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Posted at 6:44 AM ET, 01/27/2011

Wonkbook: Should Washington look to California for guidance on how to do the budget?

By Ezra Klein

totrevandouts.jpg

Here's the question: Do tax cuts cause deficits? If not, then there's no reason to worry about the Congressional Budget Office's revised estimate that the deficit will reach $1.5 trillion this year, not $1 trillion, as they'd predicted in 2010. The bulk of the difference, as you can see in this table, is due to the tax deal, which shaved expected revenue by about $400 billion.

Republicans, however, are caught between a rock and a hard place: They don't like deficits, but they do like tax cuts. So they've emerged with a fairly creative answer: A balanced budget amendment that caps spending at 20 percent of GDP and requires a two-thirds vote for tax increases. It's hard to imagine looking at this revised CBO estimate -- or the last decade of fiscal policymaking more generally -- and concluding that one of our major problems is that it's been too easy to raise taxes. Quite the opposite, actually. But if the 21 Senate Republican behind this proposal have their way, the Congress will adopt the two-thirds budgeting rules that have worked so well in, yes, California. Now, don't get me wrong: I'm a native Golden Stater, and I love -- and miss -- the sun and the people and the tacos. But I don't miss the dysfunctional, supermajoritarian budget process, which has sent the state to the edge of total bankruptcy, and I don't know that Washington would be wise to adopt it. Can't we just steal the warm weather, instead?

Top Stories

The Congressional Budget Office predicts the budget deficit will reach $1.5 trillion this year, reports Lori Montgomery: "The still-fragile economy and fresh tax cuts approved by Congress last month will drive the federal deficit to nearly $1.5 trillion this year, the biggest budget gap in U.S. history, congressional budget analysts said Wednesday. The grim forecast from the nonpartisan Congressional Budget Office came hours after President Obama called in his State of the Union address for Republicans and Democrats to work together to rein in record deficits that are pushing the national debt into uncharted territory. At $1.5 trillion, the deficit would equal 9.8 percent of the economy, the CBO said, making it one of the largest by that measure since the end of World War II."

Read the full CBO report (pdf): http://bit.ly/hoDYwZ

House Republicans are splitting on raising the debt limit, report Peter Schroeder and Erik Wasson: "The Republican Study Committee (RSC) introduced legislation on Wednesday that it says would allow the Treasury Department to avoid a default on U.S. debt without expanding the borrowing limit...The RSC’s legislation could signal that Boehner and his leadership team have a revolt on their hands over the debt-ceiling vote...The RSC’s Full Faith and Credit Act would require the Treasury to pay principal and interest due on public debt before making any other payments. Sen. Pat Toomey (R-Pa.) has introduced companion legislation in the Senate. Democrats blasted the Republican proposal, saying it prioritizes paying foreign lenders before the American people."

The Federal Reserve is staying the course on quantitative easing, report Neil Irwin and Jia Lynn Yang: "The Federal Reserve stuck with a subdued assessment of the nation's economic outlook Wednesday as it continued its strategy of buying vast sums of bonds to try to boost the economy. The latest data 'confirms that the economic recovery is continuing, though at a rate that has been insufficient to bring about a significant improvement in labor market conditions,' the Federal Open Market Committee said in a statement at the end of its two-day policy meeting. The message suggests that the Fed still views high unemployment as the economy's most pressing problem and that members have not bought into the more bullish assessment that some private forecasters have adopted recently."

Read the Fed's full statement continuing quantitative easing: http://nyti.ms/fAQDfh

Obama is slated to address gun control soon, report James Grimaldi and Perry Bacon: "White House officials on Wednesday attempted to quell criticism that President Obama dodged a national debate over guns in his State of the Union address and announced that the president would address the issue soon. But aides sidestepped questions about when Obama will talk about federal firearms policy or what he would say...As president, Obama has never delivered substantive remarks on gun policy, one of the most volatile and divisive domestic issues, out of fear of roiling swing voters in rural areas, the Midwest and the South."

Chill-pop interlude: Beach House play "Walk in the Park".

Got tips, additions, or comments? E-mail me.

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Still to come: Issa kicks off TARP hearings; Chamber of Commerce and AFL-CIO join forces on infrastructure; Republicans on the Financial Crisis Inquiry COmmission dissent; "public health" becomes the new buzzword for environmentalists; and if Up! were a '60s-era live action adventure movie from Disney.

Economy

House oversight chair Darrel Issa has kicked off his hearings by attacking "too big to fail" banks, reports Edward Wyatt: "If Representative Darrell E. Issa, Republican of California, gets his wish, he will have only two years to serve as a chief tormenter of the Obama administration. So he was understandably eager to get started on Wednesday with his first hearing as chairman of the House Committee on Oversight and Government Reform. Mr. Issa began the hearing on 'bailouts and the foreclosure crisis' by suggesting that the financial institutions that grew even larger during the crisis might be encouraged to break themselves up so that they would not find themselves, during a future crisis, in need of a bailout."

Democrats allege House Republicans' budget would cost one million jobs: http://politi.co/haigPd

The Chamber of Commerce and AFL-CIO teamed up to praise Obama's infrastructure move, reports Michael Shear: "Two men who hardly agree on anything - the president of the U.S. Chamber of Commerce, Tom Donohue, and the president of the A.FL-C.I.O., Richard Trumka - have issued a joint statement praising President Obama’s call for new infrastructure. In what has to be a first, Mr. Donohue and Mr. Trumka came together Wednesday to say that Mr. Obama was on the right track. 'America’s working families and business community stand united in applauding President Obama’s call to create jobs and grow our economy through investment in our nation’s infrastructure,' the two leaders said...During the 2010 midterm elections, they waged a furious battle, each side armed with tens of millions of dollars."

The Financial Crisis Inquiry Commission's report gives a simplistic narrative, write commission members Bill Thomas, Keith Hennessey and Douglas Holtz-Eakin: "The credit bubble, housing bubble, and the explosion of nontraditional mortgage products are not by themselves responsible for the crisis. Our country has experienced larger bubbles--the dot-com bubble of the 1990s, for example--that were not nearly as devastating as the housing bubble. Losses from the housing downturn were concentrated in highly leveraged financial institutions...We agree with our colleagues that individuals across the financial sector pursued their self-interest first, sometimes to the detriment of borrowers, investors, taxpayers and even their own firms...But it is dangerous to conclude that the crisis would have been avoided if only we had regulated everything a lot more, had fewer housing subsidies, and had more responsible bankers."

Read Thomas, Hennessey, and Holtz-Eakin's full dissent: http://bit.ly/h0zIRQ

The state fiscal crisis has a number of causes, writes David Wessel: "The deep and long recession devastated tax revenue. At the worst point, in early 2009, state and local tax revenue combined were down 11% from year-earlier levels... In the good times, governments enjoyed and spent a tax windfall; state and local tax revenue rose 36% in the five years before the bust...In the ensuing years, spending rose rapidly too...When the economy heals, state and local revenue will grow again. But that won't relieve unsustainable pressures that predate the recession, especially health costs...By any metric, and there's a debate over which is the right one, state and local governments haven't set aside enough money to cover pension or retiree health-benefit promises they've made to their workers."

Retro trailer interlude: Up! as a '60s-era Disney adventure movie.

Health Care

Medicare/Medicaid chief Donald Berwick has been renominated by the White House, reports Jennifer Haberkorn: "On Wednesday night, the White House renominated Dr. Don Berwick to head the Center for Medicare and Medicaid Services. The nomination is likely to be yet another flashpoint in the contentious health-care repeal debate on Capitol Hill. Republicans strongly objected to Berwick’s appointment last year, pointing to his previous comments in support of the British health system and rationing with 'eyes open' or closed...He will face a hearing in the Finance Committee and confirmation by the full Senate. Berwick is likely to face a difficult nomination. Many Republicans are still angry about his recess appointment and have significant questions about the agency he oversees."

Republican governors are largely going along with health care reform: http://bit.ly/gR3jZo

House Republicans are starting to use hearings to attack health care reform, reports N.C. Aizenman: "During a hearing before the House Ways and Means Committee, two business owners and a prominent economist testified that the law imposes crushing costs that hamper job creation. Republican members also grilled Austan Goolsbee, chairman of the White House Council of Economic Advisers, for nearly two hours, charging that his rosy assessment of the law's economic impact was based on accounting gimmicks. At a separate, nearly simultaneous hearing before the House Budget Committee, Chairman Paul Ryan (R-Wisc.) heaped praise on his star witness, Rick Foster, chief actuary for Medicaid and Medicare, who has questioned some of the Obama administration's predictions of savings through the health-care law."

A federal appeals court has moved up consideration of two health care lawsuits: http://bit.ly/eOnJPw

Domestic Policy

The House voted to repeal public financing for presidential elections, reports Dan Eggen: "On a mostly party-line vote of 239 to 160, the House approved a measure that would eliminate the checkoff Americans can mark on their federal income tax forms to make a $3 donation toward presidential contests. That system allows candidates to receive public matching money if they agree to limit expenditures during a primary or general election contest. House Majority Leader Eric Cantor (Va.) and other Republicans portray the bill primarily as a cost-cutting measure that would save about $520 million over 10 years. But it faces strong opposition from the White House and Senate Democrats, who say it would further strengthen the influence of corporations and other monied interest groups."

Obama's pledge to expand mobile broadband faces roadblocks in implementation: http://politi.co/eYSPUb

Senate Democrats are expected to take lead on Obama's new proposals, reports Shailagh Murray: "It is the narrowly divided Democratic-led Senate - not the Republican House - that is most likely to tackle the bipartisan initiatives Obama laid out Tuesday, including free-trade deals, border security and immigration reform, and an overhaul of the corporate tax code. Although many Senate Democrats say that liberal priorities such as climate-change legislation have fallen off Obama's agenda, they also see an opportunity to begin a political recovery by pursuing more moderate legislative goals with Republicans' help. 'We're going to try to ease out onto the frozen lake,' a senior Democratic leadership aide said of the GOP outreach effort. 'If it starts to crack, we'll run back.'"

Filibuster reformers have formally conceded defeat: http://slate.me/iiRXYn

Arne Duncan is the Obama administration's best feature, writes George Will: "Too many American parents, Duncan says, have 'cognitive dissonance' concerning primary and secondary schools: They think their children's schools are fine, and that schools that are not fine are irredeemable. This, Duncan says, is a recipe for 'stasis' and 'insidious paralysis.' He attempts to impart motion by puncturing complacency and picturing the payoff from excellence...Familiar recipes for improvement are dubious. 'Many high-performing education systems, especially in Asia,' Duncan says, 'have substantially larger classes than the United States.' In South Korea, secondary-school classes average about 36 students; in Japan, 33; in America, 25."

Cultural mashup interlude: The Parks and Recreation credits, adapted for Jabba the Hutt.

Energy

Taking up "public health" is environmentalists' latest strategy, report Darren Samuelsohn and Robin Bravender: "In their failed push to pass global warming legislation in recent years, environmental advocates have warned the public about melting sea ice, species extinction and rampant floods and droughts. The Obama administration and congressional Democrats also have promised that addressing these threats would create 'green jobs.' But 'public health' is now the phrase du jour -- both in the climate change debate and in an approaching battle over the Environmental Protection Agency’s rules for smog, soot and harmful air toxins. That means lawmakers who aim to upend environmental regulations will face green groups trying to shame them as opponents of ailing kids and seniors."

Energy Secretary Steven Chu has outlined a new spending plan to promote clean energy, reports Darius Dixon: "A day after President Obama pitched a clean energy agenda in his State of the Union speech, Energy Secretary Steven Chu outlined the administration’s strategy for producing 80 percent of the nation’s electricity from clean sources by 2035 -- and how much it might cost. The strategy includes doubling the number of the department’s energy innovation hubs to six and adding more than $8 billion for new clean-energy funding in the upcoming budget, roughly a third more than in the president’s 2010 budget request. Obama’s plan to 'win the future' suggests that the money would be paid for by cutting tax subsidies for fossil fuel producers.."

Sen. Jeff Bingaman is meeting with the White House about a clean energy standard: http://bit.ly/dP5WvO

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

By Ezra Klein  | January 27, 2011; 6:44 AM ET
Categories:  Wonkbook  
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Next: Why the State of the Union is so long

Comments

So the Financial Crisis Inquiry failed to cite the Iraq War and energy prices as contributing factors to the Great Recession?

At least my quick scan of the links suggest that.

They are clearly dunces if they forgot about all that. It is clear that 2007/8 oil spikes contributed to the recession, and that the Iraq War was a prime contributor to those spikes, as well as increased housing construction prices due to material shortages here at home. Just ask any person employed in construction if concrete and wood and metal prices didn't soar after the Iraq War.

Also, the energy price spikes had ripple effects on everything, including groceries. And those prices haven't settled back down after the oil prices later subsided.

Also, there are CBO reports somewhere I've scanned and seen written about that link the Bush Tax cuts to the onset of the recession as well as our inability to stave it off due to debt issues.

Posted by: lauren2010 | January 27, 2011 8:11 AM | Report abuse

Forgot to mention another obvious factor leading to the recession I've seen no journalist mention: the 90s boom caused lots of wealth buildup. People started cashing out from their hi-tech and other jobs and started moving across the country, buying homes, elevating home prices, etc. Home developers responded by overbuilding. Well, there were only so many people who got wealthy and cashed out and moved, and then we were stuck with inventory gluts (new and used), and this was like pouring gas on an fire. Here in Florida, there are 100s if not 1000s of entire communities where streets and lampposts and utilities and curbs and entrance gates have been constructed, but few homes built.

Who are these idiots on the inquiry panel that they miss major factors like these?

Geesh.

Posted by: lauren2010 | January 27, 2011 8:18 AM | Report abuse

--*"[L]awmakers who aim to upend environmental regulations will face green groups trying to shame them as opponents of ailing kids and seniors."*--

That's like the #1 play out of the big red collectivist strategy book, innit?

Joe Lieberman wants to KILL people!!!

Posted by: msoja | January 27, 2011 8:20 AM | Report abuse

--*Who are these idiots on the inquiry panel that they miss major factors like these?*--

You have to ask? They are politicians and political appointees. Just like the people at the top of the myriad government bureaucracies. And EVERYTHING they do is POLITICAL in nature, ie. motivated and geared toward serving the dominant POLITICAL structure. YOUR continuing naive belief that all these people are working for you, and your continuing disappointment when you get the small clues that they AREN'T, is laughable. Grow up. See what it IS. They're playing you for the useful idiot you've allowed yourself to become.

Posted by: msoja | January 27, 2011 8:27 AM | Report abuse

Msoja

I agree with much you say.

However, you are the one who worships a party and their leaders.

I am a former republican because I do not worship politicians or parties.

Posted by: lauren2010 | January 27, 2011 8:39 AM | Report abuse

http://www.businessweek.com/news/2011-01-26/social-security-to-run-deficits-for-foreseeable-future-cbo-says.html

Jan. 26 (Bloomberg) -- The U.S. Social Security program will run a deficit this year and will continue spending more on benefits than it receives in revenue for the foreseeable future, according to the Congressional Budget Office.


Anyone who claims that SS is not adding to the deficit king's tab is not being honest.

Posted by: krazen1211 | January 27, 2011 9:07 AM | Report abuse

--*Mr. Issa began the hearing on 'bailouts and the foreclosure crisis' by suggesting that the financial institutions that grew even larger during the crisis might be encouraged to break themselves up so that they would not find themselves, during a future crisis, in need of a bailout."*--

Go on, tell me fascism isn't built on the back of socialism.

Issa has ignorantly conceded the legitimacy of government bailouts, and wants to add another steaming heap of government control to the pile. I predict Dems will reluctantly find themselves casting just enough votes to make it so. Disgrace upon disgrace.

Posted by: msoja | January 27, 2011 9:13 AM | Report abuse

--*However, you are the one who worships a party and their leaders.*--

Good lord, what is wrong with you?

Posted by: msoja | January 27, 2011 9:16 AM | Report abuse

"We have to cut government, but Republicans are going at this with meat axe when what is needed is a sharp, precise scalpel,"


Obama said that 2 years ago, and 2 years later, we have the highest deficit spending in the history of the United States.

Posted by: krazen1211 | January 27, 2011 9:25 AM | Report abuse

"Can't we just steal the warm weather, instead;" that's a good one ezra lol. seriously though, i am really baffled by the credibility the gop seems to have as evidenced by the 2010 elections. the gwb 2001 and 2003 tax cuts, now extended by obama and coupled with 2 wars, brought us these deficits and lowered revenue with high unemployment; so why do americans think they will work this time?

Posted by: sbvpav | January 27, 2011 9:58 AM | Report abuse

krazen1211 just cannot help him/herself. If you took the whole quote it is easy to see how ridiculous the claim is on Social Security.

If you had investment income you WOULD count that as income, right?

The whole quote is:
=========================================

Jan. 26 (Bloomberg) -- The U.S. Social Security program will run a deficit this year and will continue spending more on benefits than it receives in revenue for the foreseeable future, according to the Congressional Budget Office.

The nonpartisan agency said today the program will run a $45 billion deficit this year and see a total shortfall of $547 billion over the subsequent 10 years.

**** The calculations exclude interest payments earned on the program’s trust fund. ****

========================================

**** added for emphasis

Posted by: grooft | January 27, 2011 10:10 AM | Report abuse

The DJIA is higher now than it was on election day 2008. What more do the Republicans want? I don't buy their crocodile tears about deficits. If they really cared about deficits, they could have done something about it when they had both Congress and the White House.

Posted by: tl_houston | January 27, 2011 10:14 AM | Report abuse

Ezra,

Do you hate America?

That is the only reason I can think of that you would ask, "Should Washington look to California for guidance on how to do the budget?" without providing the answer, "Absolutely not! Unless you want everything government does to breakdown!".

Republicans SAY they don't like deficits. They LOVE tax cuts. And they don't like government programs except defense and border defense. (And farm supports for agribusiness.)

And what do you mean by "so well"?

"Congress will adopt the two-thirds budgeting rules that have worked so well in, yes, California."

Last time I looked California, despite all its advantages in climate and wealth, was a effing disaster in terms of government and managing the public weal.

Maybe you could change the headline to -- "Are they Crazy?"

Posted by: grooft | January 27, 2011 10:22 AM | Report abuse

"They are clearly dunces if they forgot about all that. It is clear that 2007/8 oil spikes contributed to the recession, and that the Iraq War was a prime contributor to those spikes"

No, not really. Iraqi oil production in 2008 was back to 2002 levels. If the sharp cut in production was the problem we would have seen the price spike far earlier in the decade.

http://www.eia.doe.gov/cabs/iraq/oil.html

The price of oil was driven higher by emerging market demand (much of it China - Chinese GDP grew from $1.6 trillion in 2003 to $4.5 trillion in 2008) and the Fed's loose monetary policy.

The Iraq War was bad in many ways, but the U.S. can fight small wars without experiencing deep recessions (e.g. Korea, Vietnam). Vietnam was a far bigger operation and the U.S. economy was far smaller and more dependent on fossil fuels back in the 1960s, and yet the only recession which occurred during Vietnam War was the mild one in 1970.

If anything, the surge in oil prices was a huge problem for the auto industry, but it didn't really matter for finance/real estate/construction.

"as well as increased housing construction prices due to material shortages here at home. Just ask any person employed in construction if concrete and wood and metal prices didn't soar after the Iraq War."

Material shortages didn't cause the housing bust, any more than shortages of shares of technology stocks caused the dotcom crash.

Excess demand pushed prices far beyond levels that were reasonable given fundamentals. The cost of production didn't matter one iota for sales prices in the bubble markets back in 2005. An increase in demand increased quantity supplied, in economic terms.

If housing prices were going up because of a surge in the cost of production, there wouldn't have been a bubble at all, rather home production and sales would have been in a slump throughout the decade. Consider that existing homes were skyrocketing in price too - this obviously wasn't related to the cost of new home production.

Posted by: justin84 | January 27, 2011 10:25 AM | Report abuse

--*If they really cared about deficits, they could have done something about it when they had both Congress and the White House.*--

The GOP has long been Socialist Lite. The Tea Party is supposed to counter that insidiousness, but I'm pretty sure it isn't going to be enough. The mob wants it's pretty roman candle, and it won't cease its clamoring until the thing blows up in their hands.

Posted by: msoja | January 27, 2011 10:28 AM | Report abuse

"Also, there are CBO reports somewhere I've scanned and seen written about that link the Bush Tax cuts to the onset of the recession as well as our inability to stave it off due to debt issues."

Tax cuts do not by themselves cause recessions (clearly if a tax cut leads to a default on the debt, that's something else entirely). Spending cuts can, in that it interrupts a given pattern of spending and the replacement spending patterns will take time to emerge, but not tax cuts.

Posted by: justin84 | January 27, 2011 10:47 AM | Report abuse

"krazen1211 just cannot help him/herself. If you took the whole quote it is easy to see how ridiculous the claim is on Social Security.

If you had investment income you WOULD count that as income, right?
"

That investment income is, of course, borrowed from China. So, yeah, its adding to our massive deficit.

Posted by: krazen1211 | January 27, 2011 10:51 AM | Report abuse

"House oversight chair Darrel Issa has kicked off his hearings by attacking "too big to fail" banks"

That's great, but no bank is too big to fail - just too big for politicians to let fail. Again, note that TBTF was identified as a problem years ago, and many of the TBTF banks as of 1/1/2008 are bigger today.

JPM went from $1.56 trillion in assets to $2.12 trillion.

BAC went from $1.72 trillion to $2.26 trillion.

WFC went from $0.58 trillion to $1.26 trillion.

Is there really any difference between one $2 trillion bank failing and ten $200 billion banks failing? Note that in the Great Depression, most of the banks that failed were too small to survive, and they were too small because of state unit banking laws.

Stop bailing out and subsidizing banks (as well as all other industries), and you won't have the moral hazard which contributed to the last bust. Bad banking practices will be weeded out overtime by failures, just like bad practices in any other industry, and the sector will likely become far more stable.

Posted by: justin84 | January 27, 2011 11:08 AM | Report abuse

Luckily, Prop 25 in CA passed and now the budget can be passed with only a simple majority. However, prop 26 passed which requires 2/3rds majority to pass certain state and local fees.

Posted by: andymedina05 | January 27, 2011 11:13 AM | Report abuse

How can we say state and local governments are on the verge of bankruptcy when 90% of the citizens are solvent? Our debt's were run up at our behest. We are the government. We did not all agree to every expenditure, but a majority agrees each expenditure. We're not taking about bankruptcy. We're talking about self righteously and dishonestly stopping payments on our goodies while we continue to enjoy them.

Posted by: kellgo | January 27, 2011 1:09 PM | Report abuse

I live in the great state of California. No one should copy us until budgets are based on majority rule. Right now, if any fee or tax increases are included in a budget, that budget needs 67% of the vote in the Assembly & Senate in order to pass. What that has meant is that we haven't passed a budget on time in years and 34% (an easy number to reach) dictates what the majority can do.

Posted by: kindness1 | January 27, 2011 1:15 PM | Report abuse

--*We did not all agree to every expenditure, but a majority agrees each expenditure.*--

I didn't agree to any of it. I haven't voted for any of the crooks and liars currently in office. I didn't vote for any of the crooks and liars who didn't win election, either. It doesn't seem to me that there's any difference who gets elected. All of them immediately start acting as though they know better than anyone else how to spend other people's money. I say to hell with all of them, and likewise to everyone who has his hands on his neighbor's wallet. There's going to be a lot of pain coming, and every bit of it is deeply deserved.

Posted by: msoja | January 27, 2011 9:13 PM | Report abuse


It's like a politician voting to take away his job to legislate... auto

pilot and you can't ride the inevitable swing of the market forces of capitalism.

Posted by: WmLaney | February 1, 2011 1:51 AM | Report abuse

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