SYNOPSIS: Krugman talks about accounting inconsistencies and intellectual dishonesty in the report of the White House Commission on Social Security

DOBBS: "New York Times" columnist, MONEYLINE contributor Paul Krugman has been a critic of the president's plan to overhaul the Social Security system through partial privatization. In his regular "New York Times" column today, he took aim at the White House Commission on Social Security calling its recent report: "biased, internally inconsistent and intellectually dishonest." Economist Paul Krugman, how could you say such things?

PAUL KRUGMAN, ECONOMIST/"THE NEW YORK TIMES" COLUMNIST: With that report, I was startled. What it reminded me of was Hollywood studio accounting. You know, how they promise you a share of the profits, then they always manage to jigger with the accounting?

DOBBS: Yes.

KRUGMAN: So what they did was they managed to create an eminent crisis in Social Security by shifting the accounting. So in some years when Social Security is putting money into the system, that doesn't count. But in some years when Social Security will draw on its I0Us, that's a deficit. It was incredible. Why do they do that?

DOBBS: They're just setting the stage, and I'm stunned to hear you talk about it in this way, because you have eight Republicans and eight Democrats who come to gather in a bipartisan way and you look at it as biased?

KRUGMAN: I think what actually happened here is the commission, commissioners were really not paying attention. You know, the staff is all like people from the Heritage Foundation, right wing think tanks and staff went ahead and wrote this report, and I think the commissioners didn't look at it until the last minute -- and didn't realize...

DOBBS: You are looking at it in a ideological term, surely. This is just basic economics.

KRUGMAN: Well, it is just basic accounting. The one rule you do is -- you know, there are different accounting standards -- but whatever you do, you stick to one. You don't switch in midstream. And what this report does is it switches in midstream selectively. And that's -- that's a no-no.

DOBBS: Well, the basic issue here is that the Social Security trust fund, most people think of it as a trust fund. It isn't, is it?

KRUGMAN: It's -- it's a little complicated.

DOBBS: They don't -- they don't trust it. It's a not a fund. It's an entry, and they have an IOU against it they have to pay at some point.

KRUGMAN: Right, but there are two ways you can cut this. You can either say the government is all one big happy family and it's all one big budget, and these intergovernmental IOUs, which is what the trust fund is, don't matter. Or you can say Social Security, we're going to wall it off. Yes, of course, it's an accounting convention, but we're going to let it have its own account. What the commissioner report does is it says as long as Social Security is contributing, as long as its running these surpluses, then we're all one big happy family, there's no real trust fund. But the day in 2016 when it starts to draw on the IOUs, oh, well there are no real assets there and -- and you're on your own. And that -- that's -- that's the unevenness.

DOBBS: And as you point out, I believe the first year is -- what? -- 160 billion based on the math that you were using.

KRUGMAN: No, but when you actually -- the other thing they imply is that when it comes time to supply this, you know, by 2040, when my generation is all on retirement, that it's going to require that there be a net transfer into the Social Security system. But as a share of the economy, it's no worse than the tax cut we just passed.

DOBBS: And you don't like that either. Think about how bad the economy would be were we not to have that tax cut, Paul.

KRUGMAN: Oh, I think...

DOBBS: You're a Keynesian after all.

KRUGMAN: I think there's something to be said for the rebate this year, which, by the way...

DOBBS: I want to write this down: Paul Krugman admits there's something to the rebate check.

KRUGMAN: Ah, but go back and look at what Larry Lindsey and Paul O'Neill said about the idea of giving a rebate just a few months ago, and they thought that was a terrible idea. All they wanted was the long-term tax cut. Now that they were forced into it, they claim it was their idea.

DOBBS: Well, at this point, the debate becomes academic, the 40 billion moves into the economy and it's good -- I think it's a good thing in terms of giving...

KRUGMAN: Yeah.

DOBBS: ... some relief, both psychologically and real, don't you?

KRUGMAN: Yeah. I mean, I'd take another 50 basis points off the Fed funds rate in preference, but I'd like to have both actually.

DOBBS: Well, on August 21st, maybe we can give you your Christmas present early.

KRUGMAN: Yeah. You know, let me just say about -- about the report...

DOBBS: OK, quick.

KRUGMAN: ... why did they do this? You know, they've now effectively prevented any Social Security reform for a couple of years, because now we have to wait for the bad taste of this report to go away.

DOBBS: Well, it's Washington, it's 2001. Bad tastes seem to go away a little faster than they used to.

KRUGMAN: Your mouth, not mine.

(LAUGHTER)

DOBBS: OK. Paul, thanks a lot. Paul Krugman. Up next, we'll take a look at your e-mails and "Ahead of the Curve."

Originally broadcast, 7.25.01