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Posted at 6:28 AM ET, 11/29/2010

Wonkbook: The liberal budget plan; Sheila Bair's fiscal warning; Senate Dems remain divided on Bush tax cuts

By Ezra Klein

ofsbudgetpath.jpg

Another day, another deficit-reduction plan. Today's big release will establish the liberal pole in the fiscal-responsibility debate: It's a joint effort from the progressive think tanks The Century Foundation, Demos, and the Economic Policy Institute, and among its other defining characteristics, it delays cuts until unemployment is below six percent, includes carbon and financial-transaction taxes, and fills the Social Security shortfall by taxing high-earners rather than cutting benefits.

The liberal coalition -- which refers to itself as the "Our Fiscal Security" group -- joins the four other major proposals -- the Simpson-Bowles blueprint, which the commission is tweaking and considering this week, the Bipartisan Policy Center's proposal, the Committee for a Responsible Federal Budget's plan, and Rep. Jan Schakowsky's alternative -- in the discussion, and rather completes the set. Each plan has its own constituency: BPC's plan impressed wonks with its specificity and deep command of the budget, CFRB's goes the furthest, the liberal plans focus most on taxes, Simpson-Bowles remains the likeliest to command some support from critical elected officials, and so on. But eventually, one of these plans has to break out from the community of people who like to discuss budget plans and develop either a major constituency among voters and interest groups or some real friends in Congress. And for all that we know about how these plans would cut the budget, we still don't know which -- if any of them -- can actually pass.

Top Stories

The fiscal commission's chairs are adjusting their debt reduction plan, reports Damian Paletta: "The chairmen of the White House's debt-reduction commission are making last-minute changes to their provocative early draft in an effort to broaden support before a crucial Wednesday vote, people familiar with the matter said. The co-chairmen, Democrat Erskine Bowles and former Republican Sen. Alan Simpson, need 14 of the 18 members of the National Commission on Fiscal Responsibility and Reform to support their proposal in order to issue a formal recommendation, which could then be voted on by Congress before the end of the year."

Liberal groups are countering with alternative debt reduction plans, reports Jackie Calmes: "On Monday, the progressive policy organizations Demos, the Economic Policy Institute and the Century Foundation will unveil a liberal blueprint. Their report says that unlike the centrist plans, this version “stabilizes debt as a share of the economy without demanding draconian cuts to national investments or to vital safety net programs.” It would, however, leave the debt at a higher level as a share of the economy than the centrist plans. On Tuesday, a separate coalition of liberal groups, economists and labor leaders -- the Citizens’ Commission on Jobs, Deficits and America’s Economic Future -- will release a similar outline."

Without deficit reduction, the US could be the next country to experience a fiscal crisis, writes FDIC chair Sheila Bair: "With more than 70 percent of U.S. Treasury obligations held by private investors scheduled to mature in the next five years, an erosion of investor confidence would lead to sharp increases in government and private borrowing costs. And while we enjoy a uniquely favored status today - investors still view U.S. Treasury securities as a haven during crises - events in Greece and Ireland should serve as a warning. The yields on their long-term government securities have risen from rough parity with U.S. Treasury obligations in early 2007 to levels that are hundreds of basis points higher."

If you read only one 7,500 word overview of the Chinese economy and its challenges today, make it David Leonhardt's, and pay special attention to these two lines: "Saying that China does not have a big-enough consumer economy is really another way of saying that not enough of its resources reach the broad mass of its people. If they had more resources, they would surely spend more."

Senate Democrats are still unsure of their Bush tax cut extension strategy, reports Janet Hook: "House Speaker Nancy Pelosi (D., Calif.) may hold a vote mid-week on legislation that would extend the 2001 and 2003 tax cuts only for families with income less than $250,000, while allowing the upper brackets to expire. But Senate Democrats are still divided over their party's endgame strategy. Some Democrats are ready to accept a temporary extension of all tax cuts. But there is also growing interest among other Democrats in a compromise that would keep them in place only for families with income up to $1 million. Administration officials, for their part, have opposed making upper-income tax cuts permanent, but are widely viewed as being willing to accept an extension of a year or two."

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'70s rock cover interlude: the morning benders play "Dreams" by Fleetwood Mac.

Still to come: The Fed's powerful monetary-policy board will have more "hawks" on it next year; courts are set to start ruling on health care reform soon; China's rise has not done much to improve its people's health; noted food journalists Michael Pollan and Eric Schlosser back pending food safety legislation; billions in stimulus funds went to polluters; and two baby pandas hang out.

Economy

More Fed "hawks" will be in power next year, reports Sudeep Reddy: "Four presidents of regional Fed banks will step into the rotation at the Fed’s policy meeting in late January: Charles Evans of Chicago, Charles Plosser of Philadelphia, Richard Fisher of Dallas and Narayana Kocherlakota of Minneapolis...In the 2011 lineup, Evans will bring a dovish voice to the FOMC table, arguing for strong action from the Fed to combat a deflation threat...Most attention among regional bank presidents will likely go to Plosser and Fisher, two policymakers who have not been shy about casting dissenting votes...The other incoming voter, Kocherlakota, will have his first slot on the FOMC since taking office in October 2009. He had been seen as a potential hawk on the committee."

The SEC has nullified FinReg's requirement that rating agencies be held liable for their ratings: http://bit.ly/dUNvdu

Ireland has agreed to a $90 billion bailout, reports Anthony Faiola: "Ireland on Sunday reached agreement with the International Monetary Fund and the European Union for an emergency bailout package worth $90 billion, a rescue meant to both shore up that nation's buckling banks and confront investor fears that Dublin's problems are spreading to other European nations...As part of the package, European financial chiefs agreed that investors, thus far shielded from losses in Ireland and Greece, which received a bailout in May, might need to take losses in future debt crises. Attempting to blunt market fears, however, they said such losses would not be automatic and would only happen in extreme circumstances."

FinReg hasn't done away with overdraft fees: http://on.wsj.com/fEPKE0

Spain's woes show the value of Fed action in the US, writes Paul Krugman: "If Spain still had its own currency, like the United States — or like Britain, which shares some of the same characteristics — it could have let that currency fall, making its industry competitive again. But with Spain on the euro, that option isn’t available. Instead, Spain must achieve 'internal devaluation': it must cut wages and prices until its costs are back in line with its neighbors...The good news about America is that we aren’t in that kind of trap: we still have our own currency, with all the flexibility that implies. By the way, so does Britain, whose deficits and debt are comparable to Spain’s, but which investors don’t see as a default risk. The bad news about America is that a powerful political faction is trying to shackle the Federal Reserve, in effect removing the one big advantage we have over the suffering Spaniards."

Oliver Hart and Luigi Zingales have a proposal for reforming the financial-reform law by making it clear how financial institutions can avoid becoming "systemically important": "The Federal Reserve can announce what minimum conditions firms must meet to avoid being designated as systemically important. Each firm can then decide whether to meet those conditions or face federal regulation. And basic principles of economics can tell us what these minimum conditions should be. For a financial firm to cause a systemic shock, two conditions are necessary. First, the firm must be at risk of defaulting and harming the value of financial claims held by depositors and other financial institutions—that is, it has systemic claims against it. Second, it must be sufficiently large or sufficiently interconnected that the losses caused by a default spread through the entire economic system."

A cap on tax expenditures would reduce the deficit, writes Martin Feldstein: http://wapo.st/hNO60G

Political junkie map interlude: How red and blue parts of the US shifted from 1920 to 2008.

Health Care

Court rulings on health care reform's constitutionality are due soon, report Robert Pear and Kevin Sack: "As the Obama administration presses ahead with the health care law, officials are bracing for the possibility that a federal judge in Virginia will soon reject its central provision as unconstitutional and, in the worst case for the White House, halt its enforcement until higher courts can rule. The judge, Henry E. Hudson of Federal District Court in Richmond, has promised to rule by the end of the year on the constitutionality of the law’s requirement that most Americans obtain insurance, which takes effect in 2014...'He’s asked a number of questions that express skepticism,' said one administration official who is examining whether a ruling against part of the law would undermine other provisions."

Uwe Reinhardt explains how Medicare pays hospitals: http://nyti.ms/ebt9fj

China's growth has not improved health, writes David Leonhardt: "A quick quiz: Which of the following countries has had the smallest increase in life expectancy since 1990 — Bangladesh, China, Pakistan, South Korea or Sudan? The answer is not war-torn Sudan or tumultuous Pakistan. It isn’t South Korea, which started from a higher level than any of the others. And it isn’t abjectly poor Bangladesh. It’s China, the great economic success story of the last two decades and the country that inspires fear and envy around the world."

Domestic Policy

Congress should pass food safety legislation, write Michael Pollan and Eric Schlosser: "The bill would, for the first time, give the F.D.A., which oversees 80 percent of the nation’s food, the authority to test widely for dangerous pathogens and to recall contaminated food. The agency would finally have the resources and authority to prevent food safety problems, rather than respond only after people have become ill. The bill would also require more frequent inspections of large-scale, high-risk food-production plants... According to the Centers for Disease Control and Prevention, some 5,000 Americans annually die from a food-borne illness."

Social Security privatization would punish workers who retire in bad economies, writes Allan Sloan: "Let's say you had $200,000 - a not insignificant sum - in the Vanguard Target Retirement 2010 fund as of Sept. 30, 2007. That was a few days before stocks peaked...Your annuity: for a single person, $1,048 a month, adjusted annually for inflation the way Social Security is. A married couple getting a joint-and-two-thirds annuity - just as with Social Security, a surviving spouse collects two-thirds of what the couple gets - would have received $881 a month. If you turned 66 in February 2009, near the market bottom, your account would be down 29 percent. Your annuity -$793 and $692 - would be down 23 to 24 percent."

The new GOP majority in the House should reject the No Child Left Behind model of education reform, writes Diane Ravitch: http://on.wsj.com/g5yZZU

Adorable animals just chilling interlude: Two baby pandas hang out.

Energy

The Obama administration gave out billions in stimulus funds without environmental safeguards, report Kristin Lombardi and John Solomon: "In the name of job creation and clean energy, the Obama administration has doled out about $2 billion in stimulus money to some of the nation's biggest polluters while granting them exemptions from a basic form of environmental oversight, a Center for Public Integrity investigation has found. The administration has awarded more than 179,000 'categorical exclusions' to stimulus projects funded by federal agencies, freeing the projects from review under the National Environmental Policy Act, or NEPA. Officials said they did not consider companies' pollution records in deciding whether to grant the waivers."

The electric Nissan Leaf gets the equivalent of 99 miles to the gallon: http://nyti.ms/gwWlvk

Sen. Mary Landrieu will obstruct administration goals in response to a disappointing drilling meeting: http://bit.ly/hMALQs

Building code changes are an effective way of reducing energy usage, writes Kate Galbraith: "In the United States, the usual quick responders -- East Coast states like Massachusetts and West Coast states like California-- have put strict building code requirements in place. But the middle of the country lags. Ten states, including populous ones like Colorado, Missouri and Arizona, have adopted no statewide residential energy codes at least since 1998, according to the Building Codes Assistance Project, a research group that supports codes. Europe is ahead of the United States in most areas pertaining to energy-efficiency, and building codes are no exception."

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

By Ezra Klein  | November 29, 2010; 6:28 AM ET
Categories:  Wonkbook  
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Next: What happens when Medicare controls costs too well

Comments

Ezra,
It sure would be helpful and inform the discussion if every 'deficit cutting plan' blog report appended the 'get the economy back to full potential' alternative and noted the deficit cutting power of a one-percent added growth rate. You've reported the numbers before, but please, just keep appending them to each pain-caucus posting on the deficit. POLICY is where Wonkbook distinguishes itself from the conventional wisdom pundit (blather) roundup. And since Growth is really the Best Policy (along with controlling medical costs, of course) it is important that growth is mentioned as the preferred alternative, repeatedly.

Posted by: grooft | November 29, 2010 8:23 AM | Report abuse

That Allen Sloan piece excerpt is quite a poorly designed plan. Why would it convert to an annuity on a particular day? Privatization wouldn't enforce such stupid rules, that would be government regulation.

Posted by: staticvars | November 29, 2010 8:55 AM | Report abuse

"Saying that China does not have a big-enough consumer economy is really another way of saying that not enough of its resources reach the broad mass of its people. If they had more resources, they would surely spend more."

Hilarious. What country in the world, indeed in the history of the world, couldn't be improved upon by the application of a bit of western liberal redistribution?

Posted by: bgmma50 | November 29, 2010 10:05 AM | Report abuse

while the Reinhardt piece is (as most of his are) very good it does not push the envelope to the next inevitible step to show how inadequate medicare and/or payments (for whatever reason) spur hospitals to (for their own survival for some) negotiate greater charges from private insurers. If private insurers had the captive market that Medicare has then they could implement similar price controls that would reduce cost (but in turn also force some hospitals out of business).

Posted by: visionbrkr | November 29, 2010 10:07 AM | Report abuse

"Let's say you had $200,000 - a not insignificant sum - in the Vanguard Target Retirement 2010 fund as of Sept. 30, 2007."

That $200,000 represents a 1.1% annual real return from 1965-2007 for a person saving 10.4%/yr, making $30,000/yr in inflation-adjusted dollars. I use 10.4% as it is the FICA amount less 2% for disability insurance.

From Jan65-Dec07, the stock market return was 10.36% (and 5.58% adjusted for inflation). The return over this time period was slightly below the historical average of a little over 6%.

http://www.moneychimp.com/features/market_cagr.htm

But let's say that you're a mediocre investor, and lost 1.5% a year on average due to fees and occasional bad timing.

If you saved 10.4% of your gross income each year (again $30,000 in 2008 dollars) from 1965-2007, you'd have ~$549,000 at the end of 2007, approaching triple the amount Sloan uses (and presumably an annuity equivalently scaled up). Just sitting in stocks, you'd end 2008 at $339,000 and 2009 with $429,000, assuming again that you're underperforming the S&P 500 by 1.5% each year.

Note that a person who is currently starting their career only has to pay something like 0.07% in fees to a manager like Vanguard, and so even assuming the worst historical returns over 200 years (~4.0% real for stocks), they would receive similar returns as the scenario I present above, and in all probability will do better.

Also consider that the promised Social Security benefits will have to fall by ~25% (reducing the bogey for privatization), or the FICA amounts will have to rise (increasing the savings rate for the privatization scenario). Of course, we might just end up taxing high earners in order to pay promised benefits, and Social Security might look better from a low earner's perspective as it becomes more of a welfare program.

The comparison of private savings with Social Security above benefits by using a modest income of $30,000 - privatization does better as income rises, as the average replacement rate falls.

Finally, private savings are private property which aren't at risk of being cut (either directly or by increasing the retirement age), though loss of this property via taxation is always a risk.

"More than half of married couples older than 65 and 72 percent of singles get more than half of their income from Social Security, according to the Social Security Administration. For 20 percent of 65-and-older couples and 41 percent of singles, Social Security is 90 percent or more of their income. That isn't projected to change."

Well sure, the social insurance system takes ~1/6 of one's labor earnings away, with a promise of future payouts in the future.

If your ability to save is cut, and there is a promised pension benefit in the future, you aren't going to save as much.

Consequentially, we see statistics showing that a large proportion of American seniors rely on social security.

Posted by: justin84 | November 29, 2010 10:12 AM | Report abuse

I see no diiscussion of the political mechanism that is required to cut the deficit. Without such a mechanism, there will only be drift.

The political mechanism that I suggest is autobalance.

Autobalance automatically adjusts tax rates based upon a percentage of the previous year's surplus or deficit.

For example, if the percentage were 10% and the deficit were 20% of the budget, taxes would rise by 10% of 20%.

Benefits: The continual whittling of the deficit would provide cerrtainty to the markets. The same mechanism can also reduce surplus. The autobalance mechanism destroys the illusion that tax rates are independent of spending. Autobalance is a permanent solution to a problem that continually resurfaces. Most importantly, once in place, no politician will have to vote for a tax increase.

Avraam Jack Dectis

Posted by: avraamjack | November 29, 2010 12:37 PM | Report abuse

I see no diiscussion of the political mechanism that is required to cut the deficit. Without such a mechanism, there will only be drift.

The political mechanism that I suggest is autobalance.

Autobalance automatically adjusts tax rates based upon a percentage of the previous year's surplus or deficit.

For example, if the percentage were 10% and the deficit were 20% of the budget, taxes would rise by 10% of 20%.

Benefits: The continual whittling of the deficit would provide cerrtainty to the markets. The same mechanism can also reduce surplus. The autobalance mechanism destroys the illusion that tax rates are independent of spending. Autobalance is a permanent solution to a problem that continually resurfaces. Most importantly, once in place, no politician will have to vote for a tax increase.

Avraam Jack Dectis

Posted by: avraamjack | November 29, 2010 12:38 PM | Report abuse

Hi Ezra and team. I love graphs as much as you do, but can you please try to label or explain the axes somewhere next to the graph? I assume this one is (deficit)/surplus as a % of GDP?

It would just help if you could make sure graphs are clearly labeled so they can be quickly understood.

Thanks for all your great work!

Posted by: c2dh | November 29, 2010 1:11 PM | Report abuse

I have posted this already here before You guys should stop complaining because, one the health care we have now isnt as good as it was supposed to be. also the law has just been signed so give it some time. so if u want to say u have the right to choose tell that to ur congress men or state official. If you do not have insurance and need one You can find full medical coverage at the lowest price check http://ow.ly/3akSX .If you have health insurance and do not care about cost just be happy about it and believe me you are not going to loose anything!

Posted by: robertjimeniz | November 30, 2010 12:54 AM | Report abuse

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