Americans are being duped about many crucial economic concepts because of misleading terms that pollute popular understanding.
This problem caught my attention last week when a state treasurer spoke just before me at a national conference on pension plans and, along with the event host, referred to “contributions” to pension plans.
They are not alone. News reports routinely refer to contributions to pension plans by industry and government. Journalists perpetuate this misunderstanding by accepting the language politicians and others use without checking the facts, as when Gov. Scott Walker of Wisconsin said four years ago that he wanted state workers to “contribute more” to their pensions so taxpayers could contribute less.
Using the term “contribution” creates the false impression that pensions are a gift and therefore optional. There are no taxpayer contributions to public worker pension plans. All the money in these plans — except for investment earnings — is compensation that workers have earned.
Some readers may be thinking, “Hey, wait a minute. The money comes from the taxpayers.” It does, but the taxpayers traded their money for the work done by state troopers, teachers and other public sector workers. Once that work is done, the money belongs to the workers, and it is their earnings that flow into the pension plan.
The easiest way to understand this is to think of what employers that provide fringe benefits tell their workers. They call it a compensation package. Most of that package is turned over as cash wages. But some of the earnings go to pay for health care, vacations, sick leave and retirement.
How the compensation package is divvied up is mere accounting. The way the earnings are sliced has no effect on the economic and legal principle that all compensation is earned. Whether the money going into the pension plan is shown on a paycheck as a deduction or it is paid directly into the plan or is funneled through some combination of these mechanisms is of absolutely no economic or legal consequence, because the workers earned every cent. Were that not so, the pension scheme would be a crime.
Similarly, there is no employer contribution or employer match to the Social Security and Medicare taxes deducted from worker paychecks. The amount deducted from paychecks is only half the combined Medicare and Federal Insurance Contributions Act taxes. There’s that misleading word again.
The other half of the tax does not show up on paychecks because it is part of a deception by Congress to make the tax seem less onerous than it is. The other half, that so-called employer match, is just wages that workers earned and that Congress levies at a 100 percent rate.
Employers understand this. They know that if a worker has a salary of $100,000, their total cost will be $107,650, representing the salary plus Medicare and Social Security taxes. In reality the salary is $107,650 and the worker pays $15,300 in Medicare and Social Security taxes.
Such misunderstandings of basic principles show up every day in newspapers, broadcast reports and magazines. Only rarely do I see clear explanations of these and other important principles.
In the hope of improving public understanding of these issues, let’s review some other terms that are often abused, confused and debased in ways that sow confusion.
Accounting ≠ economics. Accounting tracks and summarizes transactions such as costs and revenues but ignores pollution and other costs that accounting rules ignore. The true costs and benefits show up only on what I call the universal ledger, meaning they are paid for in ways not listed on profit-and-loss statements, such as increased asthma from dirty air and cancer from polluted water.
Economics ≠ finance. Many news reports wrongly treat the terms as synonymous, noted Merrill Perlman, a former chief of The New York Times’ copy desks. Economics is about the production and consumption of goods and services. Finance, a much narrower subject, is about money, including its value over time and risks to its value.
Free market. In theory, this means buyers and sellers freely decide on prices in a market with neither subsidies nor taxes. In the real world taxes and subsidies exist. Markets have rules, which can level the field or advantage some participants. Government rules may require safe products, limit who can buy (e.g., only adults can purchase alcohol) or sell (only licensed agents may sell alcohol, drugs, insurance or surgical services). The free market is a theoretical construct that doesn’t exist in reality. What matters is whether markets are competitive or rigged.
Free trade. Like free markets, this is a unicorn. In theory, it means unrestricted sales and purchases across national borders, but all trade is regulated. The U.S.-Korea Free Trade Agreement imposes unequal tariffs. The still mostly secret Trans-Pacific Partnership has little to do with the few remaining trade barriers but a lot to do with insulating big enterprises from market competition. The same is true for the proposed Transatlantic Trade and Investment Partnership (TTIP), which critics say favors corporate interests over consumers.
Deflation. Deflation occurs when prices overall decline, not when the price of any particular item falls, such as the price of oil in the past nine months. Last year U.S. inflation was 1.5 percent, which means that while some prices fell and others rose, the overall result was that more items rose in price or rose more than the declines in things like oil and copper.
Free and clear. When a mortgage is paid off, the real property is said to be free and clear. In any jurisdiction that imposes property taxes, however, continued ownership depends on paying property taxes, which run as high as 4.2 percent of assessed value annually and on government or utilities not taking it through eminent domain. “Free and clear” implies unfettered ownership, but all property ownership is conditional.
Gross domestic product ≠ total well-being. GDP measures the economy’s total output of goods and services produced. Money spent committing crimes counts the same as money spent manufacturing life-saving drugs because no distinction is made between pathological and beneficial spending. Likewise, an economy can grow, and yet most people can be worse off when gains are concentrated at the top, as in the U.S. since 2009.
George Orwell taught us that words matter and that political language is often shrouded in euphemism. Calculated mislabelings, such as when earnings are called contributions and taxes are called matching money, reflect a politics of deceit. They are economic cousins of the three slogans made famous in George Orwell’s novel “1984”: “War is peace. Freedom is slavery. Ignorance is strength.”