Sunday, July 21, 2013

Anatomy of an Outrageous Misinformation Campaign, Washington-Post-Syle

Fred Hiatt, WaPo's editorial chief
We've just this weekend been given an astoundingly clear example of how misinformation works to the detriment of good policy, and since it took place in a Washington Post editorial, its implications for continued -- and falsely justified -- bad policy choices are equally clear. Deficit hawks love this stuff because it helps them win, by which I mean working to trim or eliminate the social safety net; liberals, Keynesians, deficit doves, whatever, hate this stuff because it's plainly either god-awful journalism or purposeful deception mounted, in effect, to attack the social safety net under the guise of "getting our fiscal house in order."

What I'm talking about is an editorial-board op-ed about Detroit's bankruptcy, with unfunded public-sector pensions as the central cause, that ran two days ago:
But we’re more impressed with what Detroit has in common with other jurisdictions. Specifically, the city is reaping what it sowed by promising public employees pay and benefits — especially health insurance and pensions for retirees — that it could not afford, and then borrowing for years to paper over the mistake. Similar issues were at the heart of three large municipal bankruptcies, in the California cities of Vallejo, Stockton and San Bernardino. A new survey by scholars at Boston College finds that state and local pension plans have $3.8 trillion in unfunded liabilities, even assuming strong rates of return.
Obviously, many jurisdictions included in that figure are currently managing their obligations well. But even a highly rated city, Chicago, just got marked down by Moody’s because of its $19 billion unfunded pension liability. The point is that long before cities reach the point of insolvency, unaffordable promises to their public-sector unions can raise borrowing costs and crowd out other public needs — such as parks, libraries, sanitation and public safety. And that’s not good for retaining a tax-paying middle-class population. Cities and states that wish to avoid a Detroit-like death spiral should start putting their retirement systems on a sustainable path now.
Economist Dean Baker
I placed the emphasis on the last line because it's the exact point of the editorial, which is that unions and the pensions and benefits they have achieved are the cause of our national decline, and the sooner we do something about it the better. The problem is it's not true, and the WaPo editorial is based on a serious misreading of the Boston College study. I offer the notion of "misreading" as a very generous interpretation of what the Post editorial board is up to. Purposeful deception is not an unkind or outrageous assessment, either.

Reliable Dean Baker was the first to flag the outrageous mistakes in the editorial:
But I apparently forgot to think about this number for the necessary 10 seconds before writing. The $3.8 trillion figure should have struck me as way too large for an estimate for unfunded liabilities, and in fact it is. Here's what the Boston College study said (page 2):
"In the aggregate, the actuarial value of assets amounted to $2.8 trillion and liabilities amounted to $3.8 trillion, producing a funded ratio of 73 percent."
You see, the $3.8 trillion figure was an estimate of total liabilities, not unfunded liabilities. Since the pensions have $2.8 trillion in assets, their unfunded liabilities are just $1 trillion. Or, to put this in terms that may be understandable to Post readers, the unfunded liabilities are 0.22 percent of projected GDP over the next 30 years. And, as I noted in my earlier post, most state and local governments are already funding at levels that are consistent with making up this shortfall so there will no required tax increases or spending cuts to meet these future obligations.
Paul Krugman, aka Krugtron.
If that were the extent of the failure of the WaPo editorial board, it would be one thing. But it's not. Paul Krugman crunches a few more numbers and squeezes more errors out of the editorial:
You see, the Boston College study doesn’t just estimate assets and liabilities; it also estimates the Annual Required Contribution, defined as
normal cost – the present value of the benefits accrued in a given year – plus a payment to amortize the unfunded liability
And it compares the ARC with actual contributions.
According to the survey, the ARC is currently about 15 percent of payroll; in reality, state and local governments are making only about 80 percent of the required contributions, so there’s a shortfall of 3 percent of payroll. Total state and local payroll, in turn, is about $70 billion per month, or $850 billion per year. So, nationwide, governments are underfunding their pensions by around 3 percent of $850 billion, or around $25 billion a year.
A $25 billion shortfall in a $16 trillion economy. We’re doomed!
 I can do the math for the last little bit: Underfunding of pensions amounts to .00156% of GDP.

As of this moment, more than 48 hours after the editorial was published, the Washington Post has made no effort to correct its mistake. Will it ever? And even if it did, do you think conservative pundits and politicians won't quote the mistake over and over until it becomes Beltway Conventional Wisdom that all Very Serious People will have come to rely on in their Very Serious Conversations?

This is another example of how Washington works. Yuck.

Update. A federal judge has halted the Detroit bankruptcy, ruling that pensions are sacrosanct under the Michigan constitution. However, U.S. bankruptcy statutes allow the trimming of pensions in bankruptcy settlements under Chapter 9, and federal law tends to trump state law. Stay tuned on that one, as the Michigan attorney general has already appealed the ruling.

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