JEFFREY BROWN: So it is the end of the year, so we’re allowed…to think big, not just the week.
What defines — what defines this year in politics?
MICHAEL GERSON: I don’t know. I — I think it was a year of impatience….
JEFFREY BROWN: E.J. The year?
E.J. DIONNE, The Washington Post: You know, I think the great political scientist, Bono, explained the last three elections — they still haven’t found what they’re looking for….
From my perspective, homes are still overvalued not just because of these long-term price trends, but from a sober analysis of the current economy. The country is overly indebted, savings-depleted and underemployed. Without government guarantees no private lenders would be active in the mortgage market, and without ridiculously low interest rates from the Federal Reserve any available credit would cost home buyers much more. These are not conditions that inspire confidence for a recovery in prices.
In trying to maintain artificial prices, government policies are keeping new buyers from entering the market, exposing taxpayers to untold trillions in liabilities and delaying a real recovery. We should recognize this reality and not pin our hopes on a return to price normalcy that never was that normal to begin with.
Baby Boomers are about to create a record population explosion in the nation’s health care program for seniors.
Starting on Saturday, Baby Boomers begin turning 65 and qualifying for Medicare ”” one every eight seconds. A record 2.8 million will qualify in 2011, rising to 4.2 million a year by 2030, projections show.
In all, the government expects 76 million Boomers will age on to Medicare. Even factoring in deaths over that period, the program will grow from 47 million today to 80 million in 2030.
Sadder, wiser, those of us gathered on the Washington Mall in the freezing morn of Mr Obama’s inauguration can see now that of all the brave, unsustainable hopes uttered by the new young president, the most unsustainable of all turned out to be his Biblical plea to “put away childish things”. He might as well have tried to legislate the word “dream” out of American public discourse. Dreams? Reality? It’s not even close, is it?
Whether fantasy will prevail over factuality, adolescent wishful thinking over maturity, will be the great political motif of the next few years. The omens are not auspicious….
Senate Democrats have filed a $1.1 trillion omnibus spending bill that would fund the government through fiscal year 2011, according to Senate GOP sources.
The 1,924-page bill includes funding to implement the sweeping healthcare reform bill Congress passed earlier this year as well as additional funds for Internal Revenue Service agents, according to a senior GOP aide familiar with the legislation.
People who wonder what America’s budget problem is ultimately about should look to Europe. In the streets of Dublin, Athens and London, angry citizens are protesting government plans to cut programs and raise taxes. The social contract is being broken. People are furious; they feel betrayed.
Modern democracies have created a new morality. Government benefits, once conferred, cannot be revoked. People expect them and consider them property rights. Just as government cannot randomly confiscate property, it cannot withdraw benefits without violating a moral code. The old-fashioned idea that government policies should serve the “national interest” has given way to inertia and squatters’ rights.
One task of the National Commission on Fiscal Responsibility and Reform ”” co-chaired by Erskine Bowles and Alan Simpson ”” was to discredit this self-serving morality. Otherwise, changing the budget will be hard, maybe impossible. If everyone feels morally entitled to existing benefits and tax breaks, public opinion will remain hopelessly muddled: desirous in the abstract of curbing budget deficits but adamant about keeping all of Social Security, Medicare and everything else. Politicians will be scared to make tough decisions for fear of voter reprisals.
Unfortunately, Bowles and Simpson ducked this political challenge….
Failure by the U.S. Congress to pass a tax cut deal soon would “materially increase” the risk of the economy stalling and a double dip recession, White House economic adviser Larry Summers said on Wednesday.
Summers, who is leaving his post as Obama’s top economic adviser this month, said Obama’s deal with Republicans to extend Bush-era tax cuts for the middle class and the wealthiest Americans would provide more fiscal support for the economy than most observers expected only weeks ago.
“Failure to pass this bill in the next couple weeks would materially increase the risk that the economy would stall out and we would have a double-dip,” Summers told reporters at the White House.
President Obama and congressional Republicans agreed Monday to a tentative deal that would extend for two years all the Bush-era income tax breaks set to expire on Dec. 31, continue unemployment benefits for an additional 13 months and cut payroll taxes for workers to encourage employers to start hiring.
The deal has been in the works for more than a week and represents a concession by Obama to political reality: Democrats don’t have the votes in Congress to extend only the expiring income tax breaks that benefit the middle class. The White House estimates that the proposed agreement would prevent typical families from facing annual tax increases of about $3,000, starting Jan. 1.
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.
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.
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.
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.
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.
The idea of a do-not-track mechanism that could be built into Web browsing software is gaining steam in Washington. This week, a House subcommittee on consumer protection is holding a hearing about do-not-track proposals and the Federal Trade Commission is expected to release an online privacy report that will promote a do-not-track mechanism.
Officials from Mozilla and Lotame are expected to appear at a separate panel this week to discuss how the industry could create its own do-not-track mechanism before “government tries to legislate how browsers function,” according to the event organizer, Jules Polonetsky, director of the Future of Privacy Forum, an Internet-industry funded think tank.
The group will discuss a technical method that would allow Web browsers to broadcast a “do not track” message at a user’s request.
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.
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.
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.
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….
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.
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.
A group of prominent Republican-leaning economists, coordinating with Republican lawmakers and political strategists, is launching a campaign this week calling on Fed Chairman Ben Bernanke to drop his plan to buy $600 billion in additional U.S. Treasury bonds.
“The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed’s objective of promoting employment,” they say in an open letter to be published as ads this week in The Wall Street Journal and the New York Times.
The economists have been consulting Republican lawmakers, including incoming House Budget Committee Chairman Paul Ryan of Wisconsin, and began discussions with potential GOP presidential candidates over the weekend, according to a person involved.
The [Deficit Reduction] report from the chairmen lists some of the best ways to raise revenue and cut spending. But it comes with no enactment strategy. In this climate, asking politicians to end the mortgage deduction and tax employer health care plans and raise capital gains taxes and cut benefits for affluent seniors is like asking them to jump on a buzzing sack full of live grenades. They won’t do it.
So we continue on the headlong path toward a national disaster. And along the way our dysfunctional political system will leave all sorts of other problems unaddressed: immigration, energy policy and on and on.
Yet, I’m optimistic right now. I’m optimistic because while our political system is a mess, the economic and social values of the country remain sound. My optimism is also based on the conviction that serious, vibrant societies don’t sit by and do nothing as their governments drive off a cliff.
Over the past few years, we have seen millions of people mobilize ”” some behind President Obama and others around the Tea Parties. The country is restive and looking for alternatives. And before the next round of voting begins, I suspect we will see another mass movement: a movement of people who don’t feel represented by either of the partisan orthodoxies; a movement of people who want to fundamentally change the norms, institutions and rigidities that cause our gridlock and threaten our country.
Russell Long, of the famous Louisiana political dynasty, loved to tell how his Uncle Earl, the governor, advised a city slicker politician, hit by redistricting, how to successfully court rural voters.
He should rumple up the fancy white suit, loosen the tie, toss dirt on those shiny shoes, and reach into his pocket, bring out that big wad of bills and “spread the joy.”
That is the mirror opposite of what the fiscal deficit commission, Congress and the White House should do if they want to seriously address long-term budget deficits. They have to spread the pain.
A draft proposal released Wednesday by the chairmen of President Obama’s bipartisan commission on reducing the federal debt calls for deep cuts in domestic and military spending starting in 2012, and an overhaul of the tax code to raise revenue. Those changes and others would erase nearly $4 trillion from projected deficits through 2020, the proposal says.
The plan would reduce projected Social Security benefits to most retirees in later decades ”” low-income people would get higher benefits ”” and slowly raise the retirement age for full benefits to 69 from 67, with a “hardship exemption” for people who physically cannot work past 62. And it would subject higher levels of income to payroll taxes, to ensure Social Security’s solvency for the next 75 years.
But the plan would not count any savings from Social Security toward meeting the overall deficit-reduction goal set by Mr. Obama, reflecting the chairmen’s sensitivity to liberal critics who have complained that Social Security should be fixed only for its own sake, not to balance the nation’s books.
Last week we talked about the first stage of the U.S. fiscal crisis: the slow erosion of long-term growth because of mounting government debt. This phenomenon arises from a straightforward application of conventional supply-side economics. Government borrowing absorbs private saving that would otherwise be used for capital formation. The diminished capital stock reduces productivity, growth, and competitiveness.
This week we look at stage two: a rapid economic meltdown precipitated by an untamable accumulation of government debt. Stage two is much more difficult to understand than stage one. Government debt in distress is not something that gets much attention from economists who study developed countries. It’s not something they were taught when they went to economics school. So as the possibility of a crisis has become more real, they are trying out a lot of new ideas.
One nice thing about this otherwise gloomy state of affairs is that politics has not yet infected the economics. The research that you see is not by economists who are pushing a partisan agenda, but by people who are genuinely concerned that the economy may be running itself off a cliff.
It is undeniable that we are on the path to fiscal collapse. This decline will occur in two stages. First there is the decay as the swelling national debt wears away the economy’s foundations and commits more and more future income to foreign creditors. We are already in stage one.
In stage two a lethal combination of phenomena arises in quick succession: greater default risk, looming inflation, higher interest rates, declining growth, financial market instability, and an acceleration of government borrowing. They feed on each other. The economy heads on a downward spiral. Between stage one and stage two there is a tipping point. Experts know it will come, but nobody wants to predict when. (See below.) This article is about the slow economic decline of stage one. Next week part 2 will describe the hell of a full-blown fiscal collapse.
There is no question economics has failed us. The old paradigms have been made obsolete by the hard reality of the 2007-2009 financial crisis and soaring government debt. But some ideas can be salvaged from the wreckage.
The mid-term elections on November 2nd saw the biggest swing to the Republicans for 72 years…With a few results still to come, they have picked up over 60 seats in the House of Representatives, for a solid majority of at least 50. In the Senate they gained at least six seats, though they will fall short of control there.
For Mr Obama, the lesson is simple enough: sharpen up, and prepare for a tough two years. Yes, this was hardly an enthusiastic vote for his opponents, more a howl of rage against incumbents from citizens struggling after the worst slowdown since the 1930s. And he has a string of legislative achievements to his name. But plenty of centrists plainly fear that he has drifted too far to the left, that he dislikes business and that he does not understand middle America. He looks a far less competent figure than he did two years ago. With a hostile House and a gridlocked Senate, the chances of passing any big new laws are remote; and Republican victories in crucial swing states such as Florida, Michigan, Ohio and Pennsylvania will make the president’s re-election battle in 2012 a lot harder. If Mr Obama is to win again, he needs to move back to the pragmatic centre of what is still a pretty conservative country.
But so do the Republicans….
A grand victory for Republicans in the 2010 midterm election? Yes, of course. But also no. In all three of the most recent earthshaking midterm elections ”” 1994, 2006 and now 2010 ”” the same candidate won: divided government.
That is not a coincidence. In the last two decades, a strong and persistent pattern has emerged, one that will dominate our politics for some time to come, because it is rooted in two important political realities. First, the public strongly prefers divided government. Second, it has every reason to.
The Fed is essentially lending enough money to the government to fund its operations for several months, something called “monetizing the debt.” In normal times, this is one of the great taboos of central banking because it is seen as a step toward spiraling inflation and because it risks encouraging reckless government spending.