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Why the Austerity 'Spreadsheet Scandal' Should Kill Obama's Social Security Cut

Reinhart and Rogoff are discredit. So is the President's budget.
 
 
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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.

Shallow Background

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" ...

The Secretary

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 creditor, not a ...

He cut me off.  Even your hero agrees with me, he said.

Who?

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.