Congressional leaders reached an agreement Thursday to temporarily extend a payroll-tax cut by two months and begin negotiations on a yearlong extension, aides said.

he agreement could end a political stalemate over the payroll-tax cut, which lowered Social Security taxes for 160 million Americans in 2011. Under the tentative agreement, the House will vote again on a two-month extension and the Senate will prepare to negotiate for an extension that will run through 2012.

Aides said House Speaker John Boehner (R, Ohio) has agreed to hold a new vote Friday on extending the tax cut, bowing to increasing pressure to end an impasse that threatened to leave workers with a tax increase next year.

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…unlike the debt-ceiling drama and the destructive impasse over a grand bargain to rein in the spiraling national debt, a stalemate on the payroll tax could be good for Social Security, good for the deficit, and good for disproving the conviction that “temporary” tax cuts must never be allowed to expire.

Let us explain.

As we’ve pointed out previously, the 2-percentage-point cut in the payroll tax (from 6.2% to 4.2%) might give a short-term boost to the economy, but it contributes to Social Security’s long-term insolvency at a time when the retirement program is already paying out more in benefits than it is collecting in taxes. A one-year extension would drive up next year’s federal deficit by more than $100 billion.
The payroll tax issue also raises the question of whether there’s any such thing as a temporary tax cut. At the end of next year, the unaffordable Bush tax cuts are set to expire. Extending the payroll tax cut would set a precedent and give ammunition to those who want another extension of the Bush cuts, adding as much as $5 trillion to deficits over the coming decade.

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A Republican payroll tax cut bill that sailed through the House despite a White House veto threat is dead on arrival in the Senate, and it will soon be time for talks on a final package, the Senate’s top Democrat says….

Reid says he will schedule a vote shortly on the House-passed bill to underscore its irrelevance ”” a vote that should start the clock ticking on what stands as the year’s final, high-stakes partisan faceoff.

“It was dead before it got to the Senate,” Reid said of the House legislation. “The Senate will not pass it. The sooner we demonstrate that, the sooner we can begin serious discussions on how to keep taxes from going up on middle-class Americans.”

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The Obama White House, in its own version of the New Year’s Eve countdown in Times Square, has added a banner to its website ”“ a clock ticking down the seconds to when taxes on the middle class will rise “if Congress doesn’t act.”

That tax hit is the 2 percent payroll tax cut now set to expire at midnight, Dec. 31. If Congress fails to at least extend that tax cut, the Social Security tax rate for employees jumps back to 6.2 percent, up from 4.2 percent. If that happens, the average American taxpayer stands to lose about $1,000 in 2012.

Leaders on both sides of the political aisle in Congress offer assurances that by year’s end the tax break will be extended. As lawmakers head into an election year, the stakes are simply too high to kick that can down the road. But GOP leaders, especially, are running up against strong opposition from the rank-and-file on anything that looks like caving on pledges to reduce deficits, dramatically cut spending, and reject all tax increases (which are an issue in this case because Democrats propose to pay for extending the payroll tax by a tax hike on millionaires.

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We Americans fool ourselves if we ignore the parallels between Europe’s problems and our own. It’s reassuring to think them separate, and the fixation on the euro — Europe’s common currency — buttresses that mindset. But Europe’s turmoil is more than a currency crisis and was inevitable, in some form, even if the euro had never been created. It’s ultimately a crisis of the welfare state, which has grown too large to be easily supported economically. People can’t live with it — and can’t live without it. The American predicament is little different.

Government expansion was one of the 20th century’s great transformations. Wealthy nations adopted programs for education, health care, unemployment insurance, old-age assistance, public housing and income redistribution. “Public spending for these activities had been almost nonexistent at the beginning of the 20th century,” writes economist Vito Tanzi in his book “Government versus Markets.”

The numbers — to those who don’t know them — are astonishing. In 1870, all government spending was 7.3 percent of national income in the United States, 9.4 percent in Britain, 10 percent in Germany and 12.6 percent in France. By 2007, the figures were 36.6 percent for the United States, 44.6 percent for Britain, 43.9 percent for Germany and 52.6 percent for France. Military costs once dominated budgets; now, social spending does.

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Ten thousand combat veterans with post-traumatic stress disorder flooded into VA hospitals every three months this year, pushing the number of patients ill with the disorder above 200,000 and straining resources, Department of Veterans Affairs data to be released today show.

he increase is more than 5% per quarter, according to data obtained by USA TODAY, and it occurs as the VA struggles to move veterans quickly into therapy. New mental health patients at about a third of VA hospitals wait longer than the department’s goal of 14 days or less, according to a USA TODAY analysis published this month.

“Demand for mental health care is only going to continue to grow as thousands more troops return home,” said Sen. Patty Murray, D-Wash., chairwoman of the Senate Veterans’ Affairs Committee. “The VA still has work to do to decrease wait times, ”¦ reduce the stigma around seeking care and to provide access to care in rural areas.”

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This was largely expected, and they did reaffirm their AAA overall rating. They felt “declining confidence” that Congress will agree on timely measures to bring about fiscal policies aimed at reducing indebtedness–KSH.

Committee members continued to meet on Capitol Hill to present legislation that could be voted on by the Congress to cut $1,200bn from the budget over 10 years.

But both sides had already begun to blame each other, with Republicans resisting tax rises in any form and Democrats demanding extra revenues be balanced against spending cuts on the grounds of fairness.

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Conceding that talks on a grand budget deal are near failure, Congressional leaders on Sunday pointed fingers at each other as they tried to deflect blame for their inability to figure out a way to lower the federal deficit without having to rely on automated cuts.

The testy exchanges ”” which dominated the Sunday talk shows ”” made clear that leaders in both parties now see the so-called sequester ”” a term meaning an automatic spending cut ”” as the most likely solution to reduce the federal deficit by $1.2 trillion over 10 years, instead of a negotiated package of spending reductions and tax increases, something they have been unable to achieve over the last 10 weeks.

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One objection that I often hear from evangelicals is that while aid is good, it is not the government’s job. Yes, individuals and churches play a vital role in aid and development. But governments play a unique and vital role that private organizations cannot. The poverty-focused programs in the foreign-aid budget are facing cuts of between $1.2 billion and $3.2 billion from 2010 levels. In comparison, the largest American Protestant denomination, the Southern Baptist Convention, has a budget of $308 million for its missionary and aid organization.

We cannot let others suffer simply because times are tough in the U.S. All Americans must understand the urgency of the human need and the effectiveness of our government’s aid programs.

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A special U.S. committee charged with reducing the federal deficit is entering a critical week for reaching a deal but has not considered extending its Nov. 23 deadline, a panel member said Monday.

“Every member understands that time is running out,” House Democrat Chris Van Hollen, a member of the “super committee,” said in an interview with MSNBC’s “Morning Joe” program. “This is the moment to get it (a deal) done if we’re going to get it done.

“The clock’s ticking. We’ve got just a little over two weeks and that includes the time that it will take to put the final touches on any agreement that we might be able to reach,” he said.

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Medicare inspectors must do a better job of tracking reports of serious mistakes in care at the nation’s hospitals, as well as of informing rating agencies of the errors, according to a report released today by the agency’s inspector general.

Hundreds of serious errors go unrecorded, the report found, because the inspectors who find problems at hospitals don’t tell the national agencies that accredit hospitals. That means that those hospitals continue to participate in Medicare and that they don’t learn from their mistakes, Inspector General Daniel Levinson wrote.

Also, Levinson wrote, no one tracks the effectiveness of policy changes or how the hospitals actually correct mistakes.

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For most of its 75-year history, the program had paid its own way through a dedicated stream of payroll taxes, even generating huge surpluses for the past two decades. But in 2010, under the strain of a recession that caused tax revenue to plummet, the cost of benefits outstripped tax collections for the first time since the early 1980s.

Now, Social Security is sucking money out of the Treasury. This year, it will add a projected $46 billion to the nation’s budget problems, according to projections by system trustees. Replacing cash lost to a one-year payroll tax holiday will require an additional $105 billion. If the payroll tax break is expanded next year, as President Obama has proposed, Social Security will need an extra $267 billion to pay promised benefits.

But while talk about fixing the nation’s finances has grown more urgent, fixing Social Security has largely vanished from the conversation.

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The United States will likely suffer the loss of its triple-A credit rating from another major rating agency by the end of this year due to concerns over the deficit, Bank of America Merrill Lynch forecasts.

The trigger would be a likely failure by Congress to agree on a credible long-term plan to cut the U.S. deficit, the bank said in a research note published on Friday.

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Plenty of lawmakers are against tax breaks and so-called loopholes. Unless, of course, they personally helped create them.

The Senate Republican leader, Mitch McConnell, for instance, says he is open to ending tax breaks for special interests. But when it comes to a tax break he secured in 2008 for the owners of thoroughbred racehorses, he argues that the measure is essential for the protection of jobs in his home state of Kentucky.

Senator John Kerry, Democrat of Massachusetts, says he too wants to eliminate such breaks, except when it comes to beer. He is one of the main supporters of a proposal that would cut taxes for small beer makers like the Samuel Adams Brewery in Boston.

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We’re just stuck?

If we don’t deal with it ”“ if we don’t proactively say we’re going to get our deficit under control ”“let me put it this way: My personal belief is that if we do proactively get our long-term budget issues under control, the bond market will say, “Okay, you’re credible and we will buy your bonds, because you have put yourself on a credible path ”“ whether it’s through cuts, whether it’s through tax increases, however you want to do it ”“ but you have to do it. But you have shown us a credible way to get to the place where the growth rate of your deficit is below the growth rate of nominal GDP.”

But if we don’t do that, my wine bottle of pain becomes a jeroboam and we end up downing it all at once.

That sounds ugly.

It is. It will force budget cuts; it will force tax increases of the magnitude that no one is ready to contemplate. We’re talking cuts in Medicare, cuts in education, in defense, in spending of all kinds. That would create a depression, a true depression that would last 4-5 years, push unemployment to 20%-25%….

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The Joint Select Committee on Deficit Reduction, aka super Congress or super committee, is Congress’s answer to its own inability to break the hold of partisan gridlock that took America to the brink of default on Aug. 2, prompting the first-ever downgrade of the nation’s credit rating.

The panel, which on Thursday holds an organizational meeting open to the public, has a sweeping mandate to propose cuts to spending and entitlements and recommend tax reform by Nov. 23. Congress must vote the package up or down ”“ no amendments or filibuster ”“ by Dec. 23, or trigger a $1.2 trillion package of automatic spending cuts, equally divided between defense and domestic spending.

“Never has Washington had an all-or-nothing panel that is empowered and backed by a firm timeline like this one is,” says John Ullyot, a public-affairs consultant in Washington and former GOP Senate staffer. “The starter pistol will fire right after Labor Day.”

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In absolute numbers, the total public debt as of Aug. 11 was $9.924 trillion, and the intra-government debt was $4.666 trillion, for a total of $14.587 trillion. That’s well over 300 million times the country’s median household income….

The GDP of the United States was $15.003 trillion at the end of the first quarter in 2011. That makes the public debt equal to 66.1% of GDP and the intra-governmental debt 31.1%. Total debt is now 97.2% of GDP and climbing rapidly.

And it’s the climbing rapidly part that is worrisome, not the debt’s current size relative to GDP. Indeed, the debt has been substantially higher by that measure in earlier times. In 1946, in the immediate aftermath of World War II, it was 129.98% of GDP. But while the debt had increased enormously during the war (it had been 50% of a much smaller GDP in 1940), it did not increase substantially over the next 15 years….

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The economy will grow by less than 3% through 2012, and unemployment will remain above 8% until 2014, the non-partisan Congressional Budget Office projects.

In its semiannual update of budget and economic data, the agency ”” which serves as the official scorekeeper for President Obama and Congress ”” projects painfully slow progress on the economic front through next year’s election and beyond.

Economic growth will remain slow but steady, it says, increasing by 2.3% this year and 2.7% next year. In a blog post on the agency’s website, director Douglas Elmendorf notes those projections were made in early July ”” before financial market gyrations and some lackluster economic indicators.

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From here:

Popular personal finance personality Dave Ramsey summed it up eloquently and simply: “If the US Government ”‹was a family, they would be making $58,000 a year, they spend $75,000 a year and are $327,000 in credit card debt. They are currently proposing big spending cuts to reduce their spending to $72,000 a year.”

Alan Haley has a further discussion of this here.

Standard and Poor’s, the agency responsible for Friday’s downgrade, merely confirmed what anyone with their eyes open for the past decade or two already knew: The U.S. has a huge and growing debt problem that it is resolutely unwilling to solve.

Not unable. Just unwilling.

Not just politicians, but anyone who buys into their divisive, fanciful rhetoric.

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Whatever one thinks of the credit-rating agencies””and we aren’t admirers””it serves no good purpose to shoot the fiscal messengers. Friday’s downgrade by Standard & Poor’s of U.S. long-term debt to AA+ from AAA will be the first of many such humiliations if Washington doesn’t change its economic and fiscal policies.

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The downgrade of the United States long-term debt to AA+ from AAA has global implications, said Alessandro Giansanti, a credit market strategist at ING in Amsterdam.

“We can see that this may force the U.S. to move more aggressively to cut spending,” he said, something that could drive the already weak economy into recession and weigh on the economies of all of its trading partners. “That’s the main driver” of the stock market declines, he said.

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Local government officials are struggling to gauge the impact of the Standard & Poor’s unprecedented downgrade of federal credit even as Washington watches global reaction to its latest financial setback.

Will the ratings agency downgrade counties and states? Will the federal government’s predicament cost local taxpayers? And can local governments have better credit than the federal government?

“We are in uncharted territory,” Prince William County Board Chairman Corey A. Stewart (R) said. “No one knows what the ultimate long-term ramifications are. .”‰.”‰. But we know they’re going to be significant.”

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[Boston University’s Laurence] Kotlikoff explains that America’s “unofficial” payment obligations ”” like Social Security, Medicare and Medicaid benefits ”” jack up the debt figure substantially.

“If you add up all the promises that have been made for spending obligations, including defense expenditures, and you subtract all the taxes that we expect to collect, the difference is $211 trillion. That’s the fiscal gap,” he says. “That’s our true indebtedness.”

We don’t hear more about this enormous number, Kotlikoff says, because politicians have chosen their language carefully to keep most of the problem off the books.

Read (or much better) listen to it all.

The global economy faces a deep crisis ”” deeper, in some ways, than the panic that struck financial markets in August 2008. At least then there was the prospect of short-term government action: tax cuts and spending increases, quantitative easing, and the like. Those measures averted total meltdown, yet the United States, Europe and Japan failed to restore strong, self-sustaining growth, leaving governments so deeply indebted that aggressive new policy interventions are probably not feasible for now. Indeed, what seems to have sent markets panicking last week is a dawning sense that capitalist democracies may have made more promises than their economies are capable of fulfilling ”” without significant growth-generating structural reforms. Or so it would appear from the recent dramas over bailing out Greece and raising the U.S. debt ceiling.

For Americans, a dead-in-the-water economy would be not only a colossal waste of productive potential but also a human tragedy, as Friday’s announcement of another U.S. unemployment rate above 9 percent cruelly demonstrated. “We need to create a self-sustaining cycle where people are spending, companies are hiring and our economy is growing,” President Obama said.

Well said. But how?….

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[If done properly]….Tax reform will already have slashed rates radically. In one Simpson-Bowles scenario, the top rate plunges to 23 percent. Conservatives could at that point contemplate increasing net revenue by slightly tweaking these new low rates, say, back to Reagan’s 28 percent, still much lower than the current 35 percent and Obama’s devoutly desired 39.6 percent. The deviation from revenue neutrality would yield new tax receipts for the Treasury, in addition to those resulting from the economic growth stimulated by the lower rates.

Democrats would have to respond by crossing their own red line on entitlements. That means real structural changes. That means raising the Medicare and Social Security ages, indexing them to longevity (until 70 becomes the new 65) and changing the inflation formula. Perhaps even means-testing Social Security (after one has recouped what one originally paid in).

The result of such a grand bargain would be debt reduction on a scale never before seen. World confidence in the American economy would rise dramatically. Best of all, we would be back on the road to national solvency….

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Just as the Y2K threat was overstated but nevertheless had unexpected, adverse intermediate term consequences, I doubt this chicanery will be cost free to the public at large. But the debt overhang that ideologues have used to whip the public into a funk is profoundly deflationary unless addressed head on, via writedowns and bankruptcies offset by fiscal stimulus. Deflation means that high quality bonds are the place to be, as the market action of last week confirmed, so Treasuries benefit from the very condition that S&P depicts as a disaster.

Thus the best outcome would be if the bond and currency markets shrug off the S&P action, which would reveal that the much feared downgrade was a paper tiger. But even if the marker response is underwhelming, it is hard to imagine that Obama will not take a political toll for his colossal miscalculation. It was he who stoked the debt ceiling phony crisis to implement a neoliberal agenda, who refused to reverse course and threaten to circumvent the debt limits when the process had clearly spun out of his control.

So even if S&P fails to land a body blow in the markets, its ploy has garnered press that seems certain to taint the Administration, and thus confirms the power of its reckless conduct. Thus the cost is not likely to show up in bond yields, but in something far more fundamental: in yet more destruction of the foundations of our society for short-term, selfish ends.

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1. The change in trajectory of US debt was in service of Banks: It began with TARP, and continued with every other bailout/stimulus/economic plan. What was S&P’s role in creating that crisis?

2. How will non-US investors (Private and Central Banks) view the downgrade?…

9. The Rating Agencies were downgraded by Dodd-Frank, with all regulatory and legal references to be removed. Was S&P’s move retaliatory?

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From here:

Earlier today, Standard & Poor’s rating agency lowered the long-term rating of the U.S. government and federal agencies from AAA to AA+. With regard to this action, the federal banking agencies are providing the following guidance to banks, savings associations, credit unions, and bank and savings and loan holding companies (collectively, banking organizations).

For risk-based capital purposes, the risk weights for Treasury securities and other securities issued or guaranteed by the U.S. government, government agencies, and government-sponsored entities will not change. The treatment of Treasury securities and other securities issued or guaranteed by the U.S. government, government agencies, and government-sponsored entities under other federal banking agency regulations, including, for example, the Federal Reserve Board’s Regulation W, will also be unaffected.