Pearlstein: Economics and the 2008 Campaign

Steven Pearlstein
Washington Post Columnist
Wednesday, October 10, 2007; 11:00 AM

Washington Post business columnist Steven Pearlstein was online Wednesday, Oct. 10 at 11 a.m. ET to discuss the economic issues of the presidential campaign and press coverage of the candidates' positions.

Read today's column: Two Hours, Nine Candidates, and Almost Nothing New

The transcript follows.

About Pearlstein: Steven Pearlstein writes about business and the economy for The Washington Post. His journalism career includes editing roles at The Post and Inc. magazine. He was founding publisher and editor of The Boston Observer, a monthly journal of liberal opinion. He got his start in journalism reporting for two New Hampshire newspapers -- the Concord Monitor and the Foster's Daily Democrat. Pearlstein has also worked as a television news reporter and a congressional staffer.

His column archive is online here.


Fairfax, Va.: Is there any leading Democratic candidate who openly advocates raising taxes on the rich; and if not, why not?

Steven Pearlstein: They all do, as far as I can remember.


Ron Paul fan: Ron Paul definitely won me with this debate. He seems the most sensible one with his (libertarian) economic policy, and unlike his rivals, his congressional record speaks for itself. He truly sticks with his principles.

Steven Pearlstein: The truth is, when you compare Ron Paul to Fred Thompson on substance, Thompson comes across as a nothing-burger.

Paul isn't afraid to tell the truth, and he surely sticks by his principles, but sometime his version of the truth is a bit on the nutty edge. I'm speaking here of his determined, hard-money monetarism which harkens back to the Republican part of 1907, not 2007.


Princeton, N.J.: Good morning and good column, Steve. Obviously from my position at your left hand I don't agree with everything you said, but I do agree with most of it. Instead of my usual screed on health care, I'll present some ideas on Social Security for your edification and the comments of the chatters:

1. The demographics: Doom sayers say, "In 1945, for every Social Security beneficiary, we had 42 workers paying in. By 2002, we had just 3.3 workers per beneficiary. By 2030, we'll have only 2.2 workers per beneficiary." So what. I presume they somehow want us to conclude that Social Security is going to pot just by looking at this one statistic, i.e. this single statistic (workers per beneficiary) dominates all other inputs. Since they do not tell us the state of Social Security at any point, we actually can conclude nothing from this argument, and if we put in its current state, this argument shows exactly the opposite of what they want us to conclude!

Today Social Security is in the best state it has ever been in-the yearly surplus last year was the largest in its history. The SS Trust Fund is $1.5 TRILLION which is also its maximum. I don't have the figures for 2006, but they are similar. So what we have is that from 1945 to 2002, the number of workers per beneficiary decreased by 92 percent, but the health of Social Security is vastly better. Clearly there are other factors that dominate this one demographic statistic. Furthermore, if Social Security could improve its condition with a 92 percent decrease in this statistic, why should we worry about the 33 percent decrease they predict for the period 2002 to 2030?

2. The projections: Dr. Steven Goss, the chief actuary of the Social Security Administration is careful to point out that what he makes are _projections_, not _predictions_. They are based on assumptions, i.e. he says that _if_ this happens _then_, this will happen. These assumptions cannot be computed, he says, because they are event driven. You would have to be a fortune teller to even make an estimate. Because of this, he actually makes three projections. The one you are quoting is the "middle" projection. If you look at the record, you will see that his "high" projection has been consistently and significantly more accurate than the middle one. The high projection says that the SS Trust Fund will not go to zero during the next 75 years, SS will be able to pay all promised benefits, and there will be a surplus in the trillions at the end of the period.

3. An assumption: The middle projection of the Social Security Administration (the one you quote) assumes that the average growth in the GDP will be 1.78 percent over the next 75 years. If you just change this one assumption, keeping all the horrible demographics that you believe in, to 2.7 percent and do the exact same computation, then you get that the SS Trust Funds never goes to zero, all promised benefits can be paid, and there is a huge surplus at the end of the period. The average growth in the GDP over the last 75 years was 3.1 percent. I am not saying what the growth in the GDP will be (that would not be mathematics, but fortune telling), I am just saying that the exact same mathematics that gives you the bad forecast with the one assumption, gives you a good forecast with an equally reasonable one.

4. "We must act now": In 1983, the SS Trust Fund was _one year_ from depletion. The government convened a commission that looked at the problem, made a few minor changes in SS (can you even name them?), and, behold, SS was safe for at least 30 years and maybe forever.

To sum up: The projections of the demise of SS are no more accurate than reading the entrails of a goat and we would be foolish to make any great changes because of them.

Steven Pearlstein: This is the standard, left-wing Democratic line, that Social Security is fine as it is, and if anything is needed, just increase the income cap on the rich. I agree up to a point: there is an actuarial problem, but it can be easily fixed. Raising the cap to $200,000 would be a first step. Making the benefit schedule more progressive by shaving off a bit for those with higher incomes would be another. Letting the retirement age continue to drift upward -- not as fast as life expectancy, but maybe half as fast. Those would pretty much do it.

Thompson's idea of fiddling with the inflation adjustment sounds like it is reasonable, and wouldn't be a catastrophe, but it is one fix I don't support. That's because over time, the country gets richer, expectations of standard of living rise, so it won't feel so good if you keep benefits in line with the cost of living from 2007 when you retire at 2070. By pegging it to wage growth, you not only have benefits keep up with contributions, you have them keep up with changing economic norms.


Washington, D.C.: My vote will almost certainly go to the candidate who promises to continue the 15 percent federal income tax rate on dividends. Since I live in D.C. where the electoral vote is already determined, this matters little to the candidates. None of them is speaking of this matter anyway. I wish they would.

Steven Pearlstein: All the Republicans vow to keep dividends taxed at 15 percent except Romney, who wants to lower it to zero for those with incomes under $200,000 (for all practical purposes, it would also go to zero for those above $200,000 once the tax lawyers finish playing their games). The Democrats are sort of silent on it. I get the impression Edwards would raise it, but the others sort of dance around it because they want to preserve some of the so-called Bush tax cuts while not others.


Phoenix, Ariz.: Republican candidates say social security must be modified. Does that mean the trillion dollar trust fund that Lyndon Johnson started the raiding will be lost? I really feel that is taxes that we all have paid and the US Government owes that to us.

Steven Pearlstein: Well, nobody is suggesting benefit cuts except the aforementioned change in the inflation index proposed by Thompson. Nor is any Democrat. So I think you're okay.


Danvers, Mass.: So these guys are way right of the people of the U.S. (reading attitude pools on what people want), and so are their predecessors, and it appears so are most of the Democratic Party candidates. Just how is it then that these kind of people get elected?

Steven Pearlstein: Well, now you get to a subject near and dear to my heart, which is the performance of the political press. And, frankly, it is clear that they, once again, have learned nothing from the past, learned nothing from the criticism that was levelled at them in the last two elections, learned nothing from the declining respect they get from their readers and viewers.

I found it fascinating that it only took Chris Matthews 43.8 minutes before his attention deficit disorder kicked in when it comes to business and economic issues, and suddenly changed the subject to Iran. That began a 10 to 15 minute diversion onto national security issues. And what it reminds us is that the people who do almost all of the campaign coverage don't know or understand much about the subject, don't care and therefore do a lousy job at it. Because they don't have the context, they can't really analyze the substantive proposals and answers, so they just give this perfunctory recitation of what the candidates say, which allows them to check off their responsibility but winds up boring the readers and allowing the candidates to get away with hookwinking the public. They all like to think they are really tough, but in fact they are pussycats on policy because they don't understand it well enough. And its absolutely still true: all they really care about is the horse-race and, at debates, whether there were any "attacks" or "fireworks." This is the entire prism through which they look at the race.


Laurel: When was the last time a primary candidate got the nomination with a bold, new idea? Goldwater? He knew his party wasn't going to win, so he ran with the explicit idea of realigning it. No one in modern times has won the presidency promising to make a tough decision.

Steven Pearlstein: No one has tried. Let me posit here one of the most important, and least understood truths about politics:

Most of the time (wars are one exception), a candidates stand on issues are not so important, in and of themselves, as they are as a way of revealing character and values. And if a candidate wants to project a character of a leader who is willing to tell the truth and signal that he has what it takes to make the tough choices, then he/she bloody well should pick a few issues in which he/she is willing to say something unpopular, particularly to his/her base.

What's curious is that no leading candidate has figured this out yet, preferring instead to read from the party poll-tested talking points. This doesn't come out in the polls because the way polls are framed, it can't. People won't tell a pollster -- I want a candidate who disagrees with me. That's absurd. But a lot of political messages get delivered indirectly, through the back door, and this is one of those.


Anonymous: Two questions; Mitt Romney cut taxes $250 million and raised FEES $500 million but no one post debate or in the debate pointed out that misleading statement - both he and Giuliani left their successors huge deficits from increased spending - why was this missed?

Fred Thompson said the strong dollar helps exports, which is 180 degrees wrong - and this man wants to inspire confidence in economic conservatives? What is wrong with this picture?

Steven Pearlstein: You know, I meant to mention that as it relates to Romney (I'm not sure it is true about NYC) and my wife chided me for that this morning. The new governor of Mass. is now struggling to close a billion dollar budget deficit left behind by Romney, so in fact he hasn't shown "that it can be done."


Kensington, Md.: Dear Mr. Pearlstein: That was one of your wittiest columns to date.

GDP per capita in this country is $40k-$50k. That is more than enough national income for every citizen in this country. What the Republicans, while perversely claiming a superior knowledge of economics, don't understand is the concept of declining marginal utility. Additional dollars of income gives you less utility as you get richer. That means it is very possible to for the country to get much richer while people are simultaneously made worse off (which is obvious even to my toddler). And if you find this idea hard to grasp, just look at the extreme case of the mercantilist era (which Adam Smith critiqued) where European nations horded huge amounts of wealth that did nobody any good.

Most politicians mistakenly believe that a modern democracy's fiscal policy should focus on national income maximization. Totally untrue. Don't let the economy fall apart, but people are served best by policies that maximize utility. That puts us firmly in the realm of addressing distributional problems, market failures, and, dare I say it, thoughtfully executed public policy.

However, the sticky point here is fairness and equity, which unfortunately causes economists to go into spasms. We know for whom a dollar will do the most good, but we can't say if he or she deserves that dollar. And I believe that is what the people we elect should be resolving for us. Cripes, but they cannot even agree that children and the elderly deserve some extra attention.

When I hear these plans that in effect focus on volumes of income or wealth, I think of a fireman that sprays all his water on just one section of the inferno. The house still burns down. Best regards.

Steven Pearlstein: Interesting take. It is true that all of us, but particularly Republicans, misuse GDP growth as the almost exclusive yardstick for success. It ignores distributional issues, as you point out. And it ignores other things that we value, like free time and clean air and a sense of community. Just talking about such things is a quiet, thoughtful, sophisticated way would increase the stature of any candidate. I suspect most of them could do it very easily. But none of them do it because their silly advisers program them not to.


Boston: Which general partners of private equity or hedge fund firms would quit the business instead of paying the same tax rate as other workers who also don't put their own capital at risk for the vast majority of their pay? What a canard...

Steven Pearlstein: Not one.


Anonymous: Why are the executives that ignored the growth of Toyota and other imports not prosecuted to return their bonuses and other ill-gotten gains? This is especially true because their cars' styling and performance were failing, and they refused to see the need for change. They focused on the profitable SUVs and Small Truck market, ignoring their loss of market share, and asking themselves why this is so.

How come all others that work in the auto industry suffer and they DO NOT?

Steven Pearlstein: Well, I'm not sure how big the bonuses have been in the auto industry. And even if they had lost their bonuses, I'm not sure the lives of the other workers would have changed much. This is a standard union line, to suggest that the bosses ran off with all the money. The right line is that the bosses were incompetent, not greedy.


MD: Other than the well rehearsed and packaged lines from Fred Thompson, "Does anyone think that he has clue about how address the economic concerns of "Middle America"?" Second, "What is the bipolar media reporting on Fred Thompson?" Depending on want media outlet, one has him committing gaffe's at the debate. Others anoint him as the new number 2 with Romney falling to third place. Who should we believe?

Steven Pearlstein: Fred Thompson's candidacy is a total creation of the media. His performance yesterday ought to have been an embarrassment, not just to a former US Senator, but to the press, which spent so much time building up this guy. He's a joke, really. Almost nothing thoughful to say on economic or business issues. Not a serious candidate, in my opinion. But then again, I'm not part of the traveling press corps.


Madison, Wis.: Thanks so much for taking questions. I'm intrigued by your assessment of Mr. Huckabee, whom you describe as the candidate "who combines intelligence, candor and comfortable familiarity with the issues and a practical approach anchored in solid conservative beliefs." What did he say in particular that impressed you?

Steven Pearlstein: His answer to the qustion about unions, in which he talked about the growing gap between ordinary Americans and CEOs and hedge fund managers, was one answer. I also liked his answer explaining he wouldn't have vetoed the SCHIP bill not because he didn't agree with the President, but because it wasn't worth the expenditure of political capital in the face of strong public disapproval. That was thoughtful, a seasoned politician who could handle substance and politics toghether (which is what you have to do as a president) and talking candidly about tradeoffs.

Let me riff on that a moment, because that is the essence of what I meant to drive at this morning. In government, the important questions aren't black and white. They involve tradeoffs -- interesting, complex, important tradeoffs. And it is so refreshing when a leader can talk about the tradeoffs involved in an issue and how he/she came to make the tradeoffs he/she did, rather than presenting everything as an easy, clearcut decusion.


D.C.: Hi Steven, I love your columns and insight, but....

Thanks for telling me sell my stocks last month in anticipation of the downturn/recession. I know you think you have solid insight (and you do), but so do all market timers. History has shown time and time again that for individual investors, attempts to time the market are a mistake and that consistent investment and yearly rebalancing is the right way to go.

Sorry to hector you, but am interested in your response since you seem so measured and wise but then you went off telling people to sell stocks in anticipation of a downturn (which obviously could still happen and eventually of course will happen to some extent since the market fluctuates). Isn't this exactly what individual investors should NOT do?

Sorry this question came off so snarky, but it really is sort of an honest question.

Steven Pearlstein: Well, if you think we're at a point where stock are going to climb from these heights, then you could say I was wrong. I'd say just hold on -- this is a fairly common way in which bull markets end and bubble burst. If you look back at the Great Depression, stocks rebounded almost to their highs in the year after the October 1929 crash. And during the tech bust of several years ago, there were determined rallies through the summer and early fall before the final capitulation.

There is nothing going on here to sustain these stock prices over the medium run except the determined belief among large number of professional investors that the bull market will continue. That's the kind of self-fulfilling belief that causes and sustains a bubble, which only gets pricked when some unpleasant reality intrudes.


Lansing, N.Y.: Jim Cramer says that Hillary is the only candidate with a sensible plan for ameliorating the huge problem created by the resets on teaser rate mortgages. (see Gretchen Morgenson's 9/26 NYT article on Countrywide Fin.Corp). At 11:00 explain the problem and what Hillary is proposing and the chair of the House finance comm. is proposing. Why didn't the press not expose the chicanery earlier?

Steven Pearlstein: If you're listening to Cramer for public policy advice, you are in trouble.

Cramer likes Hillary's plan because, as I read it (and I haven't called to get a fuller explanation), it could be a bailout. She wants state agencies to refinance bad mortgages, presumably at the full principal but this time at a fixed rate. So let's think about that. If this were a straight, vanilla refinancing, there are plenty of mortgage lenders around to do that. The only reason some special program run by a state agency would need to be involved would be if the borrower couldn't meet the normal requirements (downpayment, enough income to sustain payments at that principal and interest rate). So unless she has some other wrinkle in mind that is not included in her press release, either what she is proposing is not much, or it involves a bailout of the mortgage holders or a concessionary loan to the borrower.

I've made my own proposal on this issue which maybe the people at would provide a link for HERE. It involves Fannie, Freddie and an idea for a lien on properties facing foreclosure.


Falls Church, Va.: Understanding that the Washington Post is a pro democratic paper and that news is news, right? Then why is is that when Hillary hired Sandy Berger for her campaign it does not appear on the front page of the Post like the NY Times and Wash. Times? Not to mention news broadcasts on TV and radio.

Does this woman think the general public is stupid or that they have no memory of what this man did? I see all the Clintonites of yore gathering with their campaign to give us more of the same we suffered for 8 years.

Steven Pearlstein: That would be the same "Democratic" paper that is dogmatically free trade and supported (and still supports) the War in Iraq?


Minnesota: Hello Steven, How will the U.S. compete in an ever growing and fast paced global economy if we are unable to update/maintain our infrastructure if the Republican Party continues to pursue tax cuts on our top income earners? A prime example of why we need tax revenues is the rebuilding of the I35 bridge in Minnesota, which collapsed this summer, and now the state is realizing that the federal government may not be keeping its funding promises.

Steven Pearlstein: You know, at some point, if these guys have their way, there won't be any taxes to cut. Then what would they do?

The idea that economic growth is determined primarily by the level and marginal changes in tax rates is ecoomic nonsense. There is not only no proof of it -- there is proof that it is NOT true.


Raleigh, N.C.: I enjoyed your editorial about the 9 Republican candidates. I submitted a question to Sen. Brownback which I am kind of doubting he's going to address, but I might have better luck with you. The WaPo reported on new polling representing what I would call a sea change in the percentages of people saying the government needs to do more to help people. It has almost completely flip-flopped from majority against to majority for in the last twelve years. My personal take on this is that ordinary working people are having a hard time with their wages stagnant, health care costs rising, and pensions disappearing, and realizing that this stuff isn't because they're being lazy, or indulgent about going to the doctor, or being poor workers; and I think they're getting more impatient with the true lack of compassion in that whole bootstraps mentality. My question is, are any of the Republicans noticing this trend, and if they are, are they doing anything about it?

Steven Pearlstein: Maybe Mike Huckabee is noticing it, but for the others, it is just an inconvenient development.


Ah..."false objectivity": Your article was mostly decent, but then you just had to play the game of false objectivity. Either that, or you really didn't think very hard.

"is a soothing antidote to the relentless negativism of the Democratic candidates." Okay, let's see here. You yourself note issues with Social Security negative balance, Globalization and collapsing incomes, collapsing housing market(and potentially financial market), federal deficit spending, de-facto union banning, income inequality, and healthcare. You note that none of the Reps address these issues with any reality.

Then you declare how "refreshing" Giuliani is for not being "negative", and how the Dems are just so negative. Bad, bad, bad!

Well, when you selected from the pu-pu platter of approved columnist cliches and grabbed that one, did it even strike you the two are related? Amazingly enough, anyone can be sunny and cheerful by simply detaching from reality. Giuliani is a "soothing antidote" precisely because he doesn't offer any solutions, just bromides and platitudes.

Seriously, I expect better from you. I think I'll head over to read David Brooks, who's detachment from reality is just a great antidote from the relentless negativism of your column. Sheesh.

Steven Pearlstein: The Democratic candidates are relentlessly negative about the economy, running around saying the sky is falling for everyone but the super-rich and that it's all George Bush's fault. That's the fact. And by doing so, they leave themselves open to someone like Guiliani, because that purely negative view doesn't square the reality that a lot of people see around them. It is not to say there aren't lots of things that are less than optimal, some of which need fixing by government. But Democrats, including yourself, paint a picture that simply doesn't allow for the realities of Google and Facebook, the success of Boeing and Caterpillar, the strength of America's university and medical system, etc. In the long run, that's a losing strategy by letting the Ronald Reagans and Rudy Guiliani appeal to the basic optimism of the American people, their faith in themselves, the importance they place on entrepreneurship and self reliance, and the success of the American economy over the centuries.


Atlanta, Ga., again...: Oh, and I'll fully support any candidate who supports the FairTax. Had to get that in. The tax code we have now is absurd and ridiculous and billions of dollars are wasted each year to comply - only to have the IRS be able to do whatever the heck it wants anyway.

And, all those people lobbying for tax breaks would be GONE. Congress could spend time doing something worthwhile.

Steven Pearlstein: Okay, I'm for a simple, consumption-based income tax too. But don't assume that you also can't have such a system that also sports progressive rates.


Maryland bburbs: Steve, You say:

Well, I'm not sure how big the bonuses have been in the auto industry. And even if they had lost their bonuses, I'm not sure the lives of the other workers would have changed much. This is a standard union line, to suggest that the bosses ran off with all the money. The right line is that the bosses were incompetent, not greedy.


I don't think the chatter was trying to say that the bosses ran off with all of the money. I think he was trying to say that the bosses should not get so much money when the company is in such bad shape. The workers have given back and so should the bosses.

Steven Pearlstein: As I said, I don't think there were many big bonuses in the auto industry in recent years.


Raleigh, N.C.: Just a comment.

I've enjoyed your commentary on the political press, candidates, and handlers. Though I'm not sure that enjoyed is the right word, even though I agree with you. While it's refreshing to hear someone say this, it's still a rather depressing state of affairs.

Steven Pearlstein: Indeed.


Princeton, N.J.: You missed my point entirely. I did not say SS is fine as it is, I said we cannot tell how it will be in the future so it is foolish to take action now because of some things that may happen. If you want to raise the limit because of fairness, fine.

Steven Pearlstein: The problem with not even making a best guess at the future is that, if you wait for the future to come in order to figure it out, its too late to do anything about it. The actuaries have been pretty good at charting our course. I don't know why you are so hard on their estimates.


Olney, Md.: Mr. Pearlstein, You make some very salient points about the press' coverage of the candidates regarding economic policy. But I would respectfully add that the American voters are ultimately accountable. Anyone who pays attention and give thoughtful consideration to the candidates' positions should be appalled by what they are hearing (i.e., Romney wants to make ALL health-care spending tax-deductible?). But sadly, for the most part we don't do that, and the guys most successful at fear-mongering and vilifying their opponents win again.

Steven Pearlstein: Believe me, we could make it a whole lot easier for voters to make intelligent choices.


Troy, N.Y.: Hi Steven. What did you think of Mike Huckabee's fair tax proposal? I particularly liked the idea of the federal government getting taxes from drug dealers, prostitutes, pimps, and getting rid of the IRS. Would it actually encourage work? Do you think Huckabee is right that nothing would really discourage American consumption (think gasoline prices)? Is there an H&R Block lobby preventing this? Thanks.

Steven Pearlstein: No, that's not it. The prostitutes and pimps line is great politics, but any tax system is going to involve people who will try to avoid paying. Even the fair tax.


"performance of the political press": I think you miss one additional point. The "political press" nowadays ain't Jack Cafferty, a working class kid that fought his way up. Its a collection of Ivy's who went on Mommy and Daddy's dime. (Noted there are exceptions, but overall...)

These folks have the attitude they do because "policy" doesn't matter to them. War in Iraq? Name two colleagues who have kids in the military. Now try to name two who don't have them in an upper tier Uni.

Income inequality? These are the "winners" of that game. Social Security? A minor dribble compared to the investment portfolio. And don't even mention the tax penalty for labor income over capital for the same reason.

They are what they are because it is in their own best interest to be what they are.

Steven Pearlstein: Trust me, that's not the big problem. The big problem is that they inhabit a bubble, along with the campaigns, that is so self-focused that they forget what its all about. they write for each other. The current setup also gives the political press more power this way. It is also easier to keep writing the same things over and over again, rather than to really have to think, analyze, take risks.


Giuliani: Actually, he left NYC pretty well off. He could never have predicted 9/11 and the devastation it created and Bloomberg only raised taxes to combat the recession they had. They're doing pretty well up there now.

Steven Pearlstein:...until last month.


Steven Pearlstein: That's all the time we have for today folks. "See" you next week.


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