In place of those cuts, the president offered a mixture of real steps to reduce the deficit ”” including nearly $2 trillion in additional taxes over the coming decade, mainly at the expense of high-income Americans ”” and bogus ones, such as almost $850 billion in “savings” from the previously planned end of foreign combat operations, a chunk of which would be spent on infrastructure and jobs programs. The one bright spot: Obama didn’t ignore the rapid and unsustainable growth in healthcare entitlements, as he did in last year’s budget. Instead, he called for saving about $360 billion over 10 years on those programs, in part by paying drug companies less for medicines prescribed to low-income Medicare patients.

There’s little chance this Congress will agree to many, or even any, of those suggestions. Tax increases seem particularly unlikely. But even if lawmakers were to adopt all of Obama’s deficit-cutting measures, they wouldn’t go far enough to set the budget on a path toward balance.

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Social Security’s disability program is a political quagmire ”” and a metaphor for why federal spending and budget deficits are so difficult to control. The numbers are too big; the details, too complicated; and the choices, when faced, too wrenching. President Obama’s new budget, estimated at $3.5 trillion or more, will raise all these problems. Experience suggests that little will be done to rein in long-term spending and deficits.

Social Security’s disability program opens a window on this larger paralysis. Created in 1956, more than two decades after Congress authorized Social Security, the program was initially seen as a natural complement to coverage for retirees. Through sickness or accident, some workers had to retire early. They, too, deserved protection. For many years, the costs were modest. But in recent decades, they have exploded….

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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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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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We haven’t had the robust democratic debate about the role of government that lies at the heart of America’s budget stalemate. The truth is that most Democrats and Republicans want to avoid such a debate because it would force them into positions that, regardless of ideology, would be highly unpopular. This does not mean that the congressional supercommittee, charged with making modest cuts in deficits, need fail. There is a basis for honorable compromise; squandering it would confirm politicians’ preference for fighting over governing.

Contrary to much press coverage, the committee’s Republicans opened the door to compromise by abandoning — as they should have — opposition to tax increases. Sen. Pat Toomey of Pennsylvania proposed a tax “reform” that would raise income taxes by $250 billion over a decade. First, he would impose across-the-board reductions of most itemized deductions and use the resulting revenue gains to cut all tax rates. Next, he would adjust the rates for the top two brackets so that they’d be high enough to produce the $250 billion. All the tax increase would fall on people in the top brackets….

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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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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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The Social Security Administration has failed to inform tens of thousands of Americans that it accidentally released their names, dates of birth and Social Security numbers in an electronic database widely used by U.S. business groups.

The federal agency has kept silent about a potentially harmful security breach of the personal data of about 14,000 people each year, ignoring recommended reporting guidelines for such confidentiality breaches and violating the intent, at least, of the U.S. Privacy Act which protects personal information of private citizens.

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The wealth of nations, the [Social Trends Institute] report says, is inextricably associated with the health of families. And, amongst other factors, the global retreat from marriage and from family has depressed economic growth and has deeply hurt two generations of children.

“Evidence drawn from Europe and North America indicates that children who are raised in an intact married home are more likely to excel in school and be active in the labour force as young adults,” the report says. “An abundant social-science literature, as well as common sense, supports the claim that children are more likely to flourish, and to become productive adults, when they are raised in stable, married-couple households.” Yet, with the global decline of these households, “the sustainability of humankind’s oldest organization, the family ”“ the fount of fertility, nurturance and human capital ”“ is now an open question.”

The report cites studies that indicate that American children who are raised outside of “an intact married home” are two to three times more likely to suffer serious social and psychological problems….

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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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While many Americans worry that the Social Security Administration won’t have enough money left to pay their benefits when they retire, the agency is doling out millions of dollars to people who aren’t even alive.

The Social Security inspector general estimates that the agency has made $40.3 million in erroneous payments to deceased beneficiaries — even though the administration had already recorded their deaths in its records. The estimate is based on a sample tested during its most recent audit in January 2008, the watchdog agency said.

One man told CNNMoney that he notified Social Security four years ago that his mother had passed away, but he still can’t get the agency to stop sending her checks every month.

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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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[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.

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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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–”‹Nothing in the Congressional compromise reached over the weekend makes a significant dent in our $1.5 trillion deficit.
–In addition to an existing nearly $10 trillion of outstanding Treasury debt, the U.S. has a near unfathomable $66 trillion of future liabilities at “net present cost.”
–Aside from outright default, there are numerous ways a government can reduce its future liabilities. They include balancing the budget, unexpected inflation, currency depreciation and financial repression.

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President Obama and congressional leaders Sunday night sealed a deal to raise the federal debt limit that includes sharp spending cuts but no new taxes, breaking a partisan impasse that has driven the nation to the brink of a government default.

The agreement brings to an end a self-created crisis that has consumed Washington, rattled Wall Street, and shaken confidence in the American political system at home and abroad. The deal could clear Congress as soon as Monday night ”” barely 24 hours before Treasury officials have said they could begin running short of cash to pay the nation’s bills.

Passage of the agreement, however, remained far from certain in the House, where skeptical Republicans were just beginning to digest the details….

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Tea Party activists in and out of office, including 1st District Rep. Tim Scott, have been demanding more spending-cut assurances than House Speaker John Boehner can deliver on the debt accord. They should realize that with Democrats still controlling both the Senate and White House, they can’t get everything they want this time around.

Tea Party folks also should realize that unless the debt ceiling is raised in time, the immediate bottom-line consequences could include a federal default and U.S. credit-rating downgrade.

Of course, even with a debt deal, the nation still faces serious financial risks — including a credit-rating demotion. Fortunately, next year’s presidential and congressional elections will give voters another chance to send the message that Washington can’t keep spending so far beyond our means.

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If leadership is the capacity to take people where they need to go ”” whether or not they realize it or want it ”” then we’ve had almost no leadership in these weeks of frustrating and maddening debate over the budget and debt ceiling. There’s been an unspoken consensus among President Obama, congressional Democrats and Republicans not to discuss the central issue underlying the standoff. We’ve heard lots about “compromise” or its absence. We’ve had dueling budgets with differing mixes of spending cuts and tax increases. But we’ve heard almost nothing of the main problem that makes the budget so intractable.

It’s the elderly, stupid.

By now, it’s obvious that we need to rewrite the social contract that, over the past half-century, has transformed the federal government’s main task into transferring income from workers to retirees. In 1960, national defense was the government’s main job; it constituted 52 percent of federal outlays. In 2011 ”” even with two wars ”” it is 20 percent and falling. Meanwhile, Social Security, Medicare, Medicaid and other retiree programs constitute roughly half of non-interest federal spending.

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Take a look.

The nation’s Roman Catholic bishops are urging the GOP-led House to reject a cuts-only approach to the budget as Washington tries to avert an unprecedented government default on its multi-trillion-dollar debts.

“A just framework for future budgets cannot rely on disproportionate cuts in essential services to poor persons,” wrote Bishop Stephen Blaire of Stockton, Calif., and Bishop Howard Hubbard of Albany, N.Y., in a Tuesday (July 26) letter to House members.

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That’s why the posturing about whether and how Congress should increase the debt ceiling by Aug. 2 has been a hollow exercise. Failure to increase the borrowing limit would harm American prestige and the global financial system. But that’s nothing compared with the real threats to the U.S.’s long-term economic health, which will begin to strike with full force toward the end of this decade: Sharply rising per-capita health-care spending, coupled with the graying of the populace; a generation of workers turning into an outsize generation of beneficiaries. Hoover Institution Senior Fellow Michael J. Boskin, who was President George H.W. Bush’s chief economic adviser, says: “The word ”˜unsustainable’ doesn’t convey the problem enough, in my opinion.”

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Both bills cut discretionary spending by about the same amount, roughly $1.2 trillion depending on which benchmark is used. Both set up a bipartisan fiscal commission with special powers. Neither raises taxes, or significantly changes entitlement programs.

Mr. Reid’s bill contains a little bit more deficit reduction by cutting agricultural subsidies, selling radio spectrum licenses and improving I.R.S. enforcement. Its savings are also somewhat more front-loaded, with deficit reduction of $30 billion in 2012 as compared with $1 billion for Mr. Boehner’s, although the speaker’s bill is being rewritten.

Most of the difference in their price tags, however, has to do with the fact that Mr. Reid’s bill would count $1 trillion from the winding down of the wars in Afghanistan and Iraq as deficit savings, while Mr. Boehner’s would not ”” a matter of accounting rather than a substantive difference.

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Should America embark on such fiscal contraction at a time when economic growth has already slipped to stall speed, and debt deleveraging continues with a vengeance, I would like to flee to Mars for safety.

Yes, there is such a concept as an “expansionary fiscal contraction”, as in Ireland (1980s), Denmark (1990s), arguably Canada (1990s), and the UK after both 1932 and 1993, but in every successful case this was accompanied by monetary loosening. That card has already been played this time.

Should America instead opt to evade these fiscal cuts by actually defaulting on debts accumulated by self-indulgent baby boomers, I would also like to flee Mars because such an outcome might be even worse.

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Today’s spectacle of a dysfunctional Washington, unable to tend to even its most basic task of protecting the nation’s financial standing, may be appalling. It should not, however, be a surprise.

he inability, after eight months’ warning, to agree on any plan to deal with deficits and raise the nation’s debt ceiling isn’t some freak accident. Instead, it is the logical culmination of two giant trends in American politics: an unresolved debate over the size of government and the growing hyper-partisanship of Congress, particularly the House of Representatives.

Put those two together and you end up with leaders of the two parties speaking, as they were over the weekend, of the need to “defeat them,” as if the two parties were Cold War adversaries rather than partners in running the same nation. President Barack Obama, in a nationally televised speech last night, bluntly acknowledged how bad the picture looks to his countrymen, and to the world: “The American people may have voted for divided government,” he said, “but they didn’t vote for a dysfunctional government.”

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[In the 1950’s] the federal safety net designed for a time when unemployment was 20 percent and stockbrokers were jumping out of windows was still there. Not yet unmanageable, still a small fraction of the federal budget, still considered a lifeline for the desperate and a retirement income supplement for the rest.

Then along came the tumultuous, iconoclastic, game-changing 1960s….

In 1965, Medicare and Medicaid began paying medical expenses of the retired and those who could demonstrate “need.” Human nature being what it is, two things happened. First, those who could demonstrate “need” availed themselves of free medical care far beyond any level they would have used had they been required to pay for it. Second, given virtual carte blanche by the government, hospitals and other medical providers jacked up their prices in breathtaking fashion….

And voilá, our citizenry became entitled to medical care and a retirement income no matter what the cost. The more they got, the more they wanted…Now their time is up.

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The biggest share of federal spending now goes for Social Security (20.4 percent in 2010) and Medicare (13.1 percent), the two entitlement programs that big majorities of Americans want to protect from any reductions, according to a recent poll. Together these two programs for senior citizens consume more than one-third of spending, far more than national defense, which accounts for just 20.1 percent, despite the increases of recent years….

Who pays all of these taxes? The best information on that comes from the Congressional Budget Office, which has tracked the tax burden for many years. The most recent complete data cover 2007. CBO figured in that year more than half of all federal taxes was paid by the top 10 percent of income earners. They paid 55 percent of all federal taxes in 2007, CBO said.
That’s a comprehensive figure, counting the income tax, payroll taxes, excise taxes and even the corporate income tax (borne by stockholders in the form of reduced dividends and appreciation). And perhaps surprisingly, the top 10 percent of earners pay a greater share of federal taxes now than they did before the Bush tax cuts, which Democrats constantly criticize as a giveaway to “the rich.” The top 10 percent paid 50 percent of all federal taxes in 2001.

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House Speaker John A. Boehner and the Senate majority leader, Harry Reid, were preparing separate backup plans to raise the nation’s debt ceiling on Sunday, after the leaders were unable to end an increasingly grim standoff over the federal budget.

The dueling plans emerged as lawmakers appeared to miss a self-imposed deadline of 4 p.m. Eastern time to cut a deal before markets open in Asia. And at about 6 p.m., President Obama began meeting with Mr. Reid and the House Democratic leader, Nancy Pelosi, in the Oval Office to discuss the Reid proposal.

Mr. Reid, the Senate’s top Democrat, was trying Sunday to cobble together a plan to raise the government’s debt limit by $2.4 trillion through the 2012 election, with spending cuts of about $2.5 trillion. He would seek to avoid cuts to entitlement programs, but it was unclear how those savings would be achieved.

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