three authors is Peter R. Orszag, a senior fellow at the Brookings Institution -- a well known left-tilted think tank. Orszag's other credentials include a stint at UC Berkeley (not exactly a bastion of conservatism), and various senior roles on Bill Clinton's economic team spanning four of that administration's eight years.

Now let's look at the findings of the study. Like most politically oriented statements about economic issues, it turns out that this study is little more than an exercise in making forecasts that are superficially defensible as objective, but are in fact skewed by arbitrary assumptions chosen to ensure the desired result. I suppose we could say that this study is challenged by various methodological issues. Or we could just say it's a pack of lies.

First, the study takes as its estimate of the actuarial shortfall in Social Security and Medicare the figures calculated by the programs' trustees in their most recent annual report. These calculations drastically underestimate the deficits in these programs because they give them credit for the principle value and anticipated interest earned from the Treasury bonds in the programs' trust funds -- the so-called "lockbox."

But as Matthew Hoy pointed out today on Hoystory.com, the true and far greater value of the deficit will only become obvious in 15 years when present payroll tax revenues will not be enough to meet present benefit payments. Then,

"When the government actually has to start redeeming those bonds in the 'lockbox,' that money has to come from somewhere. Unfortunately for the American people, that somewhere is the general fund, which pays for interstate highways, the military, and various pork programs... "

This is true because the bonds in the trust fund are nothing but promises from one unit of the government to pay another unit of government. To count these bonds or the interest on them as an "asset" of the programs would be the precise equivalent of writing a check to yourself and depositing it in your own checking account -- in a word, worthless.

Now let's turn to the study's claims about the tax revenues that would be lost under Bush's tax cuts. As David Hogberg pointed out today on Cornfield Commentary, the study estimates revenues losses in the same biased and unrealistic way that the Congressional Budget Office does:

"…agencies like the CBO rely on the largely discredited method of 'static analysis,' which assumes that tax cuts have no effect on economic behavior. It assumes that if the government cuts taxes by $1 million, it will cost the government exactly $1million.

"The problem with static scoring is that people react to incentives. If they get to keep more of their income from activities like working and investing, then they will engage in more of those activities."

An increase in economic activity would at least partially offset any revenue loss. Failure to consider this element is especially important when measuring the revenue loss from the elimination of double taxation on dividend income -- a centerpiece of Bush's current tax-cut proposal. By creating marginal after-tax incentives for capital investment, labor is rendered more productive and wages subject to income tax should be expected to rise. So dividend tax revenues may fall, but income tax revenues may well more than compensate.

You don’t need to be a die-hard supply-sider to see this point -- you don’t have to believe that tax cuts always and completely "pay for themselves" in economic growth. The point is that the study takes an equally extreme opposite position -- it acts as though government can raise and lower taxes at will, and workers and investors will never alter their behavior in response.

The study both understates the deficits in Social Security and Medicare, and overstates the revenue losses from the Bush tax-cuts. But when Krugman suggests that the lost revenue ought to be used to "top up" Social Security, he introduces an even more important methodological issue -- okay, a lie... the biggest one of all, when it comes to Social Security.

Krugman completely overlooks the fact that Social Security right now -- at its current level of tax inputs and benefit outputs -- already dictates a near-zero annual rate of return for the millions of younger workers now entering the system. If a Wall Street firm was out there marketing an investment this bad with the kinds of claims that the Social Security system makes to describe how wonderful it is, Eliot Spitzer would have marched them into the gas chamber long ago.

What Krugman so insouciantly calls "topping up" Social Security really just means throwing more tax dollars at it. In the end it doesn't matter whether those tax dollars are obtained by raising the payroll tax, by not implementing Bush's tax-cuts, or any other means. The result will always be the same: more money will get stuffed into the front end of the Social Security pipeline, but the same trickle will still come out the other end. That will take today's near-zero rate of return and drive it all the way into the negative zone.

For Krugman to cite this study as authoritative is an example of the garbage-in-garbage-out principle as applied to punditry. A third party source comes up with a subjective "conclusion"... the pundit subjectively chooses to cite it... and -- presto! -- two subjective things are suddenly turned into one seemingly objective thing. But having one guy write it and another guy cite it doesn't make it objective. And it certainly doesn't make it the truth.

Posted by Donald L. Luskin at 5:23 AM | link    

Posted by Donald L. Luskin at 1:17 AM | link    

Thursday, March 20, 2003