Krugman blasts Lieberman (unfairly)

In today's NY Times, Paul Krugman calls Senator Joe Lieberman to task for consorting with liars:

Mr. Lieberman repeatedly supported the administration's scare tactics. ''Every year we wait to come up with a solution to the Social Security problem,'' he declared in March 2005, ''costs our children and grandchildren and great-grandchildren $600 billion more.''

This claim echoed a Bush administration talking point, and President Bush wasted little time citing Mr. Lieberman's statement as vindication. But the talking point was simply false, so Mr. Lieberman was providing cover for an administration lie.

Blogger Don Luskin defends Lieberman:

According to the Social Security Trustees' Annual Report, 2006, Table IV.B5: the system's unfunded obligation stands now at $4.934 trillion. According to the same table from the previous year's report, it was $4.318 trillion. Thus the growth from year to year was $616 billion. Krugman may dispute the meaning or accuracy of this figure on technical grounds, but there is simply no way he can look at the numbers and characterize Lieberman's statement as an "administration lie."

So were Lieberman and Bush telling the truth or not? When answering this question, it helps to understand what that $600 billion figure represents.

The issue comes down to the economics of discounting. Let's say I have a $200 debt to a bank that is due in 10 years, and the interest rate is 7 percent. The present discounted value of that obligation is $100 today. That is, if I were to extinguish the debt right now, it would cost me $100. If I wait a year, the repayment obligation would then be only 9 years away. At that point, extinguishing the debt would cost me $107.

One might say that waiting an extra year costs me an extra $7. Or one might not. After all, paying $107 next year is equivalent in present value to paying $100 today. One might say I haven't cost myself anything by waiting.

Now suppose my friend Joe offers me some financial advice: "Greg, you should really pay off that debt now, because waiting a year will cost you an extra $7." How should I respond?

(a) "Yes, Joe, you are right."
(b) "No, Joe, that's not the best way to think about it."
(c) "Joe, you are a liar."

I think (a) and (b) are defensible points of view. But Krugman chose (c).