Confused and Ashamed and Desperate

It’ll happen again this year – it always does. Retailers make big money off those last-minute Christmas shoppers. Those are the folks who’ll pay top dollar, or more, on Christmas Eve, even for something that’s only close enough to the right gift, but just might do, maybe. Had they not been grumpy about shopping, or posturing about how Christmas has gotten too commercial and good people should resist all that corporate nonsense about what was trendy and what everyone who was anyone simply must have, they would have done their shopping earlier. Everything would be wrapped and ready. As it is, those last-minute shoppers are a gold mine. They’re confused and ashamed and desperate. They’ll buy anything, to avoid disaster. They’re easy marks.

Wives of politicians probably know this all too well. They won’t be getting the perfect thoughtful gift, because politicians live a life of putting things off until something, anything, must be done. They’re probably all Christmas Eve shoppers, if what’s going on in Washington is any indication. As part of the deal last year to raise the debt limit, as usual, the agreement was to raise it on the condition that serious discussions about spending cuts and increased revenue would occur later. Republicans agreed that in exchange for refusing the government the means to pay the bills now due for money already appropriated and spent long ago, thus crashing the world’s economy forever – their original threat – at the end of this year the Bush tax cuts would be allowed to expire as planned, suddenly raising taxes on everyone which is a shock the economy hardly needs, and there’d be matching spending cuts that both sides would find appalling – at least twenty percent across the board, on all the spending on healthcare and social services and education, which would infuriate the Democrats, and on all defense spending too, which would infuriate the Republicans. In short, both sides created a major crisis for everyone out of thin air – now called the fiscal cliff no one wants to go over – and they then gave themselves an absolute deadline to solve this cooked-up crisis. Then they ignored the whole thing, save for a bit of occasional posturing. It was an election year. There were other things to talk about.

You don’t want these guys Christmas shopping for you. Desperate people, facing a firm deadline, buy that overpriced crap no one really wants. You might end up with a smiling wooden Buddha with a clock in his belly. And now, exactly one week before Christmas and not long before we all go over that odd cliff these guys decided to create, there’s a whiff of desperation in the air in Washington. America may not get that odd wooden Buddha, but it is unclear what we will get:

House Speaker John A. Boehner (R-Ohio) veered off the bipartisan course he had been charting toward a broad tax-and-entitlement deal with President Obama and instead Tuesday pushed a GOP package to extend tax cuts for income up to $1 million.

The move shook the Capitol after several days of significant progress between Obama and Boehner, who had moved closer to a pact raising taxes on the wealthy and curbing government spending, including on Social Security.

Boehner and his aides stressed that he was not giving up on talks with Obama over a broader deal. But the speaker said that the White House had failed to make an acceptable offer and that, as a result, he needed to move ahead with a more limited “Plan B.”

Boehner simply blew everything up, but he may have had his reasons. He may be angling for more concessions from Obama, or trying to impress the folks on his own side, many of whom hate Obama and see no reason to allow Obama to have anything Obama wants, and who also kind of hate John Boehner for even considering such a thing. Sure, Obama won the White House again, but the Republicans still control the House. Let the country go to hell. Who does Obama think he is?

That may be too simplistic a way to look at this, so consider how the Washington Post’s Ezra Klein tells the story of this mess, starting with Team Obama:

On Monday, they delivered an offer to House Speaker John Boehner that included genuine concessions. They brought their revenue request down from $1.6 trillion to $1.3 trillion. They dropped their demand that the Bush tax rates expire for all income over $250,000 a year, offering a new threshold of $400,000 a year. They brought their debt-ceiling demand down from no more debt ceiling crises ever to no debt ceiling crises for two years. They agreed to some form of chained CPI as a way to cut Social Security benefits.

Then there’s Team Boehner, if he has a team at all:

On Monday night, Boehner rejected their offer, and on Tuesday, Boehner unveiled “Plan B” – a proposal to walk away from the talks, vote on a plan to make the Bush tax rates permanent for all households with income under $1 million, and then go home for the holidays.

Between Monday night and Tuesday morning, Boehner apparently got an earful from his leadership team. They were angry, I’m told, over three main elements of the emerging deal. First, they don’t think there should be even a two-year lift in the debt ceiling, as that removes their leverage to bargain for spending cuts in 2013 and 2014. Second, they worry that the tax revenues will be locked in but that there’s no guarantee that Congress will get the entitlement cuts done. Third, they think that the spending cuts should be counted without interest and after subtracting the cost of extended unemployment insurance and infrastructure spending.

That last part is an accounting issue, but the real thing was having no more debt ceiling crises for the next two years. If the Republicans can’t threaten to crash the economy and plunge the world into economic chaos, well, they have no tools to work with. Chained CPI as a way to cut Social Security benefits – to be discussed in a moment – is fine with then. It seems they shoved Boehner out the door and told him to get out there and tell Obama to go pound sand.

Boehner has a tough job, and now the White House is confused:

Is he trying to show nervous conservatives that he’s playing hardball? Or is Boehner signaling that he can’t go any further and is now preparing to bolt the talks if the White House doesn’t make further concessions?

There are also some who think that Boehner – and, more to the point, Boehner’s House members – increasingly see weakness in the White House’s negotiating position. A few weeks ago, the Obama administration was firm that they wouldn’t budge on tax rates for income above $250,000 and that they wouldn’t budge on the debt ceiling. They’ve since budged on both. Republicans increasingly think the White House will concede more now, and that if they don’t concede more now they’ll definitely give Republicans a better deal if threatened with debt default. Whether or not that’s true, it pulls Republicans – and Boehner – to the right, as it makes it harder for Boehner to argue for a compromise now.

That’s possible, but the White House has its own problems:

Their allies are disappointed to see an old dynamic reasserting itself: The president makes concessions, thinking he’s close to a deal, and then the Republicans pocket those concessions, offering nothing but renewed threats to blow up the talks in return. … They also feel that the White House is weakening their hand if the negotiations fall apart and the president needs to win a battle for public support.

Obama will once again look like a weak sister, and there’s also pushback from congressional Democrats over that chained CPI thing. The White House didn’t expect that.

That issue is a little tricky to explain but Slate’s Matthew Yglesias gives it a go:

It involves indexing Social Security benefits to the Chained Consumer Price Index for All Urban Consumers (C-CPI-U) rather than the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) that’s currently in use. This change shows up in all kinds of think-tank plans and unofficial sketches, and it has at various times secured the endorsement of everyone from Dick Durbin to Eric Cantor.

Conservatives love this idea because it cuts Social Security benefits. Deficit hawks love it because it might also raise taxes. And negotiators love it because nobody understands what it means. But don’t let people fool you. Even though the details are technical, this is a political question, not a technical one – a benefit cut, perhaps paired with a tax increase, and not an effort to make inflation calculations “more accurate.”

Here’s the down-and-dirty on why it’s a benefit cut:

The way the index works is that the Bureau of Labor Statistics sends its minions out through the country to find out what things cost. They write this down, and the bureau notes the change over time. Then it weights the change in the price of different things according to how large a share they are in the typical consumer’s overall basket of purchases. An increase in the price of cars is a bigger deal than an increase in the price of violins because the average American spends much more on cars than on violins. The bureau also adds in some fancy math and a bit of hand-waving to try to account for changes in the quality of goods and the arrival of whole new products. The idea is to track the prices of a constant basket of goods over time.

“Chaining” the index means taking a slightly broader view of how the baskets should work in order to account for switching behavior. One reason people buy pork, for example, is that it’s cheaper than beef. But so is chicken – so if pork prices rise, price-sensitive shoppers will probably shift and buy less pork and more chicken. In other words, the price of pork went up, but the overall impact on meat prices is smaller than a naïve look at the movement in pork prices would suggest.

Yglesias offers examples:

If you want to make use of the chained index sound like a no-brainer, you can do what Bloomberg View has done and use a trivial example like “a shopper might respond to an increase in the cost of Granny Smith apples, for example, by switching to lower-cost Red Delicious.” On average, this kind of behavior-linked chaining makes the chained index about 0.25 to 0.35 percentage points lower than the unchained index. So great news! Unless, that is, you really like Granny Smith apples. If the price of bourbon tripled overnight for some reason, I would, in fact, probably shift to scotch. But I’d be pretty pissed. In the grand scheme of things, whiskeys are fairly substitutable, but they make the different varieties for a reason – people have preferences about this stuff. By shifting chaining assumptions far enough, you could make inflation completely vanish. If people can’t afford medical care, they’ll just buy over-the-counter homeopathic remedies instead! The chained index doesn’t go nearly that far, but the point is that there’s no unique right or wrong answer for how to treat product shifting, and its impact on individuals’ welfare will vary enormously.

This matters a great deal for Social Security, however, because benefit levels are adjusted upward each year in line with inflation. If Congress decides that chained index is the “right” measure of inflation, benefit levels will be lower than currently predicted and the deficit will go down.

That seems fairly technical, but there is real life:

As far as grand bargains go, that’s fair enough. But in terms of accuracy, it should be noted that the Bureau of Labor Statistic also calculates the Experimental Price Index for the Elderly (CPI-E) for reference purposes weighted to the basket of goods consumed by the elderly and finds that these prices generally rise faster than the regular index. Grandma buys a lot of health care services and isn’t so interested in the falling price of an iPad 2. So if you’re looking to trim benefits in keeping with the spirit of the program, it’s important to note that many Social Security beneficiaries already see quite meager monthly checks.

The elderly are the ones who get screwed here. That’s the problem. It’s the wrong Christmas gift.

Does it matter? The AARP thinks so:

Social Security is the principal source of family income for nearly half of older Americans. Twenty-four percent of those aged 65 and over live in families that depend on Social Security benefits for 90 percent or more of their income. Another 26 percent receive at least half but less than 90 percent of their family income from Social Security.

Social Security benefits are particularly important for women, because, on average, women live longer and earn less than men. Fifty-two percent of all women aged 65 and older depend on Social Security benefits for 50 percent or more of their family income, compared to 45 percent of men.

Additionally, reliance on Social Security as a source of guaranteed income increases with age. Eighty-eight percent of individuals aged 65 and over include Social Security benefits as a source of family income, which is double the number of individuals receiving income from pensions and retirement savings. Social Security retirement benefits are guaranteed for life and are adjusted to keep pace with inflation. In contrast, pensions and retirement savings accounts are rarely indexed to inflation, and retirees may outlive those assets.

As the only guarantee of income in retirement, Social Security has performed admirably over the years in keeping older Americans out of poverty. In 2010, Social Security income kept roughly 35 percent of older Americans out of poverty.

Maybe you don’t want to mess with that, even if you’re desperate at deadline time, and Yglesias also notes that Social Security is now a necessary thing:

Once upon a time there was an idea that a healthy part of a middle class individual’s retirement should be secured via a defined-benefit pension program that would be provided by his employer and that his employer would be encouraged to provide thanks to implicit subsidies in the tax code. That paradigm was very similar to the paradigm of employer-provided health insurance, and over time it’s tended to unravel for similar reasons. Except the pension case is even worse than the health care case, because we’ve been able to make employer-provided health care semi-viable through “continuity of coverage” rules and COBRA to let people transition from one employer-provided plan to another.

So defined benefit pensions are dying off. One natural substitute is tax-preferred individual savings vehicles like the IRA and the 401(k). Those have some conceptual virtues, but also considerable practical drawbacks since they’ve created a vast rent-seeking market in extracting management fees from careless middle class savers. They also have a lot of undesirable instability. I retire comfortably in March of 1999. You retired wiped out in March of 2001.

We have the answer to all that:

The natural supplement to the problems with individual retirement savings and substitute for the problems with defined-benefit corporate pensions is a large public sector program. Every working person gets a bit less take home pay than they would have otherwise had, but in exchange gets a guaranteed annuity when they’re retired. And fortunately for us we have a program that’s already more or less structured like that. It’s called Social Security. And as the defined benefit pension paradigm fades away, the natural and proper thing would be to rely more on Social Security as a vehicle for ensuring adequate living standards for senior citizens. The fact that this is happening more or less simultaneously with a demographic transition in which the elderly will be a larger share of the population is interesting, but doesn’t fundamentally defeat the analysis.

It’s a good argument, and now the economist Paul Krugman is a bit worried:

First things first: cutting Social Security benefits is a cruel, stupid policy – just not nearly as cruel and stupid as raising the Medicare eligibility age. But sometimes you have to accept bad things in pursuit of a larger goal: health reform should have included a public option – heck, it should have gone straight to single-payer – but a flawed route to universal coverage was better than none at all.

The question about this looming deal is whether the end justifies the means. Unfortunately, it’s not nearly as clear a case as the healthcare deal, and I’m agonizing, big time; as of last night I was marginally positive, right now marginally negative.

Yes and here’s Krugman’s view of how things stand:

First of all, the comparison has to be with what we think Obama can get if he goes over the cliff; if that happens, all the Bush tax cuts expire, and he can propose and probably get accepted a new round of middle-class cuts – but nothing else: no extension of unemployment benefits (another cruel, stupid action), no infrastructure spending to boost the economy.

Krugman goes on to discuss the revenue side of things, but then argues that’s not the most important thing here:

Switching from the regular CPI to the chained CPI doesn’t affect benefits immediately after retirement, which are based on your past earnings. What it does mean is that after retirement your payments grow more slowly, about 0.3 percent each year. So if you retire at 65, your income at 75 would be 3 percent less under this proposal than under current law; at 85 it would be 6 percent less; there’s supposedly a bump-up in benefits for people who make it that far.

This is not good; there’s no good policy reason to be doing this, because the savings won’t have any significant impact on the underlying budget issues. And for many older people it would hurt. Also, the symbolism of a Democratic president cutting Social Security is pretty awful.

So is what Obama gets out of this – basically unemployment benefits and infrastructure – worth it?

He’s not sure:

I understand that Obama prefers not to go over the cliff and face the political and economic uncertainty that this opens up; maybe my assumption that he can still get the middle-class tax cuts is wrong. On the other hand, cutting Social Security, even modestly, is a very big concession, especially because, as I said, it’s cruel and stupid viewed purely as policy.

One thing is for sure: any further concession on Obama’s part would make this a total non-starter. And I’m waiting for clarification on capital gains and dividends. But even as it stands, it’s not a deal to be happy about.

Yep, it’s like receiving that smiling wooden Buddha with a clock in his belly for Christmas – the wrong gift bought in desperation, at the last moment.

On the other hand, as Kevin Drum notes, you might as well accept any gifts you get at all:

I suppose it was never likely that Obama was going to get a deal that liberals would be wholly enthusiastic about, and I’m not excited about the Social Security cut either. However, one thing to watch out for is whether there’s more to it. It’s possible that Obama will agree to chained CPI but insist on compensating changes for the lowest earners, so that the most vulnerable seniors are held harmless. We’ll have to wait and see.

Still, Drum is unhappy:

In addition to the fact that the Social Security cuts would hurt retirees, I continue to think it sets a bad precedent to link Social Security to a broad deficit deal that’s otherwise focused on general fund spending and revenue. Social Security is a separate program, and if a deal is going to be made, compromises should be made within the program. It’s one thing to hammer out an agreement to raise revenues and cut benefits that affect only Social Security, but it’s quite another to cut Social Security benefits in return for general fund tax increases. I don’t like that, and I don’t like the idea that Obama is setting a precedent to do that kind of thing again in the future.

Drum’s final assessment:

Overall, this doesn’t sound like it’s the worst deal in the world. So far, though, I’m with Krugman: it doesn’t sound all that great either, and it’s not clear if it’s better than what Obama could get if he simply waited a bit and went over the cliff. But I guess that was never in the cards. He seemed intent from the beginning on avoiding that.

The deadline loomed. Obama felt he had to do something. Just think of those last-minute Christmas shoppers. They’re confused and ashamed and desperate. They’ll buy anything, to avoid disaster. They’re easy marks. Merry Christmas, everyone…

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About Alan

The editor is a former systems manager for a large California-based HMO, and a former senior systems manager for Northrop, Hughes-Raytheon, Computer Sciences Corporation, Perot Systems and other such organizations. One position was managing the financial and payroll systems for a large hospital chain. And somewhere in there was a two-year stint in Canada running the systems shop at a General Motors locomotive factory - in London, Ontario. That explains Canadian matters scattered through these pages. Otherwise, think large-scale HR, payroll, financial and manufacturing systems. A résumé is available if you wish. The editor has a graduate degree in Eighteenth-Century British Literature from Duke University where he was a National Woodrow Wilson Fellow, and taught English and music in upstate New York in the seventies, and then in the early eighties moved to California and left teaching. The editor currently resides in Hollywood California, a block north of the Sunset Strip.
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