The Obama administration proposed a year-long reduction in payroll taxes of 2 percentage points as part of a broader compromise to extend Bush-era tax cuts temporarily, a congressional aide said.

The proposed reduction was offered as an alternative to renewing the “Making Work Pay” tax credit, a creation of President Barack Obama that expires Dec. 31 along with lower income-tax rates enacted in 2001 and 2003, the aide said, speaking on condition of anonymity. Some Senate Republicans oppose the credit.

Negotiators also are discussing including Obama’s proposal to allow a full deduction for equipment purchases that currently must be deducted over time, an administration official said. The proposal would accelerate $200 billion in tax savings for companies in the first year and benefit 1.5 million companies and several million individuals who run businesses, according to White House estimates.

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[Scott] Pelley: How would you rate the likelihood of dipping into recession again?

[Ben] Bernanke: It doesn’t seem likely that we’ll have a double dip recession. And that’s because, among other things, some of the most cyclical parts of the economy, like housing, for example, are already very weak. And they can’t get much weaker. And so another decline is relatively unlikely. Now, that being said, I think a very high unemployment rate for a protracted period of time, which makes consumers, households less confident, more worried about the future, I think that’s the primary source of risk that we might have another slowdown in the economy.

Pelley: You seem to be saying that the recovery that we’re experiencing now is not self-sustaining.

Bernanke: It may not be. It’s very close to the border. It takes about two and a half percent growth just to keep unemployment stable. And that’s about what we’re getting. We’re not very far from the level where the economy is not self-sustaining.

The debate on Capitol Hill this week is over whether to extend the Bush tax cuts, which would likely increase the budget deficit.

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After the collapse of the Soviet Union in 1991, the United States was left as the world’s only superpower. But the “unipolar moment” did not last long. By the time Barack Obama entered the White House in January 2009, it was already clear that the era of untrammelled American confidence and power had come to a close. Two major events have undermined the swagger and self-confidence of US foreign policy. The first was the failure to secure clear victories in the wars in Iraq and Afghanistan.

The second was the financial and economic crisis that began with the collapse of Lehman Brothers in September, 2008. These three new books all respond, in different ways, to this new environment:

Washington Rules: America’s Path to Permanent War, by Andrew Bacevich

How Wars End: Why We Always Fight the Last Battle, by Gideon Rose

The Frugal Superpower: America’s Global Leadership in a Cash-strapped Era, by Michael Mandelbaum….

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The U.S. Senate on Saturday defeated two attempts by Democrats to extend the Bush-era tax cuts for the middle classes permanently, in rare weekend votes that likely had little effect on wider negotiations to reach a compromise about extending the tax cuts.

The Senate voted 53-36 to reject an attempt to initiate debate in the chamber on a measure that would have extended lower tax rates for individuals who earn less than $200,000 and couples earning less than $250,000.

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After years of debate, the Federal Communications Commission is moving forward with controversial rules intended to preserve the open Internet. The FCC chairman outlined the proposals this week and criticism came quickly, from all parts of the ideological spectrum.

Ever since he took the job, FCC chairman Julius Genachowski has been promising new rules of the road for the phone and cable companies that provide broadband access, as well as the companies and consumers who depend on it.

“It is the Internet’s openness and freedom ”” the ability to speak, innovate and engage in commerce without having to ask anyone’s permission ”” that has enabled the Internet’s unparalleled success,” he said.

In a brief appearance Wednesday, Genachowski sketched out the rules that he said would ensure that broadband providers treat all of the data on their networks equally ”” an idea known as net neutrality. But some public interest groups have seen a few more details than Genachowski announced. They say the proposed rules are net neutrality in name only.

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A bold plan to slash the U.S. budget deficit fell short Friday of winning support needed from a presidential commission to trigger congressional action, but it was expected to help shape future budget debates.

The plan found more backing than many anticipated, from Democrats and Republicans, and parts of it could be used in President Barack Obama’s next budget, due in February, as well as in congressional proposals to follow.

A formal commission vote did not occur, but 11 members said they supported the plan and seven said they did not. It needed 14 votes to be sent to Congress for legislative action.

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The longer people stay out of work, the more trouble they have finding new work.

That is a fact of life that much of Europe, with its underclass of permanently idle workers, knows all too well. But it is a lesson that the United States seems to be just learning.

This country has some of the highest levels of long-term unemployment ”” out of work longer than six months ”” it has ever recorded. Meanwhile, job growth has been, and looks to remain, disappointingly slow, indicating that those out of work for a while are likely to remain so for the foreseeable future. Even if the government report on Friday shows the expected improvement in hiring by business, it will not be enough to make a real dent in those totals.

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The global prosperity of much of the 20th century would seem to belie the pessimists, but I don’t think there is much doubt the moral authority of the West has dramatically declined in the face of the financial crisis. It has revealed deep fault lines within Western economies that have spread to the global economy.

The majority of Western governments are running fiscal deficits of 10 percent or more relative to GDP, but it is increasingly clear that there will be no quick fixes, that big government and fiscal deficits will not bring us back to the status quo ante. Indeed, the tidal wave of red ink has meant that the leverage-led or debt-led growth model is dead.

Developed countries will be forced to deal with their debt on every level, from the personal to the corporate to the sovereign. Being able to borrow may have made people feel richer, but having to repay the debt is certainly making them feel poorer, particularly since the unfunded liabilities that many governments face from aging populations will have to be paid for by a shrinking band of workers.

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Foreign banks were among the biggest beneficiaries of the $3,300bn in emergency credit provided by the Federal Reserve during the crisis, according to new data on the extraordinary efforts of the US authorities to save the global financial system.

The revelation of the scale of overseas lenders’ borrowing underlines the global nature of the turmoil and the crucial role of the Fed as the lender of last resort for the world’s banking sector.

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The chairmen of President Obama’s debt-reduction commission have been unable to win support from any of the panel’s elected officials for their proposed spending cuts and tax increases, underscoring the reluctance of both parties to risk short-term political backlash in pursuit of the nation’s long-term fiscal health.

The chairmen of the commission ”” former Senator Alan K. Simpson, a Republican, and Erskine B. Bowles, a Democrat and former chief of staff to President Bill Clinton ”” delayed for two days, until Friday, a final vote by its 18 members.

They said the delay was to provide more time to look at the final package, but it also gave them further opportunity to woo some of the 12 members of Congress on the commission, six from each party, whose support will be critical if the plan is to be taken seriously as a blueprint for eventual legislation.

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Cities are bracing to lose millions of dollars in funding for transportation and community projects, from subway lines to youth centers, because of a renewed push in Congress to ban lawmaker-directed spending known as “earmarks.”

With the incoming Republican majority in the House of Representatives committed to ending the practice and the Senate facing a vote to ban earmarks today, local officials are scrambling to find ways to pay for projects in case the federal funding never arrives.

Spending bills in the House for the 2011 fiscal year include more than 3,000 earmarks worth $3 billion, according to the budget watchdog Taxpayers for Common Sense ”” from $2.5 million for a transportation center in Rochester, N.Y., to $250,000 for park upgrades in Gonzales, La.

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It is hard to believe, but it looks like the government will soon use the taxpayers’ checkbook again to create a vast market for mortgages with low or no down payments and for overstretched borrowers with blemished credit. As in the period leading to the 2008 financial crisis, these loans will again contribute to a housing bubble, which will feed on government funding and grow to enormous size. When it collapses, housing prices will drop and a financial crisis will ensue. And, once again, the taxpayers will have to bear the costs.

In doing this, Congress is repeating the same policy mistake it made in 1992. Back then, it mandated that Fannie Mae and Freddie Mac compete with the Federal Housing Administration (FHA) for high-risk loans. Unhappily for both their shareholders and the taxpayers, Fannie and Freddie won that battle.

Now the Dodd-Frank Act, which imposed far-reaching new regulation on the financial system after the meltdown, allows the administration to substitute the FHA for Fannie and Freddie as the principal and essentially unlimited buyer of low-quality home mortgages. There is little doubt what will happen then.

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A journalist working closely with WikiLeaks says that secret documents about the Vatican and the volatile territories of North Korea and Israel are to be made public soon.

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The Times was the only American news organization to receive a massive cache of government documents that were released by WikiLeaks, the “stateless” Internet organization that specializes in exposing government secrets through leaked information.

But the Times wasn’t on WikiLeaks’ list of original recipients. The newspaper got its hands on the trove of about 250,000 cables thanks to the Guardian newspaper of Great Britain, which quietly passed the Times the raw material that it had received as one of five news organizations favored by WikiLeaks.

WikiLeaks had worked with the Times this summer in releasing about 90,000 documents prepared by U.S. military sources about the wars in Iraq and Afghanistan.

But the group pointedly snubbed the Times this time around, offering the State Department cables to two other American news outlets, CNN and the Wall Street Journal. Both turned WikiLeaks down, deciding that its terms – including a demand for financial compensation under certain circumstances – were unacceptable.

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US Secretary of State Hillary Clinton has denounced the release of classified diplomatic cables as an “attack on the international community”.

She spoke after the release of some 250,000 messages from US envoys around the world by the whistle-blowing website Wikileaks.

The cables offer candid and sometimes unflattering views of world leaders and frank assessments of security threats.

But Mrs Clinton said diplomats often needed confidentiality to be effective.

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Iran obtained 19 advanced missiles from North Korea, potentially giving the Islamic nation the capability of attacking Moscow and cities in Western Europe, according to embassy cables posted by WikiLeaks.org and provided to the New York Times.

U.S. officials denounced the release, coming on the eve of Secretary of State Hillary Clinton’s departure for a security conference in the Persian Gulf, as jeopardizing U.S. ties with foreign governments and endangering individuals. WikiLeaks began posting the cables yesterday.

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A day after the whistleblower site WikiLeaks began publishing details from a massive collection of confidential U.S. diplomatic documents, the chorus of criticism from government leaders grew louder Monday.

Top U.S. officials were quick to denounce the publication of the leaked documents Sunday. And the U.K.’s foreign office followed suit Monday, saying it condemned any release of classified documents.
“They can damage national security, are not in the national interest and, as the U.S. [has] said, may put lives at risk,” the office said in a statement.

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The first victims of the leaked cables released Sunday was anyone who shared secrets with American diplomats, especially Arab leaders who saw their private security deals – and their insistence that those deals be kept from their people – published online with undiplomatic bluntness.

But the main effect of the many details of American diplomacy revealed in the thousands of documents obtained and released by WikiLeaks was to deepen the damage to their intended targets: U.S. foreign policy, prestige, and power.

“The impression is of the world’s superpower roaming helpless in a world in which nobody behaves as bidden,” wrote Sir Simon Jenkins in the left-leaning Guardian, one of the publications that were given the documents.

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The chairman of the Joint Chiefs of Staff said that Iran is clearly on a path to building nuclear weapons and that military options have been on military leaders’ minds “for a significant period of time.”

But Adm. Mike Mullen, in an interview to air this weekend on CNN’s “Fareed Zakaria GPS,” said that diplomacy remained the No. 1 strategy for reining in a nuclear program that Tehran claims is for peaceful energy purposes.

“I still think it’s important we focus on the dialogue, we focus on the engagement, but also do it in a realistic way that looks at whether Iran is actually going to tell the truth, actually engage and actually do anything,” Mullen said.

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Even as work continues to repair our financial infrastructure and get the economy moving again, we need urgent action to forestall the next financial crisis. I fear that one will start in Washington. Total federal debt has doubled in the past seven years, to almost $14 trillion. That’s more than $100,000 for every American household. This explosive growth in federal borrowing is a result of not just the financial crisis but also government unwillingness over many years to make the hard choices necessary to rein in our long-term structural deficit.

Retiring baby boomers, who will live longer on average than any previous generation, will have a major impact on government spending. This year, the combined expenditures on Social Security, Medicare and Medicaid are projected to account for 45 percent of primary federal spending, up from 27 percent in 1975. The Congressional Budget Office projects that annual entitlement spending could triple in real terms by 2035, to $4.5 trillion in today’s dollars. Defense spending is similarly unsustainable, and our tax code is riddled with special-interest provisions that have little to do with our broader economic prosperity. Overly generous tax subsidies for housing and health care have contributed to rising costs and misallocation of resources.

Unless something is done, federal debt held by the public could rise from a level equal to 62 percent of gross domestic product this year to 185 percent in 2035. Eventually, this relentless federal borrowing will directly threaten our financial stability by undermining the confidence that investors have in U.S. government obligations….

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Now the US, relying on the same flawed theory [of quantitative money], is doing it again. Not surprisingly, China accuses it of deliberately aiming to depreciate the dollar. But the resulting increase in US exports at the expense of Chinese, Japanese, and European producers is precisely the purpose.

The euro will become progressively overvalued, just as the gold bloc was in the 1930’s. Since the eurozone is committed to austerity, its only recourse is protectionism. Meanwhile, China’s policy of slowly letting the renminbi rise against the dollar might well go into reverse, provoking US protectionism.

The failure of the G-20’s Seoul meeting to make any progress towards agreement on exchange rates or future reserve arrangements opens the door to a re-run of the 1930’s. Let’s hope that wisdom prevails before the rise of another Hitler.

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The draft recommendations of the president’s commission on deficit reduction call for closing popular tax deductions, higher gas taxes and other revenue raisers to drive tax collections up to 21% of GDP from the historical norm of about 18.5%. Another plan, proposed last week by commission member and former Congressional Budget Office director Alice Rivlin, would impose a 6.5% national sales tax on consumers.

The claim here, echoed by endless purveyors of conventional wisdom in Washington, is that these added revenues””potentially a half-trillion dollars a year””will be used to reduce the $8 trillion to $10 trillion deficits in the coming decade. If history is any guide, however, that won’t happen. Instead, Congress will simply spend the money.

In the late 1980s, one of us, Richard Vedder, and Lowell Gallaway of Ohio University co-authored a often-cited research paper for the congressional Joint Economic Committee (known as the $1.58 study) that found that every new dollar of new taxes led to more than one dollar of new spending by Congress. Subsequent revisions of the study over the next decade found similar results.

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The US Federal Reserve will slash its growth forecasts and predict higher unemployment when it releases updated economic projections this week.

The Fed will release the latest forecasts made by members of its rate-setting open market committee on Tuesday, alongside the minutes of their November meeting, giving a complete picture of why they launched a new $600bn round of asset purchases.

The revised forecasts will show how the Fed became much more pessimistic over the summer and also highlight fears among a few members of the FOMC that some of today’s 9.6 per cent unemployment rate is structural and will take years to cure.

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Check it out courtesy of Floyd Norris.

If there is a silver lining to the uproar over the Federal Reserve’s decision to create $600 billion in new reserves in the next few months, it is the renewed public attention to the Fed’s impossible dual political mandate for stable prices and maximum employment.

To be specific, Paul Ryan suddenly has company. The Wisconsin Congressman has since 1999 proposed legislation that would let the Fed focus monetary policy solely on the goal of stable prices. This week he’s been joined by fellow Republicans Mike Pence of Indiana and Tom Price of Georgia, while Senator Bob Corker of Tennessee told us he plans to work with Mr. Ryan to introduce legislation next year that would lift the dual mandate. If the 112th Congress did nothing else, this would be worth the price of its election and a major contribution to better economic policy.

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The global economy is now well into its second year of recovery from the deep recession triggered by the most devastating financial crisis since the Great Depression. In the most intense phase of the crisis, as a financial conflagration threatened to engulf the global economy, policymakers in both advanced and emerging market economies found themselves confronting common challenges. Amid this shared sense of urgency, national policy responses were forceful, timely, and mutually reinforcing. This policy collaboration was essential in averting a much deeper global economic contraction and providing a foundation for renewed stability and growth.

In recent months, however, that sense of common purpose has waned. Tensions among nations over economic policies have emerged and intensified, potentially threatening our ability to find global solutions to global problems. One source of these tensions has been the bifurcated nature of the global economic recovery: Some economies have fully recouped their losses while others have lagged behind. But at a deeper level, the tensions arise from the lack of an agreed-upon framework to ensure that national policies take appropriate account of interdependencies across countries and the interests of the international system as a whole. Accordingly, the essential challenge for policymakers around the world is to work together to achieve a mutually beneficial outcome–namely, a robust global economic expansion that is balanced, sustainable, and less prone to crises….

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Surprisingly, the chairmen overlooked the easiest route to reducing the deficits over the next decade: scaling back the costly budget that President Obama presented earlier this year. Much of the projected doubling of the national debt between 2010 and 2020 reflects the spending and tax proposals in that budget.

The Congressional Budget Office estimates that those proposals would, if enacted, raise the 10-year budget deficit by $3.8 trillion, even after taking into account the president’s proposed $1.3 trillion of new taxes on businesses and higher-income individuals. The $5.1 trillion gross cost of the Obama proposals reflects the cost of making the Bush tax cuts permanent for individuals with incomes below $250,000, of providing additional tax cuts for low- and moderate-income individuals, and of increasing spending on domestic programs.

As President Obama considers the bipartisan commission’s proposals and plans his next budget, he should begin by removing some of the $3.8 trillion of increased deficits that he proposed earlier this year. Financial markets and policy makers around the world want to see if the administration is as serious about deficit reduction as the American public.

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The mixed verdict in the case of the first Guantánamo detainee to be tried in a civilian court on Wednesday quickly re-ignited a fierce debate over the Obama administration’s effort to restore the role of the traditional criminal justice system in handling terrorism prosecutions.

Ahmed Ghailani will face between 20 years and life in prison as a result of his conviction on one charge related to the 1998 embassy bombings in Africa. But because a jury acquitted him on more than 280 other charges — including every count of murder — critics of the Obama administration’s strategy on detainees said the verdict proved that civilian courts could not be trusted to handle the prosecution of Al Qaeda terrorists.

“This is a tragic wake-up call to the Obama Administration to immediately abandon its ill-advised plan to try Guantánamo terrorists” in federal civilian courts, said Representative Peter King, Republican of New York. “We must treat them as wartime enemies and try them in military commissions at Guantánamo.”

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Today’s public offering marks the moment when the Main Street and Wall Street bailouts meet. But the Wall Street firms haven’t been divvied up as G.M. has, in ways so visible to the eye. For General Motors, divided into its “Old” and “New” halves, there’s an inescapable paradox: the only possible route to future profitability is to create, through plant closings, monuments to past unprofitability. Old G.M. may have gone away for the purposes of the stock offering, but it didn’t go away in what might rightfully be called actuality.

Across the nation, as in Detroit, there is an economic disconnect, a split between what the economic numbers say and how things feel on the ground. The economy is growing, but the unemployment rate hasn’t budged. The recession officially ended in June 2009, but more jobs have been lost than have been added since that “ending.”

Handling this disconnect requires political acuity. It brings to mind something Philip Roth once said about those who have little feel for literature and the texture of lived experience it provides and so “theorize” it. Mr. Roth imagined a scene of a father giving his son this advice while attending a baseball game: “Now, what I want you to do is watch the scoreboard. Stop watching the field. Just watch what happens when the numbers change on the scoreboard. Isn’t that great?” Then Mr. Roth asks: “Is that politicizing the baseball game? Is that theorizing the baseball game? No, it’s having not the foggiest idea in the world what baseball is.”

It’ll be fun, for a day or two, to look at the scoreboard, and to see what G.M.’s shares are going for: $26? $29? $33? $35? The numbers on the exchange will change; it’ll be great, and a welcome, temporary relief from the numbers, still difficult to comprehend, of jobs lost and plants closed. Soon enough, though, we’ll have to go back to watching what’s actually happening on the field, where there’s still a blowout in progress, with the home team way behind, and no one, seemingly, with the foggiest idea what to do about it.

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Given previous comments by Mr. Smith, taxpayers may soon be longing for the return of acting FHFA director Edward DeMarco. The Journal reports that, at a 2007 Senate hearing, Mr. [Joseph] Smith blamed predatory lenders and a lack of federal regulation for the housing crisis. Blaming the bankers and calling for more bureaucracy will earn Mr. Smith plenty of new Beltway friends, but if he remains unaware of the myriad steps regulators took to inflate the credit bubble and misallocate capital into housing, then no one should expect him to drive reform.

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