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Posted at 1:46 AM ET, 11/22/2010

Wonkbook: A deficit rorschach test; Ireland gets a bailout; QE2 vs. its skeptics

By Ezra Klein

rorschach.jpg

Here's a Wonkbook rorschach test: Do today's top two stories make you optimistic about our ability to deal with the deficit, or pessimistic?

The case for optimism: The recommendations of the various deficit commissions aren't perfectly aligned, but they're not that far, either. Defense cuts are on the table, and so is non-security discretionary spending. Higher taxes will be part of the solution, as will cuts in tax expenditures. Entitlement benefits will need to be pulled back -- but in a progressive fashion (maybe even including benefits boosts for low-income beneficiaries), and their revenues will have to increase as part of the deal. Better yet, the combination of a coming vote to lift the debt ceiling and a Republican Party that doesn't want to be seen as abandoning its anti-deficit mandate will move these policies from white papers to statute.

Here's the case for pessimism: The recommendations of the various deficit commissions aren't perfectly aligned, but they're not that far, either. They're a bunch of stuff that neither party would dream of passing. Defense cuts? Tax increases? You think lawmakers are going to go after Social Security and the mortgage-interest deduction at the same time? You've got to be kidding. Congress is about to blow up the deficit to extend the Bush tax cuts. That's where you're seeing their true colors on the debt. And the mixture of Republican newcomers who won't compromise and deficit plans that can't pass mean there's a real chance that the vote on the debt ceiling will lead to some sort of total meltdown, which will in turn freak the bond markets out, which will hurt our economy and overwhelm anything the Fed was hoping to achieve with QE2.

So, Wonkbook readers. Which is it?

Top Stories

There may be more consensus on the deficit than people realize, reports Lori Montgomery: "After an election dominated by vague demands for less debt and smaller government, the sacrifices necessary to achieve those goals are coming into sharp focus. Big cuts at the Pentagon. Higher taxes, including those on home ownership and health care. Smaller Social Security checks and higher Medicare premiums."

"Even Republicans who initially opposed the commission's creation are still at the negotiating table. 'I'm open to everything if it gets us where we need to go,' said Sen. Tom Coburn (Okla.), who is emerging as one of the GOP's most influential voices on budget issues. 'This is going to require compromise, even from someone as conservative as me.'... Over the holiday break, Bowles and Simpson are rewriting their plan to accommodate the concerns of commission members, though the two insist, in Simpson's words, that it will not be watered down to 'mush' for the sake of winning votes."

The GOP is split on an upcoming debt ceiling vote, reports Naftali Bendavid: "Minority Leader John Boehner (R., Ohio), who is set to become House speaker in January, said last week he has been talking to Republican freshmen about the need to raise the federal debt ceiling to meet the country's obligations. 'We're going to have to deal with it as adults,' Mr. Boehner said. 'Whether we like it or not, the federal government has obligations, and we have obligations on our part.'...GOP leaders hope to package a debt-limit vote with significant spending cuts, making it easier for Republicans to vote for it. But it isn't clear that will be enough for many of the GOP freshmen.

Ireland is receiving an emergency bailout from the IMF and the EU in the wake of its debt crisis, reports Anthony Faiola: "Moving to contain fears of a debt crisis in Europe, the International Monetary Fund and European Union agreed Sunday to support an emergency bailout for near-bankrupt Ireland after the desperate government here abruptly requested a lifeline following days of denying it needed help."

Skepticism about the Fed's quantitive easing could be hampering its effectiveness, reports Sudeep Reddy: "Amid widely publicized skepticism about the efficacy and wisdom of the bond buying, investors and traders are questioning whether the Fed would be able to expand its bond purchases beyond $600 billion—even if inflation continues falling and unemployment remains high. Those doubts have contributed to an increase in yields on U.S. Treasury bonds since the Fed announced the program on Nov. 3, they say...The more the public and investors believe the Fed is likely to keep buying bonds to depress long-term interest rates until the economy comes back, the more likely the markets are to keep long-term rates from rising."

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Garage rock interlude: Guided by Voices play "I Am a Tree".

Still to come: Joe Klein can't believe we've named the deficit job one; John Cassidy thinks investment banking is socially useless; states are considering eliminating Medicaid to make up budget gaps; a record number of applicants entered the green card lottery this year; the White House is dialing back its climate action commitments ahead of the next climate summit; and Bronte sisters action figures feature awesome book-throwing action.

Economy

What madness had led us to name the deficit priority number one when we've got 10% unemployment, asks Joe Klein: "The release of another budget-balancing proposal, this from the Obama deficit-reduction commission's co-chairmen, has unleashed a volcanic eruption of hurrahs from the Olympian peaks of the Establishment — and reflexive harrumphs from the left and right. In the past, I've been a reliable hurrah monger. We do have a long-term structural deficit problem...[but] you'll excuse me if I muffle my deficit-reduction cheerleading this time. There is much of value in the co-chairs' proposal...We could go through the proposal line by line — but why waste the lines? There is a larger problem: Why are we spending so much time and effort bloviating about long-term deficits and so little trying to untangle the immediate economic mess that we're in?"

The distinction between raising taxes and cutting spending is often semantic, writes Greg Mankiw: "Should the government cut spending or raise taxes to deal with its long-term fiscal imbalance? As President Obama’s deficit commission rolls out its final report in the coming weeks, this issue will most likely divide the political right and left. But, in many ways, the question is the wrong one. The distinction between spending and taxation is often murky and sometimes meaningless."

The SEC will require hedge funds to register with the government: http://nyti.ms/d6oDD0

Investment banking is a socially useless activity, writes John Cassidy: "In effect, many of the big banks have turned themselves from businesses whose profits rose and fell with the capital-raising needs of their clients into immense trading houses whose fortunes depend on their ability to exploit day-to-day movements in the markets. Because trading has become so central to their business, the big banks are forever trying to invent new financial products that they can sell but that their competitors, at least for the moment, cannot. Some recent innovations, such as tradable pollution rights and catastrophe bonds, have provided a public benefit. But it’s easy to point to other innovations that serve little purpose or that blew up and caused a lot of collateral damage, such as auction-rate securities and collateralized debt obligations."

Commercial parody interlude: Bronte sisters action figures.

Health Care

Some states are considering eliminating Medicaid, report Janet Adamy and Neil King: "Elected and appointed officials in nearly a half-dozen states, including Washington, Texas and South Carolina, have publicly thrown out the idea. Wyoming and Nevada this year produced detailed studies of what would happen should they withdraw from the program...Some policy experts say the most feasible scenario would be withdrawing from Medicaid in 2014 when the new health-care law overhaul is set to add 16 million Americans to the program's ranks. A quirk in the law passed in March suggests that a portion of the new Medicaid enrollees could instead qualify to get a tax credit to buy private insurance on state-run exchanges, although Democrats say that wasn't the intent of the law."

The Obama administration is giving bonuses to merely average Medicare Advantage plans: http://bit.ly/9ZsMQR

States will not be allowed to require that every insurer is accepted into the health exchanges, writes Timothy Jost: "Many consumer advocates favor an active exchange that would demand value for money from health plans, while insurers favor an 'any willing insurer' model. While the Guidance blesses both, it should be noted that, in the prior paragraph, the Guidance notes that the exchange must have 'discretion to determine whether health plans offered through the Exchange are ‘in the best interests of qualified individuals and qualified employers' as Section 1311(e)(1) [of the ACA] requires.' A state statute that required an exchange to certify any health plan that met all other explicit statutory requirements could not, therefore, be in compliance with the ACA"

Health care reform is spurring hospital mergers: http://nyti.ms/cJUWba

Domestic Policy

A record 15 million people entered the green card lottery this year, reports Miriam Jordan: "The so-called 'diversity visa program' lottery drew nearly 25% more entries than last year, according to the State Department. The limit of 50,000 green-card recipients through the program was established years ago by Congress. Some lawmakers are now calling for an end to the program...Critics say the program poses security risks, lures uneducated immigrants and enables individuals with no connection to the U.S. to get into the country more quickly than those sponsored by relatives and employers. 'More and more people are learning about this program and are dumbfounded that we have it in the first place,' said Rep. Bob Goodlatte (R., Va.), who has introduced legislation to abolish it."

Homeland Security is not letting local jurisdictions opt out of a immigration enforcement program: http://wapo.st/cyh2nU

Sen. Ron Wyden has killed a bill that would have given the government more power to shut down copyright-violating websites, reports Stephen Webster: "'Deploying this statute to combat online copyright infringement seems almost like using a bunker-busting cluster bomb, when what you need is a precision-guided missile,' Wyden said. The act was unanimously approved by the Senate Judiciary Committee yesterday. 'Few things are more important to the future of the American economy and job creation than protecting our intellectual property,' said Senator Patrick Leahy, a Democrat from Vermont who co-sponsored the bill."

States whose unemployment insurance funds have been depleted are raising payroll taxes to correct the shortfall: http://on.wsj.com/c3718X

Earmarks are good for America, writes Mark Greenberg: "I should know. I'm a Washington lobbyist who has practiced for more than two decades. I've secured earmarks for a bioscience park in Aurora, Colo., regional transit in Denver and a job-training program in Richmond. Earmarks don't bankrupt our government. They make it run more smoothly...Beyond the merits of any specific program, Congress modifies the budget at will. And this process - like the presidential submission process - produces political winners. Even when earmarks help particular communities, anti-earmarkers are disingenuously selective, charging that the practice is somehow illegitimate because someone, somewhere derives a political benefit."

Covert adorable animals interlude: Kittens hiding other kittens.

Energy

The White House is dialing back its climate action promises in advance of the Cancun summit, report David Fahrenthold and Juliet Eilperin: "The Republican wins will finally bury the Obama administration's Plan A, which included passing a landmark climate bill in Congress...The new GOP majority will have few easy options for undoing the White House's Plan B, a set of new regulations that will cut emissions from power plants and factories...Environmentalists now say their best hope in Cancun is not for a grand global deal - which was the ambition they brought to Copenhagen - but rather for a series of small agreements on how to pay for measures such as reducing deforestation or how to help poor countries adapt to a warming climate."

Obama has been promoting electric cars on his Europe trip: http://wapo.st/avexFw

China is starting to import coal from the United States, reports Elisabeth Rosenthal: "The United States now ships coal to China via Canada, but coal companies are scouting for new loading ports in Washington State. New mines are being planned for the Rockies and the Pacific Northwest. Indeed, some of the world’s more environmentally progressive regions are nascent epicenters of the new coal export trade, creating political tensions between business and environmental goals. Traditionally, coal is burned near where it is mined — particularly so-called thermal or steaming coal, used for heat and electricity. But in the last few years, long-distance international coal exports have been surging because of China’s galloping economy, which now burns half of the six billion tons of coal used globally each year."

Gas prices are on the rise: http://on.wsj.com/b2g1oJ

Regulations promoting compact florescent light bulbs are working fine, writes Brad Plumer: "The case for the law is still straightforward: CFLs and other more-efficeint bulbs help reduce power-plant emissions and, over the long run, save consumers money—the EPA estimates that if every household in America swapped out one incandescent for a more efficient bulb, it'd be the same as taking 800,000 cars off the road. True, there are more economically elegant ways to reduce emissions, but Republicans are opposed to carbon taxes and the like, which means that clumsy regulations are the only things that attract political support."

Closing credits: Wonkbook is compiled and produced with help from Dylan Matthews, Mike Shepard, and Michelle Williams. Photo credit: Movie Banter.

By Ezra Klein  | November 22, 2010; 1:46 AM ET
Categories:  Wonkbook  
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Next: Why China has so many fake divorces

Comments

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Posted by: jessiecoleman | November 22, 2010 4:09 AM | Report abuse

>>Here's a Wonkbook rorschach test: Do today's top two stories make you optimistic about our ability to deal with the deficit, or pessimistic?>>

I'm pessimistic that your lead stories are about the deficit when the real problem is jobs and the economy.

Posted by: fuse | November 22, 2010 7:03 AM | Report abuse

You forget, fuse, Ezra's writing for the WaPo now. Outside DC, nobody cares about deficits any more than they care about earmarks. (We all boo, and hiss, and shrug.) At the moment, we are -- well, I am -- much more immediately worried about jobs and a further descent into a worldwide depression. But Ezra's employed by Fred Hiatt, so deficits are his primary concern.

Posted by: stonedone | November 22, 2010 9:45 AM | Report abuse

Do you guys not read the site? Ezra has talked at length about how short term growth is much more important right now than dealing with the deficit.

Posted by: MosBen | November 22, 2010 9:48 AM | Report abuse

Color me a pessimist. I grew up in a very Republican family in a ruby-red state. I know the GOP -- it's scorched-earth time, and they know a majority of voters will blame the President and his party.

Posted by: scarlota | November 22, 2010 9:53 AM | Report abuse

The New Yorker article cited above -- the article questioning the value of the financial "industry," which tends to tout the worth of its services without any basis in fact -- is really worth reading.

The fact that so many states are finally willing to makes cuts to the failed Johnson Medicaid social experiment is encouraging. If Medicaid -- a program even the deficit commission now recognizes as a "budget cancer" -- shrinks, the overall cost of providing medical care shrinks: since inception, Medicaid has consumed resources at 400% over estimates and has caused an unnatural rate-of-rise in general health care costs. The fifty year rule (that a failed program cannot be corrected during the active lifetime of any of its original supporters) applies, though, so it might be 2016 before the failed Medicaid budget cancer can be eliminated: interestingly, that's also about the time the program will bankrupt the nation... so faster action might be needed to kill the program before it kills those it was intended to help.

Posted by: rmgregory | November 22, 2010 10:01 AM | Report abuse

There's no chance of anything like any of these deficit plans passing the House due to not raising taxes being a more important article of religious faith among conservatives than the resurrection. But there also won't be a real crisis involving a failure to raise the debt ceiling because Obama and the Democrats will cave because... they always cave.

Posted by: redwards95 | November 22, 2010 10:11 AM | Report abuse

"What madness had led us to name the deficit priority number one when we've got 10% unemployment,"


This is a really easy question to answer.

We watched Pelosi toss $10 billion to her teachers union friends, and we hate it.

Posted by: krazen1211 | November 22, 2010 10:35 AM | Report abuse

"Major cuts are in store for Washington's Medicaid program anyway. To plug the budget gap, the state is proposing eliminating coverage of prescription drugs, physical therapy and vision, dental and hearing treatments for adults next year.

Some policy experts say the most feasible scenario would be withdrawing from Medicaid in 2014 when the new health-care law overhaul is set to add 16 million Americans to the program's ranks.

A quirk in the law passed in March suggests that a portion of the new Medicaid enrollees could instead qualify to get a tax credit to buy private insurance on state-run exchanges, although Democrats say that wasn't the intent of the law."


ROFL at that. Gee, I wonder why people aren't going to behave as the 'intent' of the law these morons passed when they have financial incentive to do otherwise.


The state that does it first has a leg up. Simply give the Medicaid people $59 for a Southwest ticket to San Francisco or Los Angeles. 1 way.

Posted by: krazen1211 | November 22, 2010 10:38 AM | Report abuse

So Ezra, Why are the fools in Washington and the media so focused on the deficit when they should be focused on ameliorating unemployment and getting people back to work?

Joe Klein seems to have a good point here. The long-term structural deficit is a concern, but in the short term shouldn't we be more concerned about getting the unemployment rate at least below 7% before we worry about the deficit? And don't forget the more people working, the more will be making real money and paying taxes, which will increase revenues and when revenues are growing, that makes it much easier to tackle the deficit.

Deficit spending is what you are supposed to do amidst a struggling economy. Deficit-cutting and budget-balancing should be tackled when the economy is growing rapidly. In bad times, the government needs to spend. In good times, the government can cut. Have these Establishment pillars so focused on the deficit never even passed a Freshman-level Macro-Economics course? Or are just they plain stupid?

Posted by: OHIOCITIZEN | November 22, 2010 10:55 AM | Report abuse

"Earmarks are good for America, writes Mark Greenberg: "I should know. I'm a Washington lobbyist who has practiced for more than two decades."

No bias here, I'm sure.

"First, earmarks are largely irrelevant to balancing the budget. The $16.5 billion Congress spent on earmarks in fiscal year 2009 sounds like a lot, but leaves a minuscule footprint - about 1 percent of 2009's $1.4 trillion deficit. Those seriously concerned about deficits should look elsewhere for meaningful spending reductions."

Assuming modest inflation and spending growth, and that's $200 billion over the next decade. But hey, because the cummulative deficit is in the trillions, I guess $200 billion isn't real money.

"I've secured earmarks for a bioscience park in Aurora, Colo., regional transit in Denver and a job-training program in Richmond."

If Aurora, Colorado wanted a bioscience park, it should have raised its own funds to build one. If Denver wanted a regional transit system, it should have raised the funds and built it. If Richmond wanted a job training program, the same applies.

Even this would require picking Joe's pocket in order to build Bob's job training program or railway, but at the very least the most wasteful projects are eliminated by keeping the spending decisions local.

Posted by: justin84 | November 22, 2010 11:03 AM | Report abuse

rmgregory

medicaid is not a failure.

It has saved 10,000s lives over the years and has improved the quality of life for many many others.

The reason for budgetary shortfalls for these kinds of programs is due to human ineptness and human greed. Medicaid would be fully funded if we simply desired it to be so and elected the kind of people who would properly manage it.

Posted by: Lomillialor | November 22, 2010 12:17 PM | Report abuse


"I'm not trapped in here with you. You're trapped in here with me."

-Ireland to EU

Posted by: ThomasEN | November 22, 2010 10:22 PM | Report abuse

Perhaps the better question is how to take the deficit problem off the table so that other issues can receive the attention they need.

The best way to do that would be to implement an autobalance budget mechanism.

Am autobalance mechanism automatically adjusts taxes based upon a percentage of the previous years surplus or defict.

For example, if the percentage were 10% and the deficit were 20% of the budget, all taxes would go up 10% of 20%.

The result would be that the markets would have the certainty of a constant whittling of the deficit or surplus;. Autobalance is also a permanent solution, otherwise deficits will return. Autobalance also changes the nature of the debate from what the tax rates should be to what should we spend. It ends the perception that tax rates are an independent variable.

The greatest advantage of an autobalance mechanism is that once enacted it shields the Congressperson from having to vote for a tax increase, thus preserving their jobs.

Thank you.

Avraam Jack Dectis

with autobalance, Congress would still ,decide what to tax and thebrelative rates. Bowever, when they come up short, rates are automatically nudged in the correct direction.

Posted by: avraamjack | November 23, 2010 11:00 AM | Report abuse

Perhaps the better question is how to take the deficit problem off the table so that other issues can receive the attention they need.

The best way to do that would be to implement an autobalance budget mechanism.

Am autobalance mechanism automatically adjusts taxes based upon a percentage of the previous years surplus or defict.

For example, if the percentage were 10% and the deficit were 20% of the budget, all federal taxes would go up 10% of 20%.

The result would be that the markets would have the certainty of a constant whittling of the deficit or surplus;. Autobalance is also a permanent solution, otherwise deficits will return. Autobalance also changes the nature of the debate from what the tax rates should be to what should we spend. It ends the perception that tax rates are an independent variable.

Failsafes can ensure that taxes are only raised during periods of significant economic growth.

Congress would still decide what to tax and the relative tax rates. However, when they come up short, rates are automatically nudged in the correct direction.

The greatest advantage of an autobalance mechanism is that once enacted it shields the Congressperson from having to vote for a tax increase, thus preserving their jobs.

Thank you.

Avraam Jack Dectis

.

Posted by: avraamjack | November 23, 2010 11:13 AM | Report abuse

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