Deficit Reduction: Argument by Authority

The deficit hawks are going into high gear with their drive to cut social security and Medicare. President Obama's deficit commission is having a big public event on Tuesday in which many of the country's most prominent deficit hawks will tout the need to reduce the budget deficit. The next day, Wall Street investment banker Peter Peterson will be hosting a "summit on fiscal responsibility", which will feature more luminaries touting the need to get deficits under control.

What will be missing from both of these events is any serious debate on the extent of the deficit problem and its causes. These affairs are not about promoting a real exchange of views on issues like the future of social security, Medicare, and public support for education, research and infrastructure, the purpose of these events is to tell the public that everyone agrees, we have to cut the deficit. And, this means cutting social security and Medicare. This is argument by authority.

Many public debates in the United States take this form. The issue is not what is said, but rather who says it. A few years ago all the authorities said that there was no housing bubble. The large body of evidence showing that house prices had hugely diverged from the fundamentals did not matter when the chairman of the Federal Reserve Board, the president's Council of Economic Advisers and other leading lights of the economic profession insisted that everything in the housing market was just fine.

Going further back to the mid-90s, many of this same group of deficit hawk luminaries tried to use argument by authority to cut social security. They came up with the story that the consumer price index (CPI) overstated the true rate of inflation. After workers retire, their social security benefits are indexed to the CPI. This crew (which included then Senator Alan Simpson, a co-chair of President Obama's commission, and Peter Peterson) argued that social security benefits should lag the CPI by one percentage point a year. In other words, if the CPI shows 3% inflation, then social security benefits will only rise by 2%.

That may seem a small cut, but it adds up over time. A worker retired for 10 years would have their benefits reduced by approximately 10%. A worker retired for 20 years would have their benefits cut by almost 20%.

To push this agenda, they put together a panel of the country's most prominent economists, all of whom blessed the claim that the CPI overstated the true rate of inflation by at least one percentage point. In addition to this panel, the social security cutters also pulled in other prominent economists, including Martin Feldstein, formerly President Reagan's top economist and the head of the National Bureau of Economic Research.

The social security cutters were so successful in rounding up the big names that virtually no economists were prepared to publicly stand up and question their claims about the CPI. They had near free rein, running around the country with the "all the experts agree" line.

As events unfolded they were not able to get their cut in social security benefits. (Ted Kennedy and Dick Gephardt deserve big credit on this.) But what is really interesting for the current debate is what happened to the experts' claim on the CPI. There were some changes made to the CPI, but in the view of the expert panel, the major causes of the biases in the CPI were not fixed. They concluded that even after the changes the CPI still overstated the true rate of inflation by 0.8 percentage points annually.

If this claim is really true then it has enormous ramifications for our assessment of the economy. It means, for example, that incomes and wages are rising far more rapidly than the official data show. It means that people in the recent past were far poorer than is indicated by official statistics. If the claim about the CPI being overstated is true, then we would have to re-examine a vast amount of economic research that starts from the premise that the CPI is an accurate measure of inflation.

However, almost no economists have adjusted their research for a CPI's overstatement of inflation. In fact, even the members of the expert panel don't generally use a measure of inflation that adjusts for the alleged bias in the CPI. In other words, when they are not pushing cuts to social security, these economists act as though the CPI is an accurate measure of the rate of inflation. This could lead one to question these experts' integrity.

This history should give the public serious grounds for being suspicious about the latest efforts to cut social security and Medicare. A serious discussion of the deficit will show that in the short-term the deficit is not a problem and that the longer-term deficit problem is really a problem of a broken US healthcare system. The public should not allow the deficit hawks to derail a more serious discussion with their argument by authority.